Back to GetFilings.com
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _____________
Commission file number: 1-14569
PLAINS ALL AMERICAN PIPELINE, L.P.
(Exact name of registrant as specified in its charter)
Delaware 76-0582150
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
500 Dallas
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 654-1414
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
Common Units New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
Yes [x] No [_]
The aggregate value of the Common Units held by non-affiliates of the registrant
(treating all executive officers and directors of the registrant, for this
purpose, as if they may be affiliates of the registrant) was approximately
$223,207,250 on March 22, 1999 based on $17.125 per unit, the closing price of
the Common Units as reported on the New York Stock Exchange on such date).
At March 22, 1999, there were outstanding 20,059,239 Common Units and 10,029,619
Subordinated Units.
DOCUMENTS INCORPORATED BY REFERENCE: None
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]
- --------------------------------------------------------------------------------
PLAINS ALL AMERICAN PIPELINE, L.P. AND SUBSIDIARIES
1998 FORM 10-K ANNUAL REPORT
Table of Contents
Page
Part I
Items 1. and 2. Business and Properties 3
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Part II
Item 5. Market for Registrant's Common Units and Related Unitholder Matters 20
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 23
Item 7a. Quantitative and Qualitative - Disclosures About Market Risks 30
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 31
Part III
Item 10. Directors and Executive Officers of the General Partner 32
Item 11. Executive Compensation 33
Item 12. Security Ownership of Certain Beneficial Owners and Management 36
Item 13. Certain Relationships and Related Transactions 36
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 37
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements and
information that are based on the beliefs of Plains All American Pipeline, L.P.
and its general partner, as well as assumptions made by, and information
currently available to, the partnership and the general partner. All statements,
other than statements of historical fact, included in this Report are forward-
looking statements, including, but not limited to, statements identified by the
words "anticipate," "believe," "estimate," "expect," "plan," "intend" and
"forecast" and similar expressions and statements regarding the partnership's
business strategy, plans and objectives of management of the partnership for
future operations. Such statements reflect the current views of the partnership
and the general partner with respect to future events, based on what they
believe are reasonable assumptions. These statements, however, are subject to
certain risks, uncertainties and assumptions, including, but not limited to (i)
the availability of adequate supplies of and demand for crude oil in the areas
in which the partnership operates, (ii) the impact of crude oil price
fluctuations, (iii) the effects of competition, (iv) the success of the
partnership=s risk management activities, (v) the availability (or lack thereof)
of acquisition or combination opportunities, (vi) the impact of current and
future laws and governmental regulations, (vii) environmental liabilities that
are not covered by an indemnity or insurance, (viii) general economic, market or
business conditions and (ix) uncertainties inherent in the Year 2000 Issue. If
one or more of these risks or uncertainties materialize, or if underlying
assumptions prove incorrect, actual results may vary materially from those in
the forward-looking statements. Except as required by applicable securities
laws, the partnership does not intend to update these forward-looking statements
and information.
2
PART I
Items 1. and 2. BUSINESS AND PROPERTIES
General
Plains All American Pipeline, L.P. ("PAA") and its operating partnerships,
Plains Marketing, L.P. ("Marketing") and All American Pipeline, L.P. ("AAPL")
(PAA, Marketing and AAPL collectively the "Partnership") were formed in late
1998 to acquire and operate the midstream crude oil business and assets of
certain wholly owned subsidiaries ("Plains Midstream Subsidiaries" or
"Predecessor") of Plains Resources Inc. ("Plains Resources"). All 1998 operating
data included herein includes the results of the Partnership and the
Predecessor. Plains All American Inc. (the "General Partner"), a wholly owned
subsidiary of Plains Resources, is the general partner of the Partnership and
the Partnership. The Partnership is engaged in interstate and intrastate crude
oil pipeline transportation and crude oil terminalling and storage activities
and gathering and marketing activities. The Partnership's operations are
concentrated in California, Texas, Oklahoma, Louisiana and the Gulf of Mexico.
The Partnership owns and operates the All American Pipeline, a 1,233-mile
seasonally heated, 30-inch, common carrier crude oil pipeline extending from
California to West Texas, and the SJV Gathering System, a 45-mile, 16-inch,
crude oil gathering system in the San Joaquin Valley of California, both of
which the General Partner purchased from Wingfoot Ventures Seven, Inc.
("Wingfoot"), a wholly owned subsidiary of The Goodyear Tire & Rubber Company
("Goodyear"), in July 1998 for approximately $400 million (the "Acquisition").
The All American Pipeline is one of the newest interstate crude oil pipelines in
the United States, having been constructed by Goodyear between 1985 and 1987 at
a cost of approximately $1.6 billion, and is the largest capacity crude oil
pipeline connecting California and Texas, with a design capacity of 300,000
barrels per day of heavy crude oil. In West Texas, the All American Pipeline
interconnects with other crude oil pipelines that serve the Gulf Coast and
Cushing, Oklahoma, the largest crude oil trading hub in the United States (the
"Cushing Interchange") and the designated delivery point for New York Mercantile
Exchange ("NYMEX") crude oil futures contracts.
Production currently transported on the All American Pipeline originates
from the Santa Ynez field operated by Exxon and the Point Arguello field
operated by Chevron, both offshore California, and from the San Joaquin Valley.
Exxon and Chevron, as well as Texaco and Sun Operating L.P., which are other
working interest owners, are contractually obligated to ship all of their
production from these offshore fields on the All American Pipeline through
August 2007. The SJV Gathering System is used primarily to transport crude oil
from fields in the San Joaquin Valley to the All American Pipeline and to
intrastate pipelines owned by third parties. The capacity of the SJV Gathering
System is approximately 140,000 barrels per day. In addition to transporting
third-party volumes for a tariff, the Partnership is engaged in merchant
activities designed to capture price differentials between the cost to purchase
and transport crude oil to a sales point and the price received for such crude
oil at the sales point.
At the Cushing Interchange, the Partnership owns and operates a two million
barrel, above-ground crude oil terminalling and storage facility that has an
estimated daily throughput capacity of approximately 800,000 barrels per day
(the "Cushing Terminal"). The Cushing Terminal was completed in 1993, making it
the most modern facility in the area, and includes state-of-the-art design
features. The Partnership has initiated an expansion project that will add one
million barrels of storage capacity at an aggregate cost of approximately $10
million. The expansion project is expected to be completed in the second quarter
of 1999. Upon completion of the expansion project, management believes the
Cushing Terminal will be the third largest facility at the Cushing Interchange
(and the largest not owned by a major oil company) with an estimated 12% of that
area's storage capacity. The Partnership also owns 586,000 barrels of tank
capacity along the SJV Gathering System, 955,000 barrels of tank capacity along
the All American Pipeline and 360,000 barrels of tank capacity at Ingleside,
Texas on the Gulf Coast (the "Ingleside Terminal").
The Partnership's terminalling and storage operations generate revenue from
the Cushing Terminal through a combination of storage and throughput fees from
(i) refiners and gatherers seeking to segregate or custom blend crude oil for
refining feedstocks, (ii) pipelines, refiners and traders requiring segregated
tankage for foreign crude oil, (iii) traders who make or take delivery under
NYMEX contracts and (iv) producers seeking to increase their marketing
alternatives. The Cushing Terminal and the Partnership's other storage
facilities also facilitate the Partnership's merchant activities by enabling the
Partnership to buy and store crude oil when the price of crude oil in a given
month is less than the price of crude oil in a subsequent month (a "contango"
market) and to simultaneously sell crude oil futures contracts for delivery of
the crude oil in such subsequent month at the higher futures price, thereby
locking in a profit.
The Partnership's gathering and marketing operations include the purchase
of crude oil at the wellhead and the bulk purchase of crude oil at pipeline and
terminal facilities, the transportation of crude oil on trucks, barges or
pipelines, and the subsequent resale or exchange of crude oil at various points
along the crude oil distribution chain. The crude oil distribution chain extends
from the wellhead where crude oil moves by truck and gathering systems to
terminal and pipeline injection stations and major pipelines and
3
is transported to major crude oil trading locations for ultimate consumption
by refineries. In many cases, the Partnership matches supply and demand needs by
performing a merchant function--generating gathering and marketing margins by
buying crude oil at competitive prices, efficiently transporting or exchanging
the crude oil along the distribution chain and marketing the crude oil to
refineries or other customers. When there is a higher demand than supply of
crude oil in the near term, the price of crude oil in a given month exceeds the
price of crude oil in a subsequent month (a "backward" market). A backward
market has a positive impact on marketing margins because crude oil gatherers
can capture a premium for prompt deliveries. As premiums are paid for prompt
deliveries, storage opportunities are generally not profitable.
For the year ended December 31, 1998, the Partnership's pro forma gross
margin, earnings before interest expense, income taxes, depreciation and
amortization ("EBITDA") and net income totaled $74.1 million, $68.2 million and
$43.9 million, respectively. On a pro forma basis, the All American Pipeline and
the SJV Gathering System accounted for approximately 69% of the Partnership's
gross margin for the year ended December 31, 1998, while the terminalling and
storage activities and gathering and marketing activities accounted for
approximately 31%. See Item 6, "Selected Financial and Operating Data".
Initial Public Offering and Concurrent Transactions
On November 23, 1998, the Partnership completed an initial public offering
(the "IPO") of 13,085,000 common units representing limited partner interests
(the "Common Units") and received therefrom net proceeds of approximately $244.7
million. Concurrently with the closing of the IPO, certain transactions
described in the following paragraphs were consummated in connection with the
formation of the Partnership and the Partnership. Such transactions and the
transactions which occurred in conjunction with the IPO are referred to in this
report as the "Transactions."
Certain of the Plains Midstream Subsidiaries were merged into Plains
Resources, which sold the assets of these subsidiaries to the Partnership in
exchange for $64.1 million and the assumption of $11.0 million of related
indebtedness. At the same time, the General Partner conveyed all of its interest
in the All American Pipeline and the SJV Gathering System to the Partnership in
exchange for (i) 6,974,239 Common Units, 10,029,619 Subordinated Units and an
aggregate 2% general partner interest in the Partnership, (ii) the right to
receive Incentive Distributions as defined in the Partnership Agreement; and
(iii) the assumption by the Partnership of $175 million of indebtedness incurred
by the General Partner in connection with the acquisition of the All American
Pipeline and the SJV Gathering System.
In addition to the $64.1 million paid to Plains Resources, the Partnership
distributed approximately $177.6 million to the General Partner and used
approximately $3 million of the remaining proceeds to pay expenses incurred in
connection with the Transactions. The General Partner used $121.0 million of the
cash distributed to it to retire the remaining indebtedness incurred in
connection with the acquisition of the All American Pipeline and the SJV
Gathering System and to pay certain other costs associated with the Transactions
for the Partnership. The balance, $56.6 million, was distributed to Plains
Resources, which used the cash to repay indebtedness and for other general
corporate purposes.
