ITEM 3. LEGAL PROCEEDINGS
The Partnership is involved from time to time in various claims, actions, lawsuits and regulatory matters that have arisen in the ordinary course of business, including various rate cases and other proceedings before the FERC. See Items 1 & 2. "Business and Properties -- Regulation."
In particular, the Partnership is a defendant in a lawsuit filed by Transcontinental Gas Pipe Line Corporation ("Transco") in the 157th Judicial District Court, Harris County, Texas on August 30, 1996. Transco alleges that, pursuant to a platform lease agreement entered into on June 28, 1994, Transco has the right to expand its facilities and operations on the offshore platform by connecting additional pipeline receiving and appurtenant facilities. Transco has requested a declaratory judgment and is seeking damages. Management has denied Transco's request to expand its facilities and operations because the lease agreement prohibits such expansion and Transco's activities will interfere with the Manta Ray Offshore system and the Partnership's existing and planned activities on the platform. It is the opinion of management that adequate defenses exist and that the final disposition of this suit individually, and all of the Partnership's other pending legal proceedings in the aggregate, will not have a material adverse effect on the Partnership.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Partnership during the quarter ended December 31, 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Preference Units are listed on the NYSE, which is the principal trading market for such securities, under the symbol "LEV." As of March 14, 1997, there were approximately 638 holders of record of the Preference Units. In December 1996, the Board of Directors for the General Partner approved a two for one split of the Preference and Common Units for the Unitholders of record as of the close of business on December 31, 1996. In connection with the Unit split, the General Partner, on behalf of itself and the limited partners of the Partnership, executed Amendment Number 1 to the Amended and Restated Agreement of Limited Partnership of the Partnership. The Amendment modifies two provisions of the Partnership Agreement and was entered into in accordance with the terms of the Partnership Agreement to preserve the relative rights and obligations of the partners following the distribution. The following table sets forth, as adjusted for the Unit split, the high and low sales prices for the Preference Units as reported on the NYSE and the cash distributions declared per Unit for the periods indicated.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents (i) selected consolidated financial data of the Partnership for the years ended December 31, 1996, 1995 and 1994, for the period from commencement of operations on February 19, 1993 to December 31, 1993, and as of each of the periods then ended and (ii) selected consolidated financial data of Leviathan for the period from July 1, 1992 through February 18, 1993, for the fiscal year ended June 30, 1992, and as of June 30, 1992. The selected financial data of the Partnership at December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994 have been derived from the consolidated financial statements of the Partnership included elsewhere in this Annual Report. The selected financial data of the Partnership for the period from commencement of operations on February 19, 1993 to December 31, 1993 and at December 31, 1994 have been derived from the historical consolidated financial statements of the Partnership. The selected consolidated financial data of Leviathan for the period from July 1, 1992 through February 18, 1993 and for the fiscal year ended June 30, 1992 have been derived from the consolidated financial statements of Leviathan.
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(a) Balance sheet data as of February 18, 1993 related to Leviathan has been omitted as the information is not required. (b) Per Unit amounts have been restated to reflect the Unit split.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Partnership's consolidated financial statements and the notes thereto located elsewhere in this Annual Report and the information set forth under the heading "Selected Financial Data." The Partnership's principal sources of revenue are (i) platform access and processing fees and commodity charges related to its transportation services, (ii) equity earnings in investees and (iii) the sale of oil and gas production. The Partnership's principal costs include (i) expenses associated with the operation of its pipelines, platforms and equipment and its producing oil and gas wells, (ii) depreciation, depletion and amortization of its fixed assets and (iii) general and administrative expenses, including management fees allocated from the General Partner.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Revenue from transportation and platform services totaled $24.0 million for the year ended December 31, 1996 as compared with $20.5 million for the year ended December 31, 1995. The increase in transportation and platform services revenue of $3.5 million was comprised of (i) a $3.0 million increase in platform services from the Partnership's Viosca Knoll 817 platform, which was placed in service during the third quarter of 1995, (ii) a $2.6 million increase primarily from the Green Canyon system attributable to the connection of a new gas field located in Green Canyon Block 136 to the system and (iii) a decrease of $2.1 million attributable to decreases in throughput on the Ewing Bank and Tarpon systems due to normal production declines from the wells attached to such systems. Total transportation volumes for the gathering systems increased 15.4% from the year ended December 31, 1995 to the year ended December 31, 1996. This increase is primarily a result of increased throughput on the Green Canyon system as a result of the addition of Green Canyon Block 136 partially offset by lower production from the producing fields attached to the Ewing Bank, Tarpon and Manta Ray Offshore systems.
