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DRAFT 4/15/01 d8
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission file number 1-10473
PRIDE COMPANIES, L.P.
(Name of registrant)
Delaware 75-2313597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1209 North Fourth Street, Abilene, Texas 79601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(915) 677-5444
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of Each
Title of Each Class: Exchange on Which Registered:
- ------------------- ----------------------------
Common Units NASDAQ OTC Bulletin Board
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Number of Common Units outstanding as of April 2, 2001: 4,950,000
The aggregate market value of the 3,702,000 Common Units held by
non-affiliates of the Partnership as of April 2, 2001 was
approximately $926,000, which was computed using the closing sales
price of the Common Units on April 2, 2001.
TABLE OF CONTENTS
PART I
Items 1 and 2.
Business and Properties
General
Partnership Operations and Products
Markets and Competition
Customers
Long-Term Product Supply Agreement
Employees
Environmental Matters
Forward Looking Statements
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Partnership's Common Units and Related
Unitholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Partnership
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial
Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
PART I
Items 1 and 2. Business and Properties
General
Pride Companies, L.P. (the "Partnership") was formed as a limited
partnership under the laws of the State of Delaware in January 1990.
The Partnership owns and operates a common carrier products pipeline
system and three products terminals in Abilene, Texas (the "Abilene
Terminal"); San Angelo, Texas (the "San Angelo Terminal"); and Aledo,
Texas (the "Aledo Terminal") (collectively the "Products Terminals")
that are used to market conventional gasoline, low sulfur diesel fuel,
and military aviation fuel (the "Products Marketing Business"). The
Partnership also owns a modern simplex petroleum refinery facility
(the "Refinery") which was mothballed on March 22, 1998. In April
1998, the Partnership began purchasing refined products from Equilon,
a refining and marketing joint venture between Royal Dutch/Shell Group
and Texaco, Inc. (the "Equilon Agreement") to market through its
products pipeline and Products Terminals (see "Long-Term Product
Supply Agreement").
Prior to October 1, 1999, the Partnership also owned and operated
a crude oil gathering business that gathered, transported, resold and
redelivered crude oil in the Texas market (the "Crude Gathering
System"). On October 1, 1999, the Partnership sold the operating
assets utilized by the Crude Gathering System to Sun Pipe Line
Services, Inc. ("Sun") for $29,595,000 in cash proceeds and the
assumption by Sun of certain indebtedness in the amount of $5,334,000
(the "Crude Gathering Sale"). See "Partnership Operations and
Products - Crude Gathering System". Accordingly, the Crude Gathering
System has been presented as discontinued operations for all periods
herein.
The Products Marketing Business operates the Products Terminals
and one common carrier products pipeline, that originates at the
Abilene Terminal and terminates at the San Angelo Terminal (the "San
Angelo Pipeline"). The Partnership's operations are conducted
primarily in the State of Texas.
Pride Refining, Inc., a Texas corporation, (the "Managing General
Partner") owns a 1.9% general partner interest in and serves as the
managing general partner of the Partnership. The Partnership
succeeded in January 1990 to the businesses of Pride SGP, Inc.
("Special General Partner" or "Pride SGP") which owns a 0.1% general
partner interest in and serves as the special general partner of the
Partnership. The Managing General Partner and Pride SGP (collectively
the "General Partners") collectively own a 2% general partner
interest. In addition to its general partner interest, Pride SGP owns
the Series G Preferred Units of $3,144,000 ("Subordinate Preferred
Units") (See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation - Financial Condition -
Financial Resources and Liquidity") and a 4.9% interest in the
Partnership through ownership of common limited partner units ("Common
Units"). Management which is comprised of the officers of the
Managing General Partner (the "Management") collectively own a 19.8%
interest in the Partnership through their ownership of Common Units
(see "Item 10. Directors and Executive Officers of the Partnership").
Public ownership represented by the remaining Common Units is 73.3%.
In accordance with the Third Amended and Restated Agreement of Limited
Partnership of Pride Companies, L.P. (the "Partnership Agreement"),
the Managing General Partner conducts, directs and exercises control
over substantially all of the activities of the Partnership. The
Partnership has no directors or officers; however, directors and
officers of the Managing General Partner are employed by the
Partnership to function in this capacity.
On January 17, 2001, the Partnership filed a voluntary petition
under Chapter 11 of the Federal Bankruptcy Code (the "Bankruptcy") in
the Northern District of Texas, Abilene Division (the "Bankruptcy
Court"), and was authorized to continue managing and operating the
business as a debtor in possession subject to the control and
supervision of the Bankruptcy Court. The filing was necessitated by
certain actions taken by Varde Partners, Inc. ("Varde") which is the
Partnership's primary lender and also holds $17,079,000 of redeemable
preferred equity. Varde is claiming a transaction fee of $17,621,000
and the rights to certain securities it had assigned to Management
effective December 30, 1997 (see "Item 3. Legal Proceedings"). An
adversary proceeding involving all of the contested issues between
Varde and the Partnership was completed on April 6, 2001. The
Partnership believes that if the Bankruptcy Court finds in favor of
the Partnership, that the Partnership will likely be able to pay all
of its creditors and emerge from Bankruptcy in a relatively short
period of time. However, if the Bankruptcy Court finds in favor of
Varde, the Partnership will unlikely be able to pay all of its
creditors in full and a negative ruling will cause further uncertainty
about the Partnership's future. The Partnership expects the
Bankruptcy Court to issue its ruling sometime after June 8, 2001,
after final briefs are filed.
On January 18, 2001, the Managing General Partner, Special
General Partner and Pride Marketing of Texas (Cedar Wind), Inc. (a
wholly-owned subsidiary of the Partnership) each filed a voluntary
petition under Chapter 11 of the Federal Bankruptcy Code in the
Northern District of Texas, Abilene Division and were authorized to
continue managing and operating the business as a debtor in possession
subject to the control and supervision of the Bankruptcy Court.
The Partnership's principal business consists of marketing
military aviation fuel, conventional gasoline and low sulfur diesel
fuel. The San Angelo Pipeline transports products from the Abilene
Terminal to Dyess Air Force Base ("Dyess") in Abilene and to the San
Angelo Terminal. Prior to mothballing the Refinery, the Partnership
operated the Aledo pipeline ("Aledo Pipeline") which transported
product from the Abilene Terminal to the Aledo Terminal (southwest of
Fort Worth, Texas).
The Partnership's primary market area for refined products
includes Central and West Texas and is a region that is not
significantly served by the major refining centers of the Gulf Coast.
Alon USA L.P. ("Alon"), which purchased Fina, Inc.'s ("Fina") refinery
in Big Spring, Texas, in September, 2000, is a competitor of the
Partnership and has products pipeline access into Abilene, while the
Partnership is the only supplier with a products pipeline into San
Angelo.
In April 1998, Equilon converted an existing crude pipeline into
a products pipeline that delivers conventional gasoline, low sulfur
diesel fuel and military aviation fuel to the Abilene Terminal and
Aledo Terminal for distribution to the Partnership's existing
customers. In the Partnership's primary market area, product prices
reflect a premium due to transportation costs required to import
refined products from supply points outside of the market area.
Joint Reserve - Fort Worth, Dyess, and certain other military
installations have been long-time customers of the Partnership's
military aviation fuel. Management anticipates that the Partnership
will continue to bid for these and other military supply contracts in
the future although volumes have declined from prior years due to
increasing competition. See "Partnership Operations and Products" and
"Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Factors and Trends Affecting Operating
Results - Other Factors." Gasoline and diesel tankage and sales
facilities at the Aledo Terminal allow the Partnership access to the
smaller communities west of the Dallas-Fort Worth ("DFW") market along
Interstate 20 for conventional gasoline and the DFW market for low
sulfur diesel fuel. See "Markets and Competition" below.
Partnership Operations and Products
Products Marketing Business. The Partnership receives refined
products from Equilon at the Abilene Terminal and Aledo Terminal to
market through its Products Terminals in Abilene, San Angelo, and
Aledo. The Partnership transports refined products from the Abilene
Terminal to Dyess in Abilene and to the Partnership's San Angelo
Terminal through the San Angelo Pipeline. Prior to mothballing the
Refinery, the Partnership operated the Aledo Pipeline that transported
refined products from the Abilene Terminal to the Aledo Terminal. The
Aledo Pipeline was idled in April 1998, since Equilon's pipeline is
connected to the Aledo Terminal.
The Partnership delivers military aviation fuel to Dyess by
pipeline and trucks military aviation fuel from both the Abilene
Terminal and Aledo Terminal to other military installations supplied
by the Partnership. Conventional gasoline is marketed through the
Partnership's Products Terminals to non-military customers in the
Abilene area, San Angelo area, and in the communities west of the
Dallas-Fort Worth ("DFW") metropolitan area along Interstate 20. Low
sulfur diesel fuel is also marketed through the Products Terminals to
non-military customers in the Abilene area, the San Angelo area, and
in the DFW metropolitan area.
Military aviation fuel delivered by the San Angelo Pipeline to
Dyess is sold f.o.b. the Abilene Terminal with title passing to the
purchaser as the product enters the pipeline. Prior to 1998, the
Partnership had the only pipeline capable of delivering jet fuel
directly into Dyess. In late 1997, Fina purchased Conoco's products
terminal in Abilene and built its own pipeline from that terminal to
Dyess that now enables Alon to also deliver military aviation fuel by
pipeline into Dyess (see "General").
Sales of military aviation fuel constitute a significant portion
of the Partnership's revenues. See "Markets and Competition" below.
The expected volumes under the recently awarded contract are
32,850,000 gallons compared to 52,270,000 gallons under last year's
contract; however, margins under the new contract have improved from
last year's contract. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors
and Trends Affecting Operating Results - Other Factors." The
Partnership does not expect the Bankruptcy to affect the contract it
has with the Government since the Government was notified of the
Bankruptcy by the Partnership prior to such contract being awarded.
The Partnership and its predecessors have been supplying products
to Joint Reserve - Fort Worth and Dyess since the early 1960s.
Management believes that there will continue to be strong demand for
military aviation fuel in the Partnership's market area into the
foreseeable future; however, due to increased competition, the amount
of military aviation fuel supplied by the Partnership under the last
three contracts, was at reduced volumes from contracts prior to 1998.
Furthermore, future contracts may also be at reduced volumes. Dyess
is an Air Combat Command facility, formerly a strategic air command
facility, and the primary training base for the B-1 bomber crews. In
addition, Dyess also has two worldwide deployable airlift squadrons
which fly the C-130 Hercules. Under the contract that was effective
from April 1, 2000 through March 31, 2001, the Partnership contracted
to sell military aviation fuel to Dyess, Sheppard Air Force Base in
Wichita Falls, Texas, Joint Reserve - Fort Worth, E-Systems, Inc, AASF
in Grand Prairie, Texas, AASF in Dallas, Texas, and Goodfellow Air
Force Base in San Angelo, Texas. Under the new contract that is
effective from April 1, 2001 through March 31, 2002, the Partnership
will supply military aviation fuel to Dyess, Joint Reserve - Fort
Worth, AASF in Dallas, Texas, and AASF in Grand Prairie, Texas. See
"Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Factors and Trends Affecting Operating
Results - Other Factors."
For the year ended December 31, 2000, the Partnership collected
an award of $61,521,000 ("DESC Proceeds") from the United States of
America (the "Government"), also referred to as the Defense Energy
Support Center ("DESC"), related to underpayments by the Government
for jet fuel purchased from the Partnership over several years (see
"Item 3. Legal Proceedings").