In addition, concurrently with the closing of the IPO, the Partnership
entered into a $225 million bank credit agreement (the "Bank Credit Agreement")
that includes a $175 million term loan facility (the "Term Loan Facility") and a
$50 million revolving credit facility (the "Revolving Credit Facility"). The
Partnership may borrow up to $50 million under the Revolving Credit Facility for
acquisitions, capital improvements, working capital and general business
purposes. At closing, the Partnership had $175 million outstanding under the
Term Loan Facility, representing indebtedness assumed from the General Partner.
The following chart depicts the organization and ownership of PAA,
Marketing and AAPL after giving effect to the consummation of the Transactions,
including the sale of the Common Units sold in the IPO. The percentages
reflected in the organization chart represent the approximate ownership interest
in each of PAA, Marketing and AAPL individually and not on an aggregate basis.
The effective aggregate ownership percentages at the top of the chart reflect
the ownership interest of the Unitholders in the Partnership, Marketing and AAPL
on a combined basis. The 2% ownership of the General Partner reflects the
approximate effective ownership interest of the General Partner in the
Partnership, Marketing and AAPL on a combined basis.
4
[CHART APPEARS HERE]
5
Market Overview
The Department of Energy segregates the United States into five Petroleum
Administration Defense Districts ("PADDs") to gather information relating to
crude oil supply to key refining areas in the event of a national emergency. The
oil industry utilizes these districts in reporting statistics regarding crude
oil supply and demand. The All American Pipeline serves, directly or through
connecting lines, PADD V, which consists of seven western states, including
Alaska and Hawaii, PADD II, which consists of 15 states in the Midwest, and PADD
III, which consists of six states located in the South, principally bordering
the Gulf of Mexico. The table below sets forth supply, demand and shortfall
information for each PADD for 1998 and is derived from information published by
the Energy Information Administration.
Refinery Regional Supply
Petroleum Administration Defense District Demand Supply Shortfall
- ----------------------------------------- -------- -------- ---------
(thousands of barrels per day)
PADD I (East Coast) 1,600 -- 1,600
PADD II (Midwest) 3,300 500 2,800
PADD III (South) 6,900 3,300 3,600
PADD IV (Rockies) 500 300 200
PADD V (West Coast) 2,500 2,100 400
-------- -------- ---------
Total 14,800 6,200 8,600
======== ======== =========
As reflected in the table above, only 15% of the total refinery demand for
crude oil in PADD II can be supplied with crude oil produced in PADD II, with
the remainder (approximately 2.8 million barrels per day) provided by intra-U.S.
transfers of domestic crude oil production and imports from Canada and foreign
sources. In the 15-year period ending December 31, 1998, production from PADD II
has fallen approximately 52%, declining from approximately 1.1 million barrels
per day in 1984 to approximately 523,000 barrels per day in 1998. Over this same
time period, refinery demand for crude oil in this area has risen approximately
18%, increasing from approximately 2.8 million barrels per day in 1984 to
approximately 3.3 million barrels per day in 1998. Accordingly, over the last 15
years PADD II's reliance on sources outside the region has increased by
approximately 1.1 million barrels per day. Historically, PADD II refiners have
relied on crude oil production from PADD V to meet a portion of their refinery
input requirements.
Within PADD V, the supply/demand trend is quite different. Despite
significant population growth, PADD V refinery inputs (crude oil demand) have
decreased from a high of approximately 2.6 million barrels per day in 1989 to an
average of approximately 2.5 million barrels per day over the last five years.
This net decrease in refinery inputs is primarily due to (i) a reduction in the
number of operating refineries and (ii) an increase in the conversion capacity
of California refineries (which represent approximately 70% of the total PADD V
refinery inputs). Between 1985 and 1998, the number of operating California
refineries has declined from 34 (at approximately 79% of total capacity) to 21
(at approximately 95% of total capacity). A portion of the capacity lost due to
refinery closures has been met by higher capacity utilization at the continuing
refineries. Meanwhile, these units have been upgrading facilities to produce
legislatively-mandated cleaner-burning gasolines. As California refineries have
become more efficient, producing greater volumes of higher value products such
as gasoline from a lesser quantity of crude oil, overall refinery demand for
crude oil in PADD V has decreased. Excluding Hawaii, which imports approximately
80,000 barrels per day of foreign crude oil, and taking into account
geographically captive Canadian volumes which are transported to the Washington
state area, PADD V supply currently exceeds demand. In 1997 and 1998, a number
of large producers in California and Alaska announced multi-year capital
programs designed to increase production in California and Alaska. Subsequently,
several of these producers announced reductions in their 1999 capital spending
programs in response to the record low oil prices experienced in late-1998 and
early 1999, dampening the outlook for near term production growth. As a result,
the Partnership is unable to determine the long-term effects the low oil price
environment will have on California and Alaskan production volumes. However,
because of its low cost structure and the demand for crude oil in PADD II, the
Partnership believes the All American Pipeline will continue to be used to
transport California crude oil to connections with pipelines in Texas that will
deliver such crude oil to the Cushing Interchange in PADD II as well as the Gulf
Coast areas in PADD III.
Pending Acquisition
On March 17, 1999, the Partnership signed a definitive agreement with
Marathon Ashland Petroleum LLC to acquire Scurlock Permian LLC and certain other
pipeline assets. The cash purchase price for the acquisition is approximately
$138 million, plus associated closing and financing costs. The purchase price is
subject to adjustment at closing for working capital on April 1, 1999, the
effective date of the acquisition. Closing of the transaction is subject to
regulatory review and approval, consents from third parties, and customary due
diligence. Subject to satisfaction of the foregoing conditions, the transaction
is expected to close in the second quarter of 1999. The Partnership has received
a financing commitment from one of its existing lenders, which in addition to
other
6
financial resources currently available to the Partnership, will provide the
funds necessary to complete the transaction. The definitive agreement provides
that if either party fails to perform its obligations thereunder through no
fault of the other party, such defaulting party shall pay the nondefaulting
party $7.5 million as liquidated damages.
Scurlock Permian LLC, a wholly owned subsidiary of Marathon Ashland
Petroleum LLC, is engaged in crude oil transportation, trading and marketing,
operating in 14 states with more than 2,400 miles of active pipelines, numerous
storage terminals and a fleet of more than 225 trucks. Its largest asset is an
800-mile pipeline and gathering system located in the Spraberry Trend in West
Texas that extends into Andrews, Glasscock, Howard, Martin, Midland, Regan,
Upton and Irion Counties, Texas. The assets to be acquired also include
approximately one million barrels of crude oil used for working inventory.
Crude Oil Pipeline Operations
All American Pipeline
The All American Pipeline is a common carrier crude oil pipeline system
that transports crude oil produced from fields offshore and onshore California
to locations in California and West Texas pursuant to tariff rates regulated by
the Federal Energy Regulatory Commission ("FERC"). As a common carrier, the All
American Pipeline offers transportation services to any shipper of crude oil,
provided that the crude oil tendered for transportation satisfies the conditions
and specifications contained in the applicable tariff. The All American Pipeline
transports crude oil for third parties as well as for the Partnership.
The All American Pipeline is comprised of a heated pipeline system which
extends approximately 10 miles from Exxon's onshore facilities at Las Flores on
the California coast to Chevron's onshore facilities at Gaviota, California (24-
inch diameter pipe) and continues from Gaviota approximately 1,223 miles through
Arizona and New Mexico to West Texas (30-inch diameter pipe) where it
interconnects with other pipelines. These interconnecting common carrier
pipelines transport crude oil to the refineries located along the Gulf Coast and
to the Cushing Interchange. At the Cushing Interchange, these pipelines connect
with other pipelines that deliver crude oil to Midwest refiners. The All
American Pipeline also includes various pumping and heating stations, as well as
approximately one million barrels of crude oil storage tank capacity, to
facilitate the transportation of crude oil. The tank capacity is located at
stations in Sisquoc, Pentland and Cadiz, California, and at the station in Wink,
Texas. The Partnership owns approximately 5.0 million barrels of crude oil that
is used to maintain the All American Pipeline's linefill requirements.
The All American Pipeline has a designed throughput capacity of 300,000
barrels per day of heavy crude oil and larger volumes of lighter crude oils. As
currently configured, the pipeline's daily throughput capacity is approximately
216,000 barrels of heavy oil. In order to achieve designed capacity, certain
nominal capital expenditures would be required. The All American Pipeline is
operated from a control room in Bakersfield, California with a supervisory
control and data acquisition ("SCADA") computer system designed to continuously
monitor quantities of crude oil injected in and delivered through the All
American Pipeline as well as pressure and temperature variations. This
technology also allows for the batching of several different types of crude oil
with varying gravities. The SCADA system is designed to enhance leak detection
capabilities and provides for remote-controlled shut-down at every pump station
on the All American Pipeline. Pumping stations are linked by telephone and
microwave communication systems for remote-control operation of the All American
Pipeline which allows most of the pump stations to operate without full time
site personnel.
The Partnership performs scheduled maintenance on the pipeline and makes
repairs and replacements when necessary or appropriate. As one of the most
recently constructed major crude oil pipeline systems in the United States, the
All American Pipeline requires a relatively low level of maintenance capital
expenditures. The Partnership attempts to control corrosion of the pipeline
through the use of corrosion inhibiting chemicals injected into the crude
stream, external pipe coatings and an anode bed based cathodic protection
system. The Partnership monitors the structural integrity of the All American
Pipeline through a program of periodic internal inspections using electronic
"smart pig" instruments. The Partnership conducts a weekly aerial surveillance
of the entire pipeline and right-of-way to monitor activities or encroachments
on rights-of-way. Maintenance facilities containing equipment for pipe repair,
digging and light equipment maintenance are strategically located along the
pipeline. The Partnership believes that the All American Pipeline has been
constructed and is maintained in all material respects in accordance with
applicable federal, state and local laws and regulations, standards prescribed
by the American Petroleum Institute and accepted industry standards of practice.
System Supply
The All American Pipeline transports several different types of crude oil,
including (i) Outer Continental Shelf ("OCS") crude oil received at the onshore
facilities of the Santa Ynez field at Las Flores, California and the onshore
facilities of the Point Arguello field located at Gaviota, California, (ii) Elk
Hills crude oil, received at Pentland, California from a connection with the SJV
7
Gathering System and (iii) various crude oil blends received at Pentland from
the SJV Gathering System, including West Coast Heavy and Mojave Blend.