Revenue from Equity Investees totaled $20.4 million for the year ended December 31, 1996 as compared with $19.6 million for the year ended December 31, 1995. The increase of $0.8 million in revenue from Equity Investees primarily reflects increases of (i) $3.4 million from Viosca Knoll as a result of increased throughput on the system, (ii) $1.1 million from POPCO, which was placed in service in April 1996, and (iii) $0.7 million from West Cameron Dehy, which was placed in service in November 1995, offset by a decrease of $4.4 million related primarily to Stingray, HIOS and UTOS. Total gas transportation volumes for the Equity Investees increased 15.6% from the year ended December 31, 1995 to the year ended December 31, 1996 primarily as a result of increased throughput on the Viosca Knoll, HIOS and Stingray systems. Total oil transportation volumes for POPCO, which was placed in service in April 1996, totaled 7,528,000 barrels for the year ended December 31, 1996.
Revenue from oil and gas sales totaled $47.1 million for the year ended December 31, 1996 as compared with $1.9 million for the year ended December 31, 1995. The increase in oil and gas sales of $45.2 million is primarily attributable to the initiation of production from the Partnership's Viosca Knoll Block 817 lease in December 1995, the Garden Banks Block 72 lease in May 1996 and the Garden Banks Block 117 lease in July 1996. During the year ended December 31, 1996, the Partnership sold 15,730 MMcf of gas and 393,000 barrels of oil at average prices of $2.37 per Mcf and $21.76 per barrel, respectively. During 1995, the Partnership sold 392 MMcf of gas at an average price of $2.35 per Mcf.
Operating expenses for the year ended December 31, 1996 totaled $9.1 million as compared with $4.1 million for the year ended December 31, 1995. The $5.0 million increase in operating expenses is primarily attributable to the operation of new pipelines, platforms and oil and gas leases by the Partnership.
Depreciation, depletion and amortization totaled $31.7 million for the year ended December 31, 1996 as compared with $8.3 million for the year ended December 31, 1995. The $23.4 million increase in depreciation, depletion and amortization results primarily from depreciation and depletion on the oil and gas wells and facilities located on the Viosca Knoll Block 817, Garden Banks Block 72 and the Garden Banks Block 117 leases, depreciation on additional platforms and facilities constructed by the Partnership and accelerated depreciation on the Ewing Bank flow lines.
General and administrative expenses, including the management fee allocated from the General Partner, totaled $8.5 million for the year ended December 31, 1996 as compared with $7.1 million for the year ended December 31, 1995. The increase of $1.4 million primarily reflects (i) a $1.2 million reimbursement to DeepTech for certain tax
liabilities incurred by DeepTech as a result of the Partnership's public offering of an additional Preference Units in June 1994, (ii) a $0.8 million increase in management fees allocated by Leviathan to the Partnership as a result of increased operational activities and (iii) a $0.8 million increase in other general and administrative expenses of the Partnership, also as a result of increased Partnership activities, offset by a $1.4 million reimbursement from POPCO as a result of the Partnership's management of the initial phase of the construction of Poseidon.
During the year ended December 31, 1995, the Partnership recognized a $1.2 million gain on sale of certain oil and gas mineral leaseholds.
Interest income and other totaled $1.7 million for the year ended December 31, 1996 as compared with $0.6 million for the year ended December 31, 1995. The increase in interest income is primarily due to accrued interest of $1.1 million related to the $7.5 million that was added to the Payout Amount in connection with restructuring the demand charges payable to the Partnership from Tatham Offshore.
Interest and other financing costs, net of capitalized interest, for the year ended December 31, 1996 totaled $5.6 million as compared with $0.8 million for the year ended December 31, 1995. Interest and fees associated with the Partnership's credit facilities of $11.9 million and $5.3 million were capitalized in connection with construction projects and drilling activities in progress during the years ended December 31, 1996 and 1995, respectively.
