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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
<TABLE>
<S> <C>
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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
</TABLE>
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 76-0396023
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
EL PASO ENERGY BUILDING 77002
1001 LOUISIANA STREET (Zip Code)
HOUSTON, TEXAS
(Address of Principal Executive Offices)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 420-2131
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
------------------- ------------------------------
<S> <C>
Preference Units representing limited partner New York Stock Exchange
interests
Common Units representing limited partner New York Stock Exchange
interests
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE.
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
THE REGISTRANT HAD 23,349,988 COMMON UNITS AND 1,016,906 PREFERENCE UNITS
OUTSTANDING AS OF MARCH 5, 1999. THE AGGREGATE MARKET VALUE ON SUCH DATE OF THE
REGISTRANT'S COMMON UNITS AND PREFERENCE UNITS HELD BY NON-AFFILIATES WAS
APPROXIMATELY $374.7 MILLION.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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<PAGE> 2
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998
INDEX
<TABLE>
<S> <C> <C>
PART I
Items 1 and 2. Business and Properties..................................... 1
Item 3. Legal Proceedings........................................... 23
Item 4. Submission of Matters to a Vote of Security Holders......... 23
PART II
Item 5. Market for Registrant's Units and Related Unitholder
Matters................................................... 24
Item 6. Selected Financial Data..................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 26
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 33
Item 8. Financial Statements and Supplementary Data................. 34
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 34
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 35
Item 11. Executive Compensation...................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 42
Item 13. Certain Relationships and Related Transactions.............. 43
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 44
</TABLE>
i
<PAGE> 3
The following text is qualified in its entirety by reference to the more
detailed information and consolidated financial statements (including the notes
thereto) appearing elsewhere in the Annual Report on Form 10-K ("Annual
Report"). Unless the context otherwise requires, references in this Annual
Report to "Leviathan" shall mean Leviathan Gas Pipeline Partners, L.P., a
publicly held Delaware limited partnership; references to the "General Partner"
shall mean Leviathan Gas Pipeline Company, a Delaware corporation and the
general partner of Leviathan; and references to Leviathan with respect to the
operations and ownership of Leviathan's assets are also references to its
subsidiaries and the nonmanaging interest of the General Partner in certain
subsidiaries of Leviathan. For a description of certain terms used in this
Annual Report relating to the oil and natural gas industry, see Items 1 and 2.
"Business and Properties -- Certain Definitions."
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
OVERVIEW
Leviathan is primarily engaged in the gathering, transportation and
production of natural gas and crude oil in the Gulf of Mexico (the "Gulf").
Through its subsidiaries and joint ventures, Leviathan owns interests in certain
significant assets, including (i) eight natural gas pipelines (the "Gas
Pipelines"), (ii) a crude oil pipeline system ("Poseidon" and collectively with
the Gas Pipelines, the "Pipelines"), (iii) six strategically located
multi-purpose platforms, (iv) a dehydration facility, (v) four producing oil and
natural gas properties and (vi) an undeveloped oil and natural gas property. See
"Notes to Consolidated Financial Statements -- Note 2 -- Significant Accounting
Policies," "-- Note 4 -- Oil and Natural Gas Properties," "-- Note 12 -- Major
Customers" and "-- Note 13 -- Business Segment Information" located elsewhere in
the Annual Report. The General Partner performs all management and operational
functions for Leviathan and its subsidiaries. The General Partner became an
indirect wholly-owned subsidiary of El Paso Energy Corporation ("El Paso")
pursuant to El Paso's merger with DeepTech International Inc. ("DeepTech"), the
indirect parent of the General Partner, in August 1998. See "-- Recent
Developments -- Merger."
Leviathan commenced operations in February 1993 in connection with the
initial public offering of preference units representing limited partner
interests in Leviathan ("Preference Units"). In June 1994, Leviathan completed a
second public offering of Preference Units. In August 1998, approximately 94% of
the Preference Units then outstanding were converted to common units
representing limited partner interests in Leviathan ("Common Units", and
collectively with the Preference Units, the "Units"). See Item 5. "Market for
Registrant's Units and Related Unitholder Matters."
As of March 5, 1999, Leviathan had 23,349,988 Common Units and 1,016,906
Preference Units outstanding. The public owns Units representing a 72.7%
effective limited partnership interest in Leviathan. The General Partner owns a
27.3% effective interest in Leviathan, comprised of a 25.3% limited partner
interest in the form of 6,291,894 Common Units, a 1% general partner interest in
Leviathan and an approximate 1% nonmanaging interest in certain of Leviathan's
subsidiaries. The Common Units and the Preference Units are listed on the New
York Stock Exchange ("NYSE") under the symbols "LEV" and "LEV.P," respectively.
The closing price of the Units on the NYSE on March 5, 1999 was $20.875 per
Common Unit and $19.00 per Preference Unit.
RECENT DEVELOPMENTS
Merger
Effective August 14, 1998, El Paso completed the acquisition of DeepTech by
merging a wholly-owned subsidiary of El Paso with and into DeepTech (the
"Merger") pursuant to the Agreement and Plan of Merger dated as of February 27,
1998 (as amended, the "Merger Agreement"). The material terms of the Merger and
1
<PAGE> 4
the transactions contemplated by the Merger Agreement and other agreements as
these agreements relate to Leviathan are as follows:
(a) Prior to the Merger, Leviathan Holdings Company, which owns 100% of the
General Partner, was owned 85% by DeepTech resulting in DeepTech owning
an overall 23.2% effective interest in Leviathan. El Paso acquired the
minority interests of Leviathan Holdings Company and two other
subsidiaries of DeepTech primarily held by former DeepTech management
for an aggregate of $55 million. As a result, El Paso owns 100% of the
General Partner's interest in Leviathan and an overall 27.3% effective
interest in Leviathan.
(b) In June 1998, Tatham Offshore, Inc. ("Tatham Offshore"), an affiliate
of Leviathan through August 14, 1998, canceled its reversionary
interests in certain oil and natural gas properties owned by Leviathan.
(c) On August 14, 1998, Tatham Offshore transferred its remaining assets
located in the Gulf to Leviathan in exchange for the 7,500 shares of
Series B 9% Senior Convertible Preferred Stock (the "Senior Preferred
Stock") issued by Tatham Offshore and owned by Leviathan (the
"Redemption Agreement"). Under the terms of the Redemption Agreement,
Leviathan acquired all of Tatham Offshore's right, title and interest
in and to Viosca Knoll Block 817 (subject to an existing production
payment obligation), West Delta Block 35, the platform located at Ship
Shoal Block 331 and other lease blocks not material to Leviathan's
current operations. The net cash expenditure of Leviathan under the
Redemption Agreement totaled $0.8 million representing (i) $2.8 million
of abandonment costs relating to wells located at Ewing Bank Blocks 914
and 915 offset by (ii) $2.0 million of net cash generated from the
producing properties from January 1, 1998 through August 14, 1998. In
addition, Leviathan assumed all remaining abandonment and restoration
obligations associated with the platform and leases.
Construction of Multi-Purpose Platform
In 1998, Leviathan placed in service a newly constructed 100%-owned
multi-purpose platform with processing facilities located in East Cameron Block
373 at a cost of $30.2 million. The four pile production platform is
strategically located to exploit deeper water reserves in the East Cameron and
Garden Banks areas of the Gulf and is the terminus for an extension of the
Stingray system. Kerr-McGee Corporation has certain rights to utilize the
platform pursuant to a processing and use of space agreement and has committed
its production from multiple blocks in the East Cameron and Garden Banks areas
to be transported through the Stingray system. See "-- Natural Gas and Oil
Pipelines -- Stingray."
Sunday Silence Property
In October, 1998, Leviathan purchased a 100% working interest in Ewing Bank
Blocks 958, 959, 1002 and 1003 (the "Sunday Silence Property") from a
wholly-owned indirect subsidiary of El Paso for $12.2 million. The Sunday
Silence Property, discovered in July 1994, is contained within four lease blocks
in the Ewing Bank area of the Gulf in approximately 1,500 feet of water and has
received a royalty abatement from the Minerals Management Service of the U.S.
Department of the Interior ("MMS") for the first 52.5 million barrels of oil
equivalent to be produced from the field. In December 1998, Leviathan completed
the drilling of the Ewing Bank Block 958 #2 well, a delineation well
successfully drilled to a total measured depth of 14,396 feet. This well, the
third successful well to be drilled in the field, encountered approximately 80
feet of net pay in two hydrocarbon-bearing sands, including approximately 65 net
feet of high-porosity, high resistivity pay in the main field sand. To date, the
Sunday Silence Property has no production. Leviathan is currently evaluating
available alternatives to develop the Sunday Silence Property which includes,
among other things, the construction of a production platform and gathering
facilities under a farmout, trade and/or financing arrangements with an industry
partner or financial institution. There can be no assurance, however, that
Leviathan will be able to obtain a partner or financing on terms that are
acceptable to Leviathan.
2
<PAGE> 5
Joint Venture Restructuring and New Pipeline Construction
In December 1998, the partners of High Island Offshore System, a Delaware
partnership between Leviathan (40%), subsidiaries of ANR Pipeline Company
("ANR") (40%) and a subsidiary of Natural Gas Pipeline Company ("NGPL") (20%),
restructured the joint venture arrangement by (i) creating a holding company,
Western Gulf Holdings, L.L.C. ("Western Gulf"), (ii) converting High Island
Offshore System, which owns a jurisdictional natural gas pipeline located in the
Gulf, into a limited liability company, High Island Offshore System, L.L.C.
("HIOS") and (iii) forming a new limited liability company, East Breaks
Gathering Company, L.L.C. ("East Breaks") to construct and operate a
non-jurisdictional natural gas pipeline system. Western Gulf, owned 40% by
Leviathan, 40% by ANR and 20% by NGPL, owns 100% of each of HIOS and East
Breaks.
In February 1999, Western Gulf entered into a $100 million revolving credit
facility (the "Western Gulf Credit Facility") with a syndicate of commercial
banks to provide funds for the construction of the East Breaks system and for
other working capital needs of Western Gulf. The ability of Western Gulf to
borrow money under its credit facility is subject to certain customary terms and
conditions, including borrowing base limitations. The credit facility is
collateralized by substantially all of the material contracts and agreements of
East Breaks and Western Gulf including Western Gulf's ownership in HIOS and East
Breaks, and matures in February 2004. As of March 10, 1999, Western Gulf had
$44.1 million outstanding under its credit facility bearing interest at an
average floating rate of 6.4% per annum and $55.9 million of additional funds
were available under the facility.
The East Breaks system will initially consist of 85 miles of an 18 to
20-inch pipeline and related facilities connecting the Diana/Hoover prospects
developed by Exxon Company USA ("Exxon") and BP Amoco Plc ("BP Amoco") in
Alaminos Canyon Block 25 in the Gulf, with the HIOS system. See "-- Natural Gas
and Oil Pipelines -- High Island Offshore." The majority of the construction of
the East Breaks system will occur in 1999 and the system is anticipated to be in
service in late 2000 at an estimated cost of approximately $90 million. East
Breaks entered into long-term agreements with Exxon and BP Amoco involving the
commitment, gathering and processing of production from the Diana/Hoover
prospects. All of the natural gas to be produced from 11 blocks in the East
Breaks and Alaminos Canyon areas will be dedicated for transportation services
on the HIOS system.
Acquisition of Additional Interest in Viosca Knoll Gathering Company, the
Issuance of Common Units to the General Partner and the Amendment to the
Partnership Agreement
Currently, Viosca Knoll Gathering Company ("Viosca Knoll") is effectively
owned 50% by Leviathan and 50% by El Paso. See "-- Natural Gas and Oil
Pipelines -- Viosca Knoll." In January 1999, Leviathan announced its intent to
acquire all of El Paso's interest in Viosca Knoll, other than a 1% interest in
profits and capital of Viosca Knoll, for approximately $85.26 million (subject
to adjustment), comprised of 25% cash (up to a maximum of $21.315 million) and
75% Common Units (up to a maximum of 3,205,263 Common Units), the number of
which will depend on the average closing price of Common Units during the
applicable trading reference period. At the closing, (i) El Paso will contribute
to Viosca Knoll an amount of money equal to 50% of the amount then outstanding
under Viosca Knoll's credit facility (currently a total of $66.7 million is
outstanding), (ii) Leviathan will deliver to El Paso the cash and Common Units
discussed above and (iii) as required by the Amended and Restated Agreement of
Limited Partnership (the "Partnership Agreement"), the General Partner will
contribute approximately $650,000 to Leviathan in order to maintain its 1%
capital account balance. Then, during the six month period commencing on the day
after the first anniversary of that closing date, Leviathan would have the
option to acquire the remaining 1% in profits and capital in Viosca Knoll for a
cash payment equal to the sum of $1.74 million plus the amount of additional
distributions which would have been paid, accrued or been in arrears had
Leviathan acquired the remaining 1% of Viosca Knoll at the initial closing by
issuing additional Common Units in lieu of a cash payment of $1.74 million.
The number of units actually issued by Leviathan will vary depending on the
market price of Common Units during the applicable trading reference period.
Such number will be determined by dividing $63.945 million (subject to
adjustment) by the average closing sales price for a Common Unit on the NYSE
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<PAGE> 6
for the ten day trading period ending two days prior to the closing date (the
"Market Price"); provided that, for purposes of such calculation, the Market
Price will not be less than $19.95 per Common Unit or more than $24.15 per
Common Unit. Accordingly, Leviathan will neither issue less than 2,647,826 nor
more than 3,205,263 Common Units, subject to adjustments contemplated by the
definitive agreements. Based on the closing sales price of the Common Units on
March 5, 1999 of $20.875 per unit, Leviathan would issue 3,063,234 Common Units
to El Paso, which issuance would constitute approximately 10.9% of the Units
(Common and Preference) outstanding immediately after such issuance and would
result in El Paso owning, indirectly through its subsidiaries, a combined 35.4%
effective interest in Leviathan, consisting of a 1% general partnership
interest, a 33.4% limited partnership interest comprised of 9,355,128 Common
Units and an approximate 1% nonmanaging interest in certain subsidiaries of
Leviathan.
Although certain federal and state securities laws would otherwise limit El
Paso's ability to dispose of any Common Units held by it, El Paso would have the
right on three occasions to require Leviathan to file a registration statement
covering such Common Units and to participate in offerings made pursuant to
certain other registration statements filed by Leviathan during a ten year
period. Such registrations would be at Leviathan's expense and, generally, would
allow El Paso to dispose of all or any of its Common Units. If the acquisition
is consummated, there can be no assurance regarding how long El Paso may hold
any of its Common Units or whether El Paso's disposition of a significant number
of Common Units in a short period of time would not depress the market price of
the Common Units.
Upon consummation of the acquisition, Leviathan would be the beneficial
owner of 99% of Viosca Knoll and have the option to acquire the remaining 1%
interest. Leviathan and El Paso entered into a Contribution Agreement dated
January 22, 1999, which is effective as of January 1, 1999. Consummation of the
acquisition is subject to the satisfaction of certain closing conditions,
including, among other things, obtaining certain third party consents. The
consent of the lenders under both Leviathan's and Viosca Knoll's credit
facilities must be obtained prior to consummating this transaction. There can be
no assurance that all such required consents will be obtained. Management
believes that the acquisition of the Viosca Knoll interest does not require any
federal, state or other regulatory approval.
On January 19, 1999, the Board of Directors of the General Partner (the
"Board") unanimously approved and ratified and recommended that the Unitholders
approve and ratify the acquisition of the additional Viosca Knoll interest.
Based upon, among other things, a multi-faceted review and analysis of the
acquisition, as well as the recommendation for approval and ratification from
the Special Committee of independent directors and the fairness opinion of an
independent financial advisor, the Board believes that the acquisition is fair
to and in the best interests of Leviathan and its Unitholders. On March 5, 1999,
the Unitholders of record as of January 28, 1999, held a meeting and ratified
and approved (i) the transactions relating to Leviathan's acquisition of El
Paso's interest in Viosca Knoll and (ii) an amendment of the Partnership
Agreement to decrease the vote required for approval of certain actions,
including the removal of the general partner without cause, from 66 2/3% to 55%.
If the remaining conditions to closing are satisfied, including obtaining
certain third party consents, management believes that the closing of the
acquisition of the Viosca Knoll interest will occur during the second quarter of
1999.
NATURAL GAS AND OIL PIPELINES
General. Leviathan conducts a significant portion of its business
activities through joint ventures (the "Equity Investees"), organized as general
partnerships or limited liability companies, with other major oil and natural
gas companies. The Equity Investees include Viosca Knoll, Stingray Pipeline
Company ("Stingray") and U-T Offshore System ("UTOS"), all of which are
partnerships, and HIOS, Poseidon Oil Pipeline Company, L.L.C. ("POPCO"), Manta
Ray Offshore Gathering Company, L.L.C. ("Manta Ray Offshore"), Nautilus Pipeline
Company, L.L.C. ("Nautilus") and West Cameron Dehydration Company, L.L.C. ("West
Cameron Dehy"), all of which are limited liability companies. Management
decisions related to the Equity Investees are made by management committees
comprised of representatives of each partner or member, as applicable, with
authority appointed in direct relationship to ownership interests.
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Through its 100%-owned operating subsidiaries and the Equity Investees,
Leviathan owns interests in the Gas Pipelines, which are strategically located
offshore Louisiana and eastern Texas to gather and transport natural gas for
producers, marketers, pipelines and end-users for a fee. The Gas Pipelines
include over 1,200 miles of pipeline with a throughput capacity of approximately
6.8 Bcf of natural gas per day. During the years ended December 31, 1998, 1997
and 1996, the Gas Pipelines transported an average of approximately 3.2 Bcf, 2.7
Bcf and 2.7 Bcf, respectively, of natural gas per day. Each of the Gas Pipelines
interconnects with one or more long line transmission pipelines that provide
access to multiple markets in the eastern half of the United States.
None of the Gas Pipelines functions as a merchant to purchase and resell
natural gas, thus avoiding the commodity risk associated with the purchase and
resale of natural gas. Each of Nautilus, Stingray, HIOS and UTOS (together, the
"Regulated Pipelines") is currently classified as a "natural gas company" under
the Natural Gas Act of 1938, as amended (the "NGA"), and is therefore subject to
regulation by the Federal Energy Regulatory Commission ("FERC"), including
regulation of rates. None of Manta Ray Offshore, Viosca Knoll, Green Canyon Pipe
Line Company, L.L.C. ("Green Canyon"), Tarpon Transmission Company ("Tarpon") or
Ewing Bank Gathering Company, L.L.C. ("Ewing Bank") is currently considered a
"natural gas company" under the NGA. See "-- Regulation."
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. During 1998, 1997 and 1996, Poseidon transported an average
of approximately 130,000 barrels, 60,500 barrels and 30,000 barrels,
respectively, of oil per day.
The following table sets forth certain information with respect to the
Pipelines. The throughput information represents the average throughput net to
Leviathan's interest.
<TABLE>
<CAPTION>
GREEN MANTA RAY VIOSCA
CANYON TARPON OFFSHORE(1) KNOLL STINGRAY HIOS UTOS NAUTILUS POSEIDON
------ ------ ----------- ------ -------- ---- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Effective ownership interest........ 100% 100% 25.67% 50% 50% 40% 33.3% 25.67% 36%
Unregulated (U)/regulated (R)(2).... U U U U R R R R U
In-service date..................... 1990 1978 1987/88 1994 1975 1977 1978 1997 1996
Approximate capacity (MMcf per
day).............................. 220 80 755 1,000(3) 1,120 1,800 1,200 600 --
Approximate capacity (MBbl per
day).............................. -- -- -- -- -- -- -- -- 400
Aggregate miles of pipeline......... 68 40 225 125 417 204 30 101 314
Average net throughput (MMcf/MBbl
per day) for the year ended:
December 31, 1998................. 126 63 72 285 329 337 159 39 35
December 31, 1997................. 148 50 195(4) 194 353 352 105 --(6) 22(7)
December 31, 1996................. 142 33 217(5) 144 373 372 103 --(6) 11(7)
</TABLE>
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(1) In 1997, Leviathan contributed substantially all of the Manta Ray Gathering
System (approximately 160 miles of pipeline) to Manta Ray Offshore
decreasing Leviathan's ownership in this system from 100% to an effective
25.67%. Leviathan continues to own and develop 19 miles of oil pipeline
which was formerly a part of the Manta Ray Gathering System.
(2) Regulated Pipelines are subject to extensive rate regulation by the FERC
under the NGA. See "-- Regulation."
(3) The original maximum design capacity of the Viosca Knoll system was 400 MMcf
of natural gas per day. In 1996, Viosca Knoll installed a 7,000 horsepower
compressor on Leviathan's Viosca Knoll Block 817 platform to allow the
Viosca Knoll system to increase its throughput capacity to approximately 700
MMcf of natural gas per day. In 1997, Viosca Knoll added approximately 25
miles of parallel 20-inch pipelines, increasing its throughput capacity to
approximately 1,000 MMcf of natural gas per day.
(4) Represents throughput specifically allocated to Leviathan by Manta Ray
Offshore during the initial year of operations.
(5) Represents 100% ownership interest during this period.
(6) The Nautilus system was placed in service in late December 1997.
(7) Poseidon was placed in service in three phases, in April 1996, December 1996
and December 1997.
Green Canyon. The Green Canyon system, 100% owned and operated by
Leviathan, consists of approximately 68 miles of 10 to 20-inch diameter offshore
pipeline which transports natural gas from the South Marsh Island, Eugene
Island, Garden Banks and Green Canyon areas in the Gulf to the west leg of the
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South Lateral owned by Transcontinental Gas Pipe Line Corporation ("Transco")
for transportation to shore in eastern Louisiana.
Tarpon. The Tarpon system, 100% owned and operated by Leviathan, is a
non-regulated natural gas transmission facility consisting of approximately 40
miles of 16-inch diameter offshore pipeline that extends from the Ship Shoal
Block 274, South Addition, to the Eugene Island Area, South Addition, in an area
of the Gulf adjacent to the Green Canyon system.
Manta Ray Offshore. The Manta Ray Offshore system, effectively owned 25.7%
by Leviathan, 50% by Tejas Offshore Pipelines ("Tejas") and 24.3% by Marathon
Oil Company ("Marathon"), consists of (i) three separate gathering lines, all
located offshore Louisiana in the Gulf, which include a total of 76 miles of 12
to 24-inch diameter pipeline, each interconnecting offshore with the east leg of
the Transco's Southeast Louisiana Lateral, which provides transportation for
natural gas to shore in eastern Louisiana, (ii) approximately 51 miles of dual
14 and 16-inch diameter pipelines, with the 16-inch pipeline extending from
Green Canyon Block 29 and the 14-inch pipeline extending from South Timbalier
Block 301 northwesterly to a shallow water junction platform with processing
facilities located at Ship Shoal Block 207 and (iii) approximately 47 miles of
24-inch pipeline extending from Green Canyon Block 65 to Ship Shoal Block 207.
Affiliates of Marathon and Tejas have dedicated for gathering on the Manta Ray
Offshore system certain deepwater acreage positions in the area. Tejas operates
the Manta Ray Offshore system.
Viosca Knoll. The Viosca Knoll system is a non-jurisdictional gathering
system designed to serve the Main Pass, Mississippi Canyon and Viosca Knoll
areas of the Gulf, southeast of New Orleans, offshore Louisiana. The Viosca
Knoll system consists of 125 miles of predominantly 20-inch natural gas
pipelines and a 7,000 horsepower compressor. The Viosca Knoll system provides
its customers access to the facilities of a number of major interstate
pipelines, including Tennessee Gas Pipeline Company, Columbia Gulf Transmission
Company, Southern Natural Gas Company, Transco and Destin Pipeline Company
("Destin").
The base system was constructed in 1994 and is comprised of (i) an
approximately 94 mile, 20-inch diameter pipeline from a platform in Main Pass
Block 252 owned by Shell to a pipeline owned by Tennessee Gas Pipeline Company
at South Pass Block 55 and (ii) a six mile, 16-inch diameter pipeline from an
interconnection with the 20-inch diameter pipeline at Leviathan's Viosca Knoll
Block 817 platform to a pipeline owned by Southern Natural Gas Company at Main
Pass Block 289. A 7,000 horsepower compressor was installed in 1996 on the
Viosca Knoll Block 817 platform to allow the Viosca Knoll system to effect
deliveries at the operating pressures on downstream interstate pipelines with
which it is interconnected. The additional capacity created by such compression
allowed Viosca Knoll to transport new natural gas volumes during 1997 from the
Shell Oil Company ("Shell") operated Southeast Tahoe and Ram-Powell fields as
well as other new deepwater projects in the area. Recently, Viosca Knoll added
approximately 25 miles of parallel 20-inch pipelines to the system east of the
Viosca Knoll Block 817 platform to improve deliverability from certain Main Pass
producing areas and redeliveries into the Transco pipeline at Main Pass Block
261 and the Destin pipeline at Main Pass Block 260. Leviathan operates the
Viosca Knoll system. See "-- Recent Developments -- Acquisition of Additional
Interest in Viosca Knoll Gathering Company, the Issuance of Common Units to the
General Partner and the Amendment to the Partnership Agreement."
Stingray. The Stingray system, owned 50% by Leviathan and 50% by a
subsidiary of NGPL, consists of (i) approximately 361 miles of 6 to 36-inch
diameter pipeline that transports natural gas from the High Island, West
Cameron, East Cameron and Vermilion lease areas in the Gulf to onshore
transmission systems at Holly Beach, Cameron Parish, Louisiana, (ii)
approximately 12 miles of 16-inch diameter pipeline and approximately 31 miles
of 20-inch diameter pipeline, connecting the Garden Banks Block 191 lease
operated by Chevron U.S.A. Production Company and Leviathan's 50%-owned Garden
Banks Block 72 platform, respectively, to the system, and (iii) approximately 13
miles of 16-inch diameter pipeline connecting Leviathan's platform at East
Cameron Block 373 to the Stingray system at East Cameron Block 338. NGPL
operates the Stingray system.
High Island Offshore. HIOS, effectively owned 40% by Leviathan, 40% by
subsidiaries of ANR and 20% by a subsidiary of NGPL, consists of approximately
204 miles of pipeline comprised of three supply laterals, the West, Central and
East Laterals, that connect to a 42-inch diameter mainline. HIOS transports
natural
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gas received from fields located in the Galveston, Garden Banks, High Island,
West Cameron and East Breaks areas of the Gulf to a junction platform owned by
HIOS located in West Cameron Block 167. There, it interconnects with UTOS and a
pipeline owned by ANR for further transportation to points onshore. ANR operates
the HIOS system. See "-- Recent Developments -- Joint Venture Restructuring and
New Pipeline Construction."
U-T Offshore. The UTOS system, owned 33 1/3% by Leviathan, 33 1/3% by a
subsidiary of ANR and 33 1/3% by a subsidiary of NGPL, consists of approximately
30 miles of 42-inch diameter pipeline extending from a point of interconnection
with HIOS at West Cameron Block 167 to the Johnson Bayou processing facility.
The UTOS system transports natural gas from the terminus of the HIOS system at
West Cameron Block 167 to the Johnson Bayou facility, where it interconnects
with several pipelines. The UTOS system is essentially an extension of the HIOS
system, as almost all the natural gas transported through UTOS comes from HIOS.
UTOS also owns the Johnson Bayou facility, which provides primarily natural gas
and liquids separation and gas dehydration for natural gas transported on the
HIOS and UTOS systems. ANR operates the UTOS system.
Nautilus. The Nautilus system, effectively owned 25.7% by Leviathan, 50% by
Tejas and 24.3% by Marathon, consists of 101 miles of 30-inch pipeline running
downstream from Ship Shoal Block 207 and connecting to a natural gas processing
plant onshore Louisiana operated by Exxon plus certain facilities downstream of
the Exxon plant to effect deliveries into multiple interstate pipelines.
Affiliates of Marathon and Tejas have dedicated for transportation on the
Nautilus system certain deepwater acreage positions in the area. Marathon
operates and maintains the Nautilus system and Tejas performs financial,
accounting and administrative services for Nautilus.
East Breaks. See "-- Recent Developments -- Joint Venture Restructuring and
New Pipeline Construction."
Poseidon. Poseidon, owned 36% by Leviathan, 36% by a subsidiary of Texaco,
Inc. ("Texaco") and 28% by a subsidiary of Marathon, 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
consists of (i) approximately 117 miles of 16 to 20-inch diameter pipeline
extending in an easterly direction from Leviathan's 50%-owned platform located
at Garden Banks Block 72 to the Leviathan platform located at Ship Shoal Block
332, (ii) approximately 122 miles of 24-inch diameter pipeline extending in a
northerly direction from the Ship Shoal Block 332 platform to Houma, Louisiana,
and (iii) approximately 58 miles of 16-inch diameter pipeline extending
northwesterly from Ewing Bank Block 873 to the Texaco-operated Eugene Island
Pipeline System at Ship Shoal Block 141. In July 1998, POPCO completed a 17-mile
extension of 16-inch pipeline from Garden Banks Block 260 to South Marsh Island
Block 205. Texaco accepts oil from Poseidon at Larose and Houma, Louisiana and
redelivers it to St. James, Louisiana, a significant market hub for batching,
processing and transportation of oil. Currently, Texaco is the operator of POPCO
and has contracted with Equilon Pipeline Company, LLC ("Equilon"), a joint
venture between Texaco and Shell, to operate and perform the administrative
functions related to Poseidon and POPCO. Leviathan anticipates that Equilon will
be assigned Texaco's membership interest in POPCO in April 1999.
OIL AND NATURAL GAS SUPPLY
The reserves that are currently available for gathering and transportation
on the Pipelines are depleting assets and, as such, will be produced over a
finite period. Each of the Pipelines must access additional reserves to offset
the natural decline in production from existing wells connected thereto or the
loss of any such production to a competitor. Management believes that there will
be sufficient reserves available to the Gas Pipelines for transportation to
maintain throughput at or near current levels for at least the next five years.
Management believes that there should be significant increases in reserves
committed to Poseidon over the next several years.
Poseidon is currently transporting an average of approximately 139,000
barrels of oil per day. In addition to the production commitments from Texaco
and Marathon, POPCO has been successful in obtaining long-term commitments of
production from several properties containing significant reserves. POPCO has
7
<PAGE> 10
contracted with Exxon, Phillips Petroleum Company, Amoco Petroleum Company,
Anadarko Petroleum Company, Newfield Exploration, Mobil Oil Corporation, Amerada
Hess Corporation, Oryx Crude Trading & Transportation Limited Partnership, Sun
Operating Limited Partnership, Pennzoil, Enterprise Oil, PLC, British Borneo,
Reading and Bates, Occidental Petroleum Corporation and Leviathan. In addition,
discussions are currently pending with a number of other producers regarding
possible commitments of reserves to Poseidon. Leviathan anticipates that POPCO
will add more commitments as new subsalt and deepwater fields are developed in
the area which Poseidon serves, although there can be no assurance regarding if
or when any such commitment would be made or when the production from such
commitment would be made or when the production from such commitment would be
initiated.
The Viosca Knoll system experienced an increase of 47% in throughput during
1998 primarily as a result of increased compression and additional capacity from
the 25 miles of expansion pipelines placed in service in December 1997. The
Manta Ray Offshore system also experienced an increase in throughput of 47%
during 1998 primarily as a result of the Shell-operated Troika field attached to
the system in late 1997. UTOS experienced a 51% increase in transportation
volume for the year ended December 31, 1998 as compared with the previous year
primarily as a result of additional throughput allocated from the HIOS system.
The Tarpon system experienced a 24% increase in throughput for the year ended
December 31, 1998 as compared with the previous year, primarily as a result of
two new producing fields attached to the system in June and July 1997.
The Green Canyon system's throughput decreased 15% for 1998 as compared
with 1997 as a result of normal production declines from the attached fields.
The Stingray and HIOS systems experienced decreases of 7% and 4%, respectively,
in transportation volume for the year ended December 31, 1998 as compared with
the previous year as a result of normal decline in reservoir deliverability from
existing wells connected to the systems. Management believes that development in
the areas served by the Stingray and HIOS systems is likely to occur in future
years, resulting in additional throughput on both systems, and partially
offsetting the continuing decline in reservoir deliverability from existing
wells connected to these systems. See "-- Recent Developments -- Construction of
Multi-Purpose Platform" and "-- Joint Venture Restructuring and New Pipeline
Construction."
Tatham Offshore's Ewing Bank Block 914 #2 well was the only production
dedicated to the Ewing Bank system. In May 1997, the well was shut in due to a
mechanical problem. After approximately one year of evaluating certain remedies
to place the well on production, Tatham Offshore and Leviathan decided to
abandon the well and the Ewing Bank system in May 1998. See Leviathan's "Notes
to Consolidated Financial Statements -- Note 8 -- Related Party
Transactions -- Platform Access and Transportation Agreements" located elsewhere
in this Annual Report.
OFFSHORE PLATFORMS AND OTHER FACILITIES
General. Offshore platforms play a key role in the development of oil and
natural gas reserves and, thus, in the offshore pipeline network. Platforms are
used to interconnect the offshore pipeline grid and to provide an efficient
means to perform pipeline maintenance and to operate compression facilities,
separation, processing and other facilities. In addition to numerous platforms
owned by the Equity Investees, Leviathan owns six strategically located
platforms in the Gulf.
Viosca Knoll Block 817. Leviathan constructed a multi-purpose platform
located in Viosca Knoll Block 817 (the "VK 817 Platform") in 1995. The VK 817
Platform was used by Leviathan as a base for conducting drilling operations for
oil and natural gas reserves located on the Viosca Knoll Block 817 lease. In
addition, the platform serves as a base for landing other deepwater production
in the area, thereby generating platform access and processing fees for
Leviathan. Leviathan also leases platform space to Viosca Knoll for the location
of compression equipment for the Viosca Knoll system.
Garden Banks Block 72. Leviathan owns a 50% interest in a multi-purpose
platform located in Garden Banks Block 72 (the "GB 72 Platform"). The GB 72
Platform is located at the south end of the Stingray system and serves as the
westernmost terminus of Poseidon. The GB 72 Platform was also used as a drilling
and production platform and as the landing site for production from Leviathan's
Garden Banks Block 117 lease located in an adjacent lease block.
8
<PAGE> 11
East Cameron Block 373. See "-- Recent Developments -- Construction of
Multi-Purpose Platform."
Ship Shoal Block 332. Leviathan owns a 100% interest in a platform located
in Ship Shoal Block 332 which serves as a junction platform for natural gas
pipelines in the Manta Ray Offshore system as well as an eastern junction for
Poseidon.
South Timbalier Block 292. The South Timbalier Block 292 platform is a
100%-owned facility located at the easternmost terminus of the Manta Ray
Offshore system and serves as a landing site for natural gas production in the
area.
Ship Shoal Block 331. In August 1998, pursuant to the terms of the
Redemption Agreement, Leviathan acquired the Ship Shoal Block 331 platform, a
production facility located 75 miles off the coast of Louisiana in approximately
370 feet of water. Pogo Producing Company has certain rights to utilize the
platform pursuant to a processing and use of space agreement.
Other Facilities. Through its 50% ownership interest in West Cameron Dehy,
Leviathan owns an interest in certain dehydration facilities located at the
northern terminus of the Stingray system, onshore Louisiana.
MAINTENANCE
Each of the Pipelines requires regular and thorough maintenance. The
interior of the pipelines are maintained through the regular "pigging" of the
lines. Pigging involves propelling a large spherical object through the line
which collects, or pushes, any condensate and other liquids on the walls or at
the bottom of the pipeline through the line and out the far end. More
sophisticated pigging devices include those with scrapers, brushes and x-ray
devices; however, such pigging devices are usually deployed only on an as needed
basis. Corrosion inhibitors are also injected into all of the systems through
the flow stream on a continuous basis. To prevent external corrosion of the
pipe, sacrificial anodes are fastened to the pipeline itself at prescribed
intervals, providing exterior corrosion protection from sea water. The platforms
are painted to the waterline every three to five years to prevent atmospheric
corrosion. Sacrificial anodes are also fastened to the platform legs below the
waterline to prevent corrosion. A sacrificial anode is a zinc aluminum alloy
fixture that is attached to the exterior of a steel object to attract the
corrosive reaction that occurs between steel and saltwater to the fixture
itself, thus protecting the steel object from corrosion. Remote operated
vehicles or divers inspect the platforms below the waterline usually every five
years.
The Stingray, HIOS, Viosca Knoll, Manta Ray Offshore and Poseidon systems
include platforms that are manned on a continuous basis. The personnel onboard
the platforms are responsible for site maintenance, operations of the facilities
on the platform, measurement of the natural gas stream at the source of
production and corrosion control (pig launching and inhibitor injection).
COMPETITION
Each of the Gas Pipelines is located in or near natural gas production
areas that are served by other pipelines. As a result, each of Leviathan's
systems face competition from both regulated pipelines and gathering systems
with respect to its transportation services. Certain of these pipelines are not
subject to the same level of rate and service regulation as, and may have a
lower cost structure than, the Gas Pipelines, and other pipelines, such as
long-haul transporters, have rate design alternatives unavailable to the Gas
Pipelines. Consequently, such pipelines may be able to provide service on more
flexible terms and at rates significantly below the rates offered by the Gas
Pipelines. The Gas Pipelines' principal interstate pipeline competitors are
Shell, Texaco Natural Gas, Inc., ANR, Transco, Trunkline Gas Co., Texas Eastern
Transmission Corporation, Sea Robin Pipeline Company, Columbia Gas Transmission
Corporation and their affiliates. Poseidon was built as a result of Leviathan's
belief that additional sour crude oil capacity was required to transport new
subsalt and deepwater oil production to shore. Poseidon's principal competitors
for additional crude oil production are the Texaco-operated Eugene Island
Pipeline System and the Shell-operated Amberjack System. The Pipelines compete
for new production with these and other competitors on the basis of geographic
proximity to the production, cost of connection, available capacity,
transportation rates and access to onshore markets. In addition, the ability of
the Pipelines to access future reserves will be subject to the
9
<PAGE> 12
ability of the Pipelines or the producers to fund the anticipated significant
capital expenditures required to connect the new production. See "-- Industry
Condition."
CUSTOMERS AND CONTRACTS
The Gas Pipelines gather and transport natural gas under both firm and
interruptible agreements. Under firm agreements, a pipeline is obligated to
receive and deliver up to a specified maximum quantity of natural gas without
interruption, except upon occurrence of a force majeure event or certain other
specified events. Firm customers often pay a two part rate, a demand charge and
a commodity charge. Often, a demand charge covering fixed costs is payable
monthly based on the maximum contract quantity the pipeline is obligated to
transport, without regard to the quantity actually transported during such
month, and a commodity charge covering variable costs is payable monthly based
on the actual quantity of natural gas transported during such month. Under
interruptible contracts, a pipeline is usually obligated to receive and deliver
up to a specified maximum quantity of natural gas, subject to availability of
capacity, on a first-come, first-served basis. Usually, interruptible customers
pay only a commodity charge based on the actual quantity of natural gas
transported. Many of the Gas Pipelines' customers, regardless of whether their
contracts are firm or interruptible, pay a one-part rate per million British
thermal unit ("MMbtu") covering both fixed and variable costs. Poseidon receives
crude oil from the leases connected to the pipeline under long-term buy/sell
agreements.
Principal Customers. See Leviathan's "Notes to Consolidated Financial
Statements -- Note 12 -- Major Customers" for certain information regarding
Leviathan's principal transportation customers.
OIL AND NATURAL GAS PROPERTIES
General. Leviathan conducts exploration and production activities through a
subsidiary that is an independent energy company engaged in the development and
production of reserves located offshore the United States in the Gulf focusing
principally on the flextrend and deepwater areas. As of December 31, 1998,
Leviathan owned interests in 13 lease blocks in the Gulf comprising 66,369 gross
(54,278 net) acres. See "-- Oil and Natural Gas Reserves" for a discussion of
the assumptions used in, and inherent difficulties relating to, estimating
reserves. Leviathan sells the majority of its oil and natural gas production to
Offshore Gas Marketing, Inc., an affiliate of Leviathan and an indirect
wholly-owned subsidiary of El Paso.
The following is a description of the significant properties currently held
by Leviathan.
Viosca Knoll Block 817. Viosca Knoll Block 817 is a producing property that
is comprised of 5,760 gross and net acres located 40 miles off the coast of
Louisiana in approximately 670 feet of water. In 1995, Leviathan acquired from
Tatham Offshore a 75% working interest in Viosca Knoll Block 817 from the sea-
floor through the stratigraphic equivalent of the base of the Tex X-6 Sand,
subject to certain reversionary rights. In connection with the Merger, Tatham
Offshore relinquished its reversionary rights related to Viosca Knoll Block 817
and, pursuant to the Redemption Agreement, Leviathan acquired the remaining 25%
working interest in Viosca Knoll Block 817. See "-- Recent
Developments -- Merger." This 25% working interest is subject to a production
payment that entitles the holders in the aggregate to 25% of the proceeds from
the production attributable to this working interest (after deducting all
leasehold operating expenses, including platform access and processing fees)
until the holders have received the aggregate sum of $16 million. At December
31, 1998, the unpaid portion of the production payment obligation totaled $11.1
million.
Leviathan, as operator, concluded a drilling program and placed eight wells
on production on Viosca Knoll Block 817. Leviathan does not anticipate drilling
any more wells or having any other major expenditures with respect to this
property except for the possible recompletion of certain existing wells. From
inception of production in December 1995 through December 31, 1998, the Viosca
Knoll project has produced 42,661 MMcf of natural gas and 67,580 barrels of oil,
net to Leviathan's interest. The Viosca Knoll Block 817 is currently producing
an aggregate of approximately 46.3 MMcf of natural gas per day. Natural Gas
production from Viosca Knoll Block 817 is dedicated to Leviathan for gathering
through the Viosca Knoll system and oil production was transported through a
Shell-operated system.
10
<PAGE> 13
Garden Banks Block 72. Garden Banks Block 72 covers 5,760 gross (2,880 net)
acres and is located 120 miles off the coast of Louisiana in approximately 550
feet of water. Tatham Offshore and Midcon Exploration Company ("MidCon
Exploration") jointly bought the Garden Banks Block 72 lease in 1991. In 1995,
Leviathan acquired from Tatham Offshore its 50% working interest (approximately
40.2% net revenue interest) in Garden Banks Block 72, subject to certain
reversionary interests which were relinquished in connection with the Merger.
See "-- Recent Developments -- Merger." MidCon Exploration owns the remaining
50% working interest in Garden Banks Block 72.
Since May 1996, Leviathan has placed five wells on production at Garden
Banks Block 72. Leviathan does not anticipate drilling any more wells or having
any other major expenditures with respect to this property except for the
possible recompletion of certain existing wells. Production at Garden Banks
Block 72 totaled 2,979 MMcf of natural gas and 902,090 barrels of oil, net to
Leviathan's interest, from the inception of production in May 1996 through
December 31, 1998. The five wells are currently producing a total of
approximately 1,480 barrels of oil and 4.5 MMcf of natural gas per day. Natural
gas production from Garden Banks Block 72 is being transported through the
Stingray system and the oil production is delivered to Poseidon.
Garden Banks Block 117. Garden Banks Block 117 covers 5,760 gross (2,880
net) acres adjacent to Garden Banks Block 72 and is located in approximately
1,000 feet of water. Tatham Offshore and MidCon Exploration jointly acquired the
Garden Banks Block 117 lease from Shell under a farm-in arrangement which
provides that Shell retains a 1/12 overriding royalty interest in Garden Banks
Block 117 with an option to convert the overriding royalty interest into a 30%
working interest after the property has produced 25 million net equivalent
barrels of oil. In November 1994, Tatham Offshore completed the drilling of its
Garden Banks 117 #1 well. In 1995, Leviathan acquired from Tatham Offshore its
50% working interest (approximately 37.5% net revenue interest) in Garden Banks
Block 117, subject to certain reversionary interests which were relinquished in
connection with the Merger. See "-- Recent Developments -- Merger." MidCon
Exploration owns the remaining 50% working interest in Garden Banks Block 117.
In July 1996 and May 1997, Leviathan completed and initiated production
from the Garden Banks Block 117 #1 and #2 wells, respectively, which are
currently producing a total of approximately 1,365 barrels of oil and 2.7 MMcf
of natural gas per day. Since inception of production through December 31, 1998,
Garden Banks Block 117 produced 1,327 MMcf of natural gas and 761,820 barrels of
oil, net to Leviathan's interest. Leviathan does not anticipate drilling any
more wells on this property except for a recompletion of the Garden Banks 117 #2
well. Natural gas production from Garden Banks Block 117 is transported on the
Stingray system and oil production is delivered to Poseidon.
West Delta Block 35. Pursuant to the Redemption Agreement, Leviathan
acquired a 38% non-operating working interest in West Delta Block 35, a
producing field located 10 miles off the coast of Louisiana in approximately 60
feet of water covering 4,985 gross (1,894 net) acres. The West Delta Block 35
field commenced production in July 1993 and two wells are currently producing in
the aggregate approximately 8.1 MMcf of natural gas and 130 barrels of oil per
day. Since August 14, 1998 through December 31, 1998, West Delta Block 35
produced 272 MMcf of natural gas and 2,190 barrels of oil, net to Leviathan's
interest.
Sunday Silence Property. See "-- Recent Developments -- Sunday Silence
Property."
COMPETITION
The exploration and production of oil and natural gas is highly competitive
and cyclical. Competition in the industry has increased significantly during the
last several years due to an increase in worldwide demand for oil and natural
gas, which has stabilized and periodically increased the prices of those
commodities. However, from the mid 1980's through the early 1990's, increases in
worldwide energy production capability, decreases in energy consumption as a
result of conservation efforts, and the continued development of alternate
energy sources have brought about substantial surpluses in oil and natural gas
supplies, resulting in substantial competition for the marketing of oil and
natural gas. As a result, there were precipitous declines in oil and natural gas
prices and delays in producing and marketing natural gas after it is discovered.
Changes in government regulations relating to the production, transportation and
marketing of natural gas have also
11
<PAGE> 14
resulted in the abandonment by many pipelines of long-term contracts for the
purchase of natural gas, the development by natural gas producers and other
entities of their own marketing programs to take advantage of new regulations
requiring pipelines to transport natural gas for regulated fees and an
increasing tendency to rely on short-term sales contracts priced at spot market
prices. See "-- Regulation" and "-- Industry Conditions."
Many of Leviathan's competitors have financial and other resources
substantially in excess of those available to Leviathan and may, accordingly, be
better positioned to acquire and exploit prospects, hire personnel and market
production. In addition, many of Leviathan's larger competitors may be better
able to withstand the effect of changes in factors such as worldwide oil and
natural gas prices and levels of production, the cost and availability of
alternative fuels and the application of government regulations, which affect
demand for oil and natural gas production and are beyond the control of
Leviathan.
OIL AND NATURAL GAS RESERVES
The following estimates of Leviathan's total proved developed and proved
undeveloped reserves of oil and natural gas as of December 31, 1998 have been
made by Netherland, Sewell & Associates, Inc. ("Netherland, Sewell"), an
independent petroleum engineering consulting firm.