Crude Gathering System. Prior to October 1, 1999, the
Partnership's businesses included the Crude Gathering System. The
Crude Gathering System consisted of an 800-mile pipeline system,
425,000 barrels of crude oil, 40 truck injection stations, 101 trucks
used to transport crude oil and other related equipment. For the
first seven months of 1999, the Partnership gathered 38,110 barrels
per day ("BPD") of crude oil.
On October 1, 1999, the Partnership sold the operating assets
utilized by the Crude Gathering System to Sun for $29,595,000 in cash
proceeds and the assumption by Sun of certain indebtedness in the
amount of $5,334,000.
Refining. Prior to March 22, 1998, the principal business of the
Partnership was crude oil refining at its Refinery located
approximately ten miles north of Abilene, Texas. The Refinery had a
throughput capacity of 49,500 BPD and was permitted to process 44,500
BPD. For the first three months of 1998, the Refinery processed crude
oil into refined products at an average rate of approximately 28,090
BPD.
As a result of the mothballing of the Refinery, the Partnership
wrote down such assets by $40.0 million at December 31, 1997. In
December 1998, the Partnership sold its diesel desulfurization unit
for $3.1 million.
The other processing units previously utilized by the Refinery
are being held for sale along with the Aledo Pipeline. The timing of
any such sale is uncertain.
Markets and Competition
Alon, the Partnership's principal competitor in its primary
market area, operates a products pipeline in the Abilene area. This
competitor's pipeline originates in Big Spring, Texas (105 miles west
of Abilene) and supplies Abilene, Midland, and Wichita Falls, Texas
and the Midcontinent. However, the Partnership currently has the only
products pipeline access to the San Angelo area. Retailers and
jobbers who are not supplied by the Partnership or one of its exchange
partners must truck their products into San Angelo from locations as
far away as 90 to 200 miles. In April 1998, Equilon completed
conversion of an existing crude pipeline into a products pipeline that
delivers conventional gasoline, low sulfur diesel fuel and military
aviation fuel from the Gulf Coast to the Partnership's Abilene
Terminal and Aledo Terminal, and the Partnership ships product from
the Abilene Terminal to the San Angelo Terminal through the San Angelo
Pipeline. Other Gulf Coast refiners ship their products primarily
throughout the southeast and central United States. Total petroleum
product demand for the Partnership's market area is determined by
demand for conventional gasoline, low sulfur diesel fuel, and military
aviation fuel. In the case of each product, however, demand tends to
vary by locality and season. Aviation fuel consumption is from
regional military and civilian air facilities.
Longhorn Partners Pipeline, which has several major oil
companies' participating in the venture, is expected to bring
petroleum products into West Texas, New Mexico and Arizona from the
Gulf Coast. The exact timing is unknown. This would increase
competition in the Partnership's primary market areas.
In addition to its primary market areas in Abilene and San Angelo
for conventional gasoline and low sulfur diesel fuel, the Partnership
has access to a secondary market in the small communities west of
Dallas-Fort Worth along Interstate 20 for conventional gasoline and
the Dallas-Fort Worth metropolitan area for low sulfur diesel fuel.
The San Angelo market area is accessible via the San Angelo Pipeline
that is connected to storage tanks at the Abilene Terminal. Market
demand for gasoline and diesel in Abilene and in San Angelo is
estimated to be approximately 17,500 BPD and 11,000 BPD, respectively.
Market demand for petroleum products in the Dallas - Fort Worth area
is estimated to be approximately 343,000 BPD, with reformulated
gasoline, diesel and a limited amount of conventional gasoline
accounting for an aggregate of 195,000 BPD.
The Partnership sells gasoline to branded product companies and
to unbranded dealers. Low sulfur diesel fuel is primarily sold to
truck stops and end users with a limited amount sold to other branded
product companies. A number of major petroleum product marketers in
West Texas do not have local refinery facilities or sales terminals.
Accordingly, such marketers supplement their local needs by purchases
or product exchanges with local suppliers, such as the Partnership.
The Partnership currently sells or exchanges diesel, conventional
gasoline, and military aviation fuel, depending on local market needs
throughout the region. Some of the marketers in the area that
purchase from or exchange refined products with the Partnership
include Alon, Chevron Products Company ("Chevron"), Equiva, Exxon,
Phillips, Star Enterprise and Ultramar Diamond Shamrock. The
Partnership has one exchange agreement and two sales agreements with
these companies for product supplied out of the Abilene Terminal; four
exchange agreements and two sales agreements with these companies for
products supplied out of the San Angelo Terminal; and one exchange
agreement and two sales agreements with these companies for product
supplied out of the Aledo Terminal. After the Bankruptcy, one of the
marketers in the Partnership's area cancelled an exchange agreement
for product supplied out of the Aledo Terminal and San Angelo
Terminal. The Partnership does not expect any further cancellations,
however, such events are outside the Partnership's control. The
exchange agreements have enabled the Partnership to expand its
marketing area to Amarillo, Big Spring, Lubbock and Midland/Odessa,
Texas without incurring transportation costs to these cities. Prior
to March 31, 2000, the Partnership had operated several retail fueling
facilities.
Customers
Two of the Partnership's major customers are the DESC and
Chevron. Revenues from the DESC comprised 17.2%, 13.6% and 26.4% of
total revenues from the Products Marketing Business in 2000, 1999 and
1998, respectively. Revenues from Chevron comprised 8.1%, 6.7% and
0.4% of total revenues from the Products Marketing Business in 2000,
1999 and 1998, respectively.
At December 31, 2000 and 1999, the Partnership had $1,544,000 and
$283,000, respectively, in receivables from the DESC and $303,000 and
$240,000, respectively, in receivables from Chevron.
Long-Term Product Supply Agreement
In 1997, the Partnership executed a long-term product supply
agreement (see "General") with Equilon to supply gasoline, diesel fuel
and jet fuel to the Partnership. The Equilon Agreement has a 10-year
primary term which began in April 1998, the date Equilon completed its
system of pipelines and terminals. The Equilon Agreement also has
two-year renewal provisions for up to an additional 10 years. After
the initial five years of the initial ten-year term ("Primary Term"),
if Equilon determines that shipment of products on its new products
pipeline is no longer economical due to product prices, then Equilon
may notify the Partnership of proposed redetermined prices. If the
Partnership does not accept such redetermined prices, then Equilon may
elect to terminate the Equilon Agreement by 18 months' written notice.
After the Primary Term, if either party under the Equilon Agreement
can demonstrate that the prices for delivered products under the
Equilon Agreement are producing cash flows materially below that
received during the Primary Term, then such party may notify the other
party of proposed prices it must receive to continue. If the other
party does not accept such redetermined pricing, then the other party
may elect not to renew the Equilon Agreement not less than one year
prior to the end of the current term. The Equilon Agreement may
furthermore be terminated upon any breach by the other party which
continues beyond 30 days following notice of breach. Additionally,
the Equilon Agreement provides that the Partnership will purchase all
gasoline, diesel and jet fuel which it may desire to purchase,
exclusively from Equilon. The Partnership's cost for such product is
based primarily on the market price in the area in which the products
are received less a discount. The Partnership will use Equilon
products to supply its existing customer base, which includes
wholesale customers, exchange partners, and military bases, primarily
using the Products Terminals and San Angelo Pipeline.
In connection with the Equilon Agreement, the Partnership
mothballed its Refinery, but will continue to utilize the terminal and
storage facilities at the Refinery for a refined products terminalling
facility (the Abilene Terminal). As a result of the Agreements, the
Partnership believes that cash flows have been less volatile since the
Partnership is no longer exposed to the extremely volatile margins of
a refinery. The Partnership also believes that the Equilon Agreement
will better enable the Partnership to remain competitive as
environmental standards change and the industry trends toward
consolidation and realignments in the future.
Equilon has continued to provide refined products to the
Partnership subsequent to filing Bankruptcy and the Partnership
believes Equilon will continue to supply such refined products to the
Partnership provided the Partnership continues to pay Equilon in
accordance with the Equilon Agreement and Equilon has cash deposits or
a letter of credit to secure the credit (see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Financial Resources and
Liquidity").
Employees
As of December 31, 2000, the Partnership had 32 employees in the
Products Marketing Business.
Environmental Matters
The Partnership's activities involve the transportation, storage,
and marketing of refined petroleum products that constitute or contain
substances regulated under certain federal and state environmental
laws and regulations. The Partnership is also subject to federal,
state and local laws and regulations relating to air emissions and
disposal of wastewater as well as other environmental laws and
regulations, including those governing the handling, release and
cleanup of hazardous materials and wastes. The Partnership has from
time to time expended resources, both financial and managerial, to
comply with environmental regulations and permit requirements and
anticipates that it will continue to be required to expend financial
and managerial resources for this purpose in the future. For the year
ended December 31, 2001, the Partnership expects to spend $30,000
related to an investigative study by the Texas Natural Resource
Conservation Commission. The Partnership spent $217,000 related to
that study for the year ended December 31, 2000. See "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors and Trends Affecting Operating
Results" and "Item 3. Legal Proceedings."
Forward Looking Statements
This Form 10-K contains certain forward looking statements. Such
statements are typically punctuated by words or phrases such as
"anticipate," "estimate," "projects," "should," "may," "management
believes," and words or phrases of similar import. Such statements
are subject to certain risks, uncertainties or assumptions. Should
one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated or projected. Among the
key factors that may have a direct bearing on the Partnership's
results of operations and financial condition in the future are: (i)
the margins between the revenue realized by the Partnership on the
sale of refined products and the cost of those products purchased from
Equilon and the availability of such products, (ii) the sales volume
at the Products Terminals, (iii) the impact of current and future laws
and governmental regulations affecting the petroleum industry in
general and the Partnership's operations in particular, (iv) the
ability of the Partnership to sustain cash flow from operations
sufficient to realize its investment in operating assets of the
Partnership and meet its debt obligations, (v) fluctuations in refined
product prices and their impact on working capital, and (vi)
resolution of the dispute with Varde concerning the application of
proceeds from the DESC claim. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operation -
Financial Condition" and "Item 3. Legal Proceedings."
Item 3. Legal Proceedings
The Partnership is involved in various claims and routine
litigation incidental to its business for which damages are sought.
Other than the dispute with Varde, the Bankruptcy and certain tax
issues discussed below, Management believes that the outcome of all
claims and litigation is either adequately insured or will not have a
material adverse effect on the Partnership's financial position or
results of operations.
The Partnership is currently involved in Phase II of an
investigative study by the Texas Natural Resource Conservation
Commission. Management estimates the remaining cost to comply with
this study approximates $30,000 and had accrued for this amount at
December 31, 2000. Management does not believe any significant
additional amounts will be required to maintain compliance with this
study or other environmental requirements other than routine
expenditures in the ordinary course of business.
On September 5, 1995, the Partnership filed a substantial claim in
the United States Court of Federal Claims against the Government or
DESC, relating to erroneous pricing of jet fuel purchased over a
period of several years from the Partnership and its predecessors (the
"DESC Claim"). The Partnership had sued the DESC based on an illegal
economic price adjustment ("EPA") provision present in 12 jet fuel
contracts between the Partnership and the DESC. Although the DESC
acknowledged the illegality of the EPA provision, the parties
disagreed on whether the Partnership had incurred damages.
