<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Date of Report June 11, 1999 (Date of earliest event reported June 1, 1999)
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 1-11680 76-0396023
(State of Other Jurisdiction (Commission (I.R.S. Employer
Of Incorporation) File Number) Identification No.)
El Paso Energy Building
1001 Louisiana Street
Houston, Texas
(Address of Principal Executive
Offices)
77002
(Zip Code)
Registrant's Telephone Number, including area code: (713) 420-2131
------------------------------------------------------------------------------
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On January 21, 1999, Leviathan Gas Pipeline Partners, L.P. ("Leviathan")
entered into a Contribution Agreement with El Paso Field Services Company ("El
Paso"), to acquire all of El Paso's interest in Viosca Knoll Gathering Company,
a Delaware general partnership ("VK"), other than a 1% interest in profits and
capital in VK. At the time the Contribution Agreement was executed, Leviathan
and El Paso each beneficially owned a 50% interest in VK. The transactions
contemplated by the Contribution Agreement and related agreements (the "VK
Transactions") were described in Leviathan's Proxy Statement dated February 8,
1999. VK was formed in 1994 to construct, own and operate an unregulated
gathering system designed to serve the Main Pass, Mississippi Canyon and Viosca
Knoll areas of the Gulf of Mexico. The VK system is comprised of (i) an
approximately 94 mile, 20-inch diameter pipeline from a platform in Main Pass
Block 252 owned by Shell Offshore, Inc. 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.
On June 1, 1999 (the "Closing Date"), Leviathan and El Paso consummated the
VK Transactions. In connection therewith, (i) El Paso contributed to VK
$33,350,000, which amount was equal to 50% of the amount then outstanding under
VK's credit facility, (ii) a subsidiary of Leviathan acquired a 49% interest in
VK from a subsidiary of El Paso, (iii) Leviathan paid to a subsidiary of El Paso
$19,930,750 and issued to that subsidiary 2,661,870 Common Units, and (iv) as
required by Leviathan's Amended and Restated Agreement of Limited Partnership
Leviathan Gas Pipeline Company, Leviathan's general partner, contributed
$603,962 to Leviathan in order to maintain its 1% capital account balance.
Additionally, for the six months commencing on the day after the first
anniversary of the Closing Date, Leviathan has the option to acquire the
remaining 1% in profits and capital in VK for a cash payment equal to the sum of
$1,627,000 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 on the Closing Date by issuing additional Common
Units in lieu of a cash payment of $1,740,000.
1
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of business acquired.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Viosca Knoll Gathering
Company (a Delaware general partnership)
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of partners' capital present fairly, in all
material respects, the financial position of Viosca Knoll Gathering Company (a
Delaware general partnership) ("Viosca Knoll") as of December 31, 1998 and 1997,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1998 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
Viosca Knoll's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Houston, Texas
March 19, 1999
2
<PAGE> 4
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------
1999 1998 1997
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,593 $ 155 $ 135
Accounts receivable....................................... 3,356 4,885 2,658
Accounts receivable from affiliates....................... 512 179 561
Other current assets...................................... 415 232 --
-------- -------- --------
Total current assets.............................. 5,876 5,451 3,354
-------- -------- --------
Property and equipment:
Pipelines.............................................. 108,121 108,121 103,121
Construction-in-progress............................... 119 -- 1,449
Other.................................................. 77 77 24
-------- -------- --------
108,317 108,198 104,594
Less: Accumulated depreciation......................... 11,592 10,662 6,886
-------- -------- --------
Property, plant and equipment, net................... 96,725 97,536 97,708
-------- -------- --------
Debt issue costs, net....................................... 203 222 296
-------- -------- --------
Total assets...................................... $102,804 $103,209 $101,358
======== ======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable.......................................... $ 523 $ 414 $ 3,841
Accounts payable to affiliates............................ 292 552 851
Accrued liabilities....................................... 49 55 6,588
-------- -------- --------
Total current liabilities......................... 864 1,021 11,280
Provision for negative salvage.............................. 360 340 256
Notes payable............................................... 66,700 66,700 52,200
-------- -------- --------
67,924 68,061 63,736
-------- -------- --------
Commitments and contingencies
Partners' capital:
VK Deepwater.............................................. 17,440 17,574 18,811
EPEC Deepwater............................................ 17,440 17,574 18,811
-------- -------- --------
34,880 35,148 37,622
-------- -------- --------
Total liabilities and partners' capital........... $102,804 $103,209 $101,358
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
3
<PAGE> 5
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
--------------- ---------------------------
1999 1998 1998 1997 1996
------ ------ ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Transportation services...................... $7,342 $6,804 $28,806 $23,128 $13,923
Oil and natural gas sales.................... 19 223 528 -- --
------ ------ ------- ------- -------
7,361 7,027 29,334 23,128 13,923
------ ------ ------- ------- -------
Costs and expenses:
Operating expenses........................... 229 606 2,877 1,990 298
