<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 1-11680
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
(Exact name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
DELAWARE 76-0396023
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
EL PASO ENERGY BUILDING
1001 LOUISIANA STREET
HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code: (713) 420-2131
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The registrant had 26,737,465 Common Units and 291,299 Preference Units
outstanding as of August 13, 1999.
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<PAGE> 2
GLOSSARY
The following abbreviations, acronyms or defined terms used in this Form
10-Q are defined below:
Bcf........................ Billion cubic feet
East Breaks................ East Breaks Gathering Company, L.L.C., a Delaware
limited liability company and wholly owned
subsidiary of Western Gulf
El Paso Energy............. El Paso Energy Corporation, a Delaware Corporation
and the indirect parent of the General Partner
EPFS....................... El Paso Field Services Company, a Delaware
Corporation and a wholly owned subsidiary of El Paso
Energy
Equity Investees........... Collectively refers to Stingray, West Cameron Dehy,
POPCO, Manta Ray Offshore, Nautilus, HIOS, UTOS and
prior to June 1, 1999, Viosca Knoll
General Partner............ Leviathan Gas Pipeline Company, a Delaware
corporation and wholly owned indirect subsidiary of
El Paso Energy Corporation
Green Canyon............... Green Canyon Pipe Line Company, L.L.C., a Delaware
limited liability company and wholly owned
subsidiary of Leviathan
Gulf....................... Gulf of Mexico
HIOS....................... High Island Offshore System, L.L.C., a Delaware
limited liability company and wholly owned
subsidiary of Western Gulf
Leviathan.................. Leviathan Gas Pipeline Partners, L.P., a publicly
held Delaware master limited partnership, and its
subsidiaries, unless the context otherwise requires
Manta Ray Offshore......... Manta Ray Offshore Gathering Company, L.L.C., a
Delaware limited liability company and owned by
Neptune and Ocean Breeze
Mcf........................ Thousand cubic feet
MMcf....................... Million cubic feet
MMbtu...................... Million British thermal units
Nautilus................... Nautilus Pipeline Company, L.L.C., a Delaware
limited liability company and owned by Neptune and
Ocean Breeze
Neptune.................... Neptune Pipeline Company, L.L.C., a Delaware limited
liability company in which Leviathan owns a 25.67%
member interest
Ocean Breeze............... Ocean Breeze Pipeline Company, L.L.C., a Delaware
limited liability company in which Leviathan owns a
25.67% member interest
NYMEX...................... New York Mercantile Exchange
POPCO...................... Poseidon Oil Pipeline Company, L.L.C., a Delaware
limited liability company in which Leviathan owns a
36% member interest
Stingray................... Stingray Pipeline Company, L.L.C., a Delaware
limited liability company in which Leviathan owns a
50% member interest
Tarpon..................... Tarpon Transmission Company, a Texas corporation and
wholly owned subsidiary of Leviathan
UTOS....................... U-T Offshore System, a Delaware partnership in which
Leviathan
collectively owns a 66.67% member interest
West Cameron Dehy.......... West Cameron Dehydration Company, L.L.C., a Delaware
limited liability company in which Leviathan owns a
50% member interest
Western Gulf............... Western Gulf Holdings, L.L.C., a Delaware limited
liability company in which Leviathan collectively
owns a 60% member interest
Viosca Knoll............... Viosca Knoll Gathering Company, a Delaware general
partnership in which Leviathan owns a 99%
partnership interest
i
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- ------------------
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenue............................................... $23,972 $18,373 $ 45,851 $36,087
------- ------- -------- -------
Costs and expenses....................................
Operating expenses.................................. 2,431 2,708 5,025 5,546
Depreciation, depletion and amortization............ 7,009 6,978 13,727 14,845
General and administrative expenses and management
fee.............................................. 2,779 2,554 5,909 7,503
------- ------- -------- -------
12,219 12,240 24,661 27,894
------- ------- -------- -------
Operating income...................................... 11,753 6,133 21,190 8,193
Interest income and other............................. 165 73 268 157
Interest and other financing costs.................... (7,766) (4,707) (13,868) (8,429)
Minority interest in income........................... (43) (16) (80) (3)
------- ------- -------- -------
Income (loss) before income taxes..................... 4,109 1,483 7,510 (82)
Income tax benefit.................................... 79 27 177 168
------- ------- -------- -------
Net income............................................ $ 4,188 $ 1,510 $ 7,687 $ 86
======= ======= ======== =======
Weighted average number of units outstanding.......... 25,244 24,367 24,808 24,367
======= ======= ======== =======
Basic and diluted net income per unit................. $ 0.13 $ 0.05 $ 0.25 $ 0.00
======= ======= ======== =======
</TABLE>
The accompanying Notes are an integral part of these Condensed Consolidated
Financial Statements.
1
<PAGE> 4
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $ 3,301 $ 3,108
Accounts receivable....................................... 9,180 8,588
Other current assets...................................... 344 247
-------- --------
Total current assets.............................. 12,825 11,943
-------- --------
Equity investments (Notes 2 and 3).......................... 219,732 186,079
Property and equipment, net (Notes 2 and 4)................. 381,210 241,992
Other noncurrent assets..................................... 12,146 2,712
-------- --------
Total assets...................................... $625,913 $442,726
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable and accrued liabilities.................. $ 12,475 $ 11,167
Notes payable (Note 6).................................... -- 338,000
-------- --------
Total current liabilities......................... 12,475 349,167
Notes payable (Note 6)...................................... 306,500 --
Long-term debt (Note 6)..................................... 175,000 --
Other noncurrent liabilities................................ 12,151 11,661
-------- --------
Total liabilities................................. 506,126 360,828
Commitments and contingencies
Minority interest........................................... (249) (998)
Partners' capital (Note 2).................................. 120,036 82,896
-------- --------
Total liabilities and partners' capital........... $625,913 $442,726
======== ========
</TABLE>
The accompanying Notes are an integral part of these Condensed Consolidated
Financial Statements.
2
<PAGE> 5
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
--------------------
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 7,687 $ 86
Adjustments to reconcile net income to net cash provided
by operating activities................................
Depreciation, depletion and amortization............... 13,727 14,845
Distributions from equity investees.................... 24,108 13,298
Equity in earnings..................................... (19,953) (12,571)
Other noncash items.................................... 721 509
Working capital changes, net of effects of acquisitions... (2,650) (3,283)
--------- --------
Net cash provided by operating activities......... 23,640 12,884
--------- --------
Cash flows from investing activities
Additions to pipelines, platforms and facilities.......... (14,260) (12,283)
Investments in equity investees........................... (4,393) (4,543)
Acquisition of additional interests in equity investees,
net of cash received................................... (51,128) --
Net cash flow impact of acquisition of Viosca Knoll....... (19,856) --
Development of oil and natural gas properties............. (3,181) (2,540)
--------- --------
Net cash used in investing activities............. (92,818) (19,366)
--------- --------
Cash flows from financing activities
Proceeds from notes payable............................... 95,500 50,000
Long-term debt issuance................................... 175,000 --
Repayments of notes payable............................... (160,350) (18,000)
Debt issuance costs....................................... (10,126) --
Distributions to partners................................. (31,256) (30,806)
General Partner's contribution............................ 603 --
--------- --------
Net cash provided by financing activities......... 69,371 1,194
--------- --------
Increase (decrease) in cash and cash equivalents............ 193 (5,288)
Cash and cash equivalents
Beginning of period....................................... 3,108 6,430
--------- --------
End of period............................................. $ 3,301 $ 1,142
========= ========
</TABLE>
Non-cash Investing Activities: See Note 2 for discussion.
The accompanying Notes are an integral part of these Condensed Consolidated
Financial Statements.
3
<PAGE> 6
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, 1998.................... 1,017 $7,351 23,350 $ 90,972 $(15,427) $ 82,896
Net income for the six months
ended June 30, 1999
(unaudited)................. -- 131 -- 6,098 1,458 7,687
Issuance of Common Units for
acquisition of additional
interest in Viosca Knoll
(unaudited)................. -- -- 2,662 59,792 -- 59,792
General Partner contribution
related to issuance of
Common Units (unaudited).... -- -- -- -- 603 603
Cash distributions
(unaudited)................. -- (559) -- (24,517) (5,866) (30,942)
----- ------ ------ -------- -------- --------
Partners' capital at June 30,
1999 (unaudited)............ 1,017 $6,923 26,012 $132,345 $(19,232)(b) $120,036
===== ====== ====== ======== ======== ========
</TABLE>
- ---------------
(a) Leviathan Gas Pipeline Company owns a 1% general partner interest in
Leviathan.
(b) Pursuant to the terms of Leviathan's partnership agreement, no partner shall
have any obligation to restore any negative balance in its capital account
upon liquidation of Leviathan. Therefore, any net gains from the dissolution
of Leviathan's assets would be allocated first to any then-outstanding
deficit capital account balance before any of the remaining net proceeds
would be distributed to the partners in accordance with their ownership
percentages.
The accompanying Notes are an integral part of these Condensed Consolidated
Financial Statements.
4
<PAGE> 7
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION:
Leviathan is a provider of integrated energy services, including natural
gas and oil gathering, transportation, midstream and other related services in
the Gulf. Through its subsidiaries and joint ventures, Leviathan owns interests
in significant assets, including (i) nine (eight existing and one under
construction) natural gas pipelines (the "Gas Pipelines"), (ii) two (one
existing and one under construction) oil pipeline systems, (iii) six
strategically-located multi-purpose platforms, (iv) production handling and
dehydration facilities, (v) four producing oil and natural gas properties and
(vi) a non-producing oil and natural gas property, the Ewing Bank 958 Unit,
comprised of Ewing Bank Blocks 958, 959, 1002 and 1003, formerly referred to as
the Sunday Silence property. The General Partner performs all management and
operational functions for Leviathan and its subsidiaries.
