<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or
sec. 240.14a-12
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
- ----------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
N/A
- ----------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Units
- ----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
For purposes of calculating the filing fee, the aggregate number of Common Units
to which the transaction applies was assumed to be 2,928,220 Common Units, which
was used based on the hypothetical assumption that the transaction closed and,
accordingly, the number of Common Units was determined on January 20, 1999. The
actual aggregate number of Common Units to which the transaction applies will be
dependent on the average closing price of the Common Units during the applicable
10-day trading reference period; provided, that such number of Common Units
shall not be less than 2,647,826 or more than 3,205,263.
- ----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
The approximate underlying value of the transaction is $83,484,770, comprised of
$21,315,000 in cash and $62,169,770 in Common Units, at $21.23125 per Unit, the
average high and low price over the five trading day period ending on January
20, 1999. ----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$83,484,770
- ----------------------------------------------------------------------
(5) Total fee paid:
$16,696.95
- ----------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
- ----------------------------------------------------------------------
(1) Amount Previously Paid:
$16,696.95
- ----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
N/A
- ----------------------------------------------------------------------
(3) Filing Party:
N/A
- ----------------------------------------------------------------------
(4) Date Filed:
N/A
- ----------------------------------------------------------------------
<PAGE> 2
(5) Total fee paid:
$16,696.95
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
N/A
(2) Form, Schedule or Registration Statement No.:
N/A
(3) Filing Party:
N/A
(4) Date Filed:
N/A
<PAGE> 3
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
EL PASO ENERGY BUILDING
1001 LOUISIANA
HOUSTON, TEXAS 77002
February 8, 1999
TO THE UNITHOLDERS:
You are cordially invited to attend the Special Meeting of unitholders (the
"Special Meeting") of Leviathan Gas Pipeline Partners, L.P. ("Leviathan"), to be
held in Room 1AB on the ninth floor of The Travis Place Building, 1010 Travis,
Houston, TX 77002 at 10:00 a.m., local time, on Friday, March 5, 1999. Access to
the ninth floor of The Travis Place Building is through the Houston Downtown
Tunnel System. The Special Meeting is being held for the following purposes:
1. To approve and ratify the proposal (the "Proposal") and the
underlying transaction (the "Proposal Transaction") described in the Proxy
Statement. The Proposal Transaction involves Leviathan's (i) acquisition
from a subsidiary of El Paso Energy Corporation ("El Paso") of (a) all of
El Paso's interest in Viosca Knoll Gathering Company ("VK"), a Delaware
general partnership (currently owned 50% by Leviathan and 50% by El Paso),
other than a 1% interest in profits and capital in VK, for approximately
$85.260 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 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
profits and capital in VK, (ii) issuance of such common units to El Paso,
(iii) granting certain registration rights covering such common units to El
Paso and (iv) amendment of Leviathan's partnership agreement to reduce to
55% from 66 2/3% the unitholder voting percentage required to remove the
general partner without cause.
2. To transact such other business as may properly come before the
Special Meeting or any adjournment(s) thereof.
Unitholders of record as of the close of business on January 28, 1999 will
be entitled to notice of and to vote at the Special Meeting or any
adjournment(s) thereof. Even if you plan to attend the Special Meeting, I urge
you to mark, sign and date the enclosed proxy and return it in the enclosed
postage-paid envelope promptly. Any unitholder of record may revoke its proxy at
any time before the vote, or may vote personally at the Special Meeting.
While Leviathan is requesting unitholder approval and ratification of all
of the elements comprising the Proposal Transaction, Leviathan is required to
obtain the approval of the unitholders only with respect to the issuance of the
related common units. The minimum vote which will constitute unitholder approval
of the Proposal is approval by a majority of the votes cast on the Proposal,
provided that the total vote cast on the Proposal represents over 50% in
interest of all units held by unitholders of record.
I urge you to review carefully the attached Proxy Statement, which contains
a detailed description of the Proposal and the underlying Proposal Transaction
to be voted upon at the Special Meeting.
Sincerely,
Leviathan Gas Pipeline Partners,
L.P.,
by Leviathan Gas Pipeline Company,
its General Partner
/s/ KEITH B. FORMAN
------------------------------------
Keith B. Forman
Chief Financial Officer
<PAGE> 4
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
EL PASO ENERGY BUILDING
1001 LOUISIANA
HOUSTON, TEXAS 77002
NOTICE OF SPECIAL MEETING OF UNITHOLDERS OF LEVIATHAN GAS
PIPELINE PARTNERS, L.P. TO BE HELD ON MARCH 5, 1999
The enclosed form of proxy is solicited by Leviathan Gas Pipeline Partners,
L.P., a Delaware limited partnership ("Leviathan"), through Leviathan Gas
Pipeline Company, a Delaware corporation and the general partner (the "General
Partner") of Leviathan, to be used at a special meeting (the "Special Meeting")
of the holders (the "Unitholders") of common units (the "Common Units") and
preference units (the "Preference Units" and together with the Common Units, the
"Units") of Leviathan to be held in Room 1AB on the ninth floor of The Travis
Place Building, 1010 Travis at 10:00 a.m. local time, on Friday, March 5, 1999.
Access to the ninth floor of The Travis Place Building is through the Houston
Downtown Tunnel System. At the Special Meeting, Unitholders will be asked to
consider, vote upon and approve and ratify the proposal described in the proxy
materials (the "Proposal") which, if approved and ratified, will permit
Leviathan to consummate the transaction (the "Proposal Transaction") more fully
described herein, as well as to transact such other business as may properly
come before the Special Meeting or any adjournment(s) thereof. The Proposal
Transaction involves Leviathan's (i) acquisition from a subsidiary of El Paso
Energy Corporation ("El Paso") of (a) all of El Paso's interest in Viosca Knoll
Gathering Company ("VK"), a Delaware general partnership (currently owned 50% by
Leviathan and 50% by El Paso), other than a 1% interest in profits and capital
in VK, for approximately $85.260 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 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
profits and capital in VK, (ii) issuance of such Common Units to El Paso, (iii)
granting certain registration rights covering such Common Units to El Paso and
(iv) amendment of Leviathan's partnership agreement to reduce to 55% from
66 2/3% the Unitholder voting percentage required to remove the general partner
without cause.
The Proposal and underlying Proposal Transaction are described in the
enclosed proxy materials. Leviathan believes the Proposal Transaction will
provide significant benefits for Leviathan, its Unitholders and the General
Partner.
Although Unitholder approval is not required under Leviathan's partnership
agreement or any applicable Delaware law with respect to any element of the
Proposal, Leviathan is calling the Special Meeting to approve and ratify the
Proposal because the New York Stock Exchange rules may require Unitholder
approval of the issuance of Common Units to its affiliate, El Paso, under these
circumstances. Since it will be having a Unitholder meeting to authorize the
issuance of such Common Units, Leviathan will request the Unitholders to approve
and ratify the entire Proposal. The minimum vote which will constitute
Unitholder approval of the Proposal is approval by a majority of the votes cast
on the Proposal, provided that the total vote cast on the Proposal represents
over 50% in interest of all Units held by Unitholders of record.
THE BOARD OF DIRECTORS OF THE GENERAL PARTNER UNANIMOUSLY RECOMMENDS THAT
YOU VOTE FOR THE PROPOSAL.
<PAGE> 5
Unitholders of record as of the close of business on January 28, 1999, will
be entitled to notice of and to vote at the Special Meeting or any
adjournment(s) thereof. Even if you plan to attend the Special Meeting, I urge
you to mark, sign and date the enclosed proxy and return it in the enclosed
postage-paid envelope promptly. Any Unitholder of record may revoke its proxy at
any time before the vote, or may vote personally at the Special Meeting.
By Order of the General Partner,
Leviathan Gas Pipeline Company
By: /s/ KEITH B. FORMAN
----------------------------------
Keith B. Forman
Chief Financial Officer
Houston, Texas
February 8, 1999
<PAGE> 6
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
---------------------
PROXY STATEMENT
SPECIAL MEETING OF UNITHOLDERS
TO BE HELD ON MARCH 5, 1999
---------------------
The enclosed form of proxy is solicited by Leviathan Gas Pipeline Partners,
L.P., a Delaware limited partnership ("Leviathan"), through Leviathan Gas
Pipeline Company, a Delaware corporation and the general partner (the "General
Partner") of Leviathan, to be used at a special meeting (the "Special Meeting")
of the holders (the "Unitholders") of common units (the "Common Units") and
preference units (the "Preference Units" and together with the Common Units, the
"Units") of Leviathan to be held in Room 1AB on the ninth floor of The Travis
Place Building, 1010 Travis, Houston, Texas 77002 at 10:00 a.m. local time, on
Friday, March 5, 1999. Access to the ninth floor of The Travis Place Building is
through the Houston Downtown Tunnel System. At the Special Meeting, Unitholders
will be asked to consider, vote upon and approve and ratify the proposal
described in the proxy materials (the "Proposal") which, if approved and
ratified, will permit Leviathan to consummate the transaction (the "Proposal
Transaction") more fully described herein, as well as to transact such other
business as may properly come before the Special Meeting or any adjournment(s)
thereof. The Proposal Transaction involves Leviathan's (i) acquisition from a
subsidiary of El Paso Energy Corporation ("El Paso") of (a) all of El Paso's
interest in Viosca Knoll Gathering Company ("VK"), a Delaware general
partnership (currently owned 50% by Leviathan and 50% by El Paso), other than a
1% interest in profits and capital in VK, for approximately $85.260 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
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 VK, (ii)
issuance of such Common Units to El Paso, (iii) granting certain registration
rights covering such Common Units to El Paso and (iv) amendment of Leviathan's
partnership agreement to reduce to 55% from 66 2/3% the Unitholder voting
percentage required to remove the general partner without cause.
The Proposal and underlying Proposal Transaction are described in the
enclosed proxy materials (the "Proxy Statement"). Leviathan believes the
Proposal Transaction will provide significant benefits for Leviathan, its
Unitholders and the General Partner.
Although Unitholder approval is not required under Leviathan's partnership
agreement or any applicable Delaware law with respect to any element of the
Proposal, Leviathan is calling the Special Meeting to approve and ratify the
Proposal because the New York Stock Exchange ("NYSE") rules may require
Unitholder approval of the issuance of Common Units to its affiliate, El Paso,
under these circumstances. Since it will be having a Unitholder meeting to
authorize the issuance of such Common Units, Leviathan will request the
Unitholders to approve and ratify the entire Proposal. The minimum vote which
will constitute Unitholder approval of the Proposal is approval by a majority of
the votes cast on the Proposal, provided that the total vote cast on the
Proposal represents over 50% in interest of all Units held by Unitholders of
record.
THE BOARD OF DIRECTORS OF THE GENERAL PARTNER UNANIMOUSLY RECOMMENDS THAT
YOU VOTE FOR THE PROPOSAL.
---------------------
NEITHER THE PROPOSAL TRANSACTION NOR SECURITIES TO BE OFFERED IN CONNECTION
THEREWITH HAVE BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE FAIRNESS
OR MERITS OF THE PROPOSAL OR THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The approximate date on which this Proxy Statement and the accompanying
form of proxy will first be distributed to Unitholders is February 8, 1999.
THE DATE OF THIS PROXY STATEMENT IS FEBRUARY 8, 1999
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information....................................... 1
Forward Looking Statements.................................. 1
The Special Meeting......................................... 2
The Proposal and the Proposal Transaction................... 4
Business of Viosca Knoll Gathering Company.................. 13
Interests of Certain Persons in the Proposal................ 14
Certain Federal Income Tax Considerations................... 15
Summary Financial Data...................................... 16
Summary Pro Forma and Historical Condensed Consolidated
Financial Data of Leviathan............................ 16
Summary Condensed Financial Data of Viosca Knoll Gathering
Company................................................ 17
Business and Properties of Leviathan........................ 18
Market Price of and Distributions on Leviathan's Units and
Related Unitholder Matters................................ 36
Description of Leviathan's Units............................ 40
Selected Financial Data..................................... 44
Selected Unaudited Pro Forma Condensed Consolidated
Financial Information of Leviathan..................... 44
Selected Consolidated Financial Information of
Leviathan.............................................. 45
Selected Financial Information of Viosca Knoll Gathering
Company................................................ 46
Supplemental Quarterly Financial Information for Leviathan
(Unaudited)............................................... 47
Supplemental Quarterly Financial Information for Viosca
Knoll Gathering Company (Unaudited)....................... 48
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 49
Quantitative and Qualitative Disclosures About Market
Risk...................................................... 59
Security Ownership of Certain Beneficial Owners and
Management................................................ 60
Independent Public Accountants.............................. 61
Experts..................................................... 61
Exhibits.................................................... A-1
Financial Statements........................................ F-1
</TABLE>
i
<PAGE> 8
AVAILABLE INFORMATION
Leviathan is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by Leviathan can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at Seven World Trade
Center, Suite 1300, New York, New York 10048 and CitiCorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material can be obtained by mail from the Public Reference Section of the
Commission at 450 West Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, reports, proxy statements and other information concerning
Leviathan may be inspected at the offices of the NYSE, 20 Broad Street, New
York, New York 10005. Certain of such reports, proxy statements and other
information filed by Leviathan are also available on the Internet at the
Commission's World Wide Web site at http://www.sec.gov.
FORWARD LOOKING STATEMENTS
This Proxy Statement contains certain forward looking statements and
information within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of 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 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 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 underlying Proposal Transaction
subsequent to the approval, if obtained, by the Unitholders of the Proposal and
(xiii) other factors discussed more completely in Leviathan's other filings with
the Commission. Leviathan disclaims any obligation to update any forward-looking
statements to reflect events or circumstances after the date hereof.
1
<PAGE> 9
THE SPECIAL MEETING
GENERAL
The Special Meeting will be held for the purpose of approving and ratifying
the Proposal. The Special Meeting is scheduled to be held on Friday, March 5,
1999 at 10:00 a.m., local time, on the ninth floor of The Travis Place Building,
1010 Travis, Houston, Texas 77002.
UNITHOLDERS ENTITLED TO VOTE; RECORD DATE
Unitholders of record at the close of business on January 28, 1999 (the
"Record Date") will be entitled to notice of and to vote on the Proposal at the
Special Meeting and any adjournment or postponement thereof. As of the Record
Date, 23,349,988 Common Units and 1,016,906 Preference Units were issued and
outstanding, 6,291,894 Common Units of which are owned by El Paso. Unitholders
are entitled to one vote for each Preference Unit or Common Unit held, as
applicable, on each matter on which Unitholders are entitled to vote.
A complete list of such Unitholders will be available for inspection at the
offices of Leviathan, El Paso Energy Building, 1001 Louisiana, Houston, Texas
77002 during normal business hours upon written demand by any Unitholder of
record or such Unitholder's agent or attorney beginning ten business days after
the date of this Proxy Statement and continuing through the Special Meeting. Any
Unitholder of record or such Unitholder's agent or attorney may, upon written
notice and subject to Section 17-305 of the Delaware Revised Uniform Limited
Partnership Act, copy the list of Unitholders during regular business hours
during the inspection period at the Unitholder's expense.
PROXIES
Any Unitholder of record entitled to vote on a matter may vote such
Unitholder's Units either in person or by duly authorized proxy. Any Unitholder
of record may revoke its proxy at any time before the vote or may vote
personally at the Special Meeting. All Units represented by effective proxies on
the enclosed form of proxy will be voted at the Special Meeting in accordance
with the terms of such proxies. If no instructions are given, the proxies will
be voted FOR the approval of the Proposal. A properly executed proxy marked
"ABSTAIN," although counted for purposes of determining whether there is a
quorum and for purposes of determining the number of units represented and
entitled to vote at the Special Meeting, will not be voted. A proxy marked
"ABSTAIN" will have the effect of a vote against the Proposal. Units represented
by "broker non-votes" (i.e., units held by brokers or nominees which are
represented at a meeting but with respect to which the broker or nominee is not
empowered to vote) will be counted for purposes of determining whether there is
a quorum at the Special Meeting.
VOTING PROCEDURES FOR BENEFICIAL OWNERS
The enclosed proxy includes the power to vote the number of Units
registered in a holder's name, according to the books of Leviathan's transfer
agent. Leviathan will mail this Proxy Statement and a proxy to all persons who,
according to the books of Leviathan's transfer agent, beneficially own Units. If
you have Units registered in the name of a brokerage firm or trustee and plan to
attend the Special Meeting, please obtain from the firm or trustee a letter,
account statement or other evidence acceptable to Leviathan of your beneficial
ownership of those Units to facilitate your admittance to the meeting. Brokers
which hold Units as nominees will not have discretionary authority to vote or
give consents with respect to such Units in the absence of instructions from the
beneficial owners thereof.
EFFECT OF NEGATIVE VOTE ON THE PROPOSAL
If the Proposal is approved and ratified by the Unitholders, Leviathan will
consummate the Proposal Transaction, subject to the satisfaction of any
conditions to closing. If the Proposal is not approved and ratified by the
Unitholders, Leviathan will not be able to issue the related Common Units. In
such event, Leviathan
2
<PAGE> 10
and El Paso would have to restructure the underlying transactions for Leviathan
to acquire the interest in VK. No assurance can be given as to when or if such
transactions could be restructured.
SOLICITATION
The expense of preparing, printing and mailing this Proxy Statement and the
proxies solicited hereby will be borne by Leviathan. In addition to the use of
the mails, proxies may be solicited by personnel of Leviathan, without
additional remuneration, in person or by telephone, telegraph or facsimile
transmission. Leviathan will also request brokerage firms, banks, nominees,
custodians and fiduciaries to forward proxy materials to the beneficial owners
of Units as of the Record Date and will provide reimbursement for the cost of
forwarding the proxy materials in accordance with customary practice. Leviathan
expects the proxy solicitation costs to be less than $25,000. Your cooperation
in promptly signing and returning the enclosed proxy card will help to avoid
additional expenses.
ADJOURNMENT OR POSTPONEMENT
The Special Meeting may be adjourned or postponed to another date and/or
place for any proper purposes (including, without limitation, for the purpose of
soliciting additional proxies).
PERCENTAGE VOTE REQUIRED
Although Unitholder approval is not required under Leviathan's partnership
agreement or any applicable Delaware law with respect to any element of the
Proposal, Leviathan is calling the Special Meeting to approve and ratify the
Proposal because the New York Stock Exchange ("NYSE") rules may require
Unitholder approval of the issuance of Common Units to its affiliate, El Paso,
under these circumstances. Since it will be having a Unitholder meeting to
authorize the issuance of such Common Units, Leviathan is requesting that
Unitholders approve and ratify the entire Proposal. A minimum vote of 50% of the
units entitled to vote are required for approval of the Proposal, provided a
majority of such votes are in favor of the Proposal.
3
<PAGE> 11
THE PROPOSAL AND THE PROPOSAL TRANSACTION
Certain abbreviations and words commonly used in the oil and gas industry
and in this Proxy Statement are defined in Exhibit "A" to this Proxy Statement.
THE CONTRIBUTION, COMMON UNIT ISSUANCE AND CASH PAYMENT
Currently, VK is owned 50% by Leviathan and 50% by El Paso. Leviathan
desires to acquire El Paso's 50% interest in VK. Initially, Leviathan would
acquire all of El Paso's interest in VK, other than a 1% interest in profits and
capital of VK, for approximately $85.260 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 VK an amount of
money equal to 50% of the amount outstanding under VK's current credit facility
(approximately $66.70 million), (ii) Leviathan will pay El Paso the cash and
Common Units discussed above and (iii) as required by Leviathan's Amended and
Restated Agreement of Limited Partnership (the "Partnership Agreement"), the
General Partner will contribute approximately $600,000 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 VK for a cash payment equal to the sum of $1.740 million plus the
amount of additional distributions (paid, payable or in arrears) which would
have been paid, accrued or been in arrears had Leviathan acquired the remaining
1% of VK at the initial closing by issuing additional Common Units in lieu of a
cash payment of $1.740 million.
The number of units actually issued by Leviathan in connection with the
Proposal would vary depending on the market price of Common Units during the
applicable trading reference period. Such number would 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 trading day 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 or more than $24.15.
Accordingly, Leviathan will neither issue less than 2,647,826 nor more than
3,205,263 Common Units in connection with the Proposal, subject to adjustment in
the event of any split or unit distribution and for any cash distributions by VK
prior to closing. Based on the closing sales price of the Common Units on
January 15, 1999 of $20.8125, Leviathan would issue 3,072,432 Common Units in
connection with the Proposal, which issuance would constitute approximately
11.2% of the Units (Common and Preference) outstanding immediately after such
issuance and would result in El Paso owning, indirectly through its
subsidiaries, a combined 35.8% effective interest in Leviathan, consisting of a
one percent (1%) general partnership interest, a 34.1% limited partnership
interest comprised of 9,364,326 Common Units and a one percent (1%) interest in
certain subsidiaries of Leviathan. Thus, the effect of such issuance may be to
dilute the interests of Unitholders in distributions by Leviathan and to make it
more difficult for a person or group to remove the General Partner as general
partner or otherwise change management of Leviathan. However, under the terms of
the proposed amendment to the Partnership Agreement (as further discussed
below), the required vote for approval of certain actions would change from
66 2/3% to 55% and El Paso, acting alone, would not be able to prevent such
actions, assuming a continuation of El Paso's level of ownership.
Although certain federal and state securities laws would otherwise limit El
Paso's ability to dispose of any Common Units held by it, pursuant to the terms
of the proposed registrations rights agreement attached to the Contribution
Agreement, as Exhibit "E," El Paso would have the right for ten (10) years to
require Leviathan to file a registration statement covering such Units. In
addition, El Paso would have the right to participate in offerings made pursuant
to certain other registration statements filed by Leviathan. 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 Proposal Transaction 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 Proposal Transaction, Leviathan would be the
beneficial owner of 99% of VK and have the option to acquire the remaining 1%
interest. To effect the Proposal Transaction, Leviathan and
4
<PAGE> 12
El Paso entered into a Contribution Agreement dated January 22, 1999 but
effective as of January 1, 1999. Consummation of the Proposal Transaction is
subject to the satisfaction of certain closing conditions, including, among
other things, obtaining Leviathan Unitholder approval, a written fairness
opinion from an independent financial advisor and certain third party consents.
The consent of the lenders under both Leviathan's and VK's credit facilities
must be obtained prior to consummating the Proposal Transaction. There can be no
assurance that all such required consents would be obtained. Management believes
that the Proposal Transaction does not require any federal, state or other
regulatory approval.
In connection with the Proposal Transaction, Leviathan would amend the
Partnership Agreement to decrease to 55% (from 66 2/3%) the vote required to
remove the general partner without cause.
ANTICIPATED ACCOUNTING TREATMENT
The Proposal Transaction would be accounted for as a purchase of VK by
Leviathan, which means the purchase price, including costs directly related to
the Proposal Transaction, would be allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the time of
completion of the Proposal Transaction. To the extent the purchase price exceeds
the fair value of VK's identified net assets, the excess will be assigned to
goodwill and amortized to expense over a period not to exceed 40 years. Results
of operations of VK will be included in Leviathan's financial statements after
the closing of the Proposal Transaction.
See "Certain Federal Income Tax Considerations" for a discussion of the
federal income tax consequences of Leviathan's consummation of the Proposal
Transaction.
5
<PAGE> 13
[Organizational Chart depicting organizational structure before and after
contribution.]
- ---------------
(1) Assumes, in connection with the Proposal, Leviathan issues 3,205,263 Common
Units, the maximum amount required by the Proposal.
(2) Leviathan would have the option to purchase this interest for a six-month
period commencing on the day after the first anniversary of the closing
date. See "-- The Contribution, Common Unit Issuance and Cash Payment."
6
<PAGE> 14
FAIRNESS
Recommendation of the Board of Directors of the General Partner. 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 Proposal. The Board believes the Proposal Transaction is fair to,
and in the best interests of, Leviathan and its Unitholders. The Board's
determination is based on, among other things, a multi-faceted review and
analysis of the Proposal Transaction, as well as the recommendation for approval
and ratification from the Special Committee (the "Special Committee") of
independent directors and the opinion of PaineWebber Incorporated
("PaineWebber"), the financial advisor engaged to assist the Special Committee
in its evaluation of the Proposal Transaction. The Special Committee was
comprised of the two independent directors serving on the Audit and Conflicts
Committee, Mr. Michael B. Bracy, who served as chairman, and Mr. Douglas Church.
Neither Mr. Bracy nor Mr. Church is an officer of Leviathan or an officer or
director of El Paso. Mr. Wallop, the other member of the Audit and Conflicts
Committee, was not appointed to the Special Committee.
Recommendation of the Special Committee of the Board of Directors of the
General Partner. At a meeting held by the Special Committee on January 19, 1999,
the Special Committee unanimously approved and ratified and recommended that the
Board and the Unitholders approve and ratify the Proposal and the underlying
Proposal Transaction. The Special Committee believes the Proposal Transaction is
fair to, and in the best interests of, Leviathan and the Unitholders. The
Special Committee's determination is based on, among other things, an
independent review and analysis of the Proposal Transaction. In connection with
its review and analysis of the Proposal Transaction, PaineWebber was engaged to
render an opinion to the Special Committee that, based upon and subject to
various qualifications and assumptions described therein, the proposed
consideration to be paid by Leviathan in the Proposal Transaction is fair, from
a financial point of view, to the Unitholders. See "-- Fairness Opinion of
PaineWebber to the Special Committee." A copy of such opinion of PaineWebber is
attached as Exhibit B to this Proxy Statement.
Background of the Proposal Transaction. Representatives of Leviathan and El
Paso considered and negotiated the Proposal Transaction for almost four months
beginning in September 1998. The majority of the discussions took place between
Mr. Grant E. Sims, in his capacity as Leviathan's Chief Executive Officer, and
Mr. D. Mark Leland, in his capacity as Vice President of El Paso Field Services
Company, a wholly owned indirect subsidiary of El Paso. From the beginning of
negotiations, both Leviathan and El Paso agreed that, subject to a satisfactory
valuation of the VK interest and a structure of the transaction beneficial to
both parties, El Paso was willing to sell and Leviathan was willing to acquire
the VK interest.
Discussions continued through October and November 1998 and on December 1,
1998, Mr. Leland submitted a written proposal to Mr. Sims detailing El Paso's
initial valuation of the VK interest and the terms and structure of the
transaction satisfactory to El Paso. Mr. Sims verbally responded to Mr. Leland
regarding El Paso's proposal during the week of December 7, 1998. Further verbal
negotiations between Messrs. Sims and Leland continued through the weeks of
December 14, 1998 and December 21, 1998.
On December 14, 1998, Mr. Sims and Mr. Keith B. Forman, in his capacity as
Leviathan's Chief Financial Officer, contacted Mr. Bracy to apprise him of the
negotiations regarding the acquisition of the VK interest from El Paso. At such
time, Messrs. Bracy, Sims and Forman jointly agreed to retain PaineWebber to
represent the Special Committee in connection with the Proposal Transaction.
The parties reached a final verbal agreement of the Proposal Transaction on
or about December 30, 1998, which was documented in a letter dated January 4,
1999.
On January 8, 1999, Messrs. Bracy, Sims, Forman and other Leviathan
management personnel met with PaineWebber to discuss the historical and current
operations of VK and Leviathan and the outlook of their operations, including a
review of Leviathan's and VK's financial, legal, tax and accounting matters.
During the weeks of January 4, 1999 and January 11, 1999, outside counsel
prepared and delivered initial drafts of the definitive agreements. After
continuous negotiation, the definitive agreements were executed on January 21,
1999.
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<PAGE> 15
Fairness Opinion of PaineWebber to the Special Committee. PaineWebber was
retained to render an opinion to the Special Committee as to whether or not the
proposed consideration to be paid to El Paso by Leviathan in the Proposal
Transaction is fair, from a financial point of view, to the Unitholders.
THE FULL TEXT OF THE PAINEWEBBER OPINION, DATED JANUARY 19, 1999, WHICH
SETS FORTH THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS EXHIBIT "B" TO THIS PROXY
STATEMENT. YOU SHOULD READ THE PAINEWEBBER OPINION CAREFULLY AND IN ITS
ENTIRETY. THE SUMMARY OF THE PAINEWEBBER OPINION INCLUDED IN THIS DOCUMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE PAINEWEBBER
OPINION.
PaineWebber delivered its written opinion, dated January 19, 1999, to the
effect that, as of such date, and based upon its review and assumptions and
subject to the limitations summarized below, the proposed consideration to be
paid by Leviathan in the Proposal Transaction is fair, from a financial point of
view, to the Unitholders. The opinion was directed to, and prepared at the
request and for the information of, the Special Committee and does not
constitute a recommendation to any holder of Leviathan Units as to how any such
holder should vote at the Special Meeting. The opinion does not address the
relative merits of the Proposal Transaction and any other transactions or
business strategies discussed by the Special Committee as alternatives to the
Proposal Transaction or the decision of the Special Committee to proceed with
the Proposal Transaction.
In arriving at its opinion, PaineWebber has, among other things:
- Reviewed VK's audited financial information for the four fiscal years
ended December 31, 1997 and its unaudited financial information for the
eleven months ended November 30, 1998.
- Reviewed Leviathan's annual reports, forms 10-K and related financial
information for the five fiscal years ended December 31, 1997 and
Leviathan's form 10-Q and the related unaudited financial information for
the nine months ended September 30, 1998.
- Reviewed certain information, including financial forecasts, relating to
the business, earnings, cash flow, assets and prospects of VK and
Leviathan.
- Conducted discussions with members of senior management of Leviathan
concerning the businesses and prospects of VK and Leviathan.
- Compared the results of operations of VK and Leviathan with that of
certain other companies.
- Compared the proposed financial terms of the Proposal Transaction with
the financial terms of certain other mergers and acquisitions.
- Considered the pro forma effect of the Proposal Transaction on
Leviathan's earnings before interest, taxes, depreciation and
amortization ("EBITDA"), distributable cash flow (calculated as EBITDA
less interest expense and maintenance capital expenditures)
("Distributable Cash Flow"), Distributable Cash Flow per Common Unit and
distribution coverage ratios.
- Reviewed the historical market prices and trading activity for the
securities of Leviathan and compared such prices and trading activity
with those of certain other publicly traded companies.
- Reviewed a draft of the Contribution Agreement dated January 14, 1999, a
draft of the registration rights agreement dated January 14, 1999 between
Leviathan and El Paso, and a draft of the option agreement dated January
14, 1999 between Leviathan and El Paso.
- Reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as it
considered appropriate.
In preparing the PaineWebber opinion, PaineWebber relied on the accuracy
and completeness of all information supplied or otherwise made available to it
by Leviathan, and PaineWebber did not assume any
8
<PAGE> 16
responsibility to independently verify such information. With respect to the
financial forecasts examined by PaineWebber, PaineWebber assumed that they were
reasonably prepared and reflect the best currently available estimates and good
faith judgments of the management of Leviathan as to the future performance of
Leviathan and VK. PaineWebber has also relied upon assurances of the management
of Leviathan that they are unaware of any facts that would make the information
or financial forecasts provided to PaineWebber incomplete or misleading.
PaineWebber has not made any independent evaluation or appraisal of the assets
or liabilities (contingent or otherwise) of Leviathan or VK nor has PaineWebber
been furnished with any such evaluations or appraisals. PaineWebber has also
assumed, with the consent of Leviathan, that any material liabilities
(contingent or otherwise, known or unknown) of Leviathan and VK are as set forth
in the consolidated financial statements of Leviathan and VK. No opinion was
expressed in the PaineWebber opinion as to the price at which the securities of
Leviathan may trade at any time. PaineWebber's opinion was based upon economic,
monetary and market conditions existing on the date thereof.
The following paragraphs summarize the significant analyses reviewed by
PaineWebber in arriving at the PaineWebber opinion.
Historical Unit Trading Performance. PaineWebber reviewed trading prices
for the Common Units and Preference Units of Leviathan. Prior to August 6, 1998,
the Preference Unit was the sole limited partnership trading Unit for Leviathan.
On August 6, 1998, the Preference Units were converted into Common Units, except
for approximately one million Preference Units, which remained outstanding. See
"Description of Leviathan's Units -- Preference Units." As a result of the Unit
conversion, for the purposes of this analysis, the trading prices of the
Preference Units were examined before August 6, 1998 and the trading prices of
the Common Units were examined since August 6, 1998. This Unit performance
review of the Preference Units and the Common Units for the applicable periods
described above indicated that for the twelve months ended January 15, 1999, the
low and high closing prices were $19.75 and $33.88. PaineWebber also reviewed
Leviathan's Common Unit prices on January 15, 1999, and at times and for periods
prior to the announcement of the Proposal Transaction on January 8, 1998, as set
forth in the following table:
<TABLE>
<CAPTION>
CLOSING
PRICE PER
DATE/PERIOD COMMON UNIT
- ----------- -----------
<S> <C>
January 15, 1999............................................ $20.81
One Day Prior to Announcement (1/7/99)...................... 22.88
One Week Prior to Announcement (12/31/98)................... 20.13
One Month Prior to Announcement (12/9/98)................... 21.38
Latest 90-day Average Prior to Announcement................. 23.66
Latest 180-day Average Prior to Announcement................ 26.05
</TABLE>
Selected Comparable Public Company Analysis. PaineWebber reviewed and
compared certain financial information relating to VK and Leviathan to the
corresponding financial information, ratios and public market multiples for the
publicly traded companies listed below deemed by PaineWebber to be comparable to
the businesses of VK or Leviathan.
<TABLE>
<S> <C>
Buckeye Partners, L.P. Northern Border Partners, L.P.
Kaneb Pipe Line Partners, L.P. Plains All American Pipeline, L.P.
Kinder Morgan Energy Partners, L.P. TEPPCO Partners, L.P.
Lakehead Pipe Line Partners, L.P.
</TABLE>
For each of these comparable companies, PaineWebber reviewed, among other
information, the multiples of implied total enterprise value ("Implied TEV")
calculated as market value of total partnership equity based on the value of the
publicly traded units and implied general partner equity plus total consolidated
debt and other long-term liabilities less cash and cash equivalents to (1)
latest twelve months reported EBITDA and (2) projected calendar year 1999
EBITDA. PaineWebber also reviewed, among other information, the comparable
companies' multiples of implied market value of total partnership equity based
on the value of the
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<PAGE> 17
publicly traded Units and implied general partner equity ("Implied MVE") to (1)
latest twelve months reported Distributable Cash Flow and (2) projected calendar
year 1999 Distributable Cash Flow. All projected calendar year 1999 estimates
for comparable companies were based on publicly available research estimates for
the comparable companies. As of January 15, 1999, the comparable companies'
relevant ranges of multiples were as set forth below:
<TABLE>
<CAPTION>
RANGE OF
CALCULATION PERFORMED MULTIPLES
- --------------------- -------------
<S> <C>
Implied TEV/Latest Twelve Months EBITDA..................... 10.2x - 12.0x
Implied TEV/Projected 1999 EBITDA........................... 9.4x - 10.3x
Implied MVE/Latest Twelve Months Distributable Cash Flow.... 9.8x - 13.5x
Implied MVE/Projected 1999 Distributable Cash Flow.......... 8.4x - 11.3x
</TABLE>
PaineWebber applied the relevant comparable companies' range of multiples
to the 50% interest in VK's latest twelve months EBITDA, forecast 1999 EBITDA,
latest twelve months Distributable Cash Flow and forecast 1999 Distributable
Cash Flow. The VK forecast was provided by Leviathan management. The comparable
companies analysis resulted in an implied range of total enterprise values for
the 50% interest in VK of $120 million to $140 million.
PaineWebber also applied the relevant comparable companies' ranges of
multiples to Leviathan's latest twelve months EBITDA, forecast 1999 EBITDA,
latest twelve months Distributable Cash Flow and forecast 1999 Distributable
Cash Flow. Leviathan's financial forecast was provided by Leviathan management.
The comparable companies analysis resulted in an implied range for the Leviathan
Common Units of $20.00 - $25.00 per Common Unit. In addition, PaineWebber
calculated the implied unit distribution yields of the relevant comparable
companies by taking the annualized indicated quarterly unit distribution and
dividing it by the current unit price as of January 15, 1999. PaineWebber risk
adjusted the median yield of the relevant comparable companies and applied the
risk adjusted median yield range to the current annualized cash distribution per
Leviathan Common Unit to calculate an implied risk adjusted value range for the
Leviathan Common Units. The implied risk adjusted value range for the Leviathan
Common Units was $21.00 - $25.00 per Common Unit.
Selected Comparable Transaction Analysis. PaineWebber reviewed publicly
available financial information for selected mergers and acquisitions involving
companies engaged in the gathering, distribution and transportation of oil and
natural gas. PaineWebber noted there are no directly comparable transactions to
the Proposal Transaction. The selected mergers and acquisitions PaineWebber
analyzed included:
ACQUIROR/TARGET
Duke Energy Corporation/Union Pacific Resources Company (selected
assets)
CMS Energy Corporation/Duke Energy Corporation (selected assets)
TEPPCO Partners, L.P./Duke Energy Corporation (selected assets)
TransMontaigne Oil Company/Louis Dreyfus Energy Corp.
CMS Energy Corporation/Continental Natural Gas, Inc.
Midcoast Energy Resources, Inc./El Paso Field Services (selected
assets)
Plains Resources Inc./The Goodyear Tire & Rubber Company (selected
assets)
Koch Midstream/USX-Delhi Group
Kinder Morgan Energy Partners, L.P./Santa Fe Pacific Pipeline
Partners, L.P.
K N Energy, Inc./American Oil & Gas Corporation
K N Energy, Inc./Interenergy Corporation
Midcoast Energy Resources, Inc./Atrion Corporation (selected assets)
PG&E Corporation/Valero Energy Corporation (selected assets)
Basis Petroleum, Inc./Howell Corporation
Tejas Gas Corporation/Transok, Inc.
El Paso Field Services/Cornerstone Natural Gas, Inc.
Howell Corporation/Exxon Corporation (selected assets)
Kaneb Pipe Line Partners, L.P./Wyco Pipe Line Company (selected
assets)
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<PAGE> 18
PaineWebber reviewed the consideration paid (based on stock prices on the
day prior to the announcement of the transaction, when applicable) in the
relevant comparable transactions and calculated the multiples of total
enterprise value, calculated as market value of equity plus total debt and other
long-term liabilities less cash and cash equivalents, to the target's latest
twelve months EBITDA. The relevant comparable transactions range of multiples
was 7.0x to 9.0x. PaineWebber applied these multiples to the 50% interest in
VK's latest twelve months EBITDA which resulted in an implied range of total
enterprise values for the 50% interest in VK of $90 million to $115 million.
Discounted Cash Flow Analysis. PaineWebber analyzed VK based on an
unleveraged pre-tax discounted cash flow analysis of the forecast financial
performance of VK. Such forecast financial performance was based on the
five-year financial forecast for VK prepared by Leviathan management. The
discounted cash flow analysis was used to determine the discounted present value
of the unleveraged pre-tax cash flows generated by VK over the five-year
forecast period, and for the period beyond the five-year forecast period a
terminal value was derived based upon a range of EBITDA multiples in year five
of 7.0x to 9.0x. The unleveraged cash flows and terminal value were discounted
using a range of discount rates of 10.0% to 14.0%. The unleveraged discounted
cash flow analysis resulted in an implied range of total enterprise values for
the 50% interest in VK of $75 million to $90 million.
PaineWebber analyzed the value of Leviathan's Common Units based on a
discounted cash flow analysis of the forecast cash distributions per Common
Unit. Such forecast cash distributions were based on the five-year financial
forecast for Leviathan prepared by Leviathan management. The discounted cash
flow analysis was used to determine the pre-tax discounted present value of the
cash distributions per Common Unit generated over the five-year forecast period,
and for the period beyond the five-year forecast period a terminal value was
derived based upon a range of cash distributions per Common Unit multiples in
year five of 10.0x to 12.0x. The cash distributions per Common Unit and terminal
value were discounted using a range of discount rates of 7.5% to 9.5%. The
pre-tax discounted cash flow analysis resulted in a range of values for
Leviathan's Common Units of $21.00 to $26.00 per Common Unit.
Pro Forma Analysis. PaineWebber performed an analysis of the pro forma
effect of the Proposal Transaction on Leviathan's distributable cash flow per
Common Unit for the forecast fiscal years 1999 and 2000. PaineWebber combined
the forecast operating results for the 50% interest in VK to be acquired with
the forecast operating results of Leviathan to arrive at the pro forma
distributable cash flow per Common Unit. PaineWebber compared the combined
company's forecast distributable cash flow per Common Unit to Leviathan's
stand-alone forecast distributable cash flow per Common Unit. Based on such
analyses, the Proposed Transaction would be accretive to Leviathan's
distributable cash flow per Common Unit for the forecast fiscal years 1999 and
2000.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative methods of financial analyses and
the application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to partial analysis or summary
description. Accordingly, PaineWebber believes that its analysis must be
considered as a whole and that considering any portion of such analysis and of
the factors considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying the PaineWebber
opinion. In its analyses, PaineWebber made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Leviathan and VK. Any estimates
contained in these analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than as set forth therein. In addition, analyses relating to the value
of businesses do not purport to be appraisals or to reflect the prices at which
businesses may actually be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty and neither Leviathan nor
PaineWebber assume responsibility for the accuracy of such analyses and
estimates.
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<PAGE> 19
PaineWebber was selected to render a fairness opinion in connection with
the Proposal Transaction because PaineWebber is a prominent investment banking
and financial advisory firm with experience in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of securities, private placements and
valuations for corporate purposes.
Pursuant to an engagement letter between Leviathan and PaineWebber dated
January 13, 1999, PaineWebber has earned a customary fee for rendering the
PaineWebber opinion. PaineWebber's compensation for services in rendering the
opinion was not contingent upon the results of the opinion. In addition,
PaineWebber will be reimbursed for certain of its related expenses. Leviathan
also agreed, under separate agreement, to indemnify PaineWebber, its affiliates
and each of its directors, officers, agents and employees and each person, if
any, controlling PaineWebber or any of its affiliates against certain
liabilities, including liabilities under federal securities laws.
In the past, PaineWebber and/or its affiliates have provided investment
banking and other financial services to Leviathan and have received fees for
rendering these services.
In the ordinary course of business, PaineWebber and its affiliates may
trade the securities of Leviathan and El Paso for their own accounts and for the
accounts of their customers and, accordingly, may at any time hold long or short
positions in such securities.
12
<PAGE> 20
BUSINESS OF VIOSCA KNOLL GATHERING COMPANY
OVERVIEW
VK, a Delaware general partnership currently owned 50% by Leviathan and 50%
by El Paso, was formed in May 1994 to construct, own and operate 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, Louisiana (the "VK system"). The VK system has a maximum design
capacity of approximately 1 billion cubic feet ("Bcf") of gas per day and
consists of 125 miles of predominantly 20-inch gas pipelines and a large
compressor. VK 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 VK to effect deliveries at the
operating pressures on downstream interstate pipelines with which it is
interconnected. The additional capacity created by such compression allowed VK
to transport new 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, VK added approximately 25 miles of parallel 20-inch pipelines.
During 1998, the VK system gathered an average of approximately 560 million
cubic feet ("MMcf") of gas per day, approximately 93% of which was from firm
commitments. Generally speaking, VK's customers commit their interest in
producing fields to the system for the life of the reserves. VK's primary
customers are Shell, Snyder Oil Corporation (formerly Delmar Operating, Inc.)
and Flextrend Development Company, L.L.C., a subsidiary of Leviathan
("Flextrend"). Flextrend's production represented 6% of VK's throughput during
1998.
VK has a revolving credit facility with a syndicate of commercial banks to
provide up to $100 million for working capital needs. VK's ability to borrow
money under the facility is subject to certain customary terms and conditions,
including borrowing base limitations. The VK credit facility is secured by a
substantial portion of VK's assets and matures on December 20, 2001. As of
December 31, 1998, VK had $66.7 million outstanding under its credit facility
bearing interest at an average floating rate of 6.6% per annum. Currently,
approximately $33.3 million of additional funds are available under the VK
credit facility.
Prior to closing the Proposal Transaction, consent must be obtained from
lenders under the VK credit facility, as well as the Leviathan credit facility.
At such time, either or both of such facilities may be restructured. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Sources of Cash."
Upon consummation of the Proposal Transaction, Leviathan would be the
beneficial owner of 99% of VK and have the option to acquire the remaining 1%
interest for a six month period of time beginning one year after the
consummation of the Proposal Transaction.
VK's principal executive office is located at the El Paso Energy Building,
1001 Louisiana, Houston, Texas 77002 and the phone number is (713) 420-2131.
13
<PAGE> 21
RISKS INHERENT IN VK'S BUSINESS
Having owned 50% of VK since its formation in 1994, Leviathan is familiar
with, and its other operations generally have risks similar to, the risks
associated with VK's business. Some of those risks are identified below:
The VK system must access additional reserves to offset the natural
decline in production from existing wells connected to its pipelines and
wells to be connected thereto. Development of additional reserves in areas
accessible to the VK system will require significant capital expenditures
by third party producers. Such development will depend on certain economic
and business factors beyond the control of VK. Furthermore, no assurance
can be given that the production therefrom will be transported by the VK
system since VK will compete for such transportation with other pipelines.
Competition within the gas pipeline industry is intense and often
heightened during the highs and lows of business cycles. Generally, such
cycles are closely related to oil and gas commodity prices, which may
decline rapidly, as has occurred within the last nine months. The direction
of these prices in the future and the resultant effect on VK's business,
including throughput levels and transportation rates, is uncertain. There
can be no assurance that economic conditions will be favorable in the near
future for VK's business. See "-- Business and Properties of
Leviathan -- Competition" and "-- Business and Properties of
Leviathan -- Industry Conditions."
Revenues will decrease to the extent pipeline operations are curtailed
due to safety concerns or damage caused by natural disasters or other
events not controlled by VK, possibly impairing Leviathan's ability to make
cash distributions to the Unitholders.
VK could be adversely affected by environmental costs and liabilities
that may be incurred.
Cash distributions will depend upon VK's future performance, which
will depend primarily on throughput levels achieved and the rates
applicable thereto. Throughput levels and rates will be affected by a
number of factors, many of which are beyond the control of VK. Accordingly,
there can be no assurance that VK will generate and distribute any minimum
level of cash.
Cash distributions from VK to Leviathan could be interrupted or
prohibited under the terms of its credit facility, thereby reducing the
cash available for distribution to the Unitholders. The assets of VK are
pledged to secure VK's $100 million revolving credit facility, the terms of
which limit or prohibit distributions under certain circumstances. Further,
the lenders under the credit facility have the right to foreclose on the
assets of VK if an event of default occurs.
INTERESTS OF CERTAIN PERSONS IN THE PROPOSAL
El Paso has an inherent conflict of interest with respect to the Proposal
Transaction. First, an indirect wholly-owned subsidiary of El Paso, Leviathan
Gas Pipeline Company, serves as the general partner of Leviathan and owns a
combined 27.3% effective interest in Leviathan. In addition, the seller of the
VK interest, EPEC Deepwater Gathering Company ("EPEC Deepwater"), is an indirect
wholly-owned subsidiary of El Paso. El Paso acquired its ownership of EPEC
Deepwater in connection with its November 1996 acquisition of Tenneco, Inc. and
its subsidiaries. Second, El Paso's share of any distributions from VK to
Leviathan that are then distributed by Leviathan to its Unitholders will be
greater than El Paso's effective ownership interest in Leviathan (estimated to
be up to 35.8% after closing the Proposal Transaction) to the extent the General
Partner continues to receive Incentive Distributions (as defined herein) when
Leviathan achieves certain financial targets. Third, if the Proposal Transaction
is consummated, the Common Units, coupled with the related registration rights,
would provide El Paso with more liquidity than its current direct interest in
VK.
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<PAGE> 22
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
ALLOCATION OF GAIN AND LOSS
As generally required by Section 704(c) of the Internal Revenue Code (the
"Code"), certain items of Leviathan's partnership income, deduction, gain and
loss are allocated ("Section 704(c) Allocations") solely for tax purposes to
account for (i) the difference between the tax basis and fair market value of
property with respect to the Units currently outstanding (the "Current Book-Tax
Disparity") and (ii) the difference between the tax basis and fair market value
of property contributed in exchange for additional Units (the "Additional
Book-Tax Disparity") at the time the additional Units are issued. Section 704(c)
Allocations are generally intended to cause partners who did not contribute
property to receive allocations of depreciation, gain or loss from contributed
properties equal to that which they would have received had such properties
actually had a tax basis equal to their fair market value when contributed to
Leviathan. For purposes of the Section 704(c) Allocations, the current
Unitholders and the General Partner are deemed to have contributed all of
Leviathan's assets to Leviathan at the time the additional Units are issued.
Thus, pursuant to the Section 704(c) Allocations and as a result of the Current
Book-Tax Disparity, the current holders of Units and the General Partner may
suffer a reduction to their respective allocations of tax depreciation, gain or
loss following the issuance of the additional Common Units. Section 704(c)
Allocations attributable to any Additional Book-Tax Disparity will, however,
accrue to the benefit of current Unitholders and the General Partner. After an
analysis of the effect of the Section 704(c) Allocations, the General Partner
does not believe that the issuance of additional Units in the Proposal
Transaction will have a material adverse impact on current Unitholders.
TERMINATION
Under the Code, a partnership will be considered to have been terminated
for tax purposes if within a 12-month period there is a sale or exchange of 50%
or more of the interests in partnership capital and profits. A partnership
interest that changes hands more than once during a 12-month period will only be
counted once for purposes of determining whether a termination has occurred. The
General Partner does not believe that the contribution of the 49% interest in VK
will result in a constructive termination of VK under the Code.
A termination of VK would result in the closing of VK's taxable year. New
tax elections required to be made by VK, including a new election under Section
754 of the Code, must be made subsequent to a termination, and a termination
could result in a deferral of VK's deductions for depreciation. A termination
could also result in penalties if VK were unable to determine that the
termination had occurred. Moreover, a termination might either accelerate the
application of, or subject VK to, any tax legislation enacted prior to the
termination.