OCS Supply. Exxon, which owns all of the Santa Ynez production, and
Chevron, Texaco and Sun Operating L.P., which own approximately one-half of the
Point Arguello production, have entered into transportation agreements
committing to transport all of their production from these fields on the All
American Pipeline. These agreements, which expire in August 2007, provide for a
minimum tariff with annual escalations. At December 31, 1998, the tariffs
averaged $1.41 per barrel for deliveries to connecting pipelines in California
and $2.96 per barrel for deliveries to connecting pipelines in West Texas. The
agreements do not require these owners to transport a minimum volume. The
producers from the Point Arguello field who do not have contracts with the
Partnership have no other means of transporting their production and, therefore,
ship their volumes on the All American Pipeline at the posted tariffs. During
1998, approximately $33.6 million, or 45%, of the Partnership's pro forma gross
margin was attributable to volumes received from the Santa Ynez field and
approximately $12.9 million, or 17%, was attributable to volumes received from
the Point Arguello field. Transportation of volumes from the Point Arguello
field on the All American Pipeline commenced in 1991 and from the Santa Ynez
field in 1994. The table below sets forth the historical volumes received from
both of these fields.
Year Ended December 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------ ------ -------
(barrels in thousands)
Average daily volumes received from:
Point Arguello (at Gaviota) 26 30 41 60 73 63 47 29
Santa Ynez (at Las Flores) 68 85 95 92 34 -- -- --
------ ------ ------ ------ ------ ------ ------ -------
Total 94 115 136 152 107 63 47 29
====== ====== ====== ====== ====== ====== ====== =======
Absent operational or economic disruptions, the Partnership anticipates
that production from Point Arguello will continue to decline at percentage rates
which approximate historical decline rates, but that average production received
from the Santa Ynez field for 1999 will generally approximate 60,000 to 65,000
barrels per day. In connection with a proposed transfer of its ownership in
Point Arguello to a private independent oil company, Chevron provided notice to
the other working interest owners of its resignation as operator of the Point
Arguello field. The Partnership is unable to determine at this time if the
proposed transfer will occur or the consequences any such transfer or the
absence of any such transfer will have on Point Arguello production and the
resulting pipeline transportation volumes.
According to information published by the Minerals Management Service
("MMS"), significant additional proved, undeveloped reserves have been
identified offshore California which have the potential to be delivered on the
All American Pipeline. Future volumes of crude oil deliveries on the All
American Pipeline will depend on a number of factors that are beyond the
Partnership's control, including (i) the economic feasibility of developing the
reserves, (ii) the economic feasibility of connecting such reserves to the All
American Pipeline and (iii) the ability of the owners of such reserves to obtain
the necessary governmental approvals to develop such reserves. The owners of
these reserves are currently participating in a study (California Offshore Oil
and Gas Energy Resources, "COOGER") with various private organizations and
regulatory agencies to determine the best sites to locate onshore facilities
that will be required to handle and process potential production from these
undeveloped fields as well as the best methods of controlling potential
environmental dangers associated with offshore drilling and production. These
owners have also agreed to suspend drilling on the undeveloped leases until the
COOGER study is completed. The COOGER study is anticipated to be completed by
June 30, 1999, at which time owners of these undeveloped reserves must submit
their development plans to the MMS. There can be no assurance that the owners
will develop such reserves, that the MMS will approve development plans or that
future regulations or litigation will not prevent or retard their ultimate
development and production. There also can be no assurance that, if such
reserves were developed, a competing pipeline might not be built to transport
the production. In addition, a June 12, 1998 Executive Order of the President of
the United States extends until the year 2012 a statutory moratorium on new
leasing of offshore California fields. Existing fields are authorized to
continue production, but federal, state and local agencies may restrict permits
and authorizations for their development, and may restrict new onshore
facilities designed to serve offshore production of crude oil. San Luis Obispo
and Santa Barbara counties have adopted zoning ordinances that prohibit
development, construction, installation or expansion of any onshore support
facility for offshore oil and gas activity in the area, unless approved by a
majority of the votes cast by the voters of either county in an authorized
election. Any such restrictions, should they be imposed, could adversely affect
the future delivery of crude oil to the All American Pipeline.
San Joaquin Valley Supply. In addition to OCS production, crude oil from
fields in the San Joaquin Valley is delivered into the All American Pipeline at
Pentland through connections with the SJV Gathering System and pipelines
operated by EOTT, L.P. and ARCO. The San Joaquin Valley is one of the most
prolific oil producing regions in the continental United States, producing
8
approximately 591,000 barrels per day of crude oil during the first nine months
of 1998 that accounted for approximately 65% of total California production and
11% of the total production in the lower 48 states. The following table reflects
the historical production for the San Joaquin Valley as well as total California
production (excluding OCS volumes) as reported by the California Division of Oil
and Gas.
Year Ended December 31,
--------------------------------------------------------------------------------
1998(1) 1997 1996 1995 1994 1993 1992 1991 1990 1989
-------- ------ ------ ------ ------ ------ ------ ------ ------ ------
(barrels in thousands)
Average daily volumes:
San Joaquin Valley production 591 584 579 569 578 588 609 634 629 646
Total California production
(excluding OCS volumes) 780 781 772 764 784 803 835 875 879 907
- --------------
(1) Reflects information through September 1998.
Drilling and exploitation activities have increased in the San Joaquin
Valley over the last few years, primarily due to the change in ownership of
several large fields and technological advances in horizontal drilling and steam
assisted recovery methods that have improved the overall economics of field
development and reductions in the operating costs of these fields. The near term
outlook for any potential production increases has been adversely affected by
the depressed price of oil and related reductions in capital spending plans
announced by several California producers.
Alaskan North Slope Supply. Historically, the All American Pipeline had
also transported volumes of Alaskan North Slope crude oil. In 1996, the U.S.
government repealed the export ban on crude oil produced from the Alaskan North
Slope which had effectively prohibited the sale of Alaskan North Slope crude oil
to sources outside the U.S. Prior to its repeal, this ban had the impact of
increasing volumes of Alaskan crude oil delivered into the California market.
Shipments of Alaskan North Slope crude oil on the All American Pipeline ceased
in February 1997, shortly after the repeal of the export ban. In addition, ARCO
sold the only pipeline that could bring Alaskan North Slope crude oil to the All
American Pipeline. This pipeline will be converted to natural gas service
thereby eliminating the physical capability to ship Alaskan North Slope crude
oil on the All American Pipeline.
System Demand
Deliveries from the All American Pipeline are made to refineries within
California, along the Gulf Coast or in the Midwest through connecting pipelines
of other companies. Demand for crude oil shipped on the All American Pipeline in
each of these markets is affected by numerous factors, including refinery
utilization and crude oil slate requirements, regional crude oil production,
foreign imports, intra-U.S. transfers of crude oil and the price differential
(net of transportation cost) between the California and Midwest markets.
Deliveries are made to California refineries through connections with
third-party pipelines at Sisquoc, Pentland and Mojave. The deliveries at Sisquoc
and Pentland are OCS crude oil while the deliveries at Mojave are primarily
Mojave Blend. Crude oil transported to West Texas is primarily West Coast Heavy
and is delivered to third-party pipelines at Wink and McCamey, Texas. At Wink,
West Coast Heavy crude is blended with Domestic Sweet Crude to increase the
gravity (the blend is commonly referred to as West Coast Sour), permitting
delivery into third party pipelines that can transport the crude to the Cushing
Interchange. At McCamey, West Coast Heavy and OCS crude oil are delivered to a
third-party pipeline that supplies refiners on the Gulf Coast.
The following table sets forth All American Pipeline average deliveries per
day within and outside California for each of the years in the five-year period
ended December 31, 1998.
Year Ended December 31,
---------------------------------------
1998 1997 1996 1995 1994
------- ------ ------ ------ ------
(barrels in thousands)
Average daily volumes delivered to:
California
Sisquoc 24 21 17 11 21
Pentland 69 74 71 65 56
Mojave 22 32 6 -- --
------- ------ ------ ------ ------
Total California 115 127 94 76 77
Texas 59 68 113 141 108
------- ------ ------ ------ ------
Total 174 195 207 217 185
======= ====== ====== ====== ======
9
SJV Gathering System
The SJV Gathering System is a proprietary pipeline system that only
transports crude oil purchased by the Partnership. As a proprietary pipeline,
the SJV Gathering System is not subject to common carrier regulations and does
not transport crude oil for third parties. The primary purpose of the pipeline
is to gather crude oil from various sources in the San Joaquin Valley and to
blend such crude oil along the pipeline system in order to deliver either West
Coast Heavy or Mojave Blend into the All American Pipeline. Certain crude
streams are segregated and delivered into either the All American Pipeline or to
third party pipelines connected to the SJV Gathering System.
The SJV Gathering System was constructed in 1987 with a design capacity of
approximately 140,000 barrels per day. The system consists of a 16-inch pipeline
that originates at the Belridge station and extends 45 miles south to a
connection with the All American Pipeline at the Pentland station. The SJV
Gathering System is connected to several fields, including the South Belridge,
Elk Hills and Midway Sunset fields, three of the seven largest producing fields
in the lower 48 states. The SJV Gathering System also includes approximately
586,000 barrels of tank capacity, which has historically been used to facilitate
movements along the pipeline system.
The SJV Gathering System is operated in conjunction with, and with the same
SCADA system used in the operations of, the All American Pipeline. The
Partnership also takes measures to protect the pipeline from corrosion and
routinely inspects the pipeline using the same procedures and practices employed
in the operation of the All American Pipeline. Like the All American Pipeline,
the SJV Gathering System was constructed and is maintained in all material
respects in accordance with applicable federal, state and local laws and
regulations, standards recommended by the American Petroleum Institute and
accepted industry standards of practice.
The SJV Gathering System is supplied with the crude oil production
primarily from major oil companies' equity production from the South Belridge,
Cymeric, Midway Sunset and Elk Hills fields. The table below sets forth the
historical volumes received into the SJV Gathering System.
Year Ended December 31,
---------------------------------------
1998 1997 1996 1995 1994
------- ------ ------ ------ ------
(barrels in thousands)
Total average daily volumes 85 91 67 50 54
To increase utilization and margins relating to the SJV Gathering System,
the Partnership has initiated a wellhead gathering, transportation and marketing
program in the San Joaquin Valley. The new program is similar to a program to
purchase crude oil from independent producers successfully implemented by the
Plains Midstream Subsidiaries in Texas, Oklahoma, Kansas and Louisiana under
which volumes increased from 1,300 barrels per day in 1990 to 88,000 barrels per
day in 1998. The Partnership has committed resources to its new gathering
program by hiring an additional lease buyer, activating an existing truck
unloading station and arranging to make additional connections with other
pipeline systems in the San Joaquin Valley, including access into the Pacific
Pipeline. In addition, the Partnership has entered into an arrangement with
various parties whereby the Partnership has reserved up to 40,000 barrels per
day of capacity for movements into the Pacific Pipeline, and all crude oil
sourced by one such party from the Midway Sunset field will be delivered by the
Partnership into the Pacific Pipeline via the SJV Gathering System. Construction
of the Pacific Pipeline, a pipeline system that will serve the LA Basin, was
completed in early 1999. See "Competition."