Depreciation................................. 950 930 3,860 2,474 2,269
General and administrative expenses.......... 41 45 154 125 126
------ ------ ------- ------- -------
1,220 1,581 6,891 4,589 2,693
------ ------ ------- ------- -------
Operating income............................... 6,141 5,446 22,443 18,539 11,230
Interest income................................ 16 11 50 40 --
Interest and other financing costs............. (1,125) (929) (4,267) (1,959) (90)
------ ------ ------- ------- -------
Net income..................................... $5,032 $4,528 $18,226 $16,620 $11,140
====== ====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
4
<PAGE> 6
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------- ------------------------------
1999 1998 1998 1997 1996
------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $ 5,032 $ 4,528 $ 18,226 $ 16,620 $ 11,140
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation............................. 950 930 3,860 2,474 2,269
Amortization of debt issue costs......... 19 18 74 73 --
Changes in operating working capital:
Decrease (increase) in accounts
receivable.......................... 1,529 (1,323) (2,227) 340 (1,462)
(Increase) decrease in accounts
receivable from affiliates.......... (333) 65 382 573 (1,046)
Increase in other current assets....... (183) -- (232) -- --
Increase (decrease) in accounts
payable............................. 109 (2,827) (3,427) 1,937 1,557
(Decrease) increase in accounts payable
to affiliates....................... (260) (194) (299) 513 (2,312)
(Decrease) increase in accrued
liabilities......................... (6) (4,096) (6,533) 6,328 (251)
------- ------- -------- -------- --------
Net cash provided by (used in)
operating activities.............. 6,857 (2,899) 9,824 28,858 9,895
------- ------- -------- -------- --------
Cash flows from investing activities:
Additions to pipeline assets................ -- (641) (3,604) (27,541) (5,219)
Construction-in-progress.................... (119) -- -- (1,449) (3,410)
------- ------- -------- -------- --------
Net cash used in investing
activities........................ (119) (641) (3,604) (28,990) (8,629)
------- ------- -------- -------- --------
Cash flows from financing activities:
Proceeds from notes payable................. -- 7,800 14,500 18,900 33,300
Contributions from partners................. 1,400 -- -- 320 3,018
Distributions to partners................... (6,700) (4,300) (20,700) (19,300) (36,900)
Debt issue costs............................ -- -- -- (70) (300)
------- ------- -------- -------- --------
Net cash (used in) provided by
financing activities.............. (5,300) 3,500 (6,200) (150) (882)
------- ------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................. 1,438 (40) 20 (282) 384
Cash and cash equivalents at beginning of
year........................................ 155 135 135 417 33
------- ------- -------- -------- --------
Cash and cash equivalents at end of period.... $ 1,593 $ 95 $ 155 $ 135 $ 417
======= ======= ======== ======== ========
Cash paid for interest, net of amounts
capitalized................................. $ 1,113 $ 898 $ 4,180 $ 1,878 $ --
======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
5
<PAGE> 7
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
STATEMENT OF PARTNERS' CAPITAL
(In thousands)
<TABLE>
<CAPTION>
VK EPEC
DEEPWATER DEEPWATER TOTAL
--------- --------- ---------
<S> <C> <C> <C>
Partners' capital at December 31, 1995...................... $ 31,362 $ 31,362 $ 62,724
Contributions............................................. 1,509 1,509 3,018
Distributions............................................. (18,450) (18,450) (36,900)
Net income................................................ 5,570 5,570 11,140
--------- --------- ---------
Partners' capital at December 31, 1996...................... 19,991 19,991 39,982
Contributions............................................. 160 160 320
Distributions............................................. (9,650) (9,650) (19,300)
Net income................................................ 8,310 8,310 16,620
--------- --------- ---------
Partners' capital at December 31, 1997...................... 18,811 18,811 37,622
Distributions............................................. (10,350) (10,350) (20,700)
Net income................................................ 9,113 9,113 18,226
--------- --------- ---------
Partners' capital at December 31, 1998...................... 17,574 17,574 35,148
Contributions (unaudited)................................. 700 700 1,400
Distributions (unaudited)................................. (3,350) (3,350) (6,700)
Net income (unaudited).................................... 2,516 2,516 5,032
--------- --------- ---------
Partners' capital at March 31, 1999 (unaudited)............. $ 17,440 $ 17,440 $ 34,880
========= ========= =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
6
<PAGE> 8
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION:
Viosca Knoll Gathering Company ("Viosca Knoll") is a Delaware general
partnership formed in May 1994 to design, construct, own and operate the Viosca
Knoll Gathering System (the "Viosca Knoll system") and any additional facilities
constructed or acquired pursuant to the Joint Venture Agreement between VK
Deepwater Gathering Company, L.L.C. ("VK Deepwater"), an approximate 99% owned
subsidiary of Leviathan Gas Pipeline Partners, L.P. ("Leviathan"), and EPEC
Deepwater Gathering Company ("EPEC Deepwater"), an indirect subsidiary of El
Paso Energy Corporation ("El Paso"). El Paso, as a result of its merger with
DeepTech International Inc. on August 14, 1998, owns an effective 27.3% interest
in Leviathan. Each of the partners has a 50% interest in Viosca Knoll. Viosca
Knoll is managed by a committee consisting of representatives from each of the
partners. Viosca Knoll has no employees. VK Deepwater is the operator of Viosca
Knoll and has contracted with an affiliate of EPEC Deepwater to maintain the
pipeline and with Leviathan to perform financial, accounting and administrative
services.