15
<PAGE> 23
SUMMARY FINANCIAL DATA
SUMMARY PRO FORMA AND HISTORICAL CONDENSED CONSOLIDATED
FINANCIAL DATA OF LEVIATHAN
The unaudited pro forma condensed consolidated financial data of Leviathan
is based on the assumptions described in the notes to the unaudited pro forma
condensed consolidated financial statements located on pages F-3 through F-8 and
is not necessarily indicative of the results of operations that may be achieved
in the future. The summary condensed consolidated financial information of
Leviathan as of and for each of the nine months ended September 30, 1998 and
1997 was derived from Leviathan's unaudited financial statements included
elsewhere in this Proxy Statement. Leviathan believes that all material
adjustments, consisting only of normal recurring adjustments necessary for the
fair presentation of Leviathan's interim results, have been included. The
historical financial data of Leviathan for each of the three years ended
December 31, 1997, 1996 and 1995, and as of December 31, 1997 and 1996 was
derived from Leviathan's consolidated financial statements and notes thereto
included elsewhere in this Proxy Statement. The historical financial data as of
December 31, 1995 has been derived from the historical consolidated financial
statements of Leviathan (not included herein). The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and notes thereto listed on pages F-1 and F-2.
<TABLE>
<CAPTION>
PROFORMA HISTORICAL
---------------------------- ----------------------------------------------------------------
NINE MONTHS NINE MONTHS ENDED
ENDED YEAR ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
SEPTEMBER 30, DECEMBER 31, ------------------------- ----------------------------------
1998 1997 1998 1997 1997 1996 1995
------------- ------------ ----------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<CAPTION>
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Oil and gas sales............. $ 22,740 $ 58,106 $ 22,270 $ 49,124 $ 58,106 $ 47,068 $ 1,858
Gathering, transportation and
platform services............ 33,612 40,457 12,866 14,005 17,329 24,005 20,547
Equity in earnings............ 12,533 21,017 19,181 21,599 29,327 20,434 19,588
-------- -------- -------- -------- -------- -------- --------
Total revenue.......... 68,885 119,580 54,317 84,728 104,762 91,507 41,993
-------- -------- -------- -------- -------- -------- --------
Operating expenses............ 10,347 13,342 8,558 8,674 11,352 9,068 4,092
Depreciation, depletion and
amortization................. 25,859 50,170 21,897 39,474 46,289 31,731 8,290
Impairment, abandonment and
other........................ (1,131) 21,222 (1,131) 21,222 21,222 -- --
General and administrative
expenses and management
fee.......................... 14,064 14,786 13,937 10,219 14,661 8,540 7,069
-------- -------- -------- -------- -------- -------- --------
Total operating
costs................. 49,139 99,520 43,261 79,589 93,524 49,339 19,451
-------- -------- -------- -------- -------- -------- --------
Operating income.............. 19,746 20,060 11,056 5,139 11,238 42,168 22,542
Interest income and other..... 586 1,515 552 1,322 1,475 1,710 1,884
Interest and other financing
costs........................ (16,235) (15,576) (13,711) (10,350) (14,169) (5,560) (833)
Minority interest in (income)
loss......................... (200) (254) 12 34 7 (427) (251)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes........................ 3,897 5,745 (2,091) (3,855) (1,449) 37,891 23,342
Income tax benefit............ 371 311 371 238 311 801 603
-------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ 4,268 $ 6,056 $ (1,720) $ (3,617) $ (1,138) $ 38,692 $ 23,945
======== ======== ======== ======== ======== ======== ========
Basic and diluted income
(loss) per Unit.............. $ 0.13 $ 0.19 $ (0.06) $ (0.14) $ (0.06) $ 1.57 $ 0.97
======== ======== ======== ======== ======== ======== ========
Distributions declared per
Common Unit.................. $ 1.575 $ 1.85 $ 1.575 $ 1.35 $ 1.85 $ 1.45 $ 1.20
======== ======== ======== ======== ======== ======== ========
Distributions declared per
Preference Unit.............. $ 1.325 $ 1.85 $ 1.325 $ 1.35 $ 1.85 $ 1.45 $ 1.20
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA (AT END OF
PERIOD):
Property, plant and equipment,
net.......................... $340,336 (a) $207,007 $187,338 $200,639 $286,555 $285,275
Equity investments............ 167,139 (a) 185,148 182,493 182,301 107,838 82,441
Total assets.................. 526,926 (a) 405,300 395,738 409,842 453,526 398,696
Notes payable................. 345,415 (a) 291,000 220,000 238,000 227,000 135,780
Partners' capital:
Preference unitholders....... 7,587 (a) 7,587 170,481 163,426 196,224 192,225
Common unitholders........... 164,721 (a) 101,276 (12,944) (15,400) (3,969) (5,380)
General partner.............. (12,316) (a) (12,962) (2,612) (4,060) (232) (4)
Total partners'
capital............... 159,992 (a) 95,901 154,925 143,966 192,023 186,841
Book value per Unit........... 5.83 (a) 3.94 (a) 5.91 (a) (a)
</TABLE>
- ---------------
(a) Information has not been included as it is not required.
16
<PAGE> 24
SUMMARY CONDENSED FINANCIAL DATA
OF VIOSCA KNOLL GATHERING COMPANY
The condensed financial information of VK as of and for each of the nine
months ended September 30, 1998 and 1997 and for each of the three years ended
December 31, 1997, 1996 and 1995 and at December 31, 1997 and 1996 was derived
from VK's financial statements included elsewhere in this Proxy Statement. VK
believes that all material adjustments, consisting only of normal recurring
adjustments necessary for the fair presentation of VK's interim results, have
been included. The historical financial data of VK as of December 31, 1995 has
been derived from the historical financial statements of VK (not included
herein). The information set forth below should be read in conjunction with
financial statements and notes thereto listed on pages F-1 and F-2.
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------- ----------------------------
1998 1997 1997 1996 1995
----------- ----------- -------- ------- -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS(A):
Transportation services................ $ 20,746 $16,171 $ 23,128 $13,923 $ 7,107
Oil and gas sales...................... 470 -- -- -- --
-------- ------- -------- ------- -------
Total revenue................ 21,216 16,171 23,128 13,923 7,107
-------- ------- -------- ------- -------
Operating expenses..................... 1,789 1,302 1,990 298 403
Depreciation........................... 2,907 1,791 2,474 2,269 2,224
General and administrative expenses.... 127 100 125 126 118
-------- ------- -------- ------- -------
Total operating costs........ 4,823 3,193 4,589 2,693 2,745
-------- ------- -------- ------- -------
Operating income....................... 16,393 12,978 18,539 11,230 4,362
Interest income........................ 34 14 40 -- --
Interest and other financing costs..... (3,131) (1,374) (1,959) (90) --
Minority interest in income............ -- -- -- -- --
-------- ------- -------- ------- -------
Net income................... $ 13,296 $11,618 $ 16,620 $11,140 $ 4,362
======== ======= ======== ======= =======
Distributions paid to partners......... $ 14,900 $ 5,825 $ 19,300 $36,900 $ 5,650
======== ======= ======== ======= =======
BALANCE SHEET DATA (AT END OF
PERIOD)(A):
Property, plant and equipment, net..... $ 98,156 $80,459 $ 97,708 $71,108 $64,664
Total assets........................... 104,316 85,199 101,358 75,957 66,321
Notes payable.......................... 66,200 42,500 52,200 33,300 --
Partners' capital...................... 36,018 40,271 37,622 39,982 62,723
</TABLE>
- ---------------
(a) Information for book value per share, net income per share and dividends
per share have not been included as it is not applicable to VK, a Delaware
general partnership consisting of two partners.
17
<PAGE> 25
BUSINESS AND PROPERTIES OF LEVIATHAN
Unless the context otherwise requires, references in this section to
Leviathan shall include the operations and ownership of Leviathan and its
subsidiaries.
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) 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 gas properties and (vi) an
undeveloped oil and gas property. 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 pursuant to a
merger with DeepTech International Inc. ("DeepTech") on August 14, 1998. See
"-- Recent Events -- 1998 -- Merger."
Leviathan, a Delaware limited partnership, was formed in December 1992 with
the principal objective of becoming a major natural gas gatherer and transporter
in the Gulf. In the last five years, Leviathan's operations have grown through
acquisitions, pipeline expansions and the development of oil and gas reserves.
As of December 31, 1993, Leviathan had interests in seven pipeline systems,
extending over approximately 721 miles, which transported an average of 2.3 Bcf
of gas per day. From that date, Leviathan has (i) acquired all of the Manta Ray
system and constructed and acquired a 50% interest in the VK system in 1994;
(ii) constructed two multi-purpose platforms located at Viosca Knoll Block 817
and Garden Banks Block 72 in 1995 and early 1996, respectively; (iii) formed
Flextrend to acquire, develop and produce significant working interests in oil
and gas reserves located in the Gulf in 1995; (iv) completed construction of
Poseidon, in which Leviathan owns a 36% working interest, in 1996; (v) acquired
a 25.67% interest in Nautilus and Manta Ray Offshore, to which Leviathan
contributed substantially all of the Manta Ray system (originally acquired in
1994), in 1997; and (vi) constructed a multi-purpose platform located in East
Cameron Block 373 and acquired a 100% working interest in the Sunday Silence
Property (described below) in 1998. Accordingly, as of December 31, 1998,
Leviathan had interests in eight pipeline systems, extending over approximately
1,500 miles, which transported an average of approximately 3.1 Bcf of gas and
130,000 barrels of oil per day, as well as certain strategically located
platforms and other facilities and oil and gas properties. This growth has
strengthened Leviathan's underlying assets and positioned it to capitalize on
growth opportunities in the Gulf.
Leviathan commenced operations in February 1993 in connection with an
approximately $112 million initial public offering of Preference Units. As a
result of that public offering, the General Partner held the 1% general partner
interest and all of the Common Units and the public held all of the Preference
Units. In June 1994, Leviathan completed a second public offering of Preference
Units for approximately $84 million. In August 1998, approximately 94% of the
Preference Units then outstanding were converted to Common Units. See "-- Recent
Events -- 1998 -- Conversion of Preference Units into Common Units."
As of January 15, 1999, Leviathan had 1,016,906 Preference Units and
23,349,988 Common 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 its ownership of a 25.3%
limited partner interest in the form of 6,291,894 Common Units of Leviathan, a
1% general partner interest in Leviathan and a 1% nonmanaging member interest in
certain of Leviathan's subsidiaries. The Preference Units and the Common Units
are listed on the NYSE under the symbols "LEV.P" and "LEV," respectively. The
closing prices of the Preference Units and Common Units on the NYSE on January
15, 1999 were $18.00 and $20.8125 per Unit, respectively.
Leviathan's principal executive office is located at the El Paso Energy
Building, 1001 Louisiana, Houston, Texas 77002 and its phone number is (713)
420-2131.
18
<PAGE> 26
RECENT EVENTS -- 1998
Conversion of Preference Units into Common Units. On May 6, 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, had elected to convert to Common Units.
As a result, the Preference Period 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 now 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 Units or the General Partner. However,
Preference Units will not receive any distributions in excess of the minimum
quarterly distribution of $0.275 per Unit. Only Common Units and the General
Partner will be eligible to receive any of such excess 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. See
"Description of Leviathan's Units -- General -- Preference Units."
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 transaction contemplated by the Merger Agreement and other agreements as
these agreements relate to Leviathan are as follows:
(a) El Paso acquired the minority interests of Leviathan Holdings
Company, which owns 100% of the General Partner, and two other
subsidiaries of DeepTech primarily held by DeepTech management for an
aggregate of $55.0 million. Prior to the Merger, Leviathan Holdings
Company was owned 85% by DeepTech. As a result, El Paso owns 100% of
the General Partner 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 gas properties owned by
Leviathan.
(c) On August 14, 1998, Tatham Offshore transferred its remaining assets
located in the Gulf to Leviathan in consideration of the redemption
by Tatham Offshore of its 7,500 shares of Series B 9% Senior
Convertible Preferred Stock (the "Senior Preferred Stock") owned by
Leviathan (the "Redemption Agreement"). Under the terms of the
Redemption Agreement, Leviathan exchanged the Senior Preferred Stock
for 100% of Tatham Offshore's right, title and interest in and to VK
Blocks 772, 773, 774, 817, 818 and 861 (subject to an existing
production payment obligation), West Delta Block 35, Ewing Bank
Blocks 871, 914, 915 and 916 and the platform located at Ship Shoal
Block 331. 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
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 new 100% owned multi-purpose platform with processing facilities
located in East Cameron Block 373 which cost $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
19
<PAGE> 27
Corporation leases the platform from Leviathan under an operating and lease
agreement and has committed its production from multiple blocks in the East
Cameron and Garden Banks areas to be processed on this platform and transported
through the Stingray system.
Sunday Silence. 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 subsidiary of DeepTech for approximately $11.6
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 announced that the Ewing Bank Block 958 #2 well, a
delineation well in the Sunday Silence Property, had been successfully drilled
to a total measured depth of 14,396 feet. This well, the third successful well
to be drilled in the field, encountered about 80 feet of net pay in two
hydrocarbon-bearing sands, including some 65 net feet of high-porosity, high
resistivity pay in the main field sand. See "Oil and Gas Properties -- Sunday
Silence Property."
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 gas
companies. The Equity Investees include Stingray Pipeline Company ("Stingray"),
U-T Offshore System ("UTOS") and VK, all of which are partnerships, and High
Island Offshore System, L.L.C. ("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.
Through its 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
approximately 1,167 miles of pipeline with a throughput capacity of
approximately 6.5 Bcf of gas per day. During the years ended December 31, 1998,
1997 and 1996, the Gas Pipelines transported an average of approximately 3.1
Bcf, 2.7 Bcf and 2.7 Bcf, respectively, of 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
gas, thus avoiding the commodity risk associated with the purchase and resale of
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, VK, Green Canyon Pipe Line Company, L.L.C.
("Green Canyon"), Ewing Bank Gathering Company, L.L.C. ("Ewing Bank") or Tarpon
Transmission Company ("Tarpon") is currently considered a "natural gas company"
under the NGA. See "-- Regulation."
Leviathan owns a 36% interest in Poseidon, 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.
20
<PAGE> 28
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
CANYON TARPON OFFSHORE(1) VK STINGRAY HIOS UTOS NAUTILUS(2) POSEIDON
------ ------ ----------- ----- -------- ----- ----- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ownership interest....... 100% 100% 25.67% 50% 50% 40% 33.3% 25.67% 36%
Unregulated (U)/
regulated(R)(3)........ 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(4) 1,000(5) 1,120 1,800 1,200 600 --
Approximate capacity
(MBbl per day)......... -- -- -- -- -- -- -- -- 400
Aggregate miles of
pipeline............... 68 40 225(1) 125 361 203 30 101(2) 297
Average net throughput
(MMcf/MBbl per day) for
calendar year ended:
December 31, 1997...... 148 50 195(6) 194 353 352 105 --(2) 22(8)
December 31, 1996...... 142 33 217(7) 144 373 372 103 --(2) 11(8)
December 31, 1995...... 71 42 226(7) 83 352 327 118 --(2) --(8)
</TABLE>
- ---------------
(1) In January 1997, Leviathan contributed substantially all of the Manta Ray
Gathering System and the Louisiana Offshore Gathering System to Manta Ray
Offshore. Leviathan continues to own 100% of two offshore platforms, 19
miles of oil pipeline and 14 miles of gas pipeline which were formerly a
part of the Manta Ray Gathering System.
(2) The Nautilus system was placed in service in late December 1997.
(3) The Regulated Pipelines are subject to extensive rate regulation by the FERC
under the NGA. See "-- Regulation."
(4) Represents the approximate aggregate capacity of the five pipelines
comprising the Manta Ray Offshore system, including approximately 52 miles
of pipeline with a capacity of 275 MMcf of gas per day that was placed in
service in November 1997.
(5) The original maximum design capacity of the VK system was 400 MMcf of gas
per day. In 1996, VK installed a 7,000 horsepower compressor on Leviathan's
Viosca Knoll Block 817 platform to allow the VK system to effect deliveries
at the operating pressures on downstream interstate pipelines with which it
is interconnected, resulting in an increase in throughput capacity to
approximately 700 MMcf of gas per day. The additional capacity also allowed
the VK system to transport new 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, VK added approximately 25 miles of
parallel 20-inch pipelines which increased its throughput capacity to
approximately 1,000 MMcf per day.
(6) Represents throughput specifically allocated to Leviathan by Manta Ray
Offshore during the initial year of operations.
(7) Represents 100% ownership interest during this period.
(8) Poseidon was placed in service in three phases, in April 1996, December 1996
and December 1997.
Currently, Leviathan operates all of its 100% owned pipelines and the VK
system. The remaining joint venture pipelines are operated by unaffiliated
pipeline companies.
Tarpon System. The Tarpon system, 100% owned and operated by Leviathan, is
a non-regulated gas transmission facility consisting of approximately 40 miles
of 16-inch diameter offshore pipeline located on the edge of the Shelf, offshore
Louisiana. The Tarpon system 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 gathering system.
Green Canyon System. The Green Canyon system, 100% owned and operated by
Leviathan, consists of approximately 66 miles of 10- to 20-inch diameter
pipeline which transports gas from the South Marsh Island, Eugene Island, Garden
Banks and Green Canyon areas in the Gulf to the west leg of Transco's South
Lateral for transportation to shore in eastern Louisiana.
VK System. See "Business of Viosca Knoll Gathering Company."
Stingray System. The Stingray system, owned 50% by Leviathan and 50% by a
subsidiary of Natural Gas Pipeline Company ("NGPL"), consists of (i)
approximately 361 miles of six- to 36-inch diameter pipeline that transports
natural gas from the High Island, West Cameron, East Cameron and Vermilion lease
21
<PAGE> 29
areas in the Gulf to onshore transmission systems at Holly Beach, Cameron
Parish, Louisiana, and (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 the
Garden Banks Block 72 Platform, respectively, to the system.
High Island Offshore System. HIOS, effectively owned 40% by Leviathan, 40%
by subsidiaries of ANR Pipeline Company ("ANR") and 20% by a subsidiary of NGPL,
consists of approximately 203 miles of pipeline comprised of three supply
laterals, the West, Central and East Laterals, that connect to a 42-inch
diameter mainline. HIOS transports 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.
U-T Offshore System. 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 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 gas transported through UTOS
comes from HIOS. UTOS also owns the Johnson Bayou facility, which provides
primary gas and liquids separation and gas dehydration for natural gas
transported on the HIOS and UTOS systems. ANR operates the UTOS system.
Nautilus System. The Nautilus system, owned 25.7% by Leviathan, 50% by
Shell and 24.3% by Marathon Oil Company ("Marathon"), consists of 101 miles of
30-inch pipeline running downstream from Ship Shoal Block 207 and connecting to
a 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 Shell have dedicated for
transportation on the Nautilus system significant deepwater acreage positions in
the area. Shell operates the Nautilus system.
Manta Ray Offshore System. The Manta Ray Offshore system, owned 25.7% by
Leviathan, 50% by Shell and 24.3% by Marathon, consists of (i) three separate
gathering lines, all located offshore Louisiana in the Gulf, which consist of a
total of 70 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 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 Ewing Bank 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 46 miles of 24-inch pipeline extending form Green Canyon
Block 65 to Ship Shoal Block 207. Affiliates of Marathon and Shell have
dedicated for gathering on the Manta Ray Offshore System significant deepwater
acreage positions in the area. Shell operates the Manta Ray Offshore system.
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 118 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 77 miles of 24-inch diameter pipeline extending in a
northerly direction from the Ship Shoal Block 332 platform to Calliou Island,
Louisiana, (iii) approximately 60 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 and (iv) approximately 42 miles of
24-inch diameter pipeline extending in a northerly direction from Calliou Island
to Houma, Louisiana.
POPCO has been successful in obtaining long-term commitments for several
properties containing significant reserves. Texaco accepts oil from Poseidon at
Larose and Houma, Louisiana and redelivers it to
22
<PAGE> 30
St. James, Louisiana, a significant market hub for batching, processing and
transportation of oil. Texaco operates and performs the administrative functions
related to Poseidon and POPCO.
OIL AND 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. Leviathan 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.
Leviathan believes that there should be significant increases in reserves
committed to Poseidon over the next several years.
POPCO commenced operations on Poseidon in April 1996 and placed expansion
lines in service in December 1996 and December 1997. Currently, Poseidon is
transporting an average of 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 contracted with 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, Exxon, British Borneo, Reading and Bates, Occidental Petroleum
Corporation and Flextrend. In addition, discussions are currently pending with a
number of other producers regarding possible commitments of reserves to
Poseidon. Leviathan anticipates adding more commitments as new subsalt and
deepwater fields are developed in the area which it 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 Tarpon system experienced a 52% increase in throughput for the year
ended December 31, 1997 as compared with the previous year, primarily as a
result of new producing fields attached to the system in June and July 1997. The
VK system experienced an increase of 34% in throughput during 1997 primarily as
a result of new throughput from the Shell-operated Southeast Tahoe and
Ram-Powell fields. The Green Canyon system's throughput increased 4% for 1997 as
compared with 1996. UTOS experienced a 3% increase in transportation volume for
the year ended December 31, 1997 as compared with the previous year.
The Manta Ray Offshore system experienced a decline in throughput of 9%
during 1997 primarily as a result of temporary platform related production
problems from two of the fields connected to the system as well as lower
production from a low margin field connected to the system. HIOS experienced a
6% decrease in transportation volume for the year ended December 31, 1997 as
compared with the previous year. HIOS accesses the East Breaks and Garden Banks
areas of the flextrend and deepwater areas of the Gulf. Leviathan believes that
development in these and other areas served by HIOS is likely to occur in future
years, resulting in additional throughput on HIOS, and partially offsetting the
continuing decline in reservoir deliverability from existing wells connected to
HIOS. For the year ended December 31, 1997, Stingray experienced a 5% decrease
in throughput as compared with the previous year. The Ewing Bank system
experienced an 82% decrease in thoughput during 1997 compared with 1996 due to a
mechanical problem in May 1997 which shut-in Tatham Offshore's Ewing Bank Block
914 #2 well, the only production then dedicated to the Ewing Bank system. The
well and the Ewing Bank system were abandoned in May 1998.
OFFSHORE PLATFORMS AND OTHER FACILITIES
General. Offshore platforms play a key role in the development of oil and
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.
23
<PAGE> 31
VK Block 817. Leviathan constructed a multi-purpose platform located in VK
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 gas reserves
located on the VK 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 VK for the location of compression equipment for the VK system.
Garden Banks Block 72. Leviathan owns a 50% interest in a multipurpose
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 serves as the landing site for production from
Leviathan's Garden Banks Block 117 lease located in an adjacent lease block.
East Cameron Block 373. In 1998, Leviathan placed in service a new 100%
owned multi-purpose platform located in East Cameron Block 373 which cost $30.2
million. The four pile production platform with processing facilities 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 leases the platform from Leviathan under
an operating and lease agreement and has committed its production from multiple
blocks in the East Cameron and Garden Banks areas to be processed on this
platform and transported through the Stingray system. See "-- Recent
Events -- 1998 -- Construction of Multi-Purpose Platform."
Ship Shoal Block 332. Leviathan owns a 100% interest in the platform
located in Ship Shoal Block 332 which serves as a junction platform for gas
pipelines in Manta Ray Offshore's system as well as an eastern junction for
Poseidon.
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 currently operates this platform under
a lease and operating agreement.
South Timbalier Block 292. The South Timbalier Block 292 platform, a
100%-owned facility located at the easternmost terminus of Manta Ray Offshore's
system, serves as a landing site for gas production in the area.
Other Related 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, VK, 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
24
<PAGE> 32
the facilities on the platform, measurement of the 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 Pipeline Company, Transco Energy Company,
Trunkline Gas Co., subsidiaries of El Paso, 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 ability of the Pipelines or the
producers to fund the anticipated significant capital expenditures required to
connect the new production. See "-- Industry Conditions."
CUSTOMERS AND CONTRACTS
General. The Gas Pipelines gather and transport gas under both firm and
interruptible transportation service agreements. Under firm service agreements,
a pipeline is obligated to receive and deliver up to a specified maximum
quantity of gas without interruption, except upon occurrence of a force majeure
event. Firm customers often pay a two part rate, a demand charge and a commodity
charge. The demand charge 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. The commodity charge is payable monthly
based on the actual quantity of gas transported during such month. However, many
of the Gas Pipelines' firm customers pay only a one part rate that includes both
the demand and commodity components of the rate. Under interruptible contracts,
a pipeline is usually obligated to receive and deliver up to a specified maximum
quantity of gas, subject to availability of capacity, on a first-come,
first-served basis. Interruptible customers pay only a one-part commodity rate
that includes both the demand and commodity elements of the firm rate. Poseidon
receives crude oil from the leases connected to the pipeline under long-term
buy/sell agreements.
Principal Customers. See Leviathan's consolidated financial statements and
notes thereto located elsewhere in this Proxy Statement for certain information
regarding Leviathan's principal transportation customers.
OIL AND GAS PROPERTIES
General. Leviathan conducts exploration and production activities through
Flextrend, 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, 1997,
Leviathan owned interests in three lease blocks in the Gulf comprising 17,280
gross (10,080 net) acres. See "-- Oil and Gas Reserves" for a discussion of the
assumptions used in, and inherent difficulties relating to, estimating reserves.
Leviathan sells all of its oil and gas production to Offshore Gas Marketing,
Inc., an affiliate of Leviathan.
In 1995, Leviathan acquired from Tatham Offshore a 75% working interest in
VK Block 817, a 50% working interest in Garden Banks Block 72 and a 50% working
interest in Garden Banks Block 117 (the "Acquired Properties") subject to
certain reversionary rights.
25
<PAGE> 33
In connection with the merger of DeepTech and El Paso, Tatham Offshore
relinquished its reversionary rights relating to the Acquired Properties and
Leviathan exchanged 7,500 shares of Tatham Offshore 9% Senior Convertible
Preferred Stock held by Leviathan for 100% of Tatham Offshore's right, title and
interest in and to VK Blocks 772, 773, 774, 817, 818 and 861, West Delta Block
35, Ewing Bank Blocks 871, 914, 915 and 916 and the platform located on Ship
Shoal Block 331. See "-- Recent Events -- Merger."
In October 1998, Leviathan acquired the Sunday Silence Property from a
wholly-owned subsidiary of El Paso for approximately $11.6 million.
Sunday Silence Property. Leviathan owns a 100% working interest in the
Sunday Silence Property, Ewing Bank Blocks 958, 959, 1002 and 1003, a recently
discovered and currently undeveloped field that is comprised of 20,160 gross
acres located in water depths ranging from 1,400 to 1,600 feet. In July 1994,
Tatham Offshore completed the drilling of an exploratory well, the Ewing Bank
958 #1. Logs and sidewall cores indicate that the Ewing Bank 958 #1 well
contains approximately 380 feet of oil and gas pay. The Ewing Bank 958 #1 well,
which was drilled to a total measured depth of 17,600 feet, identified pay zones
in the Pliocene aged formations lying primarily at measured depths between
10,000 and 15,000 feet. Tatham Offshore completed drilling a second well at
Ewing Bank Block 1003 in September 1994 to delineate the field. During October
1994, the Ewing Bank 1003 #1 delineation well was flow-tested at a rate of
approximately 8,700 barrels of oil and 5.4 MMcf of gas per day. In December
1998, Leviathan announced that a third delineation well in the Sunday Silence
Property, Ewing Bank Block 958 #2, had been successfully drilled to a total
measured depth of 14,396 feet. This well encountered about 80 feet of net pay in
two hydrocarbon-bearing sands, including some 65 net feet of high-porosity, high
resistivity pay in the main field sand. Leviathan plans to continue development
in 1999. The Sunday Silence Property has received royalty abatement from the MMS
for the first 52.5 million barrels of oil equivalent to be produced from the
field.
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. Leviathan owns a 100% working
interest in Viosca Knoll Block 817 from the sea-floor through the stratigraphic
equivalent of the base of the Tex X-6 Sand. The property is subject to a
production payment.
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, 1997, the Viosca
Knoll project has produced 32,937 MMcf of gas and 64,770 barrels of oil, net to
Leviathan's interest. The Viosca Knoll Block 817 is currently producing an
aggregate of approximately 50 MMcf of gas per day. Gas production from the
Viosca Knoll Block 817 is dedicated to Leviathan for gathering through the VK
system and oil production was transported through a Shell-operated system.
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 June
1995, Leviathan acquired from Tatham Offshore its 50% working interest
(approximately 40.2% net revenue interest) in Garden Banks Block 72. 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 2,081 MMcf of gas and 629,280 barrels of oil, net to
Leviathan's interest, from the inception of production in May 1996 through
December 31, 1997. The five wells are currently producing a total of
approximately 1,500 barrels of oil and 5 MMcf of gas per day. 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 930
feet of water. Tatham Offshore and MidCon
26
<PAGE> 34
Exploration jointly acquired the Garden Banks Block 117 lease from Shell
Offshore, Inc. 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
June 1995, Leviathan acquired from Tatham Offshore its 50% working interest
(approximately 37.5% net revenue interest) in Garden Banks Block 117. 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 1,400 barrels of oil and 3 MMcf of
gas per day. Since inception of production through December 31, 1997, Garden
Banks Block 117 produced 896 MMcf of gas and 499,925 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. 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 MMcf of gas and 16 barrels of oil per day.
COMPETITION
The exploration and production of oil and 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 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 gas supplies, resulting in
substantial competition for the marketing of oil and gas. As a result, there
were precipitous declines in oil and 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 gas have also
resulted in the abandonment by many pipelines of long-term contracts for the
purchase of gas, the development by 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 GAS RESERVES
The following estimates of Leviathan's total proved developed and proved
undeveloped reserves of oil and gas as of December 31, 1997 have been made by
Netherland, Sewell & Associates, Inc. ("Netherland, Sewell"), an independent
petroleum engineering consulting firm.
27
<PAGE> 35
<TABLE>
<CAPTION>
GAS (MMCF)
-----------------------
OIL (BARRELS) PROVED PROVED
PROVED DEVELOPED DEVELOPED UNDEVELOPED
---------------- --------- -----------
<S> <C> <C> <C>
Viosca Knoll Block 817................................... 132,663 22,937 1,839
Garden Banks Block 72.................................... 716,141 3,266 --
Garden Banks Block 117................................... 1,270,151 2,121 --
--------- ------ -----
Total.......................................... 2,118,955 28,324 1,839
========= ====== =====
</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 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.
The following table sets forth, as of December 31, 1997, 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 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, 1997
---------------------------------
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)........................... $75,635 $2,199 $77,834
Present value of estimated future net cash flows from proved
reserves before income taxes, discounted at 10%........... $65,688 $1,678 $67,366
</TABLE>
- ---------------
(1) The average oil and gas prices, as adjusted by lease for gravity and Btu
content, regional posted price differences and oil and 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, 1997
are $17.54 per barrel of oil and $2.49 per Mcf of gas.
In accordance with applicable requirements of 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 gas, curtailments or increases
in consumption by natural gas purchasers, changes in governmental regulations or
taxation and the impact of inflation on costs.
28
<PAGE> 36
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 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 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 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 Leviathan distributions.
The present value of future net cash flows shown above should not be construed
as the current market value as of December 31, 1997, or any prior date, of the
estimated oil and gas reserves attributable to Leviathan's properties.
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 gas for the periods indicated:
<TABLE>
<CAPTION>
OIL (BARRELS) NATURAL GAS (MMCF)
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------ -------------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Net production(1).................. 801,000 393,000 -- 19,792 15,730 392
Average sales price(1)............. $ 20.61 $ 21.76 $ -- $ 2.08 $ 2.37 $2.35
Average production costs(2)........ $ 1.98 $ 1.59 $ -- $ 0.33 $ 0.27 $0.44
</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 gas acreage as of December 31, 1997. 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 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........................................... 4,072 2,654
Undeveloped acreage......................................... 13,208 7,426
------ ------
Total acreage............................................... 17,280 10,080
====== ======
</TABLE>
29
<PAGE> 37
OIL AND 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,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
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 1.00 0.75
Oil....................................... -- -- 5.00 2.75 -- --
Dry....................................... -- -- 3.00 1.75 -- --
---- ---- ----- ---- ---- ----
Total............................. -- -- 15.00 9.50 1.00 0.75
==== ==== ===== ==== ==== ====
</TABLE>
The following table sets forth Leviathan's ownership in producing wells at
December 31, 1997:
<TABLE>
<CAPTION>
GROSS NET
----- ----
<S> <C> <C>
Natural Gas................................................. 8.00 5.75
Oil......................................................... 7.00 3.75
----- ----
15.00 9.50
===== ====
</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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
REGULATION
The oil and 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 gas
industry and its individual members, some of which carry substantial penalties
for the failure to comply. Legislation affecting the oil and gas industry is
under constant review and statutes are constantly being adopted, expanded or
amended. The regulatory burden on the oil and gas industry increases its cost of
doing business.
General. The design, construction, operation and maintenance of the Gas
Pipelines of certain of their 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.
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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 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 authorizing
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") 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 is 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, Ewing Bank, Manta Ray Offshore or VK 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, Ewing Bank, Manta Ray Offshore
or VK 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, as
operator of Poseidon, 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
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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 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 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 a Certificate of Financial Responsibility of $150 million. 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 for oil and 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 gas supplies and
substantially lower commodity prices; consequently, offshore exploration and
development activities decreased during that time period. Oil and gas prices
increased moderately and stabilized from the early 1990s 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.
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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.5101 et
seq., as amended, regulates materials capable of posing an unreasonable risk to
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 ("RCRA"), as amended, 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 1999, impose increased expenditures and operating expenses
on Leviathan or the Pipelines, which may take on increased obligations 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.
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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") or Clean Water
Act, 33 U.S.C. sec.sec.1311 et. seq., imposes strict controls against the
unauthorized discharge of produced waters and other oil and 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 $150 million. 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.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 ("OSHA"),
as amended, 29 U.S.C. sec.sec.651 et. seq., the Emergency Planning and Community
Right-to-Know Act ("EPCRA"), as amended, 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; EMPLOYMENT AGREEMENTS; INCENTIVE ARRANGEMENTS
Prior to August 1998, the General Partner and Leviathan depended primarily
upon the employees and management services provided by DeepTech. Since the
Merger, El Paso has provided such services. Accordingly, El Paso hired
substantially all of DeepTech's employees comprising the Leviathan management
team. Both Mr. Grant E. Sims and Mr. James H. Lytal, the Chief Executive Officer
and the President, respectively, of Leviathan, entered into employment
agreements with five year terms with El Paso. 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 Merger,
employees of DeepTech who are terminated within 6 months after the Merger will
receive certain severance payments.
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In 1995, Leviathan adopted the Unit Rights Appreciation Plan (the "Plan")
to provide Leviathan with the ability of making awards of Unit Rights, as
hereinafter defined, to certain officers and employees of Leviathan 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 Leviathan 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 $21.500, 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 certain of the holders of the Unit Rights elected
to be paid $7.3 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. In October 1998, Leviathan paid the
holder of the 215,000 remaining Unit Rights $1.3 million upon the exercise of
the Unit Rights and the Plan was terminated. Leviathan replaced the Plan with
the option plans described below.
In August 1998, Leviathan adopted the 1998 Omnibus Compensation Plan (the
"Omnibus Plan") and the 1998 Unit Option Plan for Non-Employee Directors (the
"Director Plan" and together with the Omnibus Plan the "Option Plans"). The
Option Plans provide Leviathan with the ability to issue unit options to attract
and retain the services of knowledgeable directors, officers and key management
personnel. Unit options to purchase a maximum of 3,000,000 Common Units and
100,000 Common Units of Leviathan may be issued pursuant to the Omnibus Plan and
the Director Plan, respectively. As of December 31, 1998, Leviathan had granted
930,000 unit options at $27.1875 per unit option under the Omnibus Plan and
3,000 unit options (1,500 unit options at $27.34375 per unit option and 1,500
unit options at $25.00 per unit option) under the Director Plan.
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 three non-employee
directors of the General Partner a total of $0.6 million as a profit
participation fee. As a result of the Merger, the three non-employee directors
resigned and the compensation arrangements were terminated.
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 "-- Regulation."
In particular, Leviathan is a defendant in a lawsuit filed by
Transcontinental 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 to be
tried in March 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 Leviathan.
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MARKET PRICE OF AND DISTRIBUTIONS ON LEVIATHAN'S UNITS
AND RELATED UNITHOLDER MATTERS
MARKET INFORMATION
The Common Units and Preference Units are listed on the NYSE, which is the
principal trading market for these securities. The Common Units are listed under
the symbol "LEV" and the Preference Units are listed under the symbol "LEV.P".
On January 7, 1999, the day before the public announcement by Leviathan of the
Proposal Transaction, the last reported per Unit sales price of the Common Units
and Preference Units on the NYSE were $22.875 and $19.50, respectively. On
January 15, 1999, the last reported per Unit sales prices of the Common Units
and Preference Units on the NYSE were $20.8125 and $18.00, respectively. The
following table sets forth the high and low sales prices for the Common Units
and Preference Units as reported on the NYSE and the cash distributions declared
per Common Unit and Preference Unit for the periods indicated.
<TABLE>
<CAPTION>
PRICE RANGE DISTRIBUTIONS DECLARED PER UNIT
------------------------------------ -------------------------------
COMMON UNITS PREFERENCE UNITS COMMON UNIT PREFERENCE UNIT
---------------- ----------------- ------------ ----------------
HIGH LOW HIGH LOW
------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Fourth Quarter............. $28.500 $19.75 $25.000 $17.375 $0.525 $0.275
Third Quarter*............. 27.875 21.50 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
Year ended December 31, 1996
Fourth Quarter............. * * $22.81 $20.75 $0.400 $0.400
Third Quarter.............. * * 21.19 18.00 0.375 0.375
Second Quarter............. * * 18.00 15.69 0.350 0.350
First Quarter.............. * * 16.19 13.75 0.325 0.325
</TABLE>
- ---------------
* Effective at the close of business on August 5, 1998, the holders of
approximately 94% of the 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 "Business and Properties of
Leviathan -- Recent Events -- Conversion of Preference Units into Common
Units."
HOLDERS
As of the Record Date, there were approximately 462 and 129 holders of
record of Common Units and Preference Units, respectively.
DISTRIBUTIONS
The Preference Units are entitled to receive from Available Cash (as such
term is defined in the Partnership Agreement) a minimum quarterly distribution
for each quarter of $0.275 per Preference Unit, plus any arrearage in the
payment to such minimum quarterly distribution for prior quarters, before any
distribution of Available Cash is made to holders of Common Units for such
quarter. Subsequent to August 1998, the Preference Units are not entitled to
receive any more than the minimum quarterly distribution, plus any arrearage in
the payment of the minimum quarterly distribution for prior quarters, if any,
per quarter. See "Description of Leviathan's Units."
Cash distributions will be characterized as either distributions of Cash
from Operations or Cash from Interim Capital Transactions. This distinction
affects the amounts distributed to the Unitholders relative to
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<PAGE> 44
the General Partner and the priority of distributions to Preference Unitholders
relative to Common Unitholders. See "-- Quarterly Distributions of Available
Cash," "-- Incentive Distributions" and "-- Distributions of Cash from Interim
Capital Transactions" below. Cash from Operations, which is determined on a
cumulative basis, generally refers to all cash generated by the operations of
Leviathan's business (excluding any cash proceeds from Interim Capital
Transactions), after deducting related cash operating expenditures, cash debt
service payments, cash capital expenditures, reserves and certain other items.
Cash from Interim Capital Transactions will, generally, be generated only by (i)
borrowings and sales of debt securities by Leviathan (other than for working
capital purposes and other than for goods or services purchased on open account
in the ordinary course of business), (ii) sales of equity interests in Leviathan
for cash and (iii) sales or other voluntary or involuntary dispositions of any
assets of Leviathan for cash (other than inventory, accounts receivable and
other current assets and assets disposed of in the ordinary course of business).
Amounts of cash distributed by Leviathan on any date from any source will
be treated as a distribution of Cash from Operations, until the sum of all
amounts so distributed to the Unitholders and to the General Partner (including
any incentive distributions) equals the aggregate amount of all Cash from
Operations from February 19, 1993 ("Partnership Inception") through the end of
the calendar quarter prior to such distribution. Any amount of such cash
(irrespective of its source) distributed on such date which, together with prior
distributions of Cash from Operations, is in excess of the aggregate amount of
all Cash from Operations from Partnership Inception through the end of the
calendar quarter prior to such distribution will be deemed to constitute Cash
from Interim Capital Transactions and will be distributed accordingly. See
"-- Distributions of Cash from Interim Capital Transactions" and "-- Adjustment
of the Minimum Quarterly Distribution and Target Distribution Levels" below. If
cash that is deemed to constitute Cash from Interim Capital Transactions is
distributed in respect of each Preference Unit in an aggregate amount per
Preference Unit equal to the Unrecovered Capital with respect thereto, the
distinction between Cash from Operations and Cash from Interim Capital
Transactions will cease, and all cash will be distributed as Cash from
Operations. Because the General Partner has no present plans to cause Leviathan
to use the proceeds from Interim Capital Transactions to pay distributions to
its partners, the General Partner does not currently anticipate that there will
be any significant amounts of cash that are deemed to constitute Cash from
Interim Capital Transactions distributed to the Unitholders. See "-- Adjustment
of the Minimum Quarterly Distribution and Target Distribution Levels."
Capital expenditures that the General Partner determines are necessary or
desirable to maintain the facilities and operations of Leviathan (as
distinguished from capital expenditures made to expand the capacity of such
facilities or make strategic acquisitions) will reduce the amount of Cash from
Operations. Therefore, if the General Partner were to determine that substantial
capital expenditures were necessary or desirable to maintain the facilities, the
amount of cash distributions that are deemed to constitute Cash from Operations
would decrease and, if such expenditures were subsequently refinanced and all or
a portion of the proceeds distributed to Unitholders, the amount of cash
distributions deemed to constitute Cash from Interim Capital Transactions might
increase.
Quarterly Distributions of Available Cash. Leviathan will make
distributions to its Unitholders and to the General Partner with respect to each
calendar quarter prior to dissolution in an amount equal to 100% of its
Available Cash for such quarter. The distribution of Available Cash that
constitutes Cash from Operations with respect to each calendar quarter is
subject to the preferential rights of the Preference Unitholders to receive the
Minimum Quarterly Distribution of $0.275 per Preference Unit for such quarter,
plus any arrearages in the payment of the Minimum Quarterly Distribution for
prior quarters, prior to any distribution of Available Cash that constitutes
Cash from Operations to holders of Common Units with respect to such quarter.
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<PAGE> 45
Distribution of Cash from Operations, up to the Minimum Quarterly
Distribution, on all Units. Available Cash constituting Cash from Operations in
respect of any calendar quarter will be distributed in the following manner:
first, 98% will be distributed to the Preference Unitholders, pro
rata, and 2% will be distributed to the General Partner until there has
been distributed in respect of each Preference Unit an amount equal to the
Minimum Quarterly Distribution for such quarter;
second, 98% will be distributed to the Preference Unitholders, pro
rata, and 2% will be distributed to the General Partner until there has
been distributed in respect of each Preference Unit an amount equal to any
cumulative arrearages in the Minimum Quarterly Distribution on each
Preference Unit with respect to any prior quarter;
third, 98% will be distributed to the Common Unitholders, pro rata,
and 2% will be distributed to the General Partner until there has been
distributed in respect of each Common Unit an amount equal to the Minimum
Quarterly Distribution for such quarter; and
thereafter, in the manner described in "-- Incentive Distributions"
below.
Notwithstanding the foregoing, the Minimum Quarterly Distribution is
subject to adjustment as described under "-- Distributions of Cash from Interim
Capital Transactions" and "-- Adjustment of the Minimum Quarterly Distribution
and Target Distribution Levels" below.
Incentive Distributions. 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. For the years ended December 31, 1998 and 1997,
Leviathan paid the General Partner Incentive Distributions totaling $11.1
million and $3.9 million, respectively.
For any calendar quarter with respect to which Available Cash constituting
Cash from Operations is distributed in respect of both the Preference Units and
the Common Units in an amount equal to the Minimum Quarterly Distribution of
$0.275 per Unit, plus any Preference Unit arrearages, then any additional
Available Cash constituting Cash from operations will be allocated between the
General Partner and the Common Unitholders at differing percentage rates, which
increase the share of such additional Available Cash allocable to the General
Partner after Common Unitholders have received allocation of any such additional
Available Cash constituting Cash from Operations between the Common Unitholders
and the General Partner up to the various Target Distribution level.
<TABLE>
<CAPTION>
PERCENT OF MARGINAL
AVAILABLE CASH TO
QUARTERLY ---------------------
DISTRIBUTION COMMON GENERAL
AMOUNT UP TO UNITHOLDERS PARTNER
------------ ----------- -------
<S> <C> <C> <C>
Minimum Quarterly Distribution.............................. $0.275 98% 2%
First Target Distribution................................... 0.325 98% 2%
Second Target Distribution.................................. 0.375 85% 15%
Third Target Distribution................................... 0.425 75% 25%
Thereafter.................................................. -- 50% 50%
</TABLE>
Distributions of Cash from Interim Capital Transactions. Distributions on
any date by Leviathan of Available Cash constituting Cash from Interim Capital
Transactions will be distributed 98% to Preference and Common Unitholders, pro
rata, and 2% to the General Partner until a hypothetical holder of a Preference
Unit acquired on February 19, 1993 has received with respect to such Preference
Unit distributions of Available Cash constituting Cash from Interim Capital
Transactions in an amount equal to such Preference Unit's Unrecovered Capital
(being $10.25 per Preference Unit less any amounts previously distributed as
Cash from
38
<PAGE> 46
Interim Capital Transactions) plus accrued arrearages, if any. Thereafter,
distributions of Available Cash that constitute Cash from Interim Capital
Transactions will be distributed as if they were Cash from Operations and,
because the Minimum Quarterly Distribution and First, Second and Third Target
Distributions will have been reduced to zero as described under "-- Adjustment
of the Minimum Quarterly Distribution and Target Distribution Levels," the
General Partner's share of distributions of Available Cash will increase, in
general, to 50% of all distributions of Available Cash.
After the second anniversary of the Conversion Date, any Preference Units
that have not either been redeemed or converted into Common Units and that have
received distributions of Cash from Interim Capital Transactions equal to their
Unrecovered Capital plus accrued arrearages, if any, (i) will receive no further
distributions, (ii) will be treated as if they had been redeemed and (iii) will
cease to be outstanding for all purposes.
Distributions of Cash from Interim Capital Transactions will not reduce the
Minimum Quarterly Distribution in the quarter in which they are distributed.
Adjustment of the Minimum Quarterly Distribution and Target Distribution
Levels. The Minimum Quarterly Distribution, Unrecovered Capital per Unit and the
First, Second and Third Target Distributions will be proportionately adjusted
upward or downward, as appropriate, in the event of any combination or
subdivision of Preference Units (whether effected by a distribution payable in
Preference Units or otherwise) but not by reason of the issuance of additional
Preference Units for cash or property. For example, in the event of a
two-for-one split of the Preference Units (assuming no prior adjustments), then
the Minimum Quarterly Distribution, Unrecovered Capital for a Unit and the
First, Second and Third Target Distributions would each be reduced to 50% of its
initial level. In addition, if Unrecovered Capital is reduced as a result of a
distribution of Available Cash constituting Cash from Interim Capital
Transactions, the Minimum Quarterly Distribution and the First, Second and Third
Target Distributions will be adjusted downward proportionately, by multiplying
each such amount, as the same may have been previously adjusted, by a fraction,
the numerator of which is the Unrecovered Capital immediately after giving
effect to such distribution and the denominator of which is the Unrecovered
Capital immediately prior to such distribution. "Unrecovered Capital" means,
generally, the amount by which $10.25 per Preference Unit exceeds the aggregate
distributions of Cash from Interim Capital Transactions with respect to such
Unit, as adjusted. For example, the initial Unrecovered Capital is $10.25 per
Unit (which was the initial public offering price per Preference Unit); if Cash
from Interim Capital Transactions of $15.00 per Unit is distributed to
Unitholders (assuming no prior adjustments), then the amount of the Minimum
Quarterly Distribution, and of each of the Target Distributions, would be
reduced to 26.8% of its initial level. If and when the Unrecovered Capital is
zero, the Minimum Quarterly Distribution and the First, Second and Third Target
Distributions each will have been reduced to zero, and the General Partner's
share of distributions of Available Cash will increase, in general, to 50% of
all distributions of Available Cash.
The Minimum Quarterly Distribution and the First, Second and Third Target
Distributions may also be adjusted if legislation is enacted or the
interpretation or existing legislation is modified which causes Leviathan to
become taxable as a corporation or otherwise subjects Leviathan to taxation as
an entity for federal income tax purposes. In such event, the Minimum Quarterly
Distribution and the First, Second and Third Target Distributions for each
quarter thereafter would be reduced to an amount equal to the product of (i)
each of the Minimum Quarterly Distribution and the First, Second and Third
Target Distributions multiplied by (ii) one minus the sum of (x) the estimated
effective federal income tax rate to which Leviathan is subject as an entity
plus (y) the estimated effective overall state and local income tax rate to
which Leviathan is subject as an entity for the taxable year in which such
quarter occurs. For example, if Leviathan were to become taxable as an entity
for federal income tax purposes and Leviathan became subject to a combined
estimated effective federal, state and local income tax rate of 38%, then the
Minimum Quarterly Distribution, and each of the Target Distributions, would be
reduced to 62% of the amount thereof immediately prior to such adjustment.
For a discussion of distributions with respect to Units upon liquidation,
see "Description of Leviathan's Units -- Liquidation Rights."
39
<PAGE> 47
DESCRIPTION OF LEVIATHAN'S UNITS
The following is a general description of Leviathan's Units, including the
Common Units issued in connection with the Proposal Transaction, which Units
will be identical to the currently outstanding Common Units and are more fully
described in the Partnership Agreement. Capitalized terms used below are used as
defined in the Partnership Agreement.
GENERAL
Generally, the Units are securities entitled to participate in such
distributions of Available Cash as may properly be made from time to time and,
in the event of any liquidation or winding up of Leviathan, to share in any
assets of Leviathan remaining after satisfaction of Leviathan's liabilities.
Distributions by Leviathan of its Available Cash will be made 98% to the
Unitholders and 2% to the General Partner, except that the General Partner will
become entitled, as an incentive, to larger percentage interests to the extent
that Available Cash exceeds specified target levels that are significantly above
the Minimum Quarterly Distribution. See "Market Price of and Distributions on
Leviathan's Units and Related Unitholder Matters -- Distributions -- Incentive
Distributions."