Terminalling and Storage Activities and Gathering and Marketing Activities
Terminalling and Storage
The Cushing Terminal was constructed in 1993 to capitalize on the crude oil
supply and demand imbalance in the Midwest caused by the continued decline of
regional production supplies, increasing imports and an inadequate pipeline and
terminal infrastructure. The Cushing Terminal is also used to support and
enhance the margins associated with the Partnership's merchant activities
relating to its lease gathering and bulk trading activities. The Ingleside
Terminal was constructed in 1979 and purchased by the Plains Midstream
Subsidiaries in 1996 to enhance its lease gathering activities in South Texas.
The Cushing Terminal has a total storage capacity of two million barrels,
comprised of fourteen 100,000 barrel tanks and four 150,000 barrel tanks used to
store and terminal crude oil. The Cushing Terminal also includes a pipeline
manifold and pumping system that has an estimated daily throughput capacity of
approximately 800,000 barrels per day. The pipeline manifold and pumping system
is designed to support up to ten million barrels of tank capacity. The Cushing
Terminal is connected to the major pipelines and terminals in the Cushing
Interchange through pipelines that range in size from 10 inches to 24 inches in
diameter. A one million
10
barrel expansion project to add four 250,000 barrel tanks is currently underway
at the Cushing Terminal with completion targeted for the second quarter of 1999.
The Cushing Terminal is a state-of-the-art facility designed to serve the
needs of refiners in the Midwest. In order to service an expected increase in
the volumes as well as the varieties of foreign and domestic crude oil projected
to be transported through the Cushing Interchange, the Partnership incorporated
certain attributes into the design of the Cushing Terminal including (i)
multiple, smaller tanks to facilitate simultaneous handling of multiple crude
varieties in accordance with normal pipeline batch sizes, (ii) dual header
systems connecting each tank to the main manifold system to facilitate efficient
switching between crude grades with minimal contamination, (iii) bottom drawn
sump pumps that enable each tank to be efficiently drained down to minimal
remaining volumes to minimize crude contamination and maintain crude integrity,
(iv) a mixer on each tank to facilitate blending crude grades to refinery
specifications, and (v) a manifold and pump system that allows for receipts and
deliveries with connecting carriers at their maximum operating capacity. As a
result of incorporating these attributes into the design of the Cushing
Terminal, the Partnership believes it is favorably positioned to serve the needs
of Midwest refiners to handle increasing varieties of crude transported through
the Cushing Interchange.
The Cushing Terminal also incorporates numerous environmental and
operational safeguards. The Partnership believes that its terminal is the only
one at the Cushing Interchange for which each tank has a secondary liner (the
equivalent of double bottoms), leak detection devices and secondary seals. The
Cushing Terminal is the only terminal at the Cushing Interchange equipped with
above ground pipelines. Like the All American Pipeline and the SJV Gathering
System, the Cushing Terminal is operated by a SCADA system and each tank is
cathodically protected. In addition, each tank is equipped with an audible and
visual high level alarm system to prevent overflows; a floating roof that
minimizes air emissions and prevents the possible accumulation of potentially
flammable gases between fluid levels and the roof of the tank; and a foam line
that, in the event of a fire, is connected to the automated fire water
distribution system.
The Cushing Interchange is the largest wet barrel trading hub in the U.S.
and the delivery point for crude oil futures contracts traded on the NYMEX. The
Cushing Terminal has been designated by the NYMEX as an approved delivery
location for crude oil delivered under the NYMEX light sweet crude oil futures
contract. As a NYMEX delivery point and a cash market hub, the Cushing
Interchange serves as the primary source of refinery feedstock for the Midwest
refiners and plays an integral role in establishing and maintaining markets for
many varieties of foreign and domestic crude oil.
The Ingleside Terminal was constructed in 1979 and purchased by the Plains
Midstream Subsidiaries in 1996 to enhance its lease gathering activities in
South Texas. The Ingleside Terminal is located near the Gulf Coast port of
Corpus Christi, Texas. The Ingleside Terminal is comprised of 11 tanks ranging
in size from a minimum of 15,000 barrels to a maximum of 50,000 barrels. Three
of these tanks are heated, which allows for storage of heavier products. The
terminal has access to the receipt of crude oil and refined petroleum products
from trucks and barges. Likewise, the terminal can deliver crude oil and refined
petroleum products to barges and trucks. The Partnership leases a barge dock
approximately one mile from the Ingleside Terminal and is connected to the dock
by four pipelines ranging in size from 8 inches to 12 inches in diameter. The
dock lease can be extended in five-year intervals through 2021.
The Partnership's terminalling and storage operations generate revenue
through terminalling and storage fees paid by third parties as well as by
utilizing the tankage in conjunction with its merchant activities. Storage fees
are generated when the Partnership leases tank capacity to third parties.
Terminalling fees, also referred to as throughput fees, are generated when the
Partnership receives crude oil from one connecting pipeline (generally received
in batch sizes of 25,000 to 400,000 barrels) and redelivers such crude oil to
another connecting carrier in volumes that allow the refinery to receive its
crude oil on a ratable basis throughout a delivery period (which is generally
three to ten days). Both terminalling and storage fees are generally earned from
(i) refiners and gatherers that segregate or custom blend crudes for refining
feedstocks, (ii) pipeline operators, refiners or traders that need segregated
tankage for foreign cargoes, (iii) traders who make or take delivery under NYMEX
contracts and (iv) producers and resellers that seek to increase their marketing
alternatives. The tankage that is used to support the Partnership's arbitrage
activities position the Partnership to capture margins in a contango market or
when the market switches from contango to backwardation. The following table
sets forth the daily throughput volumes for the Partnership's terminalling and
storage operations, and quantity of tankage leased to third parties from 1994
through 1998.
11
Year Ended December 31,
---------------------------------------
1998 1997 1996 1995 1994
------- ------ ------ ------ ------
(barrels in thousands)
Throughput volumes (average
daily volumes):
Cushing Terminal 69 69 56 43 29
Ingelside Terminal 11 8 3 -- --
------- ------ ------ ------ ------
Total 80 77 59 43 29
======= ====== ====== ====== ======
Storeage leased to third parties
(monthly average volumes):
Cushing Terminal 890 414 203 208 464
Ingleside Terminal 260 254 211 -- --
------- ------ ------ ------ ------
Total 1,150 668 414 208 464
======= ====== ====== ====== ======
The Partnership has committed 1.5 million barrels of its capacity at the
Cushing Terminal to storage arrangements with third parties through mid-1999.
Gathering and Marketing Activities
The Partnership's gathering and marketing activities are primarily
conducted in Louisiana, Texas, Oklahoma and Kansas and include (i) purchasing
crude oil from producers at the wellhead and in bulk from aggregators at major
pipeline interconnects and trading locations, (ii) transporting such crude oil
on its own proprietary gathering assets or assets owned and operated by third
parties when necessary or cost effective, (iii) exchanging such crude oil for
another grade of crude oil or at a different geographic location, as
appropriate, in order to maximize margins or meet contract delivery requirements
and (iv) marketing crude oil to refiners or other resellers. For the year ended
December 31, 1998 the Partnership purchased approximately 88,000 barrels per day
of crude oil directly at the wellhead. The Partnership purchases crude oil from
producers under contracts that range in term from a thirty-day evergreen to two
years. Gathering and marketing activities are characterized by large volumes of
transactions with lower margins relative to pipeline and terminalling and
storage operations.
The following table shows the average daily volume of the Partnership's
lease gathering and bulk purchases from 1995 through 1998.
Year Ended December 31,
-----------------------------------
1998 1997 1996 1995
-------- ------- ------ ------
(barrels in thousands)
Lease gathering 88 71 59 46
Bulk purchases 95 49 32 10
-------- ------- ------ ------
Total volumes 183 120 91 56
======== ======= ====== ======
Crude Oil Purchases. In a typical producer's operation, crude oil flows
from the wellhead to a separator where the petroleum gases are removed. After
separation, the crude oil is treated to remove water, sand and other
contaminants and is then moved into the producer's on-site storage tanks. When
the tank is full, the producer contacts the Partnership's field personnel to
purchase and transport the crude oil to market. The Partnership utilizes
pipelines, trucks and barges owned and operated by third parties and the
Partnership's truck fleet and gathering pipelines to transport the crude oil to
market. The Partnership owns approximately 29 trucks, 30 tractor-trailers and 22
injection stations.
Pursuant to a Crude Oil Marketing Agreement with Plains Resources (the
"Crude Oil Marketing Agreement"), the Partnership is the exclusive
marketer/purchaser for all of Plains Resources' equity crude oil production. The
Crude Oil Marketing Agreement provides that the Partnership will purchase for
resale at market prices all of Plains Resources' crude oil production for which
it will charge a fee of $0.20 per barrel. This fee will be adjusted every three
years based upon then existing market conditions. The Crude Oil Marketing
Agreement will terminate upon a "change of control" of Plains Resources or the
General Partner. On a pro forma basis, revenues generated under the Crude Oil
Marketing Agreement for the year ended December 31, 1998 would have been
approximately $1.5 million. For the year ended December 31, 1998, Plains
Resources produced approximately 20,800 barrels per day which would be subject
to the Crude Oil Marketing Agreement. Plains Resources owns an approximate 100%
working interest in each of its fields.
Bulk Purchases. In addition to purchasing crude oil at the wellhead from
producers, the Partnership purchases crude oil in bulk at major pipeline
terminal points. This production is transported from the wellhead to the
pipeline by major oil companies, large independent producers or other gathering
and marketing companies. The Partnership purchases crude oil in bulk when it
believes additional opportunities exist to realize margins further downstream in
the crude oil distribution chain. The opportunities to earn additional margins
vary over time with changing market conditions. Accordingly, the margins
associated with the Partnership's bulk
12
purchases fluctuate from period to period. The Partnership's bulk purchasing
activities are concentrated in California, Texas, Louisiana and at the Cushing
Interchange.
Crude Oil Sales. The marketing of crude oil is complex and requires
detailed current knowledge of crude oil sources and end markets and a
familiarity with a number of factors including grades of crude oil, individual
refinery demand for specific grades of crude oil, area market price structures
for the different grades of crude oil, location of customers, availability of
transportation facilities and timing and costs (including storage) involved in
delivering crude oil to the appropriate customer. The Partnership sells its
crude oil to major integrated oil companies and independent refiners in various
types of sale and exchange transactions, generally at market-responsive prices
for terms ranging from one month to three years.