On May 10, 2000, the presiding judge in the Partnership's lawsuit
against the DESC rendered a judgment in favor of the Partnership in
the amount of $45,706,000 (comprised of an additional long-term
contract premium of $23.4 million and a transportation premium of
$22.3 million), plus statutory interest of $15,815,000 under the
Contract Disputes Act. The DESC Proceeds were $61,521,000 (see "Items
1. and 2. Business and Properties - Partnership Operations and
Products"). The DESC did not appeal the decision and the Partnership
received $45,706,000 of the judgment on July 25, 2000 and paid total
legal fees to the Partnership's attorneys of $5,908,000 ("Legal
Fees"). On August 24, 2000, the Partnership received an additional
$15,815,000 which was for the statutory interest on the judgment. The
Partnership paid bonuses totaling $6,967,000 (the "Bonuses") from the
DESC Proceeds to Management. The DESC Proceeds less the Legal Fees
and Bonuses (which together approximate 21% of the DESC Proceeds) are
$48,646,000 ("DESC Income" or "Net DESC Proceeds"). The Partnership
reported the $45,706,000 less Legal Fees of $4,339,000 and bonuses of
$5,110,000 or a net of $36,257,000 in operating income for the year
ended December 31, 2000. The Partnership reported the other
$15,815,000 less Legal Fees of $1,569,000 and Bonuses of $1,857,000 or
a net of $12,389,000 in other income for the year ended December 31,
2000.
On July 25, 2000 and July 26, 2000, the Partnership made three
payments to Varde totaling $16,606,000 (the "Payments') from the DESC
Proceeds to retire the Series A Term Loan and Series B Term Loan. On
August 23, 2000 and August 31, 2000, the Partnership also deposited
$9,360,000 (the "First Deposit") and $7,000,000 (the Second Deposit"),
respectively, for a total of $16,360,000 (the "Deposits") from the
DESC Proceeds with the District Court of Taylor County, Texas ("Texas
Court") which were expected to be used to retire debt and redeem
preferred equity securities prior to the Bankruptcy. The total of the
Payments and the Deposits is $32,966,000 (the "Disbursements"). The
balance of the Net DESC Proceeds after the Disbursements is
$15,680,000 and has been used by the Partnership for working capital
to the extent permitted under temporary injunctions issued by both the
Texas Court and the Supreme Court of New York County, New York, ("New
York Court") and subject to the supervision of the Bankruptcy Court
(see below).
Due to various layers of debt and the Partnership's preferred
equity securities, and taking into consideration preferential calls on
available cash contained in the Partnership's debt instruments and
preferred equity security instruments (including distributions paid in
kind on debt and accumulated arrearages owed on preferred equity
securities), Legal Fees and payments under the Partnership's bonus
plan, common unitholders were allocated income from the DESC Proceeds
without a corresponding distribution of cash to offset the tax
liability that arose from such income. The Partnership had originally
estimated that the net taxable income from the DESC Proceeds that
would be allocable to common unitholders would be approximately $41.0
million (or $8.28 per Common Unit). However, as a result of the
dispute with Varde, the net taxable income actually allocated to
common unitholders from the DESC Proceeds was $45,168,000 (or $9.12
per Common Unit). The Partnership had planned on redeeming all
preferred equity securities held by Varde with the DESC Proceeds in
conjunction with a new working capital facility, which would have
reduced the income allocated to the common unitholders as a result of
the payment of accumulated arrearages on the Varde preferred equity
securities (see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition -
Financial Resources and Liquidity"). As a result of the DESC Claim
being paid in two installments, such net income was reported to common
unitholders in two different months (see below).
As a result of the expected retirement of the debt with the
Payments and the Deposits, the Partnership wrote-off $2,556,000 of
deferred financing costs that were being amortized over the life of
the loans.
In accordance with the Partnership Agreement, the Managing
General Partner determined that for tax purposes it was necessary to
establish a convention for the Partnership under which the income and
certain expenses attributable to the judgment would be allocated to
the holders of Common Units. Under that convention, common
unitholders as of July 31, 2000 and August 31, 2000 were allocated the
income attributable to the portion of the proceeds from the judgment
actually received by the Partnership during those months. The
Partnership intends to take the position that suspended losses would
be available to common unitholders to offset net income attributable
to the judgment; however, it is not certain the Internal Revenue
Service will agree with this position. The actual tax impact on a
common unitholder depends upon such unitholder's overall personal tax
situation and whether such unitholder has suspended losses which can
be used to offset the allocation of income. Each common unitholder
should consult with their own tax advisor regarding the use of
suspended losses.
Under the various loan documents with Varde, one-third of the
remaining DESC Proceeds after certain payments on the Series A Term
Loan and Series B Term Loan is required to be paid to Varde. The
Partnership had planned on eventually retiring all of Varde's Debt and
Redeemable Preferred Equity with the DESC Proceeds after a replacement
working capital facility was in place; however, after the Partnership
made the Payments of $16,606,000 to Varde, Varde claimed for the first
time that it was entitled to the Varde One-Third (see "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Financial Condition - Financial Resources and
Liquidity" for the definitions of Debt, Redeemable Preferred Equity
and Varde One-Third) as a transaction fee rather than applying the
Payments against the Debt and Redeemable Preferred Equity. The
Partnership believes this position conflicts with the credit agreement
between Varde and the Partnership in that it requires that the Varde
One-Third must be applied to the Debt and Redeemable Preferred Equity
that Varde holds. However, Varde's position is that since another
loan document executed at the same time as the credit agreement does
not specifically require application of the Varde One-Third to the
Debt and Redeemable Preferred Equity that the Varde One-Third should
be treated as a transaction fee ("Transaction Fee"). The Partnership
believes the two agreements can be read together and are not
inconsistent and that Varde must, therefore, apply the Varde One-Third
to its Debt and Redeemable Preferred Equity.
Additionally, Varde also argues that the term "proceeds" as used
in the credit agreement is before the Legal Fees associated with the
DESC Claim and, therefore, the amount of proceeds used to calculate
the Varde One-Third should be $61,521,000 rather than the $55,613,000
(after Legal Fees of $5,908,000) that the Partnership believes is
correct.
If Varde's interpretations of the loan documents are correct, the
Varde One-Third would equal $17,621,000 and Varde would receive such
amounts as a Transaction Fee and not have to apply it to any of
Varde's Debt and Redeemable Preferred Equity. Further, if the Varde
One-Third is considered a Transaction Fee, net income would have
declined by $17,621,000 for the year ended December 31, 2000 to
$25,788,000. In addition, interest expense and distributions would
have increased for the year ended December 31, 2000.
The following table compares how the Partnership believes the
Payments of $16,606,000 should be applied according to its
interpretation of the loan documents and how Varde believes the
Payment should be applied according to Varde's interpretation of the
loan documents:
The
Partnership's Varde's
Interpretation Interpretation
-------------- --------------
A Term Loan $ 3,657,000 $ 3,657,000
B Term Loan 12,949,000 5,000,000
Transaction Fee (1) - 7,949,000
----------- -----------
The Payments $16,606,000 $16,606,000
=========== ===========
(1) Based on Varde's interpretation, the Partnership would
owe Varde a Transaction Fee of $17,621,000; therefore,
after the Payments, Varde would still be owed an
additional $9,672,000 as a Transaction Fee.
Under the Partnership's interpretation and after the above
Payments, Varde was due an additional $7,797,000 to be applied to
Varde's Debt and Redeemable Preferred Equity, as opposed to the
$9,672,000 Varde believes is owed as a transaction fee.
Due to the dispute with Varde, and rather than making additional
payments to Varde which Varde indicated that it would not apply in
accordance with the Partnership's interpretation of the loan
documents, the Partnership deposited $16,360,000 of the Net DESC
Proceeds with the Texas Court, which the Partnership believed should
eventually be used to retire the remaining Varde Debt and redeem a
portion of the Redeemable Preferred Equity. Under Varde's
interpretation of the loan documents, the Deposits should go to Varde
as a Transaction Fee and retire a portion of the B Term Loan. The
following table compares how the Partnership believes the Deposits
should be applied and how Varde believes the Deposits should be
applied:
The
Partnership's Varde's
Interpretation Interpretation
-------------- --------------
C Term Loan $ 6,171,000 $ -
Subordinate Note A 3,188,000 -
Series B Preferred Units (1) 3,117,000 -
Series C Preferred Units (1) 1,672,000 -
Accumulated Arrearages Series
B Preferred Units (1) 1,440,000 -
Accumulated Arrearages Series
C Preferred Units (1) 772,000 -
Transaction Fee - 9,672,000
B Term Loan - 6,688,000
----------- -----------
The Deposits $ 16,360,000 $ 16,360,000
=========== ===========
(1) Due to the Bankruptcy, it is unlikely that the full
$7,001,000 of the Deposits will be used to redeem the
Redeemable Preferred Equity.
The following table compares the outstanding balances of the Debt
and Redeemable Preferred Equity owed by the Partnership to Varde as of
December 31, 2000 after the expected application of the Payments and
the Deposits based on the Partnership's interpretation of the loan
documents prior to the Bankruptcy and Varde's interpretation of the
loan documents:
The
Partnership's Varde's
Interpretation Interpretation
-------------- --------------
B Term Loan $ - $ 1,462,000
C Term Loan - 6,577,000
Subordinate Note A - 3,324,000
Series B Preferred Units (1) 6,205,000 9,322,000
Series C Preferred Units (1) 3,328,000 5,000,000
Series D Preferred Units 2,757,000 2,757,000
Accumulated Arrearages Series
B Preferred Units (1) 945,000 2,507,000
Accumulated Arrearages Series
C Preferred Units (1) 507,000 1,344,000
Accumulated Arrearages Series
D Preferred Units 1,294,000 1,294,000
----------- -----------
Outstanding Varde Debt and
Preferred Securities $15,036,000 $33,587,000
=========== ===========
(1) Due to the Bankruptcy, the redemption of the
Redeemable Preferred Equity shown in the previous
table is unlikely to occur in the amounts indicated;
therefore, the balance in this table will likely
increase by those amounts.
The Partnership advised Varde that it did not intend to make any
further payments until the above issues were resolved. The
Partnership filed suit against Varde in the Texas Court, on August 3,
2000, demanding, among other things, that Varde apply the proceeds
from the DESC Claim in accordance with the credit agreement. The
Partnership also deposited $16,360,000 with the Texas Court. The
trial which was scheduled in the Texas Court for February 2, 2001, was
removed to the Bankruptcy Court by Varde.
On August 14, 2000, the Partnership requested an injunction from
the Texas Court to prevent Varde from accelerating the loans and
foreclosing on the collateral. On August 28, 2000, a hearing was held
and the Texas Court signed an order on September 15, 2000 that, among
other things, restrained Varde from seizing or foreclosing on any
collateral while the case was pending.
On August 8, 2000, Varde filed a new lawsuit in New York, a
notice of motion for summary judgment in lieu of complaint, in the
amount of $18,592,000 plus interest from August 8, 2000, on the ground
that the action was based upon an instrument for the payment of money
only and that there was no defense to payment. The $18,592,000 is the
amount Varde claimed was still outstanding on the B Term Loan, C Term
Loan and the remaining balance of a Transaction Fee based on the first
receipt of $45,706,000 of DESC Proceeds before reduction for Legal
Fees.
On August 31, 2000, Varde filed a second New York lawsuit
claiming $48,749,000, the amount Varde claimed was still outstanding
on the B Term Loan, C Term Loan, Subordinate Note A, Series B
Preferred Units, Series C Preferred Units, Series D Preferred Units
and the remaining balance of the Transaction Fee associated with the
receipt of the DESC Proceeds. Varde claimed that due to the defaults,
all of the aforementioned Debt and Redeemable Preferred Equity were
due.
On September 7, 2000, Varde requested and received a temporary
restraining order from the New York Court which, among other things,
enjoined the Partnership from transferring or otherwise disposing of
any personal or real property (including cash) to the extent of
$48,749,000 received as a result of the DESC Claim.
On October 10, 2000, the New York Court issued a preliminary
injunction, replacing the temporary restraining order, enjoining the
Partnership from transferring or disposing of any property to the
extent of the amount claimed of $48,749,000.