<TABLE>
<CAPTION>
NATURAL GAS (MCF)
OIL (BARRELS) ------------------------
PROVED PROVED PROVED
DEVELOPED DEVELOPED UNDEVELOPED
------------- ---------- -----------
<S> <C> <C> <C>
Viosca Knoll Block 817................................... 80,592 21,700,344 2,452,000
Garden Banks Block 72.................................... 495,437 2,306,934 --
Garden Banks Block 117................................... 991,888 1,645,839 --
West Delta Block 35...................................... 9,599 779,179 --
--------- ---------- ---------
Total.......................................... 1,577,516 26,432,296 2,452,000
========= ========== =========
</TABLE>
In general, estimates of economically recoverable oil and natural gas
reserves and of the future net revenue therefrom are based upon a number of
variable factors and assumptions, such as historical production from the subject
properties, the assumed effects of regulation by governmental agencies and
assumptions concerning future oil and natural gas prices, future operating costs
and future plugging and abandonment costs, all of which may vary considerably
from actual results. All such estimates are to some degree speculative, and
classifications of reserves are only attempts to define the degree of
speculation involved. For these reasons, estimates of the economically
recoverable oil and natural gas reserves attributable to any particular group of
properties, classifications of such reserves based on risk of recovery and
estimates of the future net revenue expected therefrom, prepared by different
engineers or by the same engineers at different sites, may vary substantially.
The meaningfulness of such estimates is highly dependent upon the assumptions
upon which they are based.
Furthermore, production from Garden Banks Block 117, Garden Banks Block 72
and Viosca Knoll Block 817 was initiated in July 1996, May 1996 and December
1995, respectively, and, accordingly, estimates of future production are based
on this limited history. Estimates with respect to proved undeveloped reserves
that may be developed and produced in the future are often based upon volumetric
calculations and upon analogy to similar types of reserves rather than upon
actual production history. Estimates based on these methods are generally less
reliable than those based on actual production history. Subsequent evaluation of
the same reserves based upon production history will result in variations, which
may be substantial, in the estimated reserves. A significant portion of
Leviathan's reserves is based upon volumetric calculations.
12
<PAGE> 15
The following table sets forth, as of December 31, 1998, the estimated
future net cash flows and the present value of estimated future net cash flows,
discounted at 10% per annum, from the production and sale of the proved
developed and undeveloped reserves attributable to Leviathan's interest in oil
and natural gas properties as of such date, as determined by Netherland, Sewell
in accordance with the requirements of applicable accounting standards, before
income taxes.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------
PROVED PROVED TOTAL
DEVELOPED UNDEVELOPED PROVED
--------- ----------- --------
(in thousands)
<S> <C> <C> <C>
Undiscounted estimated future net cash flows from proved
reserves before income taxes(1)........................... $28,457 $864 $ 29,321
Present value of estimated future net cash flows from proved
reserves before income taxes, discounted at 10%........... $26,131 $541 $ 26,672
</TABLE>
- ---------------
(1) The average oil and natural gas prices, as adjusted by lease for gravity and
Btu content, regional posted price differences and oil and natural gas price
hedges in place and weighted by production over the life of the proved
reserves, used in the calculation of estimated future net cash flows at
December 31, 1998 are $9.80 per barrel of oil and $1.53 per Mcf of natural
gas.
In accordance with applicable requirements of the Securities and Exchange
Commission (the "Commission"), the estimated discounted future net revenue from
estimated proved reserves are based on prices and costs at fiscal year end
unless future prices or costs are contractually determined at such date. Actual
future prices and costs may be materially higher or lower. Actual future net
revenue also will be affected by factors such as actual production, supply and
demand for oil and natural gas, curtailments or increases in consumption by
natural gas purchasers, changes in governmental regulations or taxation and the
impact of inflation on costs.
In accordance with the methodology approved by the Commission, specific
assumptions were applied in the computation of the reserve evaluation estimates.
Under this methodology, future net cash flows are determined by reducing
estimated future gross cash flows to Leviathan for oil and natural gas sales by
the estimated costs to develop and produce the underlying reserves, including
future capital expenditures, operating costs, transportation costs, royalty and
overriding royalty burdens, production payments and net profits interest expense
on certain of Leviathan's properties.
Future net cash flows were discounted at 10% per annum to arrive at
discounted future net cash flows. The 10% discount factor used to calculate
present value is required by the Commission, but such rate is not necessarily
the most appropriate discount rate. Present value of future net cash flows,
irrespective of the discount rate used, is materially affected by assumptions as
to timing of future oil and natural gas prices and production, which may prove
to be inaccurate. In addition, the calculations of estimated net revenue do not
take into account the effect of certain cash outlays, including, among other
things, general and administrative costs, interest expense and partner
distributions. The present value of future net cash flows shown above should not
be construed as the current market value as of December 31, 1998, or any prior
date, of the estimated oil and natural gas reserves attributable to Leviathan's
properties.
13
<PAGE> 16
PRODUCTION, UNIT PRICES AND COSTS
The following table sets forth certain information regarding the production
volumes of, average unit prices received for and average production costs for
Leviathan's sale of oil and natural gas for the periods indicated:
<TABLE>
<CAPTION>
OIL (BARRELS) NATURAL GAS (MMCF)
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------ ---------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net production(1)................ 540,000 801,000 393,000 11,324 19,792 15,730
Average sales price(1)........... $ 15.69 $ 20.61 $ 21.76 $ 2.01 $ 2.08 $ 2.37
Average production costs(2)...... $ 3.04 $ 1.98 $ 1.59 $ 0.51 $ 0.33 $ 0.27
</TABLE>
- ---------------
(1) The information regarding production and unit prices excludes overriding
royalty interests.
(2) The components of production costs may vary substantially among wells
depending on the methods of recovery employed and other factors, but
generally include third party transportation expenses, maintenance and
repair, labor and utilities costs.
The relationship between average sales prices and average production costs
depicted by the table above is not necessarily indicative of future results of
operations expected by Leviathan.
ACREAGE
The following table sets forth Leviathan's developed and undeveloped oil
and natural gas acreage as of December 31, 1998. Undeveloped acreage is
considered to be those lease acres on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and natural gas, regardless of whether or not such acreage contains
proved reserves. Gross acres in the following table refer to the number of acres
in which a working interest is owned directly by Leviathan. The number of net
acres is Leviathan's fractional ownership of working interests in the gross
acres.
<TABLE>
<CAPTION>
GROSS NET
------ ------
<S> <C> <C>
Developed acreage........................................... 6,792 5,416
Undeveloped acreage......................................... 59,577 48,862
------ ------
Total acreage..................................... 66,369 54,278
====== ======
</TABLE>
OIL AND NATURAL GAS DRILLING ACTIVITY
The following table sets forth the gross and net number of productive, dry
and total exploratory wells and development wells that Leviathan has drilled in
each of the respective years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Exploratory
Natural Gas............................... -- -- -- -- -- --
Oil....................................... -- -- -- -- 1.00 0.50
Dry....................................... -- -- -- -- -- --
---- ---- ---- ---- ----- ----
Total............................. -- -- -- -- 1.00 0.50
==== ==== ==== ==== ===== ====
Development
Natural Gas............................... -- -- -- -- 7.00 5.00
Oil....................................... 1.00 1.00 -- -- 5.00 2.75
Dry....................................... -- -- -- -- 3.00 1.75
---- ---- ---- ---- ----- ----
Total............................. 1.00 1.00 -- -- 15.00 9.50
==== ==== ==== ==== ===== ====
</TABLE>
14
<PAGE> 17
The following table sets forth Leviathan's ownership in producing wells at
December 31, 1998:
<TABLE>
<CAPTION>
GROSS NET
----- -----
<S> <C> <C>
Natural Gas................................................. 10.00 8.26
Oil......................................................... 6.00 3.00
----- -----
Total............................................. 16.00 11.26
===== =====
</TABLE>
MAJOR ENCUMBRANCES
All of the operating assets in which Leviathan owns an interest are owned
by subsidiaries or Equity Investees of Leviathan. Substantially all of the
assets of Leviathan (primarily its interest in its subsidiaries) and its
subsidiaries are pledged as collateral to secure obligations under the Leviathan
Credit Facility, as hereinafter defined. In addition, certain of the Equity
Investees currently have, and others are expected to have, credit facilities
pursuant to which substantially all of such Equity Investees' assets are or
would be pledged. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
REGULATION
The oil and natural gas industry is extensively regulated by federal and
state authorities in the United States. Numerous departments and agencies, both
federal and state, have issued rules and regulations binding on the oil and
natural gas industry and its individual members, some of which carry substantial
penalties for the failure to comply. Legislation affecting the oil and natural
gas industry is under constant review and statutes are constantly being adopted,
expanded or amended. The regulatory burden on the oil and natural gas industry
increases its cost of doing business.
General. The design, construction, operation and maintenance of the Gas
Pipelines of certain of their natural gas transmission facilities are subject to
regulation by the Department of Transportation under the Natural Gas Pipeline
Safety Act of 1968 as amended (the "NGPSA"). Operations in offshore federal
waters are regulated by the Department of Interior and the FERC. Under the Outer
Continental Shelf Lands Act (the "OCSLA") as implemented by the FERC, pipelines
that transport natural gas across the OCS must offer nondiscriminatory
transportation of natural gas. Substantially all of the pipeline network owned
by the Pipelines is located in federal waters in the Gulf, and the related
rights-of-way were granted by the federal government, the agencies of which
oversee such pipeline operations. Federal rights-of-way require compliance with
detailed federal regulations and orders which regulate such operations.
Poseidon is subject to regulation under the Hazardous Liquid Pipeline
Safety Act ("HLPSA"). Operations in offshore federal waters are regulated by the
Department of the Interior. In addition, under the OCSLA, as implemented by the
FERC, pipelines that transport crude oil across the OCS must offer "equal
access" to other potential shippers of crude. Poseidon is located in federal
waters in the Gulf, and its right-of-way was granted by the federal government.
Therefore, the FERC may assert that it has jurisdiction to compel Poseidon to
grant access under the OCSLA to other shippers of crude oil upon the
satisfaction of certain conditions and to apportion the capacity of the line
among owner and non-owner shippers.
Rates. Each of the Regulated Pipelines (Nautilus, Stingray, HIOS and UTOS)
is classified as a "natural gas company" by the NGA. Consequently, the FERC has
jurisdiction over the Regulated Pipelines with respect to transportation of
natural gas, rates and charges, construction of new facilities, extension or
abandonment of service and facilities, accounts and records, depreciation and
amortization policies and certain other matters. In addition, the Regulated
Pipelines hold certificates of public convenience and necessity issued by the
FERC covering their facilities, activities and services.
Under the terms of the Regulated Pipelines' tariffs on file at the FERC,
the Regulated Pipelines may not charge or collect more than the maximum rates on
file with the FERC. FERC regulations permit natural gas pipelines to charge
maximum rates that generally allow pipelines the opportunity to (i) recover
operating expenses, (ii) recover the pipeline's undepreciated investment in
property, plant and equipment ("rate base")
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and (iii) receive an overall allowed rate of return on the pipeline's rate base.
Leviathan believes that even after the rate base of any Regulated Pipeline is
substantially depleted, the FERC will allow such Regulated Pipeline to recover a
reasonable return, whether through a management fee or otherwise.
Each of Nautilus, Stingray, HIOS and UTOS are currently operating under
agreements with their respective customers that provide for rates that have been
approved by the FERC.
On March 13, 1997, the FERC issued an order declaring Tarpon's facilities
exempt from NGA regulation under the gathering exception, thereby terminating
Tarpon's status as a "natural gas company" under the NGA. Tarpon has agreed,
however, to continue service for shippers that have not executed replacement
contracts on the terms and conditions, and at the rate reflected in, its last
effective regulated tariff for two years from the date of the order. None of the
Green Canyon, Manta Ray Offshore or Viosca Knoll systems is currently considered
a "natural gas company" under the NGA. Consequently, these companies are not
subject to extensive FERC regulation under the NGA or the Natural Gas Policy Act
of 1978, as amended (the "NGPA"), and are thus allowed to negotiate the rates
and terms of service with their respective shippers, subject to the "equal
access" requirements of the OCSLA.
The FERC has asserted its NGA rate jurisdiction over services performed
through gathering facilities owned by a natural gas company (as defined in the
NGA) when such services were performed "in connection with" transportation
services provided by such natural gas company. Whether, and to what extent, the
FERC should exercise any NGA rate jurisdiction it may be found to have over
gathering facilities owned either by natural gas companies or affiliates thereof
is subject to case-by-case review by the FERC. Based on current FERC policy and
precedent, Leviathan does not anticipate that the FERC will assert or exercise
any NGA rate jurisdiction over the Green Canyon, Manta Ray Offshore or Viosca
Knoll systems, so long as the services provided through such lines are not
performed "in connection with" transportation services performed through any of
the Regulated Pipelines.
The FERC has generally disclaimed jurisdiction to set rates for oil
pipelines in the OCS under the Interstate Commerce Act. As a result, POPCO has
not filed tariffs with the FERC for Poseidon.
Production and Development. The production and development operations of
Leviathan are subject to regulation at the federal and state levels. Such
regulation includes requiring permits for the drilling of wells and maintaining
bonds and insurance requirements in order to drill or operate wells, and
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilled and the
plugging and abandoning of wells. Leviathan's production and development
operations are also subject to various conservation laws and regulations. These
include the regulation of the size of drilling and spacing units or proration
units, the density of wells that may be drilled, the levels of production, and
the unitization or pooling of oil and natural gas properties.
Leviathan presently has interests in or rights to offshore leases located
in federal waters. Federal leases are administered by the MMS. Individuals and
entities must qualify with the MMS prior to owning and operating any leasehold
or right-of-way interest in federal waters. Such qualification with the MMS
generally involves filing certain documents with the MMS and obtaining an
area-wide performance bond and, in some cases, supplemental bonds representing
security deemed necessary by the MMS in excess of the area-wide bond
requirements for facility abandonment and site clearance costs.
OPERATIONAL HAZARDS AND INSURANCE
A pipeline may experience damage as a result of an accident or other
natural disaster. In addition, Leviathan's production and development operations
are subject to the usual hazards incident to the drilling and production of
natural gas and crude oil, such as blowouts, cratering, explosions,
uncontrollable flows of oil, natural gas or well fluids, fires, pollution,
releases of toxic gas and other environmental hazards and risks. These hazards
can cause personal injury and loss of life, severe damage to and destruction of
property and equipment, pollution or environmental damages and suspension of
operations. To mitigate the impact of repair costs associated with such an
accident or disaster, Leviathan maintains insurance of various types that it
considers to be adequate to cover its operations. The Insurance Package covers
all of Leviathan's assets in
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amounts considered reasonable, other than for Leviathan's 50% interest in the
assets of Stingray, for which insurance is carried at the Stingray partnership
level. The Insurance Package is subject to deductibles that Leviathan considers
reasonable and not excessive. Leviathan's insurance does not cover every
potential risk associated with operating pipelines or the drilling and
production of oil and natural gas. Consistent with insurance coverage generally
available to the industry, Leviathan's insurance policies do not provide
coverage for losses or liabilities relating to pollution, except for sudden and
accidental occurrences. Leviathan does, however, have certificates of financial
responsibility of not less than $35 million per offshore facility and/or lease.
See "-- Environmental -- Water."
The occurrence of a significant event not fully insured or indemnified
against, or the failure of a party to meet its indemnification obligations,
could materially and adversely affect Leviathan's operations and financial
condition. Leviathan believes that it is adequately insured for public liability
and property damage to others with respect to its operations. However, no
assurance can be given that Leviathan will be able to maintain adequate
insurance in the future at rates it considers reasonable.
INDUSTRY CONDITIONS
The energy industry is highly cyclical, resulting in significant increased
competition during the high and low period of each cycle. This cyclical nature,
which is primarily driven by the market prices of oil and natural gas, affects
the amount of capital expended on offshore exploration and development
activities at any particular time. This amount of capital expenditure, in turn,
ultimately affects the level of throughput on the Pipelines and, thus,
Leviathan's revenue and earnings. From the mid 1980's through the early 1990's,
increases in worldwide energy production capability, decreases in energy
consumption as a result of conservation efforts and the continued development of
alternate energy sources resulted in substantial surpluses in oil and natural
gas supplies and substantially lower commodity prices; consequently, offshore
exploration and development activities decreased during that time period. Oil
and natural gas prices increased moderately and stabilized from the early 1990's
through the third quarter of 1998, bringing about a corresponding increase in
exploration and production. Since then, prices for these commodities have
declined precipitously, and the direction of these prices in the future and the
resultant effect on various segments of the energy industry is uncertain.
Because of this uncertainty, industry participants have dramatically cut
offshore exploration and development budgets. There can be no assurance that
economic conditions will be favorable in the near future for any expanded
offshore exploration and development.
ENVIRONMENTAL
General. Leviathan's operations are subject to extensive federal, state and
local statutory and regulatory requirements relating to environmental affairs,
health and safety, waste management and chemical products. In recent years,
these requirements have become increasingly stringent and in certain
circumstances, they impose "strict liability" on a company, rendering it liable
for environmental damage without regard to negligence or fault on the part of
such company. To Leviathan's knowledge, its operations are in substantial
compliance, and are expected to continue to comply in all material respects,
with applicable environmental laws, regulations and ordinances.
It is possible, however, that future developments, such as stricter
environmental laws, regulations or enforcement policies could affect the
handling, manufacture, use, emission or disposal of substances or wastes by
Leviathan or the Pipelines. In addition, some risk of environmental costs and
liabilities is inherent in Leviathan's operations and products as it is with
other companies engaged in similar or related businesses, and there can be no
assurance that material costs and liabilities, including substantial fines and
criminal sanctions for violation of environmental laws and regulations, will not
be incurred by Leviathan. Furthermore, Leviathan will likely be required to
increase its expenditures during the next several years to comply with higher
industry and regulatory safety standards. However, such expenditures cannot be
accurately estimated at this time.
Pipelines. In addition to the NGA, the NGPA and the OCSLA, several federal
and state statutes and regulations may pertain specifically to the operations of
the Pipelines. The Hazardous Materials Transportation Act, 49 U.S.C. sec.sec.
5101 et seq., as amended, regulates materials capable of posing an unreasonable
risk to
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health, safety and property when transported in commerce. The NGPSA and the
HLPSA authorize the development and enforcement of regulations governing
pipeline transportation of natural gas and hazardous liquids. Although federal
jurisdiction is exclusive over regulated pipelines, the statutes allow states to
impose additional requirements for intrastate lines if compatible with federal
programs. Both Texas and Louisiana have developed regulatory programs that
parallel the federal program for the transportation of natural gas by pipelines.
Solid Waste. The Pipelines' operations may generate or transport both
hazardous and nonhazardous solid wastes that are subject to the requirements of
the federal Resource Conservation and Recovery Act, as amended ("RCRA"), 42
U.S.C. sec.sec. 6901 et. seq., and its regulations, and comparable state
statutes and regulations. Further, it is possible that some wastes that are
currently classified as nonhazardous, via exemption or otherwise, perhaps
including wastes currently generated during pipeline operations, may, in the
future, be designated as "hazardous wastes," which would then be subject to more
rigorous and costly treatment, storage, transportation and disposal
requirements. Such changes in the regulations may result in additional
expenditures or operating expenses by Leviathan. On August 8, 1998, the
Environmental Protection Agency ("EPA") added four petroleum refining wastes to
the list of RCRA hazardous wastes. While the full impact of the rule has yet to
be determined, the rule may, as of February 8, 1999, impose increased
expenditures and operating expenses on Leviathan or the Pipelines relating to
the treatment, storage, transportation and disposal of certain petroleum
refining wastes that previously were not regulated as hazardous wastes.
Hazardous Substances. The Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), 42 U.S.C. sec.sec. 9601 et. seq., and
comparable state statutes, also known as "Superfund" laws, impose liability,
without regard to fault or the legality of the original conduct, on certain
classes of persons that cause or contribute to the release of a "hazardous
substance" into the environment. These persons include the current owner or
operator of a site, the past owner or operator of a site, and companies that
transport, dispose of, or arrange for the disposal of the hazardous substances
found at the site. CERCLA also authorizes the EPA or state agency, and in some
cases, third parties, to take actions in response to threats to the public
health or the environment and to seek to recover from the responsible classes of
persons the costs they incur. Despite the "petroleum exclusion" of Section 101
(14) that currently encompasses natural gas, Leviathan may nonetheless generate
or transport "hazardous substances" within the meaning of CERCLA, or comparable
state statutes, in the course of its ordinary operations. And, certain petroleum
refining wastes that previously were not regulated as hazardous waste may now
fall within the definition of CERCLA hazardous substances. Thus, Leviathan may
be responsible under CERCLA or the state equivalents for all or part of the
costs required to cleanup sites where a release of a hazardous substance has
occurred.
Air. Leviathan's operations may be subject to the Clean Air Act ("CAA"), 42
U.S.C. sec.sec. 7401-7642, and comparable state statutes. The 1990 CAA
amendments and accompanying regulations, state or federal, may impose certain
pollution control requirements with respect to air emissions from operations,
particularly in instances where a company constructs a new facility or modifies
an existing facility. Leviathan may also be required to incur certain capital
expenditures in the next several years for air pollution control equipment in
connection with maintaining or obtaining operating permits and approvals
addressing other air emission-related issues. However, Leviathan does not
believe its operations will be materially adversely affected by any such
requirements.
Water. The Federal Water Pollution Control Act ("FWPCA") and Clean Water
Act, 33 U.S.C. sec.sec. 1311 et. seq., impose strict controls against the
unauthorized discharge of produced waters and other oil and natural gas wastes
into navigable waters. The FWPCA provides for civil and criminal penalties for
any unauthorized discharges of oil and other hazardous substances in reportable
quantities, and, along with the Oil Pollution Act of 1990 ("OPA"), 33 U.S.C.
sec.sec. 2701-2761, imposes substantial potential liability for the costs of
removal, remediation and damages. Similarly, the OPA imposes liability for the
discharge of oil into or upon navigable waters or adjoining shorelines. Among
other things, the OPA raises liability limits, narrows defenses to liability and
provides more instances in which a responsible party is subject to unlimited
liability. One provision of the OPA requires that offshore facilities establish
and maintain evidence of financial responsibility of up to $35 million or any
amount up to $150 million if the EPA determines that a greater
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amount is justified based on the relative operational, environmental, human
health and other risks posed by the quantity or quality of the oil involved.
State laws for the control of water pollution also provide varying civil and
criminal penalties and liabilities in the case of an unauthorized discharge of
petroleum, its derivatives or other hazardous substances into state waters.
Further, the Coastal Zone Management Act ("CZMA"), 16 U.S.C. sec.sec. 1451-1464,
authorizes state implementation and development of programs containing
management measures for the control of nonpoint source pollution to restore and
protect coastal waters.
Endangered Species. The Endangered Species Act ("ESA"), 7 U.S.C. sec.sec.
136, seeks to ensure that activities do not jeopardize endangered or threatened
plant and animal species, nor destroy or modify the critical habitat of such
species. Under the ESA, certain exploration and production operations, as well
as actions by federal agencies or funded by federal agencies, must not
significantly impair or jeopardize the species or its habitat. The ESA provides
for criminal penalties for willful violations of this act. Other statutes which
provide protection to animal and plant species and thus may apply to Leviathan's
operations are the Marine Mammal Protection Act, the Marine Protection and
Sanctuaries Act, the Fish and Wildlife Coordination Act, the Fishery
Conservation and Management Act, and the Migratory Bird Treaty Act. The National
Historic Preservation Act, 16 U.S.C. sec. 470, may impose similar requirements.
Communication of Hazards. The Occupational Safety and Health Act, as
amended ("OSHA"), 29 U.S.C. sec.sec. 651 et. seq., the Emergency Planning and
Community Right-to-Know Act, as amended ("EPCRA"), 42 U.S.C. sec.sec. 11001 et.
seq., and comparable state statutes require Leviathan to organize and
disseminate information to employees, state and local organizations, and the
public about the hazardous materials used in its operations and its emergency
planning.
EMPLOYEES
Prior to August 1998, the General Partner and Leviathan depended primarily
upon the employees and management services provided by DeepTech pursuant to a
management agreement (the "Management Agreement"). Leviathan reimburses the
General Partner for all reasonable general and administrative expenses and other
reasonable expenses incurred by the General Partner and its affiliates for or on
behalf of Leviathan, including, but not limited to, amounts paid by the General
Partner to DeepTech under the Management Agreement. Since the Merger, El Paso
has provided such services under the Management Agreement for DeepTech.
Accordingly, El Paso hired substantially all of DeepTech's employees comprising
the Leviathan management team. See Item 10. "Directors and Executive Officers of
the Registrant" and Item 11. "Executive Compensation."
Through August 14, 1998, a subsidiary of Leviathan had 10 full-time
employees, based in Houma, Louisiana, to perform operational functions for its
natural gas pipeline and platform operations. El Paso hired substantially all of
these employees in connection with the Merger.
YEAR 2000
The Year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the year. Leviathan has established
a project team and works with the El Paso executive steering committee to
coordinate the phases of its Year 2000 project to ensure that Leviathan's key
automated systems and related processes will remain functional through Year
2000. Those phases include: (i) awareness, (ii) assessment, (iii) remediation,
(iv) testing, (v) implementation of the necessary modifications and (vi)
contingency planning (which was previously included as a component of
Leviathan's implementation phase). Leviathan has hired outside consultants and
is involved in several industry trade-groups to supplement Leviathan's project
team.
The awareness phase recognizes the importance of Year 2000 issues and its
potential impact on Leviathan. Through the project team, Leviathan has
established an awareness program which includes participation of management in
each business area. The awareness phase is substantially completed, although
Leviathan will continually update awareness efforts for the duration of the Year
2000 project.
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The assessment phase consists of conducting an inventory of Leviathan's key
automated systems and related processes, analyzing and assigning levels of
criticality to those systems and processes, identifying and prioritizing
resource requirements, developing validation strategies and testing plans, and
evaluating business partner relationships. Leviathan estimates that it is more
than half way complete with the portion of the assessment phase to determine the
nature and impact of the Year 2000 date change for hardware and equipment,
embedded chip systems, and third-party developed software. The assessment phase
of the project involves, among other things, efforts to obtain representations
and assurances from third parties, including Equity Investees, partners and
third party customers and vendors, that their hardware and equipment products,
embedded chip systems and software products being used by or impacting Leviathan
are or will be modified to be Year 2000 compliant. To date, the responses from
such third parties, although generally encouraging, are inconclusive. Although
Leviathan intends to interact only with those third parties that have Year 2000
compliant computer systems, it is impossible for Leviathan to monitor all such
systems. As a result, Leviathan cannot predict the potential consequences if its
Equity Investees, partners, customers or vendors are not Year 2000 compliant.
Leviathan is currently evaluating the exposure associated with such business
partner relationships.
The remediation phase involves converting, modifying, replacing or
eliminating selected key automated systems identified in the assessment phase.
The testing phase involves the validation of the identified key automated
systems. Leviathan is utilizing test tools and written procedures to document
and validate, as necessary, its unit, system, integration and acceptance
testing. Leviathan estimates that approximately three-quarters of the work for
these phases remain, and expects each phase to be substantially completed by
mid-1999.
The implementation phase involves placing the converted or replaced key
automated systems into operation. In some cases, the implementation phase will
also involve the implementation of contingency plans needed to support business
functions and processes that may be interrupted by Year 2000 failures that are
outside Leviathan's control. Leviathan is in the early stages of this phase and
expects to be substantially completed by mid-1999.
The contingency planning phase consists of developing a risk profile of
Leviathan's critical business processes and then providing for actions Leviathan
will pursue to keep such processes operational in the event of Year 2000
disruptions. The focus of such contingency planning is on prompt response to any
Year 2000 events, and a plan for subsequent resumption of normal operations. The
plan is expected to assess the risk of significant failure to critical processes
performed by Leviathan, and to address the mitigation of those risks. The plan
will also consider any significant failures in the event the most reasonably
likely worst case scenario develops, as discussed below. In addition, the plan
is expected to factor in the severity and duration of the impact of a
significant failure. Leviathan anticipates to complete its contingency plan by
mid-1999. This Year 2000 contingency plan will continue to be modified and
adjusted through the year as additional information from key external business
partners becomes available.
Leviathan's goal is to ensure that all of its critical systems and
processes that are under its direct control remain functional. Certain systems
and processes may be interrelated with or dependent upon systems outside
Leviathan's control and systems within Leviathan's control may have unpredicted
problems. Accordingly, there can be no assurance that significant disruptions
will be avoided. Leviathan's present analysis of its most reasonably likely
worst case scenario for Year 2000 disruptions includes Year 2000 failures in the
telecommunications and electricity industries, as well as interruptions from
suppliers that might cause disruptions in Leviathan's operations, thus causing
temporary financial losses and an inability to meet its obligations to
customers. A significant portion of the oil and natural gas transported through
the Pipelines is owned by third parties. Accordingly, failures of the producers
of oil and natural gas to be ready for the Year 2000 could significantly disrupt
the flow of the hydrocarbons for customers. In many cases, the producers have no
direct contractual relationship with Leviathan, and Leviathan relies on its
customers to verify the Year 2000 readiness of the producers from whom they
purchase oil and natural gas. A portion of Leviathan's revenue for the
transportation of oil and natural gas is based upon fees paid by its customers
for the reservation of capacity and a portion of the revenue is based upon the
volume of actual throughput. As such, short-term disruptions in throughput
caused by factors beyond Leviathan's control may have a financial impact on
Leviathan and could
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cause operational problems for Leviathan's customers. Longer-term disruptions
could materially impact Leviathan's operations, financial condition and cash
flows.
While the total cost of Leviathan's Year 2000 project is still being
evaluated, Leviathan estimates that the costs to be incurred in 1999 and 2000
associated with assessing, remediating and testing hardware and equipment,
embedded chip systems, and third-party developed software will not exceed $1.0
million, all of which will be expensed. As of December 31, 1998, Leviathan had
incurred less than $0.1 million related to such costs. Leviathan has previously
only tracked incremental expenses related to its Year 2000 project. The costs of
the Year 2000 project related to salaried employees of El Paso, including their
direct salaries and benefits, are not available and have not been included in
the estimated costs of the project. The management fee charged to Leviathan by
the General Partner includes such incremental expenses. Since the earlier phases
of the Year 2000 project mostly involved the work performed by such salaried
employees, the costs expended to date do not reflect the percentage completion
of the project. Leviathan anticipates that it will expend most of the costs
reported above in the remediation, implementation and contingency planning
phases of the project.
Presently, Leviathan intends to reassess its estimate of Year 2000 costs in
the event Leviathan completes an acquisition of, or makes a material investment
in, substantial facilities or another business entity.
Management does not expect the costs of Leviathan's Year 2000 project will
have a material adverse effect on Leviathan's financial position, results of
operations or cash flows. However, based on information available at this time,
Leviathan cannot conclude that disruption caused by internal or external Year
2000 related failures will not adversely effect Leviathan. Specific factors
which may affect the success of Leviathan's Year 2000 efforts and the occurrence
of Year 2000 disruption or expense include failure of Leviathan or its outside
consultants to properly identify deficient systems, the failure of the selected
remedial action to adequately address the deficiencies, the failure of
Leviathan's outside consultants to complete the remediation in a timely manner
(due to shortages of qualified labor or other factors), unforeseen expenses
related to the remediation of existing systems or the transition to replacement
systems, and the failure of third parties, including Equity Investees, to become
Year 2000 compliant or to adequately notify Leviathan of potential
noncompliance.
The above disclosure is a "Year 2000 Readiness Disclosure" made with the
intention to comply fully with the Year 2000 Information and Readiness
Disclosure Act of 1998, Pub. L. No. 105-271, 112 Stat, 2386, signed into law
October 19, 1998. All statements made herein shall be construed within the
confines of the Act. To the extent that any reader of the above Year 2000
Readiness Disclosure is other than an investor or potential investor in
Leviathan's or an affiliate's equity or debt securities, this disclosure is made
for the sole purpose of communicating or disclosing information aimed at
correcting, helping to correct and/or avoiding Year 2000 failures.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION
This Annual Report contains certain forward-looking statements and
information within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act") and Section 21E of the Exchange Act of 1934, as
amended (the "Exchange Act") 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
Leviathan's results of operations and financial condition are: (i) competitive
practices in the industry in which Leviathan competes, (ii) the impact of
current and future laws and government regulations affecting the industry in
general and Leviathan's operations in particular, (iii) environmental
liabilities to which Leviathan may become subject in the future that are not
covered by an indemnity or insurance, (iv) the throughput levels achieved by any
pipelines in which Leviathan owns (now or in the
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future) an interest, (v) the ability to access additional reserves to offset the
natural decline in production from existing wells connected to such pipelines,
(vi) changes in gathering, transportation, processing, handling and other rates
due to changes in government regulation and/or competitive factors, (vii) the
impact of oil and natural gas price fluctuations, (viii) the production rates
and reserve estimates associated with Leviathan's producing oil and natural gas
properties, (ix) significant changes from expectations of capital expenditures
and operating expenses and unanticipated project delays, (x) the ability of
equity investees to make distributions to Leviathan, (xi) the effect of the Year
2000 date change, (xii) Leviathan's consummation of the proposed acquisition of
an additional interest in Viosca Knoll, (xiii) the ability to economically raise
capital (debt and equity) to satisfy planned and unanticipated needs and (xiv)
other factors discussed more completely in Leviathan's other filings with this
Commission. Leviathan disclaims any obligation to update any forward-looking
statements to reflect events or circumstances after the date hereof.
CERTAIN DEFINITIONS
The following are abbreviations and words commonly used in the oil and
natural gas industry and in this Annual Report.
"Bcf" means billion cubic feet (or thousand MMcf).
"Btu" means British thermal unit, a unit of heat measure with one btu being
the amount of heat needed to raise the temperature of one pound of water one
degree Fahrenheit.
"development well" means a well drilled within the proved area of an oil or
natural gas reservoir to the depth of a stratigraphic horizon known to be
productive.
"gathering system" means a pipeline system connecting a number of wells,
batteries or platforms to an interconnection with an interstate pipeline.
"gross" oil and natural gas wells or "gross" acres are the total number of
wells or acres, respectively, in which Leviathan has an interest, without regard
to the size of that interest.
"MBbl" means thousand barrels, a barrel is a standard measure of volume for
oil, condensate and natural gas liquids which equals 42 U.S. gallons.
"Mcf" means thousand cubic feet, a standard measure of volume for natural
gas.
"MMcf" means million cubic feet.
"net" oil and natural gas wells or "net" acres or "net" production or
reserves are the total gross number of wells, acres, production or reserves,
respectively, in which Leviathan has an interest multiplied times Leviathan's
working interest in such wells, acres, production or reserves.
"OCS" means Outer Continental Shelf; an area offshore the United States
over which the federal government has jurisdiction, which extends from the end
of state territorial waters (three to twelve nautical miles offshore, depending
on the state) to 200 nautical miles from shore. The term OCS as used herein
includes not only those areas on the Shelf itself but those areas in the
flextrend and the deepwater, to a limit of 200 nautical miles, as well.
"recompletion" means the completion of an existing well for production from
a formation that exists behind the casing of the well.
"royalty" means an interest in an oil and natural gas lease that gives the
owner of the interest the right to receive a portion of the production from the
leased acreage (or of the proceeds of the sale thereof), but generally does not
require the owner to pay any portion of the costs of drilling or operating the
wells on the leased acreage. Royalties may be either landowner's royalties,
which are reserved by the owner of the leased acreage at the time the lease is
granted, or overriding royalties, which are usually carved from the leasehold
interest pursuant to an assignment to a third party reserved by an owner of the
leasehold in connection with a transfer of the leasehold to a subsequent owner.
22
<PAGE> 25
"working interest" means an interest in an oil and natural gas lease that
gives the owner of the interest the right to drill for and produce oil and
natural gas on the leased acreage and requires the owner to pay a share of the
costs of drilling and production operations. The share of production to which a
working interest owner is entitled will always be smaller than the share of
costs that the working interest owner is required to bear, with the balance of
the production accruing to the owners of royalties. For example, the owner of a
100% working interest in a lease burdened only by a landowner's royalty of 12.5%
would be required to pay 100% of the costs of a well but would be entitled to
retain 87.5% of the production.
In this Annual Report, natural gas volumes are stated at the legal pressure
base of the state or area in which the reserves are located and at 60 degrees
Fahrenheit.
ITEM 3. LEGAL PROCEEDINGS
Leviathan is involved from time to time in various claims, actions,
lawsuits and regulatory matters that have arisen in the ordinary course of
business, including various rate cases and other proceedings before the FERC.
See Items 1 and 2. "Business and Properties -- Regulation."
Leviathan and several subsidiaries of El Paso have been made defendants in
United States ex rel Grynberg v. El Paso Natural Gas Company, et al. litigation.
Generally, the complaint in this motion alleges an industry-wide conspiracy to
underreport the heating value as well as the volumes of the natural gas produced
from federal and Indian lands, thereby depriving the United States government of
royalties. The complaint remains sealed. Leviathan and El Paso believe the
complaint is without merit and therefore will not have a material adverse effect
on the consolidated financial position, operations or cash flows of Leviathan.
Leviathan is a defendant in a lawsuit filed by Transco in the 157th
Judicial District Court, Harris County, Texas on August 30, 1996. Transco
alleges that, pursuant to a platform lease agreement entered into on June 28,
1994, Transco has the right to expand its facilities and operations on the
offshore platform by connecting additional pipeline receiving and appurtenant
facilities. Management has denied Transco's request to expand its facilities and
operations because the lease agreement does not provide for such expansion and
because Transco's activities will interfere with the Manta Ray Offshore system
and Leviathan's existing and planned activities on the platform. Transco has
requested a declaratory judgment and is seeking damages. The case is set for
trial in June 1999. It is the opinion of management that adequate defenses exist
and that the final disposition of this suit individually, and all of Leviathan's
other pending legal proceedings in the aggregate, will not have a material
adverse effect on the consolidated financial position, operations or cash flows
of Leviathan.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of Leviathan
during the three months ended December 31, 1998.
23
<PAGE> 26
PART II
ITEM 5. MARKET FOR REGISTRANT'S UNITS AND RELATED UNITHOLDER MATTERS
The Common Units and Preference Units are listed on the NYSE, which is the
principal trading market for these securities. The Common Units, Leviathan's
primary listed securities, are listed under the symbol "LEV" and the Preference
Units, Leviathan's secondary listed securities, are listed under the symbol
"LEV.P". On March 5, 1999, the last reported per Unit sales prices on the NYSE
were $20.875 per Common Unit and $19.00 per Preference Unit. As of March 5,
1999, there were approximately 468 holders and 125 holders of record of Common
Units and Preference Units, respectively. The following table sets forth the
high and low sales prices for the Units as reported on the NYSE and the cash
distributions declared per Unit for the periods indicated.
<TABLE>
<CAPTION>
PRICE RANGE DISTRIBUTIONS DECLARED
------------------------------------- PER UNIT
COMMON UNIT PREFERENCE UNITS ----------------------
----------------- ----------------- COMMON PREFERENCE
HIGH LOW HIGH LOW UNIT UNIT
------- ------- ------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Period from January 1, 1999 through March 5, 1999...... $23.125 $19.500 $19.750 $17.625 $ -- $ --
Year ended December 31, 1998
Fourth Quarter....................................... $28.500 $19.750 $25.000 $17.375 $ 0.525 $ 0.275
Third Quarter*....................................... 27.875 21.500 29.750 21.250 0.525 0.275
Second Quarter....................................... * * 34.000 25.500 0.525 0.525
First Quarter........................................ * * 33.625 27.000 0.525 0.525
Year ended December 31, 1997
Fourth Quarter....................................... * * $33.125 $28.000 $ 0.500 $ 0.500
Third Quarter........................................ * * 28.750 23.250 0.475 0.475
Second Quarter....................................... * * 26.375 20.375 0.450 0.450
First Quarter........................................ * * 24.250 19.000 0.425 0.425
</TABLE>
- ---------------
* Effective at the close of business on August 5, 1998, the holders of
approximately 94% of the 18,075,000 Preference Units then outstanding
converted those Preference Units into Common Units. Trading commenced for the
Common Units on the NYSE on August 6, 1998. Prior to such date, there was no
active trading market for the Common Units. See "-- Conversion of Preference
Units into Common Units."
CONVERSION OF PREFERENCE UNITS INTO COMMON UNITS
On May 7, 1998, Leviathan notified the holders of its 18,075,000 then
outstanding Preference Units of their right to convert their Preference Units
into an equal number of Common Units within a 90-day period. On August 5, 1998,
the conversion period expired and holders of 17,058,094 Preference Units,
representing approximately 94% of the Preference Units then outstanding, elected
to convert to Common Units. As a result, the Preference Period, as defined in
the Partnership Agreement, ended and the Common Units (including the 6,291,894
Common Units held by the General Partner) became the primary listed security on
the NYSE under the symbol "LEV." A total of 1,016,906 Preference Units remain
outstanding and trade as Leviathan's secondary listed security on the NYSE under
the symbol "LEV.P."
The remaining Preference Units retain their distribution preferences over
the Common Units; that is, holders of such Preference Units will be paid up to
the minimum quarterly distribution of $0.275 per unit before any quarterly
distributions are made to the Common Unitholders or the General Partner.
However, holders of Preference Units will not receive any distributions in
excess of the minimum quarterly distribution of $0.275 per unit. Only holders of
Common Units and the General Partner will be eligible to receive any such excess
distributions. See "-- Cash Distributions."
In accordance with the Partnership Agreement, holders of the remaining
Preference Units will have the opportunity to convert their Preference Units
into Common Units in May 1999 and May 2000. Thereafter, any remaining Preference
Units may, under certain circumstances, be subject to redemption.
24
<PAGE> 27
CASH DISTRIBUTIONS
Leviathan makes quarterly distributions of 100% of its Available Cash, as
defined in the Partnership Agreement, to its Unitholders and to the General
Partner. Available Cash consists generally of all the cash receipts of Leviathan
plus reductions in reserves less all of its cash disbursements and net additions
to reserves. The General Partner has broad discretion to establish cash reserves
that it determines are necessary or appropriate to provide for the proper
conduct of the business of Leviathan including cash reserves for future capital
expenditures, to stabilize distributions of cash to the Unitholders and the
General Partner, to reduce debt or as necessary to comply with the terms of any
agreement or obligation of Leviathan. Leviathan expects to make distributions of
Available Cash within 45 days after the end of each quarter to Unitholders of
record on the applicable record date, which will generally be the last business
day of the month following the close of such calendar quarter.
The distribution of Available Cash for each calendar quarter is subject to
the preferential rights of the Preference Unitholders to receive the minimum
quarterly distribution of $0.275 per unit for such quarter, plus any arrearages
in the payment of the minimum quarterly distribution for prior quarters, if any,
before any distribution of Available Cash is made to holders of Common Units for
such quarter. The holders of Common Units are not entitled to arrearages in the
payment of the minimum quarterly distribution. Subsequent to August 1998, the
Preference Unitholders are not entitled to receive any more than the minimum
quarterly distribution of $0.275 per unit, plus any arrearage in the payment of
the minimum quarterly distribution for prior quarters, if any, per quarter. See
"-- Conversion of Preference Units into Common Units."
Distributions by Leviathan of its Available Cash are effectively made 98%
to Unitholders and 2% to the General Partner, subject to the payment of
incentive distributions to Leviathan if certain target levels of cash
distributions to Unitholders are achieved ("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. For
the year ended December 31, 1998, Leviathan paid the General Partner Incentive
Distributions totaling $11.1 million and paid an Incentive Distribution of $2.8
million to the General Partner in February 1999. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources -- Uses of Cash."
25
<PAGE> 28
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data of
Leviathan for the years ended December 31, 1998, 1997, 1996, 1995 and 1994, and
as of each of the years then ended. The selected financial data of Leviathan at
December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and
1996 has been derived from the consolidated financial statements of Leviathan
included elsewhere in this Annual Report. The selected financial data of
Leviathan for the years ended December 31, 1995 and 1994 and at December 31,
1996, 1995 and 1994 has been derived from the historical consolidated financial
statements of Leviathan (not included herein).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Oil and natural gas sales......................... $ 31,411 $ 58,106 $ 47,068 $ 1,858 $ 796
Gathering, transportation and platform services... 17,320 17,329 24,005 20,547 18,554
Equity in earnings................................ 26,724 29,327 20,434 19,588 14,786
-------- -------- -------- -------- --------
Total revenue............................ 75,455 104,762 91,507 41,993 34,136
-------- -------- -------- -------- --------
Operating expenses................................ 11,369 11,352 9,068 4,092 1,876
Depreciation, depletion and amortization.......... 29,267 46,289 31,731 8,290 5,085
Impairment, abandonment and other................. (1,131) 21,222 -- -- --
General and administrative expenses and management
fee............................................. 16,189 14,661 8,540 7,069 5,408
-------- -------- -------- -------- --------
Total operating costs.................... 55,694 93,524 49,339 19,451 12,369
-------- -------- -------- -------- --------
Operating income.................................. 19,761 11,238 42,168 22,542 21,767
Interest income and other......................... 771 1,475 1,710 1,884 1,293
Interest and other financing costs................ (20,242) (14,169) (5,560) (833) (912)
Minority interest in (income) loss................ (15) 7 (427) (251) (216)
-------- -------- -------- -------- --------
Income (loss) before income taxes................. 275 (1,449) 37,891 23,342 21,932
Income tax benefit................................ 471 311 801 603 136
-------- -------- -------- -------- --------
Net income (loss)........................ $ 746 $ (1,138) $ 38,692 $ 23,945 $ 22,068
======== ======== ======== ======== ========
Basic and diluted income (loss) per Unit.......... $ 0.02 $ (0.06) $ 1.57 $ 0.97 $ 1.02
======== ======== ======== ======== ========
Distributions per Common Unit..................... $ 2.075 $ 1.75 $ 1.35 $ 1.20 $ 1.20
======== ======== ======== ======== ========
Distributions per Preference Unit................. $ 1.825 $ 1.75 $ 1.35 $ 1.20 $ 1.20
======== ======== ======== ======== ========
BALANCE SHEET DATA (AT END OF PERIOD):
Property, plant and equipment, net................ $241,992 $200,639 $286,555 $285,275 $126,802
Equity investments................................ 186,079 182,301 107,838 82,441 80,560
Total assets...................................... 442,726 409,842 453,526 398,696 231,043
Notes payable..................................... 338,000 238,000 227,000 135,780 8,000
Partners' capital:
Preference unitholders.......................... 7,351 163,426 196,224 192,225 196,340
Common unitholders.............................. 90,972 (15,400) (3,969) (5,380) (3,960)
General Partner................................. (15,427) (4,060) (232) (4) 51
Total partners' capital.................. 82,896 143,966 192,023 186,841 192,431
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with Leviathan's
consolidated financial statements and the notes thereto located elsewhere in
this Annual Report and the information set forth under the heading "Selected
Financial Data" and is intended to assist in the understanding of Leviathan's
financial position and results of operations for each of the years ended
December 31, 1998, 1997 and 1996.
26
<PAGE> 29
OVERVIEW
Leviathan is primarily engaged in the gathering, transportation and
production of natural gas and crude oil in the Gulf. Through its subsidiaries
and joint ventures, Leviathan owns interests in certain significant assets,
including (i) the Gas Pipelines, (ii) Poseidon, (iii) six strategically located
multi-purpose platforms, (iv) a dehydration facility, (v) four producing oil and
natural gas properties and (vi) the Sunday Silence Property.