As the Partnership purchases crude oil, it establishes a margin by selling
crude oil for physical delivery to third party users, such as independent
refiners or major oil companies, or by entering into a future delivery
obligation with respect to futures contracts on the NYMEX. Through these
transactions, the Partnership seeks to maintain a position that is substantially
balanced between crude oil purchases and sales and future delivery obligations.
The Partnership from time to time enters into fixed price delivery contracts,
floating price collar arrangements, financial swaps and oil futures contracts as
hedging devices. To ensure a fixed price for future production, the Partnership
may sell a futures contract and thereafter either (i) make physical delivery of
its crude oil to comply with such contract or (ii) buy a matching futures
contract to unwind its futures position and sell its crude oil to a customer.
The Partnership's policy is generally to purchase only crude oil for which it
has a market and to structure its sales contracts so that crude oil price
fluctuations do not materially affect the gross margin which it receives. The
Partnership does not acquire and hold crude oil, futures contracts or other
derivative products for the purpose of speculating on crude oil price changes
that might expose the Partnership to indeterminable losses.
Risk management strategies, including those involving price hedges using
NYMEX futures contracts, have become increasingly important in creating and
maintaining margins. Such hedging techniques require significant resources
dedicated to managing futures positions. The Partnership's management monitors
crude oil volumes, grades, locations and delivery schedules and coordinates
marketing and exchange opportunities, as well as NYMEX hedging positions. This
coordination ensures that the Partnership's NYMEX hedging activities are
successfully implemented.
Crude Oil Exchanges. The Partnership pursues exchange opportunities to
enhance margins throughout the gathering and marketing process. When
opportunities arise to increase its margin or to acquire a grade of crude oil
that more nearly matches its delivery requirement or the preferences of its
refinery customers, the Partnership exchanges physical crude oil with third
parties. These exchanges are effected through contracts called exchange or buy-
sell agreements. Through an exchange agreement, the Partnership agrees to buy
crude oil that differs in terms of geographic location, grade of crude oil or
delivery schedule from crude oil it has available for sale. Generally, the
Partnership enters into exchanges to acquire crude oil at locations that are
closer to its end markets, thereby reducing transportation costs and increasing
its margin. The Partnership also exchanges its crude oil to be delivered at an
earlier or later date, if the exchange is expected to result in a higher margin
net of storage costs, and enters into exchanges based on the grade of crude oil
(which includes such factors as sulfur content and specific gravity) in order to
meet the quality specifications of its delivery contracts.
Producer Services. Crude oil purchasers who buy from producers compete on
the basis of competitive prices and highly responsive services. The Partnership
believes that its ability to offer high-quality field and administrative
services to producers is a key factor in maintaining volumes of purchased crude
oil and obtaining new volumes. High-quality field services include efficient
gathering capabilities, availability of trucks, willingness to construct
gathering pipelines where economically justified, timely pickup of crude oil
from tank batteries at the lease or production point, accurate measurement of
crude oil volumes received, avoidance of spills and effective management of
pipeline deliveries. Accounting and other administrative services include
securing division orders (statements from interest owners affirming the division
of ownership in crude oil purchased by the Partnership), providing statements of
the crude oil purchased each month, disbursing production proceeds to interest
owners and calculation and payment of ad valorem and production taxes on behalf
of interest owners. In order to compete effectively, the Partnership must
maintain records of title and division order interests in an accurate and timely
manner for purposes of making prompt and correct payment of crude oil production
proceeds, together with the correct payment of all severance and production
taxes associated with such proceeds.
Credit. The Partnership's merchant activities involve the purchase of crude
oil for resale and require significant extensions of credit by the Partnership's
suppliers of crude oil. In order to assure the Partnership's ability to perform
its obligations under crude purchase agreements, various credit arrangements are
negotiated with the Partnership's crude oil suppliers. Such arrangements include
open lines of credit directly with the Partnership and standby letters of credit
issued under the Letter of Credit Facility. See Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Capital
Resources, Liquidity and Financial Condition."
13
When the Partnership markets crude oil, it must determine the amount, if
any, of the line of credit to be extended to any given customer. If the
Partnership determines that a customer should receive a credit line, it must
then decide on the amount of credit that should be extended. Since typical
Partnership sales transactions can involve tens of thousands of barrels of crude
oil, the risk of nonpayment and nonperformance by customers is a major
consideration in the Partnership's business. The Partnership believes its sales
are made to creditworthy entities or entities with adequate credit support.
Credit review and analysis are also integral to the Partnership's leasehold
purchases. Payment for all or substantially all of the monthly leasehold
production is sometimes made to the operator of the lease. The operator, in
turn, is responsible for the correct payment and distribution of such production
proceeds to the proper parties. In these situations, the Partnership must
determine whether the operator has sufficient financial resources to make such
payments and distributions and to indemnify and defend the Partnership in the
event any third party should bring a protest, action or complaint in connection
with the ultimate distribution of production proceeds by the operator.
Operating Activities
The following table presents certain information with respect to the
Predecessor's and the Partnership's pipeline activities and its terminalling and
storage and gathering and marketing activities during the year ended December
31, 1998.
November 23, January 1,
1998 1998
Through Through Combined
December 31, November 22, Total
1998 1998 1998
------------- ------------- --------
(Predecessor)
(in thousands)
Sales to unaffiliated customers:
Pipeline $ 56,118 $221,305 $277,423
Terminalling and storage and
gathering and marketing 122,785 755,496 878,281
Operating profits:
Pipeline(1) $ 3,546 $ 13,222 $ 16,768
Terminalling and storage and
gathering and marketing 3,953 17,759 21,712
Identifiable assets:
Pipeline N/A N/A $472,144
Terminalling and storage and
gathering and marketing N/A N/A 138,064
- ----------------
(1) Consists primarily of pipeline tariff and margin revenues less pipeline
margin purchases and operating costs.
(2) Consists primarily of crude oil sales and terminalling and storage revenues
less crude oil purchases and operating costs.
Customers
Sempra Energy Trading Corporation and Koch Oil Company accounted for 30%
and 17%, respectively, of the Partnership's 1998 revenues. No other individual
customer accounted for greater than 10% of the Partnership's revenue.
Competition
The All American Pipeline encounters competition from foreign oil imports
and other pipelines that serve the California market and the refining centers in
the Midwest and on the Gulf Coast.
Construction of the Pacific Pipeline, a competing crude oil pipeline system
connecting the San Joaquin Valley to refinery markets in the Los Angeles Basin
was completed in March 1999. A substantial portion of the shipments expected to
be transported on the Pacific Pipeline will be redirected from barge and train
service. However, the Partnership expects that certain volumes currently
transported on the All American Pipeline may be redirected to Los Angeles on
such pipeline.
Competition among common carrier pipelines is based primarily on
transportation charges, access to producing areas and demand for the crude oil
by end users. The Partnership believes that high capital requirements,
environmental considerations and the difficulty in acquiring rights of way and
related permits make it unlikely that a competing pipeline system comparable in
size and scope to the All American Pipeline will be built in the foreseeable
future.
14
The Partnership faces intense competition in its terminalling and storage
activities and gathering and marketing activities. Its competitors include other
crude oil pipelines, the major integrated oil companies, their marketing
affiliates and independent gatherers, brokers and marketers of widely varying
sizes, financial resources and experience. Some of these competitors have
capital resources many times greater than the Partnership's and control
substantially greater supplies of crude oil.
Regulation
The Partnership's operations are subject to extensive regulation. Many
departments and agencies, both federal and state, are authorized by statute to
issue and have issued rules and regulations binding on the oil industry and its
individual participants. The failure to comply with such rules and regulations
can result in substantial penalties. The regulatory burden on the oil industry
increases the Partnership's cost of doing business and, consequently, affects
its profitability. However, the Partnership does not believe that it is affected
in a significantly different manner by these regulations than its competitors.
Due to the myriad and complex federal and state statutes and regulations which
may affect the Partnership, directly or indirectly, the following discussion of
certain statutes and regulations should not be relied upon as an exhaustive
review of all regulatory considerations affecting the Partnership's operations.
Pipeline Regulation
The Partnership's pipelines are subject to regulation by the Department of
Transportation ("DOT") under the Hazardous Liquids Pipeline Safety Act of
1979, as amended ("HLPSA") relating to the design, installation, testing,
construction, operation, replacement and management of pipeline facilities. The
HLPSA requires the Partnership and other pipeline operators to comply with
regulations issued pursuant to HLPSA, to permit access to and allow copying of
records and to make certain reports and provide information as required by the
Secretary of Transportation.
The Pipeline Safety Act of 1992 (the "Pipeline Safety Act") amends the
HLPSA in several important respects. It requires the Research and Special
Programs Administration ("RSPA") of DOT to consider environmental impacts, as
well as its traditional public safety mandate, when developing pipeline safety
regulations. In addition, the Pipeline Safety Act mandates the establishment by
DOT of pipeline operator qualification rules requiring minimum training
requirements for operators, and requires that pipeline operators provide maps
and records to RSPA. It also authorizes RSPA to require that pipelines be
modified to accommodate internal inspection devices, to mandate the installation
of emergency flow restricting devices for pipelines in populated or sensitive
areas and to order other changes to the operation and maintenance of petroleum
pipelines. The Partnership believes that its pipeline operations are in
substantial compliance with applicable HLPSA and Pipeline Safety Act
requirements. Nevertheless, significant expenses could be incurred in the future
if additional safety measures are required or if safety standards are raised and
exceed the current pipeline control system capabilities.
States are largely preempted by federal law from regulating pipeline safety
but may assume responsibility for enforcing federal intrastate pipeline
regulations and inspection of intrastate pipelines. In practice, states vary
considerably in their authority and capacity to address pipeline safety. The
Partnership does not anticipate any significant problems in complying with
applicable state laws and regulations in those states in which it operates.
Transportation and Sale of Crude Oil
In October 1992 Congress passed the Energy Policy Act of 1992 ("Energy
Policy Act"). The Energy Policy Act deemed petroleum pipeline rates in effect
for the 365-day period ending on the date of enactment of the Energy Policy Act
or that were in effect on the 365th day preceding enactment and had not been
subject to complaint, protest or investigation during the 365-day period to be
just and reasonable under the Interstate Commerce Act. The Energy Policy Act
also provides that complaints against such rates may only be filed under the
following limited circumstances: (i) a substantial change has occurred since
enactment in either the economic circumstances or the nature of the services
which were a basis for the rate; (ii) the complainant was contractually barred
from challenging the rate prior to enactment; or (iii) a provision of the tariff
is unduly discriminatory or preferential.