The New York Court issued a temporary restraining order on
September 7, 2000 which imposed restrictions on the Partnership's use
of DESC Proceeds. Because of these constraints, Management agreed to
extend a revolving loan to the Partnership of $4,200,000 ("Management
Revolver") from the Bonuses paid to Management as a result of the
successful litigation of the DESC Claim. The note was executed
September 18, 2000. The Partnership had drawn up to $1,990,000 during
the year ended December 31, 2000; however, the Partnership repaid the
note on November 15, 2000, and the loan balance was zero at year end.
Such note is secured by the assets of the Partnership. Although the
note accrued interest at prime plus 1.75%, Management waived such
interest for the period it was outstanding during the year ended
December 31, 2000. No further advances are expected under this
facility.
The trial in the New York Court that was scheduled for January
18, 2001 was automatically stayed by the filing of a voluntary
petition under Chapter 11 of the Federal Bankruptcy Code in the
Northern District of Texas, Abilene Division on January 17, 2001. The
Partnership was authorized to continue managing and operating its
business as a debtor in possession subject to the control and
supervision of the Bankruptcy Court (see "Items 1. and 2. Business and
Properties - General"). The filing was necessitated by certain
actions taken by Varde which is the Partnership's primary lender and
also holds the Redeemable Preferred Equity of $17,079,000.
On January 18, 2001, the Managing General Partner, Special
General Partner and Pride Marketing of Texas (Cedar Wind), Inc. (a
wholly-owned subsidiary of the Partnership) each filed a voluntary
petition under Chapter 11 of the Federal Bankruptcy Code in the
Northern District of Texas, Abilene Division, and were authorized to
continue managing and operating the business as a debtor in possession
subject to the control and supervision of the Bankruptcy Court.
On January 31, 2001, Varde removed the Partnership's suit from
the Texas Court to the Bankruptcy Court and filed a motion with the
Bankruptcy Court for appointment of a trustee. Varde subsequently
removed both of the New York state lawsuits to New York federal court.
The motion for appointment of a trustee was heard on March 6, 2001 and
the Bankruptcy Court denied Varde's request on March 22, 2001.
For the year ended December 31, 2000, in addition to the Legal
Fees paid out of the DESC Proceeds, the Partnership incurred legal
fees and other expenses of $1,172,000 in connection with the dispute
with Varde and $55,000 related to the Bankruptcy.
In March 2001, the Partnership and Varde agreed to let the
Bankruptcy Court hear all disputes from each of the removed Texas and
New York lawsuits. Closing arguments were heard by the Bankruptcy
Court on April 6, 2001. Additional briefs will be filed in the case
which are expected to be delivered to the Bankruptcy Court by June 8,
2001. Once the Bankruptcy Court reviews those briefs, a ruling will
be issued.
A common unitholder has notified the Partnership he believes the
Partnership's tax status should be classified as a corporation rather
than a partnership for federal income tax purposes. At issue is the
requirement that a publicly traded partnership have a sufficient
percentage of income that consists of "qualifying income" under
Section 7704(d)(1) of the Internal Revenue Code to be taxed as a
partnership, rather than a corporation, for federal income tax
purposes. The common unitholder has demanded that the Partnership
immediately withdraw its Schedule K-1's; however, the Partnership has
not changed its position that it will continue to be taxed as a
partnership because a sufficient portion of its income constitutes
"qualifying income" and, therefore, the Partnership does not plan on
withdrawing the Schedule K-1's.
If the Partnership is taxed as a corporation rather than a
partnership for federal income tax purposes, the Partnership's results
of operations, and the tax treatment to the Partnership and its
unitholders, would materially differ from the amounts presented
herein. However, the Partnership intends to vigorously defend its
status as a partnership for federal income tax purposes.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during
fiscal year 2000.
PART II
Item 5. Market for Partnership's Common Units and Related Unitholder
Matters
The Partnership's Common Units are traded on the NASDAQ OTC
bulletin board under the symbol PRDE. The following tables set forth,
for the periods indicated, the high and low closing prices of the
Common Units in 2000 and 1999 on the NASDAQ OTC bulletin board.
Quotations on the NASDAQ OTC bulletin board reflect interdealer,
without retail mark-up, mark-down, or commission, prices and may not
necessarily represent actual transactions. No distributions were made
on the Common Units during the past two fiscal years.
NASDAQ OTC Bulletin Board
- -------------------------
1999 HIGH LOW
____ ---- ---
First Quarter $ 0.19 $ 0.06
Second Quarter 0.50 0.13
Third Quarter 0.33 0.09
Fourth Quarter 0.17 0.11
2000 HIGH LOW
____ ____ ___
First Quarter $ 0.39 $ 0.13
Second Quarter 0.25 0.11
Third Quarter 0.31 0.02
Fourth Quarter 0.22 0.14
Assuming that the Second Deposit and $1,000 of the First Deposit
were to be used to redeem a portion of the Series B Preferred Units
and Series C Preferred Units, the remaining Series B Preferred Units
and Series C Preferred Units would be convertible into 985,000 and
528,000 Common Units, respectively. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operation - Financial Condition - Financial Resources and Liquidity."
Through December 31, 2000, these securities had total accumulated
arrearages of $4,958,000.
Based on information received from its transfer agent and
servicing agent, the Partnership estimates the number of beneficial
common unitholders of the Partnership at December 31, 2000 to be
approximately 2,900.
See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition - Financial
Resources and Liquidity" for a discussion of certain restrictions
imposed by Varde which is the Partnership's primary lender and
restrictions imposed under the terms of the preferred equity
securities on the payment of distributions to common unitholders while
such debt and preferred equity securities remain outstanding.
Item 6. Selected Financial Data
The following table sets forth, for the periods and at the dates
indicated, selected financial data for the Partnership. The table is
derived from the financial statements of the Partnership and should be
read in conjunction with those financial statements. See also "Item
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The earnings per unit amounts prior to 1997 have been restated as
required to comply with Statement of Financial Accounting Standards
No. 128, Earnings per Share. For further discussion of earnings per
unit, see the notes to the consolidated financial statements.
The income statement data and balance sheet data for prior years
has been restated to reflect the Crude Gathering System as a
discontinued operation.
(The following table should be printed on 14" x 8.5" paper)
SELECTED FINANCIAL DATA
(In thousands, except per unit amounts and footnote amounts)
Year Ended December 31,
-----------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Income Statement Data:
Revenues
Products Marketing Business $ 294,328 $ 277,179 $ 121,189 $ 130,604 $ 234,929
Net DESC Proceeds - - - - 36,257
Costs of sales and operating
expenses, excluding depreciation 291,502 266,918 115,454 126,424 230,144
Refinery closure costs - 41,396 - - -
Marketing, general and administrative
expenses 5,512 4,769 3,761 3,700 3,406
Depreciation 4,972 4,955 1,422 1,496 1,467
-------- -------- -------- -------- --------
Operating income (loss) (7,658) (40,859) 552 (1,016) 36,169
-------- -------- -------- -------- --------
Other net 156 558 322 505 1,016
Net interest income from DESC - - - - 12,389
Interest expense (5,319) (4,829) (5,647) (5,095) (1,244)
Credit and loan fees (1,388) (1,242) (1,646) (2,080) (4,921)
-------- -------- -------- -------- --------
Net income (loss) from continuing
operations (14,209) (46,372) (6,419) (7,686) 43,409
Discontinued operations :
Income (loss) from operations of
the Crude Gathering System prior
to August 1, 1999 7,794 1,341 (2,138) 269 -
(Loss) on disposal - - - (251) -
-------- -------- -------- -------- --------
Net income (loss) $ (6,415) $ (45,031) $ (8,557) $ (7,668) $ 43,409
======== ======== ======== ======== ========
Basic net income (loss) per Common
Unit :
Net income (loss) from continuing
operations $ (2.81) $ (9.18) $ (1.62) $ (1.89) $ 8.26
Net income (loss) from
discontinued operations $ 1.54 $ .26 $ (.42) $ - $ -
-------- -------- -------- -------- --------
Net income (loss) $ (1.27) $ (8.92) $ (2.04) $ (1.89) $ 8.26
======== ======== ======== ======== ========
Diluted net income (loss) per Common
Unit:
Net income (loss) from continuing
operations $ (2.81) $ (9.18) $ (1.62) $ (1.89) $ 5.82
Net income (loss) from
discontinued operations $ 1.54 $ .26 $ (.42) $ - $ -
-------- -------- -------- -------- --------
Net income (loss) $ (1.27) $ (8.92) $ (2.04) $ (1.89) $ 5.82
======== ======== ======== ======== ========
Numerator:
Basic net income (loss) from continuing
operations $ (14,209) $ (46,372) $ (6,419) $ (7,686) $ 43,409
Preferred distributions - - (1,763) (1,854) (1,683)
-------- -------- -------- -------- --------
Net income (loss) from continuing
operations less preferred
distributions (14,209) (46,372) (8,182) (9,540) 41,726
Net income (loss) from continuing
operations allocable to 2%
general partners' interest (284) (928) (163) (191) 835
-------- -------- -------- -------- --------
Numerator for basic earnings per
unit from continuing operations $ (13,925) $ (45,444) $ (8,019) $ (9,349) $ 40,891
======== ======== ======== ======== ========
Net income (loss) from discontinued
operations $ 7,794 $ 1,341 $ (2,138) $ 18 $ -
Net income (loss) from discontinued
operations allocable to 2% general
partners' interest 156 27 (43) - -
-------- -------- -------- -------- --------
Numerator for basic earnings per unit
from discontinued operations $ 7,638 $ 1,314 $ (2,095) $ 18 $ -
======== ======== ======== ======== ========
Numerator for basic earnings per unit $ (6,287) $ (44,130) $ (10,114) $ (9,331) $ 40,891
======== ======== ======== ======== ========
Diluted net income (loss) from
continuing operations $ (14,209) $ (46,372) $ (6,419) $ (7,686) $ 43,409
Preferred distributions - - (1,763) (1,854) (1,683)
Adjustments to compute diluted net income
(loss):
Subordinate Note A interest expense - - - - 186
Series B Preferred Unit distributions - - - - 795
Series C Preferred Unit distributions - - - - 427
-------- -------- -------- -------- --------
Net income (loss) from continuing
operations less preferred
distributions (14,209) (46,372) (8,182) (9,540) 43,134
Net income (loss) from continuing
operations allocable to 2%
general partners' interest (284) (928) (163) (191) 863
-------- -------- -------- -------- --------
Numerator for diluted earnings per
unit from continuing operations $ (13,925) $ (45,444) $ (8,019) $ (9,349) $ 42,271
======== ======== ======== ======== ========
Net income (loss) from discontinued
operations $ 7,794 $ 1,341 $ (2,138) $ 18 $ -
Net income (loss) from discontinued
operations allocable to 2% general
partners' interest 156 27 (43) - -
-------- -------- -------- -------- --------
Numerator for diluted earnings per unit
from discontinued operations $ 7,638 $ 1,314 $ (2,095) $ 18 $ -
======== ======== ======== ======== ========
Numerator for diluted earnings per unit $ (6,287) $ (44,130) $ (10,114) $ (9,331) $ 42,271
======== ======== ======== ======== ========
Cash distributions declared per
Common Unit $ - $ - $ - $ - $ -
Denominator :
Denominator for basic earnings per
unit :
Common Units 4,950 4,950 4,950 4,950 4,950
Adjustments to denominator for
convertible debt and convertible
preferred equity securities:
Subordinate Note A - - - - 292
Series B Preferred Units - - - - 1,315
Series C Preferred Units - - - - 705
-------- -------- -------- -------- --------
Total adjustments - - - - 2,312
-------- -------- -------- -------- --------
Denominator for diluted earnings
per unit after conversion :
Common Units 4,950 4,950 4,950 4,950 7,262
======== ======== ======== ======== ========
Balance Sheet Data (at end of period):
Net property, plant and equipment $ 70,993 $ 19,793 $ 17,518 $ 16,621 $ 15,301
Total assets 111,587 64,804 44,107 47,506 56,069
Long-term debt (including current
maturities) 51,098 37,465 39,594 25,799 9,359
Redeemable preferred equity - 19,529 19,529 17,079 17,079
Partners' capital (deficiency) 29,598 (15,433) (23,990) (28,514) 14,895
Operating Data Continuing Operations (BPD):
Products Marketing Business
Product sales - - 13,267 14,783 16,919
Refinery
Crude oil throughput 32,555 31,449 28,090 - -
Products refined 31,681 30,619 27,438 - -
Products System
Transportation volumes 13,509 11,415 7,335 - -
Prior to mothballing the Refinery on March 22, 1998, this data represents information for the Refinery and products pipelines
and terminals.