Preference Units. The Preference Units are entitled to receive from
Available Cash a Minimum Quarterly Distribution for each quarter of $0.275 per
Preference Unit, aggregating $1.10 per Preference Unit on an annualized basis,
plus any arrearage in the payment of the Minimum Quarterly Distribution for
price quarters, before any distribution of Available Cash is made to holders of
Common Units for such quarter. The Preference Units will not participate with
the Common Units in any additional distribution.
Effective August 5, 1998 (the "Conversion Date"), 17,058,094 Preference
Units were converted into an equal number of Common Units by election of the
holders thereof, resulting in 23,349,988 Common Units outstanding as of such
date. Holders of the remaining Preference Units will be given an opportunity in
May 1999 and again in May 2000 to convert their Preference Units into an equal
number of Common Units when the General Partner gives a Conversion Opportunity
Notice. The holders of Preference Units will have the opportunity, for a 90-day
period thereafter, to elect to convert their Preference Units into a like number
of Common Units. In any event, the General Partner's obligation to give
additional Conversion Opportunity Notices shall end in August 2000.
After the date of the second anniversary of the Conversion Date, any or all
of the remaining Preference Units may be redeemed at the option of Leviathan
upon at least 30 but not more than 60 days' notice at a price equal to
Unrecovered Capital plus accrued arrearages, if any. Unrecovered Capital, as
further defined in the Glossary, means an amount equal to the excess of (i)
$10.25 per Preference Unit over (ii) the sum of all distributions made in
respect of a Preference Unit out of Available Cash constituting Cash from
Interim Capital Transactions. If, after giving effect to an anticipated
redemption, fewer than 1,000,000 Preference Units would be held by nonaffiliates
of the General Partner, Leviathan must redeem all such Preference Units if it
redeems any Preference Units. The Preference Units will be entitled to a
liquidation preference over the Common Units to the extent that aggregate
distributions issued on a Preference Units are less than $10.25. See
"-- Liquidation Rights."
Holders of Preference Units do not have preemptive rights and do not have
dissenters' rights of appraisal under the Partnership Agreement or applicable
Delaware law in the event of a merger or consolidation of Leviathan or a sale of
substantially all of its assets.
Common Units. If the holders of the Preference Units receive the Minimum
Quarterly Distribution, the holders of Common Units are entitled to receive
Minimum Quarterly Distribution from Available Cash for each quarter of $0.275
per Common Unit, aggregating $1.10 per Unit on an annualized basis. No
arrearages will accrue with respect to the Common Units. After the holders of
Preference Units and Common Units have received distributions of the Minimum
Quarterly Distribution for any quarter plus any Preference Unit arrearage, the
Preference Units will not participate with the Common Units in any additional
distributions of Available Cash for such quarter.
40
<PAGE> 48
Holders of Common Units do not have preemptive rights and do not have
dissenters' rights of appraisal under the Partnership Agreement or applicable
Delaware law in the event of a merger or consolidation of Leviathan or a sale of
substantially all of its assets. Holders of Common Units are entitled to
liquidation preference to the extent that aggregate distributions issued on a
Common Unit are less than the initial Unit price. See "-- Liquidation Rights."
If Leviathan issues a class of units with rights preferential to those of
Common Units, the rights of Common Unitholders could be affected, including
rights to normal and liquidation distributions.
Voting. Generally, the General Partner has the sole authority to manage
Leviathan. Holders of Preference Units and/or Common Units are entitled to one
vote per Unit on matters to be approved by Unitholders. Unitholders are entitled
to vote only on the following matters: the sale, exchange or other disposition
of all or substantially all of Leviathan's assets; the conversion of Leviathan
into a corporation for tax purposes; the transfer of all of the General
Partner's interest; the election of any successor General Partner upon the
current General Partner's withdrawal; the removal of the General Partner; the
continuation of Leviathan upon an event of dissolution; and certain charter
amendments.
In addition, Unitholders of record will be entitled to notice of, and to
vote at, meetings of Leviathan's limited partners and to act with respect to
matters as to which approvals may be solicited. The Partnership Agreement
provides that Units held in nominee or street name account will be voted by the
broker (or other nominee) pursuant to the instruction of the beneficial owner
unless the arrangement between the beneficial owner and his nominee provides
otherwise.
LIMITED CALL RIGHT
If at any time not more than 15% of the issued and outstanding Units of any
class are held by non-affiliates of the General Partner, then Leviathan may
call, or assign to the General Partner or its affiliates its right to acquire,
the remaining publicly-held Units of such class at a purchase price equal to the
greater of (i) the highest cash price paid by the General Partner or its
affiliates for any Unit of such class purchased within the 90 days preceding the
date the General Partner mails notice of the election to call or acquire Units
of such class or (ii) the average of the last reported sales price per Unit on
the principal securities exchange on which the Unit of such class trade over the
20 trading days preceding the date five days before the General Partner mails
such notice.
TRANSFER AGENT AND REGISTRAR
Duties. ChaseMellon Shareholder Services acts as the registrar and transfer
agent (the "Transfer Agent") for the Preference and Common Units and receives a
fee from Leviathan for serving in such capacities. All fees charged by the
Transfer Agent for transfers and withdrawals of Units are borne by Leviathan and
not by the Unitholders, except that fees similar to those customarily paid by
stockholders for surety bond premiums to replace lost or stolen certificates,
taxes or other governmental charges, special charges for services requested by a
Unitholder and other similar fees or charges are borne by the affected
Unitholder. There is no charge to Unitholders for disbursements of Leviathan's
cash distributions. Leviathan indemnifies the Transfer Agent and its agents from
certain liabilities.
Resignation or Removal. The Transfer Agent may at any time resign, by
notice to Leviathan, or be removed by Leviathan, such resignation or removal to
become effective upon the appointment by the General Partner of a successor
transfer agent and registrar and its acceptance of such appointment. If no
successor has been appointed and has accepted such appointment with 30 days
after notice of such resignation or removal, the General Partner is authorized
to act as the transfer agent and registrar until a successor is appointed.
TRANSFER OF UNITS
Until a Unit has been transferred on the books of Leviathan, Leviathan and
the Transfer Agent may treat the record holder thereof as the absolute owner for
all purposes, notwithstanding any notice to the contrary or any notation or
other writing on the certificate representing such Unit, except as otherwise
required by law.
41
<PAGE> 49
Any transfer of a Unit will not be recorded by the Transfer Agent or recognized
by Leviathan unless certificates representing the Units are surrendered. When
acquiring Units, the transferee of Units (i) is an assignee until admitted to
Leviathan as a substituted limited partner, (ii) automatically requests
admission as a substituted limited partner in Leviathan, (iii) agrees to be
bound by the terms and conditions of, and executes, the Partnership Agreement,
(iv) represents that such transferee has the capacity and authority to enter
into the Partnership Agreement, (v) grants powers of attorney to the General
Partner and any liquidator of Leviathan, (vi) makes the consents and waivers
contained in the Partnership Agreement and (vii) certifies that such transferee
is an "Eligible Citizen" as defined in the second paragraph below. An assignee
will become a limited partner of Leviathan in respect of the transferred Units
upon the consent of the General Partner and the recordation of the name of the
assignee on the books and records of Leviathan. Such consent may be withheld in
the sole discretion of the General Partner. Units are securities and are
transferable according to the laws governing transfers of securities.
In addition to other rights acquired upon transfer, the transferor gives
the transferee the right to request admission as a substituted limited partner
in Leviathan in respect of the transferred Units. A purchaser or transferee of
Units who does not become a limited partner obtains only (i) the right to assign
the Units to a purchaser or other transferee and (ii) the right to transfer the
right to seek admission as a substituted limited partner in Leviathan with
respect to the transferred Units. Thus, a purchaser or transferee of Units who
does not meet the requirements of limited partner admission will not be the
record holder of such Units, will not receive cash distributions unless the
Units are held in a nominee or street name account and the nominee or broker has
ensured that such transferee satisfies such requirements of admission with
respect to such Units and may not receive certain federal income tax information
or reports furnished to Unitholders of record.
LIQUIDATION RIGHTS
Following the commencement of the liquidation of Leviathan, assets will be
sold or otherwise disposed of, and the partners' capital account balances will
be adjusted to reflect any resulting gain or loss. The manner of such adjustment
is as provided in the Partnership Agreement. The proceeds of any liquidation
will, first, be applied to the payment of creditors of Leviathan in the order of
priority provided in the Partnership Agreement and by law, and thereafter, be
distributed to the Unitholders and the General Partner in accordance with their
respective capital account balances, as so adjusted.
Partners are entitled to liquidation distributions in accordance with
capital account balances. The allocations of gain or loss at the time of
liquidation are intended to entitle the holders of outstanding Preference Units
to a preference over the holders of outstanding Common Units upon the
liquidation of Leviathan, to the extent of the Unrecovered Capital, and any
arrearages, applicable thereto. However, no assurance can be given that gain or
loss will be sufficient to achieve this result. Further, Preference Unitholders
are not entitled to share with the General Partner and such Common Unitholders
in Leviathan's assets in excess of such Unrecovered Capital and arrearages. Any
gain (or unrealized gain attributable to assets distributed in kind) will be
allocated to the partners as follows:
first, to the General Partner and the holders of Units which have
negative balances in their Capital Accounts to the extent of and in
proportion to such negative balance;
second, 98% to the Preference Unitholders and 2% to the General
Partner, until the capital account for each Preference Unit is equal to the
sum of the Unrecovered Capital in respect of such Preference Unit plus any
cumulative arrearages then existing in the payment of the Minimum Quarterly
Distribution on such Preference Unit;
third, 98% to the Common Unitholders and 2% to the General Partner
until the Capital Account for each Common Unit is equal to the Unrecovered
Capital in respect of such Common Unit;
fourth, 98% to all Unitholders (or, if liquidation occurs following
the second anniversary of the Conversion Date, to all Common Unitholders)
and 2% to the General Partner until there has been allocated under this
clause fourth an amount per Unit equal to (a) the excess of the First
Target Distribution per Unit over the Minimum Quarterly Distribution per
Unit for each quarter of Leviathan's
42
<PAGE> 50
existence, less (b) the amount per Unit of any distributions of Available
Cash constituting Cash from Operations in excess of the Minimum Quarterly
Distribution per Unit which was distributed 98% to the Common Unitholders
and 2% to the General Partner for any quarter of Leviathan's existence;
fifth, 85% to all Unitholders (or, if liquidation occurs following the
second anniversary of the Conversation Date, to all Common Unitholders) and
15% to the General Partner until there has been allocated under this clause
fifth an amount per Unit equal to (a) the excess of the Second Target
Distribution per Unit over the First Target Distribution per Unit for each
quarter of Leviathan's existence, less (b) the amount per Unit of any
distributions of Available Cash constituting Cash from Operations in excess
of the First Target Distribution per Unit which was distributed 85% to the
Common Unitholders and 15% to the General Partner for any quarter of the
Partnership's existence;
sixth, 75% to all Unitholders (or, if liquidation occurs following the
second anniversary of the Conversation Date, to all Common Unitholders) and
25% to the General Partner until there has been allocated under this clause
sixth an amount per Unit equal to (a) the excess of the Third Target
Distribution per Unit over the Second Target Distribution per Unit for each
quarter of Leviathan's existence, less (b) the amount per Unit of any
distributions of Available Cash constituting Cash from Operations in excess
of the Second Target Distribution per Unit which was distributed 75% to the
Common Unitholders and 25% to the General Partner for any quarter of
Leviathan's existence; and
thereafter, 50% to all Unitholders (or, if liquidation occurs
following the second anniversary of the Conversation Date, to all Common
Unitholders) and 50% to the General Partner.
Any loss or unrealized loss will be allocated to the partners; first, in
proportion to the positive balances of the Preference Unitholders' capital
accounts until the Preference Unitholders' capital account balances are reduced
to the amount of their Unrecovered Capital plus any arrearages; second, in
proportion to the positive balances in the General Partners' and the Common
Unitholders' capital accounts until the Common Unitholders' capital account
balances are reduced to zero; third, in proportion to the positive balances in
the General Partner's and the Preference Unitholders' capital accounts until the
Preference Unitholders' capital accounts are reduced to zero; and thereafter, to
the General Partner.
FURTHER ASSESSMENTS
Generally, limited partners will not be liable for assessments in addition
to your initial capital investment in the common units. Under certain
circumstances, however, limited partners may be required to repay to Leviathan
amounts wrongfully returned or distributed to such limited partners. Under
Delaware law, a limited partnership may not make a distribution to a partner to
the extent that at the time of the distribution, after giving effect to the
distribution, all liabilities of the partnership, other than liabilities to
partners on account of their partnership interests and nonrecourse liabilities,
exceed the fair value of the assets of the limited partnership. Delaware law
provides that a limited partner who receives such a distribution and knew at the
time of the distribution that the distribution violated the law will be liable
to the limited partnership for the amount of the distribution for three years
from the date of the distribution. Under Delaware law, an assignee who becomes a
substitute limited partner of a limited partnership is liable for the
obligations of his assignor to make contributions to the partnership, except the
assignee is not obligated for liabilities that were unknown to him at the time
he became a limited partner and that could not be ascertained from the
Partnership Agreement.
If it were determined under Delaware law that certain actions which the
limited partners may take under the Partnership Agreement constituted "control"
of Leviathan's business, then the limited partners could be held personally
liable for Leviathan's obligations to the same extent as the General Partner.
43
<PAGE> 51
SELECTED FINANCIAL DATA
SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION OF LEVIATHAN
The unaudited pro forma condensed consolidated financial information of
Leviathan is based on the assumptions described in the notes to the unaudited
pro forma condensed consolidated financial statements located on pages F-3
through F-8 and is not necessarily indicative of the results of operations that
may be achieved in the future.
<TABLE>
<CAPTION>
PRO FORMA
--------------------------------------
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT
AMOUNTS)
<S> <C> <C>
STATEMENT OF OPERATIONS:
Oil and gas sales........................................... $ 22,740 $ 58,106
Gathering, transportation and platform services............. 33,612 40,457
Equity in earnings.......................................... 12,533 21,017
-------- --------
Total revenue..................................... 68,885 119,580
-------- --------
Operating expenses.......................................... 10,347 13,342
Depreciation, depletion and amortization.................... 25,859 50,170
Impairment, abandonment and other........................... (1,131) 21,222
General and administrative expenses and management fee...... 14,064 14,786
-------- --------
Total operating costs............................. 49,139 99,520
-------- --------
Operating income............................................ 19,746 20,060
Interest income and other................................... 586 1,515
Interest and other financing costs.......................... (16,235) (15,576)
Minority interest in income................................. (200) (254)
-------- --------
Income before income taxes.................................. 3,897 5,745
Income tax benefit.......................................... 371 311
-------- --------
Net income........................................ $ 4,268 $ 6,056
======== ========
Basic and diluted income per Unit........................... $ 0.13 $ 0.19
======== ========
Distributions declared per Common Unit...................... $ 1.575 $ 1.85
======== ========
Distributions declared per Preference Unit.................. $ 1.325 $ 1.85
======== ========
BALANCE SHEET DATA (AT END OF PERIOD):
Property, plant and equipment, net.......................... $340,336 (a)
Equity investments.......................................... 167,139 (a)
Total assets................................................ 526,926 (a)
Notes payable............................................... 345,415 (a)
Partners' capital:
Preference unitholders.................................... 7,587
Common unitholders........................................ 164,721 (a)
General partner........................................... (12,316) (a)
Total partners' capital........................... 159,992 (a)
Book value per Unit......................................... 5.83 (a)
</TABLE>
- ---------------
(a) Information has not been included as it is not required.
44
<PAGE> 52
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF LEVIATHAN
The selected consolidated financial information of Leviathan as of and for
each of the nine months ended September 30, 1998 and 1997 was derived from
Leviathan's unaudited consolidated financial statements and notes thereto
included elsewhere in this Proxy Statement. Leviathan believes that all material
adjustments, consisting only of normal recurring adjustments necessary for the
fair presentation of Leviathan's interim results, have been included. The
historical financial information of Leviathan for each of the three years ended
December 31, 1997, 1996 and 1995 and as of December 31, 1997 and 1996 was
derived from Leviathan's consolidated financial statements and notes thereto
included elsewhere in this Proxy Statement. The historical financial information
of Leviathan for the year ended December 31, 1994, for the period from
commencement of operations on February 19, 1993 through December 31, 1993 and as
of December 31, 1995, 1994 and 1993 has been derived from the historical
consolidated financial statements of Leviathan (not included herein). The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and notes thereto listed on pages F-1 and
F-2.
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------------------------------------------------------
NINE MONTHS PERIOD FROM
ENDED FEBRUARY 19, 1993
SEPTEMBER 30, YEAR ENDED DECEMBER 31, (COMMENCEMENT OF
------------------- ----------------------------------------- OPERATIONS) THROUGH
1998 1997 1997 1996 1995 1994 DECEMBER 31, 1993
-------- -------- -------- -------- -------- -------- -------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Oil and gas sales..................... $ 22,270 $ 49,124 $ 58,106 $ 47,068 $ 1,858 $ 796 $ 551
Gathering, transportation and platform
services............................ 12,866 14,005 17,329 24,005 20,547 18,554 14,588
Equity in earnings.................... 19,181 21,599 29,327 20,434 19,588 14,786 9,351
-------- -------- -------- -------- -------- -------- --------
Total revenue................. 54,317 84,728 104,762 91,507 41,993 34,136 24,490
-------- -------- -------- -------- -------- -------- --------
Operating expenses.................... 8,558 8,674 11,352 9,068 4,092 1,876 1,534
Depreciation, depletion and
amortization........................ 21,897 39,474 46,289 31,731 8,290 5,085 2,679
Impairment, abandonment and other..... (1,131) 21,222 21,222 -- -- -- --
General and administrative expenses
and management fee.................. 13,937 10,219 14,661 8,540 7,069 5,408 2,944
-------- -------- -------- -------- -------- -------- --------
Total operating costs......... 43,261 79,589 93,524 49,339 19,451 12,369 7,157
-------- -------- -------- -------- -------- -------- --------
Operating income...................... 11,056 5,139 11,238 42,168 22,542 21,767 17,333
Interest income and other............. 552 1,322 1,475 1,710 1,884 1,293 187
Interest and other financing costs.... (13,711) (10,350) (14,169) (5,560) (833) (912) (426)
Minority interest in loss (income).... 12 34 7 (427) (251) (216) (171)
-------- -------- -------- -------- -------- -------- --------
(Loss) income before income taxes..... (2,091) (3,855) (1,449) 37,891 23,342 21,932 16,923
Income tax benefit (expense).......... 371 238 311 801 603 136 (93)
-------- -------- -------- -------- -------- -------- --------
Net (loss) income............. $ (1,720) $ (3,617) $ (1,138) $ 38,692 $ 23,945 $ 22,068 $ 16,830
======== ======== ======== ======== ======== ======== ========
Basic and diluted (loss) income per
Unit................................ $ (0.06) $ (0.14) $ (0.06) $ 1.57 $ 0.97 $ 1.02 $ 0.91
======== ======== ======== ======== ======== ======== ========
Distributions declared per Common
Unit................................ $ 1.575 $ 1.35 $ 1.85 $ 1.45 $ 1.20 $ 1.20 $ 0.70
======== ======== ======== ======== ======== ======== ========
Distributions declared per Preference
Unit................................ $ 1.325 $ 1.35 $ 1.85 $ 1.45 $ 1.20 $ 1.20 $ 0.70
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA (AT END OF PERIOD):
Property, plant and equipment, net.... $207,007 $187,338 $200,639 $286,555 $285,275 $126,802 $ 63,313
Equity investments.................... 185,148 182,493 182,301 107,838 82,441 80,560 50,747
Total assets.......................... 405,300 395,738 409,842 453,526 398,696 231,043 124,980
Notes payable......................... 291,000 220,000 238,000 227,000 135,780 8,000 8,000
Partners' capital:
Preference unitholders.............. 7,587 170,481 163,426 196,224 192,225 196,340 115,061
Common unitholders.................. 101,276 (12,944) (15,400) (3,969) (5,380) (3,960) (3,024)
General partner..................... (12,962) (2,612) (4,060) (232) (4) 51 117
Total partners' capital....... 95,901 154,925 143,966 192,023 186,841 192,431 112,154
Book value per Unit................... $ 3.94 (a) $ 5.91 (a) (a) (a) (a)
</TABLE>
- ---------------
(a) Information has not been included as it is not required.
45
<PAGE> 53
SELECTED FINANCIAL INFORMATION OF
VIOSCA KNOLL GATHERING COMPANY
The financial information of VK as of and for each of the nine months ended
September 30, 1998 and 1997 and for each of the three years ended December 31,
1997, 1996 and 1995 and at December 31, 1997 and 1996 was derived from VK's
financial statements included elsewhere in this Proxy Statement. VK believes
that all material adjustments, consisting only of normal recurring adjustments
necessary for the fair presentation of VK's interim results, have been included.
The historical financial information of VK for the period from inception of
operations on May 24, 1994 through December 31, 1994 and as of December 31, 1995
and 1994 has been derived from the historical financial statements of VK (not
included herein). The information set forth below should be read in conjunction
with the financial statements and notes thereto listed on pages F-1 and F-2.
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------------------------
PERIOD FROM
INCEPTION OF
OPERATIONS
NINE MONTHS ENDED (MAY 24, 1994)
SEPTEMBER 30, YEAR ENDED DECEMBER 31, THROUGH
------------------ ---------------------------- DECEMBER 31,
1998 1997 1997 1996 1995 1994
-------- ------- -------- ------- ------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Transportation services.......... $ 20,746 $16,171 $ 23,128 $13,923 $ 7,107 $ 629
Oil and gas sales................ 470 -- -- -- -- --
-------- ------- -------- ------- ------- -------
Total revenue........... 21,216 16,171 23,128 13,923 7,107 629
-------- ------- -------- ------- ------- -------
Operating expenses............... 1,789 1,302 1,990 298 403 29
Depreciation..................... 2,907 1,791 2,474 2,269 2,224 238
General and administrative
expenses....................... 127 100 125 126 118 17
-------- ------- -------- ------- ------- -------
Total operating costs... 4,823 3,193 4,589 2,693 2,745 284
-------- ------- -------- ------- ------- -------
Operating income................. 16,393 12,978 18,539 11,230 4,362 345
Interest income.................. 34 14 40 -- -- --
Interest and other financing
costs.......................... (3,131) (1,374) (1,959) (90) -- --
Minority interest in income...... -- -- -- -- -- --
-------- ------- -------- ------- ------- -------
Net income.............. $ 13,296 $11,618 $ 16,620 $11,140 $ 4,362 $ 345
======== ======= ======== ======= ======= =======
Distributions to partners........ $ 14,900 $ 5,825 $ 19,300 $36,900 $ 5,650 $ --
======== ======= ======== ======= ======= =======
BALANCE SHEET DATA (AT END OF
PERIOD):
Property, plant and equipment,
net............................ $ 98,156 $80,459 $ 97,708 $71,108 $64,664 $61,818
Total assets..................... 104,316 85,199 101,358 75,957 66,321 62,531
Notes payable.................... 66,200 42,500 52,200 33,300 -- --
Partners' capital................ 36,018 40,271 37,622 39,982 62,723 60,539
</TABLE>
46
<PAGE> 54
SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION FOR LEVIATHAN
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR TO DATE 1998
------------------------------------------------
QUARTER ENDED
---------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 YEAR TO DATE
-------- ------- ------------ ------------
(IN THOUSANDS, EXCEPT FOR PER UNIT DATA)
<S> <C> <C> <C> <C>
Revenue.......................................... $17,714 $18,373 $18,230 $54,317
Gross profit(a).................................. $ 7,010 $ 8,687 $ 8,165 $23,862
Net (loss) income................................ $(1,424) $ 1,510 $(1,806) $(1,720)
Net (loss) income per Unit....................... $ (0.05) $ 0.05 $ (0.06) $ (0.06)
Weighted average number of Units outstanding..... 24,367 24,367 24,367 24,367
Distributions declared per Common Unit........... $ 0.525 $ 0.525 $ 0.525 $ 1.575
Distributions declared per Preference Unit....... $ 0.525 $ 0.525 $ 0.275 $ 1.325
</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)
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 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.............................. $10,910 $ 9,161 $10,006 $ 8,615 $38,692
Net income 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 Unit......... $ 0.325 $ 0.35 $ 0.375 $ 0.40 $ 1.45
</TABLE>
- ---------------
(a) Represent revenue less operating and depreciation, depletion and
amortization expenses.
47
<PAGE> 55
SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION FOR
VIOSCA KNOLL GATHERING COMPANY
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR TO DATE 1998
------------------------------------------------
QUARTER ENDED
---------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 YEAR TO DATE
-------- ------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue........................................... $7,027 $7,719 $6,470 $21,216
Gross profit(a)................................... $5,491 $6,181 $4,848 $16,520
Net income........................................ $4,528 $5,096 $3,672 $13,296
</TABLE>
<TABLE>
<CAPTION>
YEAR 1997
---------------------------------------------------------
QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
-------- ------- ------------ ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue.................................. $4,926 $5,230 $6,015 $6,957 $23,128
Gross profit(a).......................... $3,779 $4,356 $4,943 $5,587 $18,665
Net income............................... $3,277 $3,871 $4,470 $5,002 $16,620
</TABLE>
<TABLE>
<CAPTION>
YEAR 1996
---------------------------------------------------------
QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
-------- ------- ------------ ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue.................................. $2,991 $3,064 $3,289 $4,579 $13,923
Gross profit(a).......................... $2,487 $2,493 $2,452 $3,924 $11,356
Net income............................... $2,441 $2,463 $2,428 $3,808 $11,140
</TABLE>
- ---------------
(a) Represent revenue less operating and depreciation and amortization
expenses.
48
<PAGE> 56
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 Proxy Statement 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 the nine months ended September
30, 1998 and 1997 and for each of the years ended December 31, 1997, 1996 and
1995. Unless the context otherwise requires, all references herein to Leviathan
with respect to the operations and ownership of Leviathan's assets are also
references to its subsidiaries.
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) four producing oil and gas properties and (v) a
dehydration facility. Additionally, as of October 1998, Leviathan owns a 100%
working interest in 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 approximately 1,167
miles of pipeline with a throughput capacity of 6.5 Bcf of 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, Green Canyon and Tarpon; a 50% interest in each
of Stingray and VK, 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 built in response to an
increased demand for additional sour crude oil pipeline capacity in the central
Gulf, consists of 297 miles of 16-inch to 24-inch pipeline with a capacity of
approximately 400,000 barrels per day and 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 gas reserves. The platforms are used to interconnect the
offshore pipeline network and to provide an efficient means to perform pipeline
maintenance and to operate compression, separation, processing and other
facilities. In addition, the multi-purpose platforms serve as landing sites for
deeper water production and as sites for the location of gas compression
facilities and drilling operations.
Leviathan owns an interest in four producing oil and gas leases in the
Gulf, Viosca Knoll Block 817 (100% working interest), Garden Banks Block 72 (50%
working interest), Garden Banks Block 117 (50% working interest) and West Delta
Block 35 (38% working interest). See "Business and Properties of
Leviathan -- Oil and Gas Properties" for current production rates and a
description of the leases.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1998 Compared With Nine Months Ended September
30, 1997
Oil and gas sales totaled $22.3 million for the nine months ended September
30, 1998 as compared with $49.1 million for the same period in 1997. The
decrease is attributable to (i) substantially lower realized oil and gas prices,
(ii) decreased production as a result of two tropical storms and Hurricane
George passing through the Gulf during the third quarter of 1998, (iii) normal
production declines from Leviathan's oil and gas properties and (iv) the lack of
acceptable markets downstream of the VK system. The production decline
attributable to the capacity constraints of the downstream transporter was
alleviated during the third quarter of 1998. During the nine months ended
September 30, 1998, Leviathan produced and sold 7,435 MMcf of gas
49
<PAGE> 57
and 424,000 barrels of oil at average prices of $2.06 per Mcf and $16.04 per
barrel, respectively. During the same period in 1997, Leviathan produced and
sold 16,410 MMcf of gas and 606,000 barrels of oil at average prices of $2.19
per Mcf and $21.20 per barrel, respectively.
Revenue from gathering, transportation and platform services totaled $12.9
million for the nine months ended September 30, 1998 as compared with $14.0
million for the same period in 1997. The decrease primarily reflects 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) $1.3 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 all of the nine months in the period ended September 30, 1998 as compared
with a portion of the nine months ended September 30, 1997 and (iii) $0.4
million in platform revenue services from Leviathan's VK Block 817 platform as a
result of lower oil and gas volumes processed on the platform due to capacity
constraints of the downstream transporter which was alleviated during the third
quarter of 1998, offset by an increase of $3.4 million in platform services
revenue from Leviathan's East Cameron Block 373 platform which was placed in
service in April 1998. Throughput volumes for Leviathan's wholly-owned gathering
systems increased approximately 1% from the first nine months of 1998 as
compared with the same period in 1997.
Revenue from Leviathan's joint ventures, the Equity Investees, through
which Leviathan conducts a significant portion of its business, totaled $19.2
million for the nine months ended September 30, 1998 as compared with $21.6
million for the same period in 1997. The decrease of $2.4 million primarily
reflects decreases of (i) $2.9 million related to Stingray and HIOS as a result
of increased maintenance costs and decreased throughput and (ii) $4.1 million
related to nonrecurring start-up costs, prior period adjustments and a change in
equity ownership of Nautilus and Manta Ray Offshore offset by an increase of
$4.6 million from Poseidon, VK and UTOS as a result of increased throughput.
Total gas throughput volumes for the Equity Investees increased approximately
19% from the nine months ended September 30, 1997 to the same period in 1998
primarily as a result of increased throughput on the VK, UTOS, Nautilus and
Manta Ray Offshore systems. Oil volumes from Poseidon totaled 24.7 million
barrels and 13.3 million barrels for the nine months ended September 30, 1998
and 1997, respectively. The Equity Investees were also impacted by two tropical
storms and Hurricane George's passing through the Gulf during the third quarter
of 1998.
Operating expenses for the nine months ended September 30, 1998 totaled
$8.6 million as compared to $8.7 million for the same period in 1997. The
decrease is primarily attributable to lower operating and transportation costs
associated with Leviathan's oil and 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 $21.9 million for the nine
months ended September 30, 1998 as compared with $39.5 million for the same
period in 1997. The decrease of $17.6 million reflects decreases of (i) $14.7
million in depreciation and depletion on oil and gas wells and facilities
located on the VK Block 817, Garden Banks Block 72 and the Garden Banks Block
117 as a result of decreased production from these leases and (ii) $2.9 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.
Impairment, abandonment and other totaled ($1.1 million) for the nine
months ended September 30, 1998 and represented the excess of estimated 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
nine months ended September 30, 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.
50
<PAGE> 58
General and administrative expenses, including the management fee allocated
from General Partner, totaled $13.9 million for the nine months ended September
30, 1998 as compared with $10.2 million for the same period in 1997. The
increase of $3.7 million reflects increases of (i) $0.9 million in management
fees allocated by General Partner to Leviathan and (ii) $2.8 million in direct
general and administrative expenses of Leviathan primarily related to (x) the
appreciation and vesting of unit rights granted in 1995 by Leviathan to certain
officers and employees of Leviathan or its affiliates that provided for the
right to purchase, or realize the appreciation of, a Preference Unit or Common
Unit (a "Unit Right") as an incentive for these individuals to continue in the
service of Leviathan or its affiliates and (y) incentive payments to General
Partner's three former non-employee directors pursuant to compensation
arrangements. See "Business and Properties of Leviathan -- Employees; Employment
Agreements; Incentive Arrangements."
Interest income and other totaled $0.6 million for the nine months ended
September 30, 1998 as compared with $1.3 million for the same period in 1997.
Interest and other financing costs, net of capitalized interest, for the
nine months ended September 30, 1998 totaled $13.7 million as compared with
$10.4 million for the same period in 1997. During the nine months ended
September 30, 1998 and 1997, Leviathan capitalized $0.6 million and $1.5
million, respectively, of interest costs in connection with construction
projects and drilling activities in progress during such periods. During the
nine months ended September 30, 1998 and 1997, Leviathan had outstanding
indebtedness averaging approximately $264.5 million and $223.5 million,
respectively.
Net loss for the nine months ended September 30, 1998 totaled $1.7 million,
or $0.06 per Unit, as compared with a net loss of $3.6 million, or $0.14 per
Unit, for the nine months ended September 30, 1997 as a result of the items
discussed above.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Oil and 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 gas properties as a result of initiating production from VK
Block 817 in December 1995, 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 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 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 Block 817 platform as a result
of additional oil and 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. Gathering
volumes from the Tarpon system increased approximately 52% during the year ended
December 31, 1997 as compared with the year ended December 31, 1996 as a result
of new producing fields attached to the system in June and July 1997. Gathering
volumes for the Green Canyon system increased 4% for the year ended December 31,
1997 as compared with the year ended December 31, 1996 due to increased
production from the Texaco-operated field located in Green Canyon Block 6.
Gathering volumes from the Manta Ray system, prior to its contribution to Manta
Ray Offshore, declined 34% as compared with 1996 as a result of temporary
platform related production problems from two of the fields connected to the
Manta Ray system. Gathering volumes from the Ewing Bank system declined 82%
during the year ended December 31,
51
<PAGE> 59
1997 as compared with the same period in 1996 due to a downhole mechanical
problem in May 1997 which caused Tatham Offshore's Ewing Bank 914 #2 well to be
shut-in.
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 VK 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 gas throughput volumes
for the Equity Investees increased approximately 9% from 1996 to 1997 primarily
as a result of increased throughput on the VK 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 gas well during 1997.
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 gas wells and facilities
located on VK 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.
General and administrative expenses, including the management fee allocated
from the General Partner, 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
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
the General Partner. See "Business and Properties of Leviathan -- Employees;
Employment Agreements; Incentive Arrangements."
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
52
<PAGE> 60
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.
Net loss for the year ended December 31, 1997 totaled $1.1 million as
compared with net income of $38.7 million for the year ended December 31, 1996
as a result of the items discussed above.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Oil and gas sales totaled $47.1 million for the year ended December 31,
1996 as compared with $1.9 million for the year ended December 31, 1995. The
increase of $45.2 million is attributable to the initiation of production from
Leviathan's VK Block 817 in December 1995, Garden Banks Block 72 in May 1996 and
Garden Banks Block 117 in July 1996. During the year ended December 31, 1996,
Leviathan produced and sold 15,730 MMcf of gas and 393,000 barrels of oil at
average prices of $2.37 per Mcf and $21.76 per barrel, respectively. During
1995, Leviathan produced and sold 392 MMcf of gas at an average price of $2.35
per Mcf.
Revenue from gathering, transportation and platform services totaled $24.0
million for the year ended December 31, 1996 as compared with $20.5 million for
the year ended December 31, 1995. The increase of $3.5 million includes
increases of $3.0 million in platform services from Leviathan's VK Block 817
platform, which was placed in service during the third quarter of 1995 and $2.6
million related to the Green Canyon system attributable to the connection of a
new gas field located in Green Canyon Block 136 to the system offset by a
decrease of $2.1 million attributable to lower throughput on the Ewing Bank and
Tarpon systems due to normal production declines from the wells attached to such
systems. Volumes for the gathering systems increased 15.4% from the year ended
December 31, 1995 to the year ended December 31, 1996. This increase is
primarily a result of increased throughput on the Green Canyon system as a
result of the addition of Green Canyon Block 136 partially offset by lower
production from the producing fields attached to the Ewing Bank, Tarpon and
Manta Ray Offshore systems.
Revenue from the Equity Investees totaled $20.4 million for the year ended
December 31, 1996 as compared with $19.6 million for the year ended December 31,
1995. The increase of $0.8 million primarily reflects increases of (i) $3.4
million from VK as a result of increased throughput on the system, (ii) $1.1
million from POPCO, which placed Poseidon in service in April 1996 and December
1996, and (iii) $0.7 million from West Cameron Dehy, which was placed in service
in November 1995, offset by a decrease of $4.4 million related primarily to
Stingray, HIOS and UTOS. Total gas throughput volumes for the Equity Investees
increased approximately 15.6% from the year ended December 31, 1995 to the year
ended December 31, 1996 primarily as a result of increased throughput on the VK,
HIOS and Stingray systems. Oil volumes from Poseidon totaled 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, 1996 totaled $9.1
million as compared with $4.1 million for the year ended December 31, 1995. The
increase of $5.0 million is primarily attributable to the operation by Leviathan
of 12 additional oil and gas wells during the year ended December 31, 1996 as
compared with the same period in 1995.
Depreciation, depletion and amortization totaled $31.7 million for the year
ended December 31, 1996 as compared with $8.3 million for the year ended
December 31, 1995. The increase of $23.4 million results primarily from
depreciation and depletion on the oil and gas wells and facilities located on VK
Block 817, Garden Banks Block 72 and Garden Banks Block 117, depreciation on
additional platforms and facilities constructed by Leviathan and accelerated
depreciation on the Ewing Bank flow lines.
General and administrative expenses, including the management fee allocated
from the General Partner, totaled $8.5 million for the year ended December 31,
1996 as compared with $7.1 million for the year ended December 31, 1995. The
increase of $1.4 million primarily reflects (i) a $1.2 million reimbursement to
DeepTech for certain tax liabilities incurred by DeepTech as a result of
Leviathan's public offering of an additional Preference Units in June 1994, (ii)
a $0.8 million increase in management fees allocated by the General Partner to
Leviathan as a result of increased operational activities and (iii) a $0.8
million increase in
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other general and administrative expenses of Leviathan, also as a result of
increased Leviathan activities, offset by a $1.4 million reimbursement from
POPCO as a result of Leviathan's management of the initial construction of
Poseidon.
During the year ended December 31, 1995, Leviathan recognized a $1.2
million gain on sale of certain oil and gas mineral leaseholds.
Interest income and other totaled $1.7 million for the year ended December
31, 1996 as compared with $0.6 million for the year ended December 31, 1995. The
increase in interest income is primarily due to accrued interest of $1.1 million
related to the $7.5 million that was added to a payout amount in connection with
restructuring the demand charges payable to Leviathan from Tatham Offshore.
Interest and other financing costs, net of capitalized interest, for the
year ended December 31, 1996 totaled $5.6 million as compared with $0.8 million
for the year ended December 31, 1995. Interest and fees associated with
Leviathan's credit facilities of $11.9 million and $5.3 million were capitalized
in connection with construction projects and drilling activities in progress
during the years ended December 31, 1996 and 1995, respectively.
Net income for the year ended December 31, 1996 totaled $38.7 million as
compared with $23.9 million for the year ended December 31, 1995 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 Proposal Transaction. Net cash
provided by operating activities for the nine months ended September 30, 1998
totaled $11.6 million. At September 30, 1998, Leviathan had cash and cash
equivalents of $3.2 million. As of January 15, 1999, Leviathan had cash and cash
equivalents of approximately $1.5 million.
Cash from operations is derived from (i) payments for gathering 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 gas
attributable to Leviathan's interest in its producing properties. Oil and gas
properties are depleting assets and will produce reduced volumes of oil and gas
in the future unless additional wells are drilled or recompletions of existing
wells are successful. See "Business and Properties of Leviathan -- Oil and Gas
Properties" for current production 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 VK 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 Equity Investees
during the years ended December 31, 1998 and 1997 totaled $31.2 million and
$27.1 million, respectively.
The Leviathan Credit Facility is a revolving credit facility 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 capital expenditures, providing working capital
and, subject to certain limitations, 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. It is
guaranteed by the General Partner and each of Leviathan's subsidiaries, and is
secured by a management agreement between the General Partner and Leviathan,
substantially all of the assets of Leviathan and the General Partner's 1%
general partner interest in Leviathan and approximate 1% interest in certain
subsidiaries of Leviathan. In April 1998, the Leviathan Credit Agreement was
amended to allow for the Merger, the consummation of the Redemption Agreement
and certain other transactions. In August 1998, the Leviathan Credit Facility
was amended to, among other things, increase the credit facility by $50 million
to $350 million of available credit. In January 1999, the Leviathan Credit
Facility was amended to, among other things, increase the credit facility to up
to $375 million of available credit. As of January 15,
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1999, Leviathan had $338.0 million outstanding under its credit facility bearing
interest at an average floating rate of approximately 7.1% per annum. Currently,
approximately $12.0 million of additional funds are available under the
Leviathan Credit Facility.
In December 1996, VK entered into a revolving credit facility (the "VK
Credit Facility") with a syndicate of commercial banks to provide up to $100
million for the addition of compression to the VK system and for other working
capital needs of VK, including funds for a one-time distribution of $25 million
to its partners. VK's ability to borrow money under the facility is subject to
certain customary terms and conditions, including borrowing base limitations.
The VK Credit Facility is secured by a substantial portion of VK's assets and
matures on December 20, 2001. As of January 15, 1999, VK had $66.7 million
outstanding under its credit facility bearing interest at an average floating
rate of 6.6% per annum. Currently, approximately $33.3 million of additional
funds are available under the VK Credit Facility.
Prior to closing the Proposal Transaction, consent must be obtained from
lenders under the VK credit facility, as well as the Leviathan Credit Facility.
At such time, either or both of such facilities may be restructured.
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 secured by
current and future gas transportation contracts between Stingray and its
customers. As of September 30, 1998, Stingray had $28.5 million outstanding
under its term loan agreement bearing interest at an average floating rate of
6.6% per annum.
In April 1996, POPCO entered into a revolving credit facility (the "POPCO
Credit Facility") with a group of commercial banks to provide up to $150 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 secured by a substantial portion of POPCO's assets
and matures on April 30, 2001. As of September 30, 1998, POPCO had $128.0
million outstanding under its credit facility bearing interest at an average
floating rate of 6.7% per annum. Currently, approximately $20.5 million of
additional funds are available under the POPCO 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 gas in the Gulf,
(iii) expenditures related to its producing oil and gas properties, (iv)
expenditures relating to the acquisition and development of the Sunday Silence
Property discussed in "Business and Properties of Leviathan -- Oil and Gas
Properties", (v) expenditures related to the abandonment of the Ewing Bank
flowlines of $2.9 million, (vi) management fees and other operating expenses,
(vii) contributions to Equity Investees as required to fund capital expenditures
for new facilities, (viii) debt service on its outstanding indebtedness and (ix)
the payment of the accelerated appreciation of Unit Rights discussed in
"Business and Properties of Leviathan -- Employees; Employment Agreements;
Incentive Arrangements."
On January 19, 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 will be paid on February 12, 1999 to all holders
of record of Common Units and Preference Units as of January 29, 1999. See
"Market Prices of and Distributions on Leviathan's Units and Related Unitholder
Matters" for a summary 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).
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Distributions by Leviathan of its Available Cash are effectively made 98%
to Unitholders and 2% to the General Partner, as general partner, subject to the
payment of Incentive Distributions to the General Partner. See "Market Price of
and Distribution on Leviathan's Units and Related Unitholder
Matters -- Distributions -- Incentive Distributions." For the years ended
December 31, 1998 and 1997, Leviathan paid the General Partner Incentive
Distributions totaling $11.1 million and $3.9 million, respectively.
In April 1998, Leviathan completed the construction and installation of a
new platform and processing facilities at East Cameron Block 373. This platform,
which cost $30.2 million, is strategically located to exploit reserves in the
East Cameron and Garden Banks areas of the Gulf and is the terminus for an
extension of the Stingray System. Leviathan funded the cost of the platform and
facilities with borrowings under the Leviathan Credit Facility.
Leviathan anticipates that its capital expenditures and equity investments
for 1999 will relate to continuing acquisition and construction activities.
Leviathan anticipates funding such cash requirements primarily with available
cash flow, borrowing from 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, VK and Stingray
were funded by borrowings under their respective credit facilities, and any
future capital expenditures by POPCO, VK and Stingray are anticipated to be
funded by borrowings under their respective credit facilities. In addition,
substantially all of the capital requirements of Nautilus and Manta Ray Offshore
were funded by the equity contributions of affiliates of Shell and Marathon.
Leviathan's cash capital expenditures and equity investments for the nine months
ended September 30, 1998 and for the year ended December 31, 1997 were $20.8 and
$42.0 million, respectively. Capital expenditures for 1997 included $11.1
million relating to the Nautilus/ Manta Ray Offshore project discussed above.
Leviathan contributed existing assets to the Nautilus and Manta Ray Offshore
joint ventures as partial consideration for its ownership therein; Leviathan may
in the future contribute existing assets to new joint ventures as partial
consideration for its ownership interest therein.
Interest costs incurred by Leviathan related to the Leviathan Credit
Facility totaled $14.3 million and $15.9 million for the nine months ended
September 30, 1998 and for the year ended December 31, 1997, respectively.
Leviathan capitalized $0.6 million and $1.7 million of such interest costs
during the nine months ended September 30, 1998 and the year ended December 31,
1997, respectively, in connection with construction projects and drilling
activities in process during each respective period.
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 to coordinate the five phases of its Year 2000 project to ensure
that Leviathan's key automated systems and related processes will remain
functional through Year 2000. The phases include: (i) awareness, (ii)
assessment, (iii) remediation, (iv) testing, and (v) implementation of the
necessary modifications. The key automated systems of Leviathan consist of (a)
hardware and equipment, (b) embedded chip systems in equipment and (c) third
party-developed software. 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
impact on Leviathan. Through the project team, Leviathan has established an
awareness program which includes participation of management in each business
area. Even though the awareness phase is substantially completed, Leviathan will
continually update awareness efforts throughout the Year 2000 project.
The assessment phase consists of conducting an inventory of its 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
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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 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.
Leviathan expects that the remediation phase, which involves converting,
modifying, replacing or eliminating selected key automated systems, will be
substantially completed by mid-1999. The testing phase represents the validation
process for key automated systems. Leviathan is utilizing test tools and written
procedures to document and validate, as necessary, its unit, system, integration
and acceptance testing. The testing phase is also anticipated to be
substantially completed by mid-1999. While Leviathan has substantially begun
work on both the remediation and testing phases, Leviathan estimates that
approximately three-quarters of the work for these phases remain.
The implementation phase represents placing the converted or replaced key
automated systems into operations. In some cases, the implementation phase will
consist of developing and executing contingency plans needed to support business
functions and processes that may be interrupted by Year 2000 failures which are
outside Leviathan's control. Contingency plans will be developed to prepare for
failures of Leviathan's key automated systems not reasonably foreseen. The
implementation phase is expected to be substantially completed by mid-1999.
Leviathan is in the early stages of this phase.
While the total cost of Leviathan's Year 2000 project is still being
evaluated, Leviathan estimates that the costs incurred in 1998, 1999 and 2000
associated with assessing, remediating and testing hardware and equipment,
embedded chip systems, and third-party developed software is anticipated not to
exceed $1.0 million, all of which will be expensed. Through December 31, 1998
Leviathan has incurred less than $0.1 million related to such costs.
Leviathan's present intention is that in the event Leviathan completes an
acquisition of, or makes a material investment in, substantial facilities or
another business entity, Leviathan will incorporate such facilities or entity
into its Year 2000 program. Accordingly, Leviathan may incur substantial costs
as a result of such acquisition or investment. This cost will be in addition to
the costs of the Year 2000 assessment, if any, made by Leviathan with respect to
such facilities or entity prior to the acquisition or investment.
Leviathan's goal is to ensure that all of its critical systems and process
that are under its direct control remain functional. However, certain systems
and processes may be interrelated with systems outside the control of Leviathan
for which there can be no assurance that all implementations will be successful.
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 financing
losses and an inability to meet its obligations to customers. Accordingly,
Leviathan's contingency plan may also consider any significant failures related
to the most reasonably likely worst case scenario, as they may occur. The plan
is expected to assess the risk of a significant failure to critical processes
performed by Leviathan. This assessment is expected to also factor in the
severity and duration of the impact of a significant failure. From this
analysis, the Year 2000 contingency plan should be developed to mitigate the
risk identified by the assessment of the most reasonably likely worst case
scenario.
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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. Based on information available at this time, however,
Leviathan cannot conclude that any failure of Leviathan, or third-party partners
and other entities to achieve Year 2000 compliance 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, 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 compliant or to adequately notify Leviathan
of potential noncompliance.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk that losses may occur in the
value of financial instruments as a result of movements in interest rates,
foreign currency exchange rates and commodity prices.
Leviathan is exposed to some market risk due to the floating interest rate
under the Leviathan Credit Facility. See "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 $338.0 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. 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.
Leviathan hedges a portion of its oil and gas production to reduce its
exposure to fluctuations in the market prices thereof. Leviathan uses various
financial instruments whereby monthly settlements are based on differences
between the prices specified in the instruments and the settlement prices of
certain futures contracts quoted on the New York Mercantile Exchange ("NYMEX")
or certain other indices. 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 used
by Leviathan differ from futures contracts in that there is no contractual
obligation which requires or allows for the future delivery of the product.
Gains or losses on hedging activities are recognized as oil and gas sales in the
period in which the hedged production is sold. For the year ended December 31,
1998, Leviathan recorded a 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 British thermal units ("MMbtu") of 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. Additionally, Leviathan had open sales hedges
of 10,000 MMbtu of 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.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of January 21, 1999, the beneficial
ownership of the outstanding Units 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. Unless otherwise
indicated, each person indicated below has sole voting and investment power with
respect to the Units beneficially owned by such person. The consummation of the
Proposal Transaction would (i) have no effect on the amount of Units and (ii)
slightly decrease the percentage of present holdings of Units held by the
directors and all directors and officers as a group of the General Partner.
<TABLE>
<CAPTION>
COMMON UNITS PREFERENCE UNITS
------------------- -------------------
PERCENT OF PERCENT OF
BENEFICIAL OWNER AND ADDRESS NUMBER CLASS NUMBER CLASS
---------------------------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C>
General Partner/El Paso................................ (1) (1) -- --
El Paso Energy Building
1001 Louisiana
Houston, Texas 77002
Grant E. Sims.......................................... 24,000 * -- --
James H. Lytal......................................... 1,050 * -- --
Keith B. Forman........................................ 1,000 * -- --
H. Brent Austin........................................ -- -- -- --
Michael B. Bracy....................................... 1,500(2) * -- --
Hollan D. Church....................................... 1,500(3) * -- --
Robert G. Phillips..................................... 1,000 * -- --
Malcolm Wallop......................................... 1,500(4) * -- --
William A. Wise........................................ -- -- -- --
D. Mark Leland......................................... -- -- -- --
Executive officers and directors of the General Partner
as a group (10 persons).............................. 31,550 * -- --
</TABLE>
- ---------------
* Less than 1%.