The Gas Pipelines, strategically located primarily offshore Louisiana and
eastern Texas, gather and transport natural gas for producers, marketers,
pipelines and end-users for a fee. The Gas Pipelines include over 1,200 miles of
pipeline with a throughput capacity of 6.8 Bcf of natural gas per day. Each of
the Gas Pipelines interconnects with one or more long line transmission
pipelines that provide access to multiple markets in the eastern half of the
United States. Leviathan'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 and Tarpon; a 50% interest in each of Stingray and Viosca Knoll, a 40%
interest in HIOS; a 33 1/3% interest in UTOS; and an effective 25.7% interest in
each of Manta Ray Offshore and Nautilus.
Leviathan owns a 36% interest in POPCO which owns and operates Poseidon.
Poseidon, a major new sour crude oil pipeline system, is currently delivering an
average of approximately 139,000 barrels of oil per day.
Leviathan also operates and owns interests in six strategically located
multi-purpose platforms in the Gulf that have processing capabilities which
complement Leviathan's pipeline operations and play a key role in the
development of oil and natural gas reserves. See Items 1 and 2. "Business and
Properties -- Offshore Platforms and Other Facilities."
Leviathan owns an interest in four producing oil and natural gas leases in
the Gulf. See Items 1 and 2. "Business and Properties -- Oil and Gas
Properties."
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Oil and natural gas sales totaled $31.4 million for the year ended December
31, 1998 as compared with $58.1 million for the same period in 1997. The
decrease is attributable to (i) substantially lower realized oil and natural gas
prices, (ii) decreased production as a result of two tropical storms and
Hurricane Georges passing through the Gulf during the third quarter of 1998,
(iii) normal production declines from Leviathan's oil and natural gas properties
and (iv) the lack of acceptable markets downstream of the Viosca Knoll system.
The production decline attributable to the capacity constraints of the
downstream transporter was alleviated during the third quarter of 1998. During
the year ended December 31, 1998, Leviathan produced and sold 11,324 MMcf of
natural gas and 540,000 barrels of oil at average prices of $2.01 per Mcf and
$15.69 per barrel, respectively. During the same period in 1997, Leviathan
produced and sold 19,792 MMcf of natural gas and 801,000 barrels of oil at
average prices of $2.08 per Mcf and $20.61 per barrel, respectively.
Revenue from gathering, transportation and platform services totaled $17.3
million for each of the years ended December 31, 1998 and 1997. The activity for
1998 remained consistent with the prior year as a result of an increase of $5.5
million in platform services revenue from Leviathan's East Cameron Block 373
platform which was placed in service in April 1998 offset by decreases of (i)
$2.8 million related to the cessation of production in May 1997 from the only
well connected to the Ewing Bank system, (ii) $1.9 million as a result of lower
throughput on the Green Canyon system and the contribution of a significant
portion of the Manta Ray system to Manta Ray Offshore on January 17, 1997
resulting in revenue from these assets being included in equity in earnings for
the entire year ended December 31, 1998 as compared with a portion of the year
ended December 31, 1997 and (iii) $0.8 million in platform revenue services from
Leviathan's VK 817 Platform as a result of lower oil and natural gas volumes
processed on the platform due to capacity constraints of the downstream
transporter which was alleviated during the third quarter of 1998. Throughput
volumes for Leviathan's wholly-owned gathering systems decreased approximately
8% for the year ended December 31, 1998 as compared with the same period in
1997.
27
<PAGE> 30
Revenue from Leviathan's joint ventures, the Equity Investees, totaled
$26.7 million for the year ended December 31, 1998 as compared with $29.3
million for the same period in 1997. The decrease of $2.6 million primarily
reflects decreases of (i) $6.7 million related to nonrecurring start-up costs,
changes in prior period estimates and a change in equity ownership of Nautilus
and Manta Ray Offshore and (ii) $2.5 million related to Stingray and HIOS as a
result of increased maintenance costs and decreased throughput offset by an
increase of $6.6 million from Poseidon, Viosca Knoll, UTOS and West Cameron Dehy
as a result of increased throughput. Total natural gas throughput volumes for
the Equity Investees increased approximately 20% from the year ended December
31, 1997 to the same period in 1998 primarily as a result of increased
throughput on the Viosca Knoll, UTOS, Nautilus and Manta Ray Offshore systems.
Oil volumes from Poseidon totaled 35.6 million barrels and 19.0 million barrels
for the year ended December 31, 1998 and 1997, respectively. The Equity
Investees were impacted by two tropical storms and Hurricane Georges passing
through the Gulf during the third quarter of 1998.
Operating expenses totaled $11.4 million for each of the years ended
December 31, 1998 and 1997. The 1998 activity remained consistent with the prior
year as a result of lower operating and transportation costs associated with
Leviathan's oil and natural gas properties offset by higher operating costs
associated with the East Cameron Block 373 platform placed in service in April
1998, the acquisition of the Ship Shoal Block 331 platform in August 1998 and
additional activities associated with the Ship Shoal Block 332 platform.
Depreciation, depletion and amortization totaled $29.3 million for the year
ended December 31, 1998 as compared with $46.3 million for the same period in
1997. The decrease of $17.0 million reflects decreases of (i) $14.0 million in
depreciation and depletion on oil and natural 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 decreased production from these leases and slightly lower
estimated abandonment obligations and (ii) $3.0 million in depreciation on
pipelines, platforms and facilities as a result of Leviathan fully depreciating
its investment in the Ewing Bank and Ship Shoal systems in June 1997 offset by
depreciation on Leviathan's East Cameron Block 373 and Ship Shoal Block 331
platforms placed in service in 1998.
Impairment, abandonment and other totaled ($1.1 million) for the year ended
December 31, 1998 and represented the excess of accrued costs over actual costs
incurred associated with the abandonment of Leviathan's Ewing Bank flowlines.
Impairment, abandonment and other totaled $21.2 million for the year ended
December 31, 1997 and consisted of a non-recurring charge to reserve Leviathan'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
accrue Leviathan's abandonment obligations associated with the gathering
facilities serving these properties, to reserve Leviathan's noncurrent
receivable related to the prepayment of the demand charge obligations under
certain agreements related to the Ewing Bank and Ship Shoal leases and to accrue
certain abandonment obligations associated with its oil and natural gas
properties. See Items 1 and 2. "Business and Properties -- Natural Gas and Oil
Pipelines -- Oil and Natural Gas Supply" and "Notes to Consolidated Financial
Statements -- Note 8 -- Related Party Transactions -- Platform Access and
Transportation Agreements" located elsewhere in this Annual Report.
General and administrative expenses, including the management fee allocated
from the General Partner, totaled $16.2 million for the year ended December 31,
1998 as compared with $14.7 million for the same period in 1997. The increase of
$1.5 million reflects increases of (i) $1.0 million in management fees allocated
by the General Partner to Leviathan as a result of increased construction and
operational activities of Leviathan and (ii) $0.5 million in direct general and
administrative expenses of Leviathan primarily related to the vesting and
appreciation of unit rights to certain officers and employees of Leviathan. See
Item 11. "Executive Compensation -- Unit Rights Appreciation Plan" and "Notes to
Consolidated Financial Statements -- Note 7 -- Partners' Capital -- Unit
Appreciation Rights Plan" located elsewhere in this Annual Report.
Interest income and other totaled $0.8 million for the year ended December
31, 1998 as compared with $1.5 million for the same period in 1997.
Interest and other financing costs, net of capitalized interest, for the
year ended December 31, 1998 totaled $20.2 million as compared with $14.2
million for the same period in 1997. During the year ended
28
<PAGE> 31
December 31, 1998 and 1997, Leviathan capitalized $1.1 million and $1.7 million,
respectively, of interest costs in connection with construction projects and
drilling activities in progress during such periods. During the years ended
December 31, 1998 and 1997, Leviathan had outstanding indebtedness averaging
approximately $288.0 million and $232.5 million, respectively.
Net income for the year ended December 31, 1998 totaled $0.7 million, or
$0.02 per Unit, as compared with a net loss of $1.1 million, or $0.06 per Unit,
for the year ended December 31, 1997 as a result of the items discussed above.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Oil and natural gas sales totaled $58.1 million for the year ended December
31, 1997 as compared with $47.1 million for the year ended December 31, 1996.
The increase of $11.0 million is attributable to increased production from
Leviathan's oil and natural gas properties as a result of initiating full
production from Viosca Knoll Block 817 in March 1996, Garden Banks Block 72 in
May 1996 and Garden Banks Block 117 in July 1996. During the year ended December
31, 1997, Leviathan produced and sold 19,792 MMcf of natural gas and 801,000
barrels of oil at average prices of $2.08 per Mcf and $20.61 per barrel,
respectively. During 1996, Leviathan produced and sold 15,730 MMcf of natural
gas and 393,000 barrels of oil at average prices of $2.37 per Mcf and $21.76 per
barrel, respectively.
Revenue from gathering, transportation and platform services totaled $17.3
million for the year ended December 31, 1997 as compared with $24.0 million for
the year ended December 31, 1996. The decrease of $6.7 million reflects
decreases of (i) $7.6 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 year ended December 31, 1997 and (ii) $3.0 million related to
lower throughput on the Ewing Bank system offset by increases of (i) $1.8
million in platform services from Leviathan's VK 817 Platform as a result of
additional oil and natural gas volumes processed on the platform and (ii) $2.1
million from the Tarpon and Green Canyon systems primarily related to (x) the
deregulation of the Tarpon system allowing Leviathan to recognize additional
revenue during the current period related to the gathering fees collected in
prior periods and (y) new production attached to these systems. Throughput
volumes for Leviathan's wholly-owned gathering systems decreased 34% for the
year ended December 31, 1997 as compared with the year ended December 31, 1996
primarily due to an 82% decline from the Ewing Bank system due to a downhole
mechanical problem in May 1997 which caused Tatham Offshore's Ewing Bank 914 #2
well to be shut-in. See Items 1 and 2. "Business and Properties -- Natural Gas
and Oil Pipelines -- Oil and Natural Gas Supply."
Revenue from the Equity Investees totaled $29.3 million for the year ended
December 31, 1997 as compared with $20.4 million for the year ended December 31,
1996. The increase of $8.9 million primarily reflects increases of (i) $2.9
million from Viosca Knoll and UTOS as a result of increased throughput, (ii)
$1.6 million from POPCO, which placed Poseidon in service in three-phases, April
1996, December 1996 and December 1997, (iii) $0.4 million from West Cameron
Dehy, (iv) $3.7 million from Manta Ray Offshore related to the Manta Ray assets
contributed by Leviathan and (v) $2.2 million from Nautilus, primarily as a
result of Nautilus recognizing as other income an allowance for funds used
during construction, offset by (vi) a $1.9 million decrease in Stingray and HIOS
as a result of increased maintenance costs during 1997. Total natural gas
throughput volumes for the Equity Investees increased approximately 9% from 1996
to 1997 primarily as a result of increased throughput on the Viosca Knoll 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
19.0 million barrels for the year ended December 31, 1997 as compared with 7.5
million barrels for the period from inception of operations in April 1996
through December 31, 1996.
Operating expenses for the year ended December 31, 1997 totaled $11.4
million as compared with $9.1 million for the year ended December 31, 1996. The
increase of $2.3 million is primarily attributable to additional maintenance
costs related to the platforms operated by Leviathan and the operation by
Leviathan of one additional oil and natural gas well during 1997.
29
<PAGE> 32
Depreciation, depletion and amortization totaled $46.3 million for the year
ended December 31, 1997 as compared with $31.7 million for the year ended
December 31, 1996. The increase of $14.6 million reflects an increase of $19.7
million in depreciation and depletion on the oil and natural gas wells and
facilities located on Viosca Knoll Block 817, Garden Banks Block 72 and 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,
offset by a decrease of $5.1 million in depreciation on pipelines, platforms and
facilities.
Impairment, abandonment and other totaled $21.2 million for the year ended
December 31, 1997 and consisted of a non-recurring charge to reserve Leviathan'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
accrue Leviathan's abandonment obligations associated with the gathering
facilities serving these properties, to reserve Leviathan's noncurrent
receivable related to the prepayment of the demand charge obligations under
certain agreements related to the Ewing Bank and Ship Shoal leases and to accrue
certain abandonment obligations associated with its oil and gas properties. See
Items 1 and 2. "Business and Properties -- Natural Gas and Oil Pipelines -- Oil
and Natural Gas Supply" and "Notes to Consolidated Financial Statements -- Note
8 -- Related Party Transactions -- Platform Access and Transportation
Agreements" located elsewhere in this Annual Report.
General and administrative expenses, including the management fee allocated
from Leviathan, totaled $14.7 million for the year ended December 31, 1997 as
compared with $8.5 million for the year ended December 31, 1996. General and
administrative expenses for the year ended December 31, 1996 were reduced by a
one-time $1.4 million reimbursement from POPCO as a result of Leviathan's
management of the initial construction of Poseidon. Excluding this one-time
reimbursement by POPCO, general and administrative expenses for the year ended
December 31, 1997 increased $4.7 million as compared to the year ended December
31, 1996. This increase reflects (i) a $1.5 million increase in management fees
allocated by the General Partner to Leviathan as a result of increased
construction and operational activities, (ii) a $3.6 million increase in direct
general and administrative expenses of Leviathan primarily related to the
appreciation and vesting of unit appreciation rights granted to certain officers
and employees in 1995, 1996 and 1997 and (iii) a $0.4 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 8 -- Related Party Transactions -- Management Fees" and
"-- Note 7 -- Partners' Capital -- Unit Appreciation Rights Plan" located
elsewhere in this Annual Report.
Interest income and other totaled $1.5 million for the year ended December
31, 1997 as compared with $1.7 million for the year ended December 31, 1996.
Interest and other financing costs, net of capitalized interest, for the
year ended December 31, 1997 totaled $14.2 million as compared with $5.6 million
for the year ended December 31, 1996. During the years ended December 31, 1997
and 1996, Leviathan capitalized $1.7 million and $11.9 million, respectively, of
interest costs in connection with construction projects and drilling activities
in progress during such periods. During the years ended December 31, 1997 and
1996, Leviathan had outstanding indebtedness averaging approximately $232.5
million and $181.4 million, respectively.
Net loss for the year ended December 31, 1997 totaled $1.1 million, or
$0.06 per Unit, as compared with net income of $38.7 million, or $1.57 per Unit,
for the year ended December 31, 1996 as a result of the items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Cash. Leviathan intends to satisfy its capital requirements and
other working capital needs primarily from cash on hand, cash from operations
and borrowings under the Leviathan Credit Facility (discussed below). However,
depending on market and other factors, Leviathan may issue additional equity to
raise cash or acquire assets, such as in the proposed acquisition of the
additional interest in Viosca Knoll. Net cash provided by operating activities
for the year ended December 31, 1998 totaled $25.7 million. At December 31,
1998, Leviathan had cash and cash equivalents of $3.1 million.
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Cash from operations is derived from (i) payments for gathering natural gas
through Leviathan's 100% owned pipelines, (ii) platform access and processing
fees, (iii) cash distributions from Equity Investees and (iv) the sale of oil
and natural gas attributable to Leviathan's interest in its producing
properties. Oil and natural gas properties are depleting assets and will produce
reduced volumes of oil and natural gas in the future unless additional wells are
drilled or recompletions of existing wells are successful. See Items 1 and 2.
"Business and Properties -- Oil and Natural Gas Properties" for current rates
from Leviathan's properties.
Leviathan's cash flows from operations will be affected by the ability of
each Equity Investee to make distributions. Distributions from such entities are
also 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 to Leviathan from its
Equity Investees during the year ended December 31, 1998 totaled $31.2 million.
The Leviathan Credit Facility is a revolving credit facility currently
providing for up to $375 million of available credit subject to customary terms
and conditions, including certain debt incurrence limitations. Proceeds from the
Leviathan Credit Facility are available to Leviathan for general partnership
purposes, including financing of capital expenditures, for working capital, and
subject to certain limitations, for paying distributions to the Unitholders. The
Leviathan 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 Leviathan Credit Facility matures in December 1999; is
guaranteed by the General Partner and each of Leviathan's subsidiaries; and is
collateralized by the Management Agreement between the General Partner and
DeepTech as amended or supplemented from time to time, substantially all of the
assets of Leviathan and the General Partner's 1% general partner interest in
Leviathan and approximate 1% nonmanaging interest in certain subsidiaries of
Leviathan. As of December 31, 1998, Leviathan had $338 million outstanding under
its credit facility bearing interest at an average floating rate of 7.1% per
annum. As of March 15, 1999, approximately $20 million of funds are available
under the facility. Management believes it will be able to extend or refinance
this credit facility on acceptable terms and conditions prior to its maturity.
Viosca Knoll has a revolving credit facility, as amended, (the "Viosca
Knoll Credit Facility") with a syndicate of commercial banks to provide up to
$100 million for the addition of compression to and expansion of 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 its credit facility is subject to certain
customary terms and conditions, including borrowing base limitations. The Viosca
Knoll Credit Facility is collateralized by all of Viosca Knoll's material
contracts and agreements, receivables and inventory and matures on December 20,
2001. As of December 31, 1998, Viosca Knoll had $66.7 million outstanding under
its credit facility bearing interest at an average floating rate of 6.7% per
annum and had approximately $33.3 million of additional funds available under
the facility.
Prior to closing the acquisition of the additional interest in Viosca
Knoll, both Leviathan and Viosca Knoll must obtain consent from their respective
lenders. At such time, either or both of such credit facilities may be
restructured.
POPCO has a revolving credit facility, as amended, (the "POPCO Credit
Facility") with a syndicate of commercial banks to provide up to $150 million
for the construction and expansion 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 collateralized by a substantial portion of POPCO's
assets and matures on April 30, 2001. As of December 31, 1998, POPCO had $131
million outstanding under its credit facility bearing interest at an average
floating rate of 6.9% per annum and had approximately $19 million of additional
funds available under the facility.
In March 1998, Stingray amended an existing term loan agreement to provide
for additional borrowings of up to $11.1 million and to extend the maturity date
of the loan from December 31, 2000 to March 31, 2003. The amended agreement
requires Stingray to make 18 quarterly principal payments of $1.6 million
commencing December 31, 1998. The term loan agreement is principally
collateralized by current and future natural gas transportation contracts
between Stingray and its customers. As of December 31, 1998, Stingray
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had $26.9 million outstanding under its term loan agreement bearing interest at
an average floating rate of 6.5% per annum.
See Items 1 and 2. "Business and Properties -- Recent Developments -- Joint
Venture Restructuring and New Pipeline Construction" for a discussion of the
Western Gulf Credit Facility.
Uses of Cash. Leviathan's capital requirements consist primarily of (i)
quarterly distributions to holders of Preference Units and Common Units and to
the 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 natural gas in the
Gulf, (iii) expenditures related to its producing oil and natural gas
properties, (iv) expenditures relating to the acquisition and development of the
Sunday Silence Property discussed in Items 1 and 2. "Business and
Properties -- Recent Developments -- Sunday Silence Property", (v) management
fees and other operating expenses, (vi) contributions to Equity Investees as
required to fund capital expenditures for new facilities and (vii) debt service
on its outstanding indebtedness. During 1998, Leviathan expended $2.9 million
for the abandonment of the Ewing Bank flowlines and $8.6 million for the
accelerated vesting of the Unit Rights discussed in Item 11. "Executive
Compensation -- Unit Rights Appreciation Plan."
In January 1999, Leviathan declared a cash distribution of $0.275 per
Preference Unit and $0.525 per Common Unit for the period from October 1, 1998
through December 31, 1998 which was paid on February 12, 1999 to all holders of
record of Preference Units and Common Units as of January 29, 1999. See Item 5.
"Market for Registrant's Common Stock and Related Unitholder Matters" for a
summary and discussion of distributions. Leviathan believes that it will be able
to continue to pay at least the current quarterly distributions of $0.275 per
Preference Unit and $0.525 per Common Unit for the foreseeable future. At these
distribution rates, the quarterly distributions total $15.6 million in respect
of the Preference Units, Common Units and General Partner interest ($62.5
million on an annual basis, including $25.6 million to the General Partner). For
the year ended December 31, 1998, Leviathan paid the General Partner Incentive
Distributions totaling $11.1 million and paid an Incentive Distribution of $2.8
million to the General Partner in February 1999.
In April 1998, Leviathan completed the construction and installation of a
new platform and processing facilities at East Cameron Block 373 at a cost $30.2
million. See Items 1 and 2. "Business and Properties -- Recent Developments
-- Construction of Multi-Purpose Platform."
Leviathan anticipates that its capital expenditures and equity investments
for 1999 will relate to continuing acquisition and construction activities,
including the acquisition of the additional interest in Viosca Knoll. Leviathan
anticipates funding such cash requirements primarily with available cash flow,
borrowings under the Leviathan Credit Facility and, depending on the capital
requirements and related market conditions, issuing additional debt and/or
equity.
Substantially all of the capital expenditures by POPCO, Viosca Knoll and
Stingray were funded by borrowings under their respective credit facilities, and
any future capital expenditures by POPCO, Viosca Knoll, Western Gulf and
Stingray are anticipated to be funded by borrowings under their respective
credit facilities. Leviathan's cash capital expenditures, including acquisition
and development costs of the Sunday Silence Property, and equity investments for
the year ended December 31, 1998 were $66.1 million. Leviathan has in the past
contributed existing assets to joint ventures as partial consideration for its
ownership interest therein and may in the future contribute existing assets,
including cash, to new joint ventures as partial consideration for its ownership
interest therein.
Interest costs related to the Leviathan Credit Facility totaled $19.2
million for the year ended December 31, 1998. Leviathan capitalized $1.1 million
of such interest costs in connection with construction projects and drilling
activities in process during the year.
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NEW ACCOUNTING STANDARDS
Reporting on the Costs of Start-Up Activities. In April 1998, the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities." This statement defines start-up
activities, requires start-up and organization costs to be expensed as incurred
and requires that any such costs that exist on the balance sheet be expensed
upon adoption of this pronouncement. The statement is effective for fiscal years
beginning after December 15, 1998. Leviathan does not expect the implementation
of this statement to have a material effect on Leviathan's financial position or
results of operations.
Accounting for Derivative Instruments and Hedging Activities. In June 1998,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 requires that entities recognize all
derivative instruments as either assets or liabilities on the balance sheet and
measure those instruments at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as a hedge transaction.
For fair-value hedge transactions in which Leviathan is hedging changes in an
asset's, liability's or firm commitment's fair value, changes in the fair value
of the derivative instrument will generally be offset in the income statement by
changes in the hedged item's fair value. For cash-flow hedge transactions, in
which Leviathan is hedging the variability of cash flows related to a
variable-rate asset, liability, or a forecasted transaction, changes in the fair
value of the derivative instrument will be reported in other comprehensive
income. The gains and losses on the derivative instrument that are reported in
other comprehensive income will be reclassified as earnings in the periods in
which earnings are impacted by the variability of the cash flows of the hedged
item. The ineffective portion of all hedges will be recognized in current-period
earnings. This statement is effective for fiscal years beginning after June 15,
1999. Leviathan has not yet determined the impact that the adoption of SFAS No.
133 will have on its financial position or results of operations.
Accounting for Contracts Involved in Energy Trading and Risk Management
Activities. In November 1998, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF 98-10, "Accounting for Contracts Involved in Energy Trading
and Risk Management Activities." EITF 98-10 requires energy trading contracts to
be recorded at fair value on the balance sheet, with the changes in fair value
included in earnings and is effective for fiscal years beginning after December
15, 1998. Leviathan adopted the provisions of EITF 98-10 in January 1999 and
does not believe that the application of this pronouncement will have a material
impact on Leviathan's financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Leviathan may utilize derivative financial instruments for purposes other
than trading to manage its exposure to movements in interest rates and commodity
prices. In accordance with procedures established by the Board of Directors,
management monitors current economic conditions and evaluates its expectations
of future prices and interest rates when making decisions with respect to risk
management.
Interest Rate Risk. Leviathan is exposed to some market risk due to the
floating interest rate under the Leviathan Credit Facility. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Under the Leviathan Credit
Facility, the remaining principal is due in December 1999, along with the final
interest payment. As of December 31, 1998, the Leviathan Credit Facility had a
principal balance of $338 million at an average floating interest rate of 7.1%
per annum. A 1 1/2% increase in interest rates could result in a $5.1 million
annual increase in interest expense on the existing principal balance. Leviathan
is exposed to similar risk under the various Equity Investee credit facilities
and loan agreements. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." Management has determined that it is not necessary to participate in
interest rate-related derivative financial instruments because it currently does
not expect significant short-term increases in interest rates charged under the
Leviathan Credit Facility or the various Equity Investee credit facilities and
loan agreements.
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Commodity Price Risk. Leviathan hedges a portion of its oil and natural gas
production to reduce its exposure to fluctuations in the market prices thereof.
Leviathan uses commodity price swap transactions whereby monthly settlements are
based on differences between the prices specified in the commodity price swap
agreements and the settlement prices of certain futures contracts quoted on the
New York Mercantile Exchange ("NYMEX") or certain other indices. Leviathan
settles the commodity price swap transactions by paying the negative difference
or receiving the positive difference between the applicable settlement price and
the price specified in the contract. The commodity price swap transactions used
by Leviathan differ from futures contracts in that there are no contractual
obligation which requires or allows for the future delivery of the product. The
credit risk from Leviathan's price swap contracts is derived from the
counter-party to the transaction, typically a major financial institution.
Management does not require collateral and does not anticipate non-performance
by this counter-party, which does not transact a sufficient volume of
transactions with Leviathan to create a significant concentration of credit
risk. Gains or losses resulting from hedging activities and the termination of
any hedging instruments are initially deferred and included as an increase or
decrease to oil and natural gas sales in the period in which the hedged
production is sold. For the year ended December 31, 1998, Leviathan recorded a
net gain of $2.5 million related to hedging activities.
As of December 31, 1998, Leviathan had open sales swap transactions for
calendar 1999 of 10,000 MMbtu of natural gas per day at a fixed price to be
determined at Leviathan's option equal to the February 1999 Natural Gas Futures
Contract on NYMEX as quoted at any time during 1998 and January 1999, to and
including the last two trading days of the February 1999 contract, minus $0.23
per MMbtu. In January 1999, Leviathan renegotiated this contract to provide for
10,000 MMbtu of natural gas per day for calendar 2000 at a fixed price to be
determined at Leviathan's option equal to the February 2000 Natural Gas Futures
Contract on NYMEX as quoted at any time during 1999 and January 2000, to and
including the last two trading days of the February 2000 contract, minus $0.5450
per MMbtu.
Additionally, Leviathan had open sales swap transactions of 10,000 MMbtu of
natural gas per day at a fixed price to be determined at Leviathan's option
equal to the January 2000 Natural Gas Futures Contract on NYMEX as quoted at any
time during 1999, to and including the last two trading days of the January 2000
contract, minus $0.50 per MMbtu.
If Leviathan had settled its open natural gas hedging positions as of
December 31, 1998 based on the applicable settlement prices of the NYMEX futures
contracts, Leviathan would have recognized a loss of approximately $2.6 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data required hereunder are
included in this Annual Report as set in Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
GENERAL
The General Partner and Leviathan utilize the employees of and management
services provided by El Paso and DeepTech under the Management Agreement.
Leviathan reimburses the General Partner for reasonable general and
administrative expenses, and other reasonable expenses, incurred by the General
Partner and its affiliates, for or on behalf of Leviathan, including, without
limitation, fees paid by the General Partner to DeepTech pursuant to the
Management Agreement.
Some of the officers and directors of the General Partner are also officers
and directors of El Paso, DeepTech and their affiliates. Such officers and
directors may spend a substantial amount of time managing the business and
affairs of the General Partner and may face a conflict regarding the allocation
of their time between Leviathan and the other business interests of the General
Partner, El Paso, DeepTech and their affiliates. In performance of its fiduciary
duties to Leviathan and its limited partners, the General Partner may retain,
acquire and invest in businesses that compete with Leviathan, subject to certain
limitations.
DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER
The following table sets forth certain information as of March 1, 1999,
regarding the executive officers and directors of the General Partner who
provide services to Leviathan. Each executive officer of the General Partner
serves Leviathan in the same office or offices each such officer holds with the
General Partner. Directors are elected annually by the General Partner's sole
stockholder, Leviathan Holding Company, and hold office until their successors
are elected and qualified. Each executive officer named in the following table
has been elected to serve until his successor is duly appointed or elected or
until his earlier removal or resignation from office.
There is no family relationship among any of the executive officers or
directors of the General Partner, and, other than described herein, no
arrangement or understanding exists between any executive officer and any other
person pursuant to which he was or is to be selected as an officer.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
William A. Wise.......... 53 Director and Chairman of the Board
Grant E. Sims............ 43 Director and Chief Executive Officer
James H. Lytal........... 41 Director and President
H. Brent Austin.......... 44 Director and Executive Vice President
Robert G. Phillips....... 44 Director and Executive Vice President
Keith B. Forman.......... 40 Vice President and Chief Financial Officer
D. Mark Leland........... 37 Vice President and Controller
Michael B. Bracy......... 57 Director
H. Douglas Church........ 61 Director
Malcolm Wallop........... 66 Director
</TABLE>
Mr. Wise has served as Director and Chairman of the Board since August
1998, Chairman of the Board of El Paso since January 1994 and Chief Executive
Officer of El Paso since January 1990. Mr. Wise has been President of El Paso
from January 1990 until April 1996 and from July 1998 to the present. Mr. Wise
served as President and Chief Operating Officer of El Paso from April 1989 to
December 1989. From March 1987 until April 1989, Mr. Wise was an Executive Vice
President of El Paso and a Senior Vice President of El Paso from January 1984 to
February 1987. Mr. Wise is a member of the Board of Directors of Battle Mountain
Gold Company and is Director and Chairman of the Board of El Paso Tennessee
Pipeline Co.
Mr. Sims has served as a Director of the General Partner since July 1995
and as Chief Executive Officer of Leviathan and the General Partner since August
1994. Mr. Sims served as President of Leviathan and the General Partner from
March 1994 through June 1995. In addition, Mr. Sims has served as a Director and
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Senior Vice President of DeepTech since July 1993 and served as a Director of
Offshore Gas Marketing, Inc., a subsidiary of DeepTech, from December 1992 to
March 1994. Prior to his employment with DeepTech, Mr. Sims spent ten years with
Transco in various capacities, most recently directing Transco's non-
jurisdictional natural gas activities.
Mr. Lytal has served as a Director of the General Partner since August 1994
and as President of Leviathan and the General Partner since July 1995. He served
as Senior Vice President of Leviathan and the General Partner from August 1994
to June 1995. Prior to joining Leviathan, Mr. Lytal was Vice President --
Business Development for American Pipeline Company from December 1992 to August
1994. Prior thereto, Mr. Lytal served as Vice President -- Business Development
for United Gas Pipe Line Company from March 1991 to December 1992. Prior
thereto, Mr. Lytal has served in various capacities in the oil and gas
exploration and production and gas pipeline industries with Texas Oil and Gas,
Inc. and American Pipeline Company from September 1980 to March 1991.
Mr. Austin has served as a Director of the General Partner and as Executive
Vice President of Leviathan and the General Partner since August 1998. Mr.
Austin has served as an Executive Vice President of El Paso since May 1995 and
as the Chief Financial Officer of El Paso since April 1992. He served as the
Senior Vice President of El Paso from April 1992 to April 1995. He served as the
Vice President, Planning and Treasurer of Burlington Resources Inc.
("Burlington") from November 1990 to March 1992 and Assistant Vice President,
Planning of Burlington from January 1989 to October 1990. Mr. Austin is a member
of the Board of Directors of El Paso Tennessee Pipeline Co.
Mr. Phillips has served as a Director of the General Partner and as
Executive Vice President of Leviathan and the General Partner since August 1998.
Mr. Phillips has served as President of El Paso Field Services Company since
June 1997. He served as President of El Paso Energy Resources Company from
December 1996 to June 1997, President of El Paso Field Services Company from
April 1996 to December 1996 and Senior Vice President of El Paso from September
1995 to April 1996. For more than five years prior thereto, Mr. Phillips was
Chief Executive Officer of Eastex Energy, Inc.
Mr. Forman has served as the Chief Financial Officer of Leviathan and the
General Partner since January 1992 and served as a Director of the General
Partner from July 1992 to August 1998. Prior to joining DeepTech, Mr. Forman
served as Vice President of the Natural Gas Pipeline Group of Manufacturers
Hanover Trust Company which he joined in 1982. His account responsibility
included interstate gas transmission companies and gas gathering companies.
Mr. Leland has served as Vice President and Controller of Leviathan and the
General Partner since August 1998 and as Vice President of El Paso Field
Services Company since September 1997. He served as Director of Business
Development for El Paso Field Services Company from September 1994 to September
1997. For more than five years prior thereto, Mr. Leland served in various
capacities in the finance and accounting functions of El Paso.
Mr. Bracy has served as a Director of the General Partner since October
1998. From January 1993 to August 1997, Mr. Bracy served as a Director,
Executive Vice President and Chief Financial Officer of NorAm Energy Corp.
("NorAm," formerly Arkla, Inc.) and as Executive Vice President and Chief
Financial Officer of NorAm from December 1991 to January 1993. For seven years
prior thereto, Mr. Bracy served in various executive capacities with NorAm. From
December 1977 to October 1984, Mr. Bracy held various executive financial
positions with El Paso and prior thereto, Mr. Bracy served in various capacities
with The Chase Manhattan Bank. Mr. Bracy is a member of the Board of Directors
of Itron, Inc.
Mr. Church has served as a Director of the General Partner since January
1999. From January 1994 to December 1998, Mr. Church served as the Senior Vice
President, Transmission, Engineering and Environmental for a subsidiary of, Duke
Energy Corporation, Texas Eastern Transmission Company ("Texas Eastern"). For
thirty-two years prior thereto, Mr. Church served in various engineering and
operating capacities with Texas Eastern, Panhandle Eastern Corporation and
Transwestern Pipeline Company. Mr. Church is a past member of the Board of
Directors of Southern Gas Association and Boys and Girls Country of Houston,
Inc. (Chairman).
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Mr. Wallop has served as a Director of the General Partner since August
1998 and as a Director of El Paso since January 1995. Since January 1995, Mr.
Wallop has served as President for Frontiers of Freedom Foundation, a political
foundation. For eighteen years prior to 1995, Mr. Wallop was a member of the
United States Senate. He is a member of the Board of Directors of Hubbell Inc.
and Sheridan State Bank.
COMPENSATION OF DIRECTORS
Directors of the General Partner are entitled to reimbursement for their
reasonable out-of-pocket expenses in connection with their travel to and from,
and attendance at, meetings of the Board or committees thereof. Mr. Paul
Thompson III, Mr. George L. Ball and Mr. William A. Bruckmann, III, directors of
the General Partner until their resignation on August 14, 1998, were paid an
annual fee of $36,000 plus $1,000 per meeting attended. Current non-employee
directors are paid an annual fee of $30,000. Officers of the General Partner are
elected by, and serve at the discretion of, the Board.
Pursuant to the former Leviathan non-employee director compensation
arrangements, Leviathan was obligated to pay each non-employee director 2 1/2%
of the General Partner's Incentive Distribution as a profit participation fee.
During the year ended December 31, 1998, Leviathan paid the Messrs. Thompson,
Ball and Bruckmann a total of $0.6 million as a profit participation fee. In
connection with the Merger, Messrs. Thompson, Ball and Bruckmann resigned and
the compensation arrangements were terminated.
In August 1998, Leviathan adopted the 1998 Unit Option Plan for
Non-Employee Directors (the "Director Plan") to provide the General Partner with
the ability to issue unit options to attract and retain the services of
knowledgeable directors. Unit options to purchase a maximum of 100,000 Common
Units of Leviathan may be issued pursuant to the Director Plan. Under the
Director Plan, Leviathan granted (i) 1,500 unit options to Mr. Wallop in August
1998 to acquire an equal number of Common Units at $27.34375 per unit, (ii)
1,500 unit options to Mr. Bracy in October 1998 to acquire an equal number of
Common Units at $25.00 per unit and (iii) 1,500 unit options to Mr. Church in
January 1999 to acquire an equal number of Common Units at $20.625 per unit.
Each unit option vests immediately at the date of grant and shall expire ten
years from such date, but shall be subject to earlier termination in the event
that Messrs. Wallop, Bracy and Church cease to be a director of the General
Partner for any reason, in which case the unit options expire 36 months after
such date except in the case of death, in which case the unit options expire 12
months after such date. The Director Plan is administered by a management
committee consisting of the Chairman of the Board and such other senior officers
of the General Partner or its affiliates as the Chairman of the Board shall
designate.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Bracy, Church and Wallop, who are neither officers nor employees of
the General Partner or any of its affiliates, currently serve as the
Compensation Committee of the Board (the "Compensation Committee"). Mr. Wallop
is a director of El Paso. Prior to August 14, 1998, Leviathan had not appointed
or empowered a Compensation Committee and, as such, the Board served in this
capacity. The Compensation Committee administers and interprets the Omnibus
Plan. See Item 11. "Executive Compensation -- Omnibus Plan."
AUDIT AND CONFLICTS COMMITTEE
Currently, Messrs. Bracy, Church and Wallop, who are neither officers nor
employees of the General Partner nor any of its affiliates, serve as the Audit
and Conflicts Committee of the Board of Directors of the General Partner and of
Leviathan (the "Audit and Conflicts Committee"). Mr. Wallop is a director of El
Paso. Through August 14, 1998, Messrs. Thompson, Ball and Bruckmann, who were
neither officers nor employees of the General Partner nor any of its affiliates,
served as the Audit and Conflicts Committee.
The Audit and Conflicts Committee provides two primary services. First, it
advises the Board of Directors in matters regarding the system of internal
controls and the annual independent audit, and reviews policies and practices of
the General Partner and Leviathan. Second, the Audit and Conflicts Committee at
the request of the General Partner, reviews specific matters as to which the
General Partner believes there may be a conflict
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of interest in order to determine if the resolution of such conflict proposed by
the General Partner is fair and reasonable to Leviathan. Except as otherwise
required by the rules of the NYSE, the Audit and Conflicts Committee only
reviews matters concerning potential conflicts of interest at the request of the
General Partner, which has sole discretion to determine which such matters to
submit to such Committee. Any such matters approved by a majority vote of the
Audit and Conflicts Committee will be conclusively deemed (i) to be fair and
reasonable to Leviathan, (ii) approved by all limited partners of Leviathan and
(iii) not a breach by the General Partner of any duties it may owe to Leviathan.
However, it is possible that such procedure in itself may constitute a conflict
of interest.
COMPENSATION OF THE GENERAL PARTNER
The General Partner receives no remuneration in connection with its
management of Leviathan other than: (i) distributions in respect of its general
and limited partner interests in Leviathan and its nonmanaging interest in
certain subsidiaries of Leviathan; (ii) Incentive Distributions in respect of
its general partner interest, as provided in the Partnership Agreement and (iii)
reimbursement for all direct and indirect costs and expenses incurred on behalf
of Leviathan, all selling, general and administrative expenses incurred by the
General Partner for or on behalf of Leviathan and all other expenses necessary
or appropriate to the conduct of the business of, and allocable to, Leviathan,
including, but not limited to the management fees paid by the General Partner to
DeepTech under the Management Agreement.
LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY; INDEMNIFICATION
The Certificate of Incorporation of the General Partner limits the
liability of the directors of the General Partner to the General Partner or its
stockholder (in their capacity as directors but not in their capacity as
officers) to the fullest extent permitted by the Delaware General Corporation
Law (the "DGCL"). Accordingly, pursuant to the terms of the DGCL as presently in
effect, directors of the General Partner will not be personally liable for
monetary damages for breach of a director's fiduciary duty as a director, except
for liability (i) for any breach of the director's duty of loyalty to the
General Partner or its stockholder, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the DGCL or (iv) for any transaction from which the
director derived an improper personal benefit. The Certificate of Incorporation
also provides that if the DGCL is amended after the approval of the Certificate
of Incorporation to authorize corporate action further eliminating or limiting
the personal liability of directors, then the liability of a director of the
General Partner will be eliminated to the full extent permitted by the DGCL, as
so amended.
In addition, the Amended and Restated By-laws of the General Partner (as
amended and restated, the "By-laws"), in substance, require the General Partner
to indemnify each person who is or was a director, officer, employee or agent of
the General Partner to the full extent permitted by the laws of the State of
Delaware in the event he is involved in legal proceedings by reason of the fact
that he is or was a director, officer, employee or agent of the General Partner,
or is or was serving at the General Partner's request as a director, officer,
employee or agent of the General Partner and its subsidiaries, another
corporation, partnership or other enterprise. The General Partner is also
required to advance to such persons payments incurred in defending a proceeding
to which indemnification might apply, provided the recipient provides an
undertaking agreeing to repay all such advanced amounts if it is ultimately
determined that he is not entitled to be indemnified. In addition, the By-laws
specifically provide that the indemnification rights granted thereunder are
non-exclusive.
The General Partner has entered into indemnification agreements with
certain of its current and past directors providing for indemnification to the
full extent permitted by the laws of the State of Delaware. These agreements
provide for specific procedures to assure the directors' rights to
indemnification, including procedures for directors to submit claims, for
determination of directors' entitlement to indemnification (including the
allocation of the burden of proof and selection of a reviewing party) and for
enforcement of directors' indemnification rights.
38
<PAGE> 41
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Leviathan or the
General Partner pursuant to the foregoing, Leviathan and the General Partner
have been informed that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the General Partner's directors,
certain officers and beneficial owners of more than 10% of a registered class of
Leviathan's equity securities to file reports of ownership and reports of
changes in ownership with the Commission and the NYSE. Directors, officers and
beneficial owners of more than 10% of Leviathan's equity securities are also
required by Commission regulations to furnish Leviathan with copies of all such
reports that are filed. Based on Leviathan's review of copies of such forms and
amendments, Leviathan believes its directors, executive officers and greater
than 10% beneficial owners complied with all filing requirements during the year
ended December 31, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The executive officers of the General Partner and Leviathan are compensated
by El Paso (and were compensated by DeepTech) and do not receive compensation
from the General Partner or Leviathan for their services in such capacities with
the exception of awards pursuant to the Unit Rights Appreciation Plan and
Omnibus Plan discussed below. However, the General Partner does make certain
payments to DeepTech pursuant to the Management Agreement. See Item 10.
"Directors and Executive Officers of the Registrant -- Compensation of
Directors."
Mr. Sims and Mr. Lytal entered into employment agreements with five year
terms with El Paso, pursuant to which they would continue to serve as Chief
Executive Officer and President, respectively, of the General Partner and
Leviathan. However, pursuant to the terms of their respective employment
agreements, Messrs. Sims and Lytal have the right to terminate such agreements
upon thirty days notice and El Paso has the right to terminate such agreements
under certain circumstances.
UNIT RIGHTS APPRECIATION PLAN
In 1995, Leviathan adopted the Unit Rights Appreciation Plan (the "Plan")
to provide Leviathan with the ability of making awards of unit rights to certain
officers and employees of the General Partner or its affiliates as an incentive
for these individuals to continue in the service of Leviathan or its affiliates.
Under the Plan, Leviathan granted 1.2 million unit rights to certain officers
and employees of the General Partner or its affiliates that provided for the
right to purchase, or realize the appreciation of, a Preference Unit or a Common
Unit (a "Unit Right"), pursuant to the provisions of the Plan. The Plan was
administered by a committee of the Board of Directors comprised of two or more
non-employee directors. The aggregate number of Unit Rights that could have been
issued pursuant to the Plan could not exceed 400,000 Unit Rights per calendar
year and 4 million Unit Rights over the term of the Plan, subject to adjustment.
No participant could have be granted more than 400,000 Unit Rights in any
calendar year. The exercise price covered by the Unit Rights granted pursuant to
the Plan was the closing price of the Preference Units as reported on the NYSE
on the date on which Unit Rights were granted pursuant to the Plan.
The exercise prices covered by the Unit Rights granted pursuant to the Plan
ranged from $15.6875 to $21.50, the closing prices of the Preference Units as
reported on the NYSE on the grant date of the respective Unit Rights. As a
result of the "change in control" occurring upon the closing of the Merger, the
Unit Rights fully vested and the holders of the Unit Rights elected to be paid
$8.6 million, the amount equal to the difference between the grant price of the
Unit Rights and the average of the high and the low sales price of the Common
Units on the date of exercise. Upon the exercise of all of the Unit Rights
outstanding, the Plan was terminated. Leviathan replaced the Plan with the
Omnibus Plan described below.
39
<PAGE> 42
OMNIBUS PLAN
In August 1998, Leviathan adopted the 1998 Omnibus Compensation Plan (the
"Omnibus Plan") to provide the General Partner with the ability to issue unit
options to attract and retain the services of knowledgeable officers and key
management personnel. Unit options to purchase a maximum of 3 million Common
Units may be issued pursuant to the Omnibus Plan. The Plan is administered by
the Compensation Committee of the Board. The Compensation Committee shall
interpret the Omnibus Plan, shall prescribe, amend and rescind rules relating to
it, select eligible participants, make grants to participants who are not
Section 16 insiders pursuant to the Exchange Act, and shall take all other
actions necessary for the Omnibus Plan administration, which actions shall be
final and binding upon all the participants.
In August 1998, Leviathan granted 930,000 unit options to employees of the
General Partner to purchase an equal number of Common Units at $27.1875 per unit
pursuant to the Omnibus Plan. These unit options, none of which are exercisable,
remain outstanding as of March 1, 1999.
REPORT FROM COMPENSATION COMMITTEE REGARDING EXECUTIVE COMPENSATION
The duty of members of the Compensation Committee is to administer the
Omnibus Plan. The Compensation Committee is responsible for establishing
appropriate compensation goals for the knowledgeable officers and key management
personnel working for the General Partner and Leviathan and evaluating the
performance of such officers and personnel in meeting such goals and making
recommendations to the Board with regard to compensation via the Omnibus Plan.
The goals of the Compensation Committee in administering the Omnibus Plan
are as follows:
(1) To fairly compensate the knowledgeable officers and key management
personnel working for the General Partner and Leviathan and its affiliates
for their contributions to Leviathan's short-term and long-term
performance.
(2) To allow the General Partner and Leviathan to attract, motivate
and retain the management personnel necessary to Leviathan's success by
providing an Omnibus Plan comparable to that offered by companies with
which Leviathan competes for such management personnel.
The elements of the Omnibus Plan described above are implemented and
periodically reviewed and adjusted by the Compensation Committee. The awards
made under the Omnibus Plan are determined based on individual performance,
experience and comparison with awards made by Leviathan's industry peers and
other companies in similar industries with comparable revenue while linking such
awards to Leviathan's achievement of certain financial goals. The Compensation
Committee confirmed that the awards made under the Omnibus Plan over the last
several months were consistent with the Compensation Committee's stated
objective.