Discontinued operations for 1998, included a $1,197,000 lower of cost or market inventory adjustment due to the decline in
inventory values. Discontinued operations for 1999 included the reversal of a $1,197,000 lower of cost or market inventory
adjustment since the market value of the crude oil was more than its carrying value.
Refinery closure costs for the year ended December 31, 1997 includes a $40,000,000 noncash charge for impairment of fixed
assets, $1,750,000 related to closure of the Refinery and related severance costs, and $367,000 related to the write-off of
certain Refinery assets offset by $721,000 in accruals that were reversed as a result of the Refinery being mothballed.
Since a portion of the debt is subject to increasing rates of interest, the Partnership is accruing interest at the effective
rate over the term of the debt. Interest expense in 1998, 1999 and 2000 reflects an accrual of $1,030,000, $315,000 and
reversal of an accrual of $1,345,000, respectively, which is based on the difference between the effective interest rates and
the stated rates.
Credit and loan fees include costs associated with the restructuring and refinancing of the Partnership of $1,064,000,
$613,000, $1,325,000, $1,761,000 and $3,456,000 for 1996, 1997, 1998, 1999 and 2000, respectively.
On December 31, 1996 after the market closed the convertible preferred limited partner units were converted to Common Units
on a one-for-one basis. At the same time, existing common limited partner units were converted to Common Units on a one-for-
twenty-one reverse unit split. The basic and diluted net loss per unit calculations for 1996 have been restated to reflect
the outstanding Common Units after the conversion.
Since cash distributions were not paid on the preferred equity, the preferred equity accrued distributions of $1,763,000,
$1,854,000 and $1,683,000 for the years ended December 31, 1998, 1999 and 2000, respectively, which have been deducted in
determining net income (loss) per unit. Included in the preferred equity accrued distributions for the years ended December
31, 1998 and 1999 were $196,000 and $147,000, respectively, related to the Series E Preferred Units and Series F Preferred
Units. The accrued distributions on the Series E Preferred Units and Series F Preferred Units were cancelled in connection
with the Crude Gathering Sale on October 1, 1999 (see Footnote 10).
In 1997, 1998, 1999 and 2000, the calculations of diluted earnings per unit exclude 300,000, 300,000, 278,000, and 208,000,
respectively, officer and employee unit appreciation rights and 2,987,000, 3,027,000, 2,751,000 and 0, respectively, units
attributed to the convertible preferred equity and convertible debt because the effect would be antidilutive. For 2000,
2,312,000 Common Unit equivalents related to the convertible preferred equity and convertible debt was included in the
calculation of dilutive earnings per unit. The calculation for those four years also exclude 70,000 director unit
appreciation rights because the plan states they will be settled for cash.
At December 31, 1996, 1997, 1998, 1999 and 2000 current maturities were $6,412,000, $1,938,000, $65,000, $25,799,000 and
$9,359,000, respectively.
In connection with the Crude Gathering Sale, Pride SGP exchanged certain assets, receivables, and the Series E and F
Preferred Units for cash and Subordinate Preferred Units which are included in Partners' capital (deficiency) for the years
ended December 31, 1999 and 2000. See "Item 7. Management's Discussion and Analysis of Financial Conditions and Results of
Operation - Factors and Trends Affecting Operating Results - Other Factors."
Due to the Refinery being mothballed on March 22, 1998, the operating data in 1998 for the Products Marketing Business is for
the period April 1, 1998 through December 31, 1998 and for the Refinery and Products System is for the period January 1, 1998
through March 31, 1998.
The Crude Gathering System segment was sold on October 1, 1999. Accordingly, the segment has been presented as discontinued
operations for all periods.
On May 10, 2000, the presiding judge in the Partnership's lawsuit against the DESC rendered a judgment in favor of the
Partnership in the amount of $45,706,000 (comprised of an additional long-term contract premium of $23.4 million and a
transportation premium of $22.3 million), plus statutory interest of $15,815,000 under the Contract Disputes Act. The total
award was $61,521,000. The DESC did not appeal the decision and the Partnership received $45,706,000 of the judgment on July
25, 2000 and paid total Legal Fees to the Partnership's attorneys of $5,908,000. On August 24, 2000, the Partnership
received an additional $15,815,000 which was for the statutory interest on the judgment. The Partnership paid Bonuses
totaling $6,967,000 from the DESC Proceeds to Management. The Partnership reported the $45,706,000 less Legal Fees of
$4,339,000 and Bonuses of $5,110,000 or a net of $36,257,000 in operating income for the year ended December 31, 2000. The
Partnership reported the other $15,815,000 less Legal Fees of $1,569,000 and Bonuses of $1,857,000 or a net of $12,389,000 in
other income for the year ended December 31, 2000.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
General
The following is a discussion of the financial condition and
results of operations of the Partnership. This discussion should be
read in conjunction with the financial statements included in this
report.
As a result of mothballing the Refinery at the end of the first
quarter of 1998 and the Crude Gathering Sale on October 1, 1999, the
Partnership's operating results for the Products Marketing Business
now depend principally on (i) the margins between the revenue realized
by the Partnership on the sale of refined products and the cost of
those refined products purchased from Equilon and (ii) the sales
volume at the Products Terminals. The price the Partnership is able
to realize on the resale of its petroleum products is influenced by
the level of competition in the Partnership's markets. Due to the
change in its core business, a comparison of the Products Marketing
Business to the Refinery and the prior products pipeline business
("Products System") would not be meaningful and, therefore, is not
included with this Form 10-K.
Prior to mothballing the Refinery and entering into the Equilon
Agreement, the Partnership's operating results depended principally on
(i) the rate of utilization of the Refinery, (ii) the margins between
the prices of its refined petroleum products and the cost of crude oil
and (iii) the volume throughput on the Products System.
The Crude Gathering System was sold on October 1, 1999 and
accordingly the Crude Gathering System is treated as a discontinued
operation in the financial statements of the Partnership. The Crude
Gathering System's operating results depended principally on (i) the
volume of throughput on and margins from the transportation and resale
of crude oil from the Partnership's Crude Gathering System and (ii)
the amount of crude oil produced in the areas the Partnership
gathered. Margins from the Crude Gathering System were influenced by
the level of competition and the price of crude oil. When prices were
higher, crude oil could generally be resold at higher margins.
Additionally, transportation charges trended upward when higher crude
oil prices resulted in increased exploration and development.
Conversely, when crude oil prices decreased, exploration and
development declined and margins on the resale of crude oil as well as
transportation charges tended to decrease.
In evaluating the financial performance of the Partnership,
Management believes it is important to look at operating income
excluding depreciation in addition to operating income which is after
depreciation. Operating income excluding depreciation measures the
Partnership's ability to generate and sustain working capital and
ultimately cash flows from operations. However, such measure is
before debt service, so it does not indicate the amount available for
distribution, reinvestment or other discretionary uses. Gross
revenues primarily reflect the level of crude oil prices and are not
necessarily an accurate reflection of the Partnership's profitability.
Also important to the evaluation of the Refinery's performance were
barrels of crude oil refined, gross margin (revenue less cost of
crude) per barrel, and operating expenses per barrel excluding
depreciation.
Year ended December 31, 2000 compared with year ended December 31,
1999.
General. Net income for the year ended December 31, 2000 was
$43.4 million compared to net loss of $7.7 million for the year ended
December 31, 1999. The results for the year ended December 31, 1999
included income of $18,000 from discontinued operations.
Continuing Operations (Products Marketing Business). Net income
from continuing operations was $43.4 million for the year ended
December 31, 2000 compared to a net loss from continuing operations of
$7.7 million for the year ended December 31, 1999. The results for
the year ended December 31, 2000 included $48.6 million of income from
the DESC Claim (see "Financial Condition - Financial Resources and
Liquidity"). The $12.4 million of interest income related to the DESC
Claim is reported separately from the $36.3 million included in
operating income which represents underpayments by the Government in
prior years for jet fuel purchased from the Partnership. As a result
of collecting the DESC Proceeds and applying it to the Debt (see
"Financial Condition - Financial Resources and Liquidity"), the
Partnership wrote-off $2.6 million of deferred financing costs that
were being amortized over the life of the loans and recognized income
of $1.3 million associated with the reversal of an accrual for
increasing rate accrued interest for the year ended December 31, 2000.
In addition, for the year ended December 31, 2000, marketing, general
and administrative expense declined $294,000 and operating expense
declined $634,000 for a total decrease of $928,000 (see "Item 3. Legal
Proceedings").
Operating income for the Products Marketing business was $36.2
million for the year ended December 31, 2000 compared to operating
loss of $1.0 million for the year ended December 31, 1999. Excluding
the $36.3 million of DESC Income (see "Item 3. Legal Proceedings")
included in operating income, the year ended December 31, 2000 would
have shown an operating loss of $88,000. As mentioned before, general
and administrative expenses and operating expenses declined a total of
$928,000 for the year ended December 31, 2000. Depreciation expense
for the Products Marketing Business was $1.5 million for both the
years ended December 31, 2000 and 1999. Operating income excluding
depreciation for the Products Marketing Business was $37.6 million for
the year ended December 31, 2000 compared to operating income
excluding depreciation of $480,000 for the year ended December 31,
1999. Excluding the $36.3 million of DESC income included in
operating income, the year ended December 31, 2000 would have shown
operating income excluding depreciation of $1.4 million. The
improvement for the year ended December 31, 2000 was due to a $928,000
reduction in general and administrative expenses and operating
expenses. For the year ended December 31, 2000, the Partnership
marketed 16,919 BPD of refined products compared to 14,783 BPD for the
year ended December 31, 1999. The net margin per barrel (after
marketing, general and administrative expenses) for the year ended
December 31, 2000 was breakeven compared to negative $0.19 for the
year ended December 31, 1999.
Discontinued Operations (Crude Gathering System). The Crude
Gathering System was sold on October 1, 1999. The results for the
year ended December 31, 1999 are discussed in the comparison of the
year ended December 31, 1999 to the year ended December 31, 1998 for
discontinued operations.
Year ended December 31, 1999 compared with year ended December 31,
1998.
General. Net loss for the year ended December 31, 1999 was $7.7
million compared to net loss of $8.6 million for the year ended
December 31, 1998. The improvement for the year ended December 31,
1999 was due to improved results from the discontinued operation which
was partially offset by weaker results in the continuing operations.