As of June 30, 1999, Leviathan had 26,011,858 Common Units and 1,016,906
Preference Units outstanding. The public owns limited partner interests
representing an effective 65.5% interest in Leviathan, comprised of 1,016,906
Preference Units and 17,058,094 Common Units. El Paso Energy, through its
subsidiaries, owns an effective 34.5% economic interest in Leviathan, comprised
of a 32.5% limited partner interest in the form of 8,953,764 Common Units, its
1% general partner interest in Leviathan and its approximate 1% nonmanaging
member interest in certain subsidiaries of Leviathan.
The 1998 Annual Report on Form 10-K for Leviathan includes a summary of
significant accounting policies and other disclosures and should be read in
conjunction with this Quarterly Report on Form 10-Q. The condensed consolidated
financial statements at June 30, 1999, and for the quarters and six months ended
June 30, 1999 and 1998 are unaudited. The condensed consolidated balance sheet
at December 31, 1998 is derived from audited consolidated financial statements
at that date. These financial statements do not include all disclosures required
by generally accepted accounting principles, but have been prepared pursuant to
the rules and regulations of the United States Securities and Exchange
Commission. In the opinion of management, all material adjustments necessary to
present fairly the consolidated financial position and results of operations for
such periods have been included. All such adjustments are of a normal recurring
nature. Results of operations for any interim period are not necessarily
indicative of the results of operations for the entire year due to the seasonal
nature of Leviathan's businesses.
NOTE 2 -- ACQUISITIONS:
Viosca Knoll
In January 1999, Leviathan entered into a Contribution Agreement with EPFS
to acquire all of EPFS's interest in Viosca Knoll other than a 1% interest in
profits and capital of Viosca Knoll. At the time the Contribution Agreement was
executed, Leviathan and EPFS each beneficially owned a 50% interest in Viosca
Knoll, which 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. The Viosca Knoll 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
Leviathan's Viosca Knoll Block 817 platform to a pipeline owned by Southern
Natural Gas Company at Main Pass Block 289.
Leviathan and EPFS closed the Viosca Knoll acquisition on June 1, 1999. In
connection therewith, (i) EPFS contributed to Viosca Knoll $33.4 million, which
amount was equal to 50% of the amount then outstanding under Viosca Knoll's
credit facility, (ii) a subsidiary of EPFS transferred a 49% interest in Viosca
Knoll to Leviathan, (iii) Leviathan paid to a subsidiary of EPFS $19.9 million
and issued to that subsidiary 2,661,870 Common Units, (iv) Leviathan paid other
closing costs of $0.8 million and (v) as required by
5
<PAGE> 8
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Leviathan's Amended and Restated Agreement of Limited Partnership, the General
Partner contributed $0.6 million to Leviathan in order to maintain its 1%
capital account balance. In addition, during the six months commencing on June
1, 2000, Leviathan has an option to acquire the remaining 1% interest in profits
and capital of Viosca Knoll for a cash payment equal to the sum of $1.6 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 on June 1, 1999, by issuing additional Common Units
in lieu of a cash payment of $1.7 million. Leviathan used the equity method of
accounting for its 50% interest in Viosca Knoll through May 31, 1999. As a
result of its acquisition of an additional 49% interest in Viosca Knoll,
Leviathan began consolidating Viosca Knoll as of June 1, 1999. The acquisition
of Viosca Knoll was accounted for as a purchase and the purchase price was
assigned to the assets and liabilities acquired based upon the estimated fair
value of those assets and liabilities as of the acquisition date. The fair value
of allocations are preliminary and may be revised after the completion of an
independent appraisal.
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fair value of assets acquired.......................... $ 83,061
Cash acquired.......................................... 434
Fair value of liabilities assumed...................... (2,962)
--------
Total purchase price......................... 80,533
Issuance of common units............................... (59,792)
--------
Net cash paid................................ $ 20,741
========
</TABLE>
The following selected unaudited pro forma information represents
Leviathan's consolidated results of operations on a pro forma basis for the six
month periods ended June 30, 1999 and 1998, assuming the Viosca Knoll
acquisition had occurred on January 1, 1998:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
PER UNIT AMOUNTS)
<S> <C> <C>
Revenue..................................................... $54,330 $46,021
Operating income............................................ $26,355 $14,334
Net income.................................................. $ 9,650 $ 3,005
Basic and diluted net income per unit....................... $ 0.29 $ 0.09
</TABLE>
HIOS/UTOS
On June 30, 1999, subsidiaries of Leviathan acquired from Natural Gas
Pipeline Company of America ("NGPL"), a subsidiary of KN Energy, Inc., for total
consideration of approximately $51 million, net of cash received, (i) all of the
outstanding stock of two of NGPL's wholly-owned subsidiaries, Natoco, Inc.
("Natoco"), which owns a 20% member interest in Western Gulf, which in turn owns
100% of each of HIOS and East Breaks, and Naloco, Inc. (Del.) ("Naloco"), which
owns a 33.33% interest in UTOS, and (ii) NGPL's ownership interest in certain
lateral pipelines located in the Gulf. In addition, Leviathan will assume NGPL's
role as operator of Stingray, the Stingray Offshore Separation Facility and West
Cameron Dehydration Facility. Leviathan financed this acquisition with funds
borrowed under its $375 million revolving credit facility discussed in Note 6.
The purchase price exceeded the fair market value of net assets acquired by
approximately $48 million. This excess cost has been preliminary assigned to
property and equipment and is to be amortized on a straight line basis over 30
years. After giving effect to the acquisition, Leviathan owns a 60% interest in
Western Gulf, and thus an effective 60% interest in each of HIOS and East Breaks
and a 66.67% interest in UTOS. Since Leviathan's control is expected to be
temporary, these investments will continue to be accounted for under the equity
method of accounting.
6
<PAGE> 9
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Western Gulf was formed in December 1998 by Leviathan, NGPL and ANR
Pipeline Company ("ANR") as a holding company for HIOS and East Breaks. HIOS
consists of approximately 204 miles of pipeline comprised of three supply
laterals, the West, Central and East Laterals, that connect to a 42-inch
diameter mainline. The HIOS system was placed in service in 1977 and is used to
gather and transport natural gas produced 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. The total
capacity of the HIOS system is approximately 1.8 Bcf of natural gas per day. ANR
operates the HIOS system. The East Breaks system is currently under
construction, with a design capacity of over 400 Mcf of natural gas per day, and
will initially consist of 85 miles of an 18 to 20-inch pipeline and related
facilities connecting the Diana/Hoover prospects developed by Exxon Company USA
("Exxon") and BP Amoco plc ("BP Amoco") in Alaminos Canyon Block 25, with the
HIOS system. The majority of the construction of the East Breaks system will
occur in 1999 and the system is anticipated to be in service by mid-2000 at an
estimated cost of approximately $90 million.
Prior to June 30, 1999, UTOS was owned equally by Leviathan, NGPL and ANR.
The UTOS system was placed in service in 1978 and 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 in
southern Louisiana. The UTOS system transports natural gas from the terminus of
the HIOS system at West Cameron Block 167 to the Johnson Bayou facility, where
it interconnects with one intrastate and four interstate pipeline systems. UTOS
also owns the Johnson Bayou facility, which provides primarily natural gas and
liquids separation and natural gas dehydration for natural gas transported on
the HIOS and UTOS systems. ANR operates the UTOS system.
The following selected unaudited pro forma information represents
Leviathan's consolidated results of operations on a pro forma basis for the six
month periods ended June 30, 1999 and 1998, assuming the HIOS/UTOS acquisition,
the acquisition of certain lateral pipelines and the effects of becoming the
operator of Stingray had occurred on January 1, 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1999 1998
-------- --------
(IN THOUSANDS EXCEPT
PER UNIT AMOUNTS)
<S> <C> <C>
Revenue..................................................... $47,755 $38,485
Operating income............................................ $22,896 $10,392
Net income (loss)........................................... $ 6,882 $ (230)
Basic and diluted net income (loss) per unit................ $ 0.23 $ (0.01)
</TABLE>
NOTE 3 -- EQUITY INVESTMENTS:
Leviathan's ownership interest in each of the Equity Investees is included
in the summarized financial information that follows:
7
<PAGE> 10
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARIZED HISTORICAL OPERATING RESULTS
SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
WEST
VIOSCA CAMERON MANTA RAY
HIOS(A) UTOS(A) KNOLL(B) STINGRAY DEHY POPCO OFFSHORE(C) NAUTILUS(C) TOTAL
------- ------- -------- -------- ------- ------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue...... $19,350 $2,119 $12,338 $ 9,068 $1,475 $36,217 $ 7,780 $ 4,453
Other income........... 118 33 31 1,105 13 191 1,144 (123)
Operating expenses..... (8,649) (1,074) (925) (5,569) (142) (3,814) (1,997) (698)
Depreciation........... (2,321) (280) (1,752) (3,800) (8) (2,301) (2,523) (2,964)
Interest expense....... -- -- (1,973) (858) -- (4,220) (18) (182)
------- ------- ------- ------- ------ ------- ------- -------
Net earnings (loss).... 8,498 798 7,719 (54) 1,338 26,073 4,386 486
Ownership percentage... 40% 33.3% 50% 50% 50% 36% 25.67% 25.67%
------- ------- ------- ------- ------ ------- ------- -------
3,399 266 3,860 (27) 669 9,386 1,126 125
Adjustments:
Depreciation(d)...... 354 17 -- 400 -- (60) (174) --
Contract
amortization(d).... (53) -- -- -- -- -- -- --
Other................ (2) 3 -- 721(e) -- -- -- (57)
------- ------- ------- ------- ------ ------- ------- -------
Equity in earnings..... $3,698 $ 286 $ 3,860 $ 1,094 $ 669 $ 9,326 $ 952 $ 68 $19,953
======= ======= ======= ======= ====== ======= ======= ======= =======
Distributions(f)....... $4,200 $ 333 $ 6,350 $ 2,501 $ 550 $ 7,463 $ 1,954 $ 757 $24,108
======= ======= ======= ======= ====== ======= ======= ======= =======
</TABLE>
- ---------------
(a) As a result of restructuring the joint venture arrangement in December
1998, the partners of HIOS, (i) created a holding company, Western Gulf,
(ii) converted the HIOS Delaware partnership into a limited liability
company and (iii) formed East Breaks. HIOS owns a regulated natural gas
system, and East Breaks is currently constructing an unregulated natural
gas system. Leviathan believes the disclosure of separate financial data
for HIOS and East Breaks is more meaningful than the consolidated results
of Western Gulf. East Breaks has had only construction activity since its
inception. On June 30, 1999, Leviathan acquired additional interests in
HIOS, East Breaks and UTOS (see Note 2). As a result of the additional
interests acquired, Leviathan owns an effective 60% interest in each of
HIOS and East Breaks and a 66.7% interest in UTOS.