The Energy Policy Act further required the FERC to issue rules establishing
a simplified and generally applicable ratemaking methodology for petroleum
pipelines, and to streamline procedures in petroleum pipeline proceedings. On
October 22, 1993, the FERC responded to the Energy Policy Act directive by
issuing Order No. 561, which adopts a new indexing rate methodology for
petroleum pipelines. Under the new regulations, which were effective January 1,
1995, petroleum pipelines are able to change their rates within prescribed
ceiling levels that are tied to the Producer Price Index for Finished Goods,
minus one percent. Rate increases made pursuant to the index will be subject to
protest, but such protests must show that the portion of the rate increase
resulting from application of the index is substantially in excess of the
pipeline's increase in costs. The new indexing methodology can be applied to any
existing rate, even if the rate is under investigation. If such rate is
subsequently adjusted, the ceiling level established under the index must be
likewise adjusted.
15
In Order No. 561, the FERC said that as a general rule pipelines must
utilize the indexing methodology to change their rates. The FERC indicated,
however, that it was retaining cost-of-service ratemaking, market-based rates,
and settlements as alternatives to the indexing approach. A pipeline can follow
a cost-of-service approach when seeking to increase its rates above index levels
for uncontrollable circumstances. A pipeline can seek to charge market-based
rates if it can establish that it lacks market power. In addition, a pipeline
can establish rates pursuant to settlement if agreed upon by all current
shippers. Initial rates for new services can be established through a cost-of-
service proceeding or through an uncontested agreement between the pipeline and
at least one shipper not affiliated with the pipeline.
On May 10, 1996, the Court of Appeals for the District of Columbia Circuit
affirmed Order No. 561. The Court held that by establishing a general indexing
methodology along with limited exceptions to indexed rates, FERC had reasonably
balanced its dual responsibilities of ensuring just and reasonable rates and
streamlining ratemaking through generally applicable procedures.
In a recent proceeding involving Lakehead Pipe Line Company, Limited
Partnership (Opinion No. 397), FERC concluded that there should not be a
corporate income tax allowance built into a petroleum pipeline's rates to
reflect income attributable to noncorporate partners since noncorporate
partners, unlike corporate partners, do not pay a corporate income tax. This
result comports with the principle that, although a regulated entity is entitled
to an allowance to cover its incurred costs, including income taxes, there
should not be an element included in the cost of service to cover costs not
incurred. Opinion No. 397 was affirmed on rehearing in May 1996. Appeals of the
Lakehead opinions were taken, but the parties to the Lakehead proceeding
subsequently settled the case, with the result that appellate review of the tax
and other issues never took place.
There is also pending at the FERC a proceeding involving another publicly
traded limited partnership engaged in the common carrier transportation of crude
oil (the "Santa Fe Proceeding") in which the FERC could further limit its
current position related to the tax allowance permitted in the rates of publicly
traded partnerships, as well as possibly alter the FERC's current application of
the FERC oil pipeline ratemaking methodology. On September 25, 1997, the
administrative law judge in the Santa Fe Proceeding issued an initial decision
addressing various aspects of the tax allowance issue as it affects publicly
traded partnerships, as well as various technical issues involving the
application of the FERC oil pipeline ratemaking methodology. The administrative
law judge's initial decision in the Santa Fe Proceeding is currently pending
review by the FERC. In such review, it is possible that the FERC could alter its
current rulings on the tax allowance issue or on the application of the FERC oil
pipeline ratemaking methodology.
The FERC generally has not investigated rates, such as those currently
charged by the Partnership, which have been mutually agreed to by the pipeline
and the shippers or which are significantly below cost of service rates that
might otherwise be justified by the pipeline under the FERC's cost-based
ratemaking methods. Substantially all of the Partnership's gross margins on
transportation are produced by rates that are either grandfathered or set by
agreement of the parties. The rates for substantially all of the crude oil
transported from California to West Texas are grandfathered and not subject to
decreases through the application of indexing. These rates have not been
decreased through application of the indexing method. Rates for OCS crude are
set by transportation agreements with shippers that do not expire until 2007 and
provide for a minimum tariff with annual escalation. The FERC has twice approved
the agreed OCS rates, although application of the PPFIG-1 index method would
have required their reduction. When these OCS agreements expire in 2007, they
will be subject to renegotiation or to any of the other methods for establishing
rates under Order No. 561. As a result, the Partnership believes that the rates
now in effect can be sustained, although no assurance can be given that the
rates currently charged by the Partnership would ultimately be upheld if
challenged. In addition, the Partnership does not believe that an adverse
determination on the tax allowance issue in the Santa Fe Proceeding would have a
detrimental impact upon the current rates charged by the Partnership.
Trucking Regulation
The Partnership operates a fleet of trucks to transport crude oil as a
private carrier. As a private carrier, the Partnership is subject to certain
motor carrier safety regulations issued by the DOT. The trucking regulations
cover, among other things, driver operations, keeping of log books, truck
manifest preparations, the placement of safety placards on the trucks and
trailer vehicles, drug and alcohol testing, safety of operation and equipment,
and many other aspects of truck operations. The Partnership is also subject to
OSHA with respect to its trucking operations.
Environmental Regulation
General
Various federal, state and local laws and regulations governing the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, affect the Partnership's operations and costs. In
particular, the Partnership's activities in connection with storage and
transportation of crude oil and other liquid hydrocarbons and its use of
facilities for treating, processing
16
or otherwise handling hydrocarbons and wastes therefrom are subject to stringent
environmental regulation. As with the industry generally, compliance with
existing and anticipated regulations increases the Partnership's overall cost of
business. Such areas affected include capital costs to construct, maintain and
upgrade equipment and facilities. While these regulations affect the
Partnership's capital expenditures and earnings, the Partnership believes that
such regulations do not affect its competitive position in that the operations
of its competitors that comply with such regulations are similarly affected.
Environmental regulations have historically been subject to frequent change by
regulatory authorities, and the Partnership is unable to predict the ongoing
cost to it of complying with these laws and regulations or the future impact of
such regulations on its operation. Violation of federal or state environmental
laws, regulations and permits can result in the imposition of significant civil
and criminal penalties, injunctions and construction bans or delays. A discharge
of hydrocarbons or hazardous substances into the environment could, to the
extent such event is not insured, subject the Partnership to substantial
expense, including both the cost to comply with applicable regulations and
claims by neighboring landowners and other third parties for personal injury and
property damage.
Water
The Oil Pollution Act ("OPA") was enacted in 1990 and amends provisions
of the Federal Water Pollution Control Act of 1972 ("FWPCA") and other
statutes as they pertain to prevention and response to oil spills. The OPA
subjects owners of facilities to strict, joint and potentially unlimited
liability for removal costs and certain other consequences of an oil spill,
where such spill is into navigable waters, in certain environmentally sensitive
areas, along shorelines or in the exclusive economic zone of the U.S. In the
event of an oil spill into such waters, substantial liabilities could be imposed
upon the Partnership. States in which the Partnership operates have also enacted
similar laws. Regulations are currently being developed under OPA and state laws
that may also impose additional regulatory burdens on the Partnership.
The FWPCA imposes restrictions and strict controls regarding the discharge
of pollutants into navigable waters. Permits must be obtained to discharge
pollutants to state and federal waters. The FWPCA imposes substantial potential
liability for the costs of removal, remediation and damages. The Partnership
believes that compliance with existing permits and compliance with foreseeable
new permit requirements will not have a material adverse effect on the
Partnership's financial condition or results of operations.
Some states maintain groundwater protection programs that require permits
for discharges or operations that may impact groundwater conditions. The
Partnership believes that it is in substantial compliance with these state
requirements.
Air Emissions
The operations of the Partnership are subject to the Federal Clean Air Act
and comparable state and local statutes. The Partnership believes that its
operations are in substantial compliance with such statutes in all states in
which they operate.
Amendments to the Federal Clean Air Act enacted in late 1990 (the "1990
Federal Clean Air Act Amendments") require or will require most industrial
operations in the U.S. to incur capital expenditures in order to meet air
emission control standards developed by the Environmental Protection Agency (the
"EPA") and state environmental agencies. In addition, the 1990 Federal Clean
Air Act Amendments include a new operating permit for major sources ("Title V
permits"), which applies to some of the Partnership's facilities. Although no
assurances can be given, the Partnership believes implementation of the 1990
Federal Clean Air Act Amendments will not have a material adverse effect on the
Partnership's financial condition or results of operations.
Solid Waste
The Partnership generates hazardous and non-hazardous solid wastes that are
subject to the requirements of the Federal Resource Conservation and Recovery
Act ("RCRA") and comparable state statutes. The EPA is considering the
adoption of stricter disposal standards for non-hazardous wastes, including oil
and gas wastes that are currently exempt from RCRA requirements. At present, the
Partnership is not required to comply with a substantial portion of the RCRA
requirements because the Partnership's operations generate minimal quantities of
hazardous wastes. However, it is possible that oil and wastes, currently
generated during operations, will in the future be designated as "hazardous
wastes." Hazardous wastes are subject to more rigorous and costly disposal
requirements than are non-hazardous wastes. Such changes in the regulations
could result in additional capital expenditures or operating expenses by the
Partnership.
Hazardous Substances
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as "Superfund," imposes liability, without regard to
fault or the legality of the original act, on certain classes of persons that
contributed to the release of a "hazardous substance" into the environment.
These persons include the owner or operator of the site and companies that
disposed or arranged for the disposal of the hazardous substances found at the
site. CERCLA also authorizes the EPA and, in some instances,
17
third parties to act in response to threats to the public health or the
environment and to seek to recover from the responsible classes of persons the
costs they incur. In the course of its ordinary operations, the Partnership may
generate waste that may fall within CERCLA's definition of a "hazardous
substance." The Partnership may be jointly and severally liable under CERCLA for
all or part of the costs required to clean up sites at which such hazardous
substances have been disposed or released into the environment.
The Partnership currently owns or leases, and has in the past owned or
leased, properties where hydrocarbons are being or have been handled. Although
the Partnership has utilized operating and disposal practices that were standard
in the industry at the time, hydrocarbons or other wastes may have been disposed
of or released on or under the properties owned or leased by the Partnership or
on or under other locations where such wastes have been taken for disposal. In
addition, many of these properties have been operated by third parties whose
treatment and disposal or release of hydrocarbons or other wastes was not under
the Partnership's control. These properties and wastes disposed thereon may be
subject to CERCLA, RCRA and analogous state laws. Under such laws, the
Partnership could be required to remove or remediate previously disposed wastes
(including wastes disposed of or released by prior owners or operators), to
clean up contaminated property (including contaminated groundwater) or to
perform remedial plugging operations to prevent future contamination.