The Viosca Knoll system is a non-jurisdictional gathering system designed
to serve the Main Pass, Mississippi Canyon and Viosca Knoll areas of the Gulf of
Mexico (the "Gulf"), southeast of New Orleans, offshore Louisiana. The Viosca
Knoll system, has a maximum design capacity of approximately 1 billion cubic
feet of natural gas per day and consists of 125 miles of predominantly 20-inch
natural gas pipelines and a large compressor. The Viosca Knoll system provides
its customers access to the facilities of a number of major interstate
pipelines, including Tennessee Gas Pipeline Company, Columbia Gulf Transmission
Company, Southern Natural Gas Company, Transcontinental Gas Pipe Line and Destin
Pipeline Company.
The base system, comprised of (i) an approximately 94 mile, 20-inch
diameter pipeline from a platform in Main Pass Block 252 owned by Shell
Offshore, Inc. ("Shell") to a pipeline owned by Tennessee Gas Pipeline Company
at South Pass Block 55 and (ii) a six mile, 16-inch diameter pipeline from an
interconnection with the 20-inch diameter pipeline at Viosca Knoll Block 817 to
a pipeline owned by Southern Natural Gas Company at Main Pass Block 289, was
constructed in 1994. A 7,000 horsepower compressor was installed in 1996 on
Leviathan's Viosca Knoll 817 platform to allow Viosca Knoll to effect deliveries
at the operating pressures on downstream interstate pipelines with which it is
interconnected. The additional capacity created by such compression allowed
Viosca Knoll to transport new natural gas volumes during 1997 from the
Shell-operated Southeast Tahoe and Ram-Powell fields as well as other new
deepwater projects in the area. In 1997, Viosca Knoll added approximately 25
miles of parallel 20-inch pipelines.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES:
Cash and cash equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Property and equipment
Gathering pipelines and related facilities are recorded at cost and
depreciated on a straight-line basis over an estimated useful life of 30 years.
Viosca Knoll also calculates a negative salvage provision using the
straight-line method based on an estimated cost of abandoning the pipeline of
$2.5 million. Other property, plant and equipment is depreciated on a
straight-line basis over an estimated useful life of five years. Maintenance and
repair costs are expensed as incurred; additions, improvements and replacements
7
<PAGE> 9
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
are capitalized. Retirements, sales and disposals of assets are recorded by
eliminating the related costs and accumulated depreciation of the disposed
assets with any resulting gain or loss reflected in income.
Viosca Knoll evaluates impairment of its property and equipment in
accordance with Statement of Financial Accounting Standard ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" which requires recognition of impairment losses on long-lived
assets if the carrying amount of such assets, grouped at the lowest level for
which there are identifiable cash flows that are largely independent of the cash
flows from other assets, exceeds the estimated undiscounted future cash flows of
such assets. Measurement of any impairment loss will be based on the fair value
of the assets.
Capitalization of interest
Interest and other financing costs are capitalized in connection with
construction activities as part of the cost of the asset and amortized over the
related asset's estimated useful life.
Debt issue costs
Debt issue costs are capitalized and amortized over the life of the related
indebtedness. Any unamortized debt issue costs are expensed at the time the
related indebtedness is repaid or otherwise terminated.
Revenue recognition
Revenue from pipeline transportation of natural gas is recognized upon
receipt of the natural gas into the pipeline system. Revenue from demand charges
is recognized in the period the services are provided. Revenue from oil and
natural gas sales is recognized upon delivery in the period of production.
Income taxes
Viosca Knoll is not a taxable entity. Income taxes are the responsibility
of the partners and are not reflected in these financial statements. However,
the taxable income or loss resulting from the operations of Viosca Knoll will
ultimately be included in the federal income tax returns of the partners and may
vary substantially from income or loss reported for financial statement
purposes.
Estimates
The preparation of Viosca Knoll's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions, including those related to potential environmental liabilities
and future regulatory status, that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Management believes that the estimates are reasonable.
Recent Pronouncements
In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." This statement
defines start-up activities, requires start-up and organization costs to be
expensed as incurred and requires that any such costs that exist on the balance
sheet be expensed upon adoption of this pronouncement. The statement is
effective for fiscal years beginning after December 15, 1998. Viosca Knoll
adopted the provisions of this statement on January 1, 1999 resulting in no
material impact on its financial position or results of operations.