(b) The information presented for Viosca Knoll as an equity investment is
through May 31, 1999. On June 1, 1999, Leviathan began consolidating the
results of Viosca Knoll as a result of acquiring an additional 49% interest
in Viosca Knoll (see Note 2).
(c) Leviathan owns a 25.67% interest in each of Neptune and Ocean Breeze, which
together own 100% of the member interests in each of Manta Ray Offshore,
which owns an unregulated natural gas system, and Nautilus, which owns a
regulated natural gas system. Leviathan believes the disclosure of separate
financial data for Manta Ray Offshore and Nautilus is more meaningful than
the consolidated results of Neptune and Ocean Breeze.
(d) Adjustments result from purchase price adjustments made in accordance with
Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations."
(e) Adjustments primarily resulting from changes in prior period estimates of
reserves for uncollectible revenue.
(f) Future distributions are at the discretion of the Equity Investees'
management committees and could further be restricted by the terms of the
Equity Investees' respective credit agreements.
8
<PAGE> 11
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARIZED HISTORICAL OPERATING RESULTS
SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
WEST
VIOSCA CAMERON MANTA RAY
HIOS UTOS KNOLL STINGRAY DEHY POPCO OFFSHORE(A) NAUTILUS(A) TOTAL
------- ------- ------- -------- ------- ------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue......... $21,730 $ 2,384 $14,746 $11,620 $1,191 $19,517 $ 5,234 $ 1,289
Other income.............. 134 57 23 434 2 145 184 17
Operating expenses........ (8,632) (1,260) (1,263) (7,611) (84) (1,960) (1,533) (678)
Depreciation.............. (2,384) (279) (1,893) (3,489) (7) (4,392) (2,129) (2,890)
Interest expense.......... -- -- (1,989) (1,069) -- (4,396) -- (12)
------- ------- ------- ------- ------ ------- ------- -------
Net earnings (loss)....... 10,848 902 9,624 (115) 1,102 8,914 1,756 (2,274)
Ownership percentage...... 40% 33.3% 50% 50% 50% 36% 25.67% 25.67%
------- ------- ------- ------- ------ ------- ------- -------
4,339 301 4,812 (58) 551 3,209 451 (584)
Adjustments:
Depreciation(b)......... 379 16 -- 406 -- -- (174) --
Contract
amortization(b)....... (53) -- -- (122) -- -- -- --
Other................... (69) 16 -- (24) -- (60) -- (765)(c)
------- ------- ------- ------- ------ ------- ------- -------
Equity in earnings
(loss)................ $ 4,596 $ 333 $ 4,812 $ 202 $ 551 $ 3,149 $ 277 $(1,349) $12,571
======= ======= ======= ======= ====== ======= ======= ======= =======
Distributions........... $ 5,240 $ 333 $ 5,800 $ 1,000 $ 425 $ -- $ 500 $ -- $13,298
======= ======= ======= ======= ====== ======= ======= ======= =======
</TABLE>
- ---------------
(a) Leviathan owns a 25.67% interest in each of Neptune and Ocean Breeze, which
together own 100% of the member interests in each of Manta Ray Offshore,
which owns an unregulated natural gas system, and Nautilus, which owns a
regulated natural gas system. Leviathan believes the disclosure of separate
financial data for Manta Ray Offshore and Nautilus is more meaningful than
the consolidated results of Neptune and Ocean Breeze.
(b) Adjustments result from purchase price adjustments made in accordance with
APB Opinion No. 16.
(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.
NOTE 4 -- PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
Property and equipment, at cost
Pipelines................................................. $ 79,313 $ 64,464
Platforms and facilities.................................. 271,049 123,912
Oil and natural gas properties, at cost, using successful
efforts method......................................... 155,931 152,750
-------- --------
506,293 341,126
Less accumulated depreciation, depletion, amortization and
impairment................................................ 125,083 99,134
-------- --------
Property and equipment, net....................... $381,210 $241,992
======== ========
</TABLE>
9
<PAGE> 12
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- BUSINESS SEGMENT INFORMATION:
The following table summarizes certain financial information for each
business segment (in thousands):
<TABLE>
<CAPTION>
GATHERING,
TRANSPORTATION
AND PLATFORM OIL AND EQUITY ELIMINATIONS
SERVICES NATURAL GAS INVESTMENTS SUBTOTAL AND OTHER TOTAL
-------------- ----------- ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
QUARTER ENDED JUNE 30,
1999:
Revenue from external
customers.......... $ 6,425 $ 8,295 $ 9,252 $ 23,972 $ -- $ 23,972
Intersegment
revenue............ 3,136 -- -- 3,136 (3,136) --
Depreciation,
depletion and
amortization....... (2,323) (4,686) -- (7,009) -- (7,009)
Operating income
(loss)............. 4,632 (1,177) 8,298 11,753 -- 11,753
Net cash flows........ 6,956 3,508 13,064 23,528 -- 23,528
Segment assets........ 310,609 77,871 222,038 610,518 15,395 625,913
QUARTER ENDED JUNE 30,
1998:
Revenue from external
customers.......... $ 4,522 $ 6,599 $ 7,252 $ 18,373 $ -- $ 18,373
Intersegment
revenue............ 2,486 -- -- 2,486 (2,486) --
Depreciation,
depletion and
amortization....... (1,903) (5,075) -- (6,978) -- (6,978)
Operating income
(loss)............. 2,700 (3,061) 6,494 6,133 -- 6,133
Net cash flows........ 4,603 2,014 6,215 12,832 -- 12,832
Segment assets........ 143,340 58,662 188,530 390,532 15,555 406,087
SIX MONTHS ENDED JUNE
30, 1999:
Revenue from external
customers.......... $ 10,798 $15,100 $ 19,953 $ 45,851 $ -- $ 45,851
Intersegment
revenue............ 6,010 -- -- 6,010 (6,010) --
Depreciation,
depletion and
amortization....... (4,243) (9,484) -- (13,727) -- (13,727)
Operating income
(loss)............. 7,642 (4,043) 17,591 21,190 -- 21,190
Net cash flows........ 11,885 5,441 21,746 39,072 -- 39,072
Segment assets........ 310,609 77,871 222,038 610,518 15,395 625,913
SIX MONTHS ENDED JUNE
30, 1998:
Revenue from external
customers.......... $ 7,782 $15,734 $ 12,571 $ 36,087 $ -- $ 36,087
Intersegment
revenue............ 5,075 -- -- 5,075 (5,075) --
Depreciation,
depletion and
amortization....... (3,519) (11,326) -- (14,845) -- (14,845)
Operating income
(loss)............. 3,129 (5,109) 10,173 8,193 -- 8,193
Net cash flows........ 6,648 6,217 10,900 23,765 -- 23,765
Segment assets........ 143,340 58,662 188,530 390,532 15,555 406,087
</TABLE>
10
<PAGE> 13
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- FINANCING TRANSACTIONS:
Senior Subordinated Notes
Leviathan entered into an indenture dated May 27, 1999 with Chase Bank of
Texas, National Association, pursuant to which it issued $175 million in
aggregate principal amount of Senior Subordinated Notes (along with the
indenture, the "Subordinated Notes"). Leviathan capitalized $5.2 million of debt
issue costs related to the issuance of the Subordinated Notes. Approximately
$19.9 million of the proceeds were used to consummate the Viosca Knoll
acquisition (see Note 2), $33.4 million were contributed to Viosca Knoll to
repay the remaining unpaid balance of the Viosca Knoll credit facility, and the
remaining proceeds were used to reduce the balance outstanding of and to extend
Leviathan's revolving credit facility (discussed below).
The Subordinated Notes bear interest at a rate of 10 3/8% per annum,
payable semi-annually, on June 1 and December 1, mature on June 1, 2009 and are
junior to substantially all of Leviathan's other indebtedness other than trade
payables and indebtedness that by its terms expressly states it is equal or
junior to the Subordinated Notes. Generally, Leviathan does not have the right
to prepay the Subordinated Notes prior to May 31, 2004 and thereafter, Leviathan
may prepay the Subordinated Notes at a premium of 5% of the face amount, which
premium declines ratably through maturity. Although the Subordinated Notes are
unsecured, all of Leviathan's subsidiaries have guaranteed those obligations.
The Subordinated Notes contain customary terms and conditions, including various
affirmative and negative covenants and the obligation to offer to repurchase the
notes at a premium under certain circumstances. Among other things, the terms of
the Subordinated Notes limit Leviathan's ability to make distributions to its
unitholders, redeem or otherwise reacquire any of its equity, incur additional
indebtedness, incur or permit to exist certain liens, make additional
investments, engage in transactions with affiliates, engage in certain types of
businesses and dispose of assets under certain circumstances, including if
certain financial tests are not satisfied or there is a default. In addition,
Leviathan will be obligated to offer to repurchase the Subordinated Notes if it
experiences certain types of changes of control or if it disposes of certain
assets and does not reinvest the proceeds or repay senior indebtedness. Also,
Leviathan agreed to file a registration statement for an offer to exchange the
Subordinated Notes for debt securities with identical terms and to complete the
registered exchange offer within 180 days after June 1, 1999.