OSHA
The Partnership is also subject to the requirements of the Federal
Occupational Safety and Health Act ("OSHA") and comparable state statutes that
regulate the protection of the health and safety of workers. In addition, the
OSHA hazard communication standard requires that certain information be
maintained about hazardous materials used or produced in operations and that
this information be provided to employees, state and local government
authorities and citizens. The Partnership believes that its operations are in
substantial compliance with OSHA requirements, including general industry
standards, record keeping requirements, employee training regulations and
monitoring of occupational exposure to regulated substances.
Endangered Species Act
The Endangered Species Act ("ESA") restricts activities that may affect
endangered species or their habitats. While certain facilities of the
Partnership are in areas that may be designated as habitat for endangered
species, the Partnership believes that it is in substantial compliance with the
ESA. However, the discovery of previously unidentified endangered species could
cause the Partnership to incur additional costs or operation restrictions or
bans in the affected area.
Hazardous Materials Transportation Requirements
The DOT regulations affecting pipeline safety require pipeline operators to
implement measures designed to reduce the environmental impact of oil discharge
from onshore oil pipelines. These regulations require operators to maintain
comprehensive spill response plans, including extensive spill response training
for pipeline personnel. In addition, DOT regulations contain detailed
specifications for pipeline operation and maintenance. The Partnership believes
that its operations are in substantial compliance with such regulations.
Environmental Remediation
During 1997, the All American Pipeline experienced a leak in a segment of
its pipeline in California which resulted in an estimated 12,000 barrels of
crude oil being released into the soil. Immediate action was taken to repair the
pipeline leak, contain the spill and to recover the released crude oil. The
Partnership has submitted a closure plan to the Regional Water Quality Board
("RWQB"). At the request of the RWQB, groundwater monitoring wells have been
installed from which water samples will be analyzed semi-annually. No
hydrocarbon contamination was detected in initial analyses taken in January
1999. The RWQB approval of PAA's closure plan is not expected until subsequent
semi-annual analyses have been performed. If the Partnership's closure plan is
disapproved, a government mandated remediation of the spill could require
significant expenditures (currently estimated to be approximately $350,000),
provided however, no assurance can be given that the actual cost thereof will
not exceed such estimate. The Partnership does not believe the ultimate
resolution of this issue will have a material adverse affect on the
Partnership's consolidated financial position, results of operations or cash
flows.
Prior to being acquired by the Partnership's predecessors in 1996, the
Ingleside Terminal experienced releases of refined petroleum products into the
soil and groundwater underlying the site due to activities on the property. The
Partnership has proposed a voluntary state-administered remediation of the
contamination on the property to determine whether the contamination extends
outside the property boundaries. If the Partnership's plan is disapproved, a
government mandated remediation of the spill could require more significant
expenditures, currently estimated to approximate $250,000, although no assurance
can be given that the actual cost could not exceed such estimate. In addition, a
portion of any such costs may be reimbursed to the Partnership from Plains
Resources. The Partnership does not believe the ultimate resolution of this
issue will have a material adverse affect on the Partnership's
18
consolidated financial position, results of operations or cash flows. See Item
13, "Certain Relationships and Related Transactions--Relationship with Plains
Resources--Indemnity from the General Partner."
The Partnership may experience future releases of crude oil into the
environment from its pipeline and storage operations, or discover releases that
were previously unidentified. While the Partnership maintains an extensive
inspection program designed to prevent and, as applicable, to detect and address
such releases promptly, damages and liabilities incurred due to any future
environmental releases from the All American Pipeline, the SJV Gathering System,
the Cushing Terminal, the Ingleside Terminal or other Partnership assets may
substantially affect the Partnership's business.
Operational Hazards and Insurance
A pipeline may experience damage as a result of an accident or other
natural disaster. These hazards can cause personal injury and loss of life,
severe damage to and destruction of property and equipment, pollution or
environmental damages and suspension of operations. The Partnership maintains
insurance of various types that it considers to be adequate to cover its
operations and properties. The insurance covers all of the Partnership's assets
in amounts considered reasonable. The insurance policies are subject to
deductibles that the Partnership considers reasonable and not excessive. The
Partnership's insurance does not cover every potential risk associated with
operating pipelines, including the potential loss of significant revenues.
Consistent with insurance coverage generally available to the industry, the
Partnership's insurance policies provide limited coverage for losses or
liabilities relating to pollution, with broader coverage for sudden and
accidental occurrences.
The occurrence of a significant event not fully insured or indemnified
against, or the failure of a party to meet its indemnification obligations,
could materially and adversely affect the Partnership's operations and financial
condition. The Partnership believes that it is adequately insured for public
liability and property damage to others with respect to its operations. With
respect to all of its coverage, no assurance can be given that the Partnership
will be able to maintain adequate insurance in the future at rates it considers
reasonable.
Title to Properties
Substantially all of the Partnership's pipelines are constructed on rights-
of-way granted by the apparent record owners of such property and in some
instances such rights-of-way are revocable at the election of the grantor. In
many instances, lands over which rights-of-way have been obtained are subject to
prior liens which have not been subordinated to the right-of-way grants. In some
cases, not all of the apparent record owners have joined in the right-of-way
grants, but in substantially all such cases, signatures of the owners of
majority interests have been obtained. Permits have been obtained from public
authorities to cross over or under, or to lay facilities in or along water
courses, county roads, municipal streets and state highways, and in some
instances, such permits are revocable at the election of the grantor. Permits
have also been obtained from railroad companies to cross over or under lands or
rights-of-way, many of which are also revocable at the grantor's election. In
some cases, property for pipeline purposes was purchased in fee. All of the pump
stations are located on property owned in fee or property under long-term
leases. In certain states and under certain circumstances, the Partnership has
the right of eminent domain to acquire rights-of-way and lands necessary for the
operations of the All American Pipeline, a common carrier pipeline.
Some of the leases, easements, rights-of-way, permits and licenses
transferred to the Partnership, upon its formation in 1998, required the consent
of the grantor to transfer such rights, which in certain instances is a
governmental entity. The General Partner believes that it has obtained such
third-party consents, permits and authorizations as are sufficient for the
transfer to the Partnership of the assets necessary for the Partnership to
operate its business in all material respects as described in this report. With
respect to any consents, permits or authorizations which have not yet been
obtained, the General Partner believes that such consents, permits or
authorizations will be obtained within a reasonable period, or that the failure
to obtain such consents, permits or authorizations will have no material adverse
effect on the operation of the Partnership's business.
The General Partner believes that the Partnership has satisfactory title to
all of its assets. Although title to such properties are subject to encumbrances
in certain cases, such as customary interests generally retained in connection
with acquisition of real property, liens related to environmental liabilities
associated with historical operations, liens for current taxes and other burdens
and minor easements, restrictions and other encumbrances to which the underlying
properties were subject at the time of acquisition by the Plains Midstream
Subsidiaries or the Partnership, the General Partner believes that none of such
burdens will materially detract from the value of such properties or from the
Partnership's interest therein or will materially interfere with their use in
the operation of the Partnership's business.
19
Employees
To carry out the operations of the Partnership, the General Partner or its
affiliates employ approximately 210 employees. None of such employees of the
General Partner is represented by labor unions, and the General Partner
considers its employee relations to be good.
Item 3. LEGAL PROCEEDINGS
The Partnership, in the ordinary course of business, is a claimant and/or a
defendant in various legal proceedings in which its exposure, individually and
in the aggregate, is not considered material to the Partnership.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders, through
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON UNITS AND RELATED UNITHOLDER MATTERS
The Common Units, representing limited partner interests in the
Partnership, are listed and traded on the New York Stock Exchange under the
symbol "PAA". The Common Units began trading on November 18, 1998, at an initial
public offering price of $20.00 per Common Unit. On March 22, 1999, the market
price for the Common Units was $17.125 per unit and there were approximately
12,300 record holders and beneficial owners (held in street name) of the
Partnership's Common Units.
The following table sets forth, for the portion of the fourth quarter 1998
in which the Common Units were traded, the range of high and low closing sales
prices for the Common Units as reported on the New York Stock Exchange Composite
Tape, and the amount of cash distribution paid per Common Unit for the portion
of the fourth quarter 1998 commencing November 23, 1998, the date of closing of
the IPO.
Common Unit Price Range
-----------------------
High Low Cash Distribution Paid Per Unit
------ ------ -------------------------------
1998:
4th Quarter $20.06 $16.75 $0.193 (paid February 12, 1999
for period from November
23, 1998, through
December 31, 1998)
The Partnership has also issued Subordinated Units, all of which are held
by an affiliate of the General Partner, for which there is no established public
trading market. The Partnership will distribute to its partners (including
holders of Subordinated Units), on a quarterly basis, all of its Available Cash
in the manner described herein. Available Cash generally means, with respect to
any quarter of the Partnership, all cash on hand at the end of such quarter less
the amount of cash reserves that is necessary or appropriate in the reasonable
discretion of the General Partner to (i) provide for the proper conduct of the
Partnership's business, (ii) comply with applicable law or any Partnership debt
instrument or other agreement, or (iii) provide funds for distributions to
Unitholders and the General Partner in respect of any one or more of the next
four quarters. Available Cash is defined in the Second Amended and Restated
Agreement of Limited Partnership of Plains All American Pipeline, L.P. (the
APartnership Agreement") listed as an exhibit to this report. The Partnership
Agreement defines Minimum Quarterly Distributions as $ 0.45 for each full fiscal
quarter (prorated for the initial partial fiscal quarter commencing November 23,
1998, the closing date of the IPO through year-end 1998). The Partnership made a
cash distribution in the amount of $ 5.8 million on February 12, 1999, in
respect to its Common Units and Subordinated Units for the period of November
23, 1998 through year-end 1998. This payment was based upon $ 0.193 per unit,
which was the Minimum Quarterly Distribution prorated for the partial quarter in
accordance with the Partnership Agreement. Distributions of Available Cash to
the holder of Subordinated Units are subject to the prior rights of the holders
of Common Units to receive the Minimum Quarterly Distributions for each quarter
during the Subordination Period, and to receive any arrearages in the
distribution of Minimum Quarterly Distributions on the Common Units for prior
quarters during the Subordination Period. The expiration of the Subordination
Period will generally not occur prior to December 31, 2003.
20
Under the terms of the Partnership's Bank Credit Agreement and Letter of
Credit Facility, the Partnership is prohibited from declaring or paying any
distribution to Unitholders if a Default or Event of Default (as defined in such
agreements) exists thereunder. See Management's Discussion and Analysis of
Financial Condition and Results of Operations - Capital Resources, Liquidity and
Financial Condition in Item 7 of this report.