(1) All of the General Partner's outstanding common stock, par value $0.10 per
share, is indirectly owned by El Paso. Before consummation of the Proposal
Transaction, the General Partner, through its ownership of 6,291,894 Common
Units, its 1% general partner interest in Leviathan and its approximate
1.0101% non-managing interest in certain of Leviathan's subsidiaries, owns a
27.3% effective interest in Leviathan. Following consummation of the
Proposal Transaction, based on the closing sales price of the Common Units
on January 15, 1999 of $20.8125, the General Partner would own a combined
35.8% effective interest in Leviathan, through its ownership of up to
9,364,326 Common Units (a 34.1% limited partnership interest), its 1%
general partner interest in Leviathan and its approximate 1.0101%
non-managing interest in certain of Leviathan's subsidiaries.
(2) Includes the option to acquire 1,500 Common Units pursuant to the Director
Plan effective August 14, 1998. Each unit option shall expire on October 20,
2008, but shall be subject to earlier termination in the event that Mr.
Bracy 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 his death, in which case the unit options expire 12 months after
such date.
(3) Includes the option to acquire 1,500 Common Units pursuant to the Director
Plan effective August 14, 1998. Each unit option shall expire on January 19,
2009, but shall be subject to earlier termination in the event that Mr.
Church 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 his death, in which case the unit options expire 12 months after
such date.
(4) Includes the option to acquire 1,500 Common Units pursuant to the Director
Plan effective August 14, 1998. Each unit option shall expire on August 18,
2008, but shall be subject to earlier termination in the event that Mr.
Wallop 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 his death, in which case the unit options expire 12 months after
such date.
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INDEPENDENT PUBLIC ACCOUNTANTS
PricewaterhouseCoopers LLP, independent public accountants, have been the
independent auditors for Leviathan since its formation in 1993. The Board of
Directors of the General Partner expects that PricewaterhouseCoopers LLP will
continue as Leviathan's independent auditors. Representatives of
PricewaterhouseCoopers LLP are expected to be present at the Special Meeting,
with the opportunity to make a statement if they desire to do so and to respond
to appropriate questions from Unitholders.
EXPERTS
The consolidated financial statements of Leviathan as of December 31, 1997
and 1996 and each of the three years in the period ending December 31, 1997
included in this Proxy Statement have been so included in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The financial statements of VK as of December 31, 1997 and 1996 and each of
the three years in the period ending December 31, 1997 included in this Proxy
Statement have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of High Island Offshore System as of December 31,
1997 and 1996 and each of the two years in the period ending December 31, 1997
included in this Proxy Statement have been so included in reliance on the report
of Deloitte & Touche LLP, independent auditors, given on the authority of said
firm as experts in auditing and accounting.
The financial statements of Poseidon Oil Pipeline Company, L.L.C. as of
December 31, 1997 and 1996 and for the year ended December 31, 1997 and for the
period from inception (February 14, 1996) through December 31, 1996 included in
this Proxy Statement have been so included in reliance on the report of Arthur
Andersen LLP independent public accountants, given on the authority of said firm
as experts in auditing and accounting.
Information derived from the report of Netherland, Sewell, independent
petroleum engineers, with respective to estimated oil and gas reserves of
Leviathan included in this Proxy Statement have been so included in reliance
upon the authority of said firm as experts with respect to the matters contained
in their report.
Information regarding the fairness of the Proposal Transaction to the
Unitholders included in this Proxy Statement has been so included based upon the
opinion of PaineWebber Incorporated, dated January 19, 1999, attached as Exhibit
"B", given on the authority of said firm as financial advisors.
Leviathan Gas Pipeline Partners,
L.P.,
by Leviathan Gas Pipeline Company,
its General Partner
/s/ KEITH B. FORMAN
------------------------------------
Keith B. Forman
Chief Financial Officer
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EXHIBITS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
EXHIBIT
-------
<S> <C>
Certain Definitions......................................... A
Opinion of PaineWebber Incorporated......................... B
Contribution Agreement...................................... C
Exhibit A: Assignment of Joint Venture Interest
Exhibit B: Registration Rights Agreement
Exhibit C: Option Agreement
Exhibit D: Termination and Release Agreement
Schedule A: Terminating Agreements
Exhibit E: Amendment No. 1 and Waiver to the Joint
Venture Agreement of Viosca Knoll Gathering
Company
Exhibit A: Ownership Information
Exhibit F: Amendment No. 2 to the Amended and Restated
Agreement of Limited Partnership of Leviathan
Gas Pipeline Partners, L.P.
Consent of Independent Accountants of PricewaterhouseCoopers
LLP....................................................... D
Independent Auditor's Consent of Deloitte & Touche LLP...... E
Consent of Independent Public Accountants of Arthur Andersen
LLP....................................................... F
Consent of Independent Petroleum Engineers and Geologists... G
Consent of Financial Advisor (PaineWebber Incorporated)..... H
</TABLE>
<PAGE> 70
EXHIBIT A
CERTAIN DEFINITIONS
The following are abbreviations and words commonly used in the oil and gas
industry and in this Proxy Statement.
"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
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 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 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.
"working interest" means an interest in an oil and gas lease that gives the
owner of the interest the right to drill for and produce oil and 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 Proxy Statement, 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.
A-1
<PAGE> 71
EXHIBIT B
FORM OF PAINEWEBBER INCORPORATED OPINION
January 19, 1999
Special Committee of the Board of Directors
Leviathan Gas Pipeline Company, as General Partner of
Leviathan Gas Pipeline Partners, L.P.
Attn: Mr. Michael B. Bracy
1001 Louisiana Street
Houston, TX 77002
Ladies and Gentlemen:
Leviathan Gas Pipeline Partners, L.P. (the "Partnership") and El Paso Field
Services Company, a subsidiary of El Paso Energy Corporation, (the
"Contributor") propose to enter into a contribution agreement (the "Contribution
Agreement") pursuant to which the Partnership will acquire the Contributor's 49%
interest in Viosca Knoll Gathering Company ("VKGC") for consideration consisting
of $21.3 million in cash and $63.9 million in value of Common Units of the
Partnership (collectively, the "Initial Consideration") and an option agreement
(the "Option Agreement") pursuant to which the Partnership will have the option
to acquire the remaining 1% interest in VKGC from the Contributor for $1.7
million in cash (collectively, with the Initial Consideration, the
"Consideration") during the six-month period following the first anniversary of
the closing of the initial transaction (collectively, the "Contribution
Transaction"). The Contribution Transaction is expected to be considered by the
unitholders of the Partnership at a special meeting to be held as soon as
reasonably practical (which currently is expected to be on or around February
23, 1999) and consummated promptly thereafter.
You have asked us whether or not, in our opinion, the proposed
Consideration to be paid by the Partnership in the Contribution Transaction is
fair to the Partnership's unitholders from a financial point of view.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed VKGC's audited financial information for the four fiscal
years ended December 31, 1997 and VKGC's unaudited financial information
for the eleven months ended November 30, 1998;
(2) Reviewed the Partnership's Annual Reports, Forms 10-K and related
financial information for the five fiscal years ended December 31, 1997 and
the Partnership's Form 10-Q and the related unaudited financial information
for the nine months ended September 30, 1998;
(3) Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets and prospects of VKGC
and the Partnership, furnished to us by the Partnership;
(4) Conducted discussions with members of senior management of the
Partnership concerning the businesses and prospects of the Partnership and
VKGC;
(5) Compared the results of operations of VKGC and the Partnership
with those of certain companies which we deemed to be relevant;
(6) Compared the proposed financial terms of the Contribution
Transaction with the financial terms of certain other mergers and
acquisitions which we deemed to be relevant;
(7) Considered the pro forma effect of the Contribution Transaction on
the Partnership's EBITDA, distributable cash flow, distributable cash flow
per unit and distribution coverage ratios;
(8) Reviewed the historical market prices and trading activity for the
securities of the Partnership and compared such prices and trading activity
with those of certain publicly traded companies which we deemed to be
relevant;
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(9) Reviewed a draft of the Contribution Agreement dated January 14,
1999, a draft of the Registration Rights Agreement between the Partnership
and the Contributor dated January 14, 1999 and a draft of the Option
Agreement dated January 14, 1999; and
(10) Reviewed such other financial studies and analyses and performed
such other investigations and took into account such other matters as we
deemed necessary, including our assessment of general economic, market and
monetary conditions.
In preparing our opinion, we have relied on the accuracy and completeness
of all information supplied or otherwise made available to us by the
Partnership, and we have not assumed any responsibility to independently verify
such information. With respect to the financial forecasts examined by us, we
have assumed that they were reasonably prepared and reflect the best currently
available estimates and good faith judgments of the management of the
Partnership as to the future performance of the Partnership and VKGC. We have
also relied upon assurances of the management of the Partnership that they are
unaware of any facts that would make the information or financial forecasts
provided to us incomplete or misleading. We have not made any independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership or VKGC nor have we been furnished with any such evaluations
or appraisals. We have also assumed with your consent, that any material
liabilities (contingent or otherwise, known or unknown) of the Partnership and
VKGC are as set forth in the consolidated financial statements of the
Partnership and VKGC, respectively. No opinion is expressed herein as to the
price at which the securities of the Partnership may trade at any time. Our
opinion is based on economic, monetary and market conditions existing on the
date hereof.
Our Opinion is directed to the Special Committee of the Board of Directors
of the General Partner of the Partnership and does not constitute a
recommendation to any unitholder of the Partnership as to how any such
unitholder should vote on the Contribution Transaction. This opinion does not
address the relative merits of the Contribution Transaction and any other
transactions or business strategies discussed by the Board of Directors as
alternatives to the Contribution Transaction or the decision of the Board of
Directors to proceed with the Contribution Transaction.
In the ordinary course of business, PaineWebber Incorporated may trade in
the securities of the Partnership and the Contributor for our own account and
for the accounts of our customers and, accordingly, may at any time hold long or
short positions in such securities.
PaineWebber Incorporated is currently acting as financial advisor to the
Special Committee in connection with the Contribution Transaction and will be
receiving a fee in connection with the rendering of this opinion. In the past,
PaineWebber Incorporated and/or its affiliates have provided investment banking
and other financial services to the Partnership and have received fees for
rendering these services.
On the basis of, and subject to the foregoing, we are of the opinion that
the proposed Consideration to be paid by the Partnership in the Contribution
Transaction is fair to the Partnership's unitholders from a financial point of
view.
This opinion has been prepared for the use of the Special Committee of the
Board of Directors of the General Partner of the Partnership in connection with
the consideration of the full Board of Directors with respect to the
Contribution Transaction and shall not be reproduced, summarized, described or
referred to, provided to any person or otherwise made public or used for any
other purpose without the prior written consent of PaineWebber Incorporated,
provided, however, that this letter may be reproduced in full in the Proxy
Statement/Prospectus related to the Contribution Transaction.
Very truly yours,
/s/ PAINEWEBBER INCORPORATED
------------------------------------
PAINEWEBBER INCORPORATED
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CONTRIBUTION AGREEMENT
This Contribution Agreement is made and entered into as of January 21, 1999
and effective as of January 1, 1999 (the "Effective Date"), by and between
Leviathan Gas Pipeline Partners, L.P., a Delaware limited partnership (together
with its permitted successors and assigns, "Leviathan"), and El Paso Field
Services Company, a Delaware corporation (together with its permitted successors
and assigns, "El Paso").
WITNESSETH:
WHEREAS, Viosca Knoll Gathering Company, a Delaware joint venture ("Viosca
Knoll"), is owned in equal percentages (50% each) by VK Deepwater Gathering
Company, L.L.C., a Delaware limited liability company and a subsidiary of
Leviathan ("VK Deepwater"), and EPEC Deepwater Gathering Company, a Delaware
corporation and a subsidiary of El Paso ("EPEC Deepwater");
WHEREAS, El Paso desires to cause EPEC Deepwater to contribute part of its
interest in Viosca Knoll to Leviathan in exchange for Leviathan issuing certain
partnership units and making a cash payment to EPEC Deepwater;
WHEREAS, the parties hereto desire to enter into this agreement to set
forth the terms, conditions and procedures of the above-described transactions;
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants and agreements contained herein and other good and valuable
consideration (the receipt and sufficiency of which are hereby confirmed and
acknowledged), the parties hereto hereby stipulate and agree as follows:
ARTICLE I.
DEFINITIONS
1.1 SPECIFIC DEFINITIONS. The following capitalized terms shall have the
meanings ascribed to them in this Section 1.1.
"Affiliate" means, with respect to a relevant Person, any Person that
directly or indirectly, through one or more intermediaries, Controls, is
Controlled by or is under common Control with such relevant Person.
"Agreement" means this Contribution Agreement (including any exhibits,
supplements and other attachments), as amended, restated, supplemented or
otherwise modified from time to time.
"Assignment" means the assignment in the form of "Exhibit A" hereto
pursuant to which EPEC Deepwater will assign the Property to Leviathan.
"Cash Contribution Amount" means an amount of money equal to the
product of (i) the difference between $85,260,000 and the Distributions
Amount and (ii) 0.25.
"Closing" shall have the meaning set forth in Section 2.1.
"Closing Date" means the date of the Closing.
"Common Units" means that number of common units representing limited
partner interests in Leviathan to be issued to EPEC Deepwater pursuant to
the terms and conditions of this Agreement, such number which shall be
determined by multiplying (i) the difference between $85,260,000 and the
Distributions Amount by (ii) 0.75 and dividing the product resulting
therefrom by the Market Price; provided, however, in no event shall the
Market Price for the purpose of calculating the number of common units to
be issued be less than $19.95 nor more than $24.15.
"Control" (including its derivatives and similar terms) means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of the relevant Person, whether
through the ownership or control of voting interests, by contract or
otherwise.
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"Credit Facility" means the Credit Agreement dated as of December 20,
1996 among Viosca Knoll and The Chase Manhattan Bank, as administrative
agent for the lenders party to the Credit Agreement, as amended, restated,
supplemented or otherwise modified from time to time, and all contracts and
agreements related thereto.
"Distributions Amount" means an amount of money equal to the sum of
all cash distributions paid or accrued and payable from Viosca Knoll to
EPEC Deepwater or El Paso on the Property from the Effective Date through
the Closing Date.
"Effective Date" shall have the meaning set forth in the preamble to
this Agreement.
"El Paso" shall have the meaning set forth in the preamble to this
Agreement.
"El Paso Indemnified Person" means, other than any Leviathan
Indemnified Person, each of (i) El Paso, (ii) its Affiliates, (iii) the
members, shareholders or other owners of El Paso and its Affiliates and
(iv) the directors, officers, employees, attorneys and agents of each
Person described in (i) through (iii) above.
"EPEC Deepwater" shall have the meaning set forth in the recitals to
this Agreement.
"IRS" shall have the meaning set forth in Section 3.1(j).
"JV Agreement" means the Joint Venture Agreement of Viosca Knoll dated
as of May 24, 1994, as amended, restated, supplemented or otherwise
modified from time to time.
"JV Amendment" means that certain Amendment No. 1 and Waiver to the JV
Agreement by and between VK Deepwater and EPEC Deepwater to be executed in
connection herewith, the form of which is attached hereto as "Exhibit E".
"Laws" means the laws, rules, regulations, decrees and orders of the
United States of America and all other governmental bodies having
jurisdiction over or affecting the obligations of the Parties created
hereby or the other provisions contained in this Agreement, or any part
thereof, or any site where any part of the obligations of the Parties
created hereby are performed, whether such now exists or hereafter comes
into effect.
"Leviathan" shall have the meaning set forth in the preamble to this
Agreement.
"Leviathan Indemnified Person" means, other than any El Paso
Indemnified Person, each of (i) Leviathan Holdings Company, a Delaware
corporation, Leviathan Gas Pipeline Company, a Delaware corporation, and
Leviathan, (ii) Leviathan's Subsidiaries and (iii) the directors, officers,
employees, attorneys and agents of each Person described in (i) through
(ii) above.
"Lien" means mortgages, deeds of trust, liens, pledges, security
interests, leases, conditional sale contracts, claims, rights of first
refusal, options, charges, liabilities, obligations, agreements,
privileges, liberties, easements, rights-of-way, limitations, reservations,
restrictions and other encumbrances of any kind.
"Loss" or "Losses" means any actions, claims, settlements, judgments,
demands, Liens, losses, damages, fines, penalties, interest, costs,
expenses (including, without limitation, expenses attributable to the
defense of any actions or claims), attorneys' fees and liabilities.
"LP Agreement" means the Amended and Restated Agreement of Limited
Partnership of Leviathan dated as of February 19, 1993, as amended,
restated, supplemented or otherwise modified from time to time.
"LP Amendment" means that certain Amendment No. 2 to the LP Agreement
to be executed in connection herewith, the form of which is attached hereto
as "Exhibit F".
"Market Price" means the average of the closing sales prices of the
common units of Leviathan as reported on the New York Stock Exchange for
the ten (10) trading days ending two (2) business days before the Closing
Date.
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"Option Agreement" means that certain Option Agreement by and between
Leviathan and El Paso to be executed in connection herewith, the form of
which is attached hereto as "Exhibit C".
"Party" means, individually, Leviathan or El Paso, and collectively,
the "Parties."
"Person" means any individual or entity, including, without
limitation, any corporation, limited liability company, partnership
(general or limited), joint venture, association, joint stock company,
trust, unincorporated organization or government (including any board,
agency, political subdivision or other body thereof).
"Property" means, other than a one percent partnership interest in
capital and in profits (as such terms are defined in Section 708(b)(1)(B)
of the Internal Revenue Code of 1986, as amended, and Treasury Regulation
Section 1.708-1(b)(1)(iii)) in Viosca Knoll being retained by EPEC
Deepwater, all of EPEC Deepwater's right, title and interest in and to (a)
the partnership interest in Viosca Knoll owned by EPEC Deepwater,
including, but not limited to, all the rights to the Distributions Amount,
the payment of which shall be made pursuant to Section 2.2(b) as adjusted
pursuant to Sections 2.2(c) and (d), (b) the JV Agreement and (c) any other
tangible or intangible assets related to (a) or (b) above, including,
without limitation, any claims, chose in action or insurance proceeds.
"Registration Rights Agreement" means that certain Registration Rights
Agreement by and between Leviathan and EPEC Deepwater to be executed in
connection herewith, the form of which is attached hereto as "Exhibit B".
"Subsidiary" means, with respect to a relevant Person, any other
Person owned more than 50% and Controlled by such relevant Person.
"Taxes" or "Tax" means any taxes, duties, assessments, fees, levies or
similar governmental charges, together with interest, penalties and
additions to tax, imposed by any taxing authority, wherever located,
including, without limitation, all net income, gross income, gross
receipts, net receipts, sales, use, transfer, franchise, privilege,
profits, social security, disability, withholding, payroll, unemployment,
excise, severance, property, windfall profits, value added, ad valorem,
occupation or any other similar governmental charge or imposition.
"Tax Returns" shall have the meaning set forth in Section 3.1(j).
"Terminated Agreements" means (i) that certain Transfer Restriction
Agreement dated as of May 24, 1994, between Leviathan, Leviathan Gas
Pipeline Company and Tennessee Gas Pipeline Company and (ii) that certain
Platform Option Agreement dated as of May 24, 1994, by and among Viosca
Knoll, Leviathan and Tenneco Deepwater Gathering Company.
"Termination Agreement" means that certain Termination and Release
Agreement by and between Leviathan, Leviathan Gas Pipeline Company, El Paso
and Tennessee Gas Pipeline Company to be executed in connection herewith,
the form of which is attached hereto as "Exhibit D".
"Transaction Agreements" means this Agreement, the Assignment, the
Registration Rights Agreement, the Option Agreement, the Termination
Agreement, the LP Amendment, the JV Amendment and any other agreements
executed in connection herewith.
"Viosca Knoll" shall have the meaning set forth in the recitals to
this Agreement.
"VK Deepwater" shall have the meaning set forth in the recitals to
this Agreement.
1.2 GENERAL DEFINITIONS. Capitalized terms used in this Agreement and not
defined in Section 1.1 shall have the meanings ascribed to them elsewhere in
this Agreement.
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ARTICLE II.
CONTRIBUTION AND RELATED MATTERS
2.1 THE CLOSING. Subject to the terms and conditions of this Agreement,
the consummation of the transactions contemplated by this Agreement as set forth
in Section 2.2 (the "Closing") will take place as promptly as practicable (and
in any event within three (3) business days) following the approval of the
transactions contemplated by the Transaction Agreements at the special meeting
of Leviathan unitholders to be held to approve such transactions in accordance
with Section 4.1, such Closing (i) to take place at such time and place as is
mutually agreed upon by the Parties and (ii) is conditioned upon the Parties'
reasonable commercial efforts (or a waiver thereof) to fulfill the conditions
set forth in Article IV.
2.2 THE TRANSACTIONS. Subject to the terms and conditions of this
Agreement, on the Closing Date:
(a) El Paso will cause EPEC to contribute an amount which equals 50%
of the then outstanding amount (including principal, interest, fees and all
other charges) under the Credit Facility to Viosca Knoll in immediately
available funds by wire transfer to an account designated by Leviathan;
(b) El Paso will cause EPEC Deepwater to contribute the Property to
Leviathan by executing and delivering the Assignment to VK Deepwater;
(c) Leviathan will issue the Common Units to EPEC Deepwater;
(d) Leviathan will pay the Cash Contribution Amount to EPEC in
immediately available funds by wire transfer to an account designated by El
Paso to reimburse EPEC for the capital expenditures EPEC incurred with
respect to the Property during the two-year period preceding the transfer
pursuant to this Agreement;
(e) Leviathan will deliver to El Paso, either on the Closing Date or
as soon as practicable thereafter, a certificate (or certificates, as El
Paso may reasonably request), in such form (or forms) as is approved by
Leviathan and conforms with applicable law, evidencing the Common Units
issued to EPEC Deepwater in accordance with Section 2.2(c); and
(f) each of El Paso and Leviathan will, or will cause the applicable
El Paso Indemnified Person or Leviathan Indemnified Person to, as
applicable, execute each of the other Transaction Agreements in order to
effect the transactions contemplated hereby.
2.3 RELEASES.
(a) Leviathan. Leviathan, on behalf of itself and each Leviathan
Indemnified Person, hereby releases and discharges each El Paso Indemnified
Person from all actions, and causes of action, judgments, executions,
suits, debts, claims, demands, liabilities, counterclaims and offsets of
every character, known or unknown, direct and/or indirect, at law or in
equity, of whatever kind or nature, by any Leviathan Indemnified Person
which have arisen or accrued through the Effective Date in any way directly
or indirectly arising out of in any way connected with the Terminating
Agreements, or any verbal or oral commitment, contract, agreement, duty,
covenant, obligation, understanding or arrangement of any kind or nature,
any amendment or modifications thereof pertaining or relating thereto.
(b) El Paso. El Paso, on behalf of itself and each El Paso Indemnified
Person, hereby releases and discharges each Leviathan Indemnified Person
from all actions, and causes of action, judgments, executions, suits,
debts, claims, demands, liabilities, counterclaims and offsets of every
character, known or unknown, direct and/or indirect, at law or in equity,
of whatever kind or nature, by any El Paso Indemnified Person which have
arisen or accrued through the Effective Date in any way directly or
indirectly arising out of or in any way connected with the Terminated
Agreements, or any verbal or oral commitment, contract, agreement, duty,
covenant, obligation, understanding or arrangement of any kind or nature,
any amendment or modifications thereof pertaining or relating thereto.
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ARTICLE III.
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF EL PASO. El Paso hereby represents
and warrants to Leviathan as follows:
(a) Organization and Good Standing. Each El Paso Indemnified Person
which is a party to any Transaction Agreement is duly formed, validly
existing and in good standing under the laws of the state of its
incorporation or formation, with all requisite power and authority to carry
on the business in which it is engaged.
(b) Authority and Authorization. Each El Paso Indemnified Person which
is a party to any Transaction Agreement has all requisite power and
authority (i) to execute and deliver, or to cause to be executed and
delivered, as applicable, each such agreement, (ii) to consummate the
transactions contemplated thereby and (iii) to perform or cause to be
performed, as applicable, all the terms and conditions thereof to be
performed by such Person. The execution and delivery of each Transaction
Agreement by the relevant El Paso Indemnified Person has been duly
authorized and approved by all requisite action on the part of such Person.
Each Transaction Agreement to which each El Paso Indemnified Person is a
party is, and will be, a valid and binding obligation of such Person,
enforceable against such Person in accordance with its terms, subject to
bankruptcy, moratorium, insolvency and other Laws generally affecting
creditors' rights and general principles of equity (whether applied in a
proceeding in a court of law or equity).
(c) No Violation. To the knowledge of each El Paso Indemnified Person,
the execution and delivery of each Transaction Agreement to which it is a
party, does not, and consummation of the transactions contemplated therein
will not, violate (i) any of the provisions of organizational documents of
such Person, (ii) any order, rule, decree or material agreement pursuant to
which such Person or the Property is bound or (iii) any applicable Laws.
(d) Good and Valid Title; No Liens. EPEC Deepwater owns (beneficially
and of record) and has good and valid title to (i) 50% of all of the
outstanding partnership interest of Viosca Knoll and (ii) all of the other
Property. EPEC Deepwater has not, voluntarily or involuntarily, with or
without consideration, sold, assigned, disposed of, transferred or
otherwise alienated any interest it owned in (a) Viosca Knoll, (b) any of
the other Property or (c) other rights related to (a) or (b). Except as
expressly set forth in Section 4.03(b) of the JV Agreement and in the
Credit Facility, including Section 2.2 thereof, (x) there are no Liens
against the Property and (y) EPEC Deepwater has not signed a financing
statement (or other instrument) or any security agreement with respect to
the Property authorizing any secured party thereunder to file any such
financing statement (or other instrument), and, to the knowledge of each El
Paso Indemnified Person, no such financing statement (or other instrument)
or mortgage has been filed. Upon the transfer of the Property to VK
Deepwater pursuant to the Assignment, VK Deepwater will have good and
indefeasible title to the Property free and clear of all Liens. El Paso
will warrant such title to the Property and defend VK Deepwater against all
claims related thereto.
(e) Litigation. There are no pending suits or actions or other
proceedings or suits which affect the Property (including, without
limitation, any actions challenging or pertaining to an El Paso Indemnified
Person's right, title and interest to the Property) or which could affect
the consummation of the transactions contemplated hereby or, in any
material respect, Viosca Knoll or the business or prospects of Viosca
Knoll. None of El Paso, EPEC Deepwater or any other El Paso Indemnified
Person believes, in good faith, that any circumstances, events or
conditions have occurred which reasonably could be expected (based on their
knowledge and experience) to form the basis for a suit, action or other
proceeding against (i) Viosca Knoll which, if adversely determined,
reasonably could be expected to affect the Property or to materially and
adversely affect Viosca Knoll or (ii) any El Paso Indemnified Person which,
if adversely determined, reasonably could be expected to affect the
transactions contemplated by any Transaction Agreement.
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(f) Conformity with Laws. Except to the extent previously disclosed by
any El Paso Indemnified Person in writing to any Leviathan Indemnified
Person, to the knowledge of each El Paso Indemnified Person, ownership and
operation of the Property and Viosca Knoll have been in conformity, in all
material respects, with all applicable Laws. Without in any way limiting
the foregoing representation and warranty, to the knowledge of each El Paso
Indemnified Person, (i) Viosca Knoll is not subject to any pending suit,
action, investigation or inquiry by any governmental authority under any
applicable Laws and (ii) no judgment, order, writ, injunction or decree of
any governmental entity has been issued or entered against any El Paso
Indemnified Person which continues to be in effect with respect to or
affecting the Property.
(g) The Assignment. The form of the Assignment (i) is sufficient to
validly transfer title to all of the Property from EPEC Deepwater to
Leviathan and then to VK Deepwater and (ii) complies with all applicable
Laws. No actions, filings, recordings or consents are necessary to transfer
any of the Property to VK Deepwater.
(h) No Outstanding Liabilities. Except as previously disclosed by any
El Paso Indemnified Person in writing to any Leviathan Indemnified Person,
no El Paso Indemnified Person has any outstanding liabilities or
obligations (whether accrued, absolute, contingent, unliquidated or
otherwise, and whether due or to become due) with respect to Viosca Knoll
or any of the Terminated Agreements.
(i) No Implied Warranties. NOTWITHSTANDING ANYTHING IN THIS AGREEMENT
TO THE CONTRARY, NOTHING IN THIS AGREEMENT IS INTENDED TO CREATE, AND EL
PASO EXPRESSLY DISCLAIMS AND NEGATES, ANY AND ALL REPRESENTATIONS AND
WARRANTIES NOT EXPRESSLY MADE HEREIN, INCLUDING, WITHOUT LIMITATION,
IMPLIED OR STATUTORILY IMPOSED WARRANTIES OF FITNESS FOR PURPOSE OR
MERCHANTABILITY, AND LEVIATHAN HEREBY WAIVES SAME.
(j) Taxes. To the knowledge of each El Paso Indemnified Person, Viosca
Knoll has (i) duly filed all material federal, state, local and foreign tax
returns, reports or forms (collectively "Tax Returns") required to be filed
by or with respect to Viosca Knoll or its assets or operations with the
Internal Revenue Service (the "IRS") or other applicable taxing authority,
(ii) paid, or adequately reserved against, all Taxes due or claimed due by
a taxing authority from or with respect to Viosca Knoll or its assets or
operations and (iii) made all material deposits required with respect to
Taxes. To the knowledge of each El Paso Indemnified Person, there has been
no material issue raised or material adjustment proposed (and none is
pending) by the IRS or any other taxing authority in connection with any
Tax Returns relating to the assets or operations of Viosca Knoll, and no
waiver or extension of any statute of limitations as to any federal, state,
local or foreign tax matter relating to the assets or operations of Viosca
Knoll has been given by or requested from Viosca Knoll with respect to any
Tax year.
With respect to the representations and warranties contained in this
Section 3.1, and with respect to the provisions of Section 6.3, the terms
"believe," "knowledge" and "experience" refer to that of those persons who from
time to time have held the office of the Chief Executive Officer, Chief
Operating Officer, President, Chief Financial Officer or any Vice President or
equivalent position of the relevant El Paso Indemnified Person and the terms
"knowledge" and "known" mean the actual conscious awareness of any such person.
3.2 REPRESENTATIONS AND WARRANTIES OF LEVIATHAN. Leviathan hereby
represents and warrants to El Paso as follows:
(a) Organization and Good Standing. Each Leviathan Indemnified Person
which is a party to any Transaction Agreement is duly formed and validly
existing and in good standing under the laws of its state or jurisdiction
of formation, with all requisite power and authority to carry on the
business in which it is engaged.
(b) Authority and Authorization. Each Leviathan Indemnified Person
which is a party to any Transaction Agreement has all requisite power and
authority (i) to execute and deliver, or to cause to be executed and
delivered, as applicable, each such agreement, (ii) to consummate the
transactions
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contemplated thereby and (iii) to perform or cause to be performed, as
applicable, all the terms and conditions thereof to be performed by such
Person. The execution and delivery of each Transaction Agreement by the
relevant Leviathan Indemnified Person has been duly authorized and approved
by all requisite action on the part of such Person. Each Transaction
Agreement to which each Leviathan Indemnified Person is a party is, and
will be, a valid and binding obligation of such Person, enforceable against
such Person in accordance with its terms, subject to bankruptcy,
moratorium, insolvency and other Laws generally affecting creditors' rights
and general principles of equity (whether applied in a proceeding in a
court of law or equity).
(c) No Violation. To the knowledge of each Leviathan Indemnified
Person, the execution and delivery of each Transaction Agreement to which
it is a party, does not, and consummation of the transactions contemplated
therein will not, violate (i) any of the provisions of organizational
documents of such Person, (ii) any order, rule, decree or material
agreement pursuant to which such Person or the Property is bound or (iii)
any applicable Laws.
(d) Issuance of the Common Units. The issuance of the Common Units by
Leviathan has been duly authorized and approved by all requisite
partnership action, and such Common Units will, when issued in
consideration for the contribution by EPEC Deepwater of the Property
pursuant to this Agreement, be validly issued, fully paid and
non-assessable; provided, however, that, any representation or warranty
with respect to the non-assessability of the Common Units is subject to the
qualifications under (i) Section 17-303(a) of the Delaware Revised Uniform
Limited Partnership Act (the "Delaware Act") and (ii) Section 17-607 of the
Delaware Act.
(e) Taxes. To the knowledge of each Leviathan Indemnified Person,
Leviathan has (i) duly filed all material Tax Returns required to be filed
by or with respect to Leviathan or its assets or operations with the IRS or
other applicable taxing authority, (ii) paid, or adequately reserved
against, all Taxes due or claimed due by a taxing authority from or with
respect to Leviathan or its assets or operations and (iii) made all
material deposits required with respect to Taxes. To the knowledge of each
Leviathan Indemnified Person, there has been no material issue raised or
material adjustment proposed (and none is pending) by the IRS or any other
taxing authority in connection with any Tax Returns relating to the assets
or operations of Leviathan, and no waiver or extension of any statute of
limitations as to any federal, state, local or foreign tax matter relating
to the assets or operations of Leviathan has been given by or requested
from Leviathan with respect to any Tax year.
With respect to the representations and warranties contained in this
Section 3.2, and with respect to the provisions of Section 6.3, the terms
"believe," "knowledge" and "experience" refer to that of those persons who from
time to time have held the office of Chief Executive Officer, Chief Operating
Officer, President, Chief Financial Officer or any Vice President or Manager or
equivalent position of the relevant Leviathan Indemnified Person, and the terms
"knowledge" and "known" mean the actual conscious awareness of any such person.
ARTICLE IV.
CONDITIONS TO CLOSING
The obligations of El Paso and Leviathan to effect the transactions
contemplated by this Agreement are subject to the Parties' reasonable commercial
efforts to fulfill the following conditions:
4.1 APPROVAL OF THE TRANSACTIONS. To the extent required by applicable
Laws, the LP Agreement or the rules of the New York Stock Exchange, the
transactions contemplated by the Transaction Agreements must be approved by the
holders of the outstanding units of Leviathan.
4.2 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of each Party contained in this Agreement must be true and correct at
and as of the Closing Date with the same force and effect as though made at and
as of that time. Each Party must have performed and complied with all of its
obligations required by this Agreement to be performed or complied with at or
prior to
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the Closing Date. Each Party must have delivered to the other Party a
certificate, dated as of the Closing Date and signed by an authorized officer,
certifying that such representations and warranties are true and correct and
that all such obligations have been performed and complied with.
4.3 CONSENTS. All consents, waivers, approvals, authorizations or orders
required to be obtained from third parties, governmental authorities or
otherwise (including, but not limited to, from lenders to Leviathan and Viosca
Knoll), and all filings required to be made, by the Parties, VK Deepwater, EPEC
Deepwater and Viosca Knoll for the consummation of the transactions contemplated
by the Transaction Agreements, must have been made and obtained by the Parties,
VK Deepwater, EPEC Deepwater and Viosca Knoll.
4.4 RELEASE FROM OBLIGATIONS UNDER CREDIT FACILITY. A waiver or release of
the clawback payment obligations under Section 2.22 of the Credit Facility as
such obligations relate to any El Paso Indemnified Person must be secured.
4.5 RECEIPT OF FAIRNESS OPINION. Leviathan must have received, in a form
reasonably acceptable to the Board of Directors of Leviathan's general partner
and any special committee thereof directed to review the fairness of the
transactions contemplated hereby, an opinion from a financial advisor with
respect to the fairness of such transactions to the unitholders of Leviathan.
ARTICLE V.
CONDUCT OF BUSINESS PENDING THE CLOSING
Each Party covenants and agrees that, except as otherwise specifically
required by the terms of this Agreement, between the Effective Date and the
Closing Date, the business of Viosca Knoll will be conducted only in, and
neither Party will take any action with respect to Viosca Knoll except in, the
ordinary course of business consistent with past practice; provided, that
Leviathan hereby covenants and agrees that it will not cause Viosca Knoll to
borrow additional amounts under the Credit Facility after the Effective Date and
prior to the Closing Date. The Parties will each use their reasonable commercial
efforts to preserve intact Viosca Knoll's business, to keep available the
services of Viosca Knoll's current officers, employees (if any) and consultants
(if any), and to preserve Viosca Knoll's present relationships with customers,
suppliers and other Persons with which it has significant business relations.
ARTICLE VI.
INDEMNIFICATION
6.1 INDEMNIFICATION OF LEVIATHAN. Subject to the limitations set forth in
this Article VI and Section 7.11, El Paso hereby agrees to RELEASE, INDEMNIFY,
PROTECT, DEFEND AND HOLD HARMLESS each Leviathan Indemnified Person from and
against any and all Losses of any kind or character, to the extent the same
arise out of any inaccuracy, violation or breach by El Paso of any
representation, warranty, condition or covenant set forth in this Agreement.
6.2 INDEMNIFICATION OF EL PASO. Subject to the limitations set forth in
this Article VI and Section 7.11, Leviathan hereby agrees to RELEASE, INDEMNIFY,
PROTECT, DEFEND AND HOLD HARMLESS each El Paso Indemnified Person from and
against any and all Losses of any kind or character, to the extent the same
arise out of any inaccuracy, violation or breach by Leviathan of any
representation, warranty, condition or covenant set forth in this Agreement.
6.3 LIMITATION ON INDEMNITIES.
(a) Notwithstanding anything to the contrary in this Agreement, the
indemnities for any inaccuracy in, violation of or breach of any
representation or warranty set forth in Sections 3.1 or 3.2 (as limited in
this Section 6.3 and by Section 7.11) are each Party's sole and exclusive
remedy for all inaccuracies in, violations of or breaches of such
representations and warranties, and for any independent common-law or
statutory rights or remedies that such Party may have at any time now and
in the future with respect to
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any and all such inaccuracies, violations or breaches by the other Party
with respect to any such representation or warranty.
(b) Except to the extent relating to (i) a requirement to obtain third
party consent to an assignment of any of the Property or (ii) the
representations and warranties set forth in Section 3.1(a)-(d), the
indemnities with respect to an inaccuracy in, violation of or breach of a
representation or warranty set forth in Section 3.1(e)-(j) shall not cover
any claim for which the underlying facts, circumstances, or conditions were
disclosed by any El Paso Indemnified Person in writing to or otherwise
known (as defined in Section 3.2) by any Leviathan Indemnified Person on or
before the date of this Agreement.
(c) Except to the extent relating to the representations and
warranties set forth in Section 3.2(a)-(c), the indemnities with respect to
an inaccuracy in, violation of or breach of a representation or warranty
set forth in Section 3.2(d) or (e) shall not cover any claim for which the
underlying facts, circumstances, or conditions were disclosed by any
Leviathan Indemnified Person in writing to or otherwise known (as defined
in Section 3.1) by any El Paso Indemnified Person on or before the date of
this Agreement.
(d) The indemnifying Party shall have the burden of proving a claim
that any indemnified Person had knowledge under this Section 6.3.
ARTICLE VII.
MISCELLANEOUS
7.1 ENTIRE AGREEMENT. This Agreement and the Transaction Agreements
constitute the entire agreement and supersede all prior (oral or written) or
oral contemporaneous proposals or agreements, all previous negotiations and all
other communications or understandings between the Parties with respect to the
subject matter hereof, including, without limitation, the Proposal Letter and
Term Sheet dated December 1, 1998, from El Paso to Leviathan and the
supplemental Letter dated January 4, 1999, from Leviathan to El Paso.
7.2 AMENDMENT AND MODIFICATION. All amendments, supplements and
modifications to this Agreement shall be in writing and signed by each of the
Parties.
7.3 COUNTERPARTS. This Agreement may be executed in multiple counterparts,
each of which, when executed, shall be deemed an original, and all of which
shall constitute but one and the same instrument.
7.4 PARTIES BOUND BY AGREEMENT. This Agreement shall be binding upon and
shall inure to the benefit of the Parties and their respective successors and
assigns.
7.5 TERMINOLOGY. All personal pronouns used in this Agreement, whether
used in the masculine, feminine or neuter gender, shall include all other
genders; the singular shall include the plural, and vice versa. Articles and
other titles or headings are for convenience only, and neither limit nor amplify
the provisions of the Agreement itself, and all references herein to articles,
sections or subdivisions thereof shall refer to the corresponding article,
section or subdivision thereof of this Agreement unless specific reference is
made to such articles, sections or subdivisions of another document or
instrument.
7.6 LAWS. This Agreement and all of the terms and conditions contained
herein, and the respective obligations of the Parties, are subject to all valid
and applicable Laws.
7.7 GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT UNDER,
AND SHALL BE CONSTRUED, INTERPRETED AND GOVERNED BY AND ACCORDING TO, THE LAWS
OF THE STATE OF TEXAS, EXCLUDING ANY CONFLICT OF LAWS PRINCIPLES WHICH, IF
APPLIED, MIGHT PERMIT OR REQUIRE THE APPLICATION OF THE LAWS OF ANOTHER
JURISDICTION.
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7.8 EXHIBITS AND SCHEDULES. All exhibits, schedules and the like contained
herein or attached hereto are integrally related to this Agreement, and are
hereby made a part of this Agreement for all purposes.
7.9 NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing (including telex, facsimile, telecopier or similar
writing) and sent to the address of the Party set forth below, or to such other
more recent address of which the sending Party actually has received written
notice:
(a) if to Leviathan, to:
Leviathan Gas Pipeline Partners, L.P.
Attn: President
1001 Louisiana
Houston, Texas 77002
Telephone: (713) 420-2131
Telecopy: (713) 420-5477
(b) if to El Paso, to:
El Paso Field Services Company
Attn: President
1001 Louisiana
Houston, Texas 77002
Telephone: (713) 420-4282
Telecopy: (713) 420-2087
Each such notice, demand or other communication shall be effective, if given by
registered or certified mail, return receipt requested, as of the third day
after the date indicated on the mailing certificate, or if given by any other
means, when delivered at the address specified in this Section.
7.10 FURTHER ASSURANCES. Subject to the terms and conditions set forth in
this Agreement, each of the Parties agrees to use all reasonable commercial
efforts to take, or to cause to be taken, all actions, and to do, or to cause to
be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement. In case, at any time after the execution of this Agreement, any
further action is necessary or desirable to carry out its purposes, the proper
officers or directors of the Parties shall take or cause to be taken all such
necessary action.
7.11 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS. Except to the extent expressly set forth to the contrary in this
Section 7.11, the representations, warranties, conditions, covenants and
agreements given by the Parties shall survive this Agreement without regard to
any action taken pursuant to this Agreement, including, without limitation, the
execution of any documents affecting an interest in real property or any
investigation made by the Party asserting the breach thereof. The
representations and warranties set forth in (i) Sections 3.1(a)-(d) and (j) and
3.2(a)-(e) shall survive for a period of four (4) years after the date of this
Agreement and (ii) Sections 3.1(e)-(i) shall survive for a period of one (1)
year after the date of this Agreement, and with respect to the survival periods
set forth in (i) and (ii), such representations and warranties shall thereafter
expire and have no further force or effect (except to the extent the indemnitee
has notified the indemnitor of an alleged inaccuracy, violation or breach with
respect thereto prior to the expiration of such one-year or four-year period, as
applicable). Such one-year and four-year survival periods shall not affect any
other representation, warranty, condition, covenant or indemnity obligation
under this Agreement.
7.12 COMMON UNITS. When issued, the Common Units (i) will be subject to
the rights, obligations and restrictions set forth in the Registration Rights
Agreement and the LP Agreement and (ii) will be subject to certain transfer
restrictions under applicable federal and state securities laws.
7.13 SEVERABILITY. Any term or provision of this Agreement that is invalid
or unenforceable in any jurisdiction shall be ineffective as to such
jurisdiction, to the extent of such invalidity or unenforceability, without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting
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the validity or enforceability of any terms and provisions of this Agreement in
any other jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, such provision shall be interpreted to be only so broad as is
enforceable. A bankruptcy or similar trustee must accept or, to the extent
permitted by law, reject this Agreement in its entirety.
7.14 WAIVERS. Neither action taken (including, without limitation, any
investigation by or on behalf of either Party) nor inaction pursuant to this
Agreement, shall be deemed to constitute a waiver of compliance with any
representation, warranty, covenant or agreement contained herein by the Party
not committing such action or inaction. A waiver by either Party of a particular
right, including, without limitation, breach of any provision of this Agreement,
shall not operate or be construed as a subsequent waiver of that same right or a
waiver of any other right.
7.15 REMEDIES. Except as expressly provided herein, the rights,
obligations and remedies created by this Agreement are cumulative and in
addition to any other rights, obligations or remedies otherwise available at law
or in equity. Nothing herein shall be considered an election of remedies.
Without being subject to the limitations required by common law, either Party
may enforce this Agreement by an injunction or specific performance. In
addition, any successful Party is entitled to costs related to enforcing this
Agreement, including, without limitation, reasonable attorneys' fees, court
costs and settlement and arbitration expenses. NOTWITHSTANDING ANYTHING HEREIN
TO THE CONTRARY, THE PARTIES WAIVE ANY AND ALL RIGHTS, CLAIMS OR CAUSES OF
ACTION ARISING UNDER THIS AGREEMENT AGAINST THE OTHER PARTY OR ITS AFFILIATES
FOR INCIDENTAL, CONSEQUENTIAL, PUNITIVE OR EXEMPLARY DAMAGES (OTHER THAN
INDEMNIFICATION OBLIGATIONS WITH RESPECT TO THIRD PARTY CLAIMS FOR SUCH
DAMAGES).
7.16 NO THIRD PARTY BENEFICIARIES. Except to the extent a third party is
expressly given rights pursuant to Article VI, any agreement herein contained,
expressed or implied, shall be only for the benefit of the Parties and their
respective legal representatives, successors, and assigns, and such agreements
shall not inure to the benefit of any other Person whomsoever, it being the
intention of the Parties that no Person shall be deemed a third party
beneficiary of this Agreement except to the extent a third party is expressly
given rights herein.
7.17 NO MERGER. The rights and obligations created by this Agreement are
separate and independent from any rights and obligations created by any other
agreements between the Parties, including, without limitation, the Assignment.
Accordingly, none of the representations, warranties, covenants or indemnities
included in any other agreements between the Parties shall be merged into this
Agreement or otherwise restrict or limit the affect of this Agreement, but each
shall survive as provided in each such agreement.
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first set forth in the preamble of this Agreement.
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
By: /s/ GRANT E. SIMS
-----------------------------------
Name: Grant E. Sims
Title: Chief Executive Officer
EL PASO FIELD SERVICES COMPANY
By: /s/ WILLIAM A. WISE
-----------------------------------
Name: William A. Wise
Title: Chairman of the Board of
Directors
Exhibit A:
Form of Assignment
Exhibit B:
Form of Registration Rights Agreement
Exhibit C:
Form of Option Agreement
Exhibit D:
Form of Termination and Release Agreement
Exhibit E:
Form of JV Amendment
Exhibit F:
Form of LP Amendment
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EXHIBIT A
VIOSCA KNOLL GATHERING COMPANY
ASSIGNMENT OF JOINT VENTURE INTEREST
This Assignment ("Assignment") is dated as of __________, 1999 and
effective as of January 1, 1999 and is between EPEC Deepwater Gathering Company,
a Delaware corporation ("Assignor"), and VK Deepwater Gathering Company, L.L.C.,
a Delaware limited liability company ("Assignee"). Assignee and Assignor may be
referred to herein individually as a "Party" and collectively as the "Parties."
For and in consideration of the mutual premises, covenants and conditions
contained herein and other good and valuable consideration (the receipt and
sufficiency of which are hereby confirmed and acknowledged), Assignor, at the
direction of Leviathan Gas Pipeline Partners, L.P., a Delaware limited
partnership ("Leviathan"), hereby sells, conveys, assigns, transfers and
delivers unto Assignee, the following described property (the "Property"):
other than a one percent partnership interest in capital and in profits (as
such terms are defined in Section 708(b)(1)(B) of the Internal Revenue Code
of 1986, as amended, and Treasury Regulation Section 1.708-1(b)(1)(iii)) in
Viosca Knoll retained by Assignor, all of Assignor's right, title and
interest in and to (a) the partnership interest in Viosca Knoll Gathering
Company, a Delaware joint venture ("Viosca Knoll") formed pursuant to that
certain Joint Venture Agreement of Viosca Knoll Gathering Company dated as
of May 24, 1994 (as amended, restated or otherwise modified from time to
time, the "JV Agreement") owned by Assignor, including, but not limited to,
all the rights to any distributions and other payments paid or payable from
Viosca Knoll to Assignor on the partnership interest being conveyed to
Assignee pursuant to this Assignment from January 1, 1999 through the date
first written above (the payment of which is deemed to have been made by
Assignor pursuant to Section 2.2(b) of the Contribution Agreement dated as
of January 21, 1999 between Leviathan and El Paso Field Services Company,
as adjusted by Section 2.2(c) and (d) thereof), (b) the JV Agreement and
(c) any other tangible or intangible assets related to (a) or (b) above,
including, without limitation, any claims, chose in action or insurance
proceeds.