Leviathan Credit Facility
Concurrent with the closing of the offering of the Subordinated Notes,
Leviathan amended and restated its $375 million credit facility (the "Leviathan
Credit Facility") to, among other things, extend its maturity from December 1999
to May 2002. Leviathan incurred approximately $3.0 million related to the
amendment and restatement of the credit facility. The Leviathan Credit Facility,
as amended, is a revolving credit facility with a syndicate of commercial banks
providing for up to $375 million of available credit, subject to customary terms
and conditions, including certain limitations on incurring additional
indebtedness (including borrowings under this facility) if certain financial
targets are not achieved and maintained. In addition, Leviathan will be required
to prepay a portion of the balance outstanding under this credit facility to the
extent such financial targets are not achieved and maintained. Funds borrowed
under the Leviathan Credit Facility are available to Leviathan for general
partnership purposes, including financing capital expenditures, working capital
requirements and, subject to certain limitations, 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, as amended, matures in
May 2002; is guaranteed by the General Partner and each of Leviathan's
subsidiaries; and is collateralized by (i) the management agreement between the
General Partner and a subsidiary of El Paso Energy, (ii) substantially all of
the assets of Leviathan and its subsidiaries and (iii) the General Partner's 1%
general partner interest in Leviathan and approximate 1% nonmanaging member
interest in certain subsidiaries of Leviathan. The Leviathan Credit
11
<PAGE> 14
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Facility has no scheduled amortization prior to maturity. As of June 30, 1999,
Leviathan had $306.5 million outstanding under its credit facility bearing
interest at an average floating rate of 7.5% per annum.
NOTE 7 -- PARTNERS' CAPITAL INCLUDING CASH DISTRIBUTIONS:
Cash distributions
Leviathan paid cash distributions of $0.275 per Preference Unit and $0.525
per Common Unit for each of the three months ended December 31, 1998 and March
31, 1999 in February 1999 and May 1999, respectively. As a result, the General
Partner received incentive distributions of $5.6 million for the six months
ended June 30, 1999. On July 19, 1999, Leviathan declared a cash distribution of
$0.275 per Preference Unit and $0.525 per Common Unit for the three months ended
June 30, 1999 which was paid on August 13, 1999, to all holders of record of
Common Units and Preference Units as of July 30, 1999. The General Partner was
paid an incentive distribution of $3.2 million for the quarter ended June 30,
1999. At the current distribution rates, the General Partner receives
approximately 19% of total cash distributions paid by Leviathan and is thus
allocated approximately 19% of Leviathan's net income.
Conversion of Preference Units into Common Units
On May 14, 1999, Leviathan notified the holders of its 1,016,906 then
outstanding Preference Units of their opportunity to submit their Preference
Units for conversion into an equal number of Common Units during a 90-day
period. During the conversion period, 725,607 Preference Units were converted
into an equal number of Common Units. The remaining 291,299 Preference Units
will retain their distribution preferences over the Common Units; that is, no
Common Unitholder or the General Partner will receive any quarterly distribution
until each Preference Unitholder has received the minimum quarterly distribution
of $0.275 per unit plus any arrearages. Holders of the Common Units and the
General Partner are entitled to distributions in excess of $0.275 per unit.
Preference Units are not entitled to any such excess distributions.
Holders of Preference Units will have a third and final conversion
opportunity in May 2000. Thereafter, any remaining Preference Units may, in
certain circumstances, be subject to mandatory redemption at below market
trading prices. Further, following this most recent conversion opportunity
period, the Preference Units may no longer meet New York Stock Exchange minimum
listing requirements and may be delisted.
NOTE 8 -- NET INCOME PER UNIT:
Basic and diluted net income per unit is calculated based upon the net
income of Leviathan less an allocation of net income to the General Partner
proportionate to its share of cash distributions and is presented below for the
quarters and six months ended June 30, 1999 and 1998 (in thousands).
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30,
---------------------------------------------------------
1999 1998
--------------------------- ---------------------------
LIMITED GENERAL LIMITED GENERAL
PARTNERS PARTNER TOTAL PARTNERS PARTNER TOTAL
-------- ------- ------ -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Net income(a)............................ $4,146 $ 42 $4,188 $1,495 $ 15 $1,510
Allocation to General Partner(b)......... (753) 753 -- (277) 277 --
------ ------ ------ ------ ---- ------
Allocation of net income as adjusted for
incentive distributions................ $3,393 $ 795 $4,188 $1,218 $292 $1,510
====== ====== ====== ====== ==== ======
Weighted average number of units
outstanding(c)......................... 25,244 24,367
====== ======
Basic and diluted net income per unit.... $ 0.13 $ 0.05
====== ======
</TABLE>
12
<PAGE> 15
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------
1999 1998
--------------------------- ---------------------------
LIMITED GENERAL LIMITED GENERAL
PARTNERS PARTNER TOTAL PARTNERS PARTNER TOTAL
-------- ------- ------ -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Net income(a)............................ $ 7,610 $ 77 $7,687 $ 85 $ 1 $ 86
Allocation to General Partner(b)......... (1,382) 1,382 -- (16) 16 --
------- ------ ------ ------ ---- ------
Allocation of net income as adjusted for
incentive distributions................ $ 6,228 $1,459 $7,687 $ 69 $ 17 $ 86
======= ====== ====== ====== ==== ======
Weighted average number of units
outstanding(c)......................... 24,808 24,367
======= ======
Basic and diluted net income per unit.... $ 0.25 $ 0.00
======= ======
</TABLE>
- ---------------
(a) Net income is initially allocated 99% to the limited partners as holders of
the Preference and Common Units and 1% to the General Partner (see (b)).
(b) Represents allocation of net income to the General Partner proportionate to
its share of each quarter's cash distributions which included incentive
distributions (see Note 7).
(c) Diluted weighted average number of units outstanding for 1999 is less than
1,000 units higher than basic weighted average units outstanding as a
result of unit options included in the diluted weighted average.
NOTE 9 -- RELATED PARTY TRANSACTIONS:
Management fees
Leviathan's partnership agreement provides for reimbursement of expenses
incurred by the General Partner, including reimbursement of expenses incurred by
El Paso Energy in providing management services to Leviathan, its subsidiaries
and the General Partner. The General Partner charged Leviathan $2.3 million,
$2.1 million, $4.7 million and $4.6 million for the quarters and six months
ended June 30, 1999 and 1998, respectively.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES:
Leviathan may utilize derivative financial instruments for purposes other
than trading to manage its exposure to movements in interest rates and commodity
prices. In accordance with procedures established by Leviathan's Board of
Directors, Leviathan monitors current economic conditions and evaluates its
expectations of future prices and interest rates when making decisions with
respect to risk management.
Interest Rate Risk
Leviathan utilizes both fixed and variable rate long-term debt. Leviathan
is exposed to some market risk due to the floating interest rate under its
credit facility. Under the Leviathan Credit Facility, as amended, the remaining
principal and the final interest payment are due in May 2002. As of August 9,
1999, Leviathan's credit facility had a principal balance of $300 million at an
average floating interest rate of 7.7% per annum. A 1.5% increase in interest
rates could result in a $4.5 million annual increase in interest expense on the
existing principal balance. Leviathan is exposed to similar risk under the
credit facilities and loan agreements entered into by its joint ventures.
Leviathan 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 the interest rates charged under its
credit facility or the various joint venture credit facilities and loan
agreements.
13
<PAGE> 16
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Commodity Price Risk
Leviathan hedges a portion of its oil and natural gas production to reduce
its exposure to fluctuations in the market prices thereof. Leviathan uses
commodity price swap transactions whereby monthly settlements are based on
differences between the prices specified in the commodity price swap agreements
and the settlement prices of certain futures contracts quoted on the NYMEX or
certain other indices. Leviathan settles the commodity price swap transactions
by paying the negative difference or receiving the positive difference between
the applicable settlement price and the price specified in the contract. The
commodity price swap transactions Leviathan uses differ from futures contracts
in that there are no contractual obligations which require or allow for the
future delivery of the product. The credit risk from Leviathan's price swap
contracts is derived from the counterparty to the transaction, typically a major
financial institution. Leviathan does not require collateral and does not
anticipate nonperformance by this counterparty, which does not transact a
sufficient volume of transactions with Leviathan to create a significant
concentration of credit risk. Gains or losses resulting from hedging activities
and the termination of any hedging instruments are initially deferred and
included as an increase or decrease to oil and natural gas sales in the period
in which the hedged production is sold. For the quarter and six months ended
June 30, 1999 and 1998, Leviathan recorded a net gain (loss) of $(0.4) million,
$0.6 million, $(0.7) million and $1.4 million, respectively, related to hedging
activities.
As of June 30, 1999, Leviathan has open sales swap transactions for 10,000
MMbtu of natural gas per day for calendar 2000 at a fixed price to be determined
at its option equal to the February 2000 Natural Gas Futures Contract on the
NYMEX as quoted at any time during 1999 and January 2000, to and including the
last two trading days of the February 2000 contract, minus $0.5450 per MMbtu.
Additionally, Leviathan has open sales swap transactions of 10,000 MMbtu of
natural gas per day at a fixed price to be determined at its 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.
At June 30, 1999, Leviathan had open crude oil hedges on approximately 500
barrels per day for the remainder of calendar 1999 at an average price of $16.10
per barrel.
If Leviathan had settled its open oil and natural gas hedging positions as
of June 30, 1999, based on the applicable settlement prices of the NYMEX futures
contracts, Leviathan would have recognized a loss of approximately $2.2 million.