Continuing Operations (Products Marketing Business). Net loss
from continuing operations was $7.7 million for the year ended
December 31, 1999 compared to $6.4 million for the year ended December
31, 1998. The results for the year ended December 31, 1998 were
stronger due to the results for the Refinery in the first quarter of
1998 and the lower credit and loan fees for the year ended December
31, 1998. Credit and loan fees for the year ended December 31, 1999
increased due to certain deferred financing costs being amortized over
a shorter period as a result of the new maturity date of the
BankBoston facility (See "Financial Condition - Financial Resources
and Liquidity"). The stronger operating results for the year December
31, 1998 were partially offset by lower interest expense for the year
ended December 31, 1999 due to the payment of $15.0 million on the A
Term Loan (See "Financial Condition - Financial Resources and
Liquidity") and increased interest income for the year ended December
31, 1999 resulting from the proceeds of the sale of the Crude
Gathering System.
Operating loss, depreciation expense, and operating income
excluding depreciation from continuing operations was $1.0 million,
$1.5 million and $480,000, respectively, for the year ended December
31, 1999. Operating income from continuing operations was $552,000
for the year ended December 31, 1998 which included operating income
of $1.0 million from the Refinery and Products System for the first
three months of 1998. Depreciation expense from continuing operations
was $1.4 million for the year ended December 31, 1998 which included
depreciation expense of $368,000 from the Refinery and Products System
for the first three months of 1998. Operating income excluding
depreciation from continuing operations was $2.0 million for the year
ended December 31, 1998 which included operating income excluding
depreciation of $1.4 million from the Refinery and Products System for
the first three months of 1998. During the year ended December 31,
1999, the Partnership marketed 14,783 BPD of refined products compared
to 17,046 BPD for the year ended December 31, 1998. For the last nine
months of 1998 which excludes the Refinery and Products System, the
Partnership marketed 13,267 BPD of refined products. The net margin
per barrel for the year ended December 31, 1999 was negative $0.19
compared to positive $0.09 for the year ended December 31, 1998. For
the last nine months of 1998 which excludes the Refinery and Products
System, the net margin per barrel was negative $0.12. Although the
amount of refined products sold each day improved for the year ended
December 31, 1999 from the last nine months of 1998, such improvement
was not enough to offset certain temporary discounts Equilon gave the
Partnership during the last nine months of 1998 as concessions for the
startup problems it experienced when it began operating the new
refined products pipeline.
Discontinued Operations (Crude Gathering System). Net income
from discontinued operations was $269,000 for the seven months ended
July 31, 1999 compared to a loss of $2.1 million for the year ended
December 31, 1998. Net income from discontinued operations for the
year ended December 31, 1999 included the reversal of a $1.2 million
lower of cost or market inventory adjustment since the market value of
the crude oil owned by the Partnership was more than its LIFO carrying
value at September 30, 1999, whereas, net loss from discontinued
operations for the year ended December 31, 1998 included a negative
$1.2 million lower of cost or market adjustment since the market value
of the crude oil owned by the Partnership was less than its carrying
value at December 31, 1998. The results from discontinued operations
for the seven months ended July 31, 1999 included $944,000 in higher
costs of sales due to hedging losses. See "Item 7a. Quantitative and
Qualitative Disclosure About Market Risk." The volume of crude oil
gathered by the Crude Gathering System decreased to 38,110 BPD for the
first seven months of 1999 from 43,508 BPD for the year ended December
31, 1998 due to the elimination of marginal contracts and lower crude
oil production in the field. For the seven months ended July 31,
1999, net margin increased to $0.12 per barrel from negative $0.04 per
barrel for the year ended December 31, 1998, which is primarily a
result of the lower of cost or market adjustments discussed earlier.
The Partnership also realized a loss for the year ended December
31, 1999 on the disposal of the discontinued operations of $251,000,
which includes operating losses incurred after the measurement date of
August 1, 1999 and prior to the disposal date of October 1, 1999.
From August 1, 1999 through October 1, 1999, the Partnership incurred
$1.3 million in higher costs of sales due to hedging losses which was
offset by the gain realized on the sale of crude oil to Sun on October
1, 1999 as part of the Crude Gathering Sale.
Factors and Trends Affecting Operating Results
A number of factors have affected the Partnership's operating
results, both indirectly and directly, such as environmental
compliance, other regulatory requirements, industry trends, price of
crude oil and, with respect to certain products, seasonality and
weather. The Managing General Partner expects that such conditions
will continue to affect the Partnership's business to varying degrees
in the future. The order in which these factors are discussed is not
intended to represent their relative significance.
Environmental Compliance. Increasing public and governmental
concern about air quality is expected to result in continued
regulation of air emissions. Regulations relating to carbon monoxide
and regulations on oxygen content in gasoline and sulfur content in
both diesel fuel and gasoline are expected to be increasingly
important in urban areas. In addition, the Partnership plans to spend
approximately $333,000 for the years ended December 31, 2001 and 2002
on several projects to maintain compliance with various other
environmental requirements including $30,000 for 2001 related to an
investigative study by the Texas Natural Resource Conservation
Commission and an aggregate of $94,000 for 2001 and 2002 related to
the cleanup of an existing leak. The remaining $209,000 is for
various operating expenses to be incurred in the ordinary course of
business.
The Partnership is currently involved in Phase II of an
investigative study by the Texas Natural Resource Conservation
Commission. Management estimates the remaining cost to comply with
this study approximates $30,000 and had accrued for this amount at
December 31, 2000. In the first quarter of 2001, the Partnership
completed Phase II and has submitted a report to the Texas Natural
Resource Conservation Commission. The Partnership spent $217,000
related to that study for the year ended December 31, 2000.
Management does not believe any significant additional amounts will be
required to maintain compliance with this study or other environmental
requirements other than expenditures incurred in the ordinary course
of business.
Effective January 1, 1995, the Clean Air Act Amendment of 1990
required that certain areas of the country use reformulated gasoline
("RFG"). The Abilene and San Angelo market areas do not require RFG.
Collin, Dallas, Denton, and Tarrant Counties, which comprise the
Dallas-Fort Worth ("DFW") metroplex area, do require RFG; however, the
Partnership's Aledo Terminal lies outside this area and is allowed to
supply conventional gasoline that is not destined for sale in these
four counties. In addition to the requirement for RFG in certain
areas, new but much less restrictive regulations took effect that
impose new quality standards for conventional gasoline in the rest of
the country. Management does not believe that these have had or will
have a material adverse effect on the Partnership's operations.
After the Crude Gathering Sale, the Partnership continues to be
responsible for certain environmental liabilities associated with the
Crude Gathering System including three on-going remediation sites, any
refined product contamination associated with the assets sold and
certain inactive crude gathering lines retained by the Partnership.
Other than $94,000 currently accrued for remediation of the sites, the
Partnership does not expect future expenditures related to these
retained environmental liabilities to be material.
Other Regulatory Requirements. The Partnership is subject to the
rules and regulations of, among others, the Occupational Safety and
Health Administration, Texas Railroad Commission, Texas Natural
Resource Conservation Commission, and United States Environmental
Protection Agency.
Industry Trends and Price of Crude Oil. The Partnership is
impacted by fluctuations in the cost of products purchased from
Equilon versus fluctuations in the price realized by the Partnership
on the sale of such products and the amount of competition in its
markets.
Seasonality and Weather. Gasoline consumption is typically
highest in the United States in the summer months and lowest in the
winter months. Diesel consumption in the southern United States is
generally higher just prior to and during the winter months when
commercial trucking is routed on southern highways to avoid severe
weather conditions further north.
Other Factors. The Government awarded the Partnership the right
to supply 32,850,000 gallons of military aviation fuel for the
contract period that began April 1, 2001 and ends March 31, 2002. The
award is for deliveries to Dyess, Joint Reserve - Fort Worth, Texas,
AASF in Dallas, Texas, and AASF in Grand Prairie, Texas. The contract
is a 37% decrease from the volumes that it supplied under the contract
which began April 1, 2000 and ended March 31, 2001; however, margins
under the new contract have improved from last year's contract. See
"Items 1. and 2. Business and Properties - Partnership Operations and
Products."
On January 17, 2001, the Partnership filed a voluntary petition
under Chapter 11 of the Federal Bankruptcy Code in the Northern
District of Texas, Abilene Division, and was authorized to continue
managing and operating the business as a debtor in possession subject
to the control and supervision of the Bankruptcy Court. The filing
was necessitated by certain actions taken by Varde which is the
Partnership's primary lender and also holds the Redeemable Preferred
Equity of $17,079,000 (see "Item 3. Legal Proceedings").
In March 2001, the Partnership and Varde agreed to let the
Bankruptcy Court hear all disputes from each of the removed Texas and
New York lawsuits (see "Item 3. Legal Proceedings"). Closing
arguments were heard by the Bankruptcy Court on April 6, 2001.
Additional briefs will be filed in the case which are expected to be
delivered to the Bankruptcy Court by June 8, 2001. Once the
Bankruptcy Court reviews those briefs, a ruling will be issued.
The Partnership believes that if the Bankruptcy Court finds in
favor of the Partnership, that the Partnership will likely be able to
pay all of its creditors and emerge from Bankruptcy in a relatively
short period of time. However, if the Bankruptcy Court finds in favor
of Varde, the Partnership will unlikely be able to pay all of its
creditors in full and a negative ruling will cause further uncertainty
about the Partnership's future.
A common unitholder has notified the Partnership he believes the
Partnership's tax status should be classified as a corporation rather
than a partnership for federal income tax purposes. At issue is the
requirement that a publicly traded partnership have a sufficient
percentage of income that consists of "qualifying income" under
Section 7704(d)(1) of the Internal Revenue Code to be taxed as a
partnership, rather than a corporation, for federal income tax
purposes. The common unitholder has demanded that the Partnership
immediately withdraw its Schedule K-1's; however, the Partnership has
not changed its position that it will continue to be taxed as a
partnership because a sufficient portion of its income constitutes
"qualifying income" and, therefore, the Partnership does not plan on
withdrawing the Schedule K-1's.
If the Partnership is taxed as a corporation rather than a
partnership for federal income tax purposes, the Partnership's results
of operations, and the tax treatment to the Partnership and its
unitholders, would materially differ from the amounts presented
herein. However, the Partnership intends to vigorously defend its
status as a partnership for federal income tax purposes.
Financial Condition
Inflation
Although the Partnership's operating costs are generally impacted
by inflation, the Managing General Partner does not expect general
inflationary trends to have a material adverse impact on the
Partnership's operations.
Financial Resources and Liquidity
With respect to the Products Marketing Business, the Partnership
receives payments from the United States Government, major oil
companies, and other customers within approximately 7 to 15 days from
shipment in the case of product sales. From September 30, 1998 to
December 31, 1999, Equilon maintained the refined products inventory
in tanks leased to Equilon by the Partnership at the Partnership's
marketing facilities. As a result, the Partnership purchased product
inventory daily from Equilon, thereby eliminating most of the carrying
costs, including interest costs. Further, this arrangement
substantially reduced the lag between the time the Partnership paid
Equilon for the product, 10 to 20 days after the sale, and the time
the Partnership received payment from its customers. Beginning
January 1, 2000, the Partnership is required to reimburse Equilon its
carrying costs of inventory, including interest costs. To offset the
interest costs associated with carrying the inventory and to reduce
letter of credit fees, the Partnership deposited $14,000,000 with
Equilon in the first and second quarters of 2000, which is included as
an offset in accounts payable. Equilon will pay the Partnership
interest income on the difference between the amount deposited and the
value of the refined products inventory maintained by Equilon at the
Partnership's terminals.
On December 31, 1997, Varde purchased and assumed the then
existing lenders' rights and obligations under the Partnership's
outstanding bank debt. In conjunction with Varde's purchase and
assumption of the lenders' rights and obligations under such bank
debt, BankBoston, N.A. ("BankBoston") refinanced the Partnership's
letter of credit facility and provided a new revolver facility (the
"BankBoston Revolver") on December 31, 1997.