Assignor hereby warrants and represents as follows:
(i) Assignor owns (beneficially and of record) and has good and valid
title to (a) 50% of all of the outstanding partnership interest in Viosca
Knoll free and clear of all liens, encumbrances and other defects, except
for liens arising under Section 4.03 of the JV Agreement and the Credit
Agreement dated as of December 20, 1996 among Viosca Knoll and the Chase
Manhattan Bank, as administrative agent for the lenders party to the Credit
Agreement, as amended, restated, supplemented or otherwise modified from
time to time (the "Credit Facility"), and (b) all of the other Property;
(ii) except as expressly set forth in Section 4.03(b) of the JV
Agreement and in the Credit Facility (a) there are no mortgages, deeds of
trust, liens, pledges, security interests, leases, conditional sale
contracts, claims, rights of first refusal, options, charges, liabilities,
obligations, agreements, privileges, liberties, easements, rights-of-way,
limitations, reservations, restrictions and other encumbrances of any kind
("Liens") against the Property and (b) Assignor has not signed a financing
statement (or other instrument) or any security agreement with respect to
the Property authorizing any secured party thereunder to file any such
financing statement (or other instrument);
(iii) upon the transfer of the Property to Assignee pursuant to the
Assignment, (a) Assignee will have good and indefeasible title to the
Property free and clear of all Liens except for Liens arising under Section
4.03 of the JV Agreement and the Credit Facility, and (b) Assignor, its
personal representatives, successors and assigns shall warrant and forever
defend such title in and to the Property unto Assignee, its personal
representatives, successors and assigns, against any and every person or
persons (except for any person so claiming any Lien under the JV Agreement
or the Credit Facility) whomsoever lawfully claiming or to claim the same
or any part thereof; and
<PAGE> 86
(iv) this form of Assignment (a) is sufficient to validly transfer
title to all of the Property from Assignor to Leviathan and then to
Assignee and no actions, filings, recordings or consents are necessary to
transfer any of the Property to Assignee and (b) complies with all
applicable laws.
Assignor hereby agrees to be responsible for, to timely perform and to
RELEASE, INDEMNIFY AND HOLD HARMLESS Assignee with respect to, all duties,
claims, obligations and liabilities against or in respect of the Property
accrued or arising before or otherwise attributable or relating to the period
before January 1, 1999, except for the Liens established as set forth in Section
4.03(b) of the JV Agreement or in the Credit Facility. Assignee assumes and
agrees to RELEASE, INDEMNIFY AND HOLD HARMLESS Assignor against all duties,
claims, obligations and liabilities against or in respect of the Property
accruing on or after January 1, 1999.
This Assignment is made pursuant to all the terms and conditions of (i)
that certain Contribution Agreement dated as of January 21, 1999 between
Leviathan and El Paso Field Services Company, a Delaware corporation, and (ii)
the JV Agreement. Assignee consents to be bound by all the terms and provisions
of the JV Agreement.
The rights and obligations created by this Assignment are separate and
independent from any rights and obligations created by any other agreements
between the Parties, including, without limitation, the Contribution Agreement.
Accordingly, none of the representations, warranties, covenants or indemnities
included in any other agreements between the Parties shall be merged into this
Assignment or otherwise restrict or limit the affect of this Assignment, but
each shall survive as provided in each such agreement.
This Assignment shall be binding on and inure to the benefit of Assignor
and Assignee, their respective personal representatives, successors and assigns.
[Remainder of this page intentionally left blank.]
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<PAGE> 87
IN WITNESS WHEREOF, the undersigned have executed this Assignment of Joint
Venture Interest as of the ________ day of __________, 1999.
ASSIGNOR:
EPEC DEEPWATER GATHERING
COMPANY
By:
----------------------------------
Name:
Title:
ASSIGNEE:
VK DEEPWATER GATHERING COMPANY,
L.L.C.
By:
----------------------------------
Name:
Title:
<PAGE> 88
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement dated as of __________, 1999 (this
"Agreement") is by and between EPEC Deepwater Gathering Company, a Delaware
corporation (the "Company"), and Leviathan Gas Pipeline Partners, L.P., a
Delaware limited partnership ("Leviathan").
WHEREAS, the Company has acquired certain limited partnership units issued
by Leviathan pursuant to that certain Contribution Agreement dated as of January
21, 1999 and effective as of January 1, 1999 (the "Contribution Agreement")
between Leviathan and the Company;
WHEREAS, the ability of the Company to freely trade such units may be
limited by applicable United States federal securities laws;
WHEREAS, in order to improve the transferability of such units, Leviathan
is willing to provide certain registration rights with respect thereto;
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants and agreements contained herein and other good and valuable
consideration (the receipt and sufficiency of which are hereby confirmed and
acknowledged), the parties hereto stipulate and agree as follows:
1. Securities Subject to this Agreement.
a. "Registrable Securities" means the limited partnership units issued
by Leviathan to the Company pursuant to the Contribution Agreement, as
adjusted in the event of unit splits, unit dividends or similar
transactions.
b. "Restricted Securities" means each Registrable Security until (i) a
registration statement covering such Restricted Security has been declared
effective and it has been disposed of pursuant to such effective
registration statement, (ii) it has been distributed pursuant to Rule 144
(or any similar provisions then in force) under the Securities Act of 1933
(as amended from time to time, the "Act") or (iii) it has been otherwise
transferred and Leviathan has delivered a new certificate or other evidence
of ownership for it not subject to any legal or other restriction on
transfer under the Act or under state securities laws and not bearing the
following legend (or one substantially similar thereto):
The securities represented by this certificate have been acquired
for investment and have not been registered under the Securities Act of
1933, as amended, or the securities laws of any state. Without such
registration, such securities may not be sold, pledged, hypothecated, or
otherwise transferred, except upon delivery to the Company of an opinion
of counsel satisfactory to the Company that registration is not required
for such transfer or the submission to the Company of such other
evidence as may be satisfactory to the Company to the effect that any
such transfer shall not be in violation of the Securities Act of 1933,
as amended, or applicable state securities laws or any rule or
regulation promulgated thereunder.
2. Demand Registration.
a. Request for Registration. Subject to the limitations contained in
this Agreement (including, but not limited to, Section 5), at any time on
or after the date of issuance of the Registrable Securities, any holder or
holders of a majority in aggregate number of Restricted Securities then
outstanding may make a written request to Leviathan for registration under
the Act pursuant to this Section 2 of all or part of its or their
Restricted Securities (a "Demand Registration"). Such request will specify
the aggregate number of Restricted Securities proposed to be sold and will
also specify the intended method of disposition thereof. Within 10 days
after receipt of such request, Leviathan will give written notice of such
registration request to all other holders of the Restricted Securities and
include in such registration all Restricted Securities with respect to
which Leviathan has received written requests for inclusion therein within
10 days after the receipt by the applicable holder of Leviathan's notice.
Each such request will also specify the aggregate number of Restricted
Securities to be registered and the intended method of
<PAGE> 89
disposition thereof. No other party, including Leviathan (but excluding
another holder of a Restricted Security) shall be permitted to offer
securities under any such Demand Registration unless (i) holders of a
majority of the Restricted Securities requesting to participate in the
Demand Registration shall consent in writing or (ii) Leviathan has an
obligation to include such securities in such registration.
b. Required Registrations. Subject to Section 5, Leviathan is
obligated to effect only three (3) Demand Registrations pursuant to this
Section 2 (in addition to any registration in which holders of Restricted
Securities may participate pursuant to the other provisions of this
Agreement).
c. Effective Registration and Expenses. A registration will not count
as a Demand Registration for the purposes of Section 2(b) until it has
become effective. In any registration initiated as a Demand Registration,
Leviathan will pay all Registration Expenses (as hereinafter defined) in
connection therewith, whether or not it becomes effective; provided,
however, that if (i) one (1) Demand Registration has previously become
effective with respect to any Registrable Securities and (ii) a subsequent
registration is initiated as a Demand Registration with respect to any
Restricted Securities and such Demand Registration could have become
effective but does not solely because of holders withdrawing their
Restricted Securities, such withdrawing holders shall pay the Registration
Expenses (pro rata on the basis of the Restricted Securities being
withdrawn by each). Notwithstanding the first sentence of this Section
2(c), any such noneffective registration shall not constitute a Demand
Registration for the purposes of Section 2(b) unless each holder of
Restricted Securities then outstanding (whether or not included in such
registration) consents to such noneffective registration counting as a
Demand Registration, in which case Leviathan shall pay the Registration
Expenses.
d. Priority on Demand Registrations. If the holders of a majority in
aggregate number of Restricted Securities to be registered in a Demand
Registration so elect, the offering of such Restricted Securities pursuant
to such Demand Registration shall be in the form of an underwritten
offering. In such event, if the managing underwriter or underwriters of
such offering advise Leviathan and the holders in writing that in their
opinion the aggregate number of Restricted Securities requested to be
included in such offering is sufficiently large to materially and adversely
affect the success or offering price of such offering, Leviathan will
include in such registration the aggregate number of such Restricted
Securities which in the opinion of such managing underwriter or
underwriters can be sold without any such material adverse effect, and such
securities shall be allocated pro rata among the holders of Restricted
Securities on the basis of the number of Restricted Securities requested to
be included in such registration by their holders.
e. Selection of Underwriters. If any Demand Registration is in the
form of an underwritten offering, the holders of a majority in aggregate
number of Restricted Securities to be registered will select and obtain the
investment banker or investment bankers and manager or managers that will
administer the offering; provided, however, that such investment bankers
and managers must be reasonably satisfactory to Leviathan.
f. Periods Where no Registration is Required. Notwithstanding anything
to the contrary in this Section 2, Leviathan will not be required to
register any Restricted Securities pursuant to this Section 2: (i) during a
reasonable period of time, not to exceed 90 days, following the
distribution of other securities pursuant to a registered underwritten
public offering if such offering was commenced prior to the time Leviathan
receives the request contemplated by Section 2(a) or (ii) during a
reasonable period of time, not to exceed 60 days, after which the Board of
Directors of Leviathan Gas Pipeline Company, a Delaware corporation and the
general partner of Leviathan (the "General Partner"), acting in its
capacity as general partner, has determined that a registration of
Restricted Securities pursuant to this Section 2 would adversely affect
Leviathan because of a material non-public acquisition or other material
transaction that is pending at the time Leviathan receives the request
contemplated by Section 2(a).
3. Piggy-Back Registration. Subject to the limitations contained in this
Agreement (including, but not limited to, Section 5), if Leviathan proposes to
file a registration statement under the Act with respect to an offering by it
for its own account of any class of security (other than a registration
statement on Form S-4 or
2
<PAGE> 90
S-8 or successor forms thereto or filed in connection with an exchange offer or
an offering of securities solely to Leviathan's existing unitholders), then
Leviathan shall in each case give written notice of such proposed filing to the
holders of Restricted Securities at least 30 days before the anticipated filing
date, and such notice shall offer such holders the opportunity to register such
number of Restricted Securities as each such holder may request. Upon the
written request of any holder of Restricted Securities made within 15 days of
receipt of such notice, Leviathan shall use its Best Efforts (as hereinafter
defined) to cause the managing underwriter or underwriters of a proposed
underwritten offering to permit the holders of Restricted Securities requested
to be included in the registration of such offering to include such securities
in such offering on the same terms and conditions as any similar securities of
Leviathan included therein. Notwithstanding the foregoing, if in the managing
underwriter's or underwriters' opinion the total amount or kind of securities
which the holders of Restricted Securities, Leviathan and any other persons or
entities intend to include in such offering is sufficiently large to materially
and adversely affect the success or offering price of such offering, then the
amount or kind of securities to be offered for the accounts of holders of
Restricted Securities shall be reduced pro rata to the extent necessary to
reduce the total amount of securities to be included in such offering to the
amount recommended by such managing underwriter; provided, however, that if
securities are being offered for the account of other persons or entities as
well as Leviathan, such reduction shall not represent a greater fraction of the
number of securities intended to be offered by holders of Restricted Securities
than the fraction of similar reductions imposed on such other persons or
entities other than Leviathan over the amount of securities they intended to
offer. In connection with a piggyback registration pursuant to this Section 3,
Leviathan will bear all Registration Expenses; provided, however, that Leviathan
will not have any obligation pursuant to this sentence to persons or entities
who do not hold Restricted Securities. "Best Efforts" as used herein means best
efforts in accordance with reasonable commercial practice and without the
incurrence of unreasonable expense.
4. Holdback Agreement.
a. Restrictions on Sale by Holder of Registrable Securities.
(i) Each holder of Registrable Securities agrees not to sell,
transfer or otherwise dispose of any Registrable Securities in violation
of the Act, or any other applicable securities law.
(ii) To the extent not inconsistent with applicable law, each
holder of Registrable Securities whose securities are included in a
registration statement agrees not to effect any sale or distribution of
the securities being registered or a similar security of Leviathan, or
any securities convertible into or exchangeable or exercisable for such
securities, including a sale pursuant to Rule 144 under the Act, during
the 14 days prior to, and during the 90 day period beginning on, the
effective date of such registration statement (except as part of such
registration), if and to the extent requested by Leviathan in the case
of a non-underwritten public offering or if and to the extent requested
by the managing underwriter or underwriters in the case of an
underwritten public offering.
b. Restrictions on Sale by Leviathan and Others. Leviathan agrees not
to effect any sale or distribution of any securities similar to those being
registered, or any securities convertible into or exchangeable or
exercisable for such securities (other than any such sale or distribution
of such securities in connection with any merger, conversion or
consolidation by Leviathan or any subsidiary thereof or the acquisition by
Leviathan or a subsidiary thereof of the capital stock or other equity or
all or substantially all of the assets or any other person or entity or in
connection with an employee stock option or benefit plan), during the 14
days prior to, and during the 90 day period beginning on, the effective
date of any registration statement in which the holders of Registrable
Securities are participating (except as part of such registration), if and
to the extent requested by the holders in the case of a non-underwritten
public offering or if and to the extent requested by the managing
underwriter or underwriters in the case of an underwritten public offering.
5. Registration Procedures. Whenever the holders of Restricted Securities
have requested that any Restricted Securities be registered pursuant to Section
2 or Section 3 of this Agreement, Leviathan will use its Best Efforts to effect
the registration of such Restricted Securities upon the terms and conditions
hereof to
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permit the sale of such Restricted Securities by holders thereof in accordance
with the intended method of disposition thereof as quickly as practicable, and
in connection with any such request, Leviathan will as expeditiously as
possible:
a. in connection with a request pursuant to Section 2, prepare and
file with the Securities and Exchange Commission (the "Commission"), not
later than 45 days after receipt of a request to file a registration
statement with respect to such Restricted Securities, a registration
statement on any form for which Leviathan then qualifies or which counsel
for Leviathan shall deem appropriate and which form shall be available for
the sale of such Restricted Securities in accordance with the intended
method of distribution thereof, and use their Best Efforts to cause such
registration statement to become effective as promptly as practicable
thereafter; provided, however, that if Leviathan shall furnish to the
holders making such a request a certificate signed by the Chief Executive
Officer of Leviathan stating that in the good faith judgment of the Board
of Directors of the General Partner it would be significantly
disadvantageous to Leviathan and its unitholders for such a registration
statement to be filed on or before the date filing would be required or to
become effective, Leviathan shall have an additional period of not more
than 30 days within which to file (or before which they request the
effectiveness of) such registration statement; and, provided further, that
not less than 5 days before filing a registration statement or prospectus
or any amendments or supplements thereto, Leviathan will (i) furnish to one
(1) counsel selected by the holders of a majority in aggregate number of
the Restricted Securities covered by such registration statement copies of
all such documents proposed to be filed and (ii) notify each seller of
Restricted Securities of any stop order issued or threatened by the
Commission and take all reasonable actions required to prevent the entry of
such stop order or to remove it if entered;
b. in connection with a registration pursuant to Section 2, prepare
and file with the Commission such amendments and supplements to such
registration statement and the prospectus used in connection therewith as
may be necessary to keep such registration statement effective for a period
of not less than 90 days or such shorter period which will terminate when
all Restricted Securities covered by such registration statement have been
sold (but not before the expiration of the 90 day period referred to in
Section 4(3) of the Act and Rule 174 thereunder, if applicable), and comply
with the provisions of the Act with respect to the disposition of all
securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the sellers thereof
set forth in such registration statement;
c. as soon as reasonably possible, furnish to each seller of
Restricted Securities to be included in a registration statement copies of
such registration statement as filed and each amendment and supplement
thereto (in each case including all exhibits thereto), the prospectus
included in such registration statement (including each preliminary
prospectus) and such other documents as such seller may reasonably request
in order to facilitate the disposition of the Restricted Securities owned
by such seller;
d. use its Best Efforts to register or qualify such Restricted
Securities under such other securities or blue sky laws of such
jurisdictions as any seller reasonably requests and do any and all other
acts and things which may be reasonably necessary or advisable to enable
such seller to consummate the disposition in such jurisdictions of the
Restricted Securities owned by such seller; provided, however, that
Leviathan will not be required to (i) qualify generally to do business in
any jurisdiction where it would not otherwise be required to qualify but
for this Section 5(d), (ii) subject itself to taxation in any such
jurisdiction or (iii) consent to general service of process in any such
jurisdiction;
e. use its Best Efforts to cause the Restricted Securities covered by
such registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary by virtue of the
business and operations of Leviathan to enable the seller or sellers
thereof to consummate the disposition of such Restricted Securities;
f. notify each seller of such Restricted Securities at any time when a
prospectus relating thereto is required to be delivered under the Act, of
the happening of any event as a result of which the prospectus included in
such registration statement contains an untrue statement of a material fact
or omits to state any material fact required to be stated therein or
necessary to make the statements therein in light of the
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circumstances being made not misleading, and Leviathan will prepare a
supplement or amendment to such prospectus so that, as thereafter delivered
to the purchasers of such Restricted Securities, such prospectus will not
contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein in light of the circumstances being made not misleading;
g. enter into customary agreements (including an underwriting
agreement in customary form) and take such other actions as are reasonably
required in order to expedite or facilitate the disposition of such
Restricted Securities;
h. use its Best Efforts to make available for inspection by any seller
of Restricted Securities, any underwriter participating in any disposition
pursuant to such registration statement, and any attorney, accountant or
other agent retained by any such seller or underwriter (collectively, the
"Inspectors"), all financial and other records, pertinent corporate
documents and properties of Leviathan (collectively, the "Records"), and
cause Leviathan's officers and employees to supply all information
reasonably requested by any such Inspector, as shall be reasonably
necessary to enable them to exercise their due diligence responsibility, in
connection with such registration statement. Records or other information
which Leviathan determines, in good faith, to be confidential and which it
notifies the Inspectors are confidential shall not be disclosed by the
Inspectors unless (i) the disclosure of such Records or other information
is necessary to avoid or correct a misstatement or omission in the
registration statement or (ii) the release of such Records or other
information is ordered pursuant to a subpoena or other order from a court
of competent jurisdiction. The seller of Restricted Securities agrees that
it will, upon learning that disclosure of such Records or other information
is sought in a court or competent jurisdiction, give notice to Leviathan
and allow Leviathan, at Leviathan's expense, to undertake appropriate
action to prevent disclosure of the Records or other information deemed
confidential;
i. use its Best Efforts to obtain a comfort letter from Leviathan's
independent public accountants in customary form and covering such matters
of the type customarily covered by comfort letters as the holders of a
majority in aggregate number of Restricted Securities being sold reasonably
request;
j. otherwise use its Best Efforts to comply with all applicable rules
and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering
a period of 12 months, beginning within 3 months after the effective date
of the registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Act;
k. if underwritten, use its Best Efforts to make appropriate officers
of Leviathan available to the underwriters for meetings with prospective
purchasers of the Restricted Securities and prepare and present to
potential investors customary "road show" material in a manner consistent
with other new issuances of other securities similar to the Restricted
Securities; and
l. if so required by applicable listing requirements, cause all such
Restricted Securities to be listed on each securities exchange on which
similar securities issued by Leviathan are then listed, provided that the
applicable listing requirements are satisfied.
(i) Leviathan may require each seller of Restricted Securities as
to which any registration is being effected to furnish to Leviathan such
information regarding the distribution of such securities as Leviathan
may from time to time reasonably request in writing.
(ii) Each holder of Restricted Securities agrees that, upon receipt
of any notice from Leviathan of the happening of any event of the kind
described in Section 5(f), such holder will forthwith discontinue
disposition of such Restricted Securities pursuant to the registration
statement covering such Restricted Securities until such holder's
receipt of the copies of the supplemented or amended prospectus
contemplated by Section 5(f), and, if so directed by Leviathan, such
holder will deliver to Leviathan (at Leviathan's expense) all copies,
other than permanent file copies then in such holder's possession, of
the prospectus covering such Restricted Securities current at the time
of receipt of such notice. If Leviathan shall give any such notice,
Leviathan shall extend the period during which such registration
statement shall be maintained effective pursuant to this Agreement
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(including the period referred to in Section 5(b)) by the number of days
during the period from and including the date of the giving of such
notice pursuant to Section 5(f) to and including the date when each
seller of Restricted Securities covered by such registration statement
shall have received the copies of the supplemented or amended prospectus
contemplated by Section 5(f).
6. Expiration. The obligation of Leviathan to register any Restricted
Securities pursuant to this Agreement shall expire on March 31, 2009.
7. Registration Expenses. All expenses incident to Leviathan's performance
of or compliance with this Agreement, including, without limitation, all
registration and filing fees, fees and expenses of compliance with securities or
blue sky laws (including fees and disbursements of Leviathan's counsel in
connection with blue sky qualifications of the Restricted Securities), rating
agency fees, printing expenses, messenger and delivery expenses, internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the fees and
expenses incurred in connection with the listing of the securities to be
registered on each securities exchange on which similar securities issued by
Leviathan are then listed, and fees and disbursements of counsel for Leviathan
and its independent certified public accountants (including the expenses of any
special audit or "comfort" letters required by or incident to such performance),
securities acts liability insurance (if Leviathan elects to obtain such
insurance), the fees and expenses of any special experts retained by Leviathan
in connection with such registration, fees and expenses of other persons
retained by Leviathan, reasonable fees and expenses of one (1) counsel (who
shall be reasonably acceptable to Leviathan) for the holders of Restricted
Securities incurred in connection with each registration hereunder (but not
including any underwriting discounts or commissions or transfer taxes
attributable to the sale of Restricted Securities) and any reasonable
out-of-pocket expenses of the holders of Restricted Securities (or the agents
who manage their accounts) excluding fees of counsel other than those fees
specifically referred to in this Section 7 and excluding travel expenses (all
such expenses being herein called "Registration Expenses"), will be borne by
Leviathan.
8. Indemnification; Contribution.
a. Indemnification by Leviathan. Leviathan agrees to RELEASE, DEFEND,
INDEMNIFY, PROTECT AND HOLD HARMLESS, to the full extent permitted by law,
each holder of Registrable Securities, its officers, directors and agents
and each person or entity who controls such holder (within the meaning of
the Act) against all losses, claims, damages, liabilities and expenses
caused by any untrue or alleged untrue statement of material fact contained
in any registration statement, prospectus or preliminary prospectus or any
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein (in case of a
prospectus or preliminary prospectus, in the light of the circumstances
under which they were made) not misleading, except insofar as the same are
caused by or contained in any information with respect to such holder
furnished in writing to Leviathan by such holder expressly for use therein
or by such holder's failure to deliver a copy of the registration statement
or prospectus or any amendments or supplements thereto after Leviathan's
compliance with Section 5(c) hereof. Leviathan will also indemnify any
underwriters of the Registrable Securities, their officers and directors
and each person or entity who controls such underwriters (within the
meaning of the Act) to the same extent as provided above with respect to
the indemnification of the holders of Registrable Securities.
b. Indemnification by Holder of Restricted Securities. In connection
with any registration statement in which a holder of Restricted Securities
is participating, each such holder will furnish to Leviathan in writing
such information with respect to such holder as is required to be included
therein for use in connection with any such registration statement or
prospectus and agrees to RELEASE, DEFEND, INDEMNIFY, PROTECT AND HOLD
HARMLESS, to the extent permitted by law, Leviathan, the General Partner,
and each of their (as applicable), directors and officers, and affiliates
of any of them (within the meaning of the Act) against any losses, claims,
damages, liabilities and expenses resulting from any untrue or alleged
untrue statement of a material fact or any omission or alleged omission of
a material fact required to be stated in the registration statement,
prospectus or preliminary prospectus or any amendment thereof or supplement
thereto or necessary to make the statements therein
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(in the case of a prospectus or preliminary prospectus, in the light of the
circumstances under which they were made) not misleading, to the extent,
but only to the extent, that such untrue statement or omission is contained
in any information with respect to such holder so furnished in writing by
such holder.
c. Conduct of Indemnification Proceedings. Any person or entity
entitled to indemnification hereunder agrees to give prompt written notice
to the indemnifying party after the receipt by such person or entity of any
written notice of the commencement of any action, suit, proceeding or
investigation or threat thereof made in writing for which such person or
entity will claim indemnification or contribution pursuant to this
Agreement and, unless in the reasonable judgment of such indemnified party
a conflict of interest may exist between such indemnified party and the
indemnifying party with respect to such claim, permit the indemnifying
party to assume the defense of such claim with counsel reasonably
satisfactory to such indemnified party. Whether or not such defense is
assumed by the indemnifying party, the indemnifying party will not be
subject to any liability for any settlement made without its consent (but
such consent will not be unreasonably withheld). No indemnifying party will
consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in
respect of such claim or litigation. If the indemnifying party is not
entitled to, or elects not to, assume the defense of a claim, it will not
be obligated to pay the fees and expenses of more than one (1) counsel with
respect to such claim, unless in the reasonable judgment of any indemnified
party a conflict of interest may exist between such indemnified party and
any other of such indemnified parties with respect to such claim, in which
event the indemnifying party shall be obligated to pay the fees and
expenses of such additional counsel or counsels.
d. Contribution. If for any reason the indemnity provided for in this
Section 8 is unavailable to, or is insufficient to hold harmless, an
indemnified party, then the indemnifying party shall contribute to the
amount paid or payable by the indemnified party as a result of such losses,
claims, damages, liabilities or expenses (i) in such proportion as is
appropriate to reflect the relative benefits received by the indemnifying
party on the one hand and the indemnified party or on the other or (ii) if
the allocation provided by clause (i) above is not permitted by applicable
law, or provides a lesser sum to the indemnified party than the amount
hereinafter calculated, in such proportion as is appropriate to reflect not
only the relative benefits received by the indemnifying party on the one
hand and the indemnified party on the other but also the relative fault of
the indemnifying party and the indemnified party as well as any other
relevant equitable considerations. The relative fault of such indemnifying
party and indemnified parties shall be determined by reference to, among
other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission
to state a material fact, has been made by, or relates to information
supplied by, such indemnifying party or indemnified parties; and the
parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such action. The amount paid or payable by a party as
a result of the losses, claims, damages, abilities and expenses referred to
above shall be deemed to include, subject to the limitations set forth in
Section 8(c), any legal or other fees or expenses reasonably incurred by
such party in connection with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 8(d) were determined by pro rata
allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately
preceding paragraph. No person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall
be entitled to contribution from any person or entity who was not guilty
of such fraudulent misrepresentation.
If indemnification is available under this Section 8, the indemnifying
parties shall indemnify each indemnified party to the full extent
provided in Section 8(a) and Section 8(b) without regard to the relative
fault of said indemnifying party or indemnified party or any other
equitable consideration provided for in this Section 8(d).
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9. Participation in Underwritten Registrations. No person or entity may
participate in any underwritten registration hereunder unless such person or
entity (a) agrees to sell such person's or entity's securities on the basis
provided in any underwriting arrangements approved by the persons or entities
entitled hereunder to approve such arrangements and (b) completes and executes
all questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements.
10. Representations and Warranties. The Company hereby represents and
warrants to Leviathan as follows:
a. It is a "sophisticated investor" as such term is contemplated by
applicable securities laws (including the related jurisprudence);
b. The Registrable Securities are being acquired solely for its own
account for investment and not with a view toward, or for resale in
connection with, any "distribution" (as such term is used in the Act and
the rules and regulations thereunder) of all or any portion thereof;
c. It understands and agrees that the Registrable Securities may not
be sold, pledged, hypothecated or otherwise transferred unless they are
registered under the Act and applicable state securities laws or an
exemption from such registration is available;
d. It has adequate means of providing for its current needs and
possible contingencies. It is able to bear the economic risks of this
investment and has a sufficient net worth to sustain a loss of its entire
investment in Leviathan if such loss should occur;
e. It has such knowledge and experience in financial and business
matters as to be capable of evaluating the merits and risks of an
investment in Leviathan; and
f. It has made its own inquiry and investigation into and based
thereon has formed an independent judgment concerning Leviathan and the
Registrable Securities, and has been furnished with or given adequate
access to such information about Leviathan and the Registrable Securities
as it has requested.
11. Rule 144. Leviathan covenants that it will use its Best Efforts to file
the reports required to be filed by it under the Act and the Exchange Act and
the rules and regulations adopted by the Commission thereunder; and it will take
such further action as any holder of Restricted Securities may reasonably
request, all to the extent required from time to time to enable such holder to
sell Restricted Securities without registration under the Act within the
limitation of the exemptions provided by (a) Rule 144 under the Act, as such
Rule may be amended from time to time, or (b) any similar rule or regulation
hereafter adopted by the Commission. Upon the request of any holder of
Restricted Securities, Leviathan will deliver to such holder a written statement
as to whether it has complied with such requirements.
12. Assignment of Registration Rights. The rights of the Company under this
Agreement with respect to any Restricted Securities may be assigned to any
person or entity who acquires all or a portion of such Restricted Securities.
Any assignment of registration rights pursuant to this Section 12 shall be
effective upon receipt by Leviathan of (i) written notice from the assignor (A)
stating the name and address of any assignee, (B) describing the manner in which
the assignee acquired the Restricted Securities from the assignor and (C)
identifying the Restricted Securities with respect to which the rights under
this Agreement are being assigned, (ii) a certificate signed by the assignee
assuming all obligations of the assignor under this Agreement and (iii) any
other certificate or document that Leviathan might reasonably require.
13. Miscellaneous.
a. Entire Agreement. This Agreement and the other agreements executed
in connection and contemporaneously herewith constitute the entire
agreement and supersede all prior (oral and written) or contemporaneous
proposals or agreements, all previous negotiations and all other
communications or understandings between the parties hereto with respect to
the subject matter hereof.
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b. Parties Bound by Agreement. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and, subject to
Section 12, their respective successors and assigns.
c. Counterparts. This Agreement may be executed in multiple
counterparts, each of which, when executed, shall be deemed an original,
and all of which shall constitute but one and the same instrument.
d. Governing Law. THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT
UNDER, AND SHALL BE CONSTRUED, INTERPRETED AND GOVERNED BY AND ACCORDING
TO, THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANY CONFLICT OF LAWS
PRINCIPLES WHICH, IF APPLIED, MIGHT PERMIT OR REQUIRE THE APPLICATION OF
THE LAWS OF ANOTHER JURISDICTION.
e. No Inconsistent Agreements. Leviathan will not hereafter enter into
any agreement with respect to its securities which is inconsistent with the
rights granted to the holders of Registrable Securities in this Agreement.
f. Remedies. Each holder of Registrable Securities, in addition to
being entitled to exercise all rights granted by law, including recovery of
damages, will be entitled to specific performance of its rights under this
Agreement. Leviathan agrees that monetary damages would not be adequate
compensation for any loss incurred by reason of a breach by it of the
provisions of this Agreement and hereby agree to waive (to the extent
permitted by law) the defense in any action for specific performance that a
remedy of law would be adequate.
g. Amendments and Waivers. Except as otherwise provided herein, the
provisions of this Agreement may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given unless Leviathan has obtained the written consent of holders of at
least a majority in aggregate number of Restricted Securities then
outstanding affected by such amendment, modification, supplement, waiver or
departure.
h. Further Assurances. Subject to the terms and conditions set forth
in this Agreement, each of the parties hereto agrees to use all reasonable
efforts to take, or to cause to be taken, all actions, and to do, or to
cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement. If, at any time after the
execution of this Agreement, any further action is necessary or desirable
to carry out its purposes, the proper officers or directors of the parties
hereto shall take or cause to be taken all such necessary action.
i. Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any jurisdiction shall be ineffective as to
such jurisdiction, to the extent of such invalidity or unenforceability,
without rendering invalid or unenforceable the remaining terms and
provisions of this Agreement or affecting the validity or enforceability of
any terms or provisions of this Agreement in any other jurisdiction. If any
provision of this Agreement is so broad as to be unenforceable, such
provision shall be interpreted to be only so broad as is enforceable. A
bankruptcy or similar trustee must accept or, to the extent permitted by
law, reject this Agreement in its entirety.
j. Waivers. Neither action taken (including, without limitation, any
investigation by or on behalf of either party hereto) nor inaction pursuant
to this Agreement, shall be deemed to constitute a waiver of compliance
with any representation, warranty, covenant or agreement contained herein
by the party not committing such action or inaction. A waiver by either
party hereto of a particular right, including, without limitation, breach
of any provision of this Agreement, shall not operate or be construed as a
subsequent waiver of that same right or a waiver of any other right.
k. No Third Party Beneficiaries. Except to the extent a third party is
expressly given rights herein, any agreement herein contained, expressed or
implied, shall be only for the benefit of the parties hereto and their
respective legal representatives and permitted successors and assigns, and
such agreements shall not inure to the benefit of any other person
whomsoever, it being the intention of the parties hereto that no person
shall be deemed a third party beneficiary of this Agreement except to the
extent a third party is expressly given rights herein.
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l. Termination. This Agreement shall terminate on March 31, 2009.
m. Notices. All notices and other communications provided or permitted
hereunder shall be made by hand-delivery or registered first-class mail:
(i) if to the Company:
EPEC Deepwater Gathering Company
1001 Louisiana
Houston, Texas 77002
Attention: President
(ii) if to a permitted successor holder of Restricted Securities at the
most current address, and with a copy to be sent to each
additional address, given by such holder to Leviathan, in writing;
and
(iii) if to Leviathan:
Leviathan Gas Pipeline Partners, L.P.
1001 Louisiana
26th Floor
Houston, Texas 77002
Attention: Chief Financial Officer
[Remainder of this page intentionally left blank.]
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first set forth in the preamble of this Agreement.
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
By:
------------------------------------
Name:
Title:
EPEC DEEPWATER GATHERING COMPANY
By:
------------------------------------
Name:
Title:
<PAGE> 99
EXHIBIT C
OPTION AGREEMENT
This Option Agreement is made and entered into as of
-----------------, 1999 and effective as of January 1, 1999 (the "Effective
Date") by and between Leviathan Gas Pipeline Partners, L.P., a Delaware limited
partnership (together with its permitted successors and assigns, "Leviathan")
and El Paso Field Services Company, a Delaware corporation (together with its
permitted successors and assigns, "El Paso").
WITNESSETH:
WHEREAS, prior to the Effective Date, Viosca Knoll Gathering Company, a
Delaware joint venture ("Viosca Knoll"), was owned in equal percentages (50%
each) by VK Deepwater Gathering Company, L.L.C., a Delaware limited liability
company and a subsidiary of Leviathan, and EPEC Deepwater Gathering Company, a
Delaware corporation and a subsidiary of El Paso ("EPEC Deepwater");
WHEREAS, as of the Effective Date and pursuant to the terms of the
Contribution Agreement (as defined herein), El Paso will cause EPEC Deepwater to
contribute all of its interest in Viosca Knoll other than the Remaining Interest
(as defined herein) to Leviathan; and
WHEREAS, in connection with the transactions contemplated by the
Contribution Agreement, El Paso desires to grant to Leviathan, and Leviathan
desires to acquire from El Paso, (i) the right to direct the vote of the
Remaining Interest with respect to all partnership matters during the Voting
Period (as defined herein) and (ii) an option to purchase the Remaining Interest
at any time during the Option Period (as defined herein) upon and subject to the
terms and the conditions hereinafter set forth; and
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants and agreements contained herein and other good and valuable
consideration (the receipt and sufficiency of which are hereby confirmed and
acknowledged), the parties hereto hereby stipulate and agree as follows:
ARTICLE I.
DEFINITIONS
1.1 DEFINITIONS. As used in this Agreement, the following capitalized
terms shall have the meanings ascribed to them in this Section 1.1.
"Accrued Dividend Amount" means an amount of money equal to the product of
(i) any distributions paid, payable or in arrears, if any, in respect of a
single Common Unit issued pursuant to the Contribution Agreement and
attributable to the period of time beginning on the Closing Date and ending upon
the Option Closing Date, multiplied by (ii) the number of Phantom Units.
"Agreement" means this Option Agreement (including any exhibit, supplements
and other attachments), as amended, restated, supplemented or otherwise modified
from time to time.
"Assignment Documents" has the meaning set forth in Section 2.4(b).
"Common Units" means common units issued by Leviathan having all the
rights, privileges and other attributes set forth in Leviathan's constitutive
documents.
"Contribution Agreement" means that certain Contribution Agreement dated as
of January 21, 1999 and effective as of the Effective Date by and between
Leviathan and El Paso.
"Distributions Amount" means an amount of money equal to the sum of all
cash distributions paid or accrued and payable from Viosca Knoll to EPEC
Deepwater or El Paso on the Remaining Interest from the Effective Date through
the Option Closing Date.
"El Paso" has the meaning set forth in the preamble to this Agreement.
"EPEC Deepwater" has the meaning set forth in the recitals to this
Agreement.
<PAGE> 100
"Exercise Notice" has the meaning set forth in Section 2.3.
"Exercise Price" means an amount of money equal to the sum of $1,740,000
plus the Accrued Dividend Amount.
"Expiration Date" means the last day of the 18th calendar month immediately
following the calendar month in which the Closing Date occurs.
"Leviathan" has the meaning set forth in the preamble to this Agreement.
"Option" has the meaning set forth in Section 2.1.
"Option Closing Date" has the meaning set forth in Section 2.3.
"Option Period" means a period of time commencing on the day after the
first anniversary of the Closing Date and terminating at 11:59 p.m. (Houston,
Texas time) on the day after the Expiration Date.
"Parties" means, collectively, Leviathan and El Paso, and individually,
each a "Party".
"Phantom Units" means the number of additional Common Units which Leviathan
would have issued pursuant to the Contribution Agreement if Leviathan had also
acquired the Remaining Interest on the Closing Date in exchange solely for
Common Units (and no cash) assuming the number of such Common Units was
calculated by dividing $1,740,000 by the Market Price.
"Remaining Interest" means, immediately following consummation of the
transactions contemplated by the Contribution Agreement, all of EPEC Deepwater's
remaining right, title and interest in and to (a) the partnership interest in
Viosca Knoll owned by EPEC Deepwater, including, but not limited to, all the
rights to the Distributions Amount, the payment of which shall be made pursuant
to Section 2.4(b) as adjusted pursuant to Section 2.4(a), and (b) any other
tangible or intangible assets related to (a) above, including, without
limitation, any claims, choses in action or insurance proceeds.
"Viosca Knoll" has the meaning set forth in the recitals to this Agreement.
"Voting Period" means a period of time commencing on the Closing Date and
terminating on the Expiration Date.
1.2 GENERAL DEFINITIONS. Capitalized terms used but not defined in this
Agreement shall have the meanings ascribed to such terms in the Contribution
Agreement.
ARTICLE II.
OPTION
2.1 GRANT OF OPTION. Subject to the terms of this Agreement, El Paso
hereby irrevocably grants to Leviathan an option (the "Option") to purchase the
Remaining Interest at any time during the Option Period.
2.2 TERM OF OPTION. The Option will be effective for the duration of the
Option Period. Unless Leviathan has exercised the Option in accordance with the
terms of this Agreement before the Option Period ends, the Option will terminate
and be of no further force or effect.
2.3 MANNER OF EXERCISE OF THE OPTION. Leviathan may exercise the Option by
delivering written notice of exercise (the "Exercise Notice") addressed to El
Paso in accordance with this Agreement at any time during the Option Period. The
Exercise Notice shall specify the date on which the related closing shall occur
(the "Option Closing Date"), which date may not be more than 30 days after the
Expiration Date.
2
<PAGE> 101
2.4 THE OPTION CLOSING DATE. On the Option Closing Date:
(a) Leviathan will pay to El Paso in immediately available funds an
amount equal to the difference, if positive, between the Exercise Price and
the Distributions Amount (which reduction shall be deemed to be an
assignment by El Paso to Leviathan of such Distributions Amount); and
(b) El Paso will, and will cause EPEC Deepwater and any other
affiliate with an interest in the Remaining Interest to, execute and
deliver to Leviathan and its applicable subsidiaries all such assignments,
bills of sale and other instruments (the "Assignment Documents") as
Leviathan may reasonably deem necessary or desirable or each other
instrument as are necessary to effect the transfer of the Remaining
Interest, including an assignment substantially similar to Exhibit "A" to
the Contribution Agreement.
2.5 REPRESENTATIONS AND WARRANTIES. At least one of the Assignment
Documents will include representations and warranties with respect to the
Remaining Interest given by El Paso: (i) substantially similar to those in
Section 3.1 of the Contribution Agreement (except to the extent that such
representations and warranties should be altered so as to apply to the Remaining
Interest and the Option Closing Date), (ii) effective as of the Option Closing
Date and (iii) which explicitly survive for periods of time (e.g., four (4)
years or one (1) year, as applicable, from the Option Closing Date) equal to the
survival periods assigned to the equivalent representations and warranties in
Section 7.11 of the Contribution Agreement.
2.6 ASSIGNABILITY OF OPTION RIGHTS. Leviathan may assign all or any
portion of its rights under this Agreement to an affiliate, provided that the
assignee expressly agrees in writing to be subject to the terms and conditions
of this Agreement.
2.7 VOTING RIGHTS OF LEVIATHAN. During the Voting Period, El Paso hereby
irrevocably grants (on behalf of EPEC Deepwater) to Leviathan the right to vote
the Remaining Interest (in Leviathan's sole discretion and without any standard
of care or other obligation to El Paso or EPEC Deepwater except that Leviathan
agrees not to direct the vote of the Remaining Interest to amend the JV
Agreement in any way to adversely affect EPEC Deepwater's interest in the joint
venture) on all matters on which such interest is entitled to vote. El Paso
hereby agrees and acknowledges that Leviathan will have no fiduciary or other
duty to El Paso or EPEC Deepwater in connection with the exercise of the voting
rights granted pursuant to this Section 2.7, except that Leviathan agrees to
release, defend and indemnify El Paso and EPEC Deepwater with respect to any
causes of action, judgments, suits, claims and counterclaims of every character,
by any person (excluding El Paso or any of its affiliates) which arises during
the Voting Period and which results from the exercise by Leviathan during the
Voting Period of any voting rights under the JV Agreement.
ARTICLE III.
MISCELLANEOUS
3.1 ENTIRE AGREEMENT. This Agreement sets forth the entire understanding
of the Parties with respect to the subject matter hereof. Any previous
agreements or understandings (whether oral or written) between the Parties
regarding the subject matter hereof are merged into and superseded by this
Agreement, including, without limitation, the Proposal Letter and Term Sheet
dated December 1, 1998, from El Paso to Leviathan and the supplemental Letter
dated January 4, 1999, from Leviathan to El Paso.
3.2 SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective successors of
the Parties hereto.
3.3 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument.
3.4 HEADINGS. The headings of the Articles, Sections and paragraphs of
this Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof.
3
<PAGE> 102
3.5 MODIFICATION AND WAIVER. No amendment, modification or alteration of
the terms or provisions of this Agreement shall be binding unless the same shall
be in writing and duly executed by the Parties hereto, except that any of the
terms or provisions of this Agreement may be waived in writing at any time by
the Party which is entitled to the benefits of such waived terms or provisions.
No waiver of any of the provisions of this Agreement shall be deemed to or shall
constitute a waiver of any other provision hereof (whether or not similar). No
delay on the part of either party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof.
3.6 EXPENSES. Except as otherwise provided in this Agreement, each Party
shall pay all costs and expenses incurred by them or on their behalf in
connection with this Agreement and the transactions contemplated hereby.
3.7 GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT UNDER,
AND SHALL BE CONSTRUED, INTERPRETED AND GOVERNED BY AND ACCORDING TO, THE LAWS
OF THE STATE OF TEXAS, EXCLUDING ANY CONFLICT OF LAWS PRINCIPLES WHICH, IF
APPLIED, MIGHT PERMIT OR REQUIRE THE APPLICATION OF THE LAWS OF ANOTHER
JURISDICTION.
3.8 SEVERABILITY. If any provision of this Agreement is unenforceable, all
other provisions of this Agreement shall nevertheless remain in full force and
effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any provision is unenforceable, the Parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the Parties as closely as possible in an acceptable
manner to the end that the transactions contemplated hereby are fulfilled.
3.9 CONSTRUCTION. This Agreement is the result of substantial negotiations
among the Parties and their respective counsel. Accordingly, the Parties agree
that the fact that counsel for one Party or another may have drafted this
Agreement is immaterial, and this Agreement will not be strictly construed
against such Party.
3.10 ENFORCEMENT. The Parties hereto agree that the remedy at Law for any
breach of this Agreement is inadequate and that should any dispute arise
concerning any matter hereunder, this Agreement shall be enforceable by specific
performance. Such remedies shall, however, be cumulative and nonexclusive, and
shall be in addition to any other remedies which the Parties hereto may have.
3.11 NOTICES. Any notice, request, demand, instruction or other
communication to be given to either Party hereunder will be in writing, and will
be deemed to be delivered upon the earlier to occur of (i) actual receipt if
delivered by hand or by commercial courier such as "Federal Express" or "DHL",
postage prepaid, to the address indicated or (ii) upon confirmation of receipt
if by facsimile transmission addressed as follows:
If to Leviathan: Leviathan Gas Pipeline Partners, L.P.
Attention: President
1001 Louisiana
Houston, Texas 77002
Telephone: (713) 420-2131
Telecopy: (713) 420-5477
If to El Paso: El Paso Field Services Company
Attention: President
1001 Louisiana
Houston, Texas 77002
Telephone: (713) 420-4282
Telecopy: (713) 420-2087
The addresses and facsimile numbers for the purpose of this Section may be
changed by either Party by giving written notice of such change to the other
Party in the manner provided herein.
4
<PAGE> 103
3.12 FURTHER ASSURANCES. Subject to the terms and conditions set forth in
this Agreement, each of the Parties agrees to use all reasonable commercial
efforts to take, or to cause to be taken, all actions, and to do, or to cause to
be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement. In case, at any time after the execution of this Agreement, any
further action is necessary or desirable to carry out its purposes, the proper
officers or directors of the Parties shall take or cause to be taken all such
necessary action.
3.13 NO MERGER. The rights and obligations created by this Agreement are
separate and independent from any rights and obligations created by any other
agreements between the Parties. Accordingly, none of the representations,
warranties, covenants or indemnities included in any other agreements between
the Parties shall be merged into this Agreement or otherwise restrict or limit
the affect of this Agreement, but each shall survive as provided in each such
agreement.
[Remainder of this page intentionally left blank.]
5
<PAGE> 104
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties as
of the date first written above.
EL PASO FIELD SERVICES COMPANY
By:
------------------------------------
Name:
Title:
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
By:
------------------------------------
Name:
Title:
<PAGE> 105
EXHIBIT D
TERMINATION AND RELEASE AGREEMENT
This Termination and Release Agreement is made and entered into as of
-----------------, 1999 and effective as of January 1, 1999 (the "Effective
Date") by and among Leviathan Gas Pipeline Partners, L.P. ("Leviathan"),
Leviathan Gas Pipeline Company, a Delaware corporation (the "General Partner")
and the general partner of Leviathan, El Paso Field Services Company, a Delaware
corporation ("El Paso") and parent of EPEC Deepwater Gathering Company, the
successor in interest to Tenneco Deepwater Gathering Company, and Tennessee Gas
Pipeline Company, a Delaware corporation ("Tennessee"). Leviathan, the General
Partner, El Paso and Tennessee may be referred to herein individually as a
"Party" or collectively as the "Parties".
WITNESSETH:
WHEREAS, Leviathan and El Paso have executed that certain Contribution
Agreement dated as of January 21, 1999 (the "Contribution Agreement"), pursuant
to which El Paso will contribute to Leviathan an interest in Viosca Knoll
Gathering Company, a Delaware joint venture ("Viosca Knoll"), the partners of
which are subsidiaries of Leviathan and El Paso, in exchange for cash and common
units of Leviathan;
WHEREAS, effective as of the Effective Date, the Parties and certain of
their Subsidiaries (herein defined) will consummate the transactions
contemplated by the Contribution Agreement;
WHEREAS, in connection with the consummation of such transactions, the
Parties desire to terminate certain agreements to which the Parties and certain
of their affiliates are party;
NOW, THEREFORE, for and in consideration of the mutual covenants herein
contained, and other good and valuable consideration (the receipt and
sufficiency of which are hereby confirmed and acknowledged) the parties hereby
agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms shall have
the respective meanings indicated below:
"Affiliate" means, with respect to a relevant Person, any Person that
directly or indirectly, through one or more intermediaries, Controls, is
Controlled by or is under common Control with such relevant Person.
"Agreement" shall mean this Termination and Release Agreement, as
amended, restated, supplemented or otherwise modified from time to time.
"Contribution Agreement" shall have the meaning set forth in the
Recitals.
"Control" (including its derivatives and similar terms) means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of the relevant Person, whether
through the ownership or control of voting interests, by contract or
otherwise.
"Effective Date" shall have the meaning set forth in the Preamble.
"El Paso" shall have the meaning set forth in the Preamble.
"El Paso Indemnified Person" means, other than any Leviathan
Indemnified Person, each of (i) El Paso, (ii) its Affiliates, (iii) the
members, shareholders or other owners of El Paso and its Affiliates and
(iv) the directors, officers, employees, attorneys and agents of each
Person described in (i) through (iii) above.
"General Partner" shall have the meaning set forth in the Preamble.
"Laws" shall mean the laws, rules, regulations, decrees and orders of
the United States of America, the State of Texas, the State of New York and
all other governmental authorities having jurisdiction, whether such Laws
now exist or hereafter come into effect.
<PAGE> 106
"Leviathan" shall have the meaning set forth in the Preamble.
"Leviathan Indemnified Person" means, other than any El Paso
Indemnified Person, each of (i) Leviathan Holdings Company, a Delaware
corporation, the General Partner and Leviathan, (ii) Subsidiaries of
Leviathan and (iii) the directors, officers, employees, attorneys and
agents of each Person described in (i) through (ii) above.
"Party" and "Parties" shall have the meaning set forth in the
Preamble.
"Person" means any individual or entity, including, without
limitation, any corporation, limited liability company, partnership
(general or limited), joint venture, association, joint stock company,
trust, unincorporated organization or government (including any board,
agency, political subdivision or other body thereof).
"Subsidiary" means, with respect to a relevant Person, any other
Person owned more than 50% and Controlled by such relevant Person.