Other
Leviathan is involved from time to time in various claims, actions,
lawsuits and regulatory matters that have arisen in the ordinary course of
business, including various rate cases and other proceedings before the Federal
Energy Regulatory Commission.
Leviathan and several subsidiaries of El Paso Energy have been made
defendants in actions brought by Jack Grynberg on behalf of the United States
Government under the false claims act. Generally, the complaints allege an
industry-wide conspiracy to underreport the heating value as well as the volumes
of the natural gas produced from federal and Indian lands, thereby depriving the
United States Government of royalties. In April 1999, the U.S. Government filed
a notice that it does not intend to intervene in these actions. Grynberg has
petitioned the Multidistrict Litigation Panel ("MLP") for consolidation of
pre-trial matters. The MLP will not consider this matter until September 1999.
Leviathan and El Paso Energy believe the complaint is without merit, and
therefore, will not have a material adverse effect on Leviathan's consolidated
financial position, results of operations or cash flows.
Leviathan is a defendant in a lawsuit filed by Transco Gas Pipe Line
Corporation ("Transco") in the 157th Judicial District Court, Harris County,
Texas on August 30, 1996. Transco alleges that, pursuant to a platform lease
agreement entered into on June 28, 1994, Transco has the right to expand its
facilities and
14
<PAGE> 17
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operations on the offshore platform by connecting additional pipeline receiving
and appurtenant facilities. Management has denied Transco's request to expand
its facilities and operations because the lease agreement does not provide for
such expansion and because Transco's activities will interfere with the Manta
Ray Offshore system and Leviathan's existing and planned activities on the
platform. Transco has requested a declaratory judgment and is seeking damages.
The case is set for trial in November 1999. It is the opinion of management that
adequate defenses exist and that the final disposition of this suit will not
have a material adverse effect on Leviathan's consolidated financial position,
results of operations or cash flows.
Leviathan is a named defendant in several lawsuits and a named party in
several governmental proceedings arising in the ordinary course of business.
While the outcome of such lawsuits or other proceedings against Leviathan cannot
be predicted with certainty, management currently does not expect these matters
to have a material adverse effect on Leviathan's consolidated financial
position, results of operations or cash flows.
NOTE 11 -- NEW ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED:
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities, was issued by the
Financial Accounting Standards Board to establish accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for 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 a hedge transaction. For fair-value hedge transactions in which
Leviathan is hedging changes in an asset's, liability's or firm commitment's
fair value, changes in the fair value of the derivative instrument will
generally be offset in the income statement by changes in the hedged item's fair
value. For cash-flow hedge transactions in which Leviathan is hedging the
variability of cash flows related to a variable-rate asset, liability, or a
forecasted transaction, changes in the fair value of the derivative instrument
will be reported in other comprehensive income. The gains and losses on the
derivative instrument that are reported in other comprehensive income will be
reclassified as earnings in the periods in which earnings are impacted by the
variability of the cash flows of the hedged item. The ineffective portion of all
hedges will be recognized in current-period earnings. This statement was amended
by SFAS No. 137 issued in June 1999. The amendment defers the effective date of
SFAS No. 133 to fiscal years beginning after June 15, 2000. Leviathan is
currently evaluating the effects of this pronouncement.
NOTE 12 -- SUBSEQUENT EVENTS:
In August, 1999 Leviathan and Tejas Energy, L.L.C. ("Tejas") formed Nemo
Gathering Company, L.L.C. ("Nemo") to build a new pipeline (the "Nemo Pipeline")
to gather natural gas from the deepwater region of the Gulf.
Nemo, owned 66.08% by Tejas and 33.92% by Leviathan, has entered into a gas
gathering agreement with Shell Deepwater Development Inc. ("Shell") and will
construct a 24-mile, 20-inch gas gathering line connecting Shell's planned
Brutus development with the existing Manta Ray Offshore Gathering System. Gas
production from the Brutus development is expected to commence in late 2001.
Tejas will operate the line once it is constructed.
Shell plans to install a tension leg platform to develop its Brutus
discovery at Green Canyon Block 158 in 2,980 feet of water. The Nemo Pipeline
will interconnect with the Manta Ray Offshore Gathering System at Leviathan's
platform located in Ship Shoal Block 332.
15
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in Item 2 updates, and should be read in
conjunction with, information set forth in Part II, Items 7, 7A and 8 in the
Leviathan Annual Report on Form 10-K for the year ended December 31, 1998 in
addition to the interim condensed consolidated financial statements and
accompanying notes presented in Item 1 of this Quarterly Report on Form 10-Q.
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 a provider of integrated energy services, including natural
gas and oil gathering,
transportation, midstream and other related services in the Gulf. Through its
subsidiaries and joint ventures, Leviathan owns interests in significant assets,
including (i) the Gas Pipelines, (ii) two (one existing and one under
construction) oil pipeline systems, (iii) six strategically-located
multi-purpose platforms, (iv) production handling and dehydration facilities,
(v) four producing oil and natural gas properties and (vi) a non-producing oil
and natural gas property, the Ewing Bank 958 Unit.
The Gas Pipelines, located primarily offshore Louisiana, Mississippi and
eastern Texas, gather and transport natural gas for producers, marketers,
pipelines and end-users for a fee. Leviathan's interest in the Gas Pipelines
consists of: a 100% interest in each of Green Canyon and Tarpon; a 99% interest
in Viosca Knoll (see Item 1. Financial Statements, Note 2); a 50% interest in
Stingray; an effective 60% interest in each of HIOS and East Breaks (see Item 1.
Financial Statements, Note 2); a 66.67% interest in UTOS (see Item 1. Financial
Statements, Note 2); and an effective 25.67% interest in each of Manta Ray
Offshore and Nautilus. The Gas Pipelines include approximately 1,200 miles of
pipeline with a throughput capacity of approximately 6.8 Bcf of natural gas per
day. Each of the Gas Pipelines interconnects with one or more long line
transmission pipelines that provide access to multiple markets in the eastern
half of the United States.
Leviathan owns a 36% interest in POPCO, which owns and operates the
Poseidon oil pipeline. The Poseidon oil pipeline is located primarily offshore
Louisiana and consists of approximately 300 miles of pipeline with a throughput
capacity of 400,000 barrels of oil per day.
Leviathan operates and owns interests in six strategically-located
multi-purpose platforms in the Gulf, including a 100% interest in five
platforms -- Viosca Knoll Block 817, East Cameron Block 373, Ship Shoal Block
332, South Timbalier Block 292 and Ship Shoal Block 331 -- and a 50% interest in
the Garden Banks Block 72 platform. These platforms have production handling
capabilities which complement Leviathan's pipeline operations and play a key
role in the development of oil and natural 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.
In addition, Leviathan owns a 50% interest in West Cameron Dehy, a dehydration
and production handling facility located at the terminus of the Stingray system,
onshore Louisiana.
Leviathan owns an interest in four producing oil and natural gas leases in
the Gulf. Currently, seven wells at Viosca Knoll Block 817 (100% working
interest, subject to a production payment obligation) are producing a gross
aggregate average of approximately 35 MMcf of natural gas per day; six wells at
Garden Banks Block 72 (50% working interest) are producing a gross aggregate
average of approximately 1,260 barrels of oil and 3.6 MMcf of natural gas per
day; two wells at Garden Banks Block 117 (50% working interest) are producing a
gross aggregate average of approximately 1,155 barrels of oil and 2.6 MMcf of
natural gas per day; and two wells at West Delta Block 35 (38% working interest)
are producing 136 barrels of oil and 8.4 MMcf of natural gas per day.
16
<PAGE> 19
Debt Offering and Acquisitions
Leviathan issued $175 million of Subordinated Notes in May 1999 and,
concurrent with the debt offering, amended and restated the Leviathan Credit
Facility (see Item 1. Financial Statements, Note 6). On June 1, 1999, Leviathan
and EPFS closed the Viosca Knoll acquisition in which Leviathan acquired an
additional 49% ownership interest in Viosca Knoll (see Item 1. Financial
Statements, Note 2). On June 30, 1999, Leviathan acquired from NGPL (i) all of
the outstanding stock of two subsidiaries of NGPL which own an effective 20%
ownership interest in each of HIOS and East Breaks, and a 33.33% ownership
interest in UTOS and (ii) ownership in certain lateral pipelines located
offshore in the Gulf (see Item 1. Financial Statements, Note 2).
RESULTS OF OPERATIONS
Second Quarter Ended June 30, 1999 Compared With Second Quarter Ended June 30,
1998
Net income for the quarter ended June 30, 1999 totaled $4.2 million, or
$0.13 per unit, as compared with $1.5 million, or $0.05 per unit, for the
quarter ended June 30, 1998 as a result of the items discussed below.
Oil and natural gas sales totaled $8.3 million for the quarter ended June
30, 1999 as compared with $6.6 million for the same period in 1998. The increase
is attributable to additional properties Leviathan acquired in August 1998,
partially offset by slightly lower oil and natural gas prices and the normal
production decline from Leviathan's oil and natural gas properties. During the
quarter ended June 30, 1999, Leviathan produced and sold 3,293 MMcf of natural
gas and 93,000 barrels of oil at average prices of $2.08 per Mcf and $15.06 per
barrel, respectively. During the same period in 1998, Leviathan produced and
sold 2,085 MMcf of natural gas and 138,000 barrels of oil at average prices of
$2.11 per Mcf and $15.64 per barrel, respectively.