Michael B. Bracy
H. Douglas Church
Malcolm Wallop
40
<PAGE> 43
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the annual
compensation earned by Leviathan's Chief Executive Officer and each of its other
four most highly compensated executive officers whose annual salary and bonus
during the year ended December 31, 1998 exceeded $100,000 (collectively, the
"Named Officers"):
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION(2) AWARDS
-------------------------------------------- -------------------------
MARKET VALUE OTHER ANNUAL ALL OTHER
NAME/PRINCIPAL FISCAL SALARY BONUS OF UNITS COMPENSATION OPTIONS COMPENSATION
POSITION YEAR ($) ($) ISSUED ($) (#) ($)
-------------- ------ ------ ----- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Grant E. Sims.......................... 1998 -- -- -- -- 215,000(3) --
Chief Executive Officer 1997 -- -- -- -- 125,000(4) --
1996 -- -- -- -- 90,000(4) --
James H. Lytal......................... 1998 -- -- -- -- 215,000(3) --
President 1997 -- -- -- -- 125,000(4) --
1996 -- -- -- -- 90,000(4) --
Keith B. Forman........................ 1998 -- -- -- -- 215,000(3) --
Chief Financial Officer 1997 -- -- -- -- 125,000(4) --
1996 -- -- -- -- 90,000(4) --
John H. Gray(1)........................ 1998 -- -- -- -- -- --
Chief Operating Officer 1997 -- -- -- -- 125,000(4) --
1996 -- -- -- -- 90,000(4) --
Donald V. Weir(1)...................... 1998 -- -- -- -- -- --
Vice President 1997 -- -- -- -- -- --
1996 -- -- -- -- -- --
T. Darty Smith......................... 1998 -- -- -- -- 70,000(3) --
Vice President 1997 -- -- -- -- 50,000(4) --
1996 -- -- -- -- 20,000(4) --
Bart H. Heijermans..................... 1998 -- -- -- -- 40,000(3) --
Vice President 1997 -- -- -- -- -- --
1996 -- -- -- -- -- --
</TABLE>
- ---------------
(1) John H. Gray, former Chief Operating Officer of the General Partner, and
Donald V. Weir, former Vice President of the General Partner, resigned their
positions in connection with the consummation of the Merger on August 14,
1998. See Items 1 and 2. "Business and Properties -- Recent
Developments -- Merger."
(2) Other than awards made under Leviathan's incentive arrangements, all other
compensation was paid by El Paso and/or DeepTech.
(3) Issued pursuant to the Omnibus Plan. See "-- Omnibus Plan."
(4) Issued pursuant to the Plan. See "-- Unit Appreciation Rights Plan."
OPTION GRANTS
The following table sets forth certain information concerning the unit
options granted to the Named Officers during the year ended December 31, 1998:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF UNITS TOTAL ANNUAL RATES OF UNIT
OF COMMON OPTIONS PRICE APPRECIATION FOR
UNITS GRANTED TO EXERCISE OR OPTION TERM
UNDERLYING EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME OPTIONS GRANTED FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- --------------- ------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Grant E. Sims........................... 215,000(1) 23% $27.1875 8/14/2008 $3,676,086 $9,315,923
James H. Lytal.......................... 215,000(1) 23% $27.1875 8/14/2008 $3,676,086 $9,315,923
Keith B. Forman......................... 215,000(1) 23% $27.1875 8/14/2008 $3,676,086 $9,315,923
T. Darty Smith.......................... 70,000(1) 8% $27.1875 8/14/2008 $1,196,865 $3,033,091
Bart H. Heijermans...................... 40,000(1) 4% $27.1875 8/14/2008 $ 683,923 $1,733,195
</TABLE>
- ---------------
(1) These unit options were issued pursuant to the Omnibus Plan and are not
immediately exercisable. One half of the unit options are considered vested
and exercisable 1 year after at the date of grant and the remaining one-half
of the units options are considered vested and exercisable 1 year after the
first anniversary of the date of grant. The unit options shall expire 10
years from such grant date, but shall be subject to earlier termination in
the event that a participant ceases employment with the General Partner for
retirement or disability, in which case the unit options expire 36 months
after such date; for termination without cause, 1 year after such date; for
voluntary termination, 3 months after such date; and death, 12 months after
such date.
41
<PAGE> 44
OPTION EXERCISES AND YEAR-END VALUE TABLE
The following table sets forth certain information concerning the unit
options held by the Named Officers at December 31, 1998 or exercised by the
Named Officers during the year then ended:
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
IN-THE-MONEY
OPTIONS AT FISCAL
NUMBER OF YEAR-END
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE(2) UNEXERCISABLE
---- --------------- ------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Grant E. Sims...................... 215,000(1) $1,745,938(1) --/215,000 $--/$--
James H. Lytal..................... 215,000(1) 1,745,938(1) --/215,000 --/ --
Keith B. Forman.................... 215,000(1) 1,745,938(1) --/215,000 --/ --
T. Darty Smith..................... 70,000(1) 416,875(1) --/70,000 --/ --
Bart H. Heijermans................. -- -- --/40,000 --/ --
</TABLE>
- ---------------
(1) As a result of the "change of control" occurring upon the closing of the
Merger, the Unit Rights issued pursuant to the Plan fully vested and the
holders of the Unit Rights elected to be paid the amount equal to the
difference between the grant price of the Unit Right and the average of the
high and the low sales price of the Common Units on the date of exercise.
(2) All unexercisable options in this column relate to options issued pursuant
to the Omnibus Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 1, 1999, the beneficial
ownership of the outstanding equity securities of each of Leviathan, by (i) each
person who is known to Leviathan to beneficially own more than 5% of the
outstanding Units of Leviathan, (ii) each director of the General Partner and
(iii) all directors and executive officers of the General Partner as a group.
<TABLE>
<CAPTION>
COMMON UNITS PREFERENCE UNITS
----------------- -----------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
---------------- ------ ------- ------ -------
<S> <C> <C> <C> <C>
General Partner/El Paso(1).............................. (1) (1) -- --
Grant E. Sims........................................... 33,000(2) * -- --
James H. Lytal.......................................... 1,050(3) * -- --
Keith B. Forman......................................... 1,000 * -- --
Robert G. Phillips...................................... 1,000 * -- --
William A. Wise......................................... -- -- -- --
H. Brent Austin......................................... -- -- -- --
D. Mark Leland.......................................... -- -- -- --
Michael B. Bracy........................................ 1,500(4) * -- --
H. Douglas Church....................................... 1,500(4) * -- --
Malcolm Wallop.......................................... 1,500(4) * -- --
Executive officers and directors of Leviathan as a group
(10 persons).......................................... 36,050 * -- --
</TABLE>
- ---------------
* Less than 1%.
(1) The address for the General Partner and El Paso is El Paso Energy Building,
1001 Louisiana Street, Houston, Texas 77002. All of the General Partner's
outstanding common stock, par value $0.10 per share, is indirectly owned by
El Paso. The General Partner has no other class of capital stock
outstanding. The General Partner, through its ownership of 6,291,894 Common
Units, its 1% general partner interest in Leviathan and its approximate 1%
nonmanaging interest in certain subsidiaries of Leviathan, owned a 27.3%
effective interest in Leviathan.
(2) Mr. Sims disclaims beneficial ownership of 2,000 common units held in trust
for his 18 year old son.
(3) Mr. Lytal may be deemed to be the beneficial owner of 34 Common Units owned
by Mr. Lytal's son, a minor.
(4) Includes the option to acquire 1,500 Common Units pursuant to the Director
Plan. See Item 10. "Directors and Executive Officers of the
Registrant -- Compensation of Directors."
42
<PAGE> 45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A discussion of certain agreements, arrangements and transactions between
or among Leviathan, the General Partner, DeepTech, Tatham Offshore and certain
other related parties is summarized in Leviathan's "Notes to Consolidated
Financial Statements -- Note 4 -- Oil and Natural Gas Properties," "-- Note 8 --
Related Party Transactions" and "-- Note 14 -- Subsequent Events" located
elsewhere in this Annual Report. Also see Item 10. "Directors and Executive
Officers of the Registrant -- Audit and Conflicts Committee."
43
<PAGE> 46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report or
incorporated by reference:
1. Financial Statements
As to financial statements and supplementary information,
reference is made to "Index to Consolidated Financial Statements"
on page F-1 of this Annual Report.
2. Financial Statement Schedules
None. All financial statement schedules are omitted because the
information is not required, is not material or is otherwise
included in the consolidated financial statements or notes thereto
included elsewhere in this Annual Report.
3.(a) Exhibits
Each exhibit identified below is filed as a part of this Annual
Report. Exhibits included in this filing are designated by an
asterisk; all exhibits not so designated are incorporated herein
by reference to a prior filing as indicated. Exhibits designated
with a "+" constitute a management contract or compensatory plan
or arrangement required to be filed as an exhibit to this report
pursuant to Item 14(c) of Form 10-K.
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
3.1 -- Certificate of Limited Partnership of Leviathan (filed as
Exhibit 3.1 to Leviathan's Registration Statement on Form
S-1, File No. 33-55642).
3.2 -- Amended and Restated Agreement of Limited Partnership of
Leviathan (filed as Exhibit 10.41 to Amendment No. 1 to
DeepTech's Registration Statement on Form S-1, File No.
33-73538); Amendment Number 1 to the Amended and Restated
Agreement of Limited Partnership of Leviathan (filed as
Exhibit 10.1 to Leviathan's Current Report on Form 8-K
dated December 31, 1996).
4.1 -- Form of Certificate Evidencing Preference Units
Representing Limited Partner Interests (filed as Exhibit
4.1 to Amendment No. 2 to Leviathan's Registration
Statement on Form S-1, File No. 33-55642).
4.2 -- Form of Certificate Evidencing Common Units Representing
Limited Partner Interests (filed as Exhibit 4.2 to
Amendment No. 2 to Leviathan's Registration Statement on
Form S-1, File No. 33-55642).
10.1 -- First Amended and Restated Management Agreement, dated
June 27, 1994 and effective as of July 1, 1992, between
DeepTech and the General Partner (filed as Exhibit 10.1
to DeepTech's Form 10-K for 1994, File No. 0-23934).
10.2* -- Sixth Amendment to First Amended and Restated Management
Agreement between DeepTech and the General Partner.
</TABLE>
44
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
10.3 -- Second Amended and Restated Credit Agreement dated
December 13, 1996 among Leviathan, The Chase Manhattan
Bank, as administrative agent, ING (U.S.) Capital
Corporation, as co-arranger, and the banks and other
financial institutions from time to time party thereto
(filed as exhibit 10.24 to Leviathan's Form 10-K for
1996); First Amendment to Second Amended and Restated
Credit Agreement dated December 13, 1996 among Leviathan,
Several Lenders, The Chase Manhattan Bank, as
Administrative Agent, and ING (U.S.) Capital Corporation,
as Co-Arranger (filed as Exhibit 10.1 to Leviathan's Form
10-Q for the quarterly period ended March 31, 1998;
Second Amendment to Second Amended and Restated Credit
Agreement dated December 13, 1996 among Leviathan,
Several Lenders, The Chase Manhattan Bank, as
Administrative Agent, and ING (U.S.) Capital Corporation,
as Co-Arranger (filed as Exhibit 10.2 to Leviathan's Form
10-Q for the quarterly period ended March 31, 1998);
Amendment No. 3 dated as of August 12, 1998, to the
Second Amended and Restated Credit Agreement, dated as of
March 23, 1995, as amended and restated through December
13, 1996, among Leviathan Gas Pipeline Partners, L.P., a
Delaware limited partnership, the banks and other
financial institutions (the "Lenders"), The Chase
Manhattan Bank, a New York banking corporation, as
administrative agent, and ING (U.S.) Capital Corporation,
a Delaware corporation, as co-arranger for the Lenders
(filed as Exhibit 10.3 to Leviathan's Form 10-Q for the
quarterly period ended September 30, 1998).
10.4* -- Amendment No. 4 dated as of January 29, 1999, to the
Second Amended and Restated Credit Agreement, dated as of
March 23, 1995, as amended and restated through December
13, 1996, among Leviathan Gas Pipeline Partners, L.P., a
Delaware limited partnership, the banks and other
financial institutions (the "Lenders"), The Chase
Manhattan Bank, a New York banking corporation, as
administrative agent, and ING (U.S.) Capital Corporation,
a Delaware corporation, as co-arranger for the Lenders.
10.5 -- Redemption Agreement dated February 27, 1998 between
Tatham Offshore, Inc. and Flextrend Development Company,
L.L.C., a subsidiary of Leviathan (filed as Exhibit 10.1
to Leviathan's Form 10-Q for the quarterly period ended
September 30, 1998).
10.6 -- Contribution Agreement between Leviathan and El Paso
Field Services Company (filed as Exhibit A to Leviathan's
Schedule 14A (Rule 14A-101) Proxy Statement effective
February 9, 1998).
10.7+ -- Leviathan 1998 Unit Option Plan for Non-Employee
Directors Effective as of August 14, 1998 (filed as
Exhibit 10.2 to Leviathan's Form 10-Q for the quarterly
period ended September 30, 1998).
10.8+ -- Leviathan Unit Rights Appreciation Plan (filed as Exhibit
10.25 to Leviathan's Form 10-K for 1996).
10.9*+ -- Leviathan 1998 Omnibus Compensation Plan, Amended and
Restated, Effective as of January 1, 1999.
21* -- List of Subsidiaries of Leviathan.
24 -- Power of Attorney (included on the signature pages of
this Annual Report on Form 10-K).
27* -- Financial Data Schedule
</TABLE>
3.(b) Reports on Form 8-K
None.
45
<PAGE> 48
POWERS OF ATTORNEY
The undersigned directors and executive officers of LEVIATHAN GAS PIPELINE
COMPANY, as General Partner of LEVIATHAN GAS PIPELINE PARTNERS, L.P. hereby
constitute and appoint H. Brent Austin and Britton White Jr., each of them, with
full power to act without the other and with full power of substitution, our
true and lawful attorneys-in-fact with full power to execute in our name and
behalf in the capacities indicated below any and all amendments (including
post-effective amendments and amendments thereto) to this Annual Report, and to
file the same, with all exhibits thereto and other documents in connection
therewith with the Securities and Exchange Commission and hereby ratify and
confirm all that such attorneys-in-fact, or either of them, or their substitutes
shall lawfully do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act,
the Registrant has duly caused this Annual Report to be signed on its behalf by
the undersigned, thereunto duly authorized on the 29th day of March 1999.
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
(Registrant)
By: LEVIATHAN GAS PIPELINE COMPANY,
its General Partner
By: /s/ GRANT E. SIMS
-------------------------------------
Grant E. Sims
Chief Executive Officer
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM A. WISE Chairman of the Board and Director March 29, 1999
- -----------------------------------------------------
William A. Wise
/s/ GRANT E. SIMS Chief Executive Officer and March 29, 1999
- ----------------------------------------------------- Director
Grant E. Sims
/s/ KEITH B. FORMAN Chief Financial Officer and Vice March 29, 1999
- ----------------------------------------------------- President
Keith B. Forman
/s/ JAMES H. LYTAL President and Director March 29, 1999
- -----------------------------------------------------
James H. Lytal
/s/ D. MARK LELAND Vice President and Controller March 29, 1999
- ----------------------------------------------------- (Chief Accounting Officer)
D. Mark Leland
/s/ H. BRENT AUSTIN Executive Vice President and March 29, 1999
- ----------------------------------------------------- Director
H. Brent Austin
/s/ ROBERT G. PHILLIPS Executive Vice President and March 29, 1999
- ----------------------------------------------------- Director
Robert G. Phillips
/s/ MICHAEL B. BRACY Director March 29, 1999
- -----------------------------------------------------
Michael B. Bracy
/s/ H. DOUGLAS CHURCH Director March 29, 1999
- -----------------------------------------------------
H. Douglas Church
/s/ MALCOLM WALLOP Director March 29, 1999
- -----------------------------------------------------
Malcolm Wallop
</TABLE>
46
<PAGE> 49
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES:
Report of Independent Accountants......................... F-2
Consolidated Balance Sheet as of December 31, 1998 and
1997................................................... F-3
Consolidated Statement of Operations for the Years Ended
December 31, 1998, 1997 and 1996....................... F-4
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996....................... F-5
Consolidated Statement of Partners' Capital for the Years
Ended December 31, 1996, 1997 and 1998................. F-6
Notes to Consolidated Financial Statements................ F-7
VIOSCA KNOLL GATHERING COMPANY:
Report of Independent Accountants......................... F-33
Balance Sheet as of December 31, 1998 and 1997............ F-34
Statement of Operations for the Years Ended December 31,
1998, 1997 and 1996.................................... F-35
Statement of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996.................................... F-36
Statement of Partners' Capital for the Years Ended
December 31, 1996, 1997 and 1998....................... F-37
Notes to Financial Statements............................. F-38
HIGH ISLAND OFFSHORE SYSTEM, L.L.C.:
Independent Auditors' Report.............................. F-43
Statements of Financial Position as of December 31, 1998
and 1997............................................... F-44
Statements of Income and Statements of Members' Equity for
the Years Ended December 31, 1998, 1997 and 1996....... F-45
Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996.................................... F-46
Notes to the Financial Statements for the Years Ended
December 31, 1998, 1997 and 1996....................... F-47
POSEIDON OIL PIPELINE COMPANY, L.L.C.
Report of Independent Public Accountants.................. F-50
Balance Sheets -- December 31, 1998 and 1997.............. F-51
Statements of Income for the Years Ended December 31, 1998
and 1997 and for the Period from Inception (February
14, 1996) through December 31, 1996.................... F-52
Statements of Members' Equity for the Years Ended December
31, 1998 and 1997 and for the Period from Inception
(February 14, 1996) through December 31, 1996.......... F-53
Statements of Cash Flows for the Years Ended December 31,
1998 and 1997 and for the Period from Inception
(February 14, 1996) through December 31, 1996.......... F-54
Notes to Financial Statements -- December 31, 1998, 1997
and 1996............................................... F-55
NEPTUNE PIPELINE COMPANY, L.L.C.
Report of Independent Public Accountants.................. F-59
Consolidated Balance Sheet as of December 31, 1998 and
1997................................................... F-60
Consolidated Statement of Income for the Years Ended
December 31, 1998 and 1997............................. F-61
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1998 and 1997............................. F-62
Statement of Members' Capital as of December 31, 1998 and
1997................................................... F-63
Notes to Consolidated Financial Statements -- December 31,
1998................................................... F-64
</TABLE>
F-1
<PAGE> 50
REPORT OF INDEPENDENT ACCOUNTANTS
To the Unitholders of Leviathan Gas Pipeline Partners, L.P.
and the Board of Directors and Stockholder of
Leviathan Gas Pipeline Company, as General Partner
In our opinion, the accompanying consolidated balance sheet and related
consolidated statements of operations, of cash flows and of partners' capital
present fairly, in all material respects, the financial position of Leviathan
Gas Pipeline Partners, L.P. and its subsidiaries ("Leviathan") at December 31,
1998 and 1997 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of Leviathan's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Houston, Texas
March 19, 1999
F-2
<PAGE> 51
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,108 $ 6,430
Accounts receivable....................................... 1,482 1,953
Accounts receivable from affiliates....................... 7,106 6,608
Other current assets...................................... 247 653
-------- --------
Total current assets.............................. 11,943 15,644
-------- --------
Equity investments.......................................... 186,079 182,301
-------- --------
Property and equipment:
Pipelines................................................. 64,464 78,617
Platforms and facilities.................................. 123,912 97,509
Oil and natural gas properties, at cost, using successful
efforts method......................................... 152,750 120,296
-------- --------
341,126 296,422
Less accumulated depreciation, depletion, amortization and
impairment............................................. 99,134 95,783
-------- --------
Property and equipment, net............................ 241,992 200,639
-------- --------
Investment in Tatham Offshore, Inc. (Notes 1 and 8)......... -- 7,500
Other noncurrent assets..................................... 2,712 3,758
-------- --------
Total assets...................................... $442,726 $409,842
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued liabilities.................. $ 10,429 $ 12,522
Accounts payable to affiliates............................ 738 1,032
Notes payable............................................. 338,000 --
-------- --------
Total current liabilities......................... 349,167 13,554
Deferred federal income taxes............................... 937 1,399
Notes payable............................................... -- 238,000
Other noncurrent liabilities................................ 10,724 13,304
-------- --------
Total liabilities................................. 360,828 266,257
-------- --------
Commitments and contingencies
Minority interest........................................... (998) (381)
-------- --------
Partners' capital:
Preference unitholders' interest.......................... 7,351 163,426
Common unitholders' interest.............................. 90,972 (15,400)
General Partner's interest................................ (15,427) (4,060)
-------- --------
82,896 143,966
-------- --------
Total liabilities and partners' capital........... $442,726 $409,842
======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-3
<PAGE> 52
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per Unit amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Revenue:
Oil and natural gas sales................................. $ 186 $ 276 $ 772
Oil and natural gas sales to affiliates................... 31,225 57,830 46,296
Gathering, transportation and platform services........... 13,924 10,029 13,974
Gathering, transportation and platform services to
affiliates............................................. 3,396 7,300 10,031
Equity in earnings........................................ 26,724 29,327 20,434
-------- -------- -------
75,455 104,762 91,507
-------- -------- -------
Costs and expenses:
Operating expenses........................................ 11,369 11,352 9,068
Depreciation, depletion and amortization.................. 29,267 46,289 31,731
Impairment, abandonment and other......................... (1,131) 21,222 --
General and administrative expenses....................... 6,416 5,869 788
Management fee and general and administrative expenses
allocated from General Partner......................... 9,773 8,792 7,752
-------- -------- -------
55,694 93,524 49,339
-------- -------- -------
Operating income............................................ 19,761 11,238 42,168
Interest income and other................................... 771 1,475 1,710
Interest and other financing costs.......................... (20,242) (14,169) (5,560)
Minority interest in (income) loss.......................... (15) 7 (427)
-------- -------- -------
Income (loss) before income taxes........................... 275 (1,449) 37,891
Income tax benefit.......................................... 471 311 801
-------- -------- -------
Net income (loss)........................................... $ 746 $ (1,138) $38,692
======== ======== =======
Weighted average number of units outstanding................ 24,367 24,367 24,367
======== ======== =======
Basic and diluted net income (loss) per unit (Note 2)....... $ 0.02(a) $ (0.06) $ 1.57
======== ======== =======
</TABLE>
- ---------------
(a) Excludes 933,000 outstanding unit options to purchase an equal number of
Common Units of Leviathan as the exercise prices of the unit options were
greater than the average market price of the Common Units (Note 7).
The accompanying notes are an integral part of this financial statement.
F-4
<PAGE> 53
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ 746 $ (1,138) $ 38,692
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Amortization of debt issue costs.................... 2,128 960 1,351
Depreciation, depletion and amortization............ 29,267 46,289 31,731
Impairment, abandonment and other................... (1,131) 21,222 --
Minority interest in income (loss).................. 15 (7) 427
Equity in earnings.................................. (26,724) (29,327) (20,434)
Distributions from equity investments............... 31,171 27,135 36,823
Deferred income taxes and other..................... (462) (323) (936)
Other noncash items................................. (310) (1,596) (6,560)
Changes in operating working capital:
Decrease (increase) in accounts receivable........ 471 4,284 (3,442)
(Increase) decrease in accounts receivable from
affiliates..................................... (498) 7,499 (7,512)
Decrease (increase) in other current assets....... 406 206 (97)
Decrease in accounts payable and accrued
liabilities.................................... (9,108) (5,247) (23,190)
(Decrease) increase in accounts payable to
affiliates..................................... (294) (2,472) 3,326
-------- -------- ---------
Net cash provided by operating activities....... 25,677 67,485 50,179
-------- -------- ---------
Cash flows from investing activities:
Acquisition and development of oil and natural gas
properties........................................... (30,548) (11,249) (59,599)
Additions to pipelines, platforms and facilities........ (27,368) (30,708) (30,095)
Equity investments...................................... (8,195) -- (12,027)
Proceeds from sales of assets and other................. 487 188 --
-------- -------- ---------
Net cash used in investing activities........... (65,624) (41,769) (101,721)
-------- -------- ---------
Cash flows from financing activities:
Decrease in restricted cash............................. -- 716 --
Debt issue costs........................................ (928) (93) (2,843)
Proceeds from notes payable............................. 129,000 65,000 89,220
Repayments of notes payable............................. (29,000) (54,000) --
Distributions to partners............................... (62,447) (47,398) (33,852)
-------- -------- ---------
Net cash provided by (used in) financing
activities.................................... 36,625 (35,775) 52,525
-------- -------- ---------
Net (decrease) increase in cash and cash equivalents...... (3,322) (10,059) 983
Cash and cash equivalents at beginning of year............ 6,430 16,489 15,506
-------- -------- ---------
Cash and cash equivalents at end of year.................. $ 3,108 $ 6,430 $ 16,489
======== ======== =========
</TABLE>
Supplemental disclosures to the statement of cash flows -- see Note 11.
The accompanying notes are an integral part of this financial statement.
F-5
<PAGE> 54
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(In thousands)
<TABLE>
<CAPTION>
PREFERENCE PREFERENCE COMMON COMMON GENERAL
UNITS UNITHOLDERS UNITS UNITHOLDERS PARTNER(a) TOTAL
---------- ----------- ------ ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Partners' capital at December 31,
1995........................... 18,075 $ 192,225 6,292 $ (5,380) $ (4) $186,841
Net income for the year ended
December 31, 1996.............. -- 28,400 -- 9,905 387 38,692
Cash distributions............... -- (24,401) -- (8,494) (615) (33,510)
------- --------- ------ -------- -------- --------
Partners' capital at December 31,
1996........................... 18,075 196,224 6,292 (3,969) (232) 192,023
Net loss for the year ended
December 31, 1997.............. -- (1,167) -- (420) 449 (1,138)
Cash distributions............... -- (31,631) -- (11,011) (4,277) (46,919)
------- --------- ------ -------- -------- --------
Partners' capital at December 31,
1997........................... 18,075 163,426 6,292 (15,400) (4,060) 143,966
Net income for the year ended
December 31, 1998.............. -- 63 -- 541 142 746
Conversion of Preference Units
into Common Units (Note 7)..... (17,058) (127,842) 17,058 127,842 -- --
Cash distributions............... -- (28,296) -- (22,011) (11,509) (61,816)
------- --------- ------ -------- -------- --------
Partners' capital at December 31,
1998........................... 1,017 $ 7,351 23,350 $ 90,972 $(15,427)(b) $ 82,896
======= ========= ====== ======== ======== ========
</TABLE>
- ---------------
(a) Leviathan Gas Pipeline Company owns a 1% general partner interest in
Leviathan Gas Pipeline Partners, L.P.
(b) Pursuant to the terms of the Partnership Agreement, no partner shall have
any obligation to restore any negative balance in its capital account upon
liquidation of Leviathan. Therefore, any net gains from the dissolution of
Leviathan's assets would be allocated first to any then-outstanding deficit
capital account balance before any of the remaining net proceeds would be
distributed to the partners in accordance with their ownership percentages.
The accompanying notes are an integral part of this financial statement.
F-6
<PAGE> 55
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION:
Leviathan Gas Pipeline Partners, L.P., a publicly held Delaware limited
partnership ("Leviathan"), is primarily engaged in the gathering, transportation
and production of natural gas and crude oil in the Gulf of Mexico (the "Gulf").
Through its subsidiaries and joint ventures, Leviathan owns interests in
significant assets, including (i) eight natural gas pipelines, (ii) a crude oil
pipeline system, (iii) six strategically located multi-purpose platforms, (iv) a
dehydration facility, (v) four producing oil and natural gas properties and (vi)
one undeveloped oil and natural gas property.
Leviathan Gas Pipeline Company, a Delaware corporation and the general
partner of Leviathan (the "General Partner"), performs all management and
operational functions of Leviathan and its subsidiaries. In August 1998, the
General Partner became a wholly-owned indirect subsidiary of El Paso Energy
Corporation ("El Paso") pursuant to El Paso's merger with DeepTech International
Inc. ("DeepTech"), the indirect parent of the General Partner, as discussed
below.
Merger
Effective August 14, 1998, El Paso completed the acquisition of DeepTech by
merging a wholly-owned subsidiary of El Paso with and into DeepTech (the
"Merger") pursuant to the Agreement and Plan of Merger dated as of February 27,
1998 (as amended, the "Merger Agreement"). The material terms of the Merger and
the transactions contemplated by the Merger Agreement and other agreements as
these agreements relate to Leviathan are as follows:
(a) Prior to the Merger, Leviathan Holdings Company, which owns 100% of the
General Partner, was owned 85% by DeepTech resulting in DeepTech owning
an overall 23.2% effective interest in Leviathan. El Paso acquired the
minority interests of Leviathan Holdings Company and two other
subsidiaries of DeepTech primarily held by former DeepTech management
for an aggregate of $55.0 million. As a result, El Paso owns 100% of
the General Partner's interest in Leviathan and an overall 27.3%
effective interest in Leviathan.
(b) In June 1998, Tatham Offshore, Inc. ("Tatham Offshore"), an affiliate
of Leviathan through August 14, 1998, canceled its reversionary
interests in certain oil and natural gas properties owned by Leviathan
(Note 4).
(c) On August 14, 1998, Tatham Offshore transferred its remaining assets
located in the Gulf to Leviathan in exchange for the 7,500 shares of
Series B 9% Senior Convertible Preferred Stock (the "Senior Preferred
Stock") issued by Tatham offshore (Note 8) and owned by Leviathan (the
"Redemption Agreement"). Under the terms of the Redemption Agreement,
Leviathan acquired all of Tatham Offshore's right, title and interest
in and to Viosca Knoll Blocks 817 (subject to an existing production
payment obligation), West Delta Block 35, the platform located at Ship
Shoal Block 331 and other lease blocks not material to Leviathan's
current operations. The net cash expenditure of Leviathan under the
Redemption Agreement totaled $774,000 representing (i) $2,771,000 of
abandonment costs relating to wells located at Ewing Bank Blocks 914
and 915 offset by (ii) $1,997,000 of net cash generated from the
producing properties from January 1, 1998 through August 14, 1998. In
addition, Leviathan assumed all remaining abandonment and restoration
obligations associated with the platform and leases.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
those 50% or more owned subsidiaries controlled by Leviathan. The General
Partner's approximate 1% nonmanaging interest in certain
F-7
<PAGE> 56
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subsidiaries of Leviathan represents the minority interest in Leviathan's
consolidated financial statements. Investments in which Leviathan owns a 20% to
50% ownership interest are accounted for using the equity method. All
significant intercompany balances and transactions have been eliminated in
consolidation. Certain amounts from the prior year have been reclassified to
conform to the current year's presentation.
Cash and cash equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Property and equipment
Gathering pipelines, platforms and related facilities are recorded at cost
and are depreciated on a straight-line basis over the estimated useful lives of
the assets which generally range from 5 to 30 years for the gathering pipelines
and from 18 to 30 years for platforms and the related facilities. Repair and
maintenance costs are expensed as incurred; additions, improvements and
replacements are capitalized.
Leviathan accounts for its oil and natural 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 and amortization expense.
Depreciation, depletion and amortization of the capitalized costs of
producing oil and natural gas properties, consisting principally of tangible and
intangible costs incurred in developing a property and costs of productive
leasehold interests, are computed on the unit-of-production method.
Unit-of-production rates are based on annual estimates of remaining proved
developed reserves or proved reserves, as appropriate, for each property. Repair
and maintenance costs are charged to expense as incurred; additions,
improvements and replacements are capitalized.
Estimated dismantlement, restoration and abandonment costs and estimated
residual salvage values are taken into account in determining depreciation
provisions for gathering pipelines, platforms, related facilities and oil and
natural gas properties. Other noncurrent liabilities at December 31, 1998 and
1997 include $10,724,000 and $9,158,0000, respectively, of accrued
dismantlement, restoration and abandonment costs.
Retirements, sales and disposals of assets are recorded by eliminating the
related costs and accumulated depreciation, depletion and amortization of the
disposed assets with any resulting gain or loss reflected in income.
Leviathan evaluates impairment of its property and equipment in accordance
with Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which requires recognition of impairment losses on long-lived assets
(including pipelines, proved properties, wells, equipment and related
facilities) if the carrying amount of such assets, grouped at the lowest level
for which there are identifiable cash flows that are largely independent of the
cash flows from other assets, exceeds the estimated undiscounted future cash
flows of such assets. Measurement of any impairment loss is based on the fair
value of the assets.
Capitalization of interest
Interest and other financing costs are capitalized in connection with
construction and drilling activities as part of the cost of the asset and
amortized over the related asset's estimated useful life.
F-8
<PAGE> 57
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Debt issue costs
Debt issue costs are capitalized and amortized over the life of the related
indebtedness. Any unamortized debt issue costs are expensed at the time the
related indebtedness is repaid or otherwise terminated.
Revenue recognition
Revenue from pipeline transportation of hydrocarbons is recognized upon
receipt of the hydrocarbons into the pipeline systems. Revenue from oil and
natural gas sales is recognized upon delivery in the period of production.
Revenue from platform access and processing services is recognized in the period
the services are provided.
Income taxes
Leviathan and its subsidiaries other than Tarpon Transmission Company
("Tarpon") are not taxable entities. However, the taxable income or loss
resulting from the operations of Leviathan will ultimately be included in the
federal and state income tax returns of the general and limited partners.
Individual partners will have different investment bases depending upon the
timing and price of acquisition of partnership units. Further, each partner's
tax accounting, which is partially dependent upon his/her tax position, may
differ from the accounting followed in the consolidated financial statements.
Accordingly, there could be significant differences between each individual
partner's tax basis and his/her share of the net assets reported in the
consolidated financial statements. Leviathan does not have access to information
about each individual partner's tax attributes in Leviathan, and the aggregate
tax bases cannot be readily determined. Accordingly, management does not believe
that, in Leviathan's circumstances, the aggregate difference would be meaningful
information.
Tarpon is, and Manta Ray Gathering Systems, Inc. ("Manta Ray") was, prior
to its liquidation in May 1996, a subsidiary of Leviathan subject to federal
corporate income taxation. Leviathan utilizes an asset and liability approach
for accounting for income taxes of Tarpon and Manta Ray that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and tax bases
of other assets and liabilities. Resulting tax liabilities, if any, are borne by
Leviathan.
Net income per unit
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing net income (loss) attributable to the limited partners by the weighted
average number of units outstanding during the period. Dilutive EPS reflects
potential dilution and is computed by dividing net income (loss) attributable to
the limited partners by the weighted average number of units outstanding during
the period increased by the number of additional units that would have been
outstanding if the dilutive potential units had been issued.
Basic income (loss) per unit and diluted income (loss) per unit for
Leviathan are the same for the years ended December 31, 1998, 1997 and 1996 as
no dilutive potential units were outstanding during the respective periods.
Leviathan includes the outstanding Preference Units in the basic and diluted net
income (loss) per unit calculation as if the Preference Units had been converted
into Common Units.
F-9
<PAGE> 58
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Basic and diluted net income (loss) per unit is calculated based upon the
net income (loss) of Leviathan less an allocation of net income to the General
Partner proportionate to its share of cash distributions and is calculated as
follows (in thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
----------------------------- ----------------------------
LIMITED GENERAL LIMITED GENERAL
PARTNERS PARTNER TOTAL PARTNERS PARTNER TOTAL
--------- -------- ------ -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)(a)..................... $ 738 $ 8 $746 $(1,127) $(11) $(1,138)
Allocation to General Partner(b)......... (134) 134 -- (460) 460 --
------- ---- ---- ------- ---- -------
Allocation of net income (loss) as
adjusted for Incentive Distributions... $ 604 $142 $746 $(1,587) $449 $(1,138)
======= ==== ==== ======= ==== =======
Weighted average number of units
outstanding............................ 24,367 24,367
======= =======
Basic and diluted net income (loss) per
unit................................... $ 0.02 $ (0.06)
======= =======
</TABLE>
- ---------------
(a) Net income (loss) allocated 99% to the limited partners as holders of the
Preference and Common Units and 1% to the General Partner.
(b) Represents allocation of net income to the General Partner proportionate to
its share of each quarter's cash distributions which included Incentive
Distributions (Note 7).
For the year ended December 31, 1996, basic and diluted net income per unit
was computed based upon the net income of Leviathan less an allocation of
approximately 1% of Leviathan's net income to the General Partner. During 1996,
the General Partner only received a 1% allocation of net income as Leviathan did
not pay any Incentive Distributions (Note 7) until 1997. The weighted average
number of Units outstanding for the year ended December 31, 1996 was 24,366,894
Units.
Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles and the estimation of oil and natural
gas reserves requires management to make estimates and assumptions that affect
the reported amounts of certain assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the related reported amounts of revenue and expenses during the
reporting period. Such estimates and assumptions include those regarding: (i)
Federal Energy Regulatory Commission ("FERC") regulations, (ii) oil and natural
gas reserve disclosure, (iii) estimated useful lives of depreciable assets and
(iv) potential abandonment, dismantlement, restoration and environmental
liabilities. Actual results could differ from those estimates. Management
believes that its estimates are reasonable.
Unit Options
In August 1998, Leviathan adopted SFAS No. 123, "Accounting for Stock Based
Compensation." While SFAS No. 123 encourages entities to adopt the fair value
method of accounting for their stock-based compensation plans, this standard
permits and Leviathan has elected to utilize the intrinsic value method under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Prior to August 1998, compensation expense for Leviathan's unit
appreciation rights was recorded annually based on the quoted market price of
Preference Units at the end of the period and the percentage of vesting which
had occurred. A description of Leviathan's option plans and pro forma
information regarding net income (loss) and net income (loss) per unit, as
calculated under the provisions of SFAS No. 123, are disclosed in Note 7.
F-10
<PAGE> 59
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Price Risk Management Activities
Leviathan enters into commodity price swap instruments for non-trading
purposes to manage its exposure to price fluctuations on anticipated natural gas
and crude oil sales transactions. To qualify for hedge accounting, the
transactions must reduce the risk of the underlying hedge items, be designated
as hedges at inception and result in cash flows and financial impacts which are
inversely correlated to the position being hedged. If correlation ceases to
exist, hedge accounting is terminated and mark-to-market accounting is applied.
Gains and losses resulting from hedging activities and the termination of any
hedging instruments are initially deferred and included as an increase or
decrease to oil and natural gas sales in the period in which the hedged
production is sold. See Note 10.
Recent Pronouncements
Effective January 1, 1998, Leviathan adopted SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the method public entities report information about
operating segments in both interim and annual financial statements issued to
unitholders and requires related disclosures about products and services,
geographic areas and major customers. See Notes 3, 4, 12 and 13.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." This statement defines start-up activities, requires start-up and
organization costs to be expensed as incurred and requires that any such costs
that exist on the balance sheet be expensed upon adoption of this pronouncement.
The statement is effective for fiscal years beginning after December 15, 1998.
Leviathan does not expect the implementation of this statement to have a
material effect on Leviathan's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that entities recognize all derivative instruments as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as a hedge transaction. For fair-value hedge transactions in which
Leviathan is hedging changes in an asset's, liability's or firm commitment's
fair value, changes in the fair value of the derivative instrument will
generally be offset in the income statement by changes in the hedged item's fair
value. For cash-flow hedge transactions, in which Leviathan is hedging the
variability of cash flows related to a variable-rate asset, liability, or a
forecasted transaction, changes in the fair value of the derivative instrument
will be reported in other comprehensive income. The gains and losses on the
derivative instrument that are reported in other comprehensive income will be
reclassified as earnings in the periods in which earnings are impacted by the
variability of the cash flows of the hedged item. The ineffective portion of all
hedges will be recognized in current-period earnings. This statement is
effective for fiscal years beginning after June 15, 1999. Leviathan has not yet
determined the impact that the adoption of SFAS No. 133 will have on its
financial position or results of operations.
In November 1998, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF 98-10, "Accounting for Contracts Involved in Energy Trading
and Risk Management Activities." EITF 98-10 requires energy trading contracts to
be recorded at fair value on the balance sheet, with the changes in fair value
included in earnings and is effective for fiscal years beginning after December
15, 1998. Leviathan adopted the provisions of EITF 98-10 in January 1999 and
does not believe that the application of this pronouncement will have a material
impact on Leviathan's financial position or results of operations.
F-11
<PAGE> 60
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- EQUITY INVESTMENTS:
Leviathan owns interests of 50% in Viosca Knoll Gathering Company ("Viosca
Knoll"), 36% in Poseidon Oil Pipeline Company, L.L.C. ("POPCO"), 50% in Stingray
Pipeline Company ("Stingray"), 40% in High Island Offshore System, L.L.C.,
("HIOS"), 33 1/3% in U-T Offshore System ("UTOS"), 50% in West Cameron
Dehydration Company, L.L.C. ("West Cameron Dehy") and an effective 25.67%
interest in each of Manta Ray Offshore Gathering Company, L.L.C. ("Manta Ray
Offshore") and Nautilus Pipeline Company, L.L.C. ("Nautilus").
The excess of the carrying amount of the investments accounted for using
the equity method over the underlying equity in net assets as of December 31,
1998 is $45,023,000. The difference between the cost of the investments
accounted for on the equity method and the underlying equity in net assets is
being depreciated on a straight-line basis over the estimated lives of the
underlying net assets.
The summarized financial information for investments, which are accounted
for using the equity method, is as follows.
SUMMARIZED HISTORICAL OPERATING RESULTS
YEAR ENDED DECEMBER 31, 1998
(In thousands)
<TABLE>
<CAPTION>
WEST MANTA
VIOSCA CAMERON RAY
HIOS KNOLL STINGRAY POPCO DEHY UTOS OFFSHORE(a) NAUTILUS(a) TOTAL
-------- ------- -------- ------- ------- ------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue........ $ 43,818 $29,334 $ 23,008 $44,522 $2,796 $ 5,174 $10,949 $ 5,403
Other income............. -- 50 670 290 11 100 488 100
Operating expenses....... (19,047) (3,031) (16,814) (4,763) (183) (2,466) (3,710) (1,979)
Depreciation............. (4,772) (3,860) (6,852) (8,846) (16) (559) (4,303) (5,845)
Interest expense......... (16) (4,267) (1,668) (8,671) -- (2) -- --
-------- ------- -------- ------- ------ ------- ------- --------
Net earnings (loss)...... 19,983 18,226 (1,656) 22,532 2,608 2,247 3,424 (2,321)
Ownership percentage..... 40% 50% 50% 36% 50% 33.3% 25.67% 25.67%
-------- ------- -------- ------- ------ ------- ------- --------
7,993 9,113 (828) 8,111 1,304 749 879 (596)
Adjustments:
Depreciation(b)........ 881 -- 749 (120) -- 33 (348) --
Contract
amortization(b)...... (105) -- (127) -- -- -- -- --
Other.................. (149) -- (49) -- -- (52) -- (714)(c)
-------- ------- -------- ------- ------ ------- ------- --------
Equity in earnings
(loss)................. $ 8,620 $ 9,113 $ (255) $ 7,991 $1,304 $ 730 $ 531 $ (1,310) $26,724
======== ======= ======== ======= ====== ======= ======= ======== =======
Distributions(d)......... $ 9,240 $10,350 $ 1,000 $ 6,732 $1,100 $ 933 $ 1,182 $ 634 $31,171
======== ======= ======== ======= ====== ======= ======= ======== =======
</TABLE>
- ---------------
(a) Leviathan owns a 25.67% interest in Neptune Pipeline Company, L.L.C.
("Neptune"). Neptune owns a 99% member interest in each of Manta Ray
Offshore, which owns a non-jurisdictional natural gas system, and Nautilus,
which owns a jurisdictional natural gas system. Leviathan believes the
disclosure of separate financial data for Manta Ray Offshore and Nautilus is
more meaningful than the consolidated results of Neptune.
(b) Adjustments result from purchase price adjustments made in accordance with
APB Opinion No. 16 "Business Combinations."
(c) Primarily relates to a revision of the allowance for funds used during
construction ("AFUDC") which represents the estimated costs, during the
construction period, of funds used for construction.
(d) Future distributions could be restricted by the terms of the equity
investees' respective credit agreements.
F-12
<PAGE> 61
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARIZED HISTORICAL OPERATING RESULTS
YEAR ENDED DECEMBER 31, 1997
(In thousands)
<TABLE>
<CAPTION>
WEST MANTA
VIOSCA CAMERON RAY
HIOS KNOLL STINGRAY POPCO DEHY UTOS OFFSHORE(a) NAUTILUS(a) TOTAL
-------- ------- -------- ------- ------- ------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue.......... $ 45,917 $23,128 $ 23,630 $26,161 $2,451 $ 3,785 $ 6,263 $ 54
Other income............... -- 40 970 209 29 61 1,564 6,489(b)
Operating expenses......... (17,101) (2,115) (15,612) (5,782) (164) (2,472) (2,223) (435)
Depreciation............... (4,774) (2,474) (7,216) (6,463) (16) (566) (1,823) (233)
Interest expense........... -- (1,959) (1,384) (5,341) -- 37 (1,483) --
-------- ------- -------- ------- ------ ------- ------- ------
Net earnings............... 24,042 16,620 388 8,784 2,300 845 2,298 5,875
Ownership percentage....... 40% 50% 50% 36% 50% 33.3% 25.67% 25.67%
-------- ------- -------- ------- ------ ------- ------- ------
9,617 8,310 194 3,162 1,150 281 590 1,508
Adjustments:
Depreciation(c).......... 845 -- 959 (120) -- 35 -- --
Contract
amortization(c)........ (105) -- (350) -- -- -- -- --
Other.................... (228) -- (49) (263) -- (24) 3,082(d) 733
-------- ------- -------- ------- ------ ------- ------- ------
Equity in earnings......... $ 10,129 $ 8,310 $ 754 $2,779 $1,150 $ 292 $ 3,672 $2,241 $29,327
======== ======= ======== ======= ====== ======= ======= ====== =======
Distributions(e)........... $ 12,200 $ 9,650 $ 1,375 $ -- $1,150 $ 200 $ 2,560 $ -- $27,135
======== ======= ======== ======= ====== ======= ======= ====== =======
</TABLE>
- ---------------
(a) Leviathan owns a 25.67% interest in Neptune. Neptune owns a 99% member
interest in each of Manta Ray Offshore, which owns a non-jurisdictional
natural gas system, and Nautilus, which owns a jurisdictional natural gas
system. Leviathan believes the disclosure of separate financial data for
Manta Ray Offshore and Nautilus is more meaningful than the consolidated
results of Neptune.
(b) Includes $6,431,000 related to AFUDC. Recognition of this allowance is
appropriate because it constitutes an actual cost of construction. For
regulated activities, Nautilus is permitted to earn a return on and recover
AFUDC through its inclusion in the rate base and the provision for
depreciation. The rate employed for the equity component of AFUDC is the
equity rate of return stated in Nautilus' FERC tariff.
(c) Adjustments result from purchase price adjustments made in accordance with
APB Opinion No. 16 "Business Combinations."
(d) Represents additional net earnings specifically allocated to Leviathan
related to the assets contributed by Leviathan to the Manta Ray Offshore
joint venture. Pursuant to the terms of the joint venture agreement,
Leviathan managed the operations of the assets contributed to Manta Ray
Offshore and was permitted to retain approximately 100% of the net earnings
from such assets during the construction phase of the expansion to the Manta
Ray Offshore system (January 17, 1997 through December 31, 1997). Effective
January 1, 1998, Manta Ray Offshore began allocating all net earnings in
accordance with the ownership percentages of the joint venture.
(e) Future distributions could be restricted by the terms of the equity
investees' respective credit agreements.