"Tennessee" shall have the meaning set forth in the Preamble.
"Terminating Agreements" shall mean the documents set forth on
"Schedule A" attached hereto and made a part of this Agreement.
"Viosca Knoll" shall have the meaning set forth in the Recitals.
2. GENERAL DEFINITIONS. Capitalized terms used but not defined in this
Agreement shall have the meanings ascribed to such terms in the Contribution
Agreement.
3. CONDITIONS PRECEDENT. The obligations and acknowledgements of the
Parties in this Agreement are subject to the execution and delivery of the
Contribution Agreement.
4. TERMINATION OF AGREEMENTS. The Parties hereby acknowledge and agree that
the Terminating Agreements are hereby terminated as of the Effective Date, and
that all rights and obligations accruing to the Parties (or any applicable
Subsidiary of a Party) thereunder are fully satisfied and terminated; provided,
however, the provisions of the Terminating Agreements that survive the
termination of the obligations thereunder shall remain in full force and effect
to the extent so specified therein.
5. MUTUAL RELEASE OF OBLIGATIONS AND CLAIMS; INDEMNITY.
(a) RELEASE BY LEVIATHAN. The General Partner and Leviathan hereby
jointly and severally release and discharge each El Paso Indemnified Person
from all actions, and causes of action, judgments, executions, suits,
debts, claims, demands, liabilities, counterclaims and offsets of every
character, known or unknown, direct and/or indirect, at law or in equity,
of whatever kind or nature which have arisen or accrued through the
Effective Date in any way directly or indirectly arising out of in any way
connected with the Terminating Agreements, or any verbal or oral
commitment, contract, agreement, duty, covenant, obligation, understanding
or arrangement of any kind or nature, any amendment or modifications
thereof pertaining or relating thereto.
(b) RELEASE BY EL PASO. El Paso hereby releases and discharges each
Leviathan Indemnified Person from all actions, and causes of action,
judgments, executions, suits, debts, claims, demands, liabilities,
counterclaims and offsets of every character, known or unknown, direct
and/or indirect, at law or in equity, of whatever kind or nature which have
arisen or accrued through the Effective Date in any way directly or
indirectly arising out of in any way connected with the Terminating
Agreements, or any verbal or oral commitment, contract, agreement, duty,
covenant, obligation, understanding or arrangement of any kind or nature,
any amendment or modifications thereof pertaining or relating thereto.
2
<PAGE> 107
6. MISCELLANEOUS.
(a) LAWS AND REGULATIONS. This Agreement and all of the terms and
conditions contained herein, and the respective obligations of the Parties,
are subject to all valid and applicable Laws.
(b) ENTIRE AGREEMENT. This Agreement and the other agreements executed
pursuant hereto and in connection herewith, if any, constitute the entire
agreement and supersede all prior (oral or written) and all oral
contemporaneous proposals or agreements, all previous negotiations and all
other communications or understandings between the Parties and their
Affiliates with respect to the subject matter hereof.
(c) AMENDMENT AND MODIFICATION. All amendments, supplements and
modifications to this Agreement shall be in writing and signed by all of
the Parties.
(d) COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which, when executed, shall be deemed an original,
and all of which shall constitute but one and the same instrument.
(e) PARTIES BOUND BY AGREEMENT. This Agreement shall be binding upon
and shall inure to the benefit of the Parties and their respective
successors and assigns.
(f) TERMINOLOGY. All personal pronouns used in this Agreement, whether
used in the masculine, feminine or neuter gender, shall include all other
genders; the singular shall include the plural, and vice versa. Articles
and other titles or headings are for convenience only, and neither limit
nor amplify the provisions of the Agreement itself, and all references
herein to articles, sections or subdivisions shall refer to the
corresponding article, section or subdivision of this Agreement unless
specific reference is made to such articles, sections or subdivisions of
another document or instrument.
(g) FURTHER ASSURANCES. Subject to the terms and conditions set forth
in this Agreement, each of the Parties agrees to use all commercially
reasonable efforts to take, or to cause to be taken, all actions, and to
do, or to cause to be done, all things necessary, proper or advisable under
applicable Laws to consummate and make effective the transactions
contemplated by this Agreement. In case, at any time after the execution of
this Agreement, any further action is necessary or desirable to carry out
its purposes, the proper officers, directors or other appropriate
representatives of the Parties shall take or cause to be taken all such
necessary action.
(h) GOVERNING LAW. TO THE EXTENT THE LAW OF ANOTHER JURISDICTION IS
NOT REQUIRED TO BE APPLIED, THIS AGREEMENT SHALL BE DEEMED TO BE AN
AGREEMENT UNDER, SHALL BE CONSTRUED, INTERPRETED AND GOVERNED BY AND
ACCORDING TO, THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO ANY CONFLICT
OR CHOICE OF LAWS PRINCIPLE WHICH, IF APPLIED, MIGHT PERMIT OR REQUIRE THE
APPLICATION OF THE LAWS OF ANOTHER JURISDICTION.
(i) EXHIBITS AND SCHEDULES. All exhibits, schedules, attachments and
the like contained herein or attached hereto are integrally related to this
Agreement, and are hereby made a part of this Agreement for all purposes.
(j) SEVERABILITY. Any term or provision of this Agreement that is
invalid or unenforceable in any jurisdiction shall be ineffective only as
to such jurisdiction and then only to the extent of such invalidity or
unenforceability, without rendering invalid or unenforceable the remaining
terms and provisions of this Agreement or affecting the validity or
enforceability of any terms and provisions of this Agreement in any other
jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, each provision shall be interpreted to be only so broad as
is enforceable. A bankruptcy or similar trustee must accept or, to the
extent permitted by Law, reject this Agreement in its entirety.
(k) WAIVERS. Neither action taken (including, without limitation, any
investigation by or on behalf of either Party) nor inaction pursuant to
this Agreement, shall be deemed to constitute a waiver of
3
<PAGE> 108
compliance with any representation, warranty, covenant or agreement
contained herein by the Party not committing such action or inaction. A
waiver by any Party of a particular right, including, without limitation,
breach of any provision of this Agreement, shall not operate or be
construed as a subsequent waiver of that same right or a waiver of any
other right.
[Remainder of Page Intentionally Left Blank]
4
<PAGE> 109
IN WITNESS WHEREOF, the undersigned parties have caused this Agreement to
be duly executed and delivered by their officers thereunto duly authorized as of
the date first above written.
LEVIATHAN GAS PIPELINE COMPANY, on
behalf of itself and in its capacity
as general partner of LEVIATHAN GAS
PIPELINE PARTNERS, L.P.
By:
------------------------------------
Name:
Title:
EL PASO FIELD SERVICES COMPANY, on
behalf of itself and in its capacity
as parent of EPEC Deepwater Gathering
Company, the successor in interest to
Tenneco DeepWater Gathering Company
By:
------------------------------------
Name:
Title:
TENNESSEE GAS PIPELINE COMPANY
By:
------------------------------------
Name:
Title:
Schedule A: Terminating Agreements
<PAGE> 110
SCHEDULE A
TERMINATING AGREEMENTS
1. That certain Transfer Restriction Agreement dated as of May 24, 1994 by
and among Leviathan Gas Pipeline Partners, L.P., a Delaware limited
partnership, Leviathan Gas Pipeline Company, a Delaware corporation, and
Tennessee Gas Pipeline Company, a Delaware corporation.
2. That certain Platform Option Agreement dated as of May 24, 1994, by and
among Viosca Knoll Gathering Company, a Delaware joint venture,
Leviathan Gas Pipeline Partners, L.P., a Delaware limited partnership,
and Tenneco Deepwater Gathering Company, a Delaware corporation.
A-1
<PAGE> 111
EXHIBIT E
AMENDMENT NO. 1 AND WAIVER TO THE
JOINT VENTURE AGREEMENT
OF
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE JOINT VENTURE)
This Amendment No. 1 and Waiver made and entered into as of
-----------------, 1999 and effective as of January 1, 1999 (this
"Amendment") to the Joint Venture Agreement (the "JV Agreement") of Viosca Knoll
Gathering Company dated as of May 24, 1994, is entered into by the Partners
(herein defined).
WITNESSETH:
WHEREAS, on May 24, 1994, Tenneco Deepwater Gathering Company, a Delaware
corporation ("Tenneco"), and VK Deepwater Gathering Company, L.L.C., a Delaware
limited liability company ("VK Deepwater"), formed the Delaware joint venture
known as Viosca Knoll Gathering Company (the "Company"), pursuant to the JV
Agreement;
WHEREAS, EPEC Deepwater Gathering Company, a Delaware corporation ("EPEC
Deepwater") is the successor in interest to Tenneco;
WHEREAS, at the closing of the transactions contemplated by that certain
Contribution Agreement dated as of January 21, 1999 and effective as of January
1, 1999 by and between Leviathan Gas Pipeline Partners, L.P. ("Leviathan"), a
Delaware limited partnership and an affiliate of VK Deepwater, and El Paso Field
Services Company, a Delaware corporation and an affiliate of EPEC Deepwater,
EPEC Deepwater will assign, at the direction of Leviathan, a partnership
interest in the Company to VK Deepwater;
WHEREAS, VK Deepwater and EPEC Deepwater are the current partners of the
Company;
WHEREAS, VK Deepwater and EPEC Deepwater (collectively, the "Partners," and
each a "Partner") have agreed to amend the JV Agreement;
NOW, THEREFORE, in consideration of the premises contained herein and for
other good and valuable consideration (the receipt and sufficiency of which is
hereby acknowledged) the Partners hereby stipulate and agree as follows:
1. DEFINITIONS. Unless otherwise defined herein, capitalized terms used
herein have the meanings ascribed to such terms in the JV Agreement.
2. AMENDMENTS. The JV Agreement shall be amended as follows:
(a) Section 16.21. Section 16.21 of the JV Agreement is amended by
deleting the notice addresses of Tenneco and VK Deepwater and replacing
them with the following:
VK Deepwater Gathering Company
Attn: President
1001 Louisiana Street
Houston, Texas 77002
Telephone: (713) 410-2131
EPEC Deepwater Gathering Company
Attn: President
1001 Louisiana Street
Houston, Texas 77002
Telephone: (713) 410-2131
(b) Exhibit A. Exhibit "A" of the JV Agreement is amended by deleting
such Exhibit in its entirety and replacing it with Exhibit "A" attached
hereto.
<PAGE> 112
3. REPRESENTATIONS AND WARRANTIES. Each Partner hereby represents and
warrants to the other Partner that, after giving effect to the amendments
provided for herein, the representations and warranties contained in the JV
Agreement will be true and correct in all material respects as if made on and as
of the date first written above (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) and that no Default or Event of Default will have occurred and be
continuing.
4. NO OTHER WAIVERS OR AMENDMENTS. Except as expressly waived or amended
hereby, the JV Agreement shall remain in full force and effect in accordance
with its terms, without any waiver, amendment or modification of any provision
thereof.
5. COUNTERPARTS. This Amendment may be executed by one or more of the
parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
6. FURTHER ASSURANCES. Subject to the terms and conditions set forth in
this Amendment, each of the Partners agrees to use all reasonable commercial
efforts to take, or to cause to be taken, all actions, and to do, or to cause to
be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Amendment. In case, at any time after the execution of this Amendment, any
further action is necessary or desirable to carry out its purposes, the proper
officers or directors of the Partners shall take or cause to be taken all such
necessary action.
7. NO MERGER. The rights and obligations created by this Amendment are
separate and independent from any rights and obligations created by any other
agreements between the Partners. Accordingly, none of the representations,
warranties, covenants or indemnities included in any other agreements between
the Parties shall be merged into this Amendment or otherwise restrict or limit
the affect of this Amendment, but each shall survive as provided in each such
agreement.
[Remainder of this page intentionally left blank.]
2
<PAGE> 113
IN WITNESS WHEREOF, the Partners have caused this Amendment to be duly
executed and delivered as of the day and year first above written.
VK DEEPWATER GATHERING COMPANY, L.L.C.
By:
-----------------------------------------
Name:
Title:
EPEC DEEPWATER GATHERING COMPANY
By:
-----------------------------------------
Name:
Title:
Exhibit A: Ownership Information
<PAGE> 114
EXHIBIT A
OWNERSHIP INFORMATION
<TABLE>
<CAPTION>
INTEREST INTEREST
IN IN
NAME OF EACH MEMBER PROFITS(1) CAPITAL(1)
------------------- ---------- ----------
<S> <C> <C>
(1) VK Deepwater Gathering Company, L.L.C., a Delaware 99% 99%
limited liability company...........................
1001 Louisiana Street
Houston, Texas 77002
Telephone: (713) 410-2131
(2) EPEC Deepwater Gathering Company, a Delaware 1% 1%
corporation.........................................
1001 Louisiana Street
Houston, Texas 77002
Telephone: (713) 410-2131
</TABLE>
- ---------------
(1) As such terms are defined in Section 708(b)(1)(B) of the Internal Revenue
Code of 1986, as amended, and Treasury Regulation Section
1.708-1(b)(1)(iii).
A-1
<PAGE> 115
EXHIBIT F
AMENDMENT NO. 2
TO
THE AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
This Amendment, dated as of
-----------------, 1999 (this "Amendment"), to the Amended and Restated
Limited Partnership Agreement of Leviathan Gas Pipeline Partners, L.P., a
Delaware corporation (as amended, the "Partnership"), dated as of February 19,
1993 (the "Partnership Agreement"), is entered into by and among Leviathan Gas
Pipeline Company, a Delaware corporation (the "General Partner"), as the general
partner of the Partnership, and the Limited Partners (as defined in the
Partnership Agreement).
RECITALS
A. WHEREAS, the Partnership has entered into certain transactions with El
Paso Field Services Company, a Delaware corporation ("El Paso"), and certain
affiliates thereof pursuant to which, at the closing contemplated thereby, El
Paso will contribute to the Partnership an interest in Viosca Knoll Gathering
Company, a Delaware joint venture ("Viosca Knoll"), in exchange for cash and
common units of the Partnership; and
B. WHEREAS, in connection with such transactions, the General Partner deems
it to be in the Partnership's best interests to amend the Partnership Agreement
by action of the General Partner pursuant to Sections 15.1-15.3 of the
Partnership Agreement; and
C. NOW, THEREFORE, AND IN CONSIDERATION of the mutual covenants, conditions
and agreements contained in this Amendment, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
AGREEMENT
1. Undefined Terms. Undefined terms used herein shall have the meanings
ascribed such terms in the Partnership Agreement.
2. Amendments. Section 13.2 of the Partnership Agreement is amended by
deleting it in its entirety and replacing it with the following:
13.2 Removal of the General Partner. The General Partner may be
removed with or without Cause if such removal is approved by at least 55%
of the Outstanding Units. Any such action by the Limited Partners for
removal of the General Partner also must provide for the election of a new
General Partner by the holders of a majority of the Outstanding Units. Such
removal shall be effective immediately following the admission of the
successor General Partner pursuant to Article XII. The right of the Limited
Partners to remove the General Partner shall not exist or be exercised
unless the Partnership has received an Opinion of Counsel opining as to the
matters covered by a Withdrawal Opinion of Counsel.
Any such successor General Partner shall be subject to the provisions
of Section 12.3.
2. Miscellaneous.
(a) Pronouns and Plurals. Whenever the context may required, any
pronoun used in this Amendment shall include the corresponding masculine,
feminine or neuter forms, and the singular form of nouns, pronouns and
verbs shall include the plural and vice-versa.
<PAGE> 116
(b) Further Action. The parties shall execute and deliver all
documents, provide all information and take or refrain from taking action
as may be necessary or appropriate to achieve the purposes of this
Amendment.
(c) Binding Effect. This Amendment shall be binding upon and inure to
the benefit of the parties hereto and their heirs, executors,
administrators, successors, legal representatives and permitted assigns.
(d) Integration. This Amendment constitutes the entire agreement among
the parties hereto pertaining to the subject matter hereof and supersedes
all prior agreements and understandings pertaining thereto.
(e) Creditors. None of the provisions of this Amendment shall be for
the benefit or, or shall be enforceable by, any creditor of the
Partnership.
(f) Waiver. No failure by any party to insist upon the strict
performance of any covenant duty, agreement or condition of this Amendment
or to exercise any right or remedy consequent upon a breach thereof shall
constitute a waiver of any such breach or any other covenant duty,
agreement or condition.
(g) Counterparts. This Amendment may be executed in counterparts, all
of which together shall constitute an agreement binding on all of the
parties hereto, notwithstanding that all such parties are not signatories
to the original or the same counterpart. Each party shall become bound by
this Amendment immediately upon affixing its signature hereto, or, in the
case of a Person acquiring a Unit, upon executing and delivering a Transfer
Application as described in the Partnership Agreement, independently of the
signature of any other party.
(h) Applicable Law. This Amendment shall be construed in accordance
with and governed by the laws of the State of Delaware, without regard to
the principles of conflicts of law.
(i) Invalidity of Provisions. If any provision of this Amendment is or
becomes invalid, illegal or unenforceable in any respect the validity,
legality and enforceability of the remaining provisions contained herein
shall not be affected thereby.
[Remainder of Page Intentionally Left Blank.]
2
<PAGE> 117
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
GENERAL PARTNER
LEVIATHAN GAS PIPELINE COMPANY
By:
----------------------------------
Name:
Title:
LIMITED PARTNERS
All Limited Partners now and
hereafter admitted
as limited partners of the
Partnership,
pursuant to Powers of Attorney now
and
hereafter executed in favor of, and
granted and
delivered to, the General Partner.
By: Leviathan Gas Pipeline Company,
General
Partner, as attorney-in-fact for
all
Limited Partners pursuant to
Powers of
Attorney granted pursuant to
Section 1.4.
By:
----------------------------------
Name:
Title:
<PAGE> 118
EXHIBIT D
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Proxy Statement on Schedule 14A of our
reports dated March 2, 1998, on our audits of the consolidated financial
statements of Leviathan Gas Pipeline Partners, L.P. and the financial statements
of Viosca Knoll Gathering Company. We also consent to the reference to our firm
under the caption "Experts."
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
February 8, 1999
<PAGE> 119
EXHIBIT E
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Proxy Statement constituting part of the
Schedule 14A of Leviathan Gas Pipeline Partners, L.P. of our report dated
February 18, 1998, appearing in the Proxy Statement, relating to the financial
statements of High Island Offshore System as of December 31, 1997 and 1996 and
for the years then ended.
We also consent to the reference to us under the heading "Experts" in such
Proxy Statement.
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 8, 1999
<PAGE> 120
EXHIBIT F
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
Proxy Statement constituting part of the Schedule 14A of Leviathan Gas Pipeline
Partners, L.P. of our report dated February 20, 1998 relating to the financial
statements of Poseidon Oil Pipeline Company, L.L.C., as of December 31, 1997 and
1996 and for the year ended December 31, 1997 and the period from inception
(February 14, 1996) through December 31, 1996, and to all references to our Firm
included in this Proxy Statement.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
February 8, 1999
<PAGE> 121
EXHIBIT G
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to the use in the Proxy Statement constituting part of
the Schedule 14A of Leviathan Gas Pipeline Partners, L.P. of our reserve report
as of December 31, 1997, and all references to our firm appearing in the Proxy
Statement of Leviathan Gas Pipeline Partners, L.P. for the fiscal year ended
December 31, 1997. We also consent to the reference to us under the heading of
"Experts" in such Proxy Statement.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ FREDERIC D. SEWELL
------------------------------------
Frederic D. Sewell
President
Dallas, Texas
February 8, 1999
<PAGE> 122
EXHIBIT H
CONSENT OF FINANCIAL ADVISOR
We hereby consent to the use of our opinion letter dated January 19, 1999
to the Special Committee of the Board of Directors of Leviathan Gas Pipeline
Company, as general partner of Leviathan Gas Pipeline Partners, L.P. included as
an exhibit to the Proxy Statement on Schedule 14A relating to the proposed
acquisition of Viosca Knoll Gathering Company and to the references to such
opinion in such Proxy Statement under the caption "The Proposal and the Proposal
Transaction -- The Contribution, Common Unit Issuance and Cash Payment" and "The
Proposal and the Proposal Transaction -- Fairness." In giving such consent, we
do not admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations issued by the Securities and Exchange Commission thereunder.
Very truly yours,
PAINEWEBBER INCORPORATED
New York, New York
February 8, 1999
<PAGE> 123
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRO FORMA LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND
SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Financial
Statements............................................. F-3
Unaudited Pro Forma Condensed Consolidated Balance Sheet
as of September 30, 1998............................... F-5
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the Nine Months Ended September 30,
1998................................................... F-6
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the Year Ended December 31, 1997........ F-7
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements................................... F-8
HISTORICAL LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND
SUBSIDIARIES
Consolidated Balance Sheet as of September 30, 1998
(unaudited) and December 31, 1997...................... F-9
Unaudited Consolidated Statement of Operations for the
Nine Months Ended September 30, 1998 and 1997.......... F-10
Unaudited Consolidated Statement of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997.......... F-11
Consolidated Statement of Partners' Capital for the Nine
Months Ended September 30, 1998 (unaudited)............ F-12
Notes to Consolidated Financial Statements (unaudited).... F-13
HISTORICAL LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND
SUBSIDIARIES
Report of Independent Accountants......................... F-20
Consolidated Balance Sheet as of December 31, 1997 and
1996................................................... F-21
Consolidated Statement of Operations for the Years Ended
December 31, 1997, 1996 and 1995....................... F-22
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995....................... F-23
Consolidated Statement of Partners' Capital for the Years
Ended December 31, 1995, 1996 and 1997................. F-24
Notes to Consolidated Financial Statements................ F-25
HISTORICAL VIOSCA KNOLL GATHERING COMPANY
Report of Independent Accountants......................... F-46
Balance Sheet as of September 30, 1998 (unaudited) and
December 31, 1997, and 1996............................ F-47
Statement of Operations for the Nine Months Ended
September 30, 1998 and 1997 (unaudited) and for the
Years Ended December 31, 1997, 1996 and 1995........... F-48
Statement of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 (unaudited) and for the
Years Ended December 31, 1997 and 1996 and 1995........ F-49
Statement of Partners' Capital for the Years Ended
December 31, 1995, 1996 and 1997 and for the nine
months ended September 30, 1998 (unaudited)............ F-50
Notes to Financial Statements............................. F-51
HISTORICAL HIGH ISLAND OFFSHORE SYSTEM
Independent Auditors' Report.............................. F-55
Statements of Financial Position as of December 31, 1997
and 1996............................................... F-56
Statements of Income and Statements of Partners' Equity
for the Years Ended December 31, 1997 and 1996......... F-57
Statements of Cash Flows for the Years Ended December 31,
1997 and 1996.......................................... F-58
Notes to the Financial Statements for the Years Ended
December 31, 1997 and 1996............................. F-59
</TABLE>
F-1
<PAGE> 124
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HISTORICAL POSEIDON OIL PIPELINE COMPANY, L.L.C
Report of Independent Public Accountants.................. F-62
Balance Sheets as of December 31, 1997 and 1996........... F-63
Statements of Income for the Year Ended December 31, 1997
and for the Period From Inception (February 14, 1996)
through December 31, 1996.............................. F-64
Statements of Members' Equity for the Year Ended December
31, 1997 and for the Period From Inception (February
14, 1996) through December 31, 1996.................... F-65
Statements of Cash Flows for the Year Ended December 31,
1997 and for the Period From Inception (February 14,
1996) through December 31, 1996........................ F-66
Notes to Financial Statements -- December 31, 1997 and
1996................................................... F-67
</TABLE>
F-2
<PAGE> 125
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated financial statements as of
and for the nine months ended September 30, 1998 and for the year ended December
31, 1997 have been prepared based on the historical consolidated balance sheet
and statements of operations of Leviathan Gas Pipeline Partners, L.P. and its
subsidiaries ("Leviathan"). The historical balance sheet and statements of
operations were adjusted to give effect to the transactions identified below
(the "Proposal Transactions"). The balance sheet was adjusted by giving effect
to the Proposal Transactions as if they had occurred on September 30, 1998. The
statements of operations for the nine months ended September 30, 1998 and for
the year ended December 31, 1997 were adjusted by giving effect to the Proposal
Transactions as if they had occurred on January 1, 1998 and January 1, 1997,
respectively.
Leviathan, a publicly held Delaware limited partnership, is primarily
engaged in the gathering and transportation of natural gas and crude oil through
its pipeline systems located in the Gulf of Mexico (the "Gulf") and in the
development and production of oil and gas reserves from its proved properties.
Leviathan, through its subsidiaries and joint ventures, owns interest in (i)
eight natural gas pipelines, (ii) a crude oil pipeline system, (iii) six
strategically located multi-purpose platforms, (iv) four producing oil and gas
properties and (v) a dehydration facility. Additionally, Leviathan owns a 100%
working interest in Ewing Bank Blocks 958, 959, 1002 and 1003.
The pro forma financial information gives effect to the following Proposal
Transactions:
(1) The Boards of Directors of Leviathan Gas Pipeline Company, the
general partner of Leviathan and a wholly-owned indirect subsidiary of El
Paso Energy Corporation ("El Paso"), and El Paso have approved, subject to
the execution of definitive agreements and the approval of a majority of
the unitholders of Leviathan, the acquisition by Leviathan of all of El
Paso's interest in Viosca Knoll Gathering Company ("Viosca Knoll"), a
Delaware general partnership (currently owned 50% by Leviathan and 50% by
El Paso), other than a 1% interest in profits and capital in Viosca Knoll,
for approximately $85.260 million (subject to adjustment). Viosca Knoll was
formed in 1994 to construct, own and operate a non-jurisdictional gathering
system designed to serve the Main Pass, Mississippi Canyon and Viosca Knoll
areas of the Gulf, southeast of New Orleans, Louisiana. Leviathan serves as
operator of the system, which is capable of delivering approximately one
billion cubic feet of gas per day and consists of approximately 125 miles
of predominately 20-inch gas pipeline and a large compressor.
(2) The total consideration of $85.260 million consists 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 actual number of common units issued by
Leviathan will depend on the market price of the common units during the
applicable trading reference period. Such number would be determined by
dividing $63.945 million by the Market Price. The "Market Price" is the
average closing sales price for a common unit as reported on the New York
Stock Exchange for the ten trading day period ending two days prior to the
closing date; provided that, for the 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 in connection with the
acquisition of the Viosca Knoll interest, subject to adjustment in the
event of any split or unit distribution.
(3) Immediately prior to closing, El Paso will contribute to Viosca
Knoll an amount of cash equal to 50% of the amount outstanding under Viosca
Knoll's current credit facility (the "Capital Contribution"). Viosca Knoll
will use the proceeds from the Capital Contribution to reduce the principal
amount outstanding.
(4) Additionally, at the closing, as required by Leviathan's Amended
and Restated Agreement of Limited Partnership, the general partner will
contribute approximately $600,000 to Leviathan in order to maintain its 1%
capital account balance.
F-3
<PAGE> 126
(5) During the six month period commencing on the day after the first
anniversary of the closing date of the Proposal Transactions, Leviathan
would have an option to acquire the remaining 1% interest in profits and
capital in Viosca Knoll for a cash payment equal to the sum of $1.740
million plus the amount of additional distributions (paid, payable or in
arrears) 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 $1.740
million.
The unaudited pro forma condensed consolidated financial statements are not
necessarily indicative of Leviathan's consolidated financial condition or
results of operations that might have occurred had the Proposal Transactions
been completed at the beginning of the period or as of the dates specified, and
do not purport to indicate Leviathan's consolidated financial position or
results of operations for any future period or at any future date. The unaudited
pro forma condensed consolidated financial statements should be read in the
context of the related historical consolidated financial statements and notes
thereto appearing elsewhere in this Proxy Statement.
F-4
<PAGE> 127
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
LEVIATHAN VIOSCA KNOLL ADJUSTMENTS PRO FORMA
--------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 3,191 $ 1,872 $ 33,100(a) $ 5,209
(33,100)(b)
21,315(c)
(21,815)(d)
646(e)
Accounts receivable........................ 5,914 4,047 -- 9,961
Other current assets....................... 128 -- -- 128
-------- -------- ---------- --------
Total current assets.................... 9,233 5,919 146 15,298
-------- -------- ---------- --------
Property and equipment, net.................. 207,007 98,156 35,173(f) 340,336
Equity investments........................... 185,148 -- 85,260(d) 167,139
(103,269)(f)
Other noncurrent assets...................... 3,912 241 -- 4,153
-------- -------- ---------- --------
Total assets....................... $405,300 $104,316 $ 17,310 $526,926
======== ======== ========== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued liabilities... $ 8,209 $ 1,779 $ -- $ 9,988
-------- -------- ---------- --------
Total current liabilities............... 8,209 1,779 -- 9,988
Notes payable................................ 291,000 66,200 (33,100)(b) 345,415
21,315(c)
Deferred income taxes........................ 1,037 -- 1,037
Other noncurrent liabilities................. 10,019 319 -- 10,338
-------- -------- ---------- --------
Total liabilities....................... 310,265 68,298 (11,785) 366,778
-------- -------- ---------- --------
Minority interests........................... (866) -- 1,022(f) 156
-------- -------- ---------- --------
Partners' capital:
Preference unitholders' interest........... 7,587 -- -- 7,587
Common unitholders' interest............... 101,276 -- 63,445(d) 164,721
General partner's interest................. (12,962) -- 646(e) (12,316)
Viosca Knoll partners' capital............. -- 36,018 33,100(a) --
(69,118)(f)
-------- -------- ---------- --------
95,901 36,018 28,073 159,992
-------- -------- ---------- --------
Total liabilities and partners'
capital.......................... $405,300 $104,316 $ 17,310 $526,926
======== ======== ========== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-5
<PAGE> 128
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
LEVIATHAN VIOSCA KNOLL ADJUSTMENTS PRO FORMA
--------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
Oil and gas sales........................... $ 22,270 $ 470 $ -- $ 22,740
Gathering, transportation and platform
services................................. 12,866 20,746 -- 33,612
Equity in earnings.......................... 19,181 -- (6,648)(c) 12,533
-------- ------- ------- --------
54,317 21,216 (6,648) 68,885
-------- ------- ------- --------
Costs and expenses:
Operating expenses.......................... 8,558 1,789 -- 10,347
Depreciation, depletion and amortization.... 21,897 2,907 1,055(d) 25,859
Impairment, abandonment and other........... (1,131) -- -- (1,131)
General and administrative expenses and
management fee........................... 13,937 127 -- 14,064
-------- ------- ------- --------
43,261 4,823 1,055 49,139
-------- ------- ------- --------
Operating income (loss)....................... 11,056 16,393 (7,703) 19,746
Interest and other income..................... 552 34 -- 586
Interest and other financing costs............ (13,711) (3,131) 1,659(a) (16,235)
(1,052)(b)
Minority interest in loss (income)............ 12 -- (212)(e) (200)
-------- ------- ------- --------
(Loss) income before income taxes............. (2,091) 13,296 (7,308) 3,897
Income tax benefit............................ 371 -- -- 371
-------- ------- ------- --------
Net (loss) income............................. $ (1,720) $13,296 $(7,308) $ 4,268
======== ======= ======= ========
Weighted average number units outstanding..... 24,367 3,072(f) 27,439
======== ======= ========
Basic and diluted net (loss) income per
unit........................................ $ (0.06) $ 0.13
======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-6
<PAGE> 129
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
LEVIATHAN VIOSCA KNOLL ADJUSTMENTS PRO FORMA
--------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
Oil and gas sales............................ $ 58,106 $ -- $ -- $ 58,106
Gathering, transportation and platform
services.................................. 17,329 23,128 -- 40,457
Equity in earnings........................... 29,327 -- (8,310)(c) 21,017
-------- ------- ------- --------
104,762 23,128 (8,310) 119,580
-------- ------- ------- --------
Costs and expenses:
Operating expenses........................... 11,352 1,990 -- 13,342
Depreciation, depletion and amortization..... 46,289 2,474 1,407(d) 50,170
Impairment, abandonment and other............ 21,222 -- -- 21,222
General and administrative expenses and
management fee............................ 14,661 125 -- 14,786
-------- ------- ------- --------
93,524 4,589 1,407 99,520
-------- ------- ------- --------
Operating income (loss)........................ 11,238 18,539 (9,717) 20,060
Interest and other income...................... 1,475 40 -- 1,515
Interest and other financing costs............. (14,169) (1,959) 1,959(a) (15,576)
(1,407)(b)
Minority interest in loss (income)............. 7 -- (261)(e) (254)
-------- ------- ------- --------
(Loss) income before income taxes.............. (1,449) 16,620 (9,426) 5,745
Income tax benefit............................. 311 -- -- 311
-------- ------- ------- --------
Net (loss) income.............................. $ (1,138) $16,620 $(9,426) $ 6,056
======== ======= ======= ========
Weighted average number units outstanding...... 24,367 3,072(f) 27,439
======== ======= ========
Basic and diluted net (loss) income per unit... $ (0.06) $ 0.19
======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-7
<PAGE> 130
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated financial statements have
been prepared to reflect the Proposal Transactions described on pages F-3 and
F-4 and the application of the adjustments to the historical amounts as
described below:
BALANCE SHEET
(a) To record the Capital Contribution from El Paso to Viosca Knoll as
described in Proposal Transaction (3) on page F-3.
(b) To reduce notes payable of Viosca Knoll using the proceeds from the
Capital Contribution.
(c) To record additional borrowings under Leviathan's credit facility in
order to fund the cash portion of the Proposal Transactions.
(d) To record the purchase of all of El Paso's interest in Viosca Knoll,
other than a 1% interest in profits and capital in Viosca Knoll, based on the
cash payment of $21.315 million and the issuance of 3,072,432 common units at
$20.8125 per unit, less $0.5 million of estimated acquisition costs. The
$20.8125 unit price is based on the closing sales price of Leviathan's common
units on January 15, 1999.
(e) To record the additional capital contribution (1%) by the general
partner of Leviathan described in Proposal Transaction (4) on page F-3.
(f) To record eliminating and consolidating entries related to Leviathan's
investment in Viosca Knoll. For purposes of a preliminary purchase price
allocation, the excess of the purchase price over the net book value of Viosca
Knoll's assets has been allocated to property and equipment.
STATEMENT OF OPERATIONS
(a) To record the reduction in Viosca Knoll's interest expense in
connection with its reduction of notes payable with the proceeds from the
Capital Contribution. The interest expense savings is calculated as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Debt reduction......................................... $33,100 $33,100
Average interest rate.................................. 6.7% 6.7%
Period outstanding..................................... 273days 365days
Interest expense savings............................... $ 1,659 $ 2,234*
</TABLE>
- ---------------
* Limited to the total interest expense for the period.
(b) To record interest expense (based on a 6.6% per annum rate) on the
$21.315 million to be borrowed to fund the cash portion of Proposal Transaction
(2) described on page F-3.
(c) To reverse Leviathan's historical equity in earnings of Viosca Knoll.
(d) To record depreciation expense associated with the allocation of the
excess purchase price to property and equipment. Such equipment will be
depreciated on a straight-line basis over the remaining useful lives of the
assets which approximate 25 years.
(e) To adjust minority interest in loss (income) for the 1.01% minority
interest ownership in Leviathan and the 1.00% minority interest ownership in
Viosca Knoll.
(f) To adjust weighted average units outstanding for the common units
issued in Proposal Transaction (2).
F-8
<PAGE> 131
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 3,191 $ 6,430
Accounts receivable....................................... 3,152 1,953
Accounts receivable from affiliates....................... 2,762 6,608
Other current assets...................................... 128 653
-------- --------
Total current assets................................... 9,233 15,644
-------- --------
Equity investments.......................................... 185,148 182,301
-------- --------
Property and equipment:
Pipelines................................................. 55,123 78,244
Platforms and facilities.................................. 121,321 97,882
Oil and gas properties, at cost, using successful efforts
method................................................. 122,431 120,296
-------- --------
298,875 296,422
Less accumulated depreciation, depletion, amortization and
impairment............................................. 91,868 95,783
-------- --------
Property and equipment, net............................ 207,007 200,639
-------- --------
Investment in Tatham Offshore, Inc. (Note 2)................ -- 7,500
Other noncurrent assets..................................... 3,912 3,758
-------- --------
Total assets...................................... $405,300 $409,842
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued liabilities.................. $ 6,343 $ 12,522
Accounts payable to affiliates............................ 1,866 1,032
-------- --------
Total current liabilities.............................. 8,209 13,554
Deferred federal income taxes............................... 1,037 1,399
Note payable................................................ 291,000 238,000
Other noncurrent liabilities................................ 10,019 13,304
-------- --------
Total liabilities...................................... 310,265 266,257
-------- --------
Minority interest........................................... (866) (381)
-------- --------
Partners' capital........................................... 95,901 143,966
-------- --------
Total liabilities and partners' capital........... $405,300 $409,842
======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-9
<PAGE> 132
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Revenue:
Oil and gas sales......................................... $ 22,270 $ 49,124
Gathering, transportation and platform services........... 12,866 14,005
Equity in earnings........................................ 19,181 21,599
-------- --------
54,317 84,728
-------- --------
Costs and expenses:
Operating expenses........................................ 8,558 8,674
Depreciation, depletion and amortization.................. 21,897 39,474
Impairment, abandonment and other......................... (1,131) 21,222
General and administrative expenses and management fee.... 13,937 10,219
-------- --------
43,261 79,589
-------- --------
Operating income............................................ 11,056 5,139
Interest income and other................................... 552 1,322
Interest and other financing costs.......................... (13,711) (10,350)
Minority interest in loss................................... 12 34
-------- --------
Loss before income taxes.................................... (2,091) (3,855)
Income tax benefit.......................................... 371 238
-------- --------
Net loss.................................................... $ (1,720) $ (3,617)
======== ========
Weighted average number of Units outstanding................ 24,367 24,367
======== ========
Basic and diluted net loss per Unit......................... $ (0.06)(a) $ (0.14)
======== ========
</TABLE>
- ---------------
(a) Excludes 930,000 and 1,500 outstanding unit options to purchase an equal
number of Common Units of the Partnership at $27.1875 per Common Unit and
$27.34375 per Common Unit, respectively, as the exercise prices of the unit
options were greater than the average market price of the Common Units.
The accompanying notes are an integral part of this financial statement.
F-10
<PAGE> 133
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (1,720) $ (3,617)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Amortization of debt issue costs....................... 765 721
Depreciation, depletion and amortization............... 21,897 39,474
Impairment, abandonment and other...................... (1,131) 21,222
Minority interest in loss.............................. (12) (34)
Equity in earnings..................................... (19,181) (21,599)
Distributions from equity investments.................. 20,880 19,310
Deferred income taxes.................................. (362) (250)
Other noncash items.................................... (218) (3,467)
Changes in operating working capital:
(Increase) decrease in accounts receivable........... (1,199) 4,080
Decrease in accounts receivable from affiliates...... 3,846 5,086
Decrease in other current assets..................... 525 465
Decrease in accounts payable and accrued
liabilities......................................... (13,287) (10,761)
Increase (decrease) in payable to affiliates......... 834 (1,255)
-------- --------
Net cash provided by operating activities......... 11,637 49,375
-------- --------
Cash flows from investing activities:
Additions to pipelines, platforms and facilities.......... (15,437) (12,261)
Equity investments........................................ (4,516) (23)
Acquisition and development of oil and gas properties..... (828) (11,212)
Other..................................................... 650 176
-------- --------
Net cash used in investing activities............. (20,131) (23,320)
-------- --------
Cash flows from financing activities:
Decrease in restricted cash............................... -- 716
Proceeds from notes payable............................... 87,000 44,000
Repayments of notes payable............................... (34,000) (51,000)
Debt issue costs.......................................... (927) (93)
Distributions to partners................................. (46,818) (33,822)
-------- --------
Net cash provided by (used in) financing
activities....................................... 5,255 (40,199)
-------- --------
Decrease in cash and cash equivalents....................... (3,239) (14,144)
Cash and cash equivalents at beginning of year.............. 6,430 16,489
-------- --------
Cash and cash equivalents at end of period.................. $ 3,191 $ 2,345
======== ========
Cash paid for interest, net of amounts capitalized.......... $ 12,875 $ 9,640
Cash paid for income taxes.................................. $ -- $ 2
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-11
<PAGE> 134
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,
1997............................ 18,075 $163,426 6,292 $(15,400) $ (4,060) $143,966
Net income (loss) for the nine
months ended September 30, 1998
(unaudited)..................... -- 19 -- (1,413) (326) (1,720)
Conversion of Preference Units
into Common Units (unaudited)... (17,058) (127,842) 17,058 127,842 -- --
Cash distributions (unaudited).... -- (28,016) -- (9,753) (8,576) (46,345)
------- -------- ------ -------- -------- --------
Partners' capital at September 30,
1998 (unaudited)................ 1,017 $ 7,587 23,350 $101,276 $(12,962) $ 95,901
======= ======== ====== ======== ======== ========
</TABLE>
- ---------------
(a) Leviathan Gas Pipeline Company owns a 1% general partner interest in
Leviathan Gas Pipeline Partners, L.P. (Notes 1 and 4).
The accompanying notes are an integral part of this financial statement.
F-12
<PAGE> 135
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION:
Leviathan Gas Pipeline Partners, L.P. (the "Partnership"), a publicly held
Delaware limited partnership, is primarily engaged in the gathering and
transportation of natural gas and crude oil through pipeline systems located in
the Gulf of Mexico (the "Gulf") and in the development and production of oil and
gas reserves. The Partnership's assets include interests in (i) eight natural
gas pipeline systems, (ii) a crude oil pipeline system, (iii) six strategically
located multi-purpose platforms, (iv) four producing oil and gas properties and
(v) a dehydration facility.
Leviathan Gas Pipeline Company ("Leviathan"), a Delaware corporation and
wholly owned subsidiary of Leviathan Holdings Company ("Leviathan Holdings"), a
wholly owned subsidiary of DeepTech International Inc. ("DeepTech"), is the
general partner of the Partnership, and as such, performs all management and
operational functions for the Partnership and its subsidiaries. On August 14,
1998, DeepTech became a wholly owned subsidiary of El Paso Energy Corporation
("El Paso Energy"). See Note 2.
As of September 30, 1998, the Partnership had 1,016,506 Preference Units
and 23,350,388 Common 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 the Partnership. Leviathan, through its ownership of
6,291,894 Common Units, its 1% general partner interest in the Partnership and
its approximate 1% nonmanaging interest in certain of the Partnership's
subsidiaries, owns a 27.3% effective interest in the Partnership. See Note 4 for
a discussion of the conversion of Preference Units into Common Units.
The accompanying consolidated financial statements have been prepared
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, the statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary for a fair
statement of the results of operations for the period covered by such
statements. These interim financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto contained
in the Partnership's Annual Report on Form 10-K for the year ended December 31,
1997.
Effective January 1, 1998, the Partnership adopted Statement of Financial
Accounting Standard ("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 shareholders and requires
related disclosures about products and services, geographic areas and major
customers. The Partnership is currently evaluating the disclosure requirements
of this statement, as this statement does not apply to interim financial
statements in the initial year of its adoption. However, comparative financial
information for interim periods in the initial year of application must be
reported in financial statements for interim periods in the second year of
application.
NOTE 2 -- RECENT EVENTS:
MERGER
Effective August 14, 1998, El Paso Energy completed the acquisition of
DeepTech by merging a wholly owned subsidiary of El Paso Energy 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 Merge and the transactions contemplated by the Merger Agreement and other
agreements as these agreements relate to the Partnership are as follows:
(a) El Paso Energy acquired the minority interests of Leviathan
Holdings and two other subsidiaries of DeepTech primarily held by DeepTech
management for an aggregate of $55.0 million. As a result, El Paso Energy
owns 100% of Leviathan's general partner interest in the Partnership and an
overall 27.3% effective interest in the Partnership.
F-13
<PAGE> 136
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) In June 1998, Tatham Offshore, Inc. ("Tatham Offshore"), an
affiliate of the Partnership through August 14, 1998, canceled its
reversionary interests in certain oil and gas properties owned by the
Partnership.
(c) On August 14, 1998, Tatham Offshore transferred its remaining
assets located in the Gulf to the Partnership in consideration of the
redemption by Tatham Offshore of its 7,500 shares of Series B 9% Senior
Convertible Preferred Stock (the "Senior Preferred Stock") owned by the
Partnership (the "Redemption Agreement"). Under the terms of the Redemption
Agreement, the Partnership exchanged the Senior Preferred Stock for 100% of
Tatham Offshore's right, title and interest in and to Viosca Knoll Blocks
772, 773, 774, 817, 818 and 861 (subject to an existing production payment
obligation), West Delta Block 35, Ewing Bank Blocks 871, 914, 915 and 916
and the platform located at Ship Shoal Block 331. The net cash expenditure
of the Partnership 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 producing properties from January 1, 1998 through
August 14, 1998. In addition, the Partnership assumed all remaining
abandonment and restoration obligations associated with the platform and
leases.
(d) Pursuant to the Merger Agreement, employees of DeepTech who were
terminated on August 14, 1998, received certain severance payments from
DeepTech. DeepTech employees hired by El Paso Energy who are terminated
during the six months after August 14, 1998, will receive certain severance
payments from El Paso Energy.
Mr. Grant E. Sims and Mr. James H. Lytal, the Chief Executive Officer and
the President, respectively, of the Partnership entered into employment
agreements with El Paso Energy effective as of August 14, 1998, and will
continue to serve as the Chief Executive Officer and the President,
respectively, of the Partnership for a term of five years. 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
Energy has the right to terminate such agreements under certain circumstances.
RECENT PRONOUNCEMENTS
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 investments 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 part of a hedge transaction and, if it is, the type of hedge
transaction. For fair-value hedge transactions in which the Partnership 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 the Partnership 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. The Partnership has
not yet determined the impact that the adoption of SFAS No. 133 will have on its
earnings or financial position.
NOTE 3 -- EQUITY INVESTMENTS:
The Partnership owns interests of 50% in Viosca Knoll Gathering Company
("Viosca Knoll"), 36% in Poseidon Oil Pipeline Company, L.L.C. ("POPCO"), 25.7%
in Nautilus Pipeline Company, L.L.C.
F-14
<PAGE> 137
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
("Nautilus"), 25.7% in Manta Ray Offshore Gathering Company, L.L.C. ("Manta Ray
Offshore"), 50% in Stingray Pipeline Company ("Stingray"), 40% in High Island
Offshore System ("HIOS"), 33 1/3% in U-T Offshore System ("UTOS") and 50% in
West Cameron Dehydration Company, L.L.C. ("West Cameron Dehy"). The summarized
financial information for these investments, which are accounted for using the
equity method, is as follows:
UNAUDITED SUMMARIZED HISTORICAL OPERATING RESULTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
---------------------------------------------------------------------------------------------
WEST MANTA
VIOSCA CAMERON RAY
HIOS KNOLL STINGRAY DEHY POPCO UTOS OFFSHORE NAUTILUS TOTAL
-------- ------- -------- ------- ------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue............ $ 31,801 $21,216 $ 17,237 $1,945 $30,477 $ 3,840 $ 7,039 $ 3,992
Other income................. 180 34 606 7 245 86 219 57
Operating expenses........... (13,249) (1,916) (11,517) (136) (3,066) (1,893) (2,671) (1,284)
Depreciation................. (3,576) (2,907) (5,131) (12) (6,590) (419) (3,235) (4,369)
Interest expense............. -- (3,131) (1,083) -- (6,552) -- -- --
-------- ------- -------- ------ ------- ------- ------- -------
Net earnings (loss).......... 15,156 13,296 112 1,804 14,514 1,614 1,352 (1,604)
Ownership percentage......... 40% 50% 50% 50% 36% 33.3% 25.7% 25.7%
-------- ------- -------- ------ ------- ------- ------- -------
6,062 6,648 56 902 5,225 537 347 (412)
Adjustments:
Depreciation(a)............ 580 -- 558 -- -- 25 (261) --
Contract amortization(a)... (79) -- (119) -- -- -- -- --
Other...................... (8) -- (37) 3 (90) 13 -- (769)(c)
-------- ------- -------- ------ ------- ------- ------- -------
Equity in earnings (loss).... $ 6,555 $ 6,648 $ 458 $ 905 $ 5,135 $ 575 $ 86 $(1,181) $19,181
======== ======= ======== ====== ======= ======= ======= ======= =======
Distributions(b)............. $ 7,640 $ 7,450 $ 1,000 $ 825 $ 3,132 $ 333 $ 500 $ -- $20,880
======== ======= ======== ====== ======= ======= ======= ======= =======
</TABLE>
- ---------------
(a) Adjustments result from purchase price adjustments made in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations."
(b) Future distributions could be restricted by the terms of the equity
investees' respective credit agreements.
(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 purposes.
F-15
<PAGE> 138
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED SUMMARIZED HISTORICAL OPERATING RESULTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
-----------------------------------------------------------------------------------
WEST MANTA
VIOSCA CAMERON RAY
HIOS KNOLL STINGRAY DEHY POPCO UTOS OFFSHORE TOTAL
-------- ------- -------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue.................. $ 34,115 $16,171 $18,471 $1,752 $18,375 $ 2,836 $ 3,889
Other income....................... 298 14 730 18 102 32 234
Operating expenses................. (11,792) (1,402) (9,928) (121) (4,573) (1,891) (1,299)
Depreciation....................... (3,582) (1,791) (5,409) (12) (4,376) (424) (1,188)
Interest expense................... -- (1,374) (1,072) -- (3,733) -- --
-------- ------- ------- ------ ------- ------- -------
Net earnings....................... 19,039 11,618 2,792 1,637 5,795 553 1,636
Ownership percentage............... 40% 50% 50% 50% 36% 33.3% 25.7%
-------- ------- ------- ------ ------- ------- -------
7,616 5,809 1,396 818 2,086 184 420
Adjustments:
Depreciation(a).................. 634 -- 718 -- -- 27 --
Contract amortization(a)......... (79) -- (255) -- -- -- --
Other............................ (98) -- (37) -- (180) (23) 2,563(b)
-------- ------- ------- ------ ------- ------- -------
Equity in earnings................. $ 8,073 $ 5,809 $ 1,822 $ 818 $ 1,906 $ 188 $ 2,983 $21,599
======== ======= ======= ====== ======= ======= ======= =======
Distributions(c)................... $ 9,400 $ 5,825 $ 1,375 $ 650 $ -- $ 200 $ 1,860 $19,310
======== ======= ======= ====== ======= ======= ======= =======
</TABLE>
- ---------------
(a) Adjustments result from purchase price adjustments made in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations."