8
<PAGE> 10
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," to be effective
for all fiscal years beginning after June 15, 1999. SFAS No. 133 requires that
entities recognize all derivative instruments as either assets or liabilities on
the balance sheet and measure those instruments at fair value. The accounting
for changes in the fair value of a derivative will depend on the intended use of
the derivative and the resulting designation. Viosca Knoll is currently
evaluating the impact, if any, of SFAS No. 133.
NOTE 3 -- INDEBTEDNESS:
In December 1996, Viosca Knoll entered into a revolving credit facility
(the "Viosca Knoll Credit Facility") with a syndicate of commercial banks to
provide up to $100 million for the addition of compression and expansion to the
Viosca Knoll System and for other working capital needs of Viosca Knoll,
including providing a one time distribution not to exceed $25 million to its
partners (Note 7). Viosca Knoll's ability to borrow money under the facility is
subject to certain customary terms and conditions, including borrowing base
limitations. The Viosca Knoll Credit Facility is collateralized by all of Viosca
Knoll's material contracts and agreements, receivables and inventory and matures
on December 20, 2001. As of March 31, 1999, December 31, 1998 and 1997, Viosca
Knoll had $66,700,000, $66,700,000 and $52,200,000, respectively, outstanding
under the Viosca Knoll Credit Facility bearing interest at an average floating
rate of 6.0%, 6.7% and 6.7% per annum. As of March 31, 1999 and December 31,
1998, approximately $33,300,000 of additional funds are available under the
Viosca Knoll Credit Facility. See Note 8.
Interest and other financing costs totaled $1,125,000 (unaudited),
$4,278,000, $2,710,000 and $90,000 for the three months ended March 31, 1999 and
for the years ended December 31, 1998, 1997 and 1996, respectively. During the
three months ended March 31, 1999 and the years ended December 31, 1998 and
1997, Viosca Knoll capitalized $0 (unaudited), $11,000 and $751,000,
respectively, of such costs in connection with construction projects in
progress.
NOTE 4 -- RELATED PARTY TRANSACTIONS:
Pursuant to a management agreement dated May 24, 1994 between Viosca Knoll
and Leviathan, Leviathan charges Viosca Knoll a base fee of $100,000 annually in
exchange for Leviathan providing financial, accounting and administrative
services on behalf of Viosca Knoll. For each of the years ended December 31,
1998, 1997 and 1996, Leviathan charged Viosca Knoll $100,000 in accordance with
this management agreement.
Viosca Knoll and EPEC Gas Services Company ("EPEC Gas"), an affiliate of
EPEC Deepwater, entered into a construction and operation agreement whereby EPEC
Gas provided personnel to manage the construction and operation of the Viosca
Knoll System in exchange for a one-time management fee of $3,000,000 and
provides routine maintenance services on behalf of Viosca Knoll. For the years
ended December 31, 1998, 1997 and 1996, EPEC Gas charged Viosca Knoll $415,000,
$216,000 and $200,000, respectively, with respect to its operating and
maintenance services.
In addition, EPEC Gas and VK-Main Pass Gathering Company, L.L.C. ("VK Main
Pass"), a subsidiary of Leviathan, acquired and installed a compressor on the
Viosca Knoll 817 Platform, which is owned by Leviathan. The compressor was
placed in service in January 1997. For the years ended December 31, 1998, 1997
and 1996, Viosca Knoll reimbursed EPEC Gas $1,762,000, $1,282,000 and
$8,072,000, respectively, for construction related costs. For the years ended
December 31, 1998, 1997 and 1996, Viosca Knoll reimbursed VK Main Pass $152,000,
$47,000 and $254,000, respectively, for construction related items.
9
<PAGE> 11
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Included in transportation services revenue during the years ended December
31, 1998, 1997 and 1996 is $1,881,000, $3,921,000 and $3,229,000, respectively,
of revenue earned from transportation services provided to Flextrend Development
Company, L.L.C., a subsidiary of Leviathan. Included in operating expenses for
the years ended December 31, 1998, 1997 and 1996 is $2,447,000, $2,116,000 and
$249,000, respectively, of platform access fees and related expenses charged to
Viosca Knoll by VK Main Pass.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES:
In the ordinary course of business, Viosca Knoll is subject to various laws
and regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect the financial position or operations of
Viosca Knoll.
The Viosca Knoll system is a gathering facility and as such is not
currently subject to rate and certificate regulation by the Federal Energy
Regulatory Commission (the "FERC"). However, the FERC has asserted that it has
rate jurisdiction under the Natural Gas Act of 1938, as amended (the "NGA"),
over gathering services performed through gathering facilities owned by a
natural gas company (as defined in the NGA) when such services were performed
"in connection with" transportation services provided by such natural gas
company. Whether, and to what extent, the FERC should exercise any NGA rate
jurisdiction it may be found to have over gathering facilities owned either by
natural gas companies or affiliates thereof is subject to case-by-case review by
the FERC. Based on current FERC policy and precedent, Viosca Knoll does not
anticipate that the FERC will assert or exercise any NGA rate jurisdiction over
the Viosca Knoll system so long as the services provided through such system are
not performed "in connection with" transportation services performed through any
of the regulated pipelines of either of the partners.