F-13
<PAGE> 62
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARIZED HISTORICAL OPERATING RESULTS
YEAR ENDED DECEMBER 31, 1996
(In thousands)
<TABLE>
<CAPTION>
WEST
VIOSCA CAMERON
HIOS KNOLL STINGRAY POPCO DEHY UTOS TOTAL
-------- ------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenue............................ $ 47,440 $13,923 $ 24,146 $ 7,819 $1,686 $ 3,476
Other income................................. 97 -- 1,186 339 10 48
Operating expenses........................... (15,683) (424) (14,260) (3,042) (162) (2,511)
Depreciation................................. (4,775) (2,269) (7,057) (2,176) (16) (560)
Other expenses............................... -- (90) (1,679) (269) -- --
-------- ------- -------- ------- ------ -------
Net earnings................................. 27,079 11,140 2,336 2,671 1,518 453
Ownership percentage......................... 40% 50% 50% 36% 50% 33.3%
-------- ------- -------- ------- ------ -------
10,832 5,570 1,168 962 759 151
Adjustments:
Depreciation(a)............................ 783 -- 669 -- -- 2
Contract amortization(a)................... (105) -- -- -- -- --
Rate refund reserve........................ (417) -- -- -- -- --
Other...................................... (107) -- -- 167 -- --
-------- ------- -------- ------- ------ -------
Equity in earnings........................... $ 10,986 $ 5,570 $ 1,837 $ 1,129 $ 759 $ 153 $20,434
======== ======= ======== ======= ====== ======= =======
Distributions................................ $ 11,400 $18,450 $ 1,923 $ 4,000 $ 650 $ 400 $36,823
======== ======= ======== ======= ====== ======= =======
</TABLE>
- ---------------
(a) Adjustments result from purchase price adjustments made in accordance with
APB Opinion No. 16, "Business Combinations."
SUMMARIZED HISTORICAL BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
HIOS VIOSCA KNOLL STINGRAY POPCO
----------------- ----------------- ------------------- -------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
----------------- ----------------- ------------------- -------------------
1998 1997 1998 1997 1998 1997 1998 1997
------- ------- ------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current assets..................... $ 4,662 $ 5,587 $ 5,451 $ 3,354 $ 17,892 $ 20,184 $ 43,338 $ 31,763
Noncurrent assets.................. 12,936 12,081 97,758 98,004 50,109 42,541 233,082 226,055
Current liabilities................ 2,626 3,380 1,021 11,280 18,960 21,787 40,134 35,864
Long-term debt..................... -- -- 66,700 52,200 20,583 11,600 131,000 120,500
Other noncurrent liabilities....... -- 199 340 256 12,924 5,289 -- --
</TABLE>
<TABLE>
<CAPTION>
WEST CAMERON
DEHY UTOS MANTA RAY OFFSHORE NAUTILUS
----------------- ----------------- ------------------- -------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
----------------- ----------------- ------------------- -------------------
1998 1997 1998 1997 1998 1997 1998 1997
------- ------- ------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current assets..................... $ 848 $ 455 $ 4,699 $ 3,955 $ 7,250 $ 31,714 $ 2,782 $ 924
Noncurrent assets.................. 647 663 2,745 2,803 135,626 127,731 113,434 120,074
Current liabilities................ 13 43 4,125 2,900 5,023 32,601 709 3,699
</TABLE>
F-14
<PAGE> 63
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- OIL AND NATURAL GAS PROPERTIES:
Capitalized Costs
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Proved properties........................................... $ 53,313 $ 38,790
Wells, equipment and related facilities..................... 99,437 81,506
-------- --------
Total capitalized costs........................... 152,750 120,296
Accumulated depreciation, depletion and amortization........ 72,194 53,684
-------- --------
Net capitalized costs............................. $ 80,556 $ 66,612
======== ========
</TABLE>
Costs incurred in the Oil and Natural Gas Acquisitions, Exploration and
Development Activities
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997
--------- ---------
(In thousands)
<S> <C> <C>
Acquisitions of proved properties........................... $16,945 $ 1
Development................................................. 17,783 10,522
Capitalized interest........................................ 328 726
------- -------
Total costs incurred.............................. $35,056 $11,249
======= =======
</TABLE>
In October 1998, Leviathan purchased a 100% working interest in Ewing Bank
Blocks 958, 959, 1002 and 1003 from a wholly-owned indirect subsidiary of El
Paso for $12,235,000. In December 1998, Leviathan completed the drilling of a
successful delineation well on the Ewing Bank unit.
In 1995, Leviathan entered into a purchase and sale agreement (the
"Purchase and Sale Agreement") with Tatham Offshore pursuant to which Leviathan
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 "Acquired Properties") from
Tatham Offshore for $30 million. Leviathan was entitled to retain all of the
revenue attributable to the Acquired Properties until it had received net
revenue equal to the payout amount, whereupon Tatham Offshore was entitled to
receive a reassignment of the Acquired Properties, subject to certain reductions
and conditions. In connection with the Merger, Tatham Offshore canceled its
reversionary interests in the Acquired Properties (Note 1).
NOTE 5 -- REGULATORY MATTERS:
The FERC has jurisdiction under the Natural Gas Act of 1938, as amended
(the "NGA"), and the Natural Gas Policy Act of 1978, as amended (the "NGPA"),
over Nautilus, Stingray, HIOS and UTOS (the "Regulated Pipelines") with respect
to transportation of natural gas, rates and charges, construction of new
facilities, extension or abandonment of service and facilities, accounts and
records, depreciation and amortization policies and certain other matters.
Leviathan's remaining systems (the "Unregulated Pipelines") are gathering
facilities and as such are not currently subject to rate and certificate
regulation by the FERC under the NGA and the NGPA. However, the FERC has
asserted that it has rate jurisdiction under the NGA over services performed
through gathering facilities owned by a natural gas company (as defined in the
NGA) when such services are performed "in connection with" transportation
services provided by such natural gas company. Whether, and to what extent, the
FERC will exercise any NGA rate jurisdiction it may be found to have over
gathering facilities owned either by natural gas companies or affiliates thereof
is subject to case-by-case review by the FERC. Based on current FERC policy and
precedent, Leviathan does not anticipate that the FERC will assert or exercise
any NGA rate jurisdiction over the Unregulated Pipelines so long as the
F-15
<PAGE> 64
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
services provided through such lines are not performed "in connection with"
transportation services performed through any of the Regulated Pipelines. Both
the Regulated and the Unregulated Pipelines are subject to the FERC's
administration of the "equal access" requirements of the Outer Continental Shelf
Lands Act ("OCSLA").
Poseidon is subject to regulation under the Hazardous Liquid Pipeline
Safety Act ("HLPSA"). Operations in offshore federal waters are regulated by the
Department of the Interior. In addition, as transporter of hydrocarbons across
the Outer Continental Shelf ("OCS"), the Poseidon system must offer "equal
access" to other potential shippers of crude. Poseidon is located in federal
waters in the Gulf, and its right-of-way was granted by the federal government.
Therefore, the FERC may assert that it has jurisdiction to compel Poseidon to
grant access under OCSLA to other shippers of crude oil upon the satisfaction of
certain conditions and to apportion the capacity of the line among owner and
non-owner shippers.
The FERC has generally disclaimed jurisdiction to set rates for oil
pipelines in the OCS under the Interstate Commerce Act. As a result, POPCO has
not filed tariffs with the FERC for the Poseidon crude oil pipeline system.
Rate Cases
Tarpon. In March 1997, the FERC issued an order declaring Tarpon's
facilities exempt from NGA regulation under the gathering exception, thereby
terminating Tarpon's status as a "natural gas company" under the NGA. Tarpon has
agreed, however, to continue service for shippers that have not executed
replacement contracts on the terms and conditions, and at the rates reflected
in, its last effective regulated tariff for two years from the date of the
order.
Other. Each of Nautilus, Stingray, HIOS, and UTOS are currently operating
under agreements with their respective customers that provide for rates that
have been approved by the FERC.
NOTE 6 -- INDEBTEDNESS:
Leviathan has a revolving credit facility, as amended and restated (the
"Leviathan Credit Facility"), with a syndicate of commercial banks to provide up
to $375 million of available credit, subject to certain incurrence limitations.
As of December 31, 1998 and 1997, Leviathan had $338 million and $238 million,
respectively, outstanding under its credit facility. At the election of
Leviathan, interest under the Leviathan Credit Facility is determined by
reference to the reserve-adjusted London interbank offer rate ("LIBOR"), the
prime rate or the 90-day average certificate of deposit. The interest rate at
December 31, 1998 and 1997 was 7.1% and 6.6% per annum, respectively. A
commitment fee is charged on the unused and available to be borrowed portion of
the credit facility. This fee varies between 0.25% and 0.375% per annum and was
0.375% per annum at December 31, 1998. The amendment to the credit facility in
January 1999 increased the commitment fee to 0.50% per annum. Amounts advanced
under the Leviathan Credit Facility were used to finance Leviathan's capital
expenditures, including construction of platforms and pipelines, investments in
equity investees and the acquisition and development of oil and natural gas
properties. Amounts remaining under the Leviathan Credit Facility are available
to Leviathan for general partnership purposes, including financing capital
expenditures, for working capital, and subject to certain limitations, for
paying distributions to unitholders. The Leviathan 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 Leviathan Credit
Facility matures in December 1999; is guaranteed by Leviathan and each of
Leviathan's subsidiaries; and is collateralized by the management agreement with
Leviathan (Note 8), substantially all of the assets of Leviathan and the General
Partner's 1% general partner interest in Leviathan and approximate 1%
nonmanaging interest in certain subsidiaries of Leviathan. Management believes
it will be able to extend or refinance this credit facility on acceptable terms
and conditions prior to its maturity.
F-16
<PAGE> 65
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest and other financing costs totaled $21,308,000, $15,890,000 and
$17,470,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
During the years ended December 31, 1998, 1997 and 1996, Leviathan capitalized
$1,066,000, $1,721,000 and $11,910,000, respectively, of such interest costs in
connection with construction projects and drilling activities in progress during
such periods. At December 31, 1998 and 1997, the unamortized portion of debt
issue costs totaled $2,549,000 and $3,749,000, respectively.
NOTE 7 -- PARTNERS' CAPITAL:
General
As of December 31, 1998, Leviathan had 23,349,988 Common Units and
1,016,906 Preference Units outstanding. Preference Units and Common Units
totaling 18,075,000 are owned by the public, representing a 72.7% effective
limited partner interest in Leviathan. The General Partner, through its
ownership of a 25.3% limited partner interest in the form of 6,291,894 Common
Units, its 1% general partner interest in Leviathan and its approximate 1%
nonmanaging interest in certain subsidiaries of Leviathan, owns a 27.3%
effective interest in Leviathan. See Note 14.
Conversion of Preference Units into Common Units
On May 7, 1998, Leviathan notified the holders of its 18,075,000 then
outstanding Preference Units of their right to convert their Preference Units
into an equal number of Common Units within a 90-day period. On August 5, 1998,
the conversion period expired and holders of 17,058,094 Preference Units,
representing approximately 94% of the Preference Units then outstanding, elected
to convert to Common Units. As a result, the Preference Period, as defined in
the Amended and Restated Agreement of Limited Partnership (the "Partnership
Agreement"), ended and the Common Units (including the 6,291,894 Common Units
held by Leviathan) became the primary listed security on the New York Stock
Exchange ("NYSE") under the symbol "LEV." A total of 1,016,906 Preference Units
remain outstanding and trade as Leviathan's secondary listed security on the
NYSE under the symbol "LEV.P". Leviathan reallocated partners' capital to
reflect this conversion of Preference Units into Common Units.
The remaining Preference Units retain their distribution preferences over
the Common Units; that is, holders of such Preference Units will be paid up to
the minimum quarterly distribution of $0.275 per unit before any quarterly
distributions are made to the Common Unitholders or the General Partner.
However, holders of Preference Units will not receive any distributions in
excess of the minimum quarterly distribution of $0.275 per unit. Only holders of
Common Units and the General Partner will be eligible to receive any such excess
distributions. See "Cash Distributions" below.
In accordance with the Partnership Agreement, holders of the remaining
Preference Units will have the opportunity to convert their Preference Units
into Common Units in May 1999 and May 2000. Thereafter, any remaining Preference
Units may, under certain circumstances, be subject to redemption.
Cash Distributions
Leviathan makes quarterly distributions of 100% of its Available Cash, as
defined in the Partnership Agreement, to its unitholders and the General
Partner. Available Cash consists generally of all the cash receipts of Leviathan
plus reductions in reserves less all of its cash disbursements and net additions
to reserves. The General Partner has broad discretion to establish cash reserves
that it determines are necessary or appropriate to provide for the proper
conduct of the business of Leviathan including cash reserves for future capital
expenditures, to stabilize distributions of cash to the unitholders and the
General Partner, to reduce debt or as necessary to comply with the terms of any
agreement or obligation of Leviathan. Leviathan expects to make distributions of
Available Cash within 45 days after the end of each quarter to unitholders of
record
F-17
<PAGE> 66
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on the applicable record date, which will generally be the last business day of
the month following the close of such calendar quarter.
The distribution of Available Cash for each quarter is subject to the
preferential rights of the Preference Unitholders to receive the minimum
quarterly distribution of $0.275 per unit for such quarter, plus any arrearages
in the payment of the minimum quarterly distribution for prior quarters, if any,
before any distribution of Available Cash is made to holders of Common Units for
such quarter. The holders of Common Units are not entitled to arrearages in the
payment of the minimum quarterly distribution. See the discussion above
regarding distributions subsequent to the end of the Preference Period.
Since commencement of operations on February 19, 1993 through December 31,
1998, Leviathan has made distributions to the unitholders equal to and in excess
of the minimum quarterly distribution of $0.275 per unit. See Note 16.
Distributions by Leviathan of its Available Cash are effectively made 98%
to unitholders and 2% to the General Partner, subject to the payment of
incentive distributions to the General Partner if certain target levels of cash
distributions to unitholders are achieved ("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.
During the years ended December 31, 1998, 1997 and 1996, the General Partner
received Incentive Distributions totaling $11,113,000, $3,885,000 and $285,000,
respectively. In February 1999, Leviathan paid a cash distribution of $0.275 per
Preference Unit and $0.525 per Common Unit and an Incentive Distribution of
$2,835,000 to the General Partner.
Unit Rights Appreciation Plan
In 1995, Leviathan adopted the Unit Rights Appreciation Plan (the "Plan")
to provide Leviathan with the ability of making awards of unit rights to certain
officers and employees of the General Partner or its affiliates as an incentive
for these individuals to continue in the service of Leviathan or its affiliates.
Under the Plan, Leviathan granted 1,200,000 unit rights to certain officers and
employees of the General Partner or its affiliates that provided for the right
to purchase, or realize the appreciation of, a Preference Unit or a Common Unit
(a "Unit Right"), pursuant to the provisions of the Plan. The exercise prices
covered by the Unit Rights granted pursuant to the Plan ranged from $15.6875 to
$21.50, the closing prices of the Preference Units as reported on the NYSE on
the grant date of the respective Unit Rights. For the years ended December 31,
1997 and 1996, Leviathan had accrued $3,710,000 and $436,000, respectively,
related to the appreciation and vestiture of these Unit Rights through such
dates. As a result of the "change in control" occurring upon the closing of the
Merger, the Unit Rights fully vested and the holders of the Unit Rights elected
to be paid $8,591,000, the amount equal to the difference between the grant
price of the Unit Rights and the average of the high and the low sales price of
the Common Units on the date of exercise. Upon the exercise of all of the Unit
Rights outstanding, the Plan was terminated. Leviathan replaced the Plan with
the Omnibus Plan discussed below.
Option Plans
In August 1998, Leviathan adopted the 1998 Omnibus Compensation Plan (the
"Omnibus Plan") to provide the General Partner with the ability to issue unit
options to attract and retain the services of knowledgeable officers and key
management personnel. Unit options to purchase a maximum of 3,000,000 Common
Units of Leviathan may be issued pursuant to the Omnibus Plan. Unit options
granted pursuant to the Omnibus Plan are not immediately exercisable. One-half
of the unit options are considered vested and exercisable one year after the
date of grant and the remaining one-half of the unit options are considered
F-18
<PAGE> 67
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
vested and exercisable one year after the first anniversary of the date of
grant. The unit options shall expire ten years from such grant date, but shall
be subject to earlier termination under certain circumstances.
In August 1998, Leviathan adopted the 1998 Unit Option Plan for
Non-Employee Directors (the "Director Plan" and collectively with the Omnibus
Plan, the "Option Plans") to provide the General Partner with the ability to
issue unit options to attract and retain the services of knowledgeable
directors. Unit options to purchase a maximum of 100,000 Common Units of
Leviathan may be issued pursuant to the Director Plan. Each unit option granted
under the Director Plan vests immediately at the date of grant and shall expire
ten years from such date, but shall be subject to earlier termination in the
event that the director ceases to be a director of the General Partner for any
reason, in which case the unit options expire 36 months after such date except
in the case of death, in which case the unit options expire 12 months after such
date.
The following table summarizes the Option Plans as of and for the year
ended December 31, 1998. No unit options had been granted by Leviathan prior to
August 1998.
<TABLE>
<CAPTION>
NUMBER UNITS OF WEIGHTED AVERAGE
UNDERLYING OPTIONS EXERCISE PRICE
------------------ ----------------
<S> <C> <C>
Outstanding at beginning of year..................... -- $ --
Granted............................................ 933,000 27.18
Exercised.......................................... -- --
Forfeited.......................................... -- --
Canceled........................................... -- --
------- ------
Outstanding at end of year........................... 933,000(1) $27.18(3)
======= ======
Options Exercisable at end of year................... 3,000(2) $26.17
======= ======
</TABLE>
- ---------------
(1) The weighted average remaining contractual life approximates 9.8 years.
(2) The weighted average remaining contractual life approximates 9.6 years.
(3) The exercise prices for outstanding options range from $25.00 to $27.3438.
The fair value of each unit option granted is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions: an expected volatility of 37%, a risk-free interest rate of
4.65%, an expected dividend yield of 8% and an expected term of 8 years. The
weighted average fair value of the unit options granted during the year ended
December 31, 1998 was $4.59. All of the unit options granted during 1998 were
granted at market value on the date of grant.
Leviathan applied APB Opinion No. 25 and related interpretations in
accounting for its Option Plans, under which no compensation expense has been
recognized during 1998 as the exercise price of each grant equaled the market
price on the date of grant. Had compensation costs for the Option Plans been
determined consistent with the methodology prescribed by SFAS No. 123,
Leviathan's net income and net income per unit would have been adjusted to a net
loss of $461,000 or $0.015 per unit on a proforma basis. The effects of applying
SFAS No. 123 in this pro forma disclosure are not indicative of future amounts.
NOTE 8 -- RELATED PARTY TRANSACTIONS:
Management Fees
Substantially all of the individuals who perform the day-to-day financial,
administrative, accounting and operational functions for Leviathan as well as
those who are responsible for the direction and control of Leviathan are
currently employed by El Paso or were employed by DeepTech. Pursuant to a
management agreement between DeepTech and the General Partner, a management fee
is charged to the General Partner which is intended to approximate the amount of
resources allocated by El Paso and/or DeepTech in providing
F-19
<PAGE> 68
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
various operational, financial, accounting and administrative services on behalf
of the General Partner and Leviathan. The management agreement expires on June
30, 2002, and may be terminated thereafter upon 90 days notice by either party.
Pursuant to the terms of the Partnership Agreement, the General Partner is
entitled to reimbursement of all reasonable general and administrative expenses
and other reasonable expenses incurred by the General Partner and its affiliates
for or on behalf of Leviathan including, but not limited to, amounts payable by
the General Partner to DeepTech under the management agreement.
Effective November 1, 1995, July 1, 1996 and July 1, 1997, primarily as a
result of the increased activities of Leviathan, the General Partner amended its
management agreement with DeepTech to provide for an annual management fee of
45.3%, 54% and 52%, respectively, of DeepTech's overhead. In connection with the
Merger, the General Partner amended its management agreement with DeepTech to
provide for a monthly management fee of $775,000. The General Partner charged
Leviathan $9,283,000, $8,080,000 and $6,590,000 pursuant to its management
agreement with DeepTech for the years ended December 31, 1998, 1997 and 1996,
respectively.
The General Partner is also required to reimburse DeepTech for certain tax
liabilities resulting from, among other things, additional taxable income
allocated to the General Partner due to (i) the issuance of additional
Preference Units (including the sale of the Preference Units by Leviathan
pursuant to its second public offering) and (ii) the investment of such proceeds
in additional acquisitions or construction projects. During the years ended
December 31, 1998, 1997 and 1996, the General Partner charged Leviathan
$489,000, $713,000 and $1,162,000, respectively, to compensate DeepTech for
additional taxable income allocated to the General Partner.
Platform Access and Transportation Agreements
General. In 1993, Leviathan entered into a master gas dedication
arrangement with Tatham Offshore (the "Master Dedication Agreement"). Under the
Master Dedication Agreement, Tatham Offshore dedicated all production from its
Viosca Knoll, Garden Banks, Ewing Bank and Ship Shoal leases as well as certain
adjoining areas of mutual interest to Leviathan for transportation. In exchange,
Leviathan agreed to install the pipeline facilities necessary to transport
production from the areas and certain related facilities and to provide
transportation services with respect to such production. Tatham Offshore agreed
to pay certain fees for transportation services and facilities access provided
under the Master Dedication Agreement. Pursuant to the terms of the Purchase and
Sale Agreement (Note 4) and the Redemption Agreement (Note 1), a subsidiary of
Leviathan assumed all of Tatham Offshore's obligations under the Master
Dedication Agreement and certain ancillary agreements.
Viosca Knoll. For the years ended December 31, 1998, 1997 and 1996,
Leviathan received $1,099,000, $1,973,000 and $1,896,000, respectively, from
Tatham Offshore as platform access and processing fees related to Leviathan's
platform located in Viosca Knoll Block 817.
For the years ended December 31, 1998, 1997 and 1996, Leviathan charged
Viosca Knoll $2,447,000, $2,116,000 and $249,000, respectively, for expenses and
platform access fees related to the Viosca Knoll Block 817 platform.
In addition, for the years ended December 31, 1998, 1997 and 1996, Viosca
Knoll reimbursed $152,000, $47,000 and $254,000, respectively, to Leviathan for
costs incurred by Leviathan in connection with the acquisition and installation
of a booster compressor on Leviathan's Viosca Knoll Block 817 platform.
During the years ended December 31, 1998, 1997 and 1996, Viosca Knoll
charged Leviathan $1,881,000, $3,921,000 and $3,229,000, respectively, for
transportation services related to transporting production from the Viosca Knoll
Block 817 lease.
F-20
<PAGE> 69
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Garden Banks. During the years ended December 31, 1998, 1997 and 1996,
POPCO charged Leviathan $1,445,000, $2,003,000 and $1,056,000, respectively, for
transportation services related to transporting production from the Garden Banks
Block 72 and 117 leases.
Ewing Bank. Pursuant to a gathering agreement (the "Ewing Bank Agreement")
among Tatham Offshore, DeepTech, and a subsidiary of Leviathan, Tatham Offshore
dedicated all natural gas and crude oil produced from eight of its Ewing Bank
leases for gathering and redelivery by Leviathan and was obligated to pay a
demand and a commodity rate for shipment of all oil and natural gas under this
agreement. Pursuant to the Ewing Bank Agreement, Leviathan constructed gathering
facilities connecting Tatham Offshore's Ewing Bank 914 #2 well to a third party
platform at Ewing Bank Block 826. For the years ended December 31, 1997 and
1996, Tatham Offshore paid Leviathan demand and commodity charges of $54,000 and
$349,000, respectively, under this agreement. Additionally, through May 1997,
Leviathan received revenue from the oil and natural gas production from the
Ewing Bank 914 #2 well as a result of its 7.13% overriding royalty interest in
the well. In 1995, Tatham Offshore experienced production problems with its
Ewing Bank 914 #2 well and in March 1996, as a result of the continued
production problems, Leviathan settled all remaining unpaid demand charge
obligations under the Ewing Bank Agreement in exchange for certain consideration
as discussed below.
Ship Shoal. Pursuant to the Master Dedication Agreement, Leviathan and
Tatham Offshore entered into a gathering and processing agreement (the "Ship
Shoal Agreement") pursuant to which Leviathan constructed a gathering line from
Tatham Offshore's Ship Shoal Block 331 to interconnect with a third-party
pipeline at Leviathan's platform and processing facilities located on Ship Shoal
Block 332 in exchange for the dedication of all of the production from Tatham
Offshore's Ship Shoal Block 331 and eight additional surrounding leases and
receipt of a demand charge of $113,000 per month over a five-year period ending
June 1999. During late 1994, all of Tatham Offshore's wells at Ship Shoal Block
331 experienced completion and production problems and in March 1996, as a
result of the continued production problems, Leviathan settled all remaining
unpaid demand charge obligations under this transportation agreement in exchange
for certain consideration as discussed below.
Transportation Agreements Settled. Tatham Offshore was obligated to make
demand charge payments to Leviathan pursuant to the Ewing Bank and Ship Shoal
Agreements discussed above. However, production problems at Ship Shoal Block 331
and the Ewing Bank 914 #2 well affected Tatham Offshore's ability to pay the
demand charge obligations under agreements relative to these properties. As a
result, effective February 1, 1996, Leviathan released Tatham Offshore from all
remaining demand charge payments under the Ewing Bank Agreement and the Ship
Shoal Agreement, a total of $17,800,000. In exchange, Leviathan received 7,500
shares Senior Preferred Stock valued at $7,500,000 and added an additional
$7,500,000 to the payout amount under the Purchase and Sale Agreement (Note 4),
which was recorded as a noncurrent receivable. Pursuant to the Redemption
Agreement, Leviathan exchanged the Senior Preferred Stock for Tatham Offshore's
remaining assets located in the Gulf (Note 1).
During 1997, Tatham Offshore announced its intent to reserve its remaining
costs associated with the Ewing Bank 914 #2 well and the three wellbores at Ship
Shoal Block 331 as a result of production problems. In addition, Leviathan had
determined that the designated net revenue from the Acquired Properties (Note 4)
was not likely to be sufficient to satisfy the payout amount and as such, would
(i) retain 100% of the net revenue from the Acquired Properties, (ii) bear all
abandonment obligations related to these properties and (iii) not realize the
$7,500,000 plus accrued interest Leviathan had recorded as a noncurrent
receivable related to the settlement of the Ewing Bank and Ship Shoal Agreements
discussed above. Accordingly, in June 1997, Leviathan recorded as impairment,
abandonment and other expense on the accompanying consolidated statement of
operations a non-recurring charge of $21,222,000 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 ($6,443,000), to fully
accrue its abandonment obligations associated with the
F-21
<PAGE> 70
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
gathering facilities serving these properties ($3,825,000), to reserve its
noncurrent receivable related to the prepayment of the demand charge obligations
under the Ewing Bank and Ship Shoal Agreements ($9,094,000) and to accrue
certain abandonment obligations associated with its Viosca Knoll and Garden
Banks properties ($1,860,000).
During 1998, Leviathan abandoned the Ewing Bank flowlines at a cost of
$2,869,000 and recorded a credit to impairment, abandonment and other of
$1,131,000, which represented the excess of the accrued costs over the actual
costs incurred associated with the abandonment of the flowlines.
Other
Leviathan has agreed to sell all of its oil and natural gas production to
Offshore Gas Marketing, Inc. ("Offshore Marketing"), an affiliate of Leviathan,
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 Leviathan's
production. During the years ended December 31, 1998, 1997 and 1996, oil and
natural gas sales to Offshore Marketing totaled $31,225,000, $57,830,000 and
$46,296,000, respectively.
Pursuant to a management agreement between Viosca Knoll and Leviathan,
Leviathan charges Viosca Knoll a base fee of $100,000 annually in exchange for
Leviathan providing financial, accounting and administrative services on behalf
of Viosca Knoll. For each of the years ended December 31, 1998, 1997 and 1996,
Leviathan charged Viosca Knoll $100,000 in accordance with this management
agreement.
For the years ended December 31, 1998 and 1997, Leviathan charged Manta Ray
Offshore $1,274,000 and $287,000, respectively, pursuant to management and
operations agreements.
Mr. Grant E. Sims and Mr. James H. Lytal entered into employment agreements
with five year terms with El Paso pursuant to which they would continue to serve
as Chief Executive Officer and President, respectively, of the General Partner
and Leviathan. However, pursuant to the terms of their respective employment
agreements, Messrs. Sims and Lytal have the right to terminate such agreements
upon thirty days notice and El Paso has the right to terminate such agreements
under certain circumstances.
Pursuant to the former Leviathan non-employee director compensation
arrangements, Leviathan was obligated to pay each non-employee director 2 1/2%
of the general partners' Incentive Distribution as a profit participation fee.
During the years ended December 31, 1998 and 1997, Leviathan paid the three non-
employee directors of Leviathan a total of $621,000 and $313,000, respectively,
as a profit participation fee. As a result of the Merger, the three non-employee
directors resigned and the compensation arrangements were terminated.
During the years ended December 31, 1997 and 1996, Leviathan was charged
$3,351,000 and $7,223,000, respectively, 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 was owned by an affiliate of DeepTech
and managed by Sedco Forex during such period.
POPCO, which owns the Poseidon crude oil pipeline system, entered into
certain agreements with a subsidiary of Leviathan which provided for POPCO's use
of certain pipelines and platforms owned by such subsidiary for fees which
consisted of a monthly rental fee of $100,000 per month for the period from
February 1996 to January 1997 and reimbursement of $2,000,000 of capital
expenditures incurred in readying one of the platforms for use.
In 1996, a subsidiary of Leviathan received a performance fee of $1,400,000
for managing the construction and installation of the initial 117 mile segment
of the Poseidon crude oil pipeline system.
F-22
<PAGE> 71
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mr. Charles M. Darling IV, a director of the General Partner and DeepTech
through August 14, 1998, was a partner in a law firm until April 1997 that
provided legal services to Leviathan. During the years ended December 31, 1997
and 1996, Leviathan incurred $55,000 and $203,000, respectively, for these
services.
Dover Technology, Inc., which is 50% owned by DeepTech, performed certain
technical and geophysical services for Leviathan in the aggregate amount of
$240,000 for the year ended December 31, 1996.
NOTE 9 -- INCOME TAXES:
Leviathan (other than its subsidiaries, Tarpon and Manta Ray) is not
subject to federal income taxes. Therefore, no recognition has been given to
income taxes other than income taxes related to Tarpon and Manta Ray. The tax
returns of Leviathan are subject to examination; if such examinations result in
adjustments to distributive shares of taxable income or loss, the tax liability
of partners could be adjusted accordingly.
Tarpon is and Manta Ray was, prior to its liquidation in May 1996, a
subsidiary of Leviathan that files separate federal income tax returns. The
income tax benefit recorded for the years ended December 31, 1998, 1997, and
1996 equals $471,000, $311,000 and $801,000, respectively, and is entirely
related to Tarpon. The benefit equals Tarpon's book loss times the effective
statutory rate for such period as no material book/tax permanent differences
exist. Leviathan's deferred income tax liability at December 31, 1998 and 1997
of $937,000 and $1,399,000, respectively, is entirely related to the differences
in the tax and book bases of the pipeline assets of Tarpon. In May 1996, Manta
Ray was merged with and into a subsidiary of Leviathan. Manta Ray had no taxable
income for the respective periods prior to its liquidation.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES:
Credit Facilities
Each of POPCO, Viosca Knoll and Stingray are parties to a credit agreement
under which it has outstanding obligations that may restrict the payment of
distributions to its owners.
POPCO has a revolving credit facility, as amended, (the "POPCO Credit
Facility") with a syndicate of commercial banks to provide up to $150 million
for the construction and expansion 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 collateralized by a substantial portion of POPCO's
assets and matures on April 30, 2001. As of December 31, 1998 and 1997, POPCO
had $131,000,000 and $120,500,000, respectively, outstanding under its credit
facility bearing interest at an average floating rate of 6.9% and 7.2% per
annum, respectively. At December 31, 1998, POPCO had approximately $19,000,000
of additional funds available under the facility.
Viosca Knoll has a revolving credit facility, as amended, (the "Viosca
Knoll Credit Facility") with a syndicate of commercial banks to provide up to
$100 million for the addition of compression to and expansion of 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. In December
1996, Leviathan received a $12,500,000 distribution from Viosca Knoll as a
result of its 50% interest in Viosca Knoll. Viosca Knoll's ability to borrow
money under its credit facility is subject to certain customary terms and
conditions, including borrowing base limitations. The Viosca Knoll Credit
Facility is collateralized by all of Viosca Knoll's material contracts and
agreements, receivables and inventory and matures on December 20, 2001. If
Viosca Knoll fails to pay any principal, interest or other amounts due pursuant
to the Viosca Knoll Credit Facility, Leviathan is obligated to pay up to a
maximum of $2,500,000 in settlement of 50% of Viosca Knoll's obligations under
the Viosca Knoll Credit Facility agreement. As of December 31, 1998 and 1997,
Viosca Knoll had $66,700,000 and $52,200,000, respectively, outstanding under
the Viosca Knoll Credit Facility bearing interest at an average floating rate of
F-23
<PAGE> 72
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6.7% per annum. At December 31, 1998, Viosca Knoll had approximately $33,300,000
of additional funds available under the facility. See Note 14.
In March 1998, Stingray amended an existing term loan agreement (the
"Stingray Credit Agreement") to provide for additional borrowings of up to $11.1
million and to extend the maturity date of the loan from December 31, 2000 to
March 31, 2003. The Stingray Credit Agreement requires Stingray to make 18
quarterly principal payments of $1,583,333 commencing December 31, 1998. The
term loan agreement is principally collateralized by current and future natural
gas transportation contracts between Stingray and its customers. As of December
31, 1998 and 1997, Stingray had $26,917,000 and $17,400,000, respectively,
outstanding under the Stingray Credit Agreement bearing interest at an average
floating rate of 6.5% per annum. On the earlier to occur of March 31, 2003 or
the accelerated due date pursuant to the Stingray Credit Agreement, if Stingray
has not settled all amounts due under the Stingray Credit Agreement, Leviathan
is obligated to pay the lesser of (i) $8,500,000, (ii) the aggregate amount of
distributions received by Leviathan from Stingray subsequent to January 1, 1998,
or (iii) 50% of any then outstanding amounts due pursuant to the Stingray Credit
Agreement. Management cannot determine the likelihood of Leviathan's potential
obligation associated with the Stingray Credit Agreement.
Hedging Activities
Leviathan hedges a portion of its oil and natural gas production to reduce
Leviathan's exposure to fluctuations in market prices of oil and natural gas and
to meet certain requirements of the Leviathan Credit Facility. Leviathan uses
commodity price swap 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. Leviathan 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 Leviathan differ from futures contracts in that there is
no contractual obligation which requires or allows for the future delivery of
the product. The credit risk from Leviathan's price swap contracts is derived
from the counter-party to the transaction, typically a major financial
institution. Management does not require collateral and does not anticipate
non-performance by this counter-party, which does not transact a sufficient
volume of transactions with Leviathan to create a significant concentration of
credit risk. Gains or losses on hedging activities are recognized as oil and gas
sales in the period in which the hedged production is sold. For the years ended
December 31, 1998, 1997 and 1996, Leviathan recorded a net (gain) loss of
($2,526,000), $6,340,000 and $2,826,000, respectively, from such activities.
As of December 31, 1998, Leviathan had open sales swap transactions for
calendar 1999 of 10,000 million British thermal units ("MMbtu") of natural gas
per day at a fixed price to be determined at Leviathan's option equal to the
February 1999 Natural Gas Futures Contract on NYMEX as quoted at any time during
1998 and January 1999, to and including the last two trading days of the
February 1999 contract, minus $0.23 per MMbtu. In January 1999, Leviathan
renegotiated this contract to provide for 10,000 MMbtu of natural gas per day
for calendar 2000 at a fixed price to be determined at Leviathan's option equal
to the February 2000 Natural Gas Futures Contract on NYMEX as quoted at any time
during 1999 and January 2000, to and including the last two trading days of the
February 2000 contract, minus $0.5450 per MMbtu.
Additionally, Leviathan had open sales swap transactions for calendar 2000
of 10,000 MMbtu of natural gas per day at a fixed price to be determined at
Leviathan's option equal to the January 2000 Natural Gas Futures Contract on
NYMEX as quoted at any time during 1999, to and including the last two trading
days of the January 2000 contract minus, $0.50 per MMbtu.
If Leviathan had settled its open natural gas hedging positions as of
December 31, 1998 and 1997 based on the applicable settlement prices of the
NYMEX futures contracts, Leviathan would have recognized a loss (gain) of
approximately $2.6 million and ($2.2 million), respectively.
F-24
<PAGE> 73
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other
Leviathan is involved from time to time in various claims, actions,
lawsuits and regulatory matters that have arisen in the ordinary course of
business, including various rate cases and other proceedings before the FERC.
Leviathan and several subsidiaries of El Paso have been made defendants in
United States ex rel Grynberg v. El Paso Natural Gas Company, et al. litigation.
Generally, the complaint in this motion alleges an industry-wide conspiracy to
underreport the heating value as well as the volumes of the natural gas produced
from federal and Indian lands, thereby depriving the United States government of
royalties. The complaint remains sealed. Leviathan and El Paso believe the
complaint is without merit and therefore will not have a material adverse effect
on the consolidated financial position, operations or cash flows of Leviathan.
Leviathan is a defendant in a lawsuit filed by Transco Gas Pipe Line
Corporation ("Transco") in the 157th Judicial District Court, Harris County,
Texas on August 30, 1996. Transco alleges that, pursuant to a platform lease
agreement entered into on June 28, 1994, Transco has the right to expand its
facilities and operations on the offshore platform by connecting additional
pipeline receiving and appurtenant facilities. Management has denied Transco's
request to expand its facilities and operations because the lease agreement does
not provide for such expansion and because Transco's activities will interfere
with the Manta Ray Offshore system and Leviathan's existing and planned
activities on the platform. Transco has requested a declaratory judgment and is
seeking damages. The case is set for trial in June 1999. It is the opinion of
management that adequate defenses exist and that the final disposition of this
suit individually, and all of Leviathan's other pending legal proceedings in the
aggregate, will not have a material adverse effect on the consolidated financial
position, operations or cash flows of Leviathan.
In the ordinary course of business, Leviathan is subject to various laws
and regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect the consolidated financial position,
operations or cash flows of Leviathan. Various legal actions which have arisen
in the ordinary course of business are pending with respect to the pipeline
interests and other assets of Leviathan. Management believes that the ultimate
disposition of these actions, either individually or in the aggregate, will not
have a material adverse effect on the consolidated financial position,
operations or cash flows of Leviathan.
NOTE 11 -- SUPPLEMENTAL DISCLOSURES TO THE STATEMENT OF CASH FLOWS:
Cash paid, net of amounts capitalized, during each of the periods presented
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------- ------- ------
(In thousands)
<S> <C> <C> <C>
Interest................................................. $17,608 $12,965 $2,890
Taxes.................................................... $ -- $ 11 $ 20
</TABLE>
Supplemental disclosures of noncash investing and financing activities
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Decrease (increase) in investment in Tatham Offshore.... $ 7,500 $ -- $(7,500)
Additions to oil and natural gas properties............. (4,683) -- --
Additions to platform and facilities.................... (7,024) -- --
Assumption of abandonment obligations................... 4,033 -- --
Increase in other noncurrent receivable................. -- -- (7,500)
Increase in deferred revenue............................ -- -- 15,000
Conveyance of assets and liabilities to POPCO........... -- -- 29,758
Conveyance of assets and liabilities to Manta Ray
Offshore and Nautilus................................. 30 72,080 --
</TABLE>
F-25
<PAGE> 74
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- MAJOR CUSTOMERS:
As discussed in Note 8, Leviathan sells substantially all of its oil and
natural gas production to Offshore Marketing.
The percentage of gathering, transportation and platform services revenue
from major customers was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
(In thousands)
<S> <C> <C> <C>
Kerr-McGee Corporation...................................... 32% -- --
Texaco Gas Marketing, Inc................................... 10% 13% --
Viosca Knoll................................................ 13% -- --
Walter Oil & Gas Corporation................................ 7% 13% --
Shell Gas Trading Company................................... -- -- 17%
Tatham Offshore............................................. -- -- 30%
</TABLE>
NOTE 13 -- BUSINESS SEGMENT INFORMATION:
Leviathan's operations consist of three segments: (i) gathering,
transportation and platform services, (ii) oil and natural gas and (iii) equity
investments. All of Leviathan's operations are conducted in the Gulf. The
gathering, transportation and platform services segment owns interests in
natural gas systems and platforms strategically located offshore Texas,
Louisiana and Mississippi that provides services to producers, marketers, other
pipelines and end-users for a fee. Leviathan is engaged in the development and
production of hydrocarbons through its oil and natural gas segment (Note 4).
Equity investments primarily include Leviathan's nonregulated and regulated
gathering and transportation activities that are conducted through joint
ventures, organized as general partnerships or limited liability companies, with
subsidiaries of major energy companies. The operational and administrative
activities of Leviathan's equity investments are primarily conducted by the
major energy companies and management decisions related to the operations are
made by management committees comprised of representatives of each partner or
member, as applicable, with authority appointed in direct relationship to
ownership interests (Note 3). Leviathan evaluates segment performance based on
operating net cash flows. The accounting policies of the individual segments are
the same as those of Leviathan, as a whole, as described in Note 2. The
following table summarizes certain financial information for each business
segment (in thousands):
<TABLE>
<CAPTION>
GATHERING,
TRANSPORTATION
AND PLATFORM OIL AND EQUITY INTERSEGMENT
SERVICES NATURAL GAS INVESTMENTS SUBTOTAL ELIMINATIONS TOTAL
-------------- ----------- ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
Revenue from external customers... $ 17,320 $ 31,411 $26,724 $ 75,455 $ -- $ 75,455
Intersegment revenue.............. 10,673 -- -- 10,673 (10,673) --
Depreciation, depletion and
amortization.................... (7,134) (22,133) -- (29,267) -- (29,267)
Impairment, abandonment and
other........................... 1,131 -- -- 1,131 -- 1,131
Operating income (loss)........... 9,128 (10,271) 20,904 19,761 -- 19,761
</TABLE>
F-26
<PAGE> 75
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
GATHERING,
TRANSPORTATION
AND PLATFORM OIL AND EQUITY INTERSEGMENT
SERVICES NATURAL GAS INVESTMENTS SUBTOTAL ELIMINATIONS TOTAL
-------------- ----------- ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Revenue from external customers... $ 17,329 $ 58,106 $29,327 $104,762 $ -- $104,762
Intersegment revenue.............. 11,162 -- -- 11,162 (11,162) --
Depreciation, depletion and
amortization.................... (9,900) (36,389) -- (46,289) -- (46,289)
Impairment, abandonment and
other........................... (10,268) (10,954) -- (21,222) -- (21,222)
Operating income (loss)........... (1,278) (9,676) 22,192 11,238 -- 11,238
YEAR ENDED DECEMBER 31, 1996:
Revenue from external customers... $ 24,005 $ 47,068 $20,434 $ 91,507 $ -- $ 91,507
Intersegment revenue.............. 10,052 -- -- 10,052 (10,052) --
Depreciation, depletion and
amortization.................... (15,002) (16,729) -- (31,731) -- (31,731)
Operating income.................. 9,787 15,489 16,892 42,168 -- 42,168
</TABLE>
NOTE 14 -- SUBSEQUENT EVENTS:
Acquisition of Additional Interest in Viosca Knoll Gathering Company, the
Issuance of Common Units to the General Partner and the Amendment to the
Partnership Agreement
Currently, Viosca Knoll is effectively owned 50% by Leviathan and 50% by El
Paso (Note 3). In January 1999, Leviathan announced its intent to acquire all of
El Paso's interest in Viosca Knoll, other than a 1% interest in profits and
capital of Viosca Knoll, for approximately $85.26 million (subject to
adjustment), comprised of 25% cash (up to a maximum of $21.315 million) and 75%
Common Units (up to a maximum of 3,205,263 Common Units), the number of which
will depend on the average closing price of Common Units during the applicable
trading reference period. At the closing, (i) El Paso will contribute to Viosca
Knoll an amount of money equal to 50% of the amount then outstanding under the
Viosca Knoll Credit Facility (currently a total of $66.7 million is
outstanding), (ii) Leviathan will deliver to El Paso the cash and Common Units
discussed above and (iii) as required by the Partnership Agreement, the General
Partner will contribute approximately $650,000 to Leviathan in order to maintain
its 1% capital account balance. Then, during the six month period commencing on
the day after the first anniversary of that closing date, Leviathan would have
the option to acquire the remaining 1% in profits and capital in Viosca Knoll
for a cash payment equal to the sum of $1.74 million plus the amount of
additional distributions which would have been paid, accrued or been in arrears
had Leviathan acquired the remaining 1% of Viosca Knoll at the initial closing
by issuing additional Common Units in lieu of a cash payment of $1.74 million.
The number of units actually issued by Leviathan will vary depending on the
market price of Common Units during the applicable trading reference period.
Such number will be determined by dividing $63.945 million (subject to
adjustment) by the average closing sales price for a Common Unit on the NYSE for
the ten day trading period ending two days prior to the closing date (the
"Market Price"); provided that, for purposes of such calculation, the Market
Price will not be less than $19.95 per Common Unit or more than $24.15 per
Common Unit. Accordingly, Leviathan will neither issue less than 2,647,826 nor
more than 3,205,263 Common Units, subject to adjustments contemplated by the
definitive agreements. Based on the closing sales price of the Common Units on
March 5, 1999 of $20.875 per unit, Leviathan would issue 3,063,234 Common Units
to El Paso, which issuance would constitute approximately 10.9% of the units
(Common and Preference) outstanding immediately after such issuance and would
result in El Paso owning, indirectly through its subsidiaries, a combined 35.4%
effective interest in Leviathan, consisting of a 1% general
F-27
<PAGE> 76
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
partnership interest, a 33.4% limited partnership interest comprised of
9,355,128 Common Units and an approximate 1% nonmanaging interest in certain
subsidiaries of Leviathan.
Although certain federal and state securities laws would otherwise limit El
Paso's ability to dispose of any Common Units held by it, El Paso would have the
right on three occasions to require Leviathan to file a registration statement
covering such Common Units and to participate in offerings made pursuant to
certain other registration statements filed by Leviathan during a ten year
period. Such registrations would be at Leviathan's expense and, generally, would
allow El Paso to dispose of all or any of its Common Units. If the acquisition
is consummated, there can be no assurance regarding how long El Paso may hold
any of its Common Units or whether El Paso's disposition of a significant number
of Common Units in a short period of time would not depress the market price of
the Common Units.
Upon consummation of the acquisition, Leviathan would be the beneficial
owner of 99% of Viosca Knoll and have the option to acquire the remaining 1%
interest. Leviathan and El Paso entered into a Contribution Agreement dated
January 22, 1999, which is effective as of January 1, 1999. Consummation of the
acquisition is subject to the satisfaction of certain closing conditions,
including, among other things, obtaining certain third party consents. The
consent of the lenders under the Leviathan Credit Facility and the Viosca Knoll
Credit Facility must be obtained prior to consummating this transaction. There
can be no assurance that all such required consents will be obtained. Management
believes that the acquisition of the Viosca Knoll interest does not require any
federal, state or other regulatory approval.