(b) Represents additional net earnings specifically allocated to the
Partnership related to the assets contributed by the Partnership to Manta
Ray Offshore. Pursuant to the terms of the arrangement, the Partnership
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 ownership percentages. (c) Future distributions could be
restricted by the terms of the equity investees' respective credit
agreements.
NOTE 4 -- PARTNERS' CAPITAL INCLUDING CASH DISTRIBUTIONS:
CASH DISTRIBUTIONS
During and after the Preference Period (as defined in the Partnership
Agreement), distributions by the Partnership of its Available Cash (as defined
in the Partnership Agreement) were and are effectively made 98% to Unitholders
and 2% to Leviathan, subject to the payment of incentive distributions to
Leviathan if certain target levels of cash distributions to Unitholders are
achieved (the "Incentive Distributions"). As an incentive, the general partner's
interest in the portion of quarterly cash distributions in excess of $0.325 per
Unit and less than or equal to $0.375 per Unit is increased to 15%. For
quarterly cash distributions over $0.375 per Unit but less than or equal to
$0.425 per Unit, the general partner receives 25% of such incremental amount and
for all quarterly cash distributions in excess of $0.425 per Unit, the general
partner receives 50% of the incremental amount. During and after the Preference
Period, the Preference Units are entitled to receive from Available Cash a
minimum quarterly distribution for each quarter of $0.275 per Preference Unit,
plus any arrearage in the payment of the minimum quarterly distribution for
prior quarters, before any distribution of Available Cash is made to holders of
Common Units for such quarter. After the Preference Period, the Preference Units
are not entitled to receive any more than the minimum quarterly distribution,
plus any arrearage in the payment of the minimum quarterly distribution from
prior quarters, if any, per quarter.
In February 1998, the Partnership paid a cash distribution of $0.50 per
Preference and Common Unit for the period from October 1, 1997 through December
31, 1997 and an Incentive Distribution of $2.4 million to Leviathan, as general
partner. In May and August 1998, the Partnership paid a cash distribution of
$0.525 per
F-16
<PAGE> 139
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Preference and Common Unit for the periods from January 1, 1998 through March
31, 1998 and from April 1, 1998 through June 30, 1998, respectively, and an
Incentive Distribution of $3.0 million to Leviathan for each of these periods.
On October 20, 1998, the Partnership declared a cash distribution of $0.275 per
Preference Unit and $0.525 per Common Unit for the period from July 1, 1998
through September 30, 1998 which will be paid on November 13, 1998 to all
holders of record of Common Units and Preference Units as of October 30, 1998.
Leviathan will receive an Incentive Distribution of $2.8 million for the three
months ended September 30, 1998.
CONVERSION OF PREFERENCE UNITS INTO COMMON UNITS
On May 6, 1998, the Partnership 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, had
elected to convert to Common Units. As a result, the Preference Period 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 now
trade as the Partnership'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, 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 Units or Leviathan, as general partner. However, Preference
Units will not receive any distributions in excess of the minimum quarterly
distribution of $0.275 per Unit. Only Common Units and Leviathan, as general
partner, will be eligible to receive any of such excess distributions.
In accordance with the Partnership Agreement, holders of the remaining
Preference Units will not have another opportunity to convert their Preference
Units into Common Units until May 1999 and again in May 2000. Thereafter, any
remaining Preference Units may, under certain circumstances, be subject to
redemption.
NOTE 5 -- RELATED PARTY TRANSACTIONS:
Management fees. For the nine months ended September 30, 1998, Leviathan
charged the Partnership $7.4 million pursuant to the Partnership Agreement which
provides for reimbursement of expenses Leviathan incurs as general partner of
the Partnership, including reimbursement of expenses incurred by DeepTech and El
Paso Energy in providing management services to Leviathan and the Partnership.
Joint Ventures. Viosca Knoll is owned 50% by a subsidiary of the
Partnership and 50% by a wholly owned indirect subsidiary of El Paso Energy.
Viosca Knoll is managed by a committee consisting of representatives from each
of the partners. The Partnership is the operator of Viosca Knoll and has
contracted the wholly owned indirect subsidiary of El Paso Energy to maintain
the pipeline and Leviathan to perform financial, accounting and administrative
services. The Viosca Knoll gathering system interconnects with six interstate
pipelines in the South Pass and Main Pass areas of the Gulf. One of these
interstate pipelines is owned by an affiliate of El Paso Energy.
Property Acquisition. In October 1998, the Partnership purchased a 100%
working interest in Ewing Bank Blocks 958, 959, 1002 and 1003 (the Sunday
Silence field) from a wholly-owned subsidiary of DeepTech for approximately
$11.6 million. The Sunday Silence field, 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 for the first 52.5 million barrels of oil equivalent to be
produced from the field. The Partnership is drilling a delineation well which is
expected to be completed in December 1998 at a cost of approximately $15.1
million.
F-17
<PAGE> 140
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other. In 1995, the Partnership adopted the Unit Rights Appreciation Plan
(the "Plan") to provide the Partnership with the ability of making awards of
Unit Rights, as hereinafter defined, to certain officers and employees of the
Partnership or its affiliates as an incentive for these individuals to continue
in the service of the Partnership or its affiliates. Under the Plan, the
Partnership granted 1,200,000 Unit Rights to certain officers and employees of
the Partnership or its affiliates that provided for the right to purchase, or
realize the appreciation of, a Preference Unit or Common Unit (see Note 4) (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. As a result of the "change of
control" occurring upon the closing of the Merger, the Unit Rights fully vested
and certain of the holders of the Unit Rights elected to be paid $7.3 million,
the amount equal to the difference between the grant price of the Unit Rights
and the average of the high and low sales price of the Common Units on the date
of exercise. As of September 30, 1998, the Partnership had accrued $1.4 million
related to the appreciation and vesting of the remaining 215,000 outstanding
Unit Rights. In October 1998, the Partnership paid the holder of the remaining
Unit Rights $1.3 million upon the exercise of the remaining Unit Rights and the
Plan was terminated.
In August 1998, the Partnership adopted the 1998 Omnibus Compensation Plan
(the "Omnibus Plan") and the 1998 Unit Option Plan for Non-Employee Directors
(the "Director Plan" and together with the Omnibus Plan the "Option Plans"). The
Option Plans provide the Partnership with the ability to issue unit options to
attract and retain the services of knowledgeable directors, officers and key
management personnel. Unit options to purchase a maximum of 3,000,000 Common
Units and 100,000 Common Units of the Partnership may be issued pursuant to the
Omnibus Plan and the Director Plan, respectively. As of September 30, 1998, the
Partnership had granted 930,000 unit options at $27.1875 per unit option and
1,500 unit options at $27.34375 per unit option under the Omnibus Plan and the
Director Plan, respectively.
Pursuant to the former Leviathan non-employee director compensation
arrangements, the Partnership 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 nine months ended September 30, 1998, the Partnership paid the
three non-employee directors of Leviathan a total of $0.6 million as a profit
participation fee. As a result of the Merger, the three non-employee directors
resigned and the compensation arrangements were terminated.
In March 1998, Tatham Offshore eliminated its 7,500 shares of 9% Senior
Convertible Preferred Stock issued to the Partnership and replaced this stock
with its Senior Preferred Stock. In connection with the Redemption Agreement
discussed in Note 2, the Senior Preferred Stock and all related unpaid dividends
were exchanged for certain oil and gas properties and an offshore platform.
NOTE 6 -- COMMITMENTS AND CONTINGENCIES:
HEDGING ACTIVITIES
The Partnership hedges a portion of its oil and natural gas production to
reduce the Partnership's exposure to fluctuations in market prices of oil and
natural gas and to meet certain requirements of the Partnership Credit Facility
(as defined herein). The Partnership uses various financial instruments whereby
monthly settlements are based on differences between the prices specified in the
instruments and the settlement prices of certain futures contracts quoted on the
New York Mercantile Exchange ("NYMEX") or certain other indices. The Partnership
settles the instruments by paying the negative difference or receiving the
positive difference between the applicable settlement price and the price
specified in the contract. The instruments utilized by the Partnership differ
from futures contracts in that there is no contractual obligation which requires
or allows for the future delivery of the product. Gains or losses on hedging
activities are recognized as oil and gas sales in the period in which the hedged
production is sold.
F-18
<PAGE> 141
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At September 30, 1998, the Partnership had open sales hedges on
approximately 25,000 million British thermal units ("MMbtu") of natural gas per
day for the remaining period in 1998 at an average price of $2.375 per MMbtu and
open purchase hedges of approximately 25,000 MMbtu of natural gas per day for
the remaining period in 1998 at an average price of $2.24 per MMbtu. In
addition, the Partnership had entered into commodity sales swap transactions for
calendar 1999 of (i) 5,000 MMbtu per day at a fixed price to be determined at
the Partnership's option equal to the January 1999 Natural Gas Futures Contract
on NYMEX as quoted at any time during 1998, to and including the last three
trading days of the January 1999 contract, minus $0.25 per MMbtu and (ii) 5,000
MMbtu per day at a fixed price to be determined at the Partnership's option
equal to the January 1999 Natural Gas Futures Contract on NYMEX as quoted at any
time during 1998, to and including the last three trading days of the January
1999 contract, minus $0.28 per MMbtu. The Partnership has also entered into a
commodity purchase swap transaction for calendar 1999 for 5,000 MMbtu per day at
a fixed price to be determined at the Partnership's option equal to the December
1998 Natural Gas Futures Contract on NYMEX as quoted at any time from July 23,
1998, to and including two days prior to the last three trading days of the
December 1998 contract, minus $0.17 per MMbtu.
At September 30, 1998, the Partnership had open sales hedges on
approximately 992 barrels of oil per day for the remaining period in 1998 at an
average price of $20.43 per barrel and open purchase hedges of approximately
1,000 barrels of oil per day for the remaining period in 1998 at an average
price of $17.81 per barrel.
F-19
<PAGE> 142
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 at December 31, 1997 and 1996
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Partnership'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.
PRICE WATERHOUSE LLP
Houston, Texas
March 2, 1998
F-20
<PAGE> 143
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 6,430 $ 16,489
Accounts receivable....................................... 1,953 6,237
Accounts receivable from affiliates....................... 6,608 14,107
Other current assets...................................... 653 859
-------- --------
Total current assets................................... 15,644 37,692
-------- --------
Equity investments.......................................... 182,301 107,838
-------- --------
Property and equipment:
Pipelines................................................. 78,244 151,253
Platforms and facilities.................................. 97,882 72,461
Oil and gas properties, at cost, using successful efforts
method................................................. 120,296 109,047
-------- --------
296,422 332,761
Less accumulated depreciation, depletion, amortization and
impairment............................................. 95,783 46,206
-------- --------
Property and equipment, net............................ 200,639 286,555
-------- --------
Investment in Tatham Offshore, Inc.......................... 7,500 7,500
Other noncurrent receivable................................. -- 8,531
Other noncurrent assets..................................... 3,758 5,410
-------- --------
Total assets...................................... $409,842 $453,526
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued liabilities.................. $ 12,522 $ 17,769
Accounts payable to affiliates............................ 1,032 3,504
-------- --------
Total current liabilities.............................. 13,554 21,273
Deferred federal income taxes............................... 1,399 1,722
Deferred revenue............................................ -- 8,913
Note payable................................................ 238,000 227,000
Other noncurrent liabilities................................ 13,304 2,490
-------- --------
Total liabilities...................................... 266,257 261,398
-------- --------
Commitments and contingencies (Note 12)
Minority interest........................................... (381) 105
-------- --------
Partners' capital:
Preference unitholders' interest.......................... 163,426 196,224
Common unitholder's interest.............................. (15,400) (3,969)
General partner's interest................................ (4,060) (232)
-------- --------
143,966 192,023
-------- --------
Total liabilities and partners' capital........... $409,842 $453,526
======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-21
<PAGE> 144
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Revenue:
Oil and gas sales......................................... $ 276 $ 772 $ 936
Oil and gas sales to affiliates........................... 57,830 46,296 922
Gathering, transportation and platform services........... 10,029 13,974 10,696
Gathering, transportation and platform services to
affiliates............................................. 7,300 10,031 9,851
Equity in earnings........................................ 29,327 20,434 19,588
-------- ------- -------
104,762 91,507 41,993
-------- ------- -------
Costs and expenses:
Operating expenses........................................ 11,352 9,068 4,092
Depreciation, depletion and amortization.................. 46,289 31,731 8,290
Impairment, abandonment and other......................... 21,222 -- --
General and administrative expenses....................... 5,869 788 1,273
Management fee and general and administrative expenses
allocated from general partner......................... 8,792 7,752 5,796
-------- ------- -------
93,524 49,339 19,451
-------- ------- -------
Operating income............................................ 11,238 42,168 22,542
Gains on sales of assets.................................... -- -- 1,247
Interest income and other................................... 1,475 1,710 637
Interest and other financing costs.......................... (14,169) (5,560) (833)
Minority interest in income................................. 7 (427) (251)
-------- ------- -------
(Loss) income before income taxes........................... (1,449) 37,891 23,342
Income tax benefit.......................................... 311 801 603
-------- ------- -------
Net (loss) income........................................... $ (1,138) $38,692 $23,945
======== ======= =======
Weighted average number of Units outstanding................ 24,367 24,367 24,367
======== ======= =======
Basic and diluted net (loss) income per Unit (Note 2)....... $ (0.06) $ 1.57 $ 0.97
======== ======= =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-22
<PAGE> 145
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income........................................ $ (1,138) $ 38,692 $ 23,945
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Amortization of debt issue costs...................... 960 1,351 687
Depreciation, depletion and amortization.............. 46,289 31,731 8,290
Impairment, abandonment and other..................... 21,222 -- --
Minority interest in income (loss).................... (7) 427 251
Equity in earnings.................................... (29,327) (20,434) (19,588)
Distributions from equity investments................. 27,135 36,823 24,642
Gains on sales of assets.............................. -- -- (1,247)
Deferred income taxes and other....................... (323) (936) (640)
Other noncash items................................... (1,596) (6,560) 152
Changes in operating working capital:
Decrease in short-term investments.................. -- -- 2,000
Decrease (increase) in accounts receivable.......... 4,284 (3,442) (1,663)
Decrease (increase) in accounts receivable from
affiliates....................................... 7,499 (7,512) (5,833)
Decrease (increase) in other current assets......... 206 (97) 67
(Decrease) increase in accounts payable and accrued
liabilities...................................... (5,247) (23,190) 44,858
(Decrease) increase in accounts payable to
affiliates....................................... (2,472) 3,326 (1,035)
-------- --------- ---------
Net cash provided by operating activities........ 67,485 50,179 74,886
-------- --------- ---------
Cash flows from investing activities:
Acquisition and development of oil and gas properties.... (11,249) (59,599) (45,291)
Additions to pipelines, platforms and facilities......... (30,708) (30,095) (121,405)
Equity investments....................................... -- (12,027) (6,936)
Proceeds from sales of assets and other.................. 188 -- 1,250
-------- --------- ---------
Net cash used in investing activities............ (41,769) (101,721) (172,382)
-------- --------- ---------
Cash flows from financing activities:
Decrease in restricted cash.............................. 716 -- --
Debt issue costs......................................... (93) (2,843) (4,363)
Proceeds from notes payable.............................. 11,000 89,220 129,780
Distributions to partners................................ (47,398) (33,852) (29,837)
-------- --------- ---------
Net cash (used in) provided by financing
activities..................................... (35,775) 52,525 95,580
-------- --------- ---------
Net (decrease) increase in cash and cash equivalents....... (10,059) 983 (1,916)
Cash and cash equivalents at beginning of year............. 16,489 15,506 17,422
-------- --------- ---------
Cash and cash equivalents at end of year................... $ 6,430 $ 16,489 $ 15,506
======== ========= =========
</TABLE>
Supplemental disclosures to the statement of cash flows -- see Note 13.
The accompanying notes are an integral part of this financial statement.
F-23
<PAGE> 146
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERENCE COMMON GENERAL
UNITHOLDERS UNITHOLDER PARTNER TOTAL
----------- ---------- ------- --------
<S> <C> <C> <C> <C>
Partners' capital at December 31, 1994............ $196,340 $ (3,960) $ 51 $192,431
Net income for the year ended December 31, 1995... 17,575 6,130 240 23,945
Cash distributions................................ (21,690) (7,550) (295) (29,535)
-------- -------- ------- --------
Partners' capital at December 31, 1995............ 192,225 (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............ 196,224 (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............ $163,426 $(15,400) $(4,060) $143,966
======== ======== ======= ========
Limited Partnership Units outstanding at December
31, 1995, 1996 and 1997......................... 18,075 6,292 --(a) 24,367
======== ======== ======= ========
</TABLE>
- ---------------
(a) Leviathan Gas Pipeline Company owns a 1% general partner interest in
Leviathan Gas Pipeline Partners, L.P.
The accompanying notes are an integral part of this financial statement.
F-24
<PAGE> 147
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION:
Leviathan Gas Pipeline Partners, L.P. (the "Partnership"), a publicly held
Delaware limited partnership, is engaged in the gathering and transportation of
natural gas and crude oil through its pipeline systems located in the Gulf of
Mexico (the "Gulf") and in the development and production of oil and gas
reserves from its proved properties. The Partnership's assets include interests
in (i) eight natural gas pipelines, (ii) a crude oil pipeline system, (iii) five
strategically located multi-purpose platforms, (iv) three producing oil and gas
properties and (v) a dehydration facility.
Leviathan Gas Pipeline Company ("Leviathan"), a Delaware corporation and
wholly-owned subsidiary of Leviathan Holdings Company ("Leviathan Holdings"), an
85%-owned subsidiary of DeepTech International Inc. ("DeepTech"), is the general
partner of the Partnership, and as such, performs all management and operational
functions of the Partnership and its subsidiaries. The remaining 15% of
Leviathan Holdings is principally owned by members of the management of
DeepTech. DeepTech also owns and controls several other operating subsidiaries
which are engaged in various oil and gas related activities.
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 the Partnership. Leviathan's
approximate 1% nonmanaging interest in certain subsidiaries of the Partnership
represents the minority interest in the Partnership's consolidated financial
statements. Investments in which the Partnership 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.
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.
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 gathering pipelines,
from 18 to 30 years for platforms and from 18 to 30 years for the related
facilities. Repair and maintenance costs are expensed as incurred; additions,
improvements and replacements are capitalized.
The Partnership accounts for its oil and gas exploration and production
activities using the successful efforts method of accounting. Under this method,
costs of successful exploratory wells, development wells and acquisitions of
mineral leasehold interests are capitalized. Production, exploratory dry hole
and other exploration costs, including geological and geophysical costs and
delay rentals, are expensed as incurred. Unproved properties are assessed
periodically and any impairment in value is recognized currently as
depreciation, depletion and amortization expense.
Depreciation, depletion and amortization of the capitalized costs of
producing oil and 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.
F-25
<PAGE> 148
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
gas properties. Other noncurrent liabilities at December 31, 1997 and 1996
include $9,158,0000 and $2,054,000, respectively, of accrued dismantlement,
restoration and abandonment costs.
The Partnership adopted 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", effective January 1, 1996. SFAS No. 121 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. Implementation of SFAS No. 121 did not have a material effect on the
Partnership's financial position or results of operations.
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.
REVENUE RECOGNITION
Revenue from pipeline transportation of hydrocarbons is recognized upon
receipt of the hydrocarbons into the pipeline systems. Revenue from oil and 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
The Partnership and its subsidiaries other than Tarpon Transmission Company
("Tarpon") are not taxable entities. However, the taxable income or loss
resulting from the operations of the Partnership will ultimately be included in
the federal and state income tax returns of the general and limited partners and
may vary substantially from the income or loss reported for financial reporting
purposes.
Tarpon is, and Manta Ray Gathering Systems, Inc. ("Manta Ray") was, prior
to its liquidation in May 1996, a subsidiary of the Partnership subject to
federal corporate income taxation. The Partnership 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 the Partnership.
NET INCOME PER UNIT
During the three months ended December 31, 1997, the Partnership adopted
SFAS No. 128, "Earnings per Share". SFAS No. 128 establishes new guidelines for
computing earnings per share ("EPS") and requires dual presentation of basic and
diluted EPS for entities with complex capital structures. Basic EPS excludes
dilution and is computed by dividing net income (loss) by the weighted average
number of units outstanding during the period. Dilutive EPS reflects potential
dilution and is computed by dividing net income (loss) 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. All prior period EPS data has been restated to conform
with the provisions of SFAS No. 128.
F-26
<PAGE> 149
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Basic income (loss) per unit and diluted income (loss) per unit for the
Partnership are the same for the years ended December 31, 1997, 1996 and 1995.
For the year ended December 31, 1997, net income (loss) per Unit was calculated
based upon the quarterly net income (loss) of the Partnership less an allocation
of net income (loss) to the general partner proportionate to its share of
quarterly cash distributions which included Incentive Distributions (see Note
9). For the years ended December 31, 1996 and 1995, net income per Unit was
computed based upon the net income of the Partnership less an allocation of
approximately 1% of the Partnership's net income to the general partner. The
weighted average number of Units outstanding for each of the years ended
December 31, 1997, 1996 and 1995 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 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 gas reserve
disclosure, (iii) estimated useful lives of depreciable assets and (iv)
potential environmental liabilities. Actual results could differ from those
estimates. Management believes that its estimates are reasonable.
OTHER
The fair values of the financial instruments included in the Partnership's
assets and liabilities approximate their carrying values.
The Partnership enters into commodity derivative transactions to hedge its
exposure to price fluctuations on anticipated natural gas and crude oil sales
transactions. Gains and losses on hedging activities are deferred and included
in the results of operations in the period in which the hedged production is
sold. See Note 12.
During June 1997, the Financial Accounting Standards Board issued 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 shareholders and requires related disclosures about products and services,
geographic areas and major customers. This statement is effective for fiscal
years beginning after December 15, 1997. The Partnership is currently evaluating
the disclosure requirements of this statement.
NOTE 3 -- OIL AND GAS PROPERTIES:
CAPITALIZED COSTS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Proved properties........................................... $ 38,790 $ 38,681
Wells, equipment and related facilities..................... 81,506 70,366
-------- --------
Total capitalized costs........................... 120,296 109,047
Accumulated depreciation, depletion and amortization........ 53,684 17,673
-------- --------
Net capitalized costs............................. $ 66,612 $ 91,374
======== ========
</TABLE>
F-27
<PAGE> 150
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COSTS INCURRED IN THE OIL AND GAS ACQUISITIONS, EXPLORATION AND DEVELOPMENT
ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Acquisitions of proved properties........................... $ 1 $ (13)
Development................................................. 10,522 54,771
Capitalized interest........................................ 726 6,296
------- -------
Total costs incurred.............................. $11,249 $61,054
======= =======
</TABLE>
On June 30, 1995, the Partnership entered into a purchase and sale
agreement (the "Purchase and Sale Agreement") with Tatham Offshore, Inc.
("Tatham Offshore"), an approximately 94%-owned affiliate of DeepTech, pursuant
to which the Partnership 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 $30,000,000. The Partnership is
entitled to retain all of the revenue attributable to the Acquired Properties
until it has received net revenue equal to the Payout Amount (as defined below),
whereupon Tatham Offshore is entitled to receive a reassignment of the Acquired
Properties, subject to reduction and conditions as discussed below. Prior to
December 10, 1996, "Payout Amount" was defined as an amount equal to all costs
incurred by the Partnership with respect to the Acquired Properties (including
the $30,000,000 acquisition cost paid to Tatham Offshore) plus interest thereon
at a rate of 15% per annum. Effective February 1, 1996, the Partnership entered
into an agreement with Tatham Offshore regarding certain transportation
agreements that increases the amount recoverable from the Payout Amount by
$7,500,000 plus interest (Note 10).
Effective December 10, 1996, the Partnership exercised its option to
permanently retain 50% of the working interest in the Acquired Properties in
exchange for forgiving 50% of the then-existing Payout Amount exclusive of the
$7,500,000 plus interest added to the Payout Amount in connection with the
restructuring of certain transportation agreements discussed above. The
Partnership remains obligated to fund any further development costs attributable
to Tatham Offshore's portion of the working interests, such costs to be added to
the Payout Amount. The Partnership's election to retain 50% of the working
interest in the Acquired Properties reduced the Payout Amount from $94,020,000
to $50,760,000. Subsequent to December 10, 1996, only 50% of the development and
operating costs attributable to the Acquired Properties are added to the Payout
Amount and 50% of the net revenue from the Acquired Properties reduce the Payout
Amount. As of December 31, 1997, the Payout Amount totaled $41,425,000. See Note
5 and 16.
NOTE 4 -- EQUITY INVESTMENTS:
The Partnership 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
("HIOS"), 33 1/3% in U-T Offshore System ("UTOS") and 50% in West Cameron
Dehydration Company, L.L.C. ("West Cameron Dehy").
Leviathan contributed the equity interests in Stingray, HIOS and UTOS to
the Partnership at its carrying value on February 19, 1993. 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, 1997 is $44,233,000.
Leviathan accounted for its acquisition of its interest in Stingray, HIOS and
UTOS using the purchase method of accounting. The difference between the cost of
the investments accounted for on the equity method and the underlying equity in
net assets of Stingray, HIOS and UTOS at acquisition was assigned to property,
plant and equipment and favorable firm transportation contracts and is being
depreciated on a straight-line basis over the estimated 20-year lives of such
property, plant and equipment and the lives of the related contracts,
respectively. The majority of such contracts expired by December 1993. The
20-year depreciable life used for the regulated pipeline assets may be impacted
by future rates approved by the FERC.
F-28
<PAGE> 151
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In January 1997, the Partnership and affiliates of Marathon Oil Company
("Marathon") and Shell Oil Company ("Shell") formed Nautilus to construct and
operate a new interstate natural gas pipeline system. In addition, the same
parties formed Manta Ray Offshore to acquire an existing gathering system from
the Partnership. The gathering system was extended and is currently delivering
gas to several downstream pipelines, including the Nautilus system. The Nautilus
and Manta Ray Offshore systems are located to serve growing production areas in
the Green Canyon area of the Gulf and are indirectly owned 50% by Shell, 24.3%
by Marathon and 25.7% by the Partnership. The capital costs associated with the
construction of the Nautilus interstate pipeline system and the expansion of the
Manta Ray Offshore gathering system, including the value of existing assets
contributed by the partners, totaled approximately $250 million. The Nautilus
system consists of 101 miles of 30-inch pipeline downstream from Ship Shoal
Block 207 connecting to a gas processing plant, onshore Louisiana, operated by
Exxon Company USA ("Exxon"), plus certain facilities downstream of the Exxon
plant to effect deliveries into multiple interstate pipelines. Upstream of the
Ship Shoal 207 platform, the existing Manta Ray Offshore gathering system was
extended into a broader gathering system that serves shelf and deepwater
production areas around Ewing Bank Block 873 to the east and Green Canyon Block
65 to the west. The Manta Ray Offshore 47-mile expansion was completed and
placed in service in November 1997. The Nautilus system, including the related
onshore facilities and platform connections, was completed and placed in service
in December 1997. Affiliates of Marathon and Shell dedicated for transportation
and gathering to each of the Nautilus and Manta Ray Offshore systems significant
deepwater acreage positions in the area and provided substantially all of the
capital funding for the new construction. The Partnership provided $11,144,000
of funding in the form of a newly constructed compressor in addition to the
contribution of the Manta Ray Offshore system.
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, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
WEST MANTA
VIOSCA CAMERON RAY
HIOS KNOLL STINGRAY POPCO DEHY UTOS OFFSHORE NAUTILUS TOTAL
-------- ------- -------- ------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue...... $ 45,569 $23,128 $ 23,630 $26,161 $2,451 $ 3,785 $ 6,263 $ 54
Other income........... 348 39 970 209 29 61 1,564 6,489(a)
Operating expenses..... (17,101) (2,115) (15,612) (5,782) (164) (2,472) (2,223) (435)
Depreciation........... (4,774) (2,473) (7,216) (6,463) (16) (566) (1,823) (233)
Other expenses......... -- (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(b)...... 845 -- 959 (120) -- 35 -- --
Contract
amortization(b).... (105) -- (350) -- -- -- -- --
Other................ (228) -- (49) (263) -- (24) 3,082(c) 733
-------- ------- -------- ------- ------ ------- ------- ---------
Equity in earnings..... $ 10,129 $ 8,310 $ 754 $2,779 $1,150 $ 292 $ 3,672 $ 2,241 $29,327
======== ======= ======== ======= ====== ======= ======= ========= =======
Distributions(d)....... $ 12,200 $ 9,650 $ 1,375 $ -- $1,150 $ 200 $ 2,560 $ -- $27,135
======== ======= ======== ======= ====== ======= ======= ========= =======
</TABLE>
- ---------------
(a) Includes $6,431,000 related to an allowance for funds used during
construction ("AFUDC") which represents the estimated costs, during the
construction period, of funds used for construction purposes. 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.
(b) Adjustments result from purchase price adjustments made in accordance with
Accounting Principles Board ("APB") No. 16 "Business Combinations".
(c) Represents additional net earnings specifically allocated to the
Partnership related to the assets contributed by the Partnership to the
Manta Ray Offshore joint venture. Pursuant to the terms of the joint
venture agreement, the Partnership 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.
(d) Future distributions could be restricted by the terms of the equity
investees' respective credit agreements.
F-29
<PAGE> 152
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........ $ 47,175 $13,923 $ 24,146 $ 7,819 $1,686 $ 3,476
Other income............. 266 -- 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........... 96 (90) (1,679) (269) -- --
-------- ------- -------- ------- ------ -------
Net earnings............. 27,079 11,140 2,336 2,671 1,518 453
Effective 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 No. 16, "Business Combinations".
SUMMARIZED HISTORICAL OPERATING RESULTS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
VIOSCA
HIOS STINGRAY KNOLL UTOS TOTAL
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Operating revenue........................ $ 53,428 $ 26,020 $ 7,107 $ 5,195
Other income............................. 659 1,306 -- 53
Operating expenses....................... (19,360) (13,993) (520) (2,828)
Depreciation............................. (4,898) (6,663) (2,224) (731)
Other expenses........................... (151) (1,245) -- (18)
-------- -------- ------- -------
Net earnings............................. 29,678 5,425 4,363 1,671
Effective ownership percentage........... 40% 50% 50% 33.3%
-------- -------- ------- -------
11,871 2,712 2,181 557
Adjustments:
Depreciation(a)........................ 854 899 -- 59
Contract amortization(a)............... (198) -- -- --
Rate refund reserve.................... 417 -- -- --
Other.................................. 168 57(b) -- 11
-------- -------- ------- -------
Equity in earnings....................... $ 13,112 $ 3,668 $ 2,181 $ 627 $19,588
======== ======== ======= ======= =======
Distributions............................ $ 15,200 $ 5,750 $ 2,825 $ 867 $24,642
======== ======== ======= ======= =======
</TABLE>
- ---------------
(a) Adjustments result from purchase price adjustments made in accordance with
APB No. 16, "Business Combinations".
(b) Includes the results of West Cameron Dehy for December 1995 (inception of
operations).
F-30
<PAGE> 153
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARIZED HISTORICAL BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIOS VIOSCA KNOLL STINGRAY POPCO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
----------------- ----------------- ----------------- -------------------
1997 1996 1997 1996 1997 1996 1997 1996
------- ------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current assets......... $ 5,587 $ 8,215 $ 3,354 $ 4,549 $20,184 $35,117 $ 31,763 $ 39,787
Noncurrent assets...... 12,081 14,985 98,004 71,408 42,541 48,917 226,055 174,922
Current liabilities.... 3,380 2,153 11,280 2,502 21,787 35,495 35,864 38,038
Long-term debt......... -- -- 52,200 33,300 11,600 17,400 120,500 84,000
Other noncurrent
liabilities.......... 199 500 257 173 5,289 2,321 -- --
</TABLE>
<TABLE>
<CAPTION>
WEST CAMERON
DEHY UTOS MANTA RAY
DECEMBER 31, DECEMBER 31, OFFSHORE NAUTILUS
------------- --------------- DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996 1997 1997
----- ----- ------ ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Current assets....................... $455 $424 $3,955 $4,211 $ 31,714 $ 924
Noncurrent assets.................... 663 679 2,803 3,305 127,731 120,074
Current liabilities.................. 43 28 2,900 3,899 32,601 3,699
</TABLE>
NOTE 5 -- IMPAIRMENT, ABANDONMENT AND OTHER:
Pursuant to the Ewing Bank Agreement discussed in Note 10, Tatham Offshore
dedicated all natural gas and crude oil produced from eight of its Ewing Bank
leases for gathering and redelivery by the Partnership and was obligated to pay
a demand rate as well as a commodity charge equal to 4% of the market price of
production actually transported. Pursuant to the Ewing Bank Agreement, the
Partnership constructed gathering facilities connecting Tatham Offshore's Ewing
Bank 914 #2 well to a third party platform at Ewing Bank Block 826.
The Partnership and Tatham Offshore entered into the Ship Shoal Agreement,
also discussed in Note 10, pursuant to which the Partnership constructed a
gathering line from Tatham Offshore's Ship Shoal Block 331 lease to interconnect
with a third-party pipeline at the Partnership's processing facilities located
on its Ship Shoal Block 332 platform. Pursuant to the terms of the Ship Shoal
Agreement, and in consideration for constructing the interconnect, refurbishing
the platform and providing access to the processing facilities, Tatham Offshore
was required to pay the Partnership demand charges and has dedicated all
production from its Ship Shoal Block 331 lease and eight additional surrounding
leases for gathering and processing by the Partnership for additional commodity
fees.
As discussed in Note 10, effective February 1, 1996, the Partnership agreed
to release Tatham Offshore from all remaining demand charge payments under the
Ewing Bank and Ship Shoal Agreements, a total of $17,800,000. Tatham Offshore
remained obligated to pay all commodity charges related to production from these
properties. In exchange, the Partnership received 7,500 shares of Tatham
Offshore 9% Senior Preferred Stock, which was valued at $7,500,000, and added
$7,500,000 to the Payout Amount under the Purchase and Sale Agreement. See Note
16.
In May 1997, the Ewing Bank 914 #2 well was shut-in as a result of a
downhole mechanical problem. Although Tatham Offshore is evaluating potential
workover or recompletion possibilities for this well, it has announced its
intent to reserve the remaining costs associated with the Ewing Bank 914 #2 well
given its current non-productive status. Production related problems resulting
from the completions of the three wellbores at Ship Shoal Block 331 have
resulted in only a minimal amount of production from the property and Tatham
Offshore has decided not to pursue further recompletion operations at this time.
See Note 16.
F-31
<PAGE> 154
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, the Partnership has determined that the designated revenue
from the Acquired Properties is not likely to be sufficient to satisfy the
Payout Amount. Under these circumstances, the Partnership would retain 100% of
the revenue from its working interests in the Acquired Properties, would bear
all abandonment obligations related to these properties and would not realize
the $7,500,000 plus accrued interest that had been recorded as a noncurrent
receivable related to the settlement of the demand charge obligations under the
Ewing Bank and Ship Shoal Agreements. Accordingly in June 1997, the Partnership
recorded as impairment, abandonment and other expense on the accompanying
consolidated statement of operations a non-recurring charge totaling $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 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 oil and gas
properties ($1,860,000).
NOTE 6 -- 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 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. The
Partnership'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, the Partnership does not anticipate that the FERC will assert or
exercise any NGA rate jurisdiction over the Unregulated Pipelines so long as the
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, Poseidon
has not filed tariffs with the FERC.
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
F-32
<PAGE> 155
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and that will remain in effect until at least the
fourth quarter of 1998. Stingray, HIOS and UTOS have each agreed to file a new
rate case in the fourth quarter of 1998.
NOTE 7 -- INDEBTEDNESS:
In February 1993, the Partnership entered into a revolving credit facility
with a syndicate of commercial banks that provided a maximum $50 million
commitment for borrowings, subject to certain borrowing base limitations (the
"Partnership Credit Facility"). The Partnership Credit Facility was amended and
restated in March 1995, February 1996, March 1996 and December 1996 and
currently provides up to $300 million of available credit, subject to certain
incurrence limitations. As of December 31, 1997 and 1996, the Partnership had
$238,000,000 and $227,000,000, respectively, outstanding under its credit
facility. At the election of the Partnership, interest under the Partnership
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, 1997 and 1996 was 6.6% per annum.
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
is currently 0.25% per annum. Amounts advanced under the Partnership Credit
Facility were used (i) to finance the Partnership's capital expenditures,
including construction of platforms and pipelines, investments in equity
investees and the acquisition and development of oil and gas properties and (ii)
to repay all of the indebtedness incurred under the Flextrend Credit Facility
(discussed below). Amounts remaining under the Partnership Credit Facility are
available to the Partnership for general partnership purposes, including
financing capital expenditures, for working capital, and subject to certain
limitations, for paying distributions to Unitholders. The Partnership Credit
Facility can also be utilized to issue letters of credit as may be required from
time to time; however, no letters of credit are currently outstanding. The
Partnership Credit Facility matures in December 1999; is guaranteed by Leviathan
and each of the Partnership's subsidiaries; and is secured by the management
agreement with Leviathan (Note 10), substantially all of the assets of the
Partnership and Leviathan's 1% general partner interest in the Partnership and
approximate 1% interest in certain subsidiaries of the Partnership.
Interest costs incurred by the Partnership totaled $15,890,000, $17,470,000
and $6,082,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. During the years ended December 31, 1997, 1996 and 1995, the
Partnership capitalized $1,721,000, $11,910,000 and $5,269,000, respectively, of
such interest costs in connection with construction projects and drilling
activities in progress during such periods. At December 31, 1997 and 1996, the
unamortized portion of debt issue costs totaled $3,749,000 and $4,616,000,
respectively.
NOTE 8 -- PARTNERS' CAPITAL:
In 1995, the Partnership adopted the Unit Rights Appreciation Plan (the
"Plan") to provide the Partnership with the ability of making awards of Unit
Rights, as hereinafter defined, to certain officers and key employees of the
Partnership or its affiliates as an incentive for these individuals to continue
in the service of the Partnership or its affiliates. Under the Plan, the
Partnership may grant to senior officers of the Partnership or its affiliates,
excluding the Chairman of the Board of Leviathan, currently Mr. Thomas P.
Tatham, with the right to purchase, or realize the appreciation of, a Preference
Unit (a "Unit Right"), pursuant to the provisions of the Plan. The aggregate
number of Preference Units as to which Unit Rights may be issued pursuant to the
Plan shall not exceed 400,000 Preference Units per calendar year and 4,000,000
Preference Units over the term of the Plan, subject to adjustment as to both
limitations under certain circumstances. No
F-33
<PAGE> 156
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
participant may be granted more than 400,000 Unit Rights in any calendar year.
The exercise price of the Preference Units covered by the Unit Rights granted
pursuant to the Plan shall be the closing price of the Preference Units as
reported on the New York Stock Exchange or, if the Preference Units are not
traded on such exchange, as reported on any other national securities exchange
on which the Preference Units are traded, on the date on which Unit Rights are
granted pursuant to the Plan. As of December 31, 1997, a total of 1,200,000 Unit
Rights have been granted under the Plan representing 400,000 Unit Rights for
each of the calendar years 1995, 1996 and 1997. For the years ended December 31,
1997 and 1996, the Partnership accrued $3,710,000 and $436,000, respectively,
related to the appreciation and vestiture of these Unit Rights.
As of December 31, 1997, 1996 and 1995, the Partnership had 18,075,000
Preference Units and 6,291,894 Common Units outstanding. All of the Preference
Units of the Partnership are owned by the public, representing a 72.7% effective
limited partner interest in the Partnership. Leviathan, through its ownership of
all of the Common Units, its 1% general partner interest in the Partnership and
its approximate 1% nonmanaging interest in certain of the Partnership
subsidiaries, owns a 27.3% effective interest in the Partnership.
NOTE 9 -- CASH DISTRIBUTIONS:
The Partnership makes quarterly distributions of 100% of its Available
Cash, as defined in the Amended and Restated Agreement of Limited Partnership
(the "Partnership Agreement"), to the Unitholders and Leviathan. Available Cash
consists generally of all the cash receipts of the Partnership plus reductions
in reserves less all of its cash disbursements and net additions to reserves.
Leviathan has broad discretion to establish cash reserves that it determines are
necessary or appropriate to provide for the proper conduct of the business of
the Partnership including cash reserves for future capital expenditures, to
stabilize distributions of cash to the Unitholders and Leviathan, to reduce debt
or as necessary to comply with the terms of any agreement or obligation of the
Partnership. The Partnership 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 of the Partnership for each quarter
within the Preference Period, as defined in the Partnership Agreement, is
subject to the preferential rights of the holders of Preference Units to receive
the Minimum Quarterly Distribution, as defined in the Partnership Agreement, for
such quarter, plus any arrearages in the payment of the Minimum Quarterly
Distribution for prior quarters, before any distribution of Available Cash is
made to holders of Common Units for such quarter. The Common Units are not
entitled to arrearages in the payment of the Minimum Quarterly Distribution. In
general, the Preference Period is defined to mean the period commencing on
February 19, 1993 and continuing through at least March 31, 1998.
Since commencement of operations on February 19, 1993 through December 31,
1997, the Partnership has made distributions to the Unitholders equal to and in
excess of the Minimum Quarterly Distribution of $0.275 per Unit. See Note 18.
Distributions by the Partnership of its Available Cash are effectively made
98% to Unitholders and 2% to Leviathan, as general partner, subject to the
payment of incentive distributions to Leviathan 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, 1997 and 1996, Leviathan received Incentive
Distributions totaling $3,885,000 and $285,000, respectively. In February 1998,
the Partnership paid a cash distribution of $0.50 per Preference and Common Unit
and an Incentive Distribution of $2,362,000 to Leviathan.
F-34
<PAGE> 157
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- 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 the Partnership are
employed by DeepTech. DeepTech entered into management agreements with each of
its subsidiaries including Leviathan in its capacity as general partner of the
Partnership. The management fee charged to Leviathan is intended to approximate
the amount of resources allocated by DeepTech in providing various operational,
financial, accounting and administrative services on behalf of Leviathan and the
Partnership. 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, Leviathan is entitled to reimbursement of all
reasonable general and administrative expenses and other reasonable expenses
incurred by Leviathan and its affiliates for or on behalf of the Partnership
including, but not limited to, amounts payable by Leviathan to DeepTech under
the management agreement.
In connection with the completion of the offering of additional Preference
Units in June 1994, Leviathan amended its management agreement with DeepTech
effective July 1, 1994 in consideration for the increase in management services
associated with the planned expansion of facilities and to more accurately
provide for the reimbursement of expenses incurred by DeepTech in providing
management services to Leviathan and the Partnership. As amended, the management
agreement provided for a management fee of $2,000,000 a year plus 40% of
DeepTech's unreimbursed selling, general and administrative expenses. Effective
November 1, 1995, July 1, 1996 and July 1, 1997, primarily as a result of the
increased activities of the Partnership, Leviathan amended its management
agreement with DeepTech to provide for an annual management fee of 45.3%, 54%
and 52%, respectively, of DeepTech's overhead. Leviathan charged the Partnership
$8,080,000, $6,590,000 and $5,796,000 pursuant to its management agreement with
DeepTech for the years ended December 31, 1997, 1996 and 1995, respectively.
Leviathan is also required to reimburse DeepTech for certain tax
liabilities resulting from, among other things, additional taxable income
allocated to Leviathan due to (i) the issuance of additional Preference Units
(including the sale of the Preference Units by the Partnership pursuant to the
second public offering) and (ii) the investment of such proceeds in additional
acquisitions or construction projects. During the years ended December 31, 1997
and 1996, Leviathan charged the Partnership $713,000 and $1,162,000,
respectively, to compensate DeepTech for additional taxable income allocated to
Leviathan.
SALES, TRANSPORTATION AND PLATFORM ACCESS AGREEMENTS
General. In December 1993, the Partnership 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 Garden Banks, Viosca Knoll, Ewing Bank and Ship Shoal leases as well as
certain adjoining areas of mutual interest to the Partnership for
transportation. In exchange, the Partnership 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 with Tatham Offshore
(Note 3), a subsidiary of the Partnership assumed all of Tatham Offshore's
obligations under the Master Dedication Agreement and certain ancillary
agreements with respect to the Acquired Properties.
Ewing Bank Gathering System. Pursuant to a gathering agreement (the "Ewing
Bank Agreement") among Tatham Offshore, DeepTech, and a subsidiary of the
Partnership, Tatham Offshore dedicated all natural gas and crude oil produced
from eight of its Ewing Bank leases for gathering and redelivery by the
Partnership and was obligated to pay a demand and a commodity rate for shipment
of all oil and gas under this
F-35
<PAGE> 158
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreement. The Ewing Bank Agreement requires Tatham Offshore to pay certain
demand charges and a commodity charge equal to 4% of the market price of
production actually transported. For the years ended December 31, 1997, 1996 and
1995, Tatham Offshore paid the Partnership demand and commodity charges of
$54,000, $349,000 and $7,626,000, respectively, under this agreement. The
Partnership also receives revenue from the oil and gas production from the Ewing
Bank 914 #2 well as a result of its 7.13% overriding royalty interest in the
well. In March 1996, the Partnership 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, the Partnership
and Tatham Offshore have entered into a gathering and processing agreement (the
"Ship Shoal Agreement") pursuant to which the Partnership constructed a
gathering line from Tatham Offshore's Ship Shoal Block 331 lease to interconnect
with a third-party pipeline at the Partnership's platform located on Ship Shoal
Block 332. In addition, the Partnership is operating the refurbished platform
located at Ship Shoal Block 332 to process production from Ship Shoal Block 331.
Pursuant to the terms of the Ship Shoal Agreement, and in consideration for
constructing the interconnect, refurbishing the platform and for providing
access to the processing facilities, Tatham Offshore was required to pay the
Partnership a demand charge of $113,000 per month over a five-year period ending
June 1999 and dedicated all production from its Ship Shoal 331 lease and eight
additional surrounding leases for gathering and processing by the Partnership.
The Ship Shoal Agreement remains in effect for the productive life of the
reserves or, if earlier, the expiration of 20 years from date of first
production. During late 1994, all of Tatham Offshore's wells at Ship Shoal 331
experienced completion and production problems. As a result, the Partnership
received only demand charges under this agreement during 1995. For the year
ended December 31, 1995, the Partnership received $1,360,000 from Tatham
Offshore for fees related to the Ship Shoal Agreement. In March 1996, the
Partnership settled all remaining unpaid demand charge obligations under this
transportation agreement in exchange for certain consideration as discussed
below.
VK 817 Platform. Tatham Offshore is also obligated to pay certain platform
access and processing fees to the Partnership. For the years ended December 31,
1997, 1996 and 1995, the Partnership received $1,973,000, $1,896,000 and
$823,000, respectively, from Tatham Offshore as platform access and processing
fees related to the Partnership's platform located in Viosca Knoll Block 817.
For the years ended December 31, 1997 and 1996, the Partnership charged
Viosca Knoll $2,116,000 and $249,000, respectively, for expenses and platform
access fees related to the Viosca Knoll 817 platform.
In addition, for the years ended December 31, 1997 and 1996, Viosca Knoll
reimbursed $47,000 and $254,000, respectively, to the Partnership for costs
incurred by the Partnership in connection with the acquisition and installation
of a booster compressor on the Partnership's Viosca Knoll 817 platform.
Transportation Agreements Settled. Tatham Offshore was obligated to make
demand charge payments to the Partnership pursuant to certain transportation
agreements discussed above. Under these agreements, the Partnership was entitled
to receive demand charges of $8,100,000 in 1996, $6,000,000 in 1997, $3,000,000
in 1998 and $700,000 in 1999. In addition to the demand charges, Tatham Offshore
is obligated to pay commodity charges, based on the volume of oil and gas
transported or processed, under these agreements.
Production problems at Ship Shoal Block 331 and reduced oil production from
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, the Partnership agreed to release Tatham Offshore
from all remaining demand charge payments under the Ewing Bank Gathering
Agreement and the Ship Shoal Agreement, a total of $17,800,000. Tatham Offshore
remains obligated to pay the commodity charges under these agreements as well as
all platform access and processing fees associated with the Viosca Knoll Block
817 lease. In exchange, the Partnership received 7,500 shares of Tatham Offshore
Senior Preferred Stock (the "Senior Preferred Stock"), which is presented on the
accompanying consolidated balance sheet at
F-36
<PAGE> 159
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1996 as investment in affiliate. The Senior Preferred Stock has a
liquidation preference of $1,000 per share, is senior in liquidation preference
to all other classes of Tatham Offshore stock and has a 9% cumulative dividend,
payable quarterly. Commencing on October 1, 1998 and for a period of 90 days
thereafter, the Partnership has the option to exchange the remaining liquidation
preference amount and accrued but unpaid dividends for shares of Tatham
Offshore's Series A 12% Convertible Exchangeable Preferred Stock (the "Series A
Preferred Stock") with an equivalent market value. Further, the Partnership has
made an irrevocable offer to Tatham Offshore to sell all or any portion of the
Senior Preferred Stock to Tatham Offshore or its designee at a price equal to
$1,000 per share, plus interest thereon at 9% per annum less the sum of any
dividends paid thereon. The Series A Preferred Stock is convertible into Tatham
Offshore common stock based on a fraction, the numerator of which is the
liquidation preference value plus all accrued but unpaid dividends and the
denominator of which is $6.53 per share. In addition, the sum of $7,500,000 was
added to the Payout Amount under the Purchase and Sale Agreement. By adding
$7,500,000 to the Payout Amount, the Partnership is entitled to an additional
$7,500,000 plus interest at the rate of 15% per annum from revenue attributable
to the Acquired Properties prior to reconveying any interest in the Acquired
Properties to Tatham Offshore. In addition, Tatham Offshore waived its remaining
option to prepay the then-existing Payout Amount and receive a reassignment of
its working interests. Tatham Offshore and the Partnership also agreed that in
the event Tatham Offshore furnishes the Partnership with a financing commitment
from a lender with a credit rating of BBB- or better covering 100% of the then
outstanding Payout Amount, then the interest rate utilized to compute the Payout
Amount shall be adjusted from and after the date of such commitment to the
interest rate specified in such commitment. Tatham Offshore granted the
Partnership the right to utilize the Ship Shoal Block 331 platform and related
facilities at a rental rate of $1.00 per annum for such period as the platform
is owned by Tatham Offshore and located on Ship Shoal Block 331, provided such
use does not interfere with lease operations or other activities of Tatham
Offshore. In addition, Tatham Offshore granted the Partnership a right of first
refusal relative to a sale of the platform.