Revenue from gathering, transportation and platform services totaled $4.0
million for the quarter ended June 30, 1999, net of $2.4 million related to the
effect of consolidating Viosca Knoll's results of operations beginning on June
1, 1999, as compared with $4.5 million for the same period in 1998. The decrease
of $0.5 million primarily reflects decreases of (i) $0.6 million in gathering
revenues as a result of lower throughput on the Green Canyon and Tarpon systems
primarily due to normal declines in production and (ii) $0.5 million in platform
services revenue from Leviathan's Viosca Knoll Block 817 platform as a result of
lower third party platform access fees because Leviathan acquired additional
interests in the Viosca Knoll Block 817 lease in August 1998, offset by a $0.6
million increase in platform services revenue from Leviathan's East Cameron
Block 373 platform as a result of increased production processed on the
platform.
Revenue from equity earnings totaled $9.3 million for the quarter ended
June 30, 1999 as compared with $6.0 million for the same period in 1998 after
taking out the effect of consolidating Viosca Knoll's results of operations
beginning on June 1, 1999. The increase of $3.3 million primarily reflects an
increase of $4.0 million from POPCO, West Cameron Dehy, Nautilus and Manta Ray
Offshore as a result of increased throughput offset by a decrease of $0.7
million as a result of decreased throughput on HIOS and UTOS. Total natural gas
throughputs for Viosca Knoll increased approximately 13% for the quarter ended
June 30, 1999 as compared to the same period in 1998. Total natural gas
throughputs for the Equity Investees, exclusive of Viosca Knoll, increased
approximately 1% for the quarter ended June 30, 1999 as compared to the same
period in 1998, primarily as a result of increased throughputs on Manta Ray
Offshore and Nautilus, offset by decreased throughputs related to HIOS, UTOS and
Stingray due to normal decline. Oil volumes from Poseidon totaled 16.0 million
barrels and 9.0 million barrels for the quarter ended June 30, 1999 and 1998,
respectively.
Depreciation, depletion and amortization, exclusive of Viosca Knoll,
totaled $6.7 million for the quarter ended June 30, 1999 as compared to $7.0
million for the same period in 1998. The decrease of $0.3 million is primarily
as a result of decreased depletion and abandonment rates related to Leviathan's
oil and natural gas wells located on the Viosca Knoll Block 817, Garden Banks
Block 72 and Garden Banks Block 117.
Interest and other financing costs, excluding capitalized interest, for the
quarter ended June 30, 1999 totaled $7.8 million as compared with $4.7 million
for the same period in 1998. During the quarter ended June 30, 1999 and 1998,
Leviathan capitalized $0.4 million and $0.1 million, respectively, of interest
costs in
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connection with construction projects in progress during such periods. During
the quarter ended June 30, 1999 and 1998, Leviathan had outstanding indebtedness
under its credit facility averaging approximately $317
million and $261 million, respectively, at average interest rates of 7.4% and
6.5% per annum. Additionally, Leviathan's Subordinated Notes, issued in May
1999, bear interest at 10 3/8% per annum.
Six Months Ended June 30, 1999 Compared With Six Months Ended June 30, 1998
Net income for the six months ended June 30, 1999 totaled $7.7 million, or
$0.25 per unit, as compared with $86,000, or $0.00 per unit, for the six months
ended June 30, 1998 as a result of the items discussed below.
Oil and natural gas sales totaled $15.1 million for the six months ended
June 30, 1999 as compared with $15.7 million for the same period in 1998. The
decrease is attributable to (i) substantially lower realized oil and natural gas
prices and (ii) normal production declines from Leviathan's oil and natural gas
properties, partially offset by production from properties Leviathan acquired in
August 1998. During the six months ended June 30, 1999, Leviathan produced and
sold 6,877 MMcf of natural gas and 193,000 barrels of oil at average prices of
$1.83 per Mcf and $12.69 per barrel, respectively. During the same period in
1998, Leviathan produced and sold 4,874 MMcf of natural gas and 308,000 barrels
of oil at average prices of $2.16 per Mcf and $16.53 per barrel, respectively.
Revenue from gathering, transportation and platform services totaled $8.3
million for the six months ended June 30, 1999, net of $2.4 million related to
the effect of consolidating Viosca Knoll's results beginning on June 1, 1999, as
compared with $7.8 million for the same period in 1998. The increase of $0.5
million primarily reflects an increase of $2.7 million in platform services
revenue from Leviathan's East Cameron Block 373 platform which was placed in
service in April 1998 offset by decreases of (i) $1.3 million in gathering
revenues as a result of lower throughput on the Green Canyon and Tarpon systems
primarily due to normal declines in production and (ii) $0.9 million in platform
access fees because Leviathan acquired additional interests in the Viosca Knoll
block 817 lease in August 1998.
Revenue from equity earnings totaled $20.0 million for the six months ended
June 30, 1999 as compared with $11.8 million for the same period in 1998 after
taking out the effect of consolidating Viosca Knoll's results of operations
beginning on June 1, 1999. The increase of $8.2 million primarily reflects
increases of (i) $0.8 million related to Stingray as a result of reductions in
prior period estimates of reserves for uncollectible revenues and (ii) $8.4
million from POPCO, West Cameron Dehy, Nautilus and Manta Ray Offshore as a
result of increased throughput, offset by a decrease of $1.0 million as a result
of decreased throughput on HIOS and UTOS. Total natural gas throughput volumes
for the Equity Investees increased approximately 3% from the six months ended
June 30, 1998 to the same period in 1999 primarily as a result of increased
throughput on the Viosca Knoll, Nautilus and Manta Ray Offshore systems. Oil
volumes from Poseidon totaled 29.5 million barrels and 15.7 million barrels for
the six months ended June 30, 1999 and 1998, respectively.
Depreciation, depletion and amortization totaled $13.4 million for the six
months ended June 30, 1999 after taking out the effect of consolidating Viosca
Knoll's results of operations beginning on June 1, 1999 as compared with $14.8
million for the same period in 1998. The decrease of $1.4 million reflects a
decrease of $1.8 million in depreciation and depletion of oil and natural gas
wells and facilities located on the Viosca Knoll Block 817, Garden Banks Block
72 and the Garden Banks Block 117 as a result of decreased depletion and
abandonment accrual rates offset by a $0.4 million increase in depreciation on
Leviathan's East Cameron Block 373 and Ship Shoal Block 331 platforms placed in
service after March 31, 1998.
General and administrative expenses, including the General Partner's
management fee, totaled $5.9
million for the six months ended June 30, 1999 as compared with $7.5 million for
the same period in 1998. The decrease of $1.6 million reflects decreases of (i)
$0.1 million in the General Partner's management fees and (ii) $1.5 million in
direct general and administrative expenses primarily related to the appreciation
and vesting of unit rights granted to certain officers and employees under a
compensation plan that was terminated in October 1998.
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Interest and other financing costs, excluding capitalized interest, for the
six months ended June 30, 1999 totaled $14.6 million as compared with $8.4
million for the same period in 1998. During the six months ended June 30, 1999
and 1998, Leviathan capitalized $0.8 million and $0.5 million, respectively, of
interest costs in connection with construction projects and drilling activities
in progress during such periods. During the six months ended June 30, 1999 and
1998, Leviathan had outstanding indebtedness under its credit facility averaging
approximately $332 million and $254 million, respectively, at average interest
rates of 7.3% and 6.5% per annum. Additionally, Leviathan's Subordinated Notes,
issued in May 1999, bear interest at
10 3/8% per annum.
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. However, depending on market and other
factors, Leviathan may issue additional debt or equity to raise cash or acquire
assets. Net cash provided by operating activities for the six months ended June
30, 1999 totaled $23.6 million. At
June 30, 1999, Leviathan had cash and cash equivalents of $3.3 million.
Cash from operations is derived from (i) payments for gathering and
transportation of natural gas through Leviathan's 100% owned pipelines, (ii)
platform access and production handling fees, (iii) cash distributions from
Equity Investees and (iv) the sale of oil and natural gas attributable to
Leviathan's interests in its producing properties. Oil and natural gas
properties are depleting assets and will produce reduced volumes of oil and
natural gas in the future unless additional wells are drilled or recompletions
of existing wells are successful. See "Overview" 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
subject to the discretion of their respective management committees. Further,
each of POPCO, Western Gulf and Stingray 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 six months ended June 30, 1999 totaled $24.1 million.
Leviathan entered into an indenture dated May 27, 1999 with Chase Bank of
Texas, National Association, pursuant to which it issued $175 million in
aggregate principal amount of Subordinated Notes. Leviathan capitalized $5.2
million of debt issue costs related to the issuance of the Subordinated Notes.
Approximately $19.9 million of the proceeds were used to pay the remaining
balance of the Viosca Knoll transaction, $33.4 million were contributed to
Viosca Knoll to repay the remaining unpaid balance of the Viosca Knoll credit
facility, and the remaining proceeds were used to reduce the balance outstanding
and to extend the Leviathan Credit Facility. Concurrent with the closing of the
offering of the Subordinated Notes, Leviathan amended and restated the Leviathan
Credit Facility to, among other things, extend its maturity from December 1999
to May 2002. As of August 9, 1999, Leviathan had $300.0 million outstanding at
an average floating rate of 7.7% per annum and approximately $44.5 million of
funds are available under this credit facility.
The Viosca Knoll revolving credit facility was cancelled concurrent with
the closing of the acquisition of the additional interest in Viosca Knoll as
discussed in Item 1. Financial Statements, Note 2. Leviathan and EPFS each
contributed $33.4 million to Viosca Knoll to repay the principal balance then
outstanding under the Viosca Knoll credit facility and to cancel the credit
facility.
POPCO has a revolving credit facility, as amended, (the "POPCO Credit
Facility") with a syndicate of commercial banks to provide up to $150 million
for working capital needs of POPCO. POPCO's ability to borrow money under the
facility is subject to certain customary terms and conditions, including certain
limitations on incurring additional indebtedness (including borrowings under
this credit facility) if certain financial targets are not achieved and
maintained. In addition, POPCO will be required to prepay a portion of the
balance outstanding under this credit facility to the extent such financial
targets are not achieved and maintained. The POPCO Credit Facility has no
scheduled amortization prior to maturity. The POPCO Credit
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Facility is collateralized by a substantial portion of POPCO's assets and
matures on April 30, 2001. As of June 30, 1999 and August 9, 1999, POPCO had
$140 million outstanding at an average floating rate of 6.5% per annum and $10
million of funds available under its credit facility.