NOTE 6 -- MAJOR CUSTOMERS:
Transportation revenue from major customers was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Shell Offshore, Inc........................ $10,836 38 $11,198 48 $ 5,141 37
Snyder Oil Corporation..................... 4,801 17 3,653 16 3,275 24
Exxon Corporation.......................... 3,354 12 498 2 -- --
Amoco Production Company................... 3,292 11 475 2 -- --
Flextrend Development Company, L.L.C. ..... 1,881 7 3,921 17 3,229 23
Other...................................... 4,642 15 3,383 15 2,278 16
------- --- ------- --- ------- ---
$28,806 100 $23,128 100 $13,923 100
======= === ======= === ======= ===
</TABLE>
NOTE 7 -- CASH DISTRIBUTIONS:
In March 1995, Viosca Knoll began making monthly distributions of 100% of
its Available Cash, as defined in the Joint Venture Agreement, to the partners.
Available Cash consists generally of all the cash receipts of Viosca Knoll less
all of its cash disbursements less reasonable reserves, including, without
limitation, those necessary for working capital and near-term commitments and
obligations or other contingencies of Viosca Knoll. Viosca Knoll expects to make
distributions of Available Cash within 15 days after the end of each month to
its partners. During the three months ended March 31, 1999 and the years ended
December 31, 1998, 1997 and 1996, Viosca Knoll paid distributions of $6,700,000
(unaudited), $20,700,000, $19,300,000 and $36,900,000, respectively, to its
partners. The distributions paid during 1996 include $25 million of funds
provided from borrowings under the Viosca Knoll Credit Facility.
10
<PAGE> 12
VIOSCA KNOLL GATHERING COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Viosca Knoll Credit Facility Agreement includes a covenant by which
distributions are limited to the greater of net income or 90% of earnings before
interest and depreciation as defined in the agreement.
NOTE 8 -- SUBSEQUENT EVENTS:
In January 1999, EPEC Deepwater announced the sale of (a) all of its
interest in Viosca Knoll, other than a 1% interest in profits and capital in
Viosca Knoll, to VK Deepwater for approximately $85.26 million (subject to
adjustment), comprised of 25% cash (up to a maximum of $21.315 million) and 75%
common units of Leviathan (up to a maximum of 3,205,263 common units), the
actual number of which will depend on the average closing price of the common
units during the applicable trading reference period, and (b) an option to
acquire the remaining 1% interest in the profits and capital in Viosca Knoll.
Prior to closing, Viosca Knoll must obtain consent from its lenders under
the Viosca Knoll Credit Facility and Leviathan must obtain consent from its
lenders as well. At such time, either or both of such credit facilities may be
restructured.
At the closing, which is anticipated to be during the second quarter of
1999, (i) EPEC Deepwater will contribute to Viosca Knoll an amount of money
equal to 50% of the amount then outstanding under the Viosca Knoll Credit
Facility (currently a total of $66.7 million is outstanding) and (ii) VK
Deepwater, through Leviathan, will pay El Paso and EPEC Deepwater the cash and
common units discussed above. Then, during the six month period commencing on
the day after the first anniversary of that closing date, VK Deepwater would
have the option to acquire the remaining 1% in profits and capital in Viosca
Knoll for a cash payment equal to the sum of $1.74 million plus the amount of
additional distributions which would have been paid, accrued or been in arrears
had VK Deepwater acquired the remaining 1% of Viosca Knoll at the initial
closing by issuing additional common units of Leviathan in lieu of a cash
payment of $1.74 million.
11
<PAGE> 13
(b) Pro forma financial information.
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 three months ended March 31, 1999 and for the year ended December
31, 1998 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 "Transactions"). The balance sheet was adjusted by giving effect to the
Transactions as if they had occurred on March 31, 1999 and the statements of
operations for the three months ended March 31, 1999 and for the year ended
December 31, 1998 were adjusted by giving effect to the Transactions as if they
had occurred on January 1, 1999 and January 1, 1998, respectively.
Leviathan, a publicly held Delaware master limited partnership, is
primarily engaged in the gathering and transportation and production of natural
gas and crude oil in the Gulf of Mexico (the "Gulf"). Through its subsidiaries
and joint ventures, Leviathan owns interests in certain significant assets,
including (i) eight natural gas pipelines, (ii) a crude oil pipeline system,
(iii) six strategically-located multi-purpose platforms, (iv) a dehydration
facility, (v) four producing oil and natural gas properties and (vi) a 100%
working interest in a non-producing oil and natural gas unit comprised of Ewing
Bank Blocks 958, 959, 1002 and 1003.