Oil and gas sales. The Partnership has agreed to sell all of its oil and
gas production to Offshore Gas Marketing, Inc. ("Offshore Marketing"), an
affiliate of the Partnership, on a month to month basis. The agreement with
Offshore Marketing provides Offshore Marketing fees equal to 2% of the sales
value of crude oil and condensate and $0.015 per dekatherm of natural gas for
selling the Partnership's production. During the years ended December 31, 1997,
1996 and 1995, oil and gas sales to Offshore Marketing totaled $57,830,000,
$46,296,000 and $922,000, respectively.
Other. During the years ended December 31, 1997, 1996 and 1995, Viosca
Knoll charged the Partnership $3,921,000, $3,229,000 and $86,000, respectively,
for transportation services related to transporting production from the Viosca
Knoll Block 817 lease. During the years ended December 31, 1997 and 1996, POPCO
charged the Partnership $2,003,000 and $1,056,000, respectively, for
transportation services related to transporting production from the Garden Banks
Block 72 and 117 leases.
OTHER
During the years ended December 31, 1997 and 1996, the Partnership 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 is owned by an
affiliate of DeepTech and managed by Sedco Forex.
POPCO entered into certain additional agreements with a subsidiary of the
Partnership which provide 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.
F-37
<PAGE> 160
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Poseidon LLC managed the construction and installation of the initial 117
mile segment of the Poseidon pipeline, which was placed in service in April
1996. Texaco Trading managed the construction and installation of the remaining
pipelines and facilities comprising the Poseidon system, which were placed in
service in December 1996 and December 1997. Poseidon LLC was paid a performance
fee of $1,400,000 for managing the construction of the initial segment of the
Poseidon pipeline.
Pursuant to a management agreement between Viosca Knoll and the
Partnership, the Partnership 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, 1997, 1996 and 1995, Leviathan charged Viosca Knoll $100,000 in
accordance with this management agreement.
For the year ended December 31, 1997, the Partnership charged Manta Ray
Offshore $287,000 pursuant to management and operations agreements.
Mr. Charles M. Darling IV, a director of Leviathan and DeepTech, was a
partner in a law firm until April 1997 that provides legal services to the
Partnership. During the years ended December 31, 1997, 1996 and 1995, the
Partnership incurred $55,000, $203,000 and $116,000, respectively, for these
services.
Pursuant to the Leviathan non-employee director compensation arrangements,
the Partnership is obligated to pay each non-employee director 2 1/2% of the
general partners' Incentive Distribution as a profit participation fee. During
the year ended December 31, 1997, the Partnership paid the three non-employee
directors of Leviathan a total of $313,000 as a profit participation fee.
Dover Technology, Inc., which is 50% owned by DeepTech, performed certain
technical and geophysical services for the Partnership in the aggregate amount
of $240,000 and $58,000 for the years ended December 31, 1996 and 1995,
respectively.
NOTE 11 -- INCOME TAXES:
The Partnership (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 the Partnership 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.
The tax attributes of the Partnership's net assets flow directly to each
individual partner. 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.
The Partnership utilizes the liability method under which deferred tax
assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. The Partnership
does not have access to information about each individual partner's tax
attributes in the Partnership, and the aggregate tax bases cannot be readily
determined. Accordingly, management does not believe that, in the Partnership's
circumstances, the aggregate difference would be meaningful information.
Tarpon is and Manta Ray was, prior to its liquidation in May 1996, a
subsidiary of the Partnership that files separate federal income tax returns.
The income tax benefit recorded for the years ended December 31, 1997, 1996, and
1995 equals $311,000, $801,000 and $603,000, respectively, and is entirely
related to Tarpon. The benefit equals Tarpon's book loss times the effective
statutory rate for such period. The Partnership's deferred income tax liability
at December 31, 1997 and 1996 of $1,399,000 and $1,722,000, respectively, is
F-38
<PAGE> 161
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 the Partnership. Manta Ray had no taxable income for the respective periods
prior to its liquidation.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES:
CREDIT FACILITIES
Each of Stingray, POPCO and Viosca Knoll are parties to a credit agreement
under which it has outstanding obligations that may restrict the payment of
distributions to its owners.
In December 1995, Stingray amended an existing term loan agreement (the
"Stingray Credit Agreement") to provide for aggregate outstanding borrowings of
up to $29 million in principal amount. The Stingray Credit Agreement requires
the payment of principal by Stingray of $1,450,000 per quarter. This term loan
agreement is principally secured by current and future gas transportation
contracts between Stingray and its customers. As of December 31, 1997, Stingray
had $17,400,000 outstanding under the Stingray Credit Agreement bearing interest
at an average floating rate of 6.53% per annum. On the earlier to occur of
December 31, 2000 or the accelerated due date pursuant to the Stingray Credit
Agreement, if Stingray has not settled all amounts due under the Stingray Credit
Agreement, the Partnership is obligated to pay the lesser of (i) $8,500,000,
(ii) the aggregate amount of distributions received by the Partnership from
Stingray subsequent to October 1, 1994, or (iii) 50% of any then outstanding
amounts due pursuant to the Stingray Credit Agreement.
In April 1996, POPCO entered into a revolving credit facility (the "POPCO
Credit Facility") with a syndicate of commercial banks to provide up to $150
million for the construction 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 secured by a substantial portion of
POPCO's assets and matures on April 30, 2001. As of December 31, 1997, POPCO had
$120,500,000 outstanding under the POPCO Credit Facility bearing interest at an
average floating rate of 7.2% per annum. As of December 31, 1997, approximately
$27,900,000 of additional funds were available under the POPCO Credit Facility.
In December 1996, Viosca Knoll entered into a revolving credit facility
(the "Viosca Knoll Credit Facility") with a syndicate of commercial banks to
provide up to $100 million for the addition of compression to the Viosca Knoll
system and for other working capital needs of Viosca Knoll, including funds for
a one-time distribution of $25,000,000 to its partners. In December 1996, the
Partnership received a $12,500,000 distribution from Viosca Knoll as a result of
its 50% working interest. Viosca Knoll's ability to borrow money under the
Viosca Knoll Credit Facility is subject to certain customary terms and
conditions, including borrowing base limitations. The Viosca Knoll Credit
Facility is secured by a substantial portion of Viosca Knoll's assets and
matures on December 20, 2001. If Viosca Knoll fails to pay any principal,
interest or other amounts due pursuant to the Viosca Knoll Credit Facility, the
Partnership 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, 1997, Viosca Knoll has $52,200,000 outstanding
under the Viosca Knoll Credit Facility bearing interest at an average floating
rate of 6.7% per annum. As of December 31, 1997, approximately $24,800,000 of
additional funds were available under the Viosca Knoll Credit Facility.
HEDGING ACTIVITIES
The Partnership hedges a portion of its oil and natural gas production to
reduce the Partnership's exposure to fluctuations in market prices of oil and
natural gas and to meet certain requirements of the Partnership Credit Facility.
The Partnership uses various financial instruments whereby monthly settlements
are based on differences between the prices specified in the instruments and the
settlement prices of certain
F-39
<PAGE> 162
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
futures contracts quoted on the New York Mercantile Exchange ("NYMEX") or
certain other indices. The Partnership settles the instruments by paying the
negative difference or receiving the positive difference between the applicable
settlement price and the price specified in the contract. The instruments
utilized by the Partnership differ from futures contracts in that there is no
contractual obligation which requires or allows for the future delivery of the
product. Gains or losses on hedging activities are recognized as oil and gas
sales in the period in which the hedged production is sold. For the years ended
December 31, 1997, 1996 and 1995, Leviathan recorded net losses of $6,340,000,
$2,826,000 and $0, respectively, related to hedging activities.
At December 31, 1997, the Partnership had open sales hedges on
approximately 27,465 million British thermal units ("MMbtu") of natural gas per
day for calendar 1998 at an average price of $2.42 per MMbtu and open purchase
hedges on approximately 27,180 MMbtu of natural gas per day for calendar 1998 at
an average price of $2.28 per MMbtu. Subsequent to December 31, 1997, the
Partnership entered into commodity swap transactions for calendar 1999 totaling
5,000 MMbtu per day at a fixed price to be determined at the Partnership's
option equal to the January 1999 Natural Gas Futures Contract on NYMEX as quoted
at any time during 1998 to and including the last three trading days of the
January 1999 contract minus $0.25 per MMbtu.
At December 31, 1997, the Partnership had open crude oil hedges on
approximately 990 barrels per day for calendar 1998 at an average price of
$20.43 per barrel. Subsequent to December 31, 1997, the Partnership entered into
purchase hedge contracts totaling 1,000 barrels of oil per day for calendar 1998
at an average price of $17.29 per barrel.
If the Partnership had settled its open natural gas and crude oil hedging
positions as of December 31, 1997 based on the applicable settlement prices of
the NYMEX futures contracts, the Partnership would have recognized income of
approximately $2.2 million.
North Atlantic Pipeline Project. Tatham Offshore Canada Limited ("Tatham
Offshore Canada"), a wholly-owned subsidiary of Tatham Offshore, is the Canadian
representative of North Atlantic Pipeline Partners, L.P. ("North Atlantic"), the
sponsor of a proposal to build an approximately 2,500 kilometer pipeline from
offshore Newfoundland and Nova Scotia to the eastern seaboard of the United
States. The Partnership has entered into a letter agreement with Tatham Offshore
Canada regarding participation in the North Atlantic pipeline project. Under
such agreement, Tatham Offshore Canada is responsible for pre-development costs
of up to $10 million. Such agreement contains certain termination rights,
contemplates the negotiation, execution and delivery of definitive agreements
and provides that the Partnership would hold a pro rata partnership interest of
up to 20% in North Atlantic. The Partnership has no financial commitment to the
project until and unless an application is approved by the appropriate Canadian
and United States regulatory authorities. In the event the Partnership was to
terminate its participation in North Atlantic after the date North Atlantic
receives regulatory approval of an application but prior to the in-service date
of the first phase of the North Atlantic pipeline, the Partnership, under
certain conditions, would be obligated to pay Tatham Offshore Canada an amount
equal to 150% of the Partnership's pro rata share of the "success fee" earned by
Tatham Offshore Canada related to the first phase of construction. For a period
of one year after the effective date of the merger discussed in Note 16, the
Partnership shall have the right to terminate this agreement without incurring
the liability for the above-mentioned "success fee". During October 1997, North
Atlantic filed applications with the FERC and its Canadian counterpart, the
National Energy Board, for approval of its proposed pipeline. Tatham Offshore
Canada is seeking additional participants on similar terms as that offered to
the Partnership.
OTHER
In the ordinary course of business, the Partnership 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 the Partnership. Various legal actions which have arisen in the
ordinary course of
F-40
<PAGE> 163
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
business are pending with respect to the pipeline interests and other assets of
the Partnership. 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 or operations of the
Partnership.
NOTE 13 -- SUPPLEMENTAL DISCLOSURES TO THE STATEMENTS OF CASH FLOWS:
CASH PAID, NET OF AMOUNTS CAPITALIZED, DURING EACH OF THE PERIODS PRESENTED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest................................................ $12,965 $ 2,890 $ --
Taxes................................................... $ 11 $ 20 $ 13
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Increase in investment in affiliate..................... $ -- $(7,500) $ --
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................................. 72,080 -- --
------- ------- -------
$72,080 $29,758 $ --
======= ======= =======
</TABLE>
NOTE 14 -- MAJOR CUSTOMERS:
The percentage of gathering, transportation and platform services revenue
from major customers was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Shell Gas Trading Company................................... -- 17% 19%
Tatham Offshore (affiliated company)........................ -- 30% 45%
Texaco Gas Marketing, Inc................................... 13% -- --
Walter Oil & Gas Corporation................................ 13% -- --
</TABLE>
NOTE 15 -- BUSINESS SEGMENT INFORMATION:
The Partnership's operations consist of two segments: (i) pipeline
gathering, transportation and platform services and (ii) development and
production of proved oil and gas reserves. All of the Partnership's
F-41
<PAGE> 164
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operations are conducted in the Gulf. The following table summarizes certain
financial information for each business segment (in thousands):
<TABLE>
<CAPTION>
GATHERING,
TRANSPORTATION
AND PLATFORM OIL AND CONSOLIDATING
SERVICES GAS SUBTOTAL ELIMINATIONS TOTAL
-------------- ----------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997:(a)
Operating revenue..................... $ 28,491 $ 58,106 $ 86,597 $(11,162) $ 75,435
Operating expenses.................... (3,221) (19,293) (22,514) 11,162 (11,352)
Depreciation, depletion and
amortization....................... (9,831) (36,389) (46,220) -- (46,220)
Impairment, abandonment and other..... (10,268) (10,954) (21,222) -- (21,222)
-------- -------- -------- -------- --------
Operating income (loss)....... $ 5,171 $ (8,530) $ (3,359) $ -- $ (3,359)
======== ======== ======== ======== ========
Year Ended December 31, 1996:(a)
Operating revenue..................... $ 34,057 $ 47,068 $ 81,125 $(10,052) $ 71,073
Operating expenses.................... (4,270) (14,850) (19,120) 10,052 (9,068)
Depreciation, depletion and
amortization....................... (15,002) (16,729) (31,731) -- (31,731)
-------- -------- -------- -------- --------
Operating income.............. $ 14,785 $ 15,489 $ 30,274 $ -- $ 30,274
======== ======== ======== ======== ========
</TABLE>
- ---------------
(a) The Partnership's activities related to the production of oil and gas
reserves commenced in December 1995 and therefore financial information for
each business segment is only presented for the years ended December 31,
1997 and 1996.
NOTE 16 -- SUBSEQUENT EVENTS:
On March 2, 1998, DeepTech announced that its Board of Directors and a
majority of its stockholders have approved entering into a definitive merger
agreement with El Paso Natural Gas Company ("El Paso"). As a result of this
merger and through a series of transactions, El Paso will own 100% of
Leviathan's general partner interest in the Partnership and an overall 27.3%
effective interest in the Partnership. The merger is subject to customary
regulatory approvals, the consummation of certain related transactions and is
expected to be completed by the end of the second quarter of 1998.
In connection with the merger of DeepTech and El Paso, Tatham Offshore has
agreed to relinquish its reversionary rights relating to the Acquired Properties
and the Partnership has agreed to exchange 7,500 shares of Tatham Offshore
Senior Preferred Stock currently held by the Partnership for 100% of Tatham
Offshore's right, title and interest in and to Viosca Knoll Blocks 772, 773,
774, 817, 818 and 861, West Delta Block 35, Ewing Bank Blocks 871, 914, 915 and
916 and the platform located at Ship Shoal Block 331. At the closing, the
Partnership will receive from/pay to Tatham Offshore an amount equal to the net
cash generated from/required by such properties from January 1, 1998 through the
closing date. In addition, the Partnership has agreed to assume all abandonment
and restoration obligations associated with the platform and leases. This
transaction has been approved by the Board of Directors of each of Tatham
Offshore and Leviathan and is expected to close in July 1998.
NOTE 17 -- SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED):
OIL AND GAS RESERVES
The following table represents the Partnership'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 1997, 1996 and
1995. Estimates of the Partnership's reserves at December 31, 1997, 1996 and
1995 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
F-42
<PAGE> 165
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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, 1994........................ 561 815
Revisions of previous estimates........................... (14) (24)
Purchase of reserves in place............................. 3,822 60,975
Production................................................ (46) (474)
------- -------
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
======= =======
Proved developed reserves -- December 31, 1995.............. 187 30,671
======= =======
Proved developed reserves -- December 31, 1996.............. 3,149 44,075
======= =======
Proved developed reserves -- December 31, 1997.............. 2,119 28,324
======= =======
</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 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, the Partnership'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 the
Partnership's reserves is based upon volumetric calculations.
FUTURE NET CASH FLOWS
The standardized measure of discounted future net cash flows relating to
the Partnership's proved oil and 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 gas
F-43
<PAGE> 166
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
prices, as adjusted for hedging and other fixed price contracts in effect, to
the Partnership's estimated share of future production from proved oil and gas
reserves. The average prices utilized in the calculation of the standardized
measure of discounted future net cash flows at December 31, 1997 were $17.54 per
barrel of oil and $2.49 per Mcf of gas. Future production and development costs
were computed by applying year-end costs to future years. As the Partnership 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 the Partnership's opinion, this standardized measure is not a
representative measure of fair market value, and the standardized measure
presented for the Partnership's proved oil and 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,
------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows......................................... $104,192 $206,311 $193,593
Future production costs..................................... 15,895 13,019 12,004
Future development costs.................................... 10,463 5,328 33,007
Future income tax expenses.................................. -- -- --
-------- -------- --------
Future net cash flows....................................... 77,834 187,964 148,582
Annual discount at 10% rate................................. 10,468 32,326 33,412
-------- -------- --------
Standardized measure of discounted future net cash flows.... $ 67,366 $155,638 $115,170
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------
PROVED PROVED
DEVELOPED UNDEVELOPED TOTAL
--------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Undiscounted estimated future net cash flows from proved
reserves before income taxes.............................. $75,635 $ 2,199 $77,834
======= ======= =======
Present value of estimated future net cash flows from proved
reserves before income taxes, discounted at 10%........... $65,688 $ 1,678 $67,366
======= ======= =======
</TABLE>
The following are the principal sources of change in the standardized
measure (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Beginning of year........................................... $155,638 $115,170 $ 6,734
Sales and transfers of oil and gas produced, net of
production costs....................................... (53,492) (40,420) (1,685)
Net changes in prices and production costs................ (35,645) 45,358 (156)
Extensions, discoveries and improved recovery, less
related costs.......................................... -- 17,077 --
Oil and gas development costs incurred during the year.... 11,140 57,501 12,865(a)
Changes in estimated future development costs............. (12,439) (29,421) --
Revisions of previous quantity estimates.................. (3,817) (19,686) (176)
Purchase of reserves in place............................. -- -- 97,188(b)
Accretion of discount..................................... 15,564 11,517 673
Changes in production rates, timing and other............. (9,583) (1,458) (273)
-------- -------- --------
End of year................................................. $ 67,366 $155,638 $115,170
======== ======== ========
</TABLE>
- ---------------
(a) Excludes aggregate capital costs of $62,900,000 attributable to
multipurpose platforms completed during 1995 at Viosca Knoll Block 817 and
Garden Banks Block 72 which are to function as both drilling and production
platforms as well as pipeline junction platforms for the Partnerships'
transportation operations.
(b) See Note 3 for discussion of Purchase and Sale Agreement with Tatham
Offshore.
F-44
<PAGE> 167
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18 -- SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
<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)
Net income (loss) per Unit...... $ 0.32(b) $ (0.58)(b) $ 0.12(b) $ 0.08 $ (0.06)
Weighted average number of Units
outstanding................... 24,367 24,367 24,367 24,367 24,367
Distributions declared per
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.............................. $10,910 $ 9,161 $10,006 $ 8,615 $38,692
Net income 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 Unit......... $ 0.325 $ 0.35 $ 0.375 $ 0.40 $ 1.45
</TABLE>
<TABLE>
<CAPTION>
YEAR 1995
---------------------------------------------------------
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................................. $ 8,475 $10,800 $12,266 $10,452 $41,993
Gross profit(a)......................... $ 5,415 $ 7,873 $ 9,372 $ 6,951 $29,611
Net income.............................. $ 3,932 $ 7,130 $ 7,255 $ 5,628 $23,945
Net income per Unit..................... $ 0.16 $ 0.29 $ 0.29 $ 0.23 $ 0.97
Weighted average number of Units
outstanding........................... 24,367 24,367 24,367 24,367 24,367
Distributions declared per Unit......... $ 0.30 $ 0.30 $ 0.30 $ 0.30 $ 1.20
</TABLE>
- ---------------
(a) Represent revenue less operating and depreciation, depletion and
amortization expenses.
(b) Restated to properly reflect the allocation of net income (loss) resulting
from Incentive Distributions to the general partner. Previously, the
Partnership had reported net income (loss) of $0.36 per Unit, ($0.64) per
Unit and $0.13 per Unit for the quarters ended March 31, June 30 and
September 30, respectively.
F-45
<PAGE> 168
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) as of December 31, 1997 and 1996, and the results
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 in accordance with generally accepted auditing standards which require
that we plan and perform the audits 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.
PRICE WATERHOUSE LLP
Houston, Texas
March 2, 1998
F-46
<PAGE> 169
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
BALANCE SHEET
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------
1998 1997 1996
------------- -------- -------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash...................................................... $ 1,872 $ 135 $ 417
Accounts receivable....................................... 4,037 2,658 2,998
Accounts receivable from affiliates....................... 10 561 1,134
-------- -------- -------
Total current assets................................... 5,919 3,354 4,549
-------- -------- -------
Property, plant and equipment:
Pipelines................................................. 107,810 103,121 67,254
Construction-in-progress.................................. -- 1,449 8,326
Other..................................................... 77 24 24
-------- -------- -------
107,887 104,594 75,604
Less: Accumulated depreciation............................ (9,731) (6,886) (4,496)
-------- -------- -------
Property, plant and equipment, net..................... 98,156 97,708 71,108
-------- -------- -------
Debt issue costs, net....................................... 241 296 300
-------- -------- -------
Total assets...................................... $104,316 $101,358 $75,957
======== ======== =======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable.......................................... $ 687 $ 3,841 $ 1,904
Accounts payable to affiliates............................ 1,048 851 338
Accrued liabilities....................................... 44 6,588 260
-------- -------- -------
Total current liabilities.............................. 1,779 11,280 2,502
Provision for negative salvage.............................. 319 256 173
Notes payable............................................... 66,200 52,200 33,300
-------- -------- -------
68,298 63,736 35,975
-------- -------- -------
Commitments and contingencies (Note 5)
Partners' capital:
VK-Deepwater.............................................. 18,009 18,811 19,991
EPEC Deepwater............................................ 18,009 18,811 19,991
-------- -------- -------
36,018 37,622 39,982
-------- -------- -------
Total liabilities and partners' capital........... $104,316 $101,358 $75,957
======== ======== =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-47
<PAGE> 170
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- --------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Transportation services..................... $20,746 $16,171 $23,128 $13,923 $7,107
Oil and gas sales........................... 470 -- -- -- --
------- ------- ------- ------- ------
21,216 16,171 23,128 13,923 7,107
------- ------- ------- ------- ------
Costs and expenses:
Operating expenses.......................... 1,789 1,302 1,990 298 403
Depreciation................................ 2,907 1,791 2,474 2,269 2,224
General and administrative expenses......... 127 100 125 126 118
------- ------- ------- ------- ------
4,823 3,193 4,589 2,693 2,745
------- ------- ------- ------- ------
Operating income.............................. 16,393 12,978 18,539 11,230 4,362
Interest income............................... 34 14 40 -- --
Interest and other financing costs............ (3,131) (1,374) (1,959) (90) --
------- ------- ------- ------- ------
Net income.................................... $13,296 $11,618 $16,620 $11,140 $4,362
======= ======= ======= ======= ======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-48
<PAGE> 171
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 13,296 $ 11,618 $ 16,620 $ 11,140 $ 4,362
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 2,907 1,791 2,474 2,269 2,224
Amortization of debt issue costs........................ 56 56 73 -- --
Changes in operating working capital:
(Increase) decrease in accounts receivable............ (1,379) (604) 340 (1,462) (1,142)
Decrease (increase) in accounts receivable from
affiliates.......................................... 551 659 573 (1,046) (88)
(Decrease) increase in accounts payable............... (3,154) (761) 1,937 1,557 213
Increase (decrease) in accounts payable to
affiliates.......................................... 197 461 513 (2,312) 915
(Decrease) increase in accrued liabilities............ (6,544) (9) 6,328 (251) 511
-------- -------- -------- -------- -------
Net cash provided by operating activities........... 5,930 13,211 28,858 9,895 6,995
-------- -------- -------- -------- -------
Cash flows from investing activities:
Additions to pipeline assets.............................. (3,293) (10,380) (27,541) (5,219) --
Construction-in-progress and other........................ -- (699) (1,449) (3,410) (4,918)
-------- -------- -------- -------- -------
Net cash used in investing activities............... (3,293) (11,079) (28,990) (8,629) (4,918)
-------- -------- -------- -------- -------
Cash flows from financing activities:
Proceeds from notes payable............................... 14,000 9,200 18,900 33,300 --
Contributions from partners............................... -- 320 320 3,018 3,472
Distributions to partners................................. (14,900) (11,650) (19,300) (36,900) (5,650)
Debt issue costs.......................................... -- (70) (70) (300) --
-------- -------- -------- -------- -------
Net cash used in financing activities............... (900) (2,200) (150) (882) (2,178)
-------- -------- -------- -------- -------
Net increase (decrease) in cash............................. 1,737 (68) (282) 384 (101)
Cash at beginning of year................................... 135 417 417 33 134
-------- -------- -------- -------- -------
Cash at end of period....................................... $ 1,872 $ 349 $ 135 $ 417 $ 33
======== ======== ======== ======== =======
Cash paid for interest, net of amounts capitalized.......... $ 3,128 $ 1,384 $ 1,878 $ -- $ --
======== ======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-49
<PAGE> 172
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, 1994...................... $ 30,270 $ 30,270 $ 60,540
Contributions............................................. 1,736 1,736 3,472
Distributions............................................. (2,825) (2,825) (5,650)
Net income for the year ended December 31, 1995........... 2,181 2,181 4,362
-------- -------- --------
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 for the year ended December 31, 1996........... 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 for the year ended December 31, 1997........... 8,310 8,310 16,620
-------- -------- --------
Partners' capital at December 31, 1997...................... 18,811 18,811 37,622
Distributions (unaudited)................................. (7,450) (7,450) (14,900)
Net income for the nine months ended September 30, 1998
(unaudited)............................................ 6,648 6,648 13,296
-------- -------- --------
Partners' capital at September 30, 1998 (unaudited)......... $ 18,009 $ 18,009 $ 36,018
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-50
<PAGE> 173
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"), a subsidiary of El Paso
Tennessee Pipeline Co. 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 an approximate 125-mile gathering system
extending from the Main Pass area of the Gulf of Mexico (the "Gulf") through the
Viosca Knoll area and terminating at points of interconnection with existing
interstate pipelines in the South Pass area of the Gulf offshore Louisiana. The
Viosca Knoll System, originally designed to transport 400 million cubic feet
("MMcf") of gas per day, began gathering activities in November 1994. During
1996, Viosca Knoll installed a 6,000 horsepower compressor on Leviathan's
platform to increase throughput capacity to approximately 700 MMcf of gas per
day. In December 1997, Viosca Knoll placed in service an expansion to its system
of approximately 25 miles of 20-inch pipe which enables Viosca Knoll to
transport additional gas volumes from producing areas near the eastern end of
the system.
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, PLANT 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
$2,500,000. 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.
Viosca Knoll adopted 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", effective January 1, 1996. SFAS No. 121 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. Implementation of
SFAS No. 121 did not have a material effect on Viosca Knoll's financial position
or results of operations.
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.
F-51
<PAGE> 174
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 $100.0 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 $25,000,000 to its
partners. Viosca Knoll's ability to borrow money under the facility is subject
to certain customary terms and conditions, including borrowing base limitations.
The Viosca Knoll Credit Facility is secured by all of Viosca Knoll's material
contracts and agreements, receivables and inventory and matures on December 20,
2001. As of December 31, 1997 and 1996, Viosca Knoll had $52,200,000 and
$33,300,000, respectively, outstanding under the Viosca Knoll Credit Facility
bearing interest at an average floating rate of 6.7% and 6.69% per annum. As of
December 31, 1997, approximately $24,800,000 of additional funds are available
under the Viosca Knoll Credit Facility. See Note 7.
Interest and other financing costs incurred by Viosca Knoll totaled
$2,637,000, $90,000 and $0 for the years ended December 31, 1997, 1996 and 1995,
respectively. During the year ended December 31, 1997, Viosca Knoll capitalized
$677,000 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,
1997, 1996 and 1995, Leviathan charged Viosca Knoll $100,000 in accordance with
this management agreement.
Viosca Knoll and EPEC Gas Services, Inc. ("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, 1997, 1996 and 1995, EPEC Gas charged Viosca Knoll $216,000,
$200,000 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, 1997,
F-52
<PAGE> 175
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1996 and 1995, Viosca Knoll reimbursed EPEC Gas $1,282,000, $8,072,000 and $0,
respectively, for construction related costs. For the years ended December 31,
1997, 1996 and 1995, Viosca Knoll reimbursed VK Main Pass $47,000, $254,000 and
$0, respectively, for construction related items.
Included in transportation services revenue during the years ended December
31, 1997, 1996 and 1995 is $3,921,000, $3,229,000 and $86,000, 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, 1997, 1996 and 1995 is $2,116,000, $249,000 and $0,
respectively, of platform access fees and related expenses charged to Viosca
Knoll by VK Main Pass.
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 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------- ------------- ------------
AMOUNT % AMOUNT % AMOUNT %
------- --- ------- --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
Shell Offshore, Inc............................ $11,198 48 $ 5,141 37 $3,297 46
Flextrend Development Company, L.L.C. ......... 3,921 17 3,229 23 86 1
Snyder Oil Company (formerly Delmar Operating,
Inc.)........................................ 3,653 16 3,275 24 2,208 31
Other.......................................... 4,356 19 2,278 16 1,516 22
------- --- ------- --- ------ ---
$23,128 100 $13,923 100 $7,107 100
======= === ======= === ====== ===
</TABLE>
F-53
<PAGE> 176
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, 1997, 1996 and 1995, Viosca
Knoll paid distributions of $19,300,000, $36,900,000 and $5,650,000,
respectively, to its partners. The distributions paid during 1996 include
$25,000,000 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.
F-54
<PAGE> 177
INDEPENDENT AUDITORS' REPORT
To the Management Committee
High Island Offshore System
Detroit, Michigan
We have audited the accompanying statements of financial position of High
Island Offshore System as of December 31, 1997 and 1996, and the related
statements of income, changes in partners' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the High Island
Offshore System'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 audits 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 as of December
31, 1997 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 18, 1998
F-55
<PAGE> 178
HIGH ISLAND OFFSHORE SYSTEM
STATEMENTS OF FINANCIAL POSITION
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $ 876,845 $ 3,285,926
Accounts receivable....................................... 4,709,918 4,717,178
Prepayments............................................... -- 211,842
------------ ------------
Total current assets.............................. 5,586,763 8,214,946
------------ ------------
GAS TRANSMISSION PLANT...................................... 371,321,033 370,130,378
Less -- accumulated depreciation.......................... 359,830,332 355,589,997
------------ ------------
Net gas transmission plant........................ 11,490,701 14,540,381
------------ ------------
DEFERRED CHARGES............................................ 590,189 444,895
------------ ------------
TOTAL ASSETS................................................ $ 17,667,653 $ 23,200,222
============ ============
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 3,077,779 $ 1,850,780
Unamortized rate reductions for excess deferred federal
income taxes........................................... 302,021 302,021
------------ ------------
Total current liabilities......................... 3,379,800 2,152,801
------------ ------------
NON CURRENT LIABILITIES
Unamortized rate reductions for excess deferred federal
income taxes........................................... 198,510 500,334
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 6)...................... -- --
------------ ------------
PARTNERS' EQUITY............................................ 14,089,343 20,547,087
------------ ------------
TOTAL LIABILITIES AND PARTNERS' EQUITY...................... $ 17,667,653 $ 23,200,222
============ ============
</TABLE>
See notes to the financial statements.
F-56
<PAGE> 179
HIGH ISLAND OFFSHORE SYSTEM
STATEMENTS OF INCOME AND STATEMENTS OF PARTNERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
STATEMENTS OF INCOME
OPERATING REVENUES
Transportation services................................... $ 45,414,839 $ 47,052,978
Other..................................................... 502,111 387,764
------------ ------------
Total operating revenues.......................... 45,916,950 47,440,742
------------ ------------
OPERATING EXPENSES
Operation and maintenance................................. 16,975,738 15,548,824
Depreciation.............................................. 4,773,588 4,775,405
Property taxes............................................ 125,368 133,662
------------ ------------
Total operating expenses.......................... 21,874,694 20,457,891
------------ ------------
NET OPERATING INCOME........................................ 24,042,256 26,982,851
------------ ------------
OTHER DEDUCTIONS
Interest on rate refund obligation........................ -- 96,624
------------ ------------
Total other deductions............................ -- 96,624
------------ ------------
NET INCOME.................................................. $ 24,042,256 $ 27,079,475
============ ============
STATEMENTS OF PARTNERS' EQUITY
BALANCE AT BEGINNING OF PERIOD.............................. $ 20,547,087 $ 21,967,612
Net income................................................ 24,042,256 27,079,475
Distributions to partners................................. (30,500,000) (28,500,000)
------------ ------------
BALANCE AT END OF PERIOD.................................... $ 14,089,343 $ 20,547,087
============ ============
</TABLE>
See notes to the financial statements.
F-57
<PAGE> 180
HIGH ISLAND OFFSHORE SYSTEM
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $24,042,256 $27,079,475
Adjustments to reconcile net income to cash provided by
operating activities
Depreciation........................................... 4,773,588 4,775,405
Decrease (increase) in accounts receivable............. 7,260 (353,633)
Decrease in prepayments................................ 211,842 91,444
(Increase) decrease in deferred charges and other...... (145,294) 67,173
Decrease in provision for regulatory matters........... -- (1,050,623)
Increase (decrease) in accounts payable................ 23,821 (1,515,481)
----------- -----------
Cash provided by operating activities............. 28,913,473 29,093,760
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................................... (822,554) (209,863)
----------- -----------
Cash used in investing activities................. (822,554) (209,863)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to partners................................. (30,500,000) (28,500,000)
----------- -----------
Cash used in financing activities................. (30,500,000) (28,500,000)
----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS DURING
PERIOD.................................................... (2,409,081) 383,897
----------- -----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 3,285,926 2,902,029
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 876,845 $ 3,285,926
=========== ===========
</TABLE>
See notes to the financial statements.
F-58
<PAGE> 181
HIGH ISLAND OFFSHORE SYSTEM
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1. FORMATION AND OWNERSHIP STRUCTURE
DESCRIPTION AND BUSINESS PURPOSE
High Island Offshore System ("HIOS" or the "Company" ) is a Delaware
partnership. The partners, each of which has a 20% interest in HIOS, are
companies affiliated with three pipeline companies as follows:
<TABLE>
<CAPTION>
PARTNER 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>
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 partner 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 ($11.4 million for 1997 and
$9.6 million for 1996).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company is regulated by and subject to the regulations and accounting
procedures of 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.
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 1997 and
1996 which include a provision for negative salvage of .2% for offshore
facilities.
INCOME TAXES
Income taxes are the responsibility of the partners and, therefore, are not
reflected in the financial statements of the Company.
F-59
<PAGE> 182
HIGH ISLAND OFFSHORE SYSTEM
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
For purposes of these financial statements, the Company considers
short-term investments to be cash equivalents. The Company had short-term
investments in the amount of $.9 million and $3.1 million at December 31, 1997
and 1996 respectively. The Company made no cash payments for interest in 1997 or
1996.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 financial statements
and notes to the financial statements to conform to the 1997 presentation,
including removing the presentation of income taxes from the financial
statements. The effect of the reclassifications was not material to the
Company's results of operations or financial position.
3. REGULATORY MATTERS
The settlement of Docket No. RP92-50 on December 28, 1992, provided that
HIOS was obligated to refund to its shippers certain reimbursements it received
from U-T Offshore System (UTOS) and from ANR related to charges HIOS paid for
liquid separation, dehydration and natural gas measurement facilities at UTOS'
Cameron Meadows plant and ANR's Grand Chenier plant. UTOS is equally owned by
affiliates of ANR, Natural Gas Pipeline Company of America, and Leviathan Gas
Pipeline Partners L.P. The disposition of reimbursements received by HIOS in
1993 was subject to a revised refund plan filed by HIOS with the FERC. As a
result of a settlement reached in September 1996, HIOS made refunds of $442,000.
On June 11, 1993, HIOS filed a settlement with the FERC to recover the cost
of purchasing line pack gas owned by HIOS' firm shippers to assist it in
complying with FERC Order No. 636. The settlement was approved by the FERC on
October 12, 1993. Under the terms of the settlement, HIOS compensated the firm
shippers who previously owned the line pack through periodic payments totaling
$1,129,834 which HIOS collected from the current shippers via a limited term
surcharge which was placed in effect on November 1, 1993. On April 22, 1996,
HIOS filed with the FERC final reports of line pack surcharge collections and
payments which reflect the completion of the line pack cost recovery and
disbursement process. Revised tariff sheets were also filed to reflect the
removal of the line pack commodity surcharge provisions contained in Section 15
of the General Terms and Conditions and related provisions of HIOS' tariff.
4. 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.
5. RELATED PARTY TRANSACTIONS
Transportation revenues derived from affiliated pipeline companies were
$6.2 million for 1997 and $16.7 million for 1996. Accounts receivable balances
due from these affiliates for transportation services amounted to $0 at December
31, 1997, and $1.5 million at December 31, 1996.
Both ANR and UTOS provide separation, dehydration and measurement services
to HIOS. HIOS incurred charges for these services of $2.5 million in 1997 and
$2.8 million in 1996 from ANR and $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-60
<PAGE> 183
HIGH ISLAND OFFSHORE SYSTEM
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Amounts due to ANR were $1,794,000 and $27,000 at December 31, 1997 and
1996, respectively, and amounts due to UTOS were $134,000 and $86,000 at
December 31, 1997 and 1996, respectively.
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.
F-61
<PAGE> 184
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, 1997
and 1996, and the related statements of income, members' equity and cash flows
for the year ended December 31, 1997 and 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, 1997 and 1996, and the results of its
operations and its cash flows for the year ended December 31, 1997 and the
period from inception (February 14, 1996) through December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 20, 1998
F-62
<PAGE> 185
POSEIDON OIL PIPELINE COMPANY, L.L.C.
BALANCE SHEETS -- DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,671,451 $ 730,480
Crude oil receivable --
Related parties........................................ 21,729,130 27,681,528
Other.................................................. 7,316,566 3,873,550
Construction advances to operator (Note 6)................ -- 7,407,710
Materials, supplies and other............................. 1,045,937 93,643
------------ ------------
Total current assets.............................. 31,763,084 39,786,911
DEBT RESERVE FUND (Notes 2 and 4)........................... 3,717,627 --
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation (Note 3)..................................... 222,337,758 174,922,387
------------ ------------
Total assets...................................... $257,818,469 $214,709,298
============ ============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable --
Related parties........................................ $ 2,602,133 $ 1,556,443
Other.................................................. 5,516,554 622,607
Crude oil payable --
Related parties........................................ 22,534,661 32,195,796
Other.................................................. 5,139,391 3,576,343
Other..................................................... 70,922 87,032
------------ ------------
Total current liabilities......................... 35,863,661 38,038,221
------------ ------------
LONG-TERM DEBT (Note 4)..................................... 120,500,000 84,000,000
------------ ------------
CONTINGENCIES (Note 7)
MEMBERS' EQUITY (Note 1):
Capital contributions..................................... 107,999,320 107,999,320
Capital distributions..................................... (17,999,320) (17,999,320)
Retained earnings......................................... 11,454,808 2,671,077
------------ ------------
Total members' equity............................. 101,454,808 92,671,077
------------ ------------
Total liabilities and members' equity............. $257,818,469 $214,709,298
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-63
<PAGE> 186
POSEIDON OIL PIPELINE COMPANY, L.L.C.
STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997 AND FOR THE PERIOD
FROM INCEPTION (FEBRUARY 14, 1996) THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
CRUDE OIL SALES............................................. $ 310,828,794 $ 176,849,075
CRUDE OIL PURCHASES......................................... (284,667,502) (169,030,526)
------------- -------------
Net sales revenue................................. 26,161,292 7,818,549
------------- -------------
OPERATING COSTS:
Transportation costs...................................... 3,146,736 858,229
Operating expenses........................................ 2,635,717 2,183,375
Depreciation.............................................. 6,463,327 2,176,157
------------- -------------
Total operating costs............................. 12,245,780 5,217,761
------------- -------------
OPERATING INCOME............................................ 13,915,512 2,600,788
OTHER INCOME (EXPENSE):
Interest income........................................... 208,961 339,452
Interest expense.......................................... (5,340,742) (269,163)
------------- -------------
NET INCOME.................................................. $ 8,783,731 $ 2,671,077
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-64
<PAGE> 187
POSEIDON OIL PIPELINE COMPANY, L.L.C.
STATEMENTS OF MEMBERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997 AND FOR THE PERIOD
FROM INCEPTION (FEBRUARY 14, 1996) THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
POSEIDON TEXACO
MARATHON PIPELINE TRADING AND
OIL COMPANY, TRANSPORTATION,
COMPANY L.L.C. 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
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-65
<PAGE> 188
POSEIDON OIL PIPELINE COMPANY, L.L.C.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND FOR THE PERIOD
FROM INCEPTION (FEBRUARY 14, 1996) THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 8,783,731 $ 2,671,077
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation........................................... 6,463,327 2,176,157
Changes in operating assets and liabilities --
Crude oil receivable................................. 2,509,382 (31,555,078)
Materials, supplies and other........................ (952,294) (93,643)
Accounts payable..................................... 5,939,637 2,179,050
Crude oil payable.................................... (8,098,087) 35,772,139
Other current liabilities............................ (16,110) 87,032
------------ -------------
Net cash provided by operating activities......... 14,629,586 11,236,734
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (54,024,948) (110,698,884)
Construction advances to operator, net.................... 7,407,710 (7,407,710)
Proceeds from the sale of property, plant and equipment... 146,250 --
------------ -------------
Net cash used in investing activities............. (46,470,988) (118,106,594)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt............................ 38,000,000 107,000,000
Cash contributions........................................ -- 41,599,660
Repayments of long-term debt.............................. (1,500,000) (23,000,000)
Cash distributions........................................ -- (17,999,320)
Increase in debt reserve fund............................. (3,717,627) --
------------ -------------
Net cash provided by financing activities......... 32,782,373 107,600,340
------------ -------------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 940,971 730,480
CASH AND CASH EQUIVALENTS, beginning of year................ 730,480 --
------------ -------------
CASH AND CASH EQUIVALENTS, end of year...................... $ 1,671,451 $ 730,480
============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest (net of amounts capitalized)....... $ 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 statements.
F-66
<PAGE> 189
POSEIDON OIL PIPELINE COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(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 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% 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% and 33 1/3%, 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% 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%, 36% and 28% of the Company, respectively, and total equity was
$90,000,000.
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.
In April 1996, the Company purchased crude oil line-fill and began
operating Phase I of the pipeline. Phase I consists of 16" and 20" sections of
pipe extending from the Garden Banks Block 72 to Ship Shoal Block 332. Phase II
of the pipeline is a 24" 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" line extending from Caillou Island to the Houma,
Louisiana area, was completed during 1997 and began operations in December 1997.
(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.
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.
F-67
<PAGE> 190
POSEIDON OIL PIPELINE COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 3 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 (Note 4), the
Company is required to maintain a debt reserve account as security on the
outstanding balance. At December 31, 1997 the balance in the account totaled
$3,717,627 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, 1997, approximates the carrying value.
RECLASSIFICATIONS
The Company reclassified the 1996 crude oil inventory balance related to
line-fill to conform to the long-term presentation used in the current year and
to fairly reflect the long-term nature of the asset.
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Rights-of-way............................................ $ 3,218,788 $ 21,824
Line-fill................................................ 11,160,410 12,137,729
Line pipe, line pipe fittings and pipeline
construction........................................... 206,041,256 95,571,124
Pumping and station equipment............................ 4,584,563 3,730,325
Office furniture, vehicles and other equipment........... 67,609 64,000
Construction work-in-progress............................ 5,904,616 65,573,542
------------ ------------
230,977,242 177,098,544
Accumulated depreciation................................. (8,639,484) (2,176,157)
------------ ------------
$222,337,758 $174,922,387
============ ============
</TABLE>
During 1996 and 1997, the Company considered two alternatives for
completing Phase III of the
pipeline; 1) purchasing the Texas Eastern Pipeline which extends from Caillou
Island to Larose, Louisiana,
or 2) constructing a segment of line from Caillou Island to Houma, Louisiana. At
December 31, 1996, the
F-68
<PAGE> 191
POSEIDON OIL PIPELINE COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company capitalized approximately $5.9 million in costs associated with Phase
III of the pipeline. These costs were incurred primarily to evaluate the two
alternatives discussed above. During 1997, the Company's management decided to
construct Phase III of the pipeline rather than purchase the Texas Eastern
Pipeline. At December 31, 1997, approximately $6.4 million is included in
property, plant and equipment as capitalized costs related to the evaluation of
the Phase III alternatives.
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, 1997.
During 1997 and 1996, the Company capitalized approximately $2,151,000 and
$2,597,000, respectively of interest expense into property, plant and equipment.
(4) DEBT
The Company maintains a $150,000,000 revolving credit facility with a group
of banks. The outstanding balance at December 31, 1997 is $120,500,000. 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 twelve months if
a Eurodollar interest rate arrangement is selected (7.19% - 7.22% at December
31, 1997). 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, 1997, 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
primarily used the funds drawn on the revolver for construction costs associated
with Phases II and III of the pipeline.
The revolving Credit Agreement requires the Company to meet certain
financial and non-financial 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 (Note 2) with a balance equal to two times the interest payments made in
the previous quarter under the credit facility. At December 31, 1997, the
Company is in compliance with all covenants.
(5) INCOME TAXES
A provision for income taxes has not been recorded in the accompanying
financial statements because taxes accrue directly to the members. The federal
and state income tax returns of the Company are prepared and filed by the
operator.
(6) TRANSACTIONS WITH RELATED PARTIES
The Company derives a significant portion of its net sales revenue from its
members and other related parties. During 1997 and 1996, the Company generated
approximately $19,790,000 and $4,086,000, respectively of net sales revenue from
related parties.
F-69
<PAGE> 192
POSEIDON OIL PIPELINE COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company paid approximately $454,000 and $401,000 to TTTI in 1997 and
1996, respectively for management, administrative and general overhead. During
1996, the Company paid TTTI and Poseidon approximately $1,034,000 and $1,330,000
for construction management fees for the construction of Phase II and Phase I,
respectively. In 1997, the Company paid construction management fees to TTTI in
connection with the completion of Phase II and Phase III of $1,091,000. As of
December 31, 1997 and 1996, the Company had outstanding advances to TTTI of
approximately $0 and $7,408,000, respectively, in connection with construction
work-in-progress.
During 1996, the Company leased a section of pipe that connected Phase I of
the pipeline into the Eugene Island Pipeline System from a related party. The
line was leased for $100,000 per month. Effective with the operation of Phase II
in January 1997, the Company no longer utilized this section of line. The
Company paid costs of approximately $752,000 associated with restoring this
section of line to its original condition in accordance with the lease agreement
during 1997. Of these costs, $592,000 and $160,000 are included in operating
expenses in the accompanying statement of operations for the years ended
December 31, 1997 and 1996, respectively.
(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-70
<PAGE> 193
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
LEVIATHAN GAS PIPELINE COMPANY, THE GENERAL PARTNER OF
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
The undersigned hereby (a) acknowledges receipt of the Notice of
Special Meeting of Leviathan Gas Pipeline Partners, L.P.,
("Leviathan") to be held at 10:00 a.m. local time, on Friday, March 5,
1999 in Room 1AB on the ninth floor of The Travis Place Building, 1010
Travis, Houston, Texas 77002, access to which is through the Houston
Downtown Tunnel System, (the "Special Meeting"), (b) acknowledges
receipt of the Proxy Statement of Leviathan in connection therewith,
dated February 8, 1999, (c) appoints Grant E. Sims, Keith B. Forman
and D. Mark Leland, or any of them, each with full power to appoint
his substitute, as Proxies of the undersigned, and (d) authorizes the
Proxies to represent and vote, as designated on the reverse side
hereof, all the Units of Leviathan which the undersigned would be
entitled to vote if personally present at the Special Meeting, or any
adjournment thereof.
The undersigned hereby revokes any proxy to vote units held by the
undersigned previously given to the extent such proxy permits the
holder thereof to vote on the matter covered by this Proxy. THE
UNDERSIGNED ACKNOWLEDGES THAT THIS PROXY WHEN PROPERLY EXECUTED WILL
BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED UNITHOLDER
AND THAT, IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED IN FAVOR
OF THE PROPOSAL.
This proxy may be revoked at any time by unitholders of record prior
to the voting of this Proxy by the execution and submission of a
revised proxy or by voting in person at the meeting.
PLEASE MARK, DATE AND SIGN THIS PROXY AND RETURN IT IN THE
ACCOMPANYING POSTPAID ENVELOPE.
(Continued and to be signed on the reverse side.)
The Board of Directors of the General Partner recommends a vote "FOR"
the Proposal.
Approval and ratification of the Proposal and the Proposal
Transaction, as described in the Proxy Statement. The Proposal
Transaction involves Leviathan's (i) acquisition from a subsidiary of
El Paso Energy Corporation ("El Paso") of (a) all of El Paso's
interest in Viosca Knoll Gathering Company ("VK"), a Delaware general
partnership (currently owned 50% by Leviathan and 50% by El Paso),
other than a 1% interest in profits and capital in VK, for
approximately $85.260 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 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 VK, (ii)
issuance of such Common Units to El Paso, (iii) granting certain
registration rights covering such Common Units to El Paso, and (iv)
amendment of Leviathan's partnership agreement to reduce to 55% from
66 2/3% the Unitholder voting percentage required to remove the
general partner without cause.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
-------------------------------
Dated:
-------------------------------
Signature(s) of Unitholder(s)
(Executors, administrators,
guardians, trustees, attorneys,
and officers signing for
corporations or other
organizations should give full
title. If a partnership or
jointly owned, each owner
should sign.)