At the request of BankBoston, the BankBoston Revolver was reduced
to zero during the third quarter of 2000. The Partnership is in the
process of closing its bank accounts with BankBoston.
During the third quarter of 2000, the Partnership established a
relationship with Wells Fargo Bank, N.A. ("Wells Fargo") and also had
Wells Fargo issue a letter of credit for $721,000.
Under the Varde loan documents, the Partnership was required to
make quarterly principal payments on the Series A Term Loan. In
addition, the Varde loan documents provide for the following
prepayments: (a) prepayments at the Partnership's option, (b)
prepayments of excess cash flow, (c) prepayments of proceeds from the
issuance of new securities, (d) prepayments from asset sales and (e)
prepayments from proceeds of legal claims, which includes DESC
Proceeds (See "Item 3. Legal Proceedings") (the "Prepayments"). On
receipt of proceeds from legal claims, the loan documents require that
the Partnership must first retire the Series A Term Loan which with
accrued interest was $3,657,000 as of July 25, 2000 ("A Term Loan")
and pay $5,000,000 towards the Series B Term Loan which with accrued
interest was $12,949,000 as of July 25, 2000 ("B Term Loan"). The
amounts outstanding on the A Term Loan and B Term Loan shown above
were before the three payments on July 25, 2000 and July 26, 2000 to
Varde totaling $16,606,000 (the "Payments") from the DESC Proceeds.
In addition, Varde also receives one-third of the remaining DESC
proceeds after reduction for the $8,657,000 applied to the A Term Loan
and B Term Loan mentioned above ("Varde One-Third"). However, as a
result of the dispute with Varde, the Partnership did not pay the
entire amount of the Varde One-Third and instead deposited $16,360,000
with the Texas Court to cover the remaining Varde One-Third plus
retire additional securities with a portion of the Partnership's two-
thirds. The Partnership believes it is allowed to retain any
remaining DESC proceeds after the payment of the Varde One-Third;
however, the Partnership used some of the remaining proceeds to
further reduce Varde securities to reduce interest expense and
accumulated arrearages. As discussed in "Item 3. Legal Proceedings,"
there is a dispute about whether the DESC Proceeds are also reduced by
the Legal Fees paid to the Partnership's attorneys in calculating the
Varde One-Third. Under the Varde credit agreement, the Partnership
believes the Varde One-Third must be applied to Varde's Debt and
Redeemable Preferred Equity (see definition below). Therefore, the
Partnership believes that the Payments of $16,606,000 retired the A
Term Loan and B Term Loan. See "Item 3. Legal Proceedings" for
discussion of dispute with Varde and Varde's interpretation of the
loan documents.
As a result of Varde's assumption of the outstanding bank debt,
additional loans to the Partnership, subsequent interest being paid in
kind, proceeds from the Crude Gathering Sale being applied to the A
Term Loan, scheduled principal payments and payments out of the DESC
Proceeds, Varde now holds a Series C Term Loan of $6,171,000 ("C Term
Loan") and Series A Unsecured Loan of $3,188,000 ("Subordinate Note
A") as of December 31, 2000. The Partnership began accruing interest
expense at the statutory rate of 6% ("Statutory Rate") on the C Term
Loan and $2,000,000 of the Subordinate Note A on July 27, 2000 as a
result of the tender by the Partnership to Varde of $8,171,000 (the
"Tender"). The Tender required that Varde had to apply the Tender in
accordance with the Partnership's interpretation of the credit
agreement. Varde refused the Tender. When the Partnership deposited
$9,360,000 in the Texas Court on August 23, 2000, the Partnership
began accruing interest expense at the Statutory Rate on an additional
$1,188,000 of the Subordinate Note A which is what would have been the
remaining balance of the Subordinate Note A had Varde accepted the
Tender on July 27, 2000. The Partnership believes the First Deposit
will eventually be used to retire the C Term Loan and Subordinate Note
A. The outstanding balance of $9,359,000 on the C Term Loan and
Subordinate Note A are included in current liabilities at December 31,
2000. The Partnership accrued total interest expense of $236,000 at
the Statutory Rate on $6,171,000 of the C Term Loan and $2,000,000 of
the Subordinate Note A from July 27, 2000 to December 31, 2000 and on
$1,188,000 of the Subordinate Note A from August 23, 2000 to December
31, 2000 and included the accrual in other accrued liabilities. See
"Item 3. Legal Proceedings" for discussion of dispute with Varde and
Varde's interpretation of the Varde loan documents.
The A Term Loan, B Term Loan, C Term Loan and Subordinate Note A
are collectively referred to as the debt (the "Debt").
On August 31, 2000, the Partnership deposited another $7,000,000
in the Texas Court. The Partnership believed the Second Deposit and
$1,000 of the First Deposit should be used to redeem a portion of the
Redeemable Preferred Equity along with paying accumulated arrearages
on those securities. However, due to the Bankruptcy, such redemption
using the Second Deposit and $1,000 of the First Deposit is unlikely.
For the year ended December 31, 2000, the Deposits with the Texas
Court accrued interest income of $391,000.
Under the amended terms, cash interest payments on the Varde
Revolver and cash interest and principal payments on the A Term Loan
were limited to $2,500,000 per annum. Any excess on the Varde
Revolver and A Term Loan along with interest on the B Term Loan, C
Term Loan and Subordinate Note A were paid in kind. Distributions on
Varde's Redeemable Preferred Equity accumulate in arrears. Prior to
the Payments and the Tender, the A Term Loan, B Term Loan, and C Term
Loan bore interest rates of 11%, 13%, 15%, 17% and 18% for the first,
second, third, fourth and fifth years, respectively, except for
$4,779,000 of the B Term Loan as of July 25, 2000 which was subject to
interest rates of 18% through maturity. As mentioned before the
Partnership began accruing interest on the C Term Loan at the
Statutory Rate of 6% per annum after the Tender on July 27, 2000.
Prior to the Tender and the First Deposit which is expected to retire
the Subordinate Note A, such note was convertible into 504,000 Common
Units as of July 25, 2000 and bore interest at prime plus one percent.
The prime rate was 9.5% at December 31, 2000. After the Tender on
July 27, 2000 and the First Deposit on August 23, 2000, the
Partnership also began accruing interest expense on the Subordinate
Note A at the Statutory Rate of 6%. See "Item 3. Legal Proceedings"
for discussion of dispute with Varde and Varde's interpretation of the
Varde loan documents.
Because a portion of the debt was subject to increasing rates of
interest, the Partnership was accruing interest at the effective rate
over the term of the debt. Interest expense for the years ended
December 2000, 1999 and 1998 reflects the reversal of an accrual of
$1,345,000 and accruals of $315,000 and $1,030,000, respectively,
which is based on the difference between the effective interest rates
and the stated rates.
As a result of the cash interest and principal payment
limitations, interest on the B Term Loan, C Term Loan, and Subordinate
Note A had been paid in kind prior to the Payments, the Tender and the
First Deposit which are expected to be used to retire such Debt. The
preferred distributions will continue to accumulate in arrears on the
remaining Redeemable Preferred Equity after the originally expected
application of the Second Deposit and $1,000 of the First Deposit
until the Partnership redeems such Redeemable Preferred Equity (see
"Item 3. Legal Proceedings").
From April 15, 1999 through January 2, 2001, the Partnership had
a $3,000,000 revolving credit facility with Varde ("Varde Revolver").
Advances under the Varde Revolver bore interest at 11% per annum,
payable monthly. The Partnership did not have any outstanding
borrowings under the Varde Revolver as of December 31, 2000.
Fees paid to Varde in the form of additional Series B Term Loans
were $150,000 in 1998 and $100,000 in 1999.
The A Term Loan, B Term Loan, C Term Loan and Subordinate Note A
were originally due December 31, 2002. As previously mentioned, the
Partnership was required to make quarterly principal payments on the A
Term Loan as well as Prepayments under certain circumstances. Varde
agreed to forego all regular principal payments in 1998 and 1999.
However, the Partnership applied $15,000,000 of the cash proceeds from
the Crude Gathering Sale to the A Term Loan on October 1, 1999, made a
quarterly principal payment of $1,353,000 on the A Term Loan in the
second quarter of 2000, and used $3,657,000 and $12,949,000 of the
Payments to retire the A Term Loan and B Term Loan, respectively. See
"Item 3. Legal Proceedings" for discussion of dispute with Varde and
Varde's interpretation of the Varde loan documents.
During the year ended December 31, 2000, the Partnership had
drawn up to approximately $2.6 million on the BankBoston Revolver.
The weighted average amount outstanding under the BankBoston Revolver
was approximately $37,000. The weighted average interest rate during
the 2000 period for the BankBoston Revolver was approximately 10.8%.
The Partnership did not draw on the Varde Revolver during the year
ended December 31, 2000. During the year ended December 31, 1999, the
Partnership had drawn up to approximately $4.2 million and $1.9
million on the BankBoston Revolver and Varde Revolver, respectively.
The weighted average amount outstanding under the BankBoston Revolver
and Varde Revolver was approximately $110,000 and $514,000,
respectively. The weighted average interest rate during the 1999
period for the BankBoston Revolver was approximately 9.5%. The Varde
Revolver accrued interest at a fixed rate of 11.0% per annum.
Cash flows will be significantly affected by fluctuations in the
cost and volume of refined products and the timing of accounts
receivable collections. For the year ended December 31, 2000, cash
was utilized as a result of the Payments, the Deposits, an increase in
accounts receivable (as a result of the higher refined product prices)
and a decrease in accounts payable (resulting from the $14,000,000 in
cash deposited with Equilon). For the year ended December 31, 1999,
cash was provided by a decrease in accounts receivables and an
increase in accounts payable (resulting from the higher refined
product prices).
On December 31, 1997, Management invested an aggregate of
$2,000,000 in the form of a note payable to Varde and received a
one-third economic non-directive interest in the following: (i)
$6,000,000 of the B Term Loan, (ii) C Term Loan, (iii) Subordinate
Note A, (iv) Series B Cumulative Convertible Preferred Units, (v)
Series C Cumulative Convertible Preferred Units and (vi) Series D
Cumulative Preferred Units. The note payable to Varde was secured by
Management's interest in such securities. Any current cash yield on
Management's share of such securities was payable to Varde as
interest, net of applicable federal income tax. As a result of the
Payments, Management believes the note payable to Varde of $2,000,000
has been retired and the above securities should be issued directly to
Management. Varde disputes this position and refuses to request the
Partnership to issue the securities.
The Partnership or Management had a three-year call on Varde's
position for an amount equal to a 40% annual return to Varde, subject
to a minimum payment of $7,500,000 over Varde's cost. Such call
lapsed December 31, 2000. The securities held by Varde have certain
antidilution provisions and registration rights.
Effective April 15, 1999, the Partnership amended the terms of its
Partnership Agreement and preferred equity securities effective as of
January 1, 1998. As a result of the amendment, preferred equity
securities are treated as accumulated arrearages rather than being
considered paid in kind. This reduces the amount of preferred equity
on the balance sheet and also affects the tax treatment of the
distributions to the common unitholders and holders of the preferred
equity securities.