The unaudited pro forma financial information gives effect to the following
Transactions:
(1) The sale of $175.0 million of Senior Subordinated Notes due May
2009 (the "Notes"). Proceeds from the Notes will be used (a) to fund the
cash portion of the acquisition of the additional interest in Viosca Knoll
Gathering Company ("Viosca Knoll") as described in (2) and (3) below, (b)
to repay outstanding principal under Viosca Knoll's credit facility
discussed in (4) below, (c) to reduce the balance outstanding on
Leviathan's $375.0 million credit facility, as amended and restated, (the
"Credit Facility") and (d) to pay fees and expenses incurred in connection
with the sale of the Notes and the amendment and restatement of the Credit
Facility.
(2) The Boards of Directors of Leviathan Gas Pipeline Company
("General Partner"), a wholly owned indirect subsidiary of El Paso Energy
Corporation ("El Paso Energy") and general partner of Leviathan, and El
Paso Energy and the unitholders of Leviathan have approved, subject to the
execution of definitive agreements, the acquisition by Leviathan of an
additional 49.0% interest in Viosca Knoll from El Paso Energy (currently
owned 50.0% by Leviathan and 50.0% by El Paso Energy), for approximately
$85.3 million (subject to adjustment for 49% of Viosca Knoll's
distributions to its partners from the effective date of January 1, 1999
through closing).
(3) The total consideration of $85.3 million consists of 25% cash (up
to a maximum of $21.3 million) and 75% common units of Leviathan (at least
2,647,826 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 $64.0 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. During the six month period
commencing on the day after the first anniversary of the closing date of
Leviathan would have an option to acquire the remaining 1.0% interest in
Viosca Knoll for a cash payment equal to the sum of $1.7 million plus the
amount of additional distributions (paid, payable or in arrears) which
would have been paid, accrued or been in arrears had Leviathan
12
<PAGE> 14
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
acquired the remaining 1.0% of Viosca Knoll at the initial closing by
issuing additional common units in lieu of a cash payment of $1.7 million.
(4) Immediately prior to closing, El Paso Energy will contribute to
Viosca Knoll an amount of cash equal to 50.0% 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.
(5) Additionally, at the closing, as required by Leviathan's Amended
and Restated Agreement of Limited Partnership, the General Partner will
contribute approximately $620,000 to Leviathan in order to maintain its
1.0% capital account balance.
(6) The amendment of the Credit Facility to extend its maturity from
December 1999 to May 2002.
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 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 offering memorandum.
13
<PAGE> 15
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------ PRO FORMA
LEVIATHAN VIOSCA KNOLL ADJUSTMENTS PRO FORMA
--------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 6,371 $ 1,593 $ 175,000 (a) $ 7,835
(6,500)(a)
33,350 (b)
(33,350)(c)
(21,244)(d)
621 (e)
(33,350)(g)
(3,250)(h)
(111,406)(i)
Accounts receivable............................. 4,494 3,868 -- 8,362
Other current assets............................ 169 415 -- 584
-------- -------- --------- --------
Total current assets..................... 11,034 5,876 (129) 16,781
-------- -------- --------- --------
Property and equipment, net....................... 240,570 96,725 32,619 (f) 369,914
Equity investments................................ 187,563 -- 82,727 (d) 170,123
(100,167)(f)
Other noncurrent assets........................... 4,073 203 6,500 (a) 13,823
3,250 (h)
(203)(g)
-------- -------- --------- --------
Total assets............................. $443,240 $102,804 $ 24,597 $570,641
======== ======== ========= ========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities:
Accounts payable and accrued liabilities........ $ 7,125 $ 864 $ -- $ 7,989
Notes payable, current portion.................. 355,000 -- (355,000)(h) --
-------- -------- --------- --------
Total current liabilities................ 362,125 864 (355,000) 7,989
Notes payable..................................... -- 66,700 (33,350)(c) 243,594
(33,350)(g)
355,000 (h)
(111,406)(i)
Long-term debt.................................... -- -- 175,000 (a) 175,000
Deferred income taxes............................. 908 -- -- 908
Other noncurrent liabilities...................... 10,401 360 -- 10,761
-------- -------- --------- --------
Total liabilities........................ 373,434 67,924 (3,106) 438,252
-------- -------- --------- --------
Minority interests................................ (1,118) -- 682 (f) (439)
(3)(g)
-------- -------- --------- --------
Partners' capital:
Preference unitholders.......................... 7,134 -- (4)(g) 7,130
Common unitholders.............................. 81,487 -- 61,483 (d) 142,812
(158)(g)
General Partner................................. (17,697) -- 621 (e) (17,114)
(38)(g)
Viosca Knoll partners' capital.................. -- 34,880 33,350 (b) --
(68,230)(f)
-------- -------- --------- --------
70,924 34,880 27,024 132,828
-------- -------- --------- --------
Total liabilities and partners'