On January 19, 1999, the Board of Directors of the General Partner
unanimously approved and ratified and recommended that the unitholders approve
and ratify the acquisition of the additional Viosca Knoll interest. Based upon,
among other things, a multi-faceted review and analysis of the acquisition, as
well as the recommendation for approval and ratification from the Special
Committee of independent directors and the fairness opinion of an independent
financial advisor, the Board of Directors of the General Partner believes that
the acquisition is fair to and in the best interests of Leviathan and its
unitholders. On March 5, 1999, the unitholders of record as of January 28, 1999,
held a meeting and ratified and approved (i) the transactions relating to
Leviathan's acquisition of El Paso's interest in Viosca Knoll and (ii) an
amendment of the Partnership Agreement to decrease the vote required for
approval of certain actions, including the removal of the general partner
without cause, from 66 2/3% to 55%.
If the remaining conditions to closing are satisfied, including obtaining
certain third party consents, management believes that the closing of the
acquisition of the Viosca Knoll interest will occur during the second quarter of
1999.
Joint Venture Restructuring and New Pipeline Construction
In December 1998, the partners of High Island Offshore System, a Delaware
partnership between Leviathan (40%), subsidiaries of ANR Pipeline Company
("ANR") (40%) and a subsidiary of Natural Gas Pipeline Company ("NGPL") (20%),
restructured the joint venture arrangement by (i) creating a holding company,
Western Gulf Holdings, L.L.C. ("Western Gulf"), (ii) converting High Island
Offshore System, which owns a jurisdictional natural gas pipeline located in the
Gulf, into a limited liability company, HIOS and (iii) forming a new limited
liability company, East Breaks Gathering Company, L.L.C. ("East Breaks") to
construct and operate a non-jurisdictional natural gas pipeline system. Western
Gulf, owned 40% by Leviathan, 40% by ANR and 20% by NGPL, owns 100% of each of
HIOS and East Breaks.
In February 1999, Western Gulf entered into a $100 million revolving credit
facility (the "Western Gulf Credit Facility") with a syndicate of commercial
banks to provide funds for the construction of the East Breaks system and for
other working capital needs of Western Gulf. The ability of Western Gulf to
borrow money under its credit facility is subject to certain customary terms and
conditions, including borrowing base limitations. The credit facility is
collateralized by substantially all of the material contracts and agreements of
F-28
<PAGE> 77
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
East Breaks and Western Gulf including Western Gulf's ownership in HIOS and East
Breaks, and matures in February 2004. As of March 10, 1999, Western Gulf had
$44.1 million outstanding under its credit facility bearing interest at an
average floating rate of 6.4% per annum and $55.9 million of additional funds
were available under the credit facility.
The East Breaks system will initially consist of 85 miles of an 18 to
20-inch pipeline and related facilities connecting the Diana/Hoover prospects
developed by Exxon Company USA ("Exxon") and BP Amoco Plc ("BP Amoco") in
Alaminos Canyon Block 25 in the Gulf, with the HIOS system. The majority of the
construction of the East Breaks system will occur in 1999 and the system is
anticipated to be in service in late 2000 at an estimated cost of approximately
$90 million. East Breaks entered into long-term agreements with Exxon and BP
Amoco involving the commitment, gathering and processing of production from the
Diana/Hoover prospects. All of the natural gas to be produced from 11 blocks in
the East Breaks and Alaminos Canyon areas will be dedicated for transportation
services on the HIOS system.
NOTE 15 -- SUPPLEMENTAL OIL AND NATURAL GAS INFORMATION (UNAUDITED):
Oil and natural gas reserves
The following table represents Leviathan's net interest in estimated
quantities of developed and undeveloped reserves of crude oil, condensate and
natural gas and changes in such quantities at fiscal year end 1998, 1997 and
1996. Estimates of Leviathan's reserves at December 31, 1998, 1997 and 1996 have
been made by the independent engineering consulting firm, Netherland, Sewell &
Associates, Inc. Net proved reserves are the estimated quantities of crude oil
and natural gas which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed reserves are
proved reserve volumes that can be expected to be recovered through existing
wells with existing equipment and operating methods. Proved undeveloped reserves
are proved reserve volumes that are expected to be recovered from new wells on
undrilled acreage or from existing wells where a significant expenditure is
required for recompletion.
F-29
<PAGE> 78
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Estimates of reserve quantities are based on sound geological and
engineering principles, but, by their very nature, are still estimates that are
subject to substantial upward or downward revision as additional information
regarding producing fields and technology becomes available.
<TABLE>
<CAPTION>
OIL/CONDENSATE NATURAL GAS
(BARRELS) (MCF)
-------------- -----------
(In thousands)
<S> <C> <C>
Proved reserves -- December 31, 1995....................... 4,323 61,292
Revisions of previous estimates.......................... (734) (4,823)
Extensions, discoveries and other additions.............. 294 3,832
Production............................................... (421) (15,787)
----- -------
Proved reserves -- December 31, 1996....................... 3,462 44,514
Revisions of previous estimates.......................... (542) 5,441
Production............................................... (801) (19,792)
----- -------
Proved reserves -- December 31, 1997....................... 2,119 30,163
Revisions of previous estimates.......................... (33) 1,833
Purchase of reserves in place............................ 32 8,212
Production............................................... (540) (11,324)
----- -------
Proved reserves -- December 31, 1998....................... 1,578 28,884
===== =======
Proved developed reserves -- December 31, 1996............. 3,149 44,075
===== =======
Proved developed reserves -- December 31, 1997............. 2,119 28,324
===== =======
Proved developed reserves -- December 31, 1998............. 1,578 26,432
===== =======
</TABLE>
In general, estimates of economically recoverable oil and natural gas
reserves and of the future net revenue therefrom are based upon a number of
variable factors and assumptions, such as historical production from the subject
properties, the assumed effects of regulation by governmental agencies and
assumptions concerning future oil and natural gas prices, future operating costs
and future plugging and abandonment costs, all of which may vary considerably
from actual results. All such estimates are to some degree speculative, and
classifications of reserves are only attempts to define the degree of
speculation involved. For these reasons, estimates of the economically
recoverable oil and natural gas reserves attributable to any particular group of
properties, classifications of such reserves based on risk of recovery and
estimates of the future net revenue expected therefrom, prepared by different
engineers or by the same engineers at different times, may vary substantially.
The meaningfulness of such estimates is highly dependent upon the assumptions
upon which they are based.
Furthermore, Leviathan's wells have only been producing for a short period
of time and, accordingly, estimates of future production are based on this
limited history. Estimates with respect to proved undeveloped reserves that may
be developed and produced in the future are often based upon volumetric
calculations and upon analogy to similar types of reserves rather than upon
actual production history. Estimates based on these methods are generally less
reliable than those based on actual production history. Subsequent evaluation of
the same reserves based upon production history will result in variations, which
may be substantial, in the estimated reserves. A significant portion of
Leviathan's reserves is based upon volumetric calculations.
Future net cash flows
The standardized measure of discounted future net cash flows relating to
Leviathan's proved oil and natural gas reserves is calculated and presented in
accordance with SFAS No. 69, "Disclosures About Oil and Gas Producing
Activities." Accordingly, future cash inflows were determined by applying
year-end oil and natural gas prices, as adjusted for hedging and other fixed
price contracts in effect, to Leviathan's estimated
F-30
<PAGE> 79
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
share of future production from proved oil and natural gas reserves. The average
prices utilized in the calculation of the standardized measure of discounted
future net cash flows at December 31, 1998 were $9.80 per barrel of oil and
$1.53 per Mcf of gas. Future production and development costs were computed by
applying year-end costs to future years. As Leviathan is not a taxable entity,
no future income taxes were provided. A prescribed 10% discount factor was
applied to the future net cash flows.
In Leviathan's opinion, this standardized measure is not a representative
measure of fair market value, and the standardized measure presented for
Leviathan's proved oil and natural gas reserves is not representative of the
reserve value. The standardized measure is intended only to assist financial
statement users in making comparisons between companies.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Future cash inflows.................................. $ 53,299 $104,192 $206,311
Future production costs.............................. (13,412) (15,895) (13,019)
Future development costs............................. (10,566) (10,463) (5,328)
Future income tax expenses........................... -- -- --
-------- -------- --------
Future net cash flows................................ 29,321 77,834 187,964
Annual discount at 10% rate.......................... (2,649) (10,468) (32,326)
-------- -------- --------
Standardized measure of discounted future net cash
flows.............................................. $ 26,672 $ 67,366 $155,638
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------
PROVED PROVED
DEVELOPED UNDEVELOPED TOTAL
--------- -------------- -------
(In thousands)
<S> <C> <C> <C>
Undiscounted estimated future net cash flows from
proved reserves before income taxes............... $28,457 $864 $29,321
======= ==== =======
Present value of estimated future net cash flows
from proved reserves before income taxes,
discounted at 10%................................. $26,131 $541 $26,672
======= ==== =======
</TABLE>
The following are the principal sources of change in the standardized
measure (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Beginning of year.................................... $ 67,366 $155,638 $115,170
Sales and transfers of oil and natural gas
produced, net of production costs............... (22,131) (53,492) (40,420)
Net changes in prices and production costs......... (32,129) (35,645) 45,358
Extensions, discoveries and improved recovery, less
related costs................................... -- -- 17,077
Oil and natural gas development costs incurred
during the year................................. 120 11,140 57,501
Changes in estimated future development costs...... (443) (12,439) (29,421)
Revisions of previous quantity estimates........... 1,920 (3,817) (19,686)
Purchase of reserves in place...................... 7,573 -- --
Accretion of discount.............................. 6,736 15,564 11,517
Changes in production rates, timing and other...... (2,340) (9,583) (1,458)
-------- -------- --------
End of year.......................................... $ 26,672 $ 67,366 $155,638
======== ======== ========
</TABLE>
F-31
<PAGE> 80
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
<TABLE>
<CAPTION>
YEAR 1998
---------------------------------------------------------
QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
-------- ------- ------------ ----------- -------
(In thousands, except for per Unit data)
<S> <C> <C> <C> <C> <C>
Revenue.................................. $17,714 $18,373 $18,230 $21,138 $75,455
Gross profit(a).......................... $ 7,010 $ 8,687 $ 8,165 $10,957 $34,819
Net income (loss)........................ $(1,424) $ 1,510 $(1,806) $ 2,466 $ 746
Basic and diluted net income (loss) per
unit................................... $ (0.05) $ 0.05 $ (0.06) $ 0.08 $ 0.02
Weighted average number of Units
outstanding............................ 24,367 24,367 24,367 24,367 24,367
Distributions declared per Common Unit... $ 0.525 $ 0.525 $ 0.525 $ 0.525 $ 2.10
Distributions declared per Preference
Unit................................... $ 0.525 $ 0.525 $ 0.275 $ 0.275 $ 1.60
</TABLE>
<TABLE>
<CAPTION>
YEAR 1997
-----------------------------------------------------------
QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
-------- -------- ------------ ----------- --------
(In thousands, except for per Unit data)
<S> <C> <C> <C> <C> <C>
Revenue.................................. $31,028 $ 28,226 $25,474 $20,034 $104,762
Gross profit(a).......................... $13,980 $ 11,289 $11,311 $10,541 $ 47,121
Net income (loss)........................ $ 8,964 $(15,855) $ 3,274 $ 2,479 $ (1,138)
Basic and diluted net income (loss) per
unit................................... $ 0.32 $ (0.58) $ 0.12 $ 0.08 $ (0.06)
Weighted average number of Units
outstanding............................ 24,367 24,367 24,367 24,367 24,367
Distributions declared per Preference and
Common Unit............................ $ 0.425 $ 0.45 $ 0.475 $ 0.50 $ 1.85
</TABLE>
<TABLE>
<CAPTION>
YEAR 1996
---------------------------------------------------------
QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
-------- ------- ------------ ----------- -------
(In thousands, except for per Unit data)
<S> <C> <C> <C> <C> <C>
Revenue.................................. $19,637 $18,562 $24,214 $29,094 $91,507
Gross profit(a).......................... $12,437 $10,792 $13,246 $14,233 $50,708
Net income (loss)........................ $10,910 $ 9,161 $10,006 $ 8,615 $38,692
Basic and diluted net income (loss) per
unit................................... $ 0.44 $ 0.37 $ 0.41 $ 0.35 $ 1.57
Weighted average number of Units
outstanding............................ 24,367 24,367 24,367 24,367 24,367
Distributions declared per Preference and
Common Unit............................ $ 0.325 $ 0.35 $ 0.375 $ 0.40 $ 1.45
</TABLE>
- ---------------
(a) Represent revenue less operating and depreciation, depletion and
amortization expenses.
F-32
<PAGE> 81
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Viosca Knoll Gathering
Company (a Delaware general partnership)
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of partners' capital present fairly, in all
material respects, the financial position of Viosca Knoll Gathering Company (a
Delaware general partnership) ("Viosca Knoll") as of December 31, 1998 and 1997,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1998 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
Viosca Knoll's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Houston, Texas
March 19, 1999
F-33
<PAGE> 82
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 155 $ 135
Accounts receivable....................................... 4,885 2,658
Accounts receivable from affiliates....................... 179 561
Other current assets...................................... 232 --
-------- --------
Total current assets.............................. 5,451 3,354
-------- --------
Property and equipment:
Pipelines.............................................. 108,121 103,121
Construction-in-progress............................... -- 1,449
Other.................................................. 77 24
-------- --------
108,198 104,594
Less: Accumulated depreciation......................... 10,662 6,886
-------- --------
Property, plant and equipment, net................... 97,536 97,708
-------- --------
Debt issue costs, net....................................... 222 296
-------- --------
Total assets...................................... $103,209 $101,358
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable.......................................... $ 414 $ 3,841
Accounts payable to affiliates............................ 552 851
Accrued liabilities....................................... 55 6,588
-------- --------
Total current liabilities......................... 1,021 11,280
Provision for negative salvage.............................. 340 256
Notes payable............................................... 66,700 52,200
-------- --------
68,061 63,736
-------- --------
Commitments and contingencies
Partners' capital:
VK Deepwater.............................................. 17,574 18,811
EPEC Deepwater............................................ 17,574 18,811
-------- --------
35,148 37,622
-------- --------
Total liabilities and partners' capital........... $103,209 $101,358
======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-34
<PAGE> 83
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Revenue:
Transportation services................................... $28,806 $23,128 $13,923
Oil and natural gas sales................................. 528 -- --
------- ------- -------
29,334 23,128 13,923
------- ------- -------
Costs and expenses:
Operating expenses........................................ 2,877 1,990 298
Depreciation.............................................. 3,860 2,474 2,269
General and administrative expenses....................... 154 125 126
------- ------- -------
6,891 4,589 2,693
------- ------- -------
Operating income............................................ 22,443 18,539 11,230
Interest income............................................. 50 40 --
Interest and other financing costs.......................... (4,267) (1,959) (90)
------- ------- -------
Net income.................................................. $18,226 $16,620 $11,140
======= ======= =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-35
<PAGE> 84
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 18,226 $ 16,620 $ 11,140
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation.......................................... 3,860 2,474 2,269
Amortization of debt issue costs...................... 74 73 --
Changes in operating working capital:
(Increase) decrease in accounts receivable.......... (2,227) 340 (1,462)
Decrease (increase) in accounts receivable from
affiliates....................................... 382 573 (1,046)
Increase in other current assets.................... (232) -- --
(Decrease) increase in accounts payable............. (3,427) 1,937 1,557
(Decrease) increase in accounts payable to
affiliates....................................... (299) 513 (2,312)
(Decrease) increase in accrued liabilities.......... (6,533) 6,328 (251)
--------- --------- ---------
Net cash provided by operating activities........ 9,824 28,858 9,895
--------- --------- ---------
Cash flows from investing activities:
Additions to pipeline assets............................. (3,604) (27,541) (5,219)
Construction-in-progress................................. -- (1,449) (3,410)
--------- --------- ---------
Net cash used in investing activities............ (3,604) (28,990) (8,629)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from notes payable.............................. 14,500 18,900 33,300
Contributions from partners.............................. -- 320 3,018
Distributions to partners................................ (20,700) (19,300) (36,900)
Debt issue costs......................................... -- (70) (300)
--------- --------- ---------
Net cash used in financing activities............ (6,200) (150) (882)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents....... 20 (282) 384
Cash and cash equivalents at beginning of year............. 135 417 33
--------- --------- ---------
Cash and cash equivalents at end of year................... $ 155 $ 135 $ 417
========= ========= =========
Cash paid for interest, net of amounts capitalized......... $ 4,180 $ 1,878 $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-36
<PAGE> 85
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
STATEMENT OF PARTNERS' CAPITAL
(In thousands)
<TABLE>
<CAPTION>
VK EPEC
DEEPWATER DEEPWATER TOTAL
--------- --------- ---------
<S> <C> <C> <C>
Partners' capital at December 31, 1995...................... $ 31,362 $ 31,362 $ 62,724
Contributions............................................. 1,509 1,509 3,018
Distributions............................................. (18,450) (18,450) (36,900)
Net income................................................ 5,570 5,570 11,140
--------- --------- ---------
Partners' capital at December 31, 1996...................... 19,991 19,991 39,982
Contributions............................................. 160 160 320
Distributions............................................. (9,650) (9,650) (19,300)
Net income................................................ 8,310 8,310 16,620
--------- --------- ---------
Partners' capital at December 31, 1997...................... 18,811 18,811 37,622
Distributions............................................. (10,350) (10,350) (20,700)
Net income................................................ 9,113 9,113 18,226
--------- --------- ---------
Partners' capital at December 31, 1998...................... $ 17,574 $ 17,574 $ 35,148
========= ========= =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-37
<PAGE> 86
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION:
Viosca Knoll Gathering Company ("Viosca Knoll") is a Delaware general
partnership formed in May 1994 to design, construct, own and operate the Viosca
Knoll Gathering System (the "Viosca Knoll system") and any additional facilities
constructed or acquired pursuant to the Joint Venture Agreement between VK
Deepwater Gathering Company, L.L.C. ("VK Deepwater"), an approximate 99% owned
subsidiary of Leviathan Gas Pipeline Partners, L.P. ("Leviathan"), and EPEC
Deepwater Gathering Company ("EPEC Deepwater"), an indirect subsidiary of El
Paso Energy Corporation ("El Paso"). El Paso, as a result of its merger with
DeepTech International Inc. on August 14, 1998, owns an effective 27.3% interest
in Leviathan. Each of the partners has a 50% interest in Viosca Knoll. Viosca
Knoll is managed by a committee consisting of representatives from each of the
partners. Viosca Knoll has no employees. VK Deepwater is the operator of Viosca
Knoll and has contracted with an affiliate of EPEC Deepwater to maintain the
pipeline and with Leviathan to perform financial, accounting and administrative
services.
The Viosca Knoll system is a non-jurisdictional gathering system designed
to serve the Main Pass, Mississippi Canyon and Viosca Knoll areas of the Gulf of
Mexico (the "Gulf"), southeast of New Orleans, offshore Louisiana. The Viosca
Knoll system, has a maximum design capacity of approximately 1 billion cubic
feet of natural gas per day and consists of 125 miles of predominantly 20-inch
natural gas pipelines and a large compressor. The Viosca Knoll system provides
its customers access to the facilities of a number of major interstate
pipelines, including Tennessee Gas Pipeline Company, Columbia Gulf Transmission
Company, Southern Natural Gas Company, Transcontinental Gas Pipe Line and Destin
Pipeline Company.
The base system, comprised of (i) an approximately 94 mile, 20-inch
diameter pipeline from a platform in Main Pass Block 252 owned by Shell
Offshore, Inc. ("Shell") to a pipeline owned by Tennessee Gas Pipeline Company
at South Pass Block 55 and (ii) a six mile, 16-inch diameter pipeline from an
interconnection with the 20-inch diameter pipeline at Viosca Knoll Block 817 to
a pipeline owned by Southern Natural Gas Company at Main Pass Block 289, was
constructed in 1994. A 7,000 horsepower compressor was installed in 1996 on
Leviathan's Viosca Knoll 817 platform to allow Viosca Knoll to effect deliveries
at the operating pressures on downstream interstate pipelines with which it is
interconnected. The additional capacity created by such compression allowed
Viosca Knoll to transport new natural gas volumes during 1997 from the
Shell-operated Southeast Tahoe and Ram-Powell fields as well as other new
deepwater projects in the area. In 1997, Viosca Knoll added approximately 25
miles of parallel 20-inch pipelines.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES:
Cash and cash equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Property and equipment
Gathering pipelines and related facilities are recorded at cost and
depreciated on a straight-line basis over an estimated useful life of 30 years.
Viosca Knoll also calculates a negative salvage provision using the
straight-line method based on an estimated cost of abandoning the pipeline of
$2.5 million. Other property, plant and equipment is depreciated on a
straight-line basis over an estimated useful life of five years. Maintenance and
repair costs are expensed as incurred; additions, improvements and replacements
are capitalized. Retirements, sales and disposals of assets are recorded by
eliminating the related costs and accumulated depreciation of the disposed
assets with any resulting gain or loss reflected in income.
Viosca Knoll evaluates impairment of its property and equipment in
accordance with Statement of Financial Accounting Standard ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets
F-38
<PAGE> 87
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and for Long-Lived Assets to be Disposed Of" which requires recognition of
impairment losses on long-lived assets if the carrying amount of such assets,
grouped at the lowest level for which there are identifiable cash flows that are
largely independent of the cash flows from other assets, exceeds the estimated
undiscounted future cash flows of such assets. Measurement of any impairment
loss will be based on the fair value of the assets.
Capitalization of interest
Interest and other financing costs are capitalized in connection with
construction activities as part of the cost of the asset and amortized over the
related asset's estimated useful life.
Debt issue costs
Debt issue costs are capitalized and amortized over the life of the related
indebtedness. Any unamortized debt issue costs are expensed at the time the
related indebtedness is repaid or otherwise terminated.
Revenue recognition
Revenue from pipeline transportation of natural gas is recognized upon
receipt of the natural gas into the pipeline system. Revenue from demand charges
is recognized in the period the services are provided. Revenue from oil and
natural gas sales is recognized upon delivery in the period of production.
Income taxes
Viosca Knoll is not a taxable entity. Income taxes are the responsibility
of the partners and are not reflected in these financial statements. However,
the taxable income or loss resulting from the operations of Viosca Knoll will
ultimately be included in the federal income tax returns of the partners and may
vary substantially from income or loss reported for financial statement
purposes.
Estimates
The preparation of Viosca Knoll's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions, including those related to potential environmental liabilities
and future regulatory status, that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Management believes that the estimates are reasonable.
Recent Pronouncements
In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." This statement
defines start-up activities, requires start-up and organization costs to be
expensed as incurred and requires that any such costs that exist on the balance
sheet be expensed upon adoption of this pronouncement. The statement is
effective for fiscal years beginning after December 15, 1998. Viosca Knoll does
not expect the implementation of this statement to have a material effect on
Viosca Knoll's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," to be effective
for all fiscal years beginning after June 15, 1999. SFAS No. 133 requires that
entities recognize all derivative instruments as either assets or liabilities on
the balance sheet and measure those instruments at fair value. The accounting
for changes in the fair value of
F-39
<PAGE> 88
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
a derivative will depend on the intended use of the derivative and the resulting
designation. Viosca Knoll is currently evaluating the impact, if any, of SFAS
No. 133.
NOTE 3 -- INDEBTEDNESS:
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 and expansion to the
Viosca Knoll System and for other working capital needs of Viosca Knoll,
including providing a one time distribution not to exceed $25 million to its
partners (Note 7). 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 collateralized by all of Viosca
Knoll's material contracts and agreements, receivables and inventory and matures
on December 20, 2001. As of December 31, 1998 and 1997, Viosca Knoll had
$66,700,000 and $52,200,000, respectively, outstanding under the Viosca Knoll
Credit Facility bearing interest at an average floating rate of 6.7% per annum.
As of December 31, 1998, approximately $33,300,000 of additional funds are
available under the Viosca Knoll Credit Facility. See Note 8.
Interest and other financing costs totaled $4,278,000, $2,710,000 and
$90,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
During the year ended December 31, 1998 and 1997, Viosca Knoll capitalized
$11,000 and $751,000, respectively, of such costs in connection with
construction projects in progress.
NOTE 4 -- RELATED PARTY TRANSACTIONS:
Pursuant to a management agreement dated May 24, 1994 between Viosca Knoll
and Leviathan, Leviathan charges Viosca Knoll a base fee of $100,000 annually in
exchange for Leviathan providing financial, accounting and administrative
services on behalf of Viosca Knoll. For each of the years ended December 31,
1998, 1997 and 1996, Leviathan charged Viosca Knoll $100,000 in accordance with
this management agreement.
Viosca Knoll and EPEC Gas Services Company ("EPEC Gas"), an affiliate of
EPEC Deepwater, entered into a construction and operation agreement whereby EPEC
Gas provided personnel to manage the construction and operation of the Viosca
Knoll System in exchange for a one-time management fee of $3,000,000 and
provides routine maintenance services on behalf of Viosca Knoll. For the years
ended December 31, 1998, 1997 and 1996, EPEC Gas charged Viosca Knoll $415,000,
$216,000 and $200,000, respectively, with respect to its operating and
maintenance services.
In addition, EPEC Gas and VK-Main Pass Gathering Company, L.L.C. ("VK Main
Pass"), a subsidiary of Leviathan, acquired and installed a compressor on the
Viosca Knoll 817 Platform, which is owned by Leviathan. The compressor was
placed in service in January 1997. For the years ended December 31, 1998, 1997
and 1996, Viosca Knoll reimbursed EPEC Gas $1,762,000, $1,282,000 and
$8,072,000, respectively, for construction related costs. For the years ended
December 31, 1998, 1997 and 1996, Viosca Knoll reimbursed VK Main Pass $152,000,
$47,000 and $254,000, respectively, for construction related items.
Included in transportation services revenue during the years ended December
31, 1998, 1997 and 1996 is $1,881,000, $3,921,000 and $3,229,000, respectively,
of revenue earned from transportation services provided to Flextrend Development
Company, L.L.C., a subsidiary of Leviathan. Included in operating expenses for
the years ended December 31, 1998, 1997 and 1996 is $2,447,000, $2,116,000 and
$249,000, respectively, of platform access fees and related expenses charged to
Viosca Knoll by VK Main Pass.
F-40
<PAGE> 89
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- COMMITMENTS AND CONTINGENCIES:
In the ordinary course of business, Viosca Knoll is subject to various laws
and regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect the financial position or operations of
Viosca Knoll.
The Viosca Knoll system is a gathering facility and as such is not
currently subject to rate and certificate regulation by the Federal Energy
Regulatory Commission (the "FERC"). However, the FERC has asserted that it has
rate jurisdiction under the Natural Gas Act of 1938, as amended (the "NGA"),
over gathering services performed through gathering facilities owned by a
natural gas company (as defined in the NGA) when such services were performed
"in connection with" transportation services provided by such natural gas
company. Whether, and to what extent, the FERC should exercise any NGA rate
jurisdiction it may be found to have over gathering facilities owned either by
natural gas companies or affiliates thereof is subject to case-by-case review by
the FERC. Based on current FERC policy and precedent, Viosca Knoll does not
anticipate that the FERC will assert or exercise any NGA rate jurisdiction over
the Viosca Knoll system so long as the services provided through such system are
not performed "in connection with" transportation services performed through any
of the regulated pipelines of either of the partners.
NOTE 6 -- MAJOR CUSTOMERS:
Transportation revenue from major customers was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Shell Offshore, Inc........................ $10,836 38 $11,198 48 $ 5,141 37
Snyder Oil Corporation..................... 4,801 17 3,653 16 3,275 24
Exxon Corporation.......................... 3,354 12 498 2 -- --
Amoco Production Company................... 3,292 11 475 2 -- --
Flextrend Development Company, L.L.C. ..... 1,881 7 3,921 17 3,229 23
Other...................................... 4,642 15 3,383 15 2,278 16
------- --- ------- --- ------- ---
$28,806 100 $23,128 100 $13,923 100
======= === ======= === ======= ===
</TABLE>
NOTE 7 -- CASH DISTRIBUTIONS:
In March 1995, Viosca Knoll began making monthly distributions of 100% of
its Available Cash, as defined in the Joint Venture Agreement, to the partners.
Available Cash consists generally of all the cash receipts of Viosca Knoll less
all of its cash disbursements less reasonable reserves, including, without
limitation, those necessary for working capital and near-term commitments and
obligations or other contingencies of Viosca Knoll. Viosca Knoll expects to make
distributions of Available Cash within 15 days after the end of each month to
its partners. During the years ended December 31, 1998, 1997 and 1996, Viosca
Knoll paid distributions of $20,700,000, $19,300,000 and $36,900,000,
respectively, to its partners. The distributions paid during 1996 include $25
million of funds provided from borrowings under the Viosca Knoll Credit
Facility. The Viosca Knoll Credit Facility Agreement includes a covenant by
which distributions are limited to the greater of net income or 90% of earnings
before interest and depreciation as defined in the agreement.
NOTE 8 -- SUBSEQUENT EVENTS:
In January 1999, EPEC Deepwater announced the sale of (a) all of its
interest in Viosca Knoll, other than a 1% interest in profits and capital in
Viosca Knoll, to VK Deepwater for approximately $85.26 million
F-41
<PAGE> 90
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(subject to adjustment), comprised of 25% cash (up to a maximum of $21.315
million) and 75% common units of Leviathan (up to a maximum of 3,205,263 common
units), the actual number of which will depend on the average closing price of
the common units during the applicable trading reference period, and (b) an
option to acquire the remaining 1% interest in the profits and capital in Viosca
Knoll.
Prior to closing, Viosca Knoll must obtain consent from its lenders under
the Viosca Knoll Credit Facility and Leviathan must obtain consent from its
lenders as well. At such time, either or both of such credit facilities may be
restructured.
At the closing, which is anticipated to be during the second quarter of
1999, (i) EPEC Deepwater will contribute to Viosca Knoll an amount of money
equal to 50% of the amount then outstanding under the Viosca Knoll Credit
Facility (currently a total of $66.7 million is outstanding) and (ii) VK
Deepwater, through Leviathan, will pay El Paso and EPEC Deepwater the cash and
common units discussed above. Then, during the six month period commencing on
the day after the first anniversary of that closing date, VK Deepwater would
have the option to acquire the remaining 1% in profits and capital in Viosca
Knoll for a cash payment equal to the sum of $1.74 million plus the amount of
additional distributions which would have been paid, accrued or been in arrears
had VK Deepwater acquired the remaining 1% of Viosca Knoll at the initial
closing by issuing additional common units of Leviathan in lieu of a cash
payment of $1.74 million.
F-42
<PAGE> 91
INDEPENDENT AUDITORS' REPORT
To the Management Committee
High Island Offshore System, L.L.C.
Detroit, Michigan
We have audited the accompanying statements of financial position of High
Island Offshore System, L.L.C. as of December 31, 1998 and 1997, and the related
statements of income, members' equity, and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the High Island Offshore System, L.L.C.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of High Island Offshore System, L.L.C. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 19, 1999
F-43
<PAGE> 92
HIGH ISLAND OFFSHORE SYSTEM, L.L.C.
STATEMENTS OF FINANCIAL POSITION
AS OF DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 868,312 $ 876,845
Accounts receivable....................................... 3,777,590 4,709,918
Prepayments............................................... 15,948 --
------------ ------------
Total current assets.............................. 4,661,850 5,586,763
------------ ------------
Gas transmission plant...................................... 372,370,180 371,321,033
Less -- accumulated depreciation.......................... 364,601,970 359,830,332
------------ ------------
Net gas transmission plant........................ 7,768,210 11,490,701
------------ ------------
Deferred charges............................................ 5,168,277 590,189
------------ ------------
Total assets...................................... $ 17,598,337 $ 17,667,653
============ ============
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,424,849 $ 3,077,779
Unamortized rate reductions for excess deferred federal
income taxes........................................... 201,347 302,021
------------ ------------
Total current liabilities......................... 2,626,196 3,379,800
------------ ------------
Noncurrent liabilities
Unamortized rate reductions for excess deferred federal
income taxes........................................... -- 198,510
------------ ------------
Commitments and contingencies (Note 6)...................... -- --
------------ ------------
Members' equity............................................. 14,972,141 14,089,343
------------ ------------
Total liabilities and members' equity............. $ 17,598,337 $ 17,667,653
============ ============
</TABLE>
See notes to the financial statements.
F-44
<PAGE> 93
HIGH ISLAND OFFSHORE SYSTEM, L.L.C.
STATEMENTS OF INCOME AND STATEMENTS OF MEMBERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
STATEMENTS OF INCOME
Operating revenues:
Transportation services......................... $ 43,477,250 $ 45,414,839 $ 47,052,978
Other........................................... 340,323 502,111 387,764
------------ ------------ ------------
Total operating revenues................ 43,817,573 45,916,950 47,440,742
------------ ------------ ------------
Operating expenses:
Operation and maintenance....................... 18,935,495 16,975,738 15,548,824
Depreciation.................................... 4,771,638 4,773,588 4,775,405
Property taxes.................................. 111,105 125,368 133,662
------------ ------------ ------------
Total operating expenses................ 23,818,238 21,874,694 20,457,891
------------ ------------ ------------
Net operating income.................... 19,999,335 24,042,256 26,982,851
------------ ------------ ------------
Other income and deductions....................... (16,537) -- 96,624
------------ ------------ ------------
Total other income and deductions....... (16,537) -- 96,624
------------ ------------ ------------
Net income........................................ $ 19,982,798 $ 24,042,256 $ 27,079,475
============ ============ ============
STATEMENTS OF MEMBERS' EQUITY
Balance at beginning of period.................... $ 14,089,343 $ 20,547,087 $ 21,967,612
Net income...................................... 19,982,798 24,042,256 27,079,475
Capital contributions........................... 4,000,000 -- --
Distributions to members........................ (23,100,000) (30,500,000) (28,500,000)
------------ ------------ ------------
Balance at end of period.......................... $ 14,972,141 $ 14,089,343 $ 20,547,087
============ ============ ============
</TABLE>
See notes to the financial statements.
F-45
<PAGE> 94
HIGH ISLAND OFFSHORE SYSTEM, L.L.C.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 19,982,798 $ 24,042,256 $ 27,079,475
Adjustments to reconcile net income to cash
provided by (used in) operating activities
Depreciation................................ 4,771,638 4,773,588 4,775,405
Accounts receivable......................... 932,328 7,260 (353,633)
Prepayments................................. (15,948) 211,842 91,444
Deferred charges and other.................. (4,877,271) (145,294) 67,173
Provision for regulatory matters............ -- -- (1,050,623)
Accounts payable............................ (335,434) 23,821 (1,515,481)
------------ ------------ ------------
Cash provided by operating activities.... 20,458,111 28,913,473 29,093,760
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures............................. (1,366,644) (822,554) (209,863)
------------ ------------ ------------
Cash used in investing activities........ (1,366,644) (822,554) (209,863)
------------ ------------ ------------
Cash flows from financing activities:
Capital contributions............................ 4,000,000 -- --
Distributions to members......................... (23,100,000) (30,500,000) (28,500,000)
------------ ------------ ------------
Cash used in financing activities........ (19,100,000) (30,500,000) (28,500,000)
------------ ------------ ------------
(Decrease) increase in cash and cash equivalents... (8,533) (2,409,081) 383,897
Cash and cash equivalents at beginning of period... 876,845 3,285,926 2,902,029
------------ ------------ ------------
Cash and cash equivalents at end of period......... $ 868,312 $ 876,845 $ 3,285,926
============ ============ ============
</TABLE>
See notes to the financial statements.
F-46
<PAGE> 95
HIGH ISLAND OFFSHORE SYSTEM, L.L.C.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 -- FORMATION AND OWNERSHIP STRUCTURE
Description and Business Purpose
Effective December 10, 1998, High Island Offshore System, ("HIOS" or the
"Company"), a Delaware partnership, was converted to a Delaware Limited
Liability Corporation ("L.L.C."). As of December 31, 1998, the members of the
Company, each of which held a 20% interest in HIOS, were companies affiliated
with three pipeline companies as follows:
<TABLE>
<CAPTION>
MEMBER AFFILIATED PIPELINE COMPANY
------ ---------------------------
<S> <C>
American Natural Offshore Company ANR Pipeline Company
NATOCO, Inc. Natural Gas Pipeline Company of America
Texam Offshore Gas Transmission, L.L.C. Leviathan Gas Pipeline Partners, L.P.
Texas Offshore Pipeline System, Inc. ANR Pipeline Company
Transco Offshore Pipeline Company, L.L.C. Leviathan Gas Pipeline Partners, L.P.
</TABLE>
In January 1999, the members contributed their capital accounts to Western
Gulf Holdings, L.L.C. ("Western Gulf") in exchange for ownership interests in
Western Gulf, which is now the sole member holding ownership in the Company.
Western Gulf was formed to invest in the development of a 85 mile pipeline which
will connect to HIOS and extend to the deep water "Diana" prospect containing an
estimated 1 trillion cubic feet of reserves. The new line is scheduled to begin
transporting gas in late 2000 and is projected to cost $90 million. The line
will be owned by East Breaks Gathering Company, L.L.C., which is also owned by
Western Gulf.
HIOS owns a 203.4 mile undersea gas transmission system in the Gulf of
Mexico which provides transportation services as authorized by the Federal
Energy Regulatory Commission ("FERC"). HIOS' major transportation customers
include natural gas marketers and producers, and interstate natural gas pipeline
companies. The Company extends credit for transportation services provided to
these customers. The concentrations of customers, described above, may affect
the Company's overall credit risk in that the customers may be similarly
affected by changes in economic, regulatory and other factors.
HIOS is managed by a committee consisting of representatives from each of
the member companies. HIOS has no employees. ANR Pipeline Company ("ANR")
operates the system on behalf of HIOS under an agreement which provides that
services rendered to HIOS will be reimbursed at cost ($12.4 million for 1998,
$11.4 million for 1997, and $9.6 million for 1996).
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company is regulated by the FERC. In addition, the Company meets the
criteria and, accordingly, follows the accounting and reporting requirements of
Statement of Financial Accounting Standards No. 71 for regulated enterprises.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
reported amounts of revenues and expenses. Actual results could differ from
those estimates. Management believes that its estimates are reasonable.
F-47
<PAGE> 96
HIGH ISLAND OFFSHORE SYSTEM, L.L.C.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation
Annual depreciation and negative salvage provisions are computed on a
straight-line basis using rates of depreciation which vary by type of property.
The annual composite depreciation rates were approximately 1.29% for 1998, 1997,
and 1996 which include a provision for negative salvage of .2% for offshore
facilities.
Income Taxes
For tax filing purposes, the Company has elected partnership status, and
therefore, income taxes are the responsibility of the Members and are not
reflected in the financial statements of the Company.
Statement of Cash Flows
For purposes of these financial statements, the Company considers
short-term investments purchased with an original maturity of three months or
less to be cash equivalents. The Company had short-term investments in the
amount of $.9 million at December 31, 1998 and 1997. The Company made no cash
payments for interest in 1998, 1997, or 1996.
Accounting Pronouncements
The Financial Accounting Standards Board has issued FAS 133, "Accounting
for Derivative Instruments and Hedging Activities," to be effective for all
fiscal years beginning after June 15, 1999. FAS 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The accounting
for changes in the fair value of a derivative will depend on the intended use of
the derivative and the resulting designation. The Company is currently
evaluating the impact, if any, of FAS 133.
NOTE 3 -- REGULATORY MATTERS
By letter order issued September 18, 1995, the FERC approved the settlement
of the Company's rate filing at Docket No. RP94-162, which required that the
Company file a new rate case within three years. On October 8, 1998, the FERC
granted a request filed by the Company for an extension of time for the filing
of its next general rate case until January 1, 2003. Costs incurred in
connection with the extension of the rate case settlement have been deferred and
are being amortized on a straight-line basis through the period ending December
31, 2002.
NOTE 4 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash invested on a temporary basis at short-term
market rates of interest approximates the fair market value of the investments.
NOTE 5 -- RELATED PARTY TRANSACTIONS
Transportation revenues derived from affiliated pipeline companies were $.8
million for 1998, $6.2 million for 1997, and $16.7 million for 1996. The Company
had no accounts receivable balances due from these affiliates for transportation
services at December 31, 1998 and 1997.
Both ANR and U-T Offshore System ("UTOS") provide separation, dehydration
and measurement services to HIOS. UTOS is equally owned by affiliates of ANR,
Natural Gas Pipeline Company of America, and Leviathan Gas Pipeline Partners,
L.P. HIOS incurred charges for these services of $2.5 million in 1998, $2.5
million in 1997, and $2.8 million in 1996 from ANR and $2.0 million in 1998,
$1.7 million in 1997, and $1.4 million in 1996 from UTOS.
In February 1996, the Company reached an agreement with ANR, which was
approved by the FERC, which provides that rates charged by ANR would be $2.8
million for calendar year 1996, $2.5 million per year for calendar years 1997,
1998 and 1999 and $2.2 million for calendar year 2000. The rate would be
negotiated for calendar year 2001 and thereafter.
F-48
<PAGE> 97
HIGH ISLAND OFFSHORE SYSTEM, L.L.C.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Amounts due to ANR were $1.9 million and $1.8 million at December 31, 1998
and 1997, respectively, and amounts due to UTOS were $.2 million and $.1 million
at December 31, 1998 and 1997, respectively.
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company is subject to various laws
and regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect the financial position or the results of
operations of the Company.
NOTE 7 -- LEGAL PROCEEDINGS
In 1996, Jack Grynberg filed a claim under the False Claims Act on behalf
of the U.S. government in the U.S. District Court, District of Columbia, against
70 defendants, including the Company. The suit sought damages for the alleged
underpayment of royalties due to the purported improper measurement of gas. The
1996 suit was dismissed without prejudice in March 1997 and the dismissal was
affirmed by the D.C. Court of Appeals in October 1998. In September 1997, Mr.
Grynberg filed 77 separate, similar False Claims Act suits against natural gas
transmission companies and producers, gatherers, and processors of natural gas,
seeking unspecified damages. The Company has been included in two of the
September 1997 suits. The suits were filed in the U.S. District Court, District
of Colorado and the U.S. District Court, Eastern District of Michigan. The
United States Department of Justice has notified the Company that it is
reviewing these lawsuits to determine whether or not the United States will
intervene.
Although no assurances can be given and no determination can be made at
this time as to the outcome of any particular lawsuit or proceeding, the Company
believes there are meritorious defenses to substantially all such claims and
that any liability which may be finally determined should not have a material
adverse effect on the Company's financial position or results of operations.
F-49
<PAGE> 98
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of
Poseidon Oil Pipeline Company, L.L.C.:
We have audited the accompanying balance sheets of Poseidon Oil Pipeline
Company, L.L.C. (a Delaware limited liability company), as of December 31, 1998
and 1997, and the related statements of income, members' equity and cash flows
for the years ended December 31, 1998 and 1997, and for the period from
inception (February 14, 1996) through December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Poseidon Oil Pipeline
Company, L.L.C., as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years ended December 31, 1998 and 1997,
and for the period from inception (February 14, 1996) through December 31, 1996,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 18, 1999
F-50
<PAGE> 99
POSEIDON OIL PIPELINE COMPANY, L.L.C.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 685,540 $ 1,671,451
Crude oil receivables --
Related parties........................................ 28,216,308 21,729,130
Other.................................................. 12,179,468 7,316,566
Construction advances to operator (Note 6)................ 1,234,467 --
Materials, supplies and other............................. 1,022,450 1,045,937
------------ ------------
Total current assets.............................. 43,338,233 31,763,084
Debt reserve fund (Notes 2 and 4)........................... 4,329,254 3,717,627
Property, plant and equipment, net of accumulated
depreciation
(Note 3).................................................. 228,752,910 222,337,758
------------ ------------
Total assets...................................... $276,420,397 $257,818,469
============ ============
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable --
Related parties........................................ $ 4,945,839 $ 2,602,133
Other.................................................. 2,165,159 5,516,554
Crude oil payables --
Related parties........................................ 28,646,791 22,534,661
Other.................................................. 3,778,243 5,139,391
Other..................................................... 597,590 70,922
------------ ------------
Total current liabilities......................... 40,133,622 35,863,661
------------ ------------
Long-term debt (Note 4)..................................... 131,000,000 120,500,000
------------ ------------
Members' equity (Note 1):
Capital contributions..................................... 107,999,320 107,999,320
Capital distributions..................................... (36,699,320) (17,999,320)
Retained earnings......................................... 33,986,775 11,454,808
------------ ------------
Total members' equity............................. 105,286,775 101,454,808
------------ ------------
Total liabilities and members' equity............. $276,420,397 $257,818,469
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE> 100
POSEIDON OIL PIPELINE COMPANY, L.L.C.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE PERIOD FROM INCEPTION (FEBRUARY 14, 1996)
THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Crude oil sales................................. $ 370,431,640 $ 310,828,794 $ 176,849,075
Crude oil purchases............................. (325,909,477) (284,667,502) (169,030,526)
------------- ------------- -------------
Net sales revenue..................... 44,522,163 26,161,292 7,818,549
------------- ------------- -------------
Operating costs:
Transportation costs.......................... 1,636,162 3,146,736 858,229
Operating expenses............................ 3,127,134 2,635,717 2,183,375
Depreciation.................................. 8,846,395 6,463,327 2,176,157
------------- ------------- -------------
Total operating costs................. 13,609,691 12,245,780 5,217,761
------------- ------------- -------------
Operating income................................ 30,912,472 13,915,512 2,600,788
Other income (expense):
Interest income............................... 290,745 208,961 339,452
Interest expense.............................. (8,671,250) (5,340,742) (269,163)
------------- ------------- -------------
Net income...................................... $ 22,531,967 $ 8,783,731 $ 2,671,077
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 101
POSEIDON OIL PIPELINE COMPANY, L.L.C.
STATEMENTS OF MEMBERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE PERIOD FROM INCEPTION (FEBRUARY 14, 1996)
THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
POSEIDON
MARATHON PIPELINE TEXACO
OIL COMPANY, TRADING AND
COMPANY L.L.C. TRANSPORTATION, INC.