Western Gulf, which owns all of HIOS and East Breaks, entered into a
revolving credit facility
(the "Western Gulf Credit Facility") with a syndicate of commercial banks in
February 1999 to provide up to $100 million for the construction of the East
Breaks system and for other working capital needs of Western Gulf, East Breaks
and HIOS. Western Gulf's ability to borrow money under its credit facility is
subject to certain customary terms and conditions, including certain limitations
on incurring additional indebtedness (including borrowings under this credit
facility) if certain financial targets are not achieved and maintained. In
addition, Western Gulf would be required to prepay a portion of the balance
outstanding under this credit facility to the extent such financial targets are
not achieved and maintained. The Western Gulf Credit Facility has no scheduled
amortization prior to its maturity in February 2004. The Western Gulf Credit
Facility is collateralized by substantially all of the material contracts and
agreements of East Breaks and Western Gulf, including Western Gulf's ownership
interests in HIOS and East Breaks, and is supported by a guarantee of East
Breaks. In addition, Leviathan has agreed to return up to $3.0 million in
distributions paid to Leviathan by Western Gulf under certain circumstances. As
of June 30, 1999, Western Gulf had $47.1 million outstanding under this credit
facility bearing interest at a floating rate of 6.5% per annum. As of
August 9, 1999, Western Gulf had $50.1 million outstanding at an average
floating rate of 6.5% per annum and $49.9 million of funds available under its
credit facility.
Stingray has an existing term loan agreement with a syndicate of commercial
banks which matures on March 31, 2003. The agreement requires Stingray to make
18 quarterly principal payments of approximately $1.6 million commencing
December 31, 1998. The term loan agreement is principally collateralized by
current and future natural gas transportation contracts between Stingray and its
customers. On the earlier of March 31, 2003, or the accelerated due date
pursuant to the Stingray term loan agreement, if Stingray has not paid all
amounts due under its term loan agreement, Leviathan is obligated to pay the
lesser of (i) $8.5 million, (ii) the aggregate amount of distributions received
by Leviathan from Stingray subsequent to January 1, 1998 or (iii) 50% of any
then outstanding amounts due pursuant to the Stingray term loan agreement.
Leviathan does not expect to have to pay any amount pursuant to this obligation.
As of
June 30, 1999 and August 9, 1999, Stingray had $23.7 million outstanding under
its term loan agreement bearing interest at an average floating rate of 6.25%
per annum.
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 energy-related infrastructure in the Gulf, (iii)
expenditures related to its producing oil and natural gas properties, (iv)
expenditures relating to the development of its non-producing property, the
Ewing Bank 958 Unit, (v) administrative expenses (including management fees) and
other operating expenses, (vi) contributions to Equity Investees as required to
fund capital expenditures for new facilities and (vii) debt service on its
outstanding indebtedness.
During the six months ended June 30, 1999, Leviathan paid distributions to
its partners totaling $31.3 million, including $5.6 million to the General
Partner as incentive distributions. These distribution payments covered the
period from October 1, 1998 through March 31, 1999. On July 19, 1999, Leviathan
declared its second quarter cash distribution of $0.275 per Preference Unit and
$0.525 per Common Unit covering the three months ended June 30, 1999. The
distributions were paid on August 13, 1999 to all holders of record of Common
Units and Preference Units at the close of business on July 30, 1999 and
included an incentive distribution to the General Partner of $3.2 million.
Leviathan believes that it will be able to continue to pay at least the current
quarterly cash 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 $17.4 million.
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East Breaks is currently constructing a natural gas pipeline system which
will initially consist of 85 miles of an 18 to 20-inch pipeline and related
facilities connecting the Diana and Hoover prospects developed by Exxon and BP
Amoco in Alaminos Canyon Block 25 in the Gulf with the HIOS system. The majority
of the construction of the East Breaks system will occur in 1999 and the system
is anticipated to be in service by
mid-2000 at an estimated cost of approximately $90 million. East Breaks entered
into long-term agreements with Exxon and BP Amoco involving the commitment,
gathering and processing of production from the Diana and Hoover prospects.
Substantially all of the construction costs of the East Breaks system will be
funded by the Western Gulf Credit Facility. All of the natural gas to be
produced from 11 blocks in the East Breaks and Alaminos Canyon areas will be
dedicated for transportation services on the HIOS system.
Substantially all of the capital expenditures by POPCO, Viosca Knoll, East
Breaks and Stingray were funded by borrowings under separate credit facilities,
and any future capital expenditures by East Breaks, POPCO and Stingray are
anticipated to be funded by borrowings under these credit facilities.
Leviathan's capital expenditures (including construction and installation costs
of a 40-mile, 14-inch crude oil pipeline from Ship Shoal Block 332 to Green
Canyon Block 253 (the "Allegheny oil pipeline"), the Nemo Pipeline (see Note 12)
and development costs of the Ewing Bank 958 Unit) and equity investments and
acquisitions for the six months ended June 30, 1999 totaled $93 million. In the
past, Leviathan has contributed existing assets to joint ventures as partial
consideration for its ownership interest therein and may in the future
contribute existing assets, including cash, to new joint ventures as partial
consideration for its ownership interest therein.
Interest costs incurred by Leviathan totaled $14.6 million for the six
months ended June 30, 1999. Leviathan capitalized $0.8 million of such interest
costs in connection with construction projects and drilling activities in
progress during the period.
Leviathan anticipates that its capital expenditures and equity investments
for the remainder of 1999 will relate to continuing acquisition, construction
and development activities, including the completion of the Allegheny oil
pipeline, the construction of the Nemo Pipeline and the development of the Ewing
Bank 958 Unit. Leviathan anticipates funding such cash requirements primarily
with available cash flow, borrowings under the Leviathan Credit Facility and,
depending on the capital requirements and related market conditions, issuing
additional debt and/or equity.
YEAR 2000
The Year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the year. Leviathan has established
a project team and works with the El Paso Energy executive steering committee to
coordinate the phases of its Year 2000 project to ensure that Leviathan's key
automated systems and related processes will remain functional through Year
2000. Those phases include: (i) awareness, (ii) assessment, (iii) remediation,
(iv) testing, (v) implementation of the necessary modifications and (vi)
contingency planning (which was previously included as a component of
Leviathan's implementation phase). Leviathan has hired outside consultants and
is involved in several industry trade-groups to supplement Leviathan's project
team.
The awareness phase recognizes the importance of Year 2000 issues and its
potential impact on Leviathan. Through the project team, Leviathan has
established an awareness program which includes participation of management in
each business area. The awareness phase is substantially completed, although
Leviathan will continually update awareness efforts for the duration of the Year
2000 project.
The assessment phase consists of conducting an inventory of Leviathan's key
automated systems and related processes, analyzing and assigning levels of
criticality to those systems and processes, identifying and prioritizing
resource requirements, developing validation strategies and testing plans, and
evaluating business partner relationships. Leviathan has substantially completed
the assessment phase to determine the nature and impact of the Year 2000 date
change for hardware and equipment, embedded chip systems, and third-party
developed software. The assessment phase of the project involves, among other
things, efforts to obtain representations and assurances from third parties,
including Equity Investees, partners and third party customers and vendors, that
their hardware and equipment products, embedded chip systems and software
products being used by or impacting Leviathan are or will be modified to be Year
2000 compliant. To date, the
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responses from such third parties, although generally encouraging, are
inconclusive. Although Leviathan intends to interact only with those third
parties that have Year 2000 compliant computer systems, it is impossible for
Leviathan to monitor all such systems. As a result, Leviathan cannot predict the
potential consequences if its Equity Investees, partners, customers or vendors
are not Year 2000 compliant. Leviathan is currently evaluating the exposure
associated with such business partner relationships.
The remediation phase involves converting, modifying, replacing or
eliminating selected key automated systems identified in the assessment phase.
The testing phase involves the validation of the identified key automated
systems. Leviathan is utilizing test tools and written procedures to document
and validate, as necessary, its unit, system, integration and acceptance
testing. The implementation phase involves placing the converted or replaced key
automated systems into operation. In some cases, the implementation phase will
also involve the implementation of contingency plans needed to support business
functions and processes that may be interrupted by Year 2000 failures that are
outside Leviathan's control. As of August 9, 1999, each phase was substantially
completed.
The contingency planning phase consists of developing a risk profile of
Leviathan's critical business processes and then providing for actions Leviathan
will pursue to keep such processes operational in the event of Year 2000
disruptions. The focus of such contingency planning is on prompt response to any
Year 2000 events, and a plan for subsequent resumption of normal operations. The
plan is expected to assess the risk of significant failure to critical processes
performed by Leviathan, and to address the mitigation of those risks. The plan
will also consider any significant failures in the event the most reasonably
likely worst case scenario develops, as discussed below. In addition, the plan
is expected to factor in the severity and duration of the impact of a
significant failure. As of August 9, 1999, the contingency plan was
substantially complete. This Year 2000 contingency plan will continue to be
modified and adjusted through the year as additional information from key
external business partners becomes available.