capital................................ $443,240 $102,804 $ 24,597 $570,641
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
14
<PAGE> 16
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------ PRO FORMA
LEVIATHAN VIOSCA KNOLL ADJUSTMENTS PRO FORMA
--------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
Oil and natural gas sales.................... $ 6,805 $ 19 $ -- $ 6,824
Gathering, transportation and platform
services.................................. 4,373 7,342 -- 11,715
Equity in earnings........................... 10,701 -- (2,516)(d) 8,185
------- ------- -------- --------
21,879 7,361 (2,516) 26,724
------- ------- -------- --------
Costs and expenses:
Operating expenses........................... 2,594 229 -- 2,823
Depreciation, depletion and amortization..... 6,719 950 322 (e) 7,991
General and administrative expenses and
management fee............................ 3,130 41 -- 3,171
------- ------- -------- --------
12,443 1,220 322 13,985
------- ------- -------- --------
Operating income............................... 9,436 6,141 (2,838) 12,739
Interest and other income...................... 103 16 -- 119
Interest and other financing costs............. (6,102) (1,125) 1,125 (a) (9,190)
6,102 (b)
(4,539)(c)
(160)(c)
(4,491)(f)
Minority interests in income................... (37) -- (64)(g) (101)
------- ------- -------- --------
Income before income taxes..................... 3,400 5,032 (4,865) 3,567
Income tax benefit............................. 99 -- -- 99
------- ------- -------- --------
Net income..................................... $ 3,499 $ 5,032 $ (4,865) $ 3,666
======= ======= ======== ========
Weighted average number units outstanding...... 24,367 2,819 (h) 27,186
======= ======== ========
Basic and diluted net income per unit.......... $ 0.12 $ 0.11
======= ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
15
<PAGE> 17
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------ PRO FORMA
LEVIATHAN VIOSCA KNOLL ADJUSTMENTS PRO FORMA
--------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
Oil and natural gas sales.................... $31,411 $ 528 $ -- $ 31,939
Gathering, transportation and platform
services.................................. 17,320 28,806 -- 46,126
Equity in earnings........................... 26,724 -- (9,113)(d) 17,611
------- ------- -------- --------
75,455 29,334 (9,113) 95,676
------- ------- -------- --------
Costs and expenses:
Operating expenses........................... 11,369 2,877 -- 14,246
Depreciation, depletion and amortization..... 29,267 3,860 1,431 (e) 34,558
Impairment, abandonment and other............ (1,131) -- -- (1,131)
General and administrative expenses and
management fee............................ 16,189 154 -- 16,343
------- ------- -------- --------
55,694 6,891 1,431 64,016
------- ------- -------- --------
Operating income............................... 19,761 22,443 (10,544) 31,660
Interest and other income...................... 771 50 -- 821
Interest and other financing costs............. (20,242) (4,267) 4,267 (a) (32,579)
20,242 (b)
(18,156)(c)
(650)(c)
(13,773)(f)
Minority interests in income................... (15) -- (221)(g) (236)
------- ------- -------- --------
Income before income taxes..................... 275 18,226 (18,835) (334)
Income tax benefit............................. 471 -- -- 471
------- ------- -------- --------
Net income..................................... $ 746 $18,226 $(18,835) $ 137
======= ======= ======== ========
Weighted average number units outstanding...... 24,367 2,819 (h) 27,186
======= ======== ========
Basic and diluted net income per unit.......... $ 0.02 $ 0.00
======= ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
16
<PAGE> 18
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 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 proceeds from the sale of $175.0 million of Notes and the
payment of $6.5 million of fees and expenses incurred in connection
with the sale of the Notes.
(b) To record the Capital Contribution from El Paso Energy to Viosca Knoll
as described in Transaction (4).
(c) To reduce notes payable of Viosca Knoll using the proceeds from the
Capital Contribution.
(d) To record the purchase of an additional 49.0% interest in Viosca Knoll
from El Paso Energy with a cash payment of $20,494,000 and the issuance
of 2,709,983 common units at $22.6875 per unit, and $750,000 of
estimated acquisition costs. The cash payment is calculated as
$85,260,000 (original purchase price) less $3,283,000 which represents
49.0% of Viosca Knoll's cash distributions to its partners from the
effective date of the Viosca Knoll transaction (January 1, 1999)
through March 31, 1999 multiplied by 25.0%. The $22.6875 unit price is
based on the closing sales price of Leviathan's common units on May 14,
1999.
(e) To record the additional capital contribution (1.0%) by the General
Partner described in the Transaction (5).
(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.
(g) To repay the remaining outstanding principal balance under Viosca
Knoll's credit facility, cancel this credit facility and write off the
associated debt issue costs.
(h) To pay fees and expenses associated with the amendment and extension of
the Credit Facility and reclassify the outstanding balance of the
Credit Facility as long-term.