Item 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL AND OPERATING DATA
On November 23, 1998, the Partnership completed the IPO and the
Transactions whereby the Partnership became the successor to the business of the
Predecessor. The following selected pro forma and historical financial
information was derived from the audited consolidated financial statements of
the Partnership as of December 31, 1998, and for the period from November 23,
1998 through December 31, 1998, and the audited combined financial statements of
the Predecessor, as of December 31, 1997, 1996, 1995 and 1994 and for the period
from January 1, 1998 through November 22, 1998 and for the years ended December
31, 1997, 1996, 1995 and 1994, including the notes thereto, certain of which
appear elsewhere in this Report. The Predecessor operating data for all periods
is derived from the records of the Partnership and the Predecessor. Commencing
July 30, 1998, (the date of the acquisition of the All American Pipeline and the
SJV Gathering System from Goodyear), the results of operations of the All
American Pipeline and the SJV Gathering System are included in the results of
operations of the Predecessor. The selected financial data should be read in
conjunction with the consolidated and combined financial statements, including
the notes thereto, and Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Year November 23, January 1,
Ended 1998 to 1998 to Year Ended December 31,
December 31, December 31, November 22, -------------------------------------------------------
1998(1) 1998 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ------------ ----------
(Pro forma) (Predecessor) (Predecessor)
(Unaudited) (in thousands, except unit data)
Income Statement Data
Revenues $1,568,853 $ 176,445 $ 953,244 $ 752,522 $ 531,698 $ 339,825 $ 199,239
Cost of Sales and
Operations 1,494,732 168,946 922,263 740,042 522,167 333,459 193,050
------------ ------------ ------------ ------------ ------------ ------------ ----------
Gross Margin 74,121 7,499 30,981 12,480 9,531 6,366 6,189
------------ ------------ ------------ ------------ ------------ ------------ ----------
General and administrative
expenses 6,501 771 4,526 3,529 2,974 2,415 2,376
Depreciation and
amortization 11,303 1,192 4,179 1,165 1,140 944 906
------------ ------------ ------------ ------------ ------------ ------------ ----------
Total expenses 17,804 1,963 8,705 4,694 4,114 3,359 3,282
------------ ------------ ------------ ------------ ------------ ------------ ----------
Operating income 56,317 5,536 22,276 7,786 5,417 3,007 2,907
Interest expense 12,991 1,371 11,260 4,516 3,559 3,460 3,550
Interest and other income 584 12 572 138 90 115 115
------------ ------------ ------------ ------------ ------------ ------------ ----------
Net income (loss) before
provision (benefit) in
lieu of income taxes $ 43,910 $ 4,177 $ 11,588 $ 3,408 $ 1,948 $ (338) $ (528)
Provision (benefit) in lieu
of income taxes - - 4,563 1,268 726 (93) (151)
------------ ------------ ------------ ------------ ------------ ------------ ----------
Net Income (loss) $ 43,910 $ 4,177 $ 7,025 $ 2,140 $ 1,222 $ (245) $ (377)
============ ============ ============ ============ ============ ============ ==========
Basic and Diluted Net
Income (loss) Per Limited
Partner Unit(2) $ 1.43 $ 0.14 $ 0.40 $ 0.12 $ 0.07 $ (0.01) $ (0.02)
============ ============ ============ ============ ============ ============ ==========
Weighted Average Number
of Limited Partner
Units Outstanding 30,088,858 30,088,858 17,003,858 17,003,858 17,003,858 17,003,858 17,003,858
============ ============ ============ ============ ============ ============ ==========
(Financial data continued on the next page. See footnotes on next page.)
21
Year November 23, January 1,
Ended 1998 to 1998 to Year Ended December 31,
December 31, December 31, November 22, -------------------------------------------------------
1998(1) 1998 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ------------ ----------
(Pro forma) (Predecessor) (Predecessor)
(Unaudited) (in thousands, except barrel amounts)
Balance Sheet Data:
(at end of period):
Working capital(3) $ 17,099 $ 17,099 N/A $ 10,962 $ 12,087 $ 9,579 $ 4,734
Total assets 610,208 610,208 N/A 149,619 122,557 82,076 62,847
Related party debt
Short-term 10,790 10,790 N/A 8,945 9,501 6,524 -
Long-term - - N/A 28,531 31,811 32,095 35,854
Total debt(3) 184,750 184,750 N/A 18,000 - - -
Partners' Equity 277,643 277,643 N/A - - - -
Combined Equity - - N/A 5,975 3,835 2,613 2,858
Other Data:
EBITDA(4) $ 68,204 $ 6,740 $ 27,027 $ 9,089 $ 6,647 $ 4,066 $ 3,928
Maintenance capital
expenditures(5) 1,679 200 1,479 678 1,063 571 274
Operating Data:
Volumes (barrels per day):
Tariff(6) 124,500 110,200 113,700 - - - -
Margin(7) 49,200 50,900 49,100 - - - -
-------- -------- -------- ------- -------- ------- -------
Total pipeline 173,700 161,100 162,800 - - - -
======== ======== ======== ======= ======== ======= =======
Lease gathering(8) 112,900 126,200 87,100 71,400 58,500 45,900 29,600
Bulk purchases(9) 97,900 133,600 94,700 48,500 31,700 10,200 -
Terminal throughput(10) 79,800 61,900 81,400 76,700 59,800 42,500 28,900
- ----------------------
(1) The unaudited selected pro forma financial and operating data for the year
ended December 31, 1998, is based on the historical financial statements of
the Partnership, the Predecessor and Wingfoot. The historical financial
statements of Wingfoot reflect the historical operating results of the All
American Pipeline and the SJV Gathering System through July 30, 1998.
Effective July 30 1998, the Predecessor acquired the All American Pipeline
and SJV Gathering system from Goodyear for approximately $400 million. The
pro forma selected financial data reflects certain pro forma adjustments to
the historical results of operations as if the Partnership had been formed
and the Acquisition had taken place on January 1, 1998. The pro forma
adjustments include: (i) pro forma depreciation and amortization expense
based on the purchase price of the Wingfoot assets by the Predecessor; (ii)
the elimination of interest expense on loans from Goodyear to Wingfoot as
all such debt was extinguished in connection with the Acquisition; (iii)
the reduction in compensation and benefits expense due to the termination
of personnel in connection with the Acquisition; (iv) the elimination of
interest expense of the Predecessor related to debt owed to Plains
Resources as such debt was extinguished in connection with the
Transactions; (v) pro forma interest on debt assumed by the Partnership on
the closing date of the IPO; and (vi) the elimination of income tax expense
as income taxes will be borne by the partners and not the Partnership. The
pro forma adjustments do not include approximately $0.9 million of general
and administrative expenses that the General Partner believes will be
incurred by the Partnership as a result of its being a separate public
entity.
(2) Basic and diluted net income (loss) per Unit for the Partnership is
computed by dividing the limited partners' 98% interest in net income by
the number of outstanding Common and Subordinated Units. For periods prior
to November 23, 1998, such units are equal to the Common and Subordinated
Units received by the General Partner in exchange for the assets
contributed to the Partnership
(3) Excludes intercompany debt.
(4) EBITDA means earnings before interest expense, income taxes, depreciation
and amortization. EBITDA provides additional information for evaluating the
Partnership's ability to make the Minimum Quarterly Distribution and is
presented solely as a supplemental measure. EBITDA is not a measurement
presented in accordance with generally accepted accounting principles
("GAAP") and is not intended to be used in lieu of GAAP presentations of
results of operations and cash provided by operating activities. The
Partnership's EBITDA may not be comparable to EBITDA of other entities as
other entities may not calculate EBITDA in the same manner as the
Partnership.
(5) Maintenance capital expenditures are capital expenditures made to replace
partially or fully depreciated assets to maintain the existing operating
capacity of existing assets or extend their useful lives. Capital
expenditures made to expand the Partnership's existing capacity, whether
through construction or acquisition, are not considered maintenance capital
22
expenditures. Repair and maintenance expenditures associated with existing
assets that do not extend the useful life or expand operating capacity are
charged to expense as incurred.
(6) Represents crude oil deliveries on the All American Pipeline for the
account of third parties.
(7) Represents crude oil deliveries on the All American Pipeline and the SJV
Gathering System for the account of affiliated entities
(8) Represents barrels of crude oil purchased at the wellhead, including
volumes which would have been purchased under the Crude Oil Marketing
Agreement.
(9) Represents barrels of crude oil purchased at collection points, terminals
and pipelines.
(10) Represents total crude oil barrels delivered from the Cushing Terminal and
the Ingleside Terminal
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations for the Partnership and its predecessor entities should be read in
conjunction with the historical consolidated and combined financial statements
and notes thereto of the Partnership and the Plains Midstream Subsidiaries
included elsewhere in this report. For more detailed information regarding the
basis of presentation for the following financial information, see the notes to
the historical consolidated and combined financial statements.
General
The Partnership is a limited partnership which was formed in the third
quarter of 1998 to acquire and operate the midstream crude oil business and
assets of Plains Resources. The Partnership is engaged in interstate and
intrastate crude oil pipeline transportation and crude oil terminalling and
storage activities and gathering and marketing activities. The Partnership's
operations are primarily concentrated in California, Texas, Oklahoma, Louisiana
and the Gulf of Mexico. The historical results of operations discussed below are
derived from the historical financial statements of the Partnership and the
Predecessor included elsewhere herein.
Pipeline Operations. The activities from pipeline operations generally
consist of transporting third-party volumes of crude oil for a tariff ("Tariff
Activities") and merchant activities designed to capture price differentials
between the cost to purchase and transport crude oil to a sales point and the
price received for such crude oil at the sales point ("Margin Activities").
Tariffs on the All American Pipeline vary by receipt point and delivery point.
Tariffs for OCS crude oil delivered to California markets averaged $1.41 per
barrel and tariffs for OCS volumes delivered to West Texas were $2.96 per barrel
as of December 31, 1998. Tariffs for San Joaquin Valley crude oil delivered to
West Texas were $1.25 per barrel as of December 31, 1998. The gross margin
generated by Tariff Activities depends on the volumes transported on the
pipeline and the level of the tariff charged, as well as the fixed and variable
costs of operating the pipeline. As is common with most merchant activities, the
ability of the Partnership to generate a profit on Margin Activities is not tied
to the absolute level of crude oil prices but is generated by the difference
between the price paid and other costs incurred in the purchase of crude oil and
the price at which it sells crude oil. The Partnership is well positioned to
take advantage of these price differentials due to its ability to move purchased
volumes on the All American Pipeline. The Partnership combines reporting of
gross margin for Tariff Activities and Margin Activities due to the sharing of
fixed costs between the two activities.
Terminalling and Storage Activities and Gathering and Marketing Activities.
Gross margin from terminalling and storage activities is dependent on the
throughput volume of crude oil stored and the level of fees generated at the
Cushing Terminal. Gross margin from the Partnership's gathering and marketing
activities is dependent on the Partnership's ability to sell crude oil at a
price in excess of the cost.