(28%) (36%) (36%) TOTAL
----------- ----------- -------------------- ------------
<S> <C> <C> <C> <C>
Balance, February 14, 1996.......... $ -- $ -- $ -- $ --
Cash contributions................ 5,200,000 -- 36,399,660 41,599,660
Property contributions............ 20,000,000 36,399,660 10,000,000 66,399,660
Cash distributions................ -- (3,999,660) (13,999,660) (17,999,320)
Net income........................ 747,901 961,588 961,588 2,671,077
----------- ----------- ------------ ------------
Balance, December 31, 1996.......... 25,947,901 33,361,588 33,361,588 92,671,077
Net income........................ 2,459,445 3,162,143 3,162,143 8,783,731
----------- ----------- ------------ ------------
Balance, December 31, 1997.......... 28,407,346 36,523,731 36,523,731 101,454,808
Net income........................ 6,308,951 8,111,508 8,111,508 22,531,967
Cash distributions................ (5,236,000) (6,732,000) (6,732,000) (18,700,000)
----------- ----------- ------------ ------------
Balance, December 31, 1998.......... $29,480,297 $37,903,239 $ 37,903,239 $105,286,775
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 102
POSEIDON OIL PIPELINE COMPANY, L.L.C.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE PERIOD FROM INCEPTION (FEBRUARY 14, 1996)
THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $22,531,967 $ 8,783,731 $ 2,671,077
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation.................................. 8,846,395 6,463,327 2,176,157
Changes in operating assets and liabilities --
Crude oil receivables....................... (11,350,080) 2,509,382 (31,555,078)
Materials, supplies and other............... 23,487 (952,294) (93,643)
Accounts payable............................ (1,007,689) 5,939,637 2,179,050
Crude oil payables.......................... 4,750,982 (8,098,087) 35,772,139
Other current liabilities................... 526,668 (16,110) 87,032
----------- ------------ -------------
Net cash provided by operating
activities............................. 24,321,730 14,629,586 11,236,734
----------- ------------ -------------
Cash flows from investing activities:
Capital expenditures............................. (15,261,547) (54,024,948) (110,698,884)
Construction advances to operator, net........... (1,234,467) 7,407,710 (7,407,710)
Proceeds from the sale of property, plant and
equipment..................................... -- 146,250 --
----------- ------------ -------------
Net cash used in investing activities.... (16,496,014) (46,470,988) (118,106,594)
----------- ------------ -------------
Cash flows from financing activities:
Proceeds from issuance of debt................... 32,000,000 38,000,000 107,000,000
Cash contributions............................... -- -- 41,599,660
Repayments of long-term debt..................... (21,500,000) (1,500,000) (23,000,000)
Cash distributions............................... (18,700,000) -- (17,999,320)
Increase in debt reserve fund.................... (611,627) (3,717,627) --
----------- ------------ -------------
Net cash provided by financing
activities............................. (8,811,627) 32,782,373 107,600,340
----------- ------------ -------------
Increase in cash and cash equivalents.............. (985,911) 940,971 730,480
Cash and cash equivalents, beginning of year....... 1,671,451 730,480 --
----------- ------------ -------------
Cash and cash equivalents, end of year............. $ 685,540 $ 1,671,451 $ 730,480
=========== ============ =============
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts
capitalized................................... $ 8,596,583 $ 5,342,217 $ 205,713
=========== ============ =============
Supplemental disclosure of noncash financing
activities:
Initial Poseidon property contribution........... $ -- $ -- $ 36,399,660
=========== ============ =============
Block 873 Pipeline property contribution......... $ -- $ -- $ 30,000,000
=========== ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE> 103
POSEIDON OIL PIPELINE COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 -- ORGANIZATION AND NATURE OF BUSINESS
Poseidon Oil Pipeline Company, L.L.C. (the Company), is a Delaware limited
liability company formed on February 14, 1996, to design, construct, own and
operate the unregulated Poseidon Pipeline extending from the Gulf of Mexico to
onshore Louisiana. The original members of the Company were Texaco Trading and
Transportation, Inc. (TTTI), and Poseidon Pipeline Company, L.L.C. (Poseidon), a
subsidiary of Leviathan Gas Pipeline Partners, L.P. TTTI contributed $36,399,660
in cash, and Poseidon contributed property, plant and equipment, valued by the
two parties (TTTI and Poseidon) at $36,399,660, at the formation of the Company.
Each member received a 50 percent ownership interest in the Company.
Subsequently, $2,799,320 in cash was equally distributed to TTTI and Poseidon,
leaving $70 million of equity in the Company as of April 23, 1996.
On July 1, 1996, Marathon Pipeline Company (MPLC) and Texaco Pipeline, Inc.
(TPLI), through their 66 2/3 percent and 33 1/3 percent respectively owned
venture, Block 873 Pipeline Company (Block 873), contributed property, plant and
equipment valued by the parties (Block 873, TTTI and Poseidon) at $30,000,000.
In return, they received a 33 1/3 percent interest in the Company. Immediately
after the contribution, MPLC and TPLI transferred their pro rata ownership
interests in the Company to Marathon Oil Company (Marathon) and TTTI,
respectively. Marathon then contributed an additional $5.2 million in cash, and
distributions of $12.6 million and $2.6 million in cash were made to TTTI and
Poseidon, respectively. Upon completion of this transaction, TTTI, Poseidon and
Marathon owned 36 percent, 36 percent and 28 percent of the Company,
respectively, and total equity was $90,000,000.
The Company purchased crude oil line-fill and began operating Phase I of
the pipeline in April 1996. Phase I consists of 16-inch and 20-inch sections of
pipe extending from the Garden Banks Block 72 to Ship Shoal Block 332. Phase II
of the pipeline is a 24-inch section of pipe from Ship Shoal Block 332 to
Caillou Island. Line-fill was purchased for Phase II in late December 1996 and
operations began in January 1997. Construction of Phase III of the pipeline
consisting of a section of 24-inch line extending from Caillou Island to the
Houma, Louisiana, area was completed during 1997, and operations began in
December 1997.
The Company is in the business of transporting crude oil in the Gulf of
Mexico in accordance with various purchase and sale contracts with producers
served by the pipeline. The Company buys crude oil at various points along the
pipeline and resells the crude oil at a destination point in accordance with
each individual contract. Net sales revenue is earned based upon the
differential between the sale price and purchase price. Differences between
purchased and sold volumes in any period are recorded as changes in line-fill.
Effective January 1, 1998, Shell Oil Company and Texaco Inc. (Texaco)
formed Equilon Enterprises LLC (Equilon). Equilon is a joint venture which
combines both companies' western and midwestern U.S. refining and marketing
businesses and both companies' nationwide trading, transportation and lubricants
businesses. Under the formation agreement, Shell Oil Company and Texaco
assigned, or caused to be assigned, the economic benefits and detriments of
certain regulated and unregulated pipeline assets, including TTTI's beneficial
interest in the Company. As a result of the joint venture, Equilon became
operator of the Company on January 1, 1998.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles.
F-55
<PAGE> 104
POSEIDON OIL PIPELINE COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Property, Plant and Equipment
Contributed property, plant and equipment is recorded at fair value as
agreed to by the members at the date of contribution. Acquired property, plant
and equipment is recorded at cost. Pipeline equipment is depreciated using a
composite, straight-line method over estimated useful lives of three to 30
years. Line-fill is not depreciated as management of the Company believes the
cost of all barrels is fully recoverable. Major renewals and betterments are
capitalized in the property accounts while maintenance and repairs are expensed
as incurred. No gain or loss is recognized on normal asset retirements under the
composite method.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Debt Reserve Fund
In connection with the Company's revolving credit facility (see Note 4),
the Company is required to maintain a debt reserve account as security on the
outstanding balance. At December 31, 1998, the balance in the account totaled
$4,329,254 and was comprised of funds earning interest at a money market rate.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
short-term receivables, payables and long-term debt. The carrying values of cash
and cash equivalents, short-term receivables and payables approximate fair
value. The fair value for long-term debt is estimated based on current rates
available for similar debt with similar maturities and securities and, at
December 31, 1998, approximates the carrying value.
NOTE 3 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Rights-of-way............................................ $ 3,218,788 $ 3,218,788
Line-fill................................................ 11,350,466 11,160,410
Line pipe, line pipe fittings and pipeline
construction........................................... 223,076,191 206,041,256
Pumping and station equipment............................ 4,613,516 4,584,563
Office furniture, vehicles and other equipment........... 83,812 67,609
Construction work in progress............................ 3,896,016 5,904,616
------------ ------------
246,238,789 230,977,242
Less -- Accumulated depreciation......................... (17,485,879) (8,639,484)
------------ ------------
$228,752,910 $222,337,758
============ ============
</TABLE>
F-56
<PAGE> 105
POSEIDON OIL PIPELINE COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Management evaluates the carrying value of the pipeline in accordance with
the guidelines presented under Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 establishes standards for
measuring the impairment of long-lived assets to be held and used and of those
to be disposed. Management believes no impairment of assets exists as of
December 31, 1998.
During 1998 and 1997, the Company capitalized approximately $-- and
$2,151,000, respectively, of interest cost into property, plant and equipment.
NOTE 4 -- DEBT
The Company maintains a $150,000,000 revolving credit facility with a group
of banks. The outstanding balance at December 31, 1998, is $131,000,000. Under
the terms of the related credit agreement, the Company has the option to either
draw or renew amounts at various maturities ranging from one to 12 months if a
Eurodollar interest rate arrangement is selected (6.875 percent to 6.9375
percent at December 31, 1998). These borrowings can then be renewed assuming no
event of default exists. Alternatively, the Company may select to borrow under a
base interest rate arrangement, calculated in accordance with the credit
agreement. The revolving credit facility matures on April 30, 2001.
At December 31, 1998, the entire outstanding balance had been borrowed
under the Eurodollar alternative, and it is the Company's intent to extend
repayment beyond one year, thus the entire balance has been classified as
long-term.
The debt is secured by various assets of the Company including accounts
receivable, inventory, pipeline equipment and investments. The Company has used
the funds drawn on the revolver primarily for construction costs associated with
Phases II and III of the pipeline.
The revolving credit agreement requires the Company to meet certain
financial and nonfinancial covenants. The Company must maintain a tangible net
worth, calculated in accordance with the credit agreement, of not less than
$80,000,000. Beginning April 1, 1997, the Company is required to maintain a
ratio of earnings before interest, taxes, depreciation and amortization to
interest paid or accrued, as calculated in accordance with the credit agreement,
of 2.50 to 1.00. In addition, the Company is required to maintain a debt reserve
fund (see Note 2) with a balance equal to two times the interest payments made
in the previous quarter under the credit facility.
NOTE 5 -- INCOME TAXES
A provision for income taxes has not been recorded in the accompanying
financial statements because such taxes accrue directly to the members. The
federal and state income tax returns of the Company are prepared and filed by
the operator.
NOTE 6 -- TRANSACTIONS WITH RELATED PARTIES
The Company derives a significant portion of its gross sales and gross
purchases from its members and other related parties. The Company generated
approximately $263,872,000 in gross affiliated sales and approximately
$226,184,000 in gross affiliated purchases for 1998. During 1997 and 1996, the
Company generated approximately $19,790,000 and $4,086,000 of net sales revenue
from related parties.
The Company paid approximately $558,000 to Equilon in 1998 and $454,000 and
$401,000 to TTTI in 1997 and 1996, respectively, for management, administrative
and general overhead. In 1998, 1997 and 1996, the Company paid construction
management fees of $2,133,507, $1,091,000 and $2,364,000, respectively, to
Equilon in connection with the completion of Phase II and Phase III. As of
December 31, 1998 and 1997, the
F-57
<PAGE> 106
POSEIDON OIL PIPELINE COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company had outstanding advances to Equilon of approximately $1,234,000 and $--,
respectively, in connection with construction work in progress.
NOTE 7 -- CONTINGENCIES
In the normal course of business, the Company is involved in various legal
actions arising from its operations. In the opinion of management, the outcome
of these legal actions will not significantly affect the financial position or
results of operations of the Company.
F-58
<PAGE> 107
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Members
of Neptune Pipeline Company, L.L.C.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of members' capital and of cash flows present
fairly, in all material respects, the financial position of Neptune Pipeline
Company, L.L.C. at December 31, 1998 and 1997, and the result of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Houston, Texas
March 11, 1999
F-59
<PAGE> 108
NEPTUNE PIPELINE COMPANY, L.L.C.
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,016,841 $ 18,531,456
Transportation receivable................................. 1,279,405 764,008
Owing from related parties................................ 2,880,664 11,974,091
Other receivable.......................................... 104,756 89,821
------------ ------------
Total current assets.............................. 10,281,666 31,359,376
Pipelines and equipment..................................... 261,104,113 249,861,312
Less: accumulated depreciation............................ 12,204,577 2,056,246
------------ ------------
248,899,536 247,805,066
Long-term receivable........................................ 160,000 --
------------ ------------
Total assets...................................... $259,341,202 $279,164,442
============ ============
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 964,761 $ 2,001,863
Owing to related parties.................................. 4,784,102 32,779,237
Deferred income........................................... -- 20,478
------------ ------------
Total current liabilities......................... 5,748,863 34,801,578
Minority interest........................................... 1,872,959 1,778,740
Members' equity............................................. 251,719,380 242,584,124
------------ ------------
Total liabilities and members' equity............. $259,341,202 $279,164,442
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-60
<PAGE> 109
NEPTUNE PIPELINE COMPANY, L.L.C.
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Operating income:
Transportation revenue.................................... $16,172,659 $6,317,728
Other gas revenue......................................... 180,236 --
----------- ----------
Total revenues.................................... 16,352,895 6,317,728
Operating expenses:
Operating & maintenance................................... 3,575,712 1,693,978
Administrative & general.................................. 1,455,240 992,520
Depreciation.............................................. 10,148,332 2,056,246
Property taxes............................................ 326,332 --
----------- ----------
Total operating expenses.......................... 15,505,616 4,742,744
Net operating income........................................ 847,279 1,574,984
Other income (expense)
Other expense.......................................... (150,100) --
Interest income........................................ 385,123 362,142
Allowance for funds used during construction........... -- 6,430,641
----------- ----------
Total other income, net........................... 235,023 6,792,783
Net income before minority interest......................... 1,082,302 8,367,767
Minority interest in income of subsidiaries............... 11,026 81,736
----------- ----------
Net income.................................................. $ 1,071,276 $8,286,031
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-61
<PAGE> 110
NEPTUNE PIPELINE COMPANY, L.L.C.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 1,071,276 $ 8,286,031
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation........................................... 10,148,332 2,056,246
Allowance for funds used during construction........... -- (6,430,641)
Minority interest in income of subsidiaries............ 11,026 81,736
(Increases) decreases in working capital:
Transportation receivables............................. (515,397) (764,008)
Owing from related parties............................. 9,093,427 (11,974,091)
Other receivable....................................... 25,065 (89,503)
Accounts payable....................................... (1,037,102) 2,001,863
Owing to related parties............................... (30,791,136) 32,779,237
Deferred income........................................ (20,478) (54,522)
------------ -------------
Net cash provided by (used for) operating
activities...................................... (12,014,987) 25,892,348
------------ -------------
Cash flows used for investing activities:
Capital expenditures...................................... (9,252,950) (179,087,955)
Proceeds from property sales and salvage.................. 187,149 --
Contributions in aid of construction...................... 419,000 --
------------ -------------
Net cash used for investing activities............ (8,646,801) (179,087,955)
------------ -------------
Cash flows provided by financing activities:
Members' contributed capital.............................. 13,985,491 172,512,990
Minority interest contributed capital..................... 83,193 1,696,980
Distributions............................................. (5,921,511) (2,560,000)
------------ -------------
Net cash provided by financing activities......... 8,147,173 171,649,970
------------ -------------
Increase (decrease) in cash and cash equivalents............ $(12,514,615) $ 18,454,363
============ =============
Reconciliation of beginning and ending balances
Cash and cash equivalents -- beginning of year............ $ 18,531,456 $ 77,093
Increase (decrease) in cash and cash equivalents.......... (12,514,615) 18,454,363
------------ -------------
Cash and cash equivalents -- end of year.................... $ 6,016,841 $ 18,531,456
============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-62
<PAGE> 111
NEPTUNE PIPELINE COMPANY, L.L.C.
STATEMENT OF MEMBERS' CAPITAL
AS OF DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
TEJAS OFFSHORE
PIPELINE LLC/ MARATHON GAS SAILFISH
SHELL SEAHORSE TRANSMISSION PIPELINE
COMPANY INC. COMPANY LLC TOTAL
-------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Capital account balances at December
31, 1996............................ $ 1,194 $ 581 $ 612 $ 2,387
Members' contributions................ 115,473,693 56,659,297 380,000 172,512,990
Contributed assets.................... 4,100,000 -- 60,242,716 64,342,716
Net income............................ 3,433,401 1,328,264 3,524,366 8,286,031
Distributions......................... -- -- (2,560,000) (2,560,000)
------------ ----------- ----------- ------------
Capital account balances at December
31, 1997............................ 123,008,288 57,988,142 61,587,694 242,584,124
Members' contributions................ 5,369,182 3,524,321 5,091,988 13,985,491
Net income............................ 585,317 236,169 249,790 1,071,276
Distributions......................... (3,358,512) (1,246,864) (1,316,135) (5,921,511)
------------ ----------- ----------- ------------
Capital account balances at December
31, 1998............................ $125,604,275 $60,501,768 $65,613,337 $251,719,380
============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-63
<PAGE> 112
NEPTUNE PIPELINE COMPANY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 -- ORGANIZATION AND CONTROL
Neptune Pipeline Company, L.L.C. (Neptune) owns a 99% member interest in
Manta Ray Offshore Gathering Company, L.L.C. (Manta Ray) and Nautilus Pipeline
Company, L.L.C. (Nautilus). Neptune is owned as follows: Tejas Offshore
Pipeline, LLC (Tejas), an affiliate of Shell Oil Company owns a 49.9% member
interest; Shell Seahorse Company (Shell Seahorse), an affiliate of Shell Oil
Company owns a 0.1% member interest; Marathon Gas Transmission Inc. (Marathon)
owns a 24.33% member interest; Sailfish Pipeline Company, L.L.C. (Sailfish) owns
a 25.67% member interest.
Tejas acquired its 49.9% interest from Shell Seahorse on February 2, 1998.
Agreements between the member companies address the allocation of income
and capital contributions and distributions amongst the respective members'
capital accounts. As a result of these agreements, the ratio of members' equity
accounts per the Statement of Members' Capital differs from the members'
ownership interests in Neptune.
Neptune was formed to acquire, construct, own and operate through Manta Ray
and Nautilus, the Manta Ray System and the Nautilus System and any other natural
gas pipeline systems approved by the members. As of December 31, 1998 the Manta
Ray System and the Nautilus System are the only pipelines owned by Manta Ray and
Nautilus, respectively.
The formation of Manta Ray was accomplished through cash and fixed asset
contributions from the member companies. Fixed asset contributions, which
accounted for approximately 50% of all contributions, consisted of the Manta Ray
System and various compressor equipment (contributed by Sailfish) and the
Boxer-Bullwinkle System (contributed by Shell Seahorse). Because both cash and
fixed assets were contributed, the Manta Ray System and related compressor
equipment and the Boxer-Bullwinkle System were recorded at $64,342,716, which
represented their fair value on the date of contribution.
The Manta Ray System consists of a 169 mile gathering system located in the
South Timbalier and Ship Shoal areas of the Gulf of Mexico. An additional
segment, 47 miles of 24 inch pipeline and associated facilities, extending from
Green Canyon Block 65, offshore Louisiana, to Ship Shoal Block 207, offshore
Louisiana, was constructed during 1997 and first provided natural gas
transportation service on December 15, 1997. This newly constructed pipeline is
referred to as Phase II Facilities elsewhere in these notes.
The Nautilus System consists of a 30-inch natural gas pipeline and
appurtenant facilities extending approximately 101 miles from Ship Shoal Block
207, offshore Louisiana, to six delivery point interconnects near the outlet of
Exxon Company, U.S.A.'s Garden City Gas Processing Plant in St. Mary Parish,
Louisiana. The Nautilus System was constructed during 1997 and first provided
natural gas transportation service on December 15, 1997.
Neptune, Manta Ray and Nautilus (collectively referred to as the Companies)
have no employees and receive all administrative and operating support through
contractual arrangements with affiliated companies. These services and
agreements are outlined in Note 3, Related Party Transactions.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Neptune and
its subsidiaries. All intercompany transactions and balances have been
eliminated in consolidation.
F-64
<PAGE> 113
NEPTUNE PIPELINE COMPANY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Regulation
Nautilus, as an interstate pipeline, is subject to regulation by the
Federal Energy Regulatory Commission (FERC). Nautilus has accounting policies
that conform to generally accepted accounting principles, as applied to
regulated enterprises and are in accordance with the accounting requirements and
ratemaking practices of the FERC.
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Pipelines and Equipment
Newly constructed pipelines are recorded at historical cost. Regulated
pipelines and equipment includes an Allowance for Funds Used During Construction
(AFUDC). The rates used in the calculation of AFUDC are determined in accordance
with guidelines established by FERC. The Manta Ray pipeline and related
facilities are depreciated on a straight-line basis over their estimated useful
life of 30 years, while the Nautilus pipeline and related facilities are
depreciated on a straight line basis over their estimated useful life of 20
years. Maintenance and repair costs are expensed as incurred while additions,
improvements and replacements are capitalized.
Income Taxes
Neptune is treated as a tax partnership under the provisions of the
Internal Revenue Code. Accordingly, the accompanying financial statements do not
reflect a provision for income taxes since Neptune's results of operations and
related credits and deductions will be passed through to and taken into account
by its partners in computing their respective tax liabilities.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
requires recognition of impairment losses on long-lived assets if the carrying
amount of such assets, grouped at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows from
other assets, exceeds the estimated undiscounted future cash flows of such
assets. Measurement of any impairment loss is based on the fair value of the
asset. At December 31, 1998 and 1997, there were no impairments.
Revenue Recognition
Revenue from Manta Ray's and Nautilus' transportation of natural gas is
recognized upon receipt of natural gas into the pipeline systems.
In the course of providing transportation services to customers, Nautilus
and Manta Ray may receive different quantities of gas from shippers than the
quantities delivered on behalf of those shippers. These transactions result in
imbalances which are settled in cash on a monthly basis. In addition, certain
imbalances may occur with interconnecting facilities when the Companies deliver
more or less than what is nominated (scheduled). The settlement of these
imbalances is governed by Operational Balancing Agreements (OBA). Certain OBAs
stipulate that settlement will occur through delivery of physical quantities in
subsequent months. The Companies record the net of all imbalances as
Transportation Revenue or Other Revenue and carry the net position as a payable
or a receivable, as appropriate.
F-65
<PAGE> 114
NEPTUNE PIPELINE COMPANY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The reported amounts of financial instruments such as cash and cash
equivalents, receivables, and current liabilities approximate fair value because
of their maturities.
Use of Estimates and Significant Risks
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the financial
statements and the related reported amounts of revenue and expenses during the
reporting period. Such estimates and assumptions include those made in areas of
FERC regulations, fair value of financial instruments, future cash flows
associated with assets, useful lives for depreciation and potential
environmental liabilities. Actual results could differ from those estimates.
Management believes that the estimates are reasonable.
Development and production of natural gas in the service area of the
pipelines are subject to, among other factors, prices for natural gas and
federal and state energy policy, none of which are within the Companies'
control.
Reclassification
Certain prior period amounts in the financial statements and notes thereto
have been reclassified to conform with the current year presentation.
NOTE 3 -- RELATED PARTY TRANSACTIONS
Construction Management Agreements
On January 17, 1997, Nautilus entered into a Construction Management
Agreement (the Agreement) with Marathon under which Marathon agreed to construct
the Nautilus System. As of December 31, 1998 and 1997 respectively, Nautilus had
incurred $113,127,385, and $113,041,314 of costs under the Agreement. Of these
amounts, $309,238 and $2,665,922 were recorded as liabilities to affiliates at
December 31, 1998 and 1997, respectively.
On January 17, 1997, Manta Ray entered into a Construction Management
Agreement with Shell Seahorse under which Shell Seahorse agreed to construct the
Phase II Facilities. Also on January 17, 1997, Manta Ray entered into a
Construction Management Agreement with Marathon under which Marathon agreed to
construct a slug catcher. On August 1, 1998, Manta Ray entered into a
Construction Management Agreement with Marathon under which Marathon agreed to
construct condensate stabilization facilities. As of December 31, 1998 and 1997,
Manta Ray had incurred $83,388,913 and $64,016,789, respectively, under these
agreements. Of these amounts, $4,236,507 and $7,875,533 were recorded as
liabilities to affiliates at December 31, 1998 and 1997, respectively.
Transportation Services
During 1998, $3,881,667 of transportation revenues for Nautilus were
derived from related parties. During 1997, Nautilus derived substantially all of
its transportation revenue from transportation services provided under
agreements with Shell Offshore Incorporated (SOI) and Marathon Oil Company, both
of which are affiliates of Nautilus. All transactions were at rates pursuant to
the existing tariff. At December 31, 1998 and 1997 respectively, Nautilus had
affiliate receivables of $596,090 and $0 relating to transportation and gas
imbalances. At December 31, 1998 and 1997, respectively, Nautilus had affiliate
payables of $230,730 and $0 relating to transportation and gas imbalances.
F-66
<PAGE> 115
NEPTUNE PIPELINE COMPANY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1998, $4,902,613 of transportation revenues on Manta Ray were derived
from related parties. During 1997, Manta Ray derived substantially all of its
transportation revenue from transportation services provided under agreements
with third parties. All transactions were at negotiated rates. At December 31,
1998 and 1997 respectively, Manta Ray had receivables of $1,857,320 and $639,208
relating to transportation and gas imbalances.
At December 31, 1998, Manta Ray also had a receivable from Sailfish of
$297,348 relating to accumulated transportation and gas balancing activity
associated with the assets contributed by Sailfish.
Leases
Effective December 1, 1997, Manta Ray, as lessor, and Nautilus, as lessee,
entered into a lease agreement for usage of offshore platform space located at
Ship Shoal Block 207. The term of the lease is for the life of the platform,
subject to certain early termination conditions, and requires minimum lease
payments of $225,000 per year adjusted annually for inflation. The associated
lease revenue and expense have been eliminated in consolidation.
Operating and Administrative Expense
Since the Companies have no employees, operating, maintenance and general
and administrative services are provided to the Companies under service
agreements with Manta Ray Gathering Company, L.L.C., Marathon, and Shell
Seahorse, all of which are affiliates of the Companies. Substantially all
operating and administrative expenses were incurred through services provided
under these agreements.
Other Affiliate Transactions
During 1997, Manta Ray and Nautilus had various transactions relating to
construction with member companies or affiliates which resulted in affiliate
receivables of $11,337,218 and affiliate payables of $22,237,782.
Also included in Owing from Related Parties at December 31, 1998 is a
receivable from an affiliate for $129,698 relating to the sale of land during
the fourth quarter of 1998 by Nautilus. No gain or loss was recognized on the
sale.
NOTE 4 -- PIPELINES AND EQUIPMENT
Pipelines and equipment at December 31, 1998 and 1997 is comprised of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Pipelines and equipment..................................... $244,835 $242,194
Land........................................................ 1,107 1,237
AFUDC....................................................... 6,430 6,430
Construction in progress.................................... 8,732 --
-------- --------
Subtotal.......................................... 261,104 249,861
Accumulated depreciation.................................... 12,204 2,056
-------- --------
Total............................................. $248,900 $247,805
======== ========
</TABLE>
At December 31, 1997, included in pipelines and equipment is an accrued
estimate of costs incurred to date of $3,022,000. Actual costs incurred during
1998 relating to this accrual totaled $1,855,000. Pipelines and Equipment and
Owing to Related Parties have been adjusted in 1998.
F-67
<PAGE> 116
NEPTUNE PIPELINE COMPANY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1998, Nautilus entered into interconnection agreements with certain
other parties in which Nautilus agreed to construct interconnection facilities
whereby the parties agreed to contribute $619,000 as partial reimbursement for
construction costs. Nautilus was reimbursed $419,000 during 1998 and the
remaining balance will be paid monthly based on throughput. The receivable
balance at December 31, 1998 was $200,000, the current portion of which is
$40,000.
NOTE 5 -- REGULATORY MATTERS
The FERC has jurisdiction over the Nautilus System with respect to
transportation of gas, rates and charges, construction of new facilities,
extension or abandonment of service facilities, accounts and records,
depreciation and amortization policies and certain other matters.
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Companies are subject to various
laws and regulations. In the opinion of management, compliance with existing
laws and regulations will not materially affect the financial position, the
results of operations or cash flows of the Companies.
Various legal actions, which have arisen in the ordinary course of
business, are pending with respect to the assets of the Companies. Management
believes that the ultimate disposition of these actions, either individually or
in aggregate, will not have a material adverse effect on the financial position,
the results of operations or the cash flows of the Companies.
Pursuant to the terms of a construction agreement entered into in 1995,
Manta Ray agreed to pay liquidated damages to various parties if Manta Ray did
not complete an interconnect by May 31, 1998 between the Manta Ray System and
the system operated by Trunkline Gas Pipeline Company. Under the provision,
Manta Ray incurred $150,000 in 1998, which is recorded in Other Expense. Manta
Ray will be obligated to pay an additional $100,000 if the interconnect is not
completed by May 31, 1999 and $50,000 if the interconnect is not completed by
May 31, 2000.
F-68
<PAGE> 117
INDEX TO EXHIBITS
Each exhibit identified below is filed as a part of this Annual Report.
Exhibits included in this filing are designated by an asterisk; all exhibits not
so designated are incorporated herein by reference to a prior filing as
indicated. Exhibits designated with a "+" constitute a management contract or
compensatory plan or arrangement required to be filed as an exhibit to this
report pursuant to Item 14(c) of Form 10-K.
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
3.1 -- Certificate of Limited Partnership of Leviathan (filed as
Exhibit 3.1 to Leviathan's Registration Statement on Form
S-1, File No. 33-55642).
3.2 -- Amended and Restated Agreement of Limited Partnership of
Leviathan (filed as Exhibit 10.41 to Amendment No. 1 to
DeepTech's Registration Statement on Form S-1, File No.
33-73538); Amendment Number 1 to the Amended and Restated
Agreement of Limited Partnership of Leviathan (filed as
Exhibit 10.1 to Leviathan's Current Report on Form 8-K
dated December 31, 1996).
4.1 -- Form of Certificate Evidencing Preference Units
Representing Limited Partner Interests (filed as Exhibit
4.1 to Amendment No. 2 to Leviathan's Registration
Statement on Form S-1, File No. 33-55642).
4.2 -- Form of Certificate Evidencing Common Units Representing
Limited Partner Interests (filed as Exhibit 4.2 to
Amendment No. 2 to Leviathan's Registration Statement on
Form S-1, File No. 33-55642).
10.1 -- First Amended and Restated Management Agreement, dated
June 27, 1994 and effective as of July 1, 1992, between
DeepTech and the General Partner (filed as Exhibit 10.1
to DeepTech's Form 10-K for 1994, File No. 0-23934).
10.2* -- Sixth Amendment to First Amended and Restated Management
Agreement between DeepTech and the General Partner.
10.3 -- Second Amended and Restated Credit Agreement dated
December 13, 1996 among Leviathan, The Chase Manhattan
Bank, as administrative agent, ING (U.S.) Capital
Corporation, as co-arranger, and the banks and other
financial institutions from time to time party thereto
(filed as exhibit 10.24 to Leviathan's Form 10-K for
1996); First Amendment to Second Amended and Restated
Credit Agreement dated December 13, 1996 among Leviathan,
Several Lenders, The Chase Manhattan Bank, as
Administrative Agent, and ING (U.S.) Capital Corporation,
as Co-Arranger (filed as Exhibit 10.1 to Leviathan's Form
10-Q for the quarterly period ended March 31, 1998;
Second Amendment to Second Amended and Restated Credit
Agreement dated December 13, 1996 among Leviathan,
Several Lenders, The Chase Manhattan Bank, as
Administrative Agent, and ING (U.S.) Capital Corporation,
as Co-Arranger (filed as Exhibit 10.2 to Leviathan's Form
10-Q for the quarterly period ended March 31, 1998);
Amendment No. 3 dated as of August 12, 1998, to the
Second Amended and Restated Credit Agreement, dated as of
March 23, 1995, as amended and restated through December
13, 1996, among Leviathan Gas Pipeline Partners, L.P., a
Delaware limited partnership, the banks and other
financial institutions (the "Lenders"), The Chase
Manhattan Bank, a New York banking corporation, as
administrative agent, and ING (U.S.) Capital Corporation,
a Delaware corporation, as co-arranger for the Lenders
(filed as Exhibit 10.3 to Leviathan's Form 10-Q for the
quarterly period ended September 30, 1998).
10.4* -- Amendment No. 4 dated as of January 29, 1999, to the
Second Amended and Restated Credit Agreement, dated as of
March 23, 1995, as amended and restated through December
13, 1996, among Leviathan Gas Pipeline Partners, L.P., a
Delaware limited partnership, the banks and other
financial institutions (the "Lenders"), The Chase
Manhattan Bank, a New York banking corporation, as
administrative agent, and ING (U.S.) Capital Corporation,
a Delaware corporation, as co-arranger for the Lenders.
</TABLE>
<PAGE> 118
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
10.5 -- Redemption Agreement dated February 27, 1998 between
Tatham Offshore, Inc. and Flextrend Development Company,
L.L.C., a subsidiary of Leviathan (filed as Exhibit 10.1
to Leviathan's Form 10-Q for the quarterly period ended
September 30, 1998).
10.6 -- Contribution Agreement between Leviathan and El Paso
Field Services Company (filed as Exhibit A to Leviathan's
Schedule 14A (Rule 14A-101) Proxy Statement effective
February 9, 1998).
10.7+ -- Leviathan 1998 Unit Option Plan for Non-Employee
Directors Effective as of August 14, 1998 (filed as
Exhibit 10.2 to Leviathan's Form 10-Q for the quarterly
period ended September 30, 1998).
10.8+ -- Leviathan Unit Rights Appreciation Plan (filed as Exhibit
10.25 to Leviathan's Form 10-K for 1996).
10.9*+ -- Leviathan 1998 Omnibus Compensation Plan, Amended and
Restated, Effective as of January 1, 1999.
21* -- List of Subsidiaries of Leviathan.
24 -- Power of Attorney (included on the signature pages of
this Annual Report on Form 10-K).
27* -- Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.2
SIXTH AMENDMENT TO
FIRST AMENDED AND RESTATED MANAGEMENT AGREEMENT
BETWEEN DEEPTECH INTERNATIONAL INC.
AND LEVIATHAN GAS PIPELINE COMPANY
This Sixth Amendment dated as of August 15, 1998 (this "Amendment") has
been executed and delivered by the undersigned for the purpose of amending 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
certain compensation and other provisions included in the Agreement.
NOW, THEREFORE, the Parties hereby amend the Agreement as follows:
1. Amendment of Subsection 3.1. Section 3.1 of the Agreement is hereby
amended by deleting it in its entirety and replacing it with the
following:
3.1 Fee. Prior to July 1, 1994, the annual compensation due DII from
LGPC for services provided pursuant to this Agreement shall
accrue in accordance with the original terms and conditions of
the Agreement prior to any amendments. On and as of July 1, 1994
through and including October 31, 1995, the annual compensation
(prorated for any portion of a year) due DII from LGPC for
services provided pursuant to this Agreement shall be (i) a base
fee of $2,000,000.00 plus (ii) 40% of DII's Unreimbursed
Overhead, if any. On and as of November 1, 1995 through and
including June 30, 1996, the annual compensation (prorated for
any portion of a year) due DII from LGPC for services provided
pursuant to this Agreement shall be 45.3% of DII's Overhead. On
and as of July 1, 1996 through and including June 30, 1997, the
annual compensation due DII from LGPC for services provided
pursuant to this Agreement shall be 54% of DII's Overhead. On and
as of July 1, 1997 through and including August 14, 1998, the
annual compensation (prorated for any portion of a year) due DII
from LGPC for services provided pursuant to this Agreement shall
be 52% of DII's Overhead. On and as of August 15, 1998 through
the term of this Agreement, the annual compensation (prorated for
any portion of a month) due DII from LGPC for services provided
pursuant to this Agreement shall be a fee of $775,000 per month.
1
<PAGE> 2
LGPC shall also promptly reimburse DII with respect to amounts incurred for
the direct benefit of LGPC.
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: /s/ Jeffrey I. Beason By: /s/ Grant E. Sims
- -------------------------------- --------------------------------
Jeffrey I. Beason Grant E. Sims
Vice President and Controller Chief Executive Officer
By: /s/ C. Dana Rice By: /s/ D. Mark Leland
- -------------------------------- --------------------------------
C. Dana Rice D. Mark Leland
Vice President and Treasurer Vice President and Controller
2
<PAGE> 1
EXHIBIT 10.4
AMENDMENT NO. 4
AMENDMENT NO. 4, dated as of January 29, 1999 (this "Amendment"), to
the Second Amended and Restated Credit Agreement, dated as of March 23, 1995, as
amended and restated through December 13, 1996 (as amended, supplemented or
otherwise modified prior to the date hereof, the "Credit Agreement"), among
LEVIATHAN GAS PIPELINE PARTNERS, L.P., a Delaware limited partnership (the
"Borrower"), the banks and other financial institutions (the "Lenders") parties
hereto, THE CHASE MANHATTAN BANK, a New York banking corporation, as
administrative agent (in such capacity, the "Administrative Agent") for the
Lenders and ING (U.S.) CAPITAL CORPORATION, a Delaware corporation, as
co-arranger for the Lenders (the "Co-Arranger").
W I T N E S S E T H:
WHEREAS, pursuant to the Credit Agreement, the Lenders have agreed to
make, and have made, extensions of credit to the Borrower; and
WHEREAS, the Borrower has requested that certain provisions of the
Credit Agreement be amended and waived in the manner provided for in this
Amendment; and
WHEREAS, the Administrative Agent, the Co-Arranger and the Required
Lenders are willing to agree to such amendments and waivers, but only on the
terms and subject to the conditions set forth in this Amendment;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the sufficiency of which is hereby acknowledged, the
Borrower, the Administrative Agent, the Co-Arranger and the Required Lenders
hereby agree as follows:
1. Definitions. Unless otherwise defined herein, terms defined in the
recitals to this Amendment have the meanings specified therein, and terms
defined in the Credit Agreement (including all amendments thereto) are used
herein as therein defined.
2. Amendments to Credit Agreement.
(a) Amendment to Recitals. The second "Whereas" clause in the
recitals is amended by adding immediately after the amount "$350,000,000" the
phrase "(subject to further increase as provided in subsection 2.9 hereof)".
(b) Amendment to Subsection 1.1. (a) Subsection 1.1 of the Credit
Agreement is amended by adding at the end of the definition of "Consolidated Net
Worth" the following sentence:
In calculating Consolidated Net Worth, any reductions thereto otherwise
required by ceiling test write downs relating to oil and gas reserves shall
be excluded.
<PAGE> 2
2
(b) Subsection 1.1 of the Credit Agreement is amended by adding to the
definition of "Revolving Credit Commitments" the phrase "or increased"
immediately after the word "reduced."
(c) Amendment to Section 2. Section 2 of the Credit Agreement is
amended by adding the following new subsection 2.9:
2.9 Increase in Revolving Credit Commitments. (a) The Borrower may
increase the aggregate Revolving Credit Commitments at any one time prior
to May 28, 1999 by notifying the Administrative Agent in writing of the
amount (the "Offered Increase Amount") of such proposed increase (such
notice, a "Commitment Increase Notice"). The Borrower shall offer one or
more of the Lenders the opportunity to participate in all or a portion of
the Offered Increase Amount pursuant to paragraph (b) below. Each
Commitment Increase Notice shall specify which Lenders the Borrower desires
to participate in such Revolving Credit Commitment increase. Any such
increase in the Revolving Credit Commitments shall become effective on the
dates specified in the Commitment Increase Agreements referred to in
paragraph (b) below.
(b) Any Lender which accepts an offer to it by the Borrower to
increase its Revolving Credit Commitment pursuant to subsection 2.9(a)
shall execute an agreement (a "Commitment Increase Agreement") with the
Borrower and the Administrative Agent, whereupon such Lender shall be bound
by and entitled to the benefits of this Agreement with respect to the full
amount of its Revolving Credit Commitment as so increased, and Schedule I
shall be deemed to be amended to so increase the Revolving Credit
Commitment and to reflect the resulting Commitment Percentages of the
respective Lenders after giving effect to such increase.
(c) Notwithstanding anything to the contrary in this subsection 2.9
(i) in no event shall any transaction effected pursuant to this subsection
2.9 cause the aggregate Revolving Credit Commitments hereunder to exceed
$375,000,000 and (ii) no Lender shall have any obligation to increase its
Revolving Credit Commitment unless it agrees to do so in its sole
discretion. The Borrower will execute and deliver to the Administrative
Agent a new Revolving Credit Note for each Lender which requests the same
in the amount of the Revolving Credit Commitment of such Lender after
giving effect to any increase in the Revolving Credit Commitments. Each
such Lender will return the existing Revolving Credit Note held by it to
the Administrative Agent.
(d) Amendment to Subsection 8.1. Subsection 8.1(a) of the Credit
Agreement is hereby amended by deleting the amount of "85,000,000" and
substituting therefor the amount of "60,000,000."
3. Waivers to Credit Agreement.
(a) It is the intention of the Borrower, the Administrative Agent, the
Co-Arranger and the Lenders that the provisions in the Credit Agreement relating
to the
<PAGE> 3
3
Incurrence Limitation not be effective from the Amendment Effective Date
through May 28, 1999. Each of the Administrative Agent, the Co-Arranger and the
Lenders hereby waives compliance by the Borrower with the requirements of
subsections 2.4, 3.1(a), 4.1(c) and 7.2(b)(ii)(y) during the period beginning
the Amendment Effective Date through and including May 28, 1999 to the extent
and only to the extent that such subsections relate to the Incurrence
Limitation. All provisions waived as a result of this paragraph shall become
binding once again as of May 29, 1999.
(b) Each of the Administrative Agent, the Co-Arranger and the Lenders
hereby waives compliance by the Borrower with the requirements of subsections
8.1(d) and 8.1(e) during the period beginning the Amendment Effective Date
through and including May 28, 1999.
4. Interest Rate. From the Amendment Effective Date through and including
May 28, 1999 the Applicable Margin for (a) Alternate Base Rate Loans shall be
1.00% and (b) Eurodollar Loans shall be 2.25%, notwithstanding the pricing grid
set forth in the definition of "Applicable Margin".
5. Commitment Fee. From the Amendment Effective Date through and including
May 28, 1999, the commitment fee under subsection 2.5 of the Credit Agreement
payable to each Lender shall be computed at the rate per annum equal to .50% on
the average daily amount of the Available Revolving Credit Commitment of such
Lender rather than at the Applicable Margin therefor as set forth under the
column heading "Commitment Fee".
6. Forms of Commitment Increase Notice and Commitment Increase Agreement.
The Commitment Increase Notice and Commitment Increase Agreement referred to in
subsection 2.9 of the Credit Agreement, as amended hereby, shall be
substantially in the form of Exhibits A and B hereto, respectively.
7. Conditions to Effectiveness. This Amendment shall become effective on
the date (the "Amendment Effective Date") on which all of the following
conditions precedent have been satisfied or waived:
(a) The Borrower, the Administrative Agent and the Required Lenders
shall have executed and delivered to the Administrative Agent this Amendment,
and the other Loan Parties shall have executed and delivered to the
Administrative Agent the attached Acknowledgment ("Acknowledgment") approving
this Amendment.
(b) The Administrative Agent shall have received from the Borrower (i)
for the account of each Lender which executes and delivers this Amendment on or
prior to the Amendment Effective Date, the fees associated with this Amendment
and (ii) for the account of the Administrative Agent and the Co-Arranger, such
additional fees as are separately agreed with the Borrower.
<PAGE> 4
4
(c) The Administrative Agent shall have received a certificate of each
of the Borrower, Leviathan and each Subsidiary of the Borrower which is a Loan
Party, dated the Amendment Effective Date, as to the incumbency and signature of
the officers of each such Person executing this Amendment and the
Acknowledgment, satisfactory in form and substance to the Administrative Agent,
executed by the Chief Executive Officer, Chief Operating Officer, Chief
Financial Officer, President, Treasurer or any Vice President and the Secretary
or any Assistant Secretary of each such Person.
(d) The Administrative Agent shall have received the executed legal
opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P., counsel to the Borrower
and the other Loan Parties, in form and substance reasonably satisfactory to the
Administrative Agent.
8. General.
(a) Representations and Warranties. After giving effect to the
effectiveness of this Amendment, the representations and warranties made by the
Loan Parties in the Loan Documents are true and correct in all material respects
on and as of the Amendment Effective Date (unless such representations or
warranties are stated to refer to a specific earlier date, in which case such
representations and warranties shall be true and correct in all material
respects as of such earlier date) as if made on and as of the Amendment
Effective Date and no Default or Event of Default will have occurred and be
continuing.
(b) Payment of Expenses. The Borrower agrees to pay or reimburse the
Administrative Agent for all of its out-of-pocket costs and reasonable expenses
incurred in connection with this Amendment, any other documents prepared in
connection herewith and the transactions contemplated hereby, including, without
limitation, the reasonable fees and disbursements of counsel to the
Administrative Agent.
(c) No Other Amendments; Confirmation. Except as expressly amended,
modified and supplemented hereby, the provisions of the Credit Agreement, the
Notes and the other Loan Documents are and shall remain in full force and
effect.
(d) Governing Law; Counterparts. (i) THIS AMENDMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
(ii) This Amendment may be executed by one or more of the parties to
this Amendment on any number of separate counterparts, and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
<PAGE> 5
5
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered as of the day and year first above written.
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
By /s/ KEITH FORMAN
-----------------------------------
Name: Keith Forman
Title: Chief Financial Officer
THE CHASE MANHATTAN BANK, as
Administrative Agent and Lender
By /s/ PETER M. LING
-----------------------------------
Name: Peter M. Ling
Title: Vice President
ING (U.S.) CAPITAL CORPORATION, as
Co-Arranger and Lender
By /s/ W.K. GRANT
-----------------------------------
Name: W.K. Grant
Title: Senior Vice President
DEN NORSKE BANK ASA
By /s/ MORTEN BJORNSEN
-----------------------------------
Name: Morten Bjornsen
Title: Senior Vice President
By /s/ BYRON L. COOLEY
-----------------------------------
Name: Byron L. Cooley
Title: Senior Vice President
WELLS FARGO BANK TEXAS, N.A.
By /s/ CHRISTINA FAITH
-----------------------------------
Name: Christina Faith
Title: Assistant Vice President
<PAGE> 6
6
MEESPIERSON CAPITAL CORP.
By /s/ DARREL W. HOLLEY
-----------------------------------
Name: Darrel W. Holley
Title: Senior Vice President
By /s/ KAREL LOUMAN
-----------------------------------
Name: Karel Louman
Title: Managing Director
BANK OF SCOTLAND
By /s/ ANNIE CHIN TAT
-----------------------------------
Name: Annie Chin Tat
Title: Senior Vice President
PARIBAS
By /s/ BARTON D. SCHOUEST
-----------------------------------
Name: Barton D. Schouest
Title: Managing Director
By /s/ DOUGLAS R. LIFTMAN
-----------------------------------
Name: Douglas R. Liftman
Title: Authorized Signatory
CREDIT LYONNAIS CAYMAN ISLAND BRANCH
By /s/ PHILIPPE SOUSTRA
-----------------------------------
Name: Philippe Soustra
Title: Authorized Signatory
FIRST UNION NATIONAL BANK
By /s/ ROBERT R. WETTEROFF
-----------------------------------
Name: Robert R. Wetteroff
Title: Senior Vice President
<PAGE> 7
7
ARAB BANKING CORPORATION (B.S.C.)