(i) To reduce the balance outstanding under the Credit Facility using the
remaining proceeds from the Notes calculated as follows (in thousands):
<TABLE>
<S> <C>
Proceeds from the Notes........................... $175,000
Fees and expenses related to sale of the Notes.... (6,500)
Cash portion of the acquisition of the additional
Viosca Knoll interest............................ (20,494)
Repayment and cancellation of Viosca Knoll's
credit facility.................................. (33,350)
Fees and expenses associated with the amended and
restated Credit Facility......................... (3,250)
--------
Remaining proceeds from the Notes used to
reduce Credit Facility...................... $111,406
========
</TABLE>
STATEMENT OF OPERATIONS
(a) To reverse interest expense related to Viosca Knoll's credit facility
which was repaid with the proceeds from the Capital Contribution and
the Notes.
(b) To reverse Leviathan's historical interest expense.
(c) To record interest expense on the Notes at a rate of 10 3/8% per annum
and the amortization of debt issue costs related to the Notes over ten
years.
17
<PAGE> 19
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) To reverse Leviathan's historical equity in earnings of Viosca Knoll.
(e) 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.
(f) To record interest expense and amortization costs related to the
amended and restated Credit Facility calculated as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
- ---------------------------------
<S> <C>
Credit Facility debt issue costs:
Balance of debt issue costs as of January 1,
1999........................................... $ 2,712
Amendment and restatement fees................... 3,250
--------
5,962
Life of Credit Facility.......................... 3 years
Quarterly debt issue cost amortization........... $ 497(x)
========
</TABLE>
<TABLE>
<S> <C>
Credit Facility interest expense:
Outstanding balance as of January 1, 1999........ $338,000
Reduction of Credit Facility using proceeds from
the Notes...................................... (111,406)
--------
Outstanding balance at beginning of quarter...... 226,594
Quarterly borrowings............................. 17,000
--------
Outstanding balance at end of quarter............ $243,594
Average outstanding balance...................... $235,094
Assumed average interest rate.................... 7.5%
Assumed quarterly interest expense................. $ 4,408
Less capitalized interest.......................... (439)
Commitment fees.................................... 25
Amortization of debt issue costs................... 497 see(x) above
--------
Adjusted interest expense.......................... $ 4,491
========
</TABLE>
18
<PAGE> 20
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------
<S> <C>
Credit Facility debt issue costs:
Balance of debt issue costs as of January 1, 1998......... $3,749
Amendment and restatement fees............................ 3,250
------
6,999
Life of Credit Facility................................... 3 years
------
Annual debt issue cost amortization....................... $2,333(y)
======
</TABLE>
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL
----------- ----------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C>
Credit Facility interest
expense:
Outstanding balance as
of January 1, 1998... $ 238,000
Reduction of Credit
Facility using
proceeds from the
Notes................ (110,585)(1)
---------
Outstanding balance at
beginning of
quarter.............. 127,415 $140,415 $159,415 $180,415
Quarterly borrowings... 13,000 19,000 21,000 47,000
--------- -------- -------- --------
Outstanding balance at
end of quarter....... $ 140,415 $159,415 $180,415 $227,415
Average outstanding
balance.............. $ 133,915 $149,915 $169,915 $203,915
Assumed average
interest rate........ 7.5% 7.5% 7.5% 7.5%
Assumed quarterly
interest expense..... $ 2,511 $ 2,811 $ 3,186 $ 3,823 $12,331
Less capitalized interest....................................................... (1,066)
Commitment fees................................................................. 175
Amortization of debt issue costs................................................ 2,333 see(y) above
-------
Adjusted interest expense....................................................... $13,773
=======
</TABLE>
- ---------------
<TABLE>
<S> <C>
(1) Calculated as follows (in thousands):
Proceeds from the Notes................................. $175,000
Fees and expenses related to sale of the Notes.......... (6,500)
Cash portion of the acquisition of the additional Viosca
Knoll interest (25% of the original purchase price of
$85,260,000).......................................... (21,315)
Repayment and cancellation of Viosca Knoll's credit
facility.............................................. (33,350)
Fees and expenses associated with the amended and
restated Credit Facility.............................. (3,250)
--------
Remaining proceeds from the Notes used to reduce
Credit Facility.................................. $110,585
========
(g) To adjust minority interest in income for the approximate 1.0% minority interest ownership
in certain of Leviathan's subsidiaries and the 1.0% minority interest ownership in Viosca
Knoll.
(h) To adjust weighted average units outstanding for the common units issued (2,818,512 common
units based on 75% of the purchase price on the effective date of the transaction of
January 1, 1999 and 1998 of $85,260,000 and the closing price of Leviathan's common units
on May 14, 1999 of $22.6875) in Transaction (3).
</TABLE>
19
<PAGE> 21
(c) Exhibits.
None
20
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
(Registrant)
By: LEVIATHAN GAS PIPELINE COMPANY,
its General Partner
Date: June 11, 1999 By: /s/ GRANT E. SIMS
------------- ------------------------------------
Name: Grant E. Sims
----------------------------------
Title: Chief Executive Officer
---------------------------------
21