Leviathan's goal is to ensure that all of its critical systems and
processes that are under its direct control remain functional. Certain systems
and processes may be interrelated with or dependent upon systems outside
Leviathan's control and systems within Leviathan's control may have unpredicted
problems. Accordingly, there can be no assurance that significant disruptions
will be avoided. Leviathan's present analysis of its most reasonably likely
worst case scenario for Year 2000 disruptions includes Year 2000 failures in the
telecommunications and electricity industries, as well as interruptions from
suppliers that might cause disruptions in Leviathan's operations, thus causing
temporary financial losses and an inability to meet its obligations to
customers. A significant portion of the oil and natural gas transported through
the pipelines is owned by third parties. Accordingly, failures of the producers
of oil and natural gas to be ready for the Year 2000 could significantly disrupt
the flow of the hydrocarbons for customers. In many cases, the producers have no
direct contractual relationship with Leviathan, and Leviathan relies on its
customers to verify the Year 2000 readiness of the producers from whom they
purchase oil and natural gas. A portion of Leviathan's revenue for the
transportation of oil and natural gas is based upon fees paid by its customers
for the reservation of capacity and a portion of the revenue is based upon the
volume of actual throughput. As such, short-term disruptions in throughput
caused by factors beyond Leviathan's control may have a financial impact on
Leviathan and could cause operational problems for Leviathan's customers.
Longer-term disruptions could materially impact Leviathan's operations,
financial condition, and cash flows.
Leviathan estimates that the costs to be incurred in 1999 and 2000
associated with assessing, remediating and testing hardware and equipment,
embedded chip systems, and third-party developed software will not exceed $1.0
million, all of which will be expensed. As of June 30, 1999, Leviathan had
incurred less than $0.1 million related to such costs. Leviathan has previously
only tracked incremental expenses related to its Year 2000 project. The costs of
the Year 2000 project related to salaried employees of El Paso Energy, including
their direct salaries and benefits, are not available and have not been included
in the estimated costs of the project. The management fee charged to Leviathan
by the General Partner includes such incremental expenses.
Presently, Leviathan intends to reassess its estimate of Year 2000 costs in
the event Leviathan completes an acquisition of, or makes a material investment
in, substantial facilities or another business entity.
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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. However, based on information available at this time,
Leviathan cannot conclude that disruption caused by internal or external Year
2000 related failures will not adversely affect Leviathan. Specific factors
which may affect the success of Leviathan's Year 2000 efforts and the frequency
or severity of a Year 2000 disruption or amount of any expense include failure
of Leviathan or its outside consultants to properly identify deficient systems,
the failure of the selected remedial action to adequately address the
deficiencies, the failure of Leviathan's outside consultants to complete the
remediation in a timely manner (due to shortages of qualified labor or other
factors), the failure of other parties to joint ventures in which Leviathan is
involved to meet their obligations, both financial and operational under the
relevant joint venture agreements to remediate assets used by the joint venture,
unforeseen expenses related to the remediation of existing systems or the
transition to replacement systems, and the failure of third parties, including
Equity Investees, to become Year 2000 compliant or to adequately notify
Leviathan of potential noncompliance.
The above disclosure is a "Year 2000 Readiness Disclosure" made with the
intention to comply fully with the Year 2000 Information and Readiness
Disclosure Act of 1998, Pub. L. No. 105-271, 112 Stat, 2386, signed into law
October 19, 1998. All statements made herein shall be construed within the
confines of the Act. To the extent that any reader of the above Year 2000
Readiness Disclosure is other than an investor or potential investor in
Leviathan's or an affiliate's equity or debt securities, this disclosure is made
for the sole purpose of communicating or disclosing information aimed at
correcting, helping to correct and/or avoiding Year 2000 failures.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION
This Quarterly Report contains forward-looking statements and information
within the meaning of the Private Securities Litigation Reform Act of 1995 and
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 financial position, results of
operations, and cash flows are:
- competitive practices in the industry in which Leviathan competes,
- the impact of current and future laws and government regulations
affecting the industry in general and Leviathan's operations in
particular,
- environmental liabilities to which Leviathan may become subject in the
future that are not covered by an indemnity or insurance,
- the throughput levels achieved by any pipelines in which Leviathan owns
(now or in the future) an interest,
- the ability to access additional reserves to offset the natural decline
in production from existing wells connected to such pipelines,
- changes in gathering, transportation, processing, handling and other
rates due to changes in government regulation and/or competitive factors,
- the impact of oil and natural gas price fluctuations,
- the production rates and reserve estimates associated with Leviathan's
producing oil and natural gas properties,
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- significant changes from expectations of capital expenditures and
operating expenses and unanticipated project delays,
- the ability of Equity Investees to make distributions to Leviathan,
- the effect of the Year 2000 date change,
- the ability to economically raise capital (debt and equity) to satisfy
planned and unanticipated needs, and
- other factors discussed more completely in Leviathan's other filings with
the U.S. Securities and Exchange Commission.
Leviathan disclaims any obligation to update any forward-looking statements
to reflect events or circumstances after the date hereof.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Leviathan may utilize derivative financial instruments for purposes other
than trading to manage its exposure to movements in interest rates and commodity
prices. In accordance with procedures established by Leviathan's Board of
Directors, Leviathan monitors current economic conditions and evaluates its
expectations of future prices and interest rates when making decisions with
respect to risk management.
Interest Rate Risk
Leviathan utilizes both fixed and variable rate long-term debt. Leviathan
is exposed to some market risk due to the floating interest rate under its
credit facility. Under the Leviathan Credit Facility, as amended, the remaining
principal and the final interest payment are due in May 2002. As of August 9,
1999, Leviathan's credit facility had a principal balance of $300 million at an
average floating interest rate of 7.7% per annum. A 1.5% increase in interest
rates could result in a $4.5 million annual increase in interest expense on the
existing principal balance. Leviathan is exposed to similar risk under the
credit facilities and loan agreements entered into by its joint ventures.
Leviathan 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 the interest rates charged under its
credit facility or the various joint venture credit facilities and loan
agreements.
Commodity Price Risk
Leviathan hedges a portion of its oil and natural gas production to reduce
its exposure to fluctuations in the market prices thereof. Leviathan uses
commodity price swap transactions whereby monthly settlements are based on
differences between the prices specified in the commodity price swap agreements
and the settlement prices of certain futures contracts quoted on the NYMEX or
certain other indices. Leviathan settles the commodity price swap transactions
by paying the negative difference or receiving the positive difference between
the applicable settlement price and the price specified in the contract. The
commodity price swap transactions Leviathan uses differ from futures contracts
in that there are no contractual obligations which require or allow for the
future delivery of the product. The credit risk from Leviathan's price swap
contracts is derived from the counter-party to the transaction, typically a
major financial institution. Leviathan does not require collateral and does not
anticipate non-performance by this counter-party, which does not transact a
sufficient volume of transactions with Leviathan to create a significant
concentration of credit risk. Gains or losses resulting from hedging activities
and the termination of any hedging instruments are initially deferred and
included as an increase or decrease to oil and natural gas sales in the period
in which the hedged production is sold. For the quarter and six months ended
June 30, 1999 and 1998, Leviathan recorded a net gain (loss) of $(0.4) million,
$0.6 million, $(0.7) million and $1.4 million, respectively, related to hedging
activities.
As of June 30, 1999, Leviathan has open sales swap transactions for 10,000
MMbtu of natural gas per day for calendar 2000 at a fixed price to be determined
at its option equal to the February 2000 Natural Gas
24
<PAGE> 27
Futures Contract on NYMEX as quoted at any time during 1999 and January 2000, to
and including the last two trading days of the February 2000 contract, minus
$0.5450 per MMbtu. Additionally, Leviathan has open sales swap transactions of
10,000 MMbtu of natural gas per day at a fixed price to be determined at its
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.
At June 30, 1999, Leviathan had open crude oil hedges on approximately 500
barrels per day for the remainder of calendar 1999 at an average price of $16.10
per barrel.
If Leviathan had settled its open oil and natural gas hedging positions as
of June 30, 1999, based on the applicable settlement prices of the NYMEX futures
contracts, Leviathan would have recognized a loss of approximately $2.2 million.
25
<PAGE> 28
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I -- Financial Information, Note 10, which is incorporated herein
by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Each exhibit identified below is filed as part of this quarterly report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27. -- Financial Data Schedule.
</TABLE>
(b) Report on Form 8-K
Leviathan filed a report under Item 2 and Item 7 on Form 8-K, dated July
15, 1999 with regard to the purchase by Leviathan of several companies which
hold ownership interests in the High Island Offshore System, U-T Offshore
System, East Breaks Gathering Company and a number of small offshore pipeline
laterals owned by Natural Gas Pipeline Company of America, a subsidiary of KN
Energy, Inc.
Leviathan filed a report under Item 2 and Item 7 on Form 8-K, dated June
11, 1999 with regard to the acquisition of all of a subsidiary of El Paso Field
Services Company's interest in Viosca Knoll Gathering Company, other than a 1%
interest in profits and capital.
26
<PAGE> 29
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 and thereunto duly authorized.
LEVIATHAN GAS PIPELINE PARTNERS,
L.P.
By: LEVIATHAN GAS PIPELINE
COMPANY, its General Partner
Date: August 13, 1999
By: /s/ KEITH B. FORMAN
----------------------------------
Keith B. Forman
Chief Financial Officer
Date: August 13, 1999
By: /s/ D. MARK LELAND
----------------------------------
D. Mark Leland
Vice President and Controller
(Principal Accounting Officer)
27
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27. -- Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,301
<SECURITIES> 0
<RECEIVABLES> 9,180
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,825
<PP&E> 506,293
<DEPRECIATION> 125,083
<TOTAL-ASSETS> 625,913
<CURRENT-LIABILITIES> 12,475
<BONDS> 481,500
0
0
<COMMON> 0
<OTHER-SE> 120,036
<TOTAL-LIABILITY-AND-EQUITY> 625,913
<SALES> 0
<TOTAL-REVENUES> 45,851
<CGS> 0
<TOTAL-COSTS> 24,661
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,868
<INCOME-PRETAX> 7,510
<INCOME-TAX> (177)
<INCOME-CONTINUING> 7,687
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,687
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.25
</TABLE>