In conjunction with Varde's assumption of the previous existing
bank debt, Varde received preferred equity securities. As a result of
the assumption, Varde holds $17,079,000 of redeemable preferred equity
("Redeemable Preferred Equity") including $9,322,000 of Series B
Cumulative Convertible Preferred Units ("Series B Preferred Units"),
$5,000,000 of Series C Cumulative Convertible Preferred Units ("Series
C Preferred Units") and $2,757,000 of Series D Cumulative Preferred
Units ("Series D Preferred Units') which are all redeemable on
December 31, 2002. The Partnership had expected prior to the
Bankruptcy that once the dispute with Varde was resolved that the
Second Deposit of $7,000,000 and $1,000 from the First Deposit would
be used to redeem $3,117,000 of the Series B Preferred Units and
$1,672,000 of the Series C Preferred Units (See "Item 3. Legal
Proceedings") or a total of $4,789,000 along with payment of
accumulated arrearages on the Redeemable Preferred Equity of
$2,212,000 (see below) or a total of $7,001,000. At December 31, 2000
and after adjusting for the expected redemption with the Second
Deposit and $1,000 from the First Deposit and prior to the Bankruptcy,
the Series B Preferred Units and Series C Preferred Units are
convertible into 985,000 and 528,000 Common Units, respectively or a
total of 1,513,000 Common Units. The preferential quarterly payments
on the Series B Preferred Units and Series C Preferred Units are 6%
per annum in the first three years after issuance, 12% per annum in
the fourth and fifth years and 15% per annum thereafter or at the
Partnership's option may accumulate in arrears at 8% per annum in the
first three years. On August 31, 2000, the Partnership began accruing
interest at the Statutory Rates on the Series B Preferred Units and
Series C Preferred Units to the extent that the Second Deposit and
$1,000 of the First Deposit were expected to be applied to such
securities prior to the Bankruptcy. The Partnership accrued interest
expense of $140,000 related to that portion of the Redeemable
Preferred Equity as of December 31, 2000 and included it in other
accrued liabilities. Due to the Bankruptcy, such redemption using the
Second Deposit and $1,000 of the First Deposit is now unlikely. The
preferential quarterly payments on the Series D Preferred Units are
11% per annum in the first three years after issuance, 13% per annum
in the fourth and fifth years and 15% per annum thereafter or at the
Partnership's option may accumulate in arrears at 13% per annum in the
first three years. For the years ended December 31, 2000 and 1999,
the Partnership accumulated arrearages of $1,683,000 and $1,707,000,
respectively, on the Redeemable Preferred Equity. Through December
31, 2000, these securities had total accumulated arrearages of
$4,958,000. The Partnership had expected that once the dispute with
Varde was resolved, that part of the Second Deposit and $1,000 of the
First Deposit would be used to pay $1,440,000 of the accumulated
arrearages on the Series B Preferred Units and $772,000 of the
accumulated arrearages on the Series C Preferred Units or a total of
$2,212,000. However, due to the Bankruptcy, such payments of the
accumulated arrearages using the Second Deposit and $1,000 of the
First Deposit is now unlikely. Prior to the Bankruptcy, the
Partnership also expected to redeem additional Redeemable Preferred
Equity and pay additional accumulated arrearages once a replacement
working capital facility was in place (See "Item 3. Legal
Proceedings").
The Partnership also accumulated arrearages of $343,000 on
preferred equity securities owned by Pride SGP through the third
quarter of 1999. These accumulated arrearages were canceled on
October 1, 1999 as part of an exchange between Pride SGP and the
Partnership, as described in the following paragraph.
In connection with the Crude Gathering Sale on October 1, 1999,
Pride SGP exchanged (a) certain trunklines and related pumping
facilities owned by Pride SGP, (b) interest payable to Pride SGP from
the Partnership of $548,000, (c) rentals payable to Pride SGP from the
Partnership of $2,146,000, (d) the Series E Preferred Units ("Series E
Preferred Units") in the face amount of $2,000,000 held by Pride SGP,
and (e) the Series F Preferred Units ("Series F Preferred Units") in
the face amount of $450,000 held by Pride SGP for (y) $2,000,000 in
cash and (z) newly issued Series G Preferred Units ("Subordinate
Preferred Units") in the face amount of $3,144,000. The Subordinate
Preferred Units are subordinate to the Series B Preferred Units,
Series C Preferred Units and Series D Preferred Units and at the
Partnership's option may be redeemed on the latter of the retirement
of the Redeemable Preferred Equity or October 1, 2004. The
Subordinate Preferred Units will not accrue any distributions prior to
October 1, 2004. Beginning October 1, 2004, distributions will accrue
on these securities at a rate equal to the lesser of (i) the
Partnership's net income less any distributions accrued or paid on the
Redeemable Preferred Equity held by Varde or (ii) 10% per annum.
At December 31, 2000, Pride SGP held the Subordinate Preferred
Units in the face amount of $3,144,000.
Any payments of principal on the securities held by Varde shall
be applied in the following order: Varde Revolver, A Term Loan, B Term
Loan, C Term Loan, Subordinate Note A, pro rata to the Series B
Preferred Units and Series C Preferred Units, and Series D Preferred
Units.
At December 31, 2000, 4,950,000 Common Units were outstanding,
representing a 98% limited partner interest. Pride SGP, Management
and the public own 250,000, 998,000 and 3,702,000 Common Units,
respectively.
The Common Units rank behind the Partnership's indebtedness with
Varde, as well as, the Series B Preferred Units, Series C Preferred
Units, Series D Preferred Units and Subordinate Preferred Units
(collectively "Preferred Equity Securities"). As a result of the
layers of debt and the Preferred Equity Securities ahead of the Common
Units and taking into consideration the various preferential calls on
available cash contained in the debt instruments and Preferred Equity
Securities instruments (including accumulated arrearages on the
Preferred Equity Securities), common unitholders were allocated income
under the Partnership Agreement for the year ended December 31, 2000
as a result of the DESC Proceeds without a corresponding distribution
of cash to offset any potential tax liability.
In the future common unitholders may also receive allocations of
income from operations, asset sales or litigation to the extent cash
generated from such activities is required to be applied to debt and
preferred equity securities. The actual impact on a common unitholder
of repayment of debt and retirement of the preferred equity securities
is dependent upon each common unitholder's personal tax basis in their
Common Units and such common unitholder's overall personal tax
situation.
Under the terms of the Partnership's loan documents with Varde,
Varde restricted the payment of distributions to common unitholders
throughout the term of the loan documents. In addition, the Preferred
Equity Securities instruments also limit distributions to common
unitholders. Future distributions will be dependent on, among other
things, payment in full of the Varde Debt, the termination of the loan
documents and the redemption of all Preferred Equity Securities.
As of December 31, 2000 and after the previously expected
redemption with the Second Deposit and $1,000 of the First Deposit
prior to the Bankruptcy, the Series B Preferred Units and Series C
Preferred Units held by Varde are convertible into 1,513,000 Common
Units. If Varde converted all their convertible securities into
Common Units, the number of Common Units outstanding would increase
from 4,950,000 Common Units to 6,463,000 Common Units.
The Partnership has to maintain compliance with certain financial
and other covenants, as defined in the credit agreement with Varde;
however, the Partnership feels it has defenses to alleged defaults
occurring after July 25, 2000. The Varde credit agreement contains
restrictive covenants including, among other things, restrictions on
additional indebtedness, commitments and payments thereon, sale of
assets and securities, and certain affiliate transactions. Prior to
the receipt of the DESC Proceeds, the Partnership was not in
compliance with the consolidated operating cash flow to consolidated
debt service ("COCF/CDS Covenant") and earnings before interest,
taxes, depreciation and amortization covenant ("EBITDA Covenant");
however, it came in compliance beginning on July 25, 2000 on receipt
of the DESC Proceeds. The financial covenants in the Varde credit
agreement for the year 2000 were based on the combined results of the
Products Marketing Business and the Crude Gathering System, and due to
the sale of the Crude Gathering System on October 1, 1999, it was
unlikely the Partnership could have complied with the current
financial covenants during the year ended December 31, 2000 without
receipt of the DESC Proceeds (see "Item 3. Legal Proceedings"). The
Partnership is still not in compliance with the requirement that the
auditors' opinion on the financial statements contain no material
qualifications or going concern uncertainties. The Partnership has
utilized a portion of the DESC Proceeds to provide the necessary
working capital to the extent permitted under the temporary
injunctions issued by both the Texas Court and New York Court and
subject to the supervision of the Bankruptcy Court. Prior to the
dispute with Varde and the Bankruptcy, the Partnership had hoped to
obtain a new working capital facility. Due to the dispute with Varde
and the Bankruptcy, it is unlikely a lender will provide a replacement
working capital facility until such dispute is resolved and the
Bankruptcy Court approves a plan of reorganization. Also, there can
be no assurance that the Partnership will be successful in obtaining a
replacement working capital facility even after such dispute is
resolved and the Bankruptcy Court approves a plan of reorganization.
Substantially all of the Partnership's assets are pledged as
collateral to Varde in connection with the credit agreement. See
"Item 3. Legal Proceedings" for information on the dispute with Varde
and the potentially material adverse effects such dispute could have
on the Partnership's financial condition.
Varde sent the Partnership notices of defaults and accelerations
under the credit agreement and the preferred equity instruments for
not paying the Varde One-Third within two days of receipt of the DESC
Proceeds, for not providing certain financial information, for the
engagement of independent certified public accountants without Varde's
consent, for failing to retire the Subordinate Note A and for failing
to redeem the Redeemable Preferred Equity which events occurred after
July 25, 2000. The Partnership believes it has complied with the
Varde One-Third requirement with the Tender and the Deposits (see
"Item 3. Legal Proceedings"). As discussed in the preceding
paragraph, the Partnership feels it has defenses to the other alleged
defaults occurring after July 25, 2000.
The New York Court issued a temporary restraining order on
September 7, 2000 which imposed restrictions on the Partnership's use
of DESC Proceeds (see "Item 3. Legal Proceedings"). Because of these
constraints, Management agreed to extend a revolving loan to the
Partnership of $4,200,000 from the Bonuses paid to Management as a
result of the successful litigation of the DESC Claim. The note was
executed September 18, 2000. The Partnership had drawn up to
$1,990,000 during the year ended December 31, 2000; however, the
Partnership repaid the note on November 15, 2000, and the loan balance
was zero at year end. Such note is secured by the assets of the
Partnership. Although the note accrued interest at prime plus 1.75%,
Management waived such interest for the period it was outstanding
during the year ended December 31, 2000. No further advances are
expected under this facility.
Excluding the income resulting from the DESC Claim, the
Partnership has continually incurred operating losses prior to the
year ended December 31, 2000. Operating results prior to the year
ended December 31, 2000 suffered as a result of increasing
competition, depressed operating margins and higher financing costs.
If the Partnership's interpretation of the loan documents is correct
and the Partnership emerges from Bankruptcy, then the Partnership
expects to retire the Varde Debt. In such event, the Partnership
believes it will have positive cash flow and net income will be close
to break even.
The Partnership's ability to improve profits is principally
dependent upon increased volumes and/or improved profit margins, as
well as continued cost control initiatives. Under a new military
aviation fuel contract with the U.S. Government which began April 1,
2001 and ends March 31, 2002, the Partnership will supply
approximately 32,850,000, gallons which is a 37% decrease from the
volumes that it supplied under the contract which began April 1, 2000
and ended March 31, 2001; however, margins under the new contract have
improved from last year's contract.
As a result of problems associated with the startup of the new
products pipeline by Equilon in 1998, Equilon agreed to certain
contract concessions. On October 1, 1998 the Partnership sold to
Equilon the refined products held by it at the Products Terminals and
in the San Angelo Pipeline. In addition, Equilon leased certain
tankage from the Partnership and sells refined products to the
Partnership daily from such facilities, thus eliminating the need for
the Partnership to maintain its own refined products inventory. On
April 15, 1999, Equilon further agreed to extend the lease and
maintain the inventory provided the Partnership reimburses Equilon for
its carrying costs beginning January 1, 2000, which primarily includes
interest costs. To offset the interest costs associated with carrying
the inventory and to reduce letters of credit fees, the Partnership
deposited $14,000,000 with Equilon in the first and second quarters of<