By /s/ STEPHEN A. PLAUCHE
-----------------------------------
Name: Stephen A. Plauche
Title: Vice President
CREDIT AGRICOLE INDOSUEZ
By /s/ JEAN YVES KLEIN
-----------------------------------
Name: Jean Yves Klein
Title: Executive Vice President
By /s/ GORDON JASON
-----------------------------------
Name: Gordon Jason
Title: First Vice President &
Deputy Chief Credit Officer
PNC BANK, NATIONAL ASSOCIATION
By /s/ JULIE QUAID
-----------------------------------
Name: Julie Quaid
Title: Assistant Vice President
THE BANK OF NOVA SCOTIA
By /s/ F.C.H. ASHBY
-----------------------------------
Name: F.C.H. Ashby
Title: Senior Manager
Loan Operations
HIBERNIA NATIONAL BANK
By /s/ GARY C. CULBERTSON
-----------------------------------
Name: Gary C. Culbertson
Title: Assistant Vice President
<PAGE> 8
ACKNOWLEDGMENT
Each undersigned guarantors hereby consents and agrees to the foregoing
Amendment and acknowledges and agrees that (i) all obligations of the Borrower
under the Credit Agreement, as amended by the foregoing Amendment, including all
obligations in respect any increase in the Revolving Credit Commitments and
extensions of credit thereunder, are Obligations which are secured and
guaranteed by the Security Documents to which it is a party, (ii) all references
to the Credit Agreement in the Security Documents refer to the Credit Agreement,
as amended from time to time (including pursuant to the foregoing Amendment) and
(iii) all references to Loans and Letters of Credit and Letters of Credit in the
Security Documents refer to the Loans and Letter of Credit under the Credit
Agreement, as amended by the foregoing Amendment, including the Loan made and
Letters of Credit issued under any increase in the Revolving Credit Commitments
effected pursuant to the Amendment.
LEVIATHAN GAS PIPELINE COMPANY
/s/ KEITH FORMAN
- ------------------------------------
Keith Forman
Chief Financial Officer
DELOS OFFSHORE COMPANY, L.L.C.
/s/ KEITH FORMAN
- ------------------------------------
Keith Forman
Chief Financial Officer
EWING BANK GATHERING COMPANY, L.L.C.
/s/ KEITH FORMAN
- ------------------------------------
Keith Forman
Chief Financial Officer
FLEXTREND DEVELOPMENT COMPANY, L.L.C.
/s/ KEITH FORMAN
- ------------------------------------
Keith Forman
Chief Financial Officer
GREEN CANYON PIPELINE COMPANY, L.L.C.
/s/ KEITH FORMAN
- -------------------------------------
Keith Forman
Chief Financial Officer
<PAGE> 9
LEVIATHAN OIL TRANSPORT SYSTEMS, L.L.C.
/s/ KEITH FORMAN
- -------------------------------------
Keith Forman
Chief Financial Officer
MANTA RAY GATHERING COMPANY, L.L.C.
/s/ KEITH FORMAN
- -------------------------------------
Keith Forman
Chief Financial Officer
POSEIDON PIPELINE COMPANY, L.L.C.
/s/ KEITH FORMAN
- -------------------------------------
Keith Forman
Chief Financial Officer
SAILFISH PIPELINE COMPANY, L.L.C.
/s/ KEITH FORMAN
- --------------------------------------
Keith Forman
Chief Financial Officer
STINGRAY HOLDING, L.L.C.
/s/ KEITH FORMAN
- ---------------------------------------
Keith Forman
Chief Financial Officer
TARPON TRANSMISSION COMPANY
/s/ KEITH FORMAN
- ----------------------------------------
Keith Forman
Chief Financial Officer
TRANSCO HYDROCARBONS COMPANY, L.L.C.
/s/ KEITH FORMAN
- -----------------------------------------
Keith Forman
Chief Financial Officer
<PAGE> 10
TEXAM OFFSHORE GAS TRANSMISSION, L.L.C.
/s/ KEITH FORMAN
- -----------------------------------------
Keith Forman
Chief Financial Officer
TRANSCO OFFSHORE PIPELINE COMPANY, L.L.C.
/s/ KEITH FORMAN
- ------------------------------------------
Keith Forman
Chief Financial Officer
VK DEEPWATER GATHERING COMPANY, L.L.C.
/s/ KEITH FORMAN
- ------------------------------------------
Keith Forman
Chief Financial Officer
VK-MAIN PASS GATHERING COMPANY, L.L.C.
/s/ KEITH FORMAN
- ------------------------------------------
Keith Forman
Chief Financial Officer
<PAGE> 1
EXHIBIT 10.9
LEVIATHAN GAS PIPELINE
PARTNERS, L.P.
1998 OMNIBUS COMPENSATION
PLAN
AMENDED AND RESTATED EFFECTIVE AS OF JANUARY 1, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
SECTION 1 PURPOSES........................................................1
SECTION 2 DEFINITIONS.....................................................1
2.1 Beneficiary.....................................................1
2.2 Board of Directors..............................................1
2.3 Cause...........................................................1
2.4 Code............................................................2
2.5 Common Units....................................................2
2.6 Company.........................................................2
2.7 Exchange Act....................................................2
2.8 Fair Market Value...............................................2
2.9 General Partner.................................................3
2.10 Management Committee............................................3
2.11 Maximum Annual Employee Grant...................................3
2.12 Participant.....................................................3
2.13 Performance Goals...............................................3
2.14 Performance Period..............................................3
2.15 Permanent Disability or Permanently Disabled....................3
2.16 Plan Administrator..............................................4
2.17 Restricted Unit.................................................4
2.18 Rule 16b-3......................................................4
2.19 Section 16 Insider..............................................4
2.20 Unit Option.....................................................4
2.21 Unit Option Price...............................................4
SECTION 3 ADMINISTRATION..................................................4
SECTION 4 ELIGIBILITY.....................................................5
SECTION 5 UNITS AVAILABLE FOR THE PLAN....................................5
SECTION 6 UNITS OPTIONS...................................................6
SECTION 7 UNITS APPRECIATION RIGHTS......................................11
SECTION 8 RESTRICTED UNITS...............................................12
SECTION 9 REGULATORY APPROVALS AND LISTING...............................14
SECTION 10 EFFECTIVE DATE AND TERM OF PLAN................................15
SECTION 11 GENERAL PROVISIONS.............................................15
SECTION 12 COMPLIANCE WITH SECTION 16.....................................17
SECTION 13 AMENDMENT, TERMINATION OR DISCONTINUANCE OF THE PLAN...........18
</TABLE>
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Leviathan Gas Pipeline Partners, L.P. i Table of Contents
1998 Omnibus Compensation Plan
<PAGE> 3
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
1998 OMNIBUS COMPENSATION PLAN
AMENDED AND RESTATED EFFECTIVE AS OF JANUARY 1, 1999
SECTION 1 PURPOSES
The purposes of the Leviathan Gas Pipeline Partners, L.P. 1998 Omnibus
Compensation Plan, (the "Plan") are to promote the interests of Leviathan Gas
Pipeline Partners, L.P., a Delaware limited partnership (the "Company") and its
unitholders by strengthening its ability to attract and retain officers and key
management employees ("key management employees" means those employees who hold
the position of department director) in the employ of the Company, the General
Partner (as defined below) or their affiliates by furnishing suitable
recognition of their ability and industry which contributed materially to the
success of the Company and to align the interests and efforts of the Company's
and General Partner's officers and key management employees to the long-term
interests of the Company's unitholders. The Plan provides for the grant of unit
options, unit appreciation rights and restricted units in accordance with the
terms and conditions set forth below.
SECTION 2 DEFINITIONS
Unless otherwise required by the context, the following terms when used in
the Plan shall have the meanings set forth in this Section 2:
2.1 BENEFICIARY
The person or persons designated by the Participant pursuant to Section
6.2(f) of this Plan to whom payments are to be paid pursuant to the terms of the
Plan in the event of the Participant's death.
2.2 BOARD OF DIRECTORS
The Board of Directors of the General Partner.
2.3 CAUSE
The Company may terminate the Participant's employment for Cause. A
termination for Cause is a termination evidenced by a resolution adopted in good
faith by two-thirds (2/3) of the Board of Directors that the Participant (i)
willfully and continually failed to substantially perform the Participant's
duties with the Company (other than a failure resulting from the Participant's
incapacity due to physical or mental illness) which failure continued for a
period of at least thirty (30) days after a written notice of demand for
substantial performance had been delivered to the Participant specifying the
manner in which the Participant has failed to substantially perform or (ii)
willfully engaged in
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Leviathan Gas Pipeline Partners, L.P. Page 1
1998 Omnibus Compensation Plan
<PAGE> 4
conduct which is demonstrably and materially injurious to the Company,
monetarily or otherwise; provided, however, that no termination of the
Participant's employment shall be for Cause as set forth in clause (ii) above
until (A) there shall have been delivered to the Participant a copy of a written
notice setting forth that the Participant was guilty of the conduct set forth in
clause (ii) above and specifying the particulars thereof in detail and (B) the
Participant shall have been provided an opportunity to be heard by the Board of
Directors (with the assistance of the Participant's counsel if the Participant
so desires). No act, nor failure to act, on the Participant's part shall be
considered "willful" unless the Participant has acted, or failed to act, with an
absence of good faith and without a reasonable belief that the Participant's
action or failure to act was in the best interest of the Company.
Notwithstanding anything contained in the Plan to the contrary, no failure to
perform by the Participant after notice of termination is given by the
Participant shall constitute Cause.
2.4 CODE
The Internal Revenue Code of 1986, as amended and in effect from time to
time, and the temporary or final regulations of the Secretary of the U.S.
Treasury adopted pursuant thereto.
2.5 COMMON UNITS
The Common Units of the Company, as defined and described in the Amended
and Restated Agreement of Limited Partnership of the Company, dated February 19,
1993, as amended from time to time.
2.6 COMPANY
Leviathan Gas Pipeline Partners, L.P., a Delaware limited partnership, and
any successor in interest.
2.7 EXCHANGE ACT
The Securities Exchange Act of 1934, as amended.
2.8 FAIR MARKET VALUE
As applied to a specific date, Fair Market Value shall be deemed to be the
mean between the highest and lowest quoted selling prices at which Common Units
are sold on such date as reported in the New York Stock Exchange
("NYSE")-Composite Transactions by The Wall Street Journal for such date, or if
no Common Units were traded on such date, on the next preceding day on which
Common Units were so traded.
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Leviathan Gas Pipeline Partners, L.P. Page 2
1998 Omnibus Compensation Plan
<PAGE> 5
2.9 GENERAL PARTNER
General Partner means Leviathan Gas Pipeline Company, a Delaware
corporation and the general partner of the Company.
2.10 MANAGEMENT COMMITTEE
A committee consisting of the Chairman of the Board of the General Partner
and such other senior officers as the Chairman of the Board shall designate.
2.11 MAXIMUM ANNUAL EMPLOYEE GRANT
The Maximum Annual Employee Grant set forth in Section 5.3.
2.12 PARTICIPANT
An eligible employee to whom a unit option, unit appreciation right or
Restricted Unit is granted under the Plan as set forth in Section 4.
2.13 PERFORMANCE GOALS
The Plan Administrator shall establish, in writing, one or more performance
goals ("Performance Goals") for each Performance Period. Such Performance Goals
shall be set no later than the commencement of the applicable Performance
Period, or such later date as may be permitted with respect to
"performance-based" compensation under Section 162(m) of the Code.
2.14 PERFORMANCE PERIOD
That period of time during which Performance Goals are measured to
determine the vesting or granting of unit options, unit appreciation rights or
Restricted Units, as the Plan Administrator may determine.
2.15 PERMANENT DISABILITY OR PERMANENTLY DISABLED
A Participant shall be deemed to have become Permanently Disabled for
purposes of the Plan if the Chairman of the Board of the General Partner shall
find upon the basis of medical evidence satisfactory to the Chairman of the
Board that the Participant is totally disabled, whether due to physical or
mental condition, so as to be prevented from engaging in further employment by
the Company, the General Partner or any of their affiliates, and that such
disability will be permanent and continuous during the remainder of the
Participant's lifetime; provided, that with respect to Section 16 Insiders such
determination shall be made by the Plan Administrator.
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Leviathan Gas Pipeline Partners, L.P. Page 3
1998 Omnibus Compensation Plan
<PAGE> 6
2.16 PLAN ADMINISTRATOR
The Compensation Committee of the Board of Directors or any other committee
appointed and/or authorized pursuant to Section 3 to administer the Plan,
including the Management Committee.
2.17 RESTRICTED UNIT
A Common Unit granted under the Plan that is subject to the requirements of
Section 8 and such other restrictions as the Plan Administrator deems
appropriate. References to a Restricted Unit in this Plan shall include a
Performance Restricted Unit (as defined in Section 5.2) unless the context
otherwise requires.
2.18 RULE 16B-3
Rule 16b-3 of the General Rules and Regulations under the Exchange Act.
2.19 SECTION 16 INSIDER
Any person who is selected by the Plan Administrator to receive unit
options, unit appreciation rights or Restricted Units pursuant to the Plan and
who is subject to the requirements of Section 16 of the Exchange Act, and the
rules and regulations promulgated thereunder.
2.20 UNIT OPTION
An option to acquire a Common Unit of the Company at the unit option price,
and which is not intended to meet the requirements of an incentive option as
defined in Section 422 of the Code.
2.21 UNIT OPTION PRICE
The price at which each unit option is exercisable for a Common Unit.
SECTION 3 ADMINISTRATION
3.1 With respect to awards made under the Plan to Section 16 Insiders,
the Plan shall be administered by the Compensation Committee of the Board of
Directors, which shall be constituted at all times so awards to Section 16
Insiders pursuant to this Plan shall qualify as an exception to liability under
Section 16(b) of the Exchange Act, so long as any of the Company's equity
securities are registered pursuant to Section 12(b) or 12(g) of the Exchange
Act. Except as provided below, and as may be required by Section 16(b) of the
Exchange Act, the Plan shall be administered by the Management Committee. The
Management Committee shall interpret the Plan, prescribe, amend, and
- --------------------------------------------------------------------------------
Leviathan Gas Pipeline Partners, L.P. Page 4
1998 Omnibus Compensation Plan
<PAGE> 7
rescind rules relating to it, select eligible Participants, make grants to
Participants who are not Section 16 Insiders, and take all other actions
necessary for its administration, which actions shall be final and binding upon
all Participants.
3.2 Except for the terms and conditions explicitly set forth in the
Plan, the Management Committee shall have sole authority to construe and
interpret the Plan, to establish, amend and rescind rules and regulations
relating to the Plan, to select persons eligible to participate in the Plan, to
grant unit options, unit appreciation rights and Restricted Units thereunder, to
administer the Plan, to make recommendations to the Board of Directors, and to
take all such steps and make all such determinations in connection with the Plan
and the unit options, unit appreciation rights and Restricted Units granted
thereunder as it may deem necessary or advisable, which determination shall be
final and binding upon all Participants. The Plan Administrator shall cause the
Company at its expense to take any action related to the Plan which may be
necessary to comply with the provisions of any federal or state law or any
regulations issued thereunder.
3.3 Each member of any committee acting as Plan Administrator, while
serving as such, shall be considered to be acting in his or her capacity as a
director of the General Partner. Members of the Board of Directors and members
of any committee acting under the Plan shall be fully protected in relying in
good faith upon the advice of counsel and shall incur no liability except for
gross negligence or willful misconduct in the performance of their duties.
SECTION 4 ELIGIBILITY
To be eligible for selection by the Plan Administrator to participate in
the Plan, an individual must be an officer or key management employee of the
Company, the General Partner, or any of their affiliates, as of the date on
which the Plan Administrator grants to such individual a unit option, unit
appreciation right or Restricted Units or a person who, in the judgment of the
Plan Administrator, holds a position of responsibility and is able to contribute
substantially to the Company's continued success. Members of the Board of
Directors who are full-time salaried officers shall be eligible to participate.
Members of the Board of Directors who are not employees are not eligible to
participate in this Plan.
SECTION 5 UNITS AVAILABLE FOR THE PLAN
5.1 Subject to Section 5.4, the maximum number of units that may be
issued for which unit options, unit appreciation rights and Restricted Units may
at any time be granted under the Plan is three million (3,000,000) Common Units,
from units held in the Company's treasury or out of the authorized but unissued
units of the Company, or the General Partner, as appropriate, or partly out of
each, as shall be determined by the Plan Administrator.
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Leviathan Gas Pipeline Partners, L.P. Page 5
1998 Omnibus Compensation Plan
<PAGE> 8
5.2 Notwithstanding the foregoing, and subject to Section 5.4, the
number of units for which Restricted Units may be granted under the Plan
pursuant to Section 8 of the Plan may not exceed five hundred thousand (500,000)
Common Units, unless the granting or vesting of such Restricted Units is in
compliance with the performance-based requirements of Section 162(m) of the Code
("Performance Restricted Units"). The grant of Performance Restricted Units is
not limited by this Section 5.2.
5.3 The maximum number of units with respect to which awards under
this Plan may be granted to any eligible employee in any one year shall not
exceed: (a) five hundred thousand (500,000) in the case of unit options (and
unit appreciation rights) and (b) five hundred thousand (500,000) in the case of
Restricted Units (whether or not such Restricted Units are Performance
Restricted Units). The foregoing maximums shall be referred to collectively as
the "Maximum Annual Employee Grant."
5.4 In the event of a recapitalization, unit split, unit dividend,
exchange of units, merger, reorganization, change in corporate structure or
units of the Company or similar event, the Board of Directors, upon the
recommendation of the Plan Administrator, may make appropriate adjustments in
the number of units authorized for the Plan, the Maximum Annual Employee Grant
and, with respect to outstanding unit options, unit appreciation rights and
Restricted Units, the Plan Administrator may make appropriate adjustments in the
number of units and the Unit Option Price.
SECTION 6 UNIT OPTIONS
6.1 Unit options may be granted to eligible employees in such number,
and at such times during the term of the Plan as the Plan Administrator shall
determine, the Plan Administrator taking into account the duties of the
respective employees, their present and potential contributions to the success
of the Company, and such other factors as the Plan Administrator shall deem
relevant in accomplishing the purposes of the Plan. The granting of a unit
option shall take place when the Plan Administrator by resolution, written
consent or other appropriate action determines to grant such a unit option to a
particular Participant at a particular price. Each unit option shall be
evidenced by a written instrument delivered by or on behalf of the Company
containing provisions not inconsistent with the Plan.
6.2 All unit options under the Plan shall be granted subject to the
following terms and conditions:
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Leviathan Gas Pipeline Partners, L.P. Page 6
1998 Omnibus Compensation Plan
<PAGE> 9
(a) Unit Option Price
The Unit Option Price shall be determined by the Plan
Administrator, but shall not be less than one hundred percent (100%)
of the Fair Market Value of the Common Units on the date the unit
option is granted.
(b) Duration of Unit Options
Unit options shall be exercisable at such time and under
such conditions as set forth in the unit option grant, but in no event
shall any unit option be exercisable later than the tenth anniversary
of the date of its grant.
(c) Exercise of Unit Options
Unless otherwise provided by the Plan Administrator, a
Participant may not exercise a unit option until the Participant has
completed one (1) year of continuous employment with the Company, the
General Partner or any of their affiliates from and including the date
on which the unit option is granted. This requirement is waived in the
event of death or Permanent Disability of a Participant before such
period of continuous employment is completed and may be waived or
modified in the agreement evidencing the option or by resolution
adopted at any time by the Plan Administrator. Thereafter, Common
Units covered by a unit option may be purchased at one time or in such
installments over the balance of the unit option period as may be
provided in the unit option grant. Any units not purchased on the
applicable installment date may be purchased thereafter at any time
prior to the final expiration of the unit option. To the extent that
the right to purchase units has accrued thereunder, unit options may
be exercised from time to time by written notice to the Company or
General Partner, as appropriate, setting forth the number of units
with respect to which the unit option is being exercised, and such
additional information as may be required by the Plan Administrator.
(d) Payment
The purchase price of units purchased under unit options
shall be paid in full to the Company upon the exercise of the unit
option by delivery of consideration equal to the product of the Unit
Option Price and the number of units purchased (the "Purchase Price").
Such consideration may be either (i) in cash or (ii) at the discretion
of the Plan Administrator, in Common Units already owned by the
Participant for at sufficient time (generally six (6) months) to not
result in an accounting charge to the Company, or any combination of
cash and Common Units. The Fair Market Value of such Common Units as
delivered shall be valued as of the day prior to delivery. The Plan
Administrator can determine at the time the unit option is granted
that additional forms of payment will be permitted. To the extent
permitted by the Plan Administrator and applicable laws
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Leviathan Gas Pipeline Partners, L.P. Page 7
1998 Omnibus Compensation Plan
<PAGE> 10
and regulations (including, but not limited to, federal tax and
securities laws, regulations and state corporate law), a unit option
may also be exercised by delivery of a properly executed exercise
notice together with irrevocable instructions to a broker to promptly
deliver to the Company the amount of sale or loan proceeds to pay the
Purchase Price. A Participant shall have none of the rights of a
unitholder until the units of Common Units are issued to the
Participant.
If specifically authorized in the unit option grant, a
Participant may elect to pay all or a portion of the Purchase Price by
having Common Units with a Fair Market Value equal to all or a portion
of the Purchase Price be withheld from the units issuable to the
Participant upon the exercise of the unit option. The Fair Market
Value of such Common Units as is withheld shall be determined as of
the same day as the exercise of the unit option. In the event a unit
option grant to a Section 16 Insider provides that the Purchase Price
may be paid in whole or in part by having units with a Fair Market
Value equal to all or a portion of the Purchase Price withheld from
the units issuable to the Participant upon the exercise of the unit
option, the withholding of units issuable upon the exercise of a unit
option to pay the Purchase Price by a Section 16 Insider must be in
accordance with applicable requirements of an exemption to liability
under Section 16(b) of the Exchange Act or the rules and regulations
promulgated thereunder.
Notwithstanding any other provision in the Plan to the
contrary and unless the Plan Administrator shall otherwise determine,
in the event of a "cashless" exercise, and for that purpose only under
this Plan, a Participant's compensation shall be equal to the
difference between the actual sales price received for the underlying
Common Unit and the Unit Option Price. For all other purposes under
the Plan, the Fair Market Value shall be the value against which
compensation is determined.
(e) Restrictions
The Plan Administrator shall determine and reflect in the
unit option grant, with respect to each unit option, the nature and
extent of the restrictions, if any, to be imposed on the units of
Common Units which may be purchased thereunder, including, but not
limited to, restrictions on the transferability of such units acquired
through the exercise of such unit options for such periods as the Plan
Administrator may determine and, further, that in the event a
Participant's employment by the Company, the General Partner or any of
their affiliates, terminates during the period in which such units are
nontransferable, the Participant shall be required to sell such units
back to the Company at such prices as the Plan Administrator may
specify in the unit option. In addition, the Plan Administrator may
require that a Participant who wants to effectuate a "cashless"
exercise of unit options be required to sell the shares of Common
Stock acquired
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Leviathan Gas Pipeline Partners, L.P. Page 8
1998 Omnibus Compensation Plan
<PAGE> 11
in the associated exercise to the Company, or in the open market
through the use of a broker selected by the Company, at such price and
on such terms as the Plan Administrator may determine at the time of
grant, or otherwise.
(f) Nontransferability of Unit Options
During a Participant's lifetime, a unit option may be
exercisable only by the Participant. Unit options granted under the
Plan and the rights and privileges conferred thereby shall not be
subject to execution, attachment or similar process and may not be
transferred, assigned, pledged or hypothecated in any manner (whether
by operation of law or otherwise) other than by will or by the
applicable laws of descent and distribution. Notwithstanding the
foregoing, to the extent permitted by applicable law, the Plan
Administrator may permit a recipient of a unit option to designate in
writing during the Participant's lifetime a Beneficiary to receive and
exercise the Participant's unit options in the event of such
Participant's death (as provided in Section 6.2(i)). If any
Participant attempts to transfer, assign, pledge, hypothecate or
otherwise dispose of any option under the Plan or of any right or
privilege conferred thereby, contrary to the provisions of the Plan,
or suffers the sale or levy or any attachment or similar process upon
the rights and privileges conferred hereby, all affected unit options
held by such Participant shall be immediately forfeited.
(g) Purchase for Investment
The Plan Administrator shall have the right to require that
each Participant or other person who shall exercise a unit option
under the Plan, and each person into whose name Common Units shall be
issued pursuant to the exercise of a unit option, represent and agree
that any and all Common Units purchased pursuant to such unit option
are being purchased for investment only and not with a view to the
distribution or resale thereof and that such units will not be sold
except in accordance with such restrictions or limitations as may be
set forth in the unit option. This Section 6.2(g) shall be inoperative
during any period of time when the Company has obtained all necessary
or advisable approvals from governmental agencies and has completed
all necessary or advisable registrations or other qualifications of
Common Units as to which unit options may from time to time be granted
as contemplated in Section 9.
(h) Termination of Employment
Upon the termination of a Participant's employment for any
reason other than death or Permanent Disability, the Participant's
unit option shall be exercisable only to the extent that it was then
exercisable and, unless the term of the unit options expires sooner,
such unit options shall expire according to the following schedule;
provided, that the Plan Administrator may at any time determine in a
particular case that specific limitations and restrictions under the
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Leviathan Gas Pipeline Partners, L.P. Page 9
1998 Omnibus Compensation Plan
<PAGE> 12
Plan shall not apply, or that a unit option should expire sooner or
should terminate when the Participant's employment status ceases:
(i) Retirement
The unit option shall expire, unless exercised,
thirty-six (36) months after the Participant's retirement from
the Company, the General Partner or any of their affiliates.
(ii) Disability
The unit option shall expire, unless exercised,
thirty-six (36) months after the Participant's Permanent
Disability.
(iii) Termination
Subject to subparagraph (iv) below, the unit option
shall expire, unless exercised, three (3) months after a
Participant resigns or is terminated as an employee of the
Company, the General Partner or any of their affiliates, other
than for Cause, unless the Chairman of the Board of the General
Partner shall have determined in a specific case that the unit
option should expire sooner or should terminate when the
Participant's employment status ceases; provided, however, that
for Section 16 Insiders, such determination shall be made by the
Plan Administrator.
(iv) All Other Terminations
Notwithstanding subparagraph (iii) above, the unit
option shall expire (x) upon termination of employment for Cause;
(y) one year, unless exercised, after the Participant's
termination of employment on account of disability (as defined in
Section 22(e)(3) of the Code); and (z) three (3) months after the
Participant's termination of employment other than on account of
death, Permanent Disability or termination for Cause.
(i) Death of Participant
Upon the death of a Participant, whether during the Participant's
period of employment or during the thirty-six (36) month period referred to
in Sections 6.2(h)(i) and (ii), the unit option shall expire, unless the
original term of the unit option expires sooner, twelve (12) months after
the date of the Participant's death, unless the unit option is exercised
within such twelve (12) month period by the Participant's Beneficiary,
legal representatives, estate or the person or persons to whom the
deceased's unit option rights shall have passed by will or the laws of
descent and distribution; provided, that the Plan Administrator shall
determine in a particular case that specific limitations and restrictions
under the Plan shall not
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Leviathan Gas Pipeline Partners, L.P. Page 10
1998 Omnibus Compensation Plan
<PAGE> 13
apply. Notwithstanding any other Plan provisions pertaining to the times at
which unit options may be exercised, no unit option shall continue to be
exercisable, pursuant to Section 6.2(h) or this Section 6.2(i), at a time
that would violate the maximum duration of Section 6.2(b).
(j) Deferral Election
A Participant may elect irrevocably (at a time and in a manner
determined by the Plan Administrator) prior to exercising a unit option
granted under the Plan that issuance of Common Units upon exercise of such
unit option shall be deferred until a pre-specified date in the future or
until the Participant ceases to be employed by the Company, the General
Partner or any of their affiliates, as elected by the Participant. After
the exercise of any such unit option and prior to the issuance of any
deferred units, the number of Common Units issuable to the Participant
shall be credited to a memorandum deferred account and any dividends or
other distributions paid on the Common Units shall be deemed reinvested in
additional Common Units until all credited units shall become issuable
pursuant to the Participant's election.
SECTION 7 UNIT APPRECIATION RIGHTS
7.1 The Plan Administrator may grant unit appreciation rights to
Participants in connection with any unit option granted under the Plan, either
at the time of the grant of such unit option or at any time thereafter during
the term of the unit option. Such unit appreciation rights shall cover the same
units covered by the unit options (or such lesser number of Common Units as the
Plan Administrator may determine) and shall, except as provided in Section 7.3,
be subject to the same terms and conditions as the related unit options and such
further terms and conditions not inconsistent with the Plan as shall from time
to time be determined by the Plan Administrator.
7.2 Each unit appreciation right shall entitle the holder of the related
unit option to surrender to the Company unexercised the related unit option, or
any portion thereof, and to receive from the Company in exchange therefor an
amount equal to the excess of the Fair Market Value of one Common Unit on the
date the right is exercised over the Unit Option Price per unit times the number
of units covered by the unit option, or portion thereof, which is surrendered.
Payment shall be made in Common Units valued at Fair Market Value as of the date
the right is exercised, or in cash, or partly in units and partly in cash, at
the discretion of the Plan Administrator. Notwithstanding the foregoing and to
the extent required by an applicable exemption to liability under Section 16(b)
of the Exchange Act, a payment, in whole or in part, of cash upon exercise of a
unit appreciation right by a Section 16 Insider may be made only if the Plan
Administrator approves such election to receive cash and the right is exercised
in accordance with the requirements of such exemption under Section 16(b) of the
Exchange Act. Unit appreciation rights may be exercised from time to time upon
actual receipt by the
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1998 Omnibus Compensation Plan
<PAGE> 14
Company of written notice stating the number of Common Units with respect to
which the unit appreciation right is being exercised. The value of any
fractional units shall be paid in cash.
7.3 Unit appreciation rights are subject to the following restrictions:
(a) Each unit appreciation right shall be exercisable at such time
or times as the unit option to which it relates shall be exercisable, or at
such other times as the Plan Administrator may determine; provided,
however, that such right shall not be exercisable until the Participant
shall have completed a six (6) month period of continuous employment with
the Company, the General Partner or any of their affiliates immediately
following the date on which the unit appreciation right is granted. In the
event of death or Permanent Disability of a Participant during employment
but before the Participant has completed such period of continuous
employment, such unit appreciation right shall be exercisable; but only
within the period specified in the related unit option. Notwithstanding the
foregoing, a unit appreciation right may not be exercised for cash by a
Section 16 Insider unless such exercise is pursuant to an exemption to
liability under Section 16(b) of the Exchange Act or rules promulgated
thereunder.
(b) The Plan Administrator in its sole discretion may approve or
deny in whole or in part a request to exercise a unit appreciation right.
Denial or approval of such request shall not require a subsequent request
to be similarly treated by the Plan Administrator.
(c) The right of a Participant to exercise a unit appreciation
right shall be canceled if and to the extent the related unit option is
exercised. To the extent that a unit appreciation right is exercised, the
related unit option shall be deemed to have been surrendered unexercised
and canceled.
(d) A holder of unit appreciation rights shall have none of the
rights of a unitholder until Common Units, if any, are issued to such
holder pursuant to such holder's exercise of such rights.
(e) The acquisition of Common Units pursuant to the exercise of a
unit appreciation right shall be subject to the same restrictions as would
apply to the acquisition of Common Units acquired upon acquisition of the
related unit option, as set forth in Section 6.2.
SECTION 8 RESTRICTED UNITS
8.1 Subject to Sections 5.2 and 5.3, Restricted Units (including
Performance Restricted Units as described in Section 8.2 below) may be granted
to Participants in such
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Leviathan Gas Pipeline Partners, L.P. Page 12
1998 Omnibus Compensation Plan
<PAGE> 15
number and at such times during the term of the Plan as the Plan Administrator
shall determine, taking into account the duties of the respective Participants,
their present and potential contributions to the success of the Company, and
such other factors as the Plan Administrator shall deem relevant in
accomplishing the purposes of the Plan. The granting of Restricted Units shall
take place when the Plan Administrator by resolution, written consent or other
appropriate action determines to grant such Restricted Units to a particular
Participant. Each grant shall be evidenced by a written instrument delivered by
or on behalf of the Company containing provisions not inconsistent with the
Plan. The Participant receiving a grant of Restricted Units shall be recorded as
a unitholder of the Company. Each Participant who receives a grant of Restricted
Units shall have all the rights of a unitholder with respect to such units
(except as provided in the restrictions on transferability), including, but not
limited to, the right to distributions on such Common Units; provided, however,
that no Participant awarded Restricted Units shall have any right as a
unitholder with respect to any units subject to the Participant's Restricted
Units grant prior to the date of issuance to the Participant of a certificate or
certificates for such units.
8.2 Notwithstanding any other provision to the contrary in this Section
8, before Performance Restricted Units can be granted or vested, as applicable,
the Plan Administrator shall:
(a) Determine the Performance Goals applicable to the particular
Performance Period; and
(b) Certify in writing that such Performance Goals for a particular
Performance Period have been attained.
8.3 A grant of Restricted Units shall entitle a Participant to receive,
on the date or dates designated by the Plan Administrator, upon payment to the
Company of the par value, if applicable, of the Common Units in a manner
determined by the Plan Administrator, the number of Common Units selected by the
Plan Administrator. The Plan Administrator may require, under such terms and
conditions as it deems appropriate or desirable, that the certificates (if
issued) for Restricted Units delivered under the Plan may be held in custody by
a bank or other institution, or that the Company may itself hold such units in
custody until the Restriction Period (as defined in Section 8.4) expires or
until restrictions thereon otherwise lapse, and may require, as a condition of
any issuance of Restricted Units that the Participant shall have delivered a
units power endorsed in blank relating to the Restricted Units.
8.4 During a period of time following the date of grant, as determined by
the Plan Administrator, which shall in no event be less than one (1) year (the
"Restriction Period"), the Restricted Units may not be sold, assigned,
transferred, pledged, hypothecated or otherwise encumbered or disposed of by the
recipient, except in the event of death or Permanent Disability, the transfer to
the Company as provided under the Plan or the Plan Administrator's waiver or
modification of such restrictions in the
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Leviathan Gas Pipeline Partners, L.P. Page 13
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<PAGE> 16
agreement evidencing the grant of Restricted Units, or by resolution of the Plan
Administrator adopted at any time.
8.5 Except as provided in Section 8.6, if a Participant terminates
employment with the Company for any reason before the expiration of the
Restriction Period, all Restricted Units still subject to restriction shall be
forfeited by the Participant to the Company. In addition, in the event of any
attempt by the Participant to sell, exchange, transfer, pledge or otherwise
dispose of Restricted Units in violation of the terms of the Plan, such units
shall be forfeited to the Company.
8.6 The Restriction Period for any Participant shall be deemed to end and
all restrictions on Restricted Units shall lapse, upon the Participant's death
or Permanent Disability or any termination of employment determined by the Plan
Administrator to end the Restriction Period.
8.7 When the restrictions imposed by Section 8.4 expire or otherwise
lapse with respect to one or more Restricted Units, the Company shall deliver to
the Participant (or the Participant's legal representative, Beneficiary or heir)
one (1) Common Unit for each Restricted Unit. At that time, the agreement
referred to in Section 8.1, as it relates to such units, shall be terminated.
8.8 Subject to Section 8.3 (and Section 8.2 in the case of Performance
Restricted Units), a Participant entitled to receive Restricted Units under the
Plan shall be issued a certificate or shall have a book entry account
established for such units. Such certificate or account shall be registered in
the name of the Participant, and shall bear an appropriate legend reciting the
terms, conditions and restrictions, if any, applicable to such units and shall
be subject to appropriate stop-transfer orders.
SECTION 9 REGULATORY APPROVALS AND LISTING
9.1 The Company shall not be required to issue any certificate or
establish any account for Common Units (i) upon the exercise of a unit option or
a unit appreciation right granted under the Plan, (ii) with respect to a grant
of Restricted Units, or (iii) Common Units awarded as payment of vested units
prior to:
(a) obtaining any approval or ruling from the Securities and
Exchange Commission, the Internal Revenue Service or any other governmental
agency which the Company or the General Partner, in its sole discretion,
shall determine to be necessary or advisable;
(b) listing of such units on any stock exchange on which the
Common Units may then be listed; or
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<PAGE> 17
(c) completing any registration or other qualification of such
units under any federal or state laws, rulings or regulations of any
governmental body which the Company or the General Partner, in its sole
discretion, shall determine to be necessary or advisable.
All certificates or accounts for Common Units delivered under the Plan
shall also be subject to such stop-transfer orders and other restrictions as the
Plan Administrator may deem advisable under the rules, regulations and other
requirements of the Securities and Exchange Commission, any stock exchange upon
which Common Units is then listed and any applicable federal or State securities
laws, and the Plan Administrator may cause a legend or legends to be placed on
any such certificates or accounts to make appropriate reference to such
restrictions. The foregoing provisions of this paragraph shall not be effective
if and to the extent that the Common Units delivered under the Plan are covered
by an effective and current registration statement under the Securities Act of
1933, as amended, or if and so long as the Plan Administrator determines that
application of such provisions is no longer required or desirable. In making
such determination, the Plan Administrator may rely upon an opinion of counsel
for the Company or the General Partner.
SECTION 10 EFFECTIVE DATE AND TERM OF PLAN
The Plan shall be effective as of August 14, 1998, and shall terminate ten
(10) years therefrom, unless terminated earlier pursuant to Section 13, herein.
Unit options, unit appreciation rights and Restricted Units theretofore granted
may extend beyond that date and the terms and conditions of the Plan shall
continue to apply thereto and to Common Units acquired thereunder. To the extent
required for compliance with Section 16(b) of the Exchange Act and rules
promulgated thereunder, Common Units underlying unit options, unit appreciation
rights and Restricted Units granted to Section 16 Insiders may not be sold until
a date at least six (6) months after the date such General Partner approval of
the Plan is obtained, and unit appreciation rights that are granted subject to
General Partner approval of the Plan to Section 16 Insiders may not be exercised
for cash until a date at least six (6) months after the date such General
Partner approval is obtained.
SECTION 11 GENERAL PROVISIONS
11.1 Nothing contained in the Plan, or in any unit option, unit
appreciation right or Restricted Unit granted pursuant to the Plan, shall confer
upon any employee any right with respect to continuance of employment by the
Company, the General Partner or any of their affiliates, nor interfere in any
way with the right of the Company, the General Partner or any of their
affiliates to terminate the employment of such employee at any time with or
without assigning any reason therefor.
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1998 Omnibus Compensation Plan
<PAGE> 18
11.2 Grants, vesting or payment of unit options, unit appreciation rights
or Restricted Units shall not be considered as part of a Participant's salary or
used for the calculation of any other pay, allowance, pension or other benefit
unless otherwise permitted by other benefit plans provided by the Company, the
General Partner or any of their affiliates, or required by law or by contractual
obligations of the Company, the General Partner or any of their affiliates.
11.3 The right of a Participant or Beneficiary to the payment of any
compensation under the Plan may not be assigned, transferred, pledged or
encumbered, nor shall such right or other interests be subject to attachment,
garnishment, execution or other legal process.
11.4 Leaves of absence for such periods and purposes conforming to the
personnel policy of the Company, the General Partner or any of their affiliates,
as applicable, shall not be deemed terminations or interruptions of employment,
unless a Participant commences a leave of absence from which he or she is not
expected to return to active employment with the Company, the General Partner or
any of their affiliates.
11.5 In the event a Participant is transferred from the Company to the
General Partner or any of their affiliates, or vice versa, or is promoted or
given different responsibilities, the unit options, unit appreciation rights and
Restricted Units granted to the Participant prior to such date shall not be
affected.
11.6 The Plan shall be construed and governed in accordance with the laws
of the State of Texas, except that it shall be construed and governed in
accordance with applicable federal law in the event that such federal law
preempts state law.
11.7 Appropriate provision shall be made for all taxes required to be
withheld in connection with the exercise, grant or other taxable event with
respect to unit options, unit appreciation rights and Restricted Units under the
applicable laws or regulations of any governmental authority, whether federal,
state or local and whether domestic or foreign, including, but not limited to,
the required withholding of a sufficient number of units otherwise issuable to a
Participant to satisfy the said required minimum tax withholding obligations. If
provided in the grant, a Participant is permitted to deliver Common Units
(including units acquired pursuant to the exercise of a unit option or unit
appreciation right other than the unit option or unit appreciation right
currently being exercised, to the extent permitted by applicable regulations)
for payment of withholding taxes on the exercise of a unit option or unit
appreciation right, or upon the grant or vesting of Restricted Units. At the
election of the Plan Administrator or, subject to approval of the Plan
Administrator in its sole discretion, at the election of a Participant, Common
Units may be withheld from the units issuable to the Participant upon the
exercise of a unit option or unit appreciation right or upon the vesting of the
Restricted Units to satisfy tax withholding obligations. The Fair Market Value
of Common Units as delivered pursuant to this Section 11.7 shall be valued as of
the day prior to delivery, and shall be calculated in accordance with Section
2.8. The election by a Section 16 Insider
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Leviathan Gas Pipeline Partners, L.P. Page 16
1998 Omnibus Compensation Plan
<PAGE> 19
to have Common Units withheld to pay tax obligations in connection with the
exercise of a unit option or unit appreciation right or the vesting of
Restricted Units must be made in accordance with the provisions, if any, of
Section 16 of the Exchange Act and the rules promulgated thereunder.
Any Participant that makes a Section 83(b) election under the Code shall,
within ten (10) days of making such election, notify the Company in writing of
such election and shall provide the Company with a copy of such election form
filed with the Internal Revenue Service.
Tax advice should be obtained by the Participant prior to the Participant's
(i) entering into any transaction under or with respect to the Plan, (ii)
designating or choosing the times of distributions under the Plan, or (iii)
disposing of any Common Units issued under the Plan.
SECTION 12 COMPLIANCE WITH SECTION 16
The Company's intention is that, so long as any of the Company's equity
securities are registered pursuant to Section 12(b) or 12(g) of the Exchange
Act, with respect to awards granted to or held by Section 16 Insiders, the Plan
shall comply in all respects with Rule 16b-3 or any successor rule or rule of
similar application under Section 16 of the Exchange Act or rules thereunder. If
any Plan provision is later found not to be in compliance with Rule 16b-3 or
such other rules promulgated under Section 16 of the Exchange Act, that
provision shall be deemed modified as necessary to meet the requirements of
Section 16 of the Exchange Act.
Notwithstanding anything in the Plan to the contrary, the Board of
Directors, in its absolute discretion, may bifurcate the Plan so as to restrict,
limit, or condition the applicability of any provision of the Plan to
Participants who are Section 16 Insiders without so restricting, limiting, or
conditioning the Plan with respect to other Participants.
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1998 Omnibus Compensation Plan
<PAGE> 20
SECTION 13 AMENDMENT, TERMINATION OR DISCONTINUANCE
OF THE PLAN
13.1 Subject to the Board of Directors and Section 13.2, the Plan
Administrator may from time to time make such amendments to the Plan as it may
deem proper and in the best interest of the Company without further approval of
the General Partner, including, but not limited to, any amendment necessary to
ensure that the Company may obtain any regulatory approval referred to in
Section 11; provided, however, that no change in any unit option, unit
appreciation right or Restricted Units theretofore granted may be made without
the consent of the Participant which would impair the right of the Participant
to acquire or retain Common Units or cash that the Participant may have acquired
as a result of the Plan.
13.2 To the extent required for compliance with applicable law or
regulation, including Section 16(b) of the Exchange Act, the Plan Administrator
and the Board of Directors may not amend the Plan without the approval of the
sole stockholder of the General Partner to
(a) materially increase the number of units or rights that may be
issued under the Plan to Section 16 Insiders;
(b) otherwise materially increase the benefits accruing to the
Participants under the Plan.
13.3 The Board of Directors may at any time suspend the operation of or
terminate the Plan with respect to any Common Units or rights which are not at
that time subject to unit option, unit appreciation right or grant of Restricted
Units, not yet granted.
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Leviathan Gas Pipeline Partners, L.P. Page 18
1998 Omnibus Compensation Plan
<PAGE> 21
IN WITNESS WHEREOF, the Company has caused amendment and restatement to be
executed effective as of January 1, 1999.
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
By: Leviathan Gas Pipeline Company
The General Partner
By /s/ H. Brent Austin
---------------------
Plan Administrator
ATTEST:
By /s/ David L. Siddall
---------------------
Title: Corporate Secretary
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Leviathan Gas Pipeline Partners, L.P. Page 19
1998 Omnibus Compensation Plan
<PAGE> 1
EXHIBIT 21
LEVIATHAN SUBSIDIARIES
<TABLE>
<S> <C>
Delos Offshore Company, L.L.C., a Delaware limited liability company
Ewing Bank Gathering Company, L.L.C., a Delaware limited liability company
Flextrend Development Company, L.L.C., a Delaware limited liability company
Green Canyon Pipe Line Company, L.L.C., a Delaware limited liability company
West Cameron Dehydration Company, L.L.C., a Delaware limited liability company (50%)
Leviathan Oil Transport Systems, L.L.C., a Delaware limited liability company
Manta Ray Gathering Company, L.L.C., a Delaware limited liability company
Poseidon Pipeline Company, L.L.C., a Delaware limited liability company
Poseidon Oil Pipeline Company, L.L.C., a Delaware limited liability company (36%)
Sailfish Pipeline Company, L.L.C., a Delaware limited liability company
Neptune Pipeline Company, L.L.C., a Delaware limited liability company (25.67%)
Manta Ray Offshore Gathering Company, L.L.C., a Delaware limited liability company
Nautilus Pipeline Company, L.L.C., a Delaware limited liability company
Ocean Breeze Pipeline Company, L.L.C., a Delaware limited liability company (25.67%)
Manta Ray Offshore Gathering Company, L.L.C., a Delaware limited liability company
Nautilus Pipeline Company, L.L.C., a Delaware limited liability company
Stingray Holding, L.L.C., a Delaware limited liability company
Stingray Pipeline Company, a Louisiana partnership (50%)
Tarpon Transmission Company, a Texas corporation
Texam Offshore Gas Transmission, L.L.C., a Delaware limited liability company
Western Gulf Holdings, L.L.C., a Delaware limited liability company (20%)
High Island Offshore System, L.L.C., a Delaware limited liability company
East Breaks Gathering Company, L.L.C., a Delaware limited liability company
Transco Hydrocarbons Company, L.L.C., a Delaware limited liability company
U-T Offshore System, a Delaware partnership (33 1/3%)
Transco Offshore Pipeline Company, L.L.C., a Delaware limited liability company
Western Gulf Holdings, L.L.C., a Delaware limited liability company (20%)
High Island Offshore System, L.L.C., a Delaware limited liability company
East Breaks Gathering Company, L.L.C., a Delaware limited liability company
VK Deepwater Gathering Company, L.L.C., a Delaware limited liability company
Viosca Knoll Gathering Company, a Delaware partnership (50%)
VK-Main Pass Gathering Company, L.L.C., a Delaware limited liability company
</TABLE>
<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 DECEMBER 31, 1998 INCLUDED IN ITS FORM 10-K FOR THE PERIOD ENDED DECEMBER 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,108
<SECURITIES> 0
<RECEIVABLES> 8,588
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,943
<PP&E> 341,126
<DEPRECIATION> 99,134
<TOTAL-ASSETS> 442,726
<CURRENT-LIABILITIES> 349,167
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 442,726
<SALES> 31,411
<TOTAL-REVENUES> 75,455
<CGS> 11,369
<TOTAL-COSTS> 11,369
<OTHER-EXPENSES> 28,136
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,242
<INCOME-PRETAX> 275
<INCOME-TAX> (471)
<INCOME-CONTINUING> 746
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 746
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