Net income for the year ended December 31, 1996 totaled $38.7 million as compared with $23.9 million for the year ended December 31, 1995 as a result of the items discussed above. Net income per Unit for the year ended December 31, 1996 totaled $1.57 per Unit as compared with $0.97 per Unit for the year ended December 31, 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Revenue from transportation and platform services totaled $20.5 million for the year ended December 31, 1995 as compared with $18.6 million for the year ended December 31, 1994. The increase in transportation and platform services revenue of $1.9 million resulted primarily from (i) a $1.4 million increase related to the Partnership receiving additional demand charge revenues from the Ewing Bank system in 1995 as compared with demand charge revenue during 1994 as a result of additional facilities installed by the Partnership in late 1994, (ii) a $0.9 million increase from the Partnership's Viosca Knoll 817 platform, which was placed in service in July 1995 and (iii) a $1.0 million increase from the Manta Ray Gathering System as a result of higher demand charges or throughputs; partially offset by a decrease of $1.4 million from the Tarpon and Green Canyon systems as a result of lower throughput on those systems. Total transportation volumes for the gathering systems decreased 2.3% from the year ended December 31, 1994 to the year ended December 31, 1995. This decrease is primarily a result of lower production from the producing fields attached to the Green Canyon and Tarpon systems partially offset by increased throughput on the Manta Ray Gathering System and the Ewing Bank system.
Revenue from Equity Investees totaled $19.6 million for the year ended December 31, 1995 as compared with $14.8 million for the year ended December 31, 1994. The increase of $4.8 million resulted primarily from (i) an increase in equity earnings from HIOS of $7.1 million as a result of higher tariffs collected by such pipeline as well as settlements of rate cases for HIOS which allowed HIOS to retain certain revenue that was collected subject to refund in prior periods and was partially offset by (ii) a decrease in equity earnings from Stingray of $4.0 million as a result of lower demand charge revenues on such system for 1995 caused by the expiration of firm transportation agreements with Natural Gas Pipeline Company of America and Trunkline in November 1994. In addition, equity earnings from the UTOS partnership declined $0.4 million primarily as a result of costs associated with the settlement of its rate case. Equity in earnings for the year ended December 31, 1994 also included $0.2 million from Viosca Knoll as compared with $2.2 million for the year ended December 31, 1995. The increase in equity earnings from Viosca Knoll reflects a full year's operation of the Viosca Knoll system during 1995 as compared with operations of only two months during 1994. Total gas transportation volumes for the Partnership's Equity Investees increased 7.3% from the year ended December 31, 1994 to the year ended December 31, 1995 primarily as a result of increased throughput on the Viosca Knoll, HIOS and UTOS systems.
Oil and gas sales for the year ended December 31, 1995 increased to $1.9 million from $0.8 million for the year ended December 31, 1994. The increase in oil and gas sales was primarily a result of additional production from the Ewing Bank 914 #2 well and the initiation of production from the Viosca Knoll Block 817 lease in December 1995.
Operating expenses for the year ended December 31, 1995 totaled $4.1 million as compared with $1.9 million for the year ended December 31, 1994. The $2.2 million increase was primarily attributable to the operations of new pipelines, platforms and production equipment during 1995.
Depreciation, depletion and amortization totaled $8.3 million for the year ended December 31, 1995 as compared with $5.1 million for the year ended December 31, 1994. The $3.2 million increase was primarily attributable to the addition of new pipelines, platforms and production equipment.
General and administrative expenses, including the management fee allocated from the General Partner, totaled $7.1 million for the year ended December 31, 1995 as compared with $5.4 million for the year ended December 31, 1994. The $1.7 million increase reflects the amendment of the Management Agreement with the General Partner, effective July 1, 1994, to reimburse DeepTech for increased management services provided to the Partnership associated with the expansion of the Partnership's pipeline facilities and to more accurately provide for the reimbursement of DeepTech's expenses in providing management services. The increase also reflects management services associated with the Partnership's oil and gas activities during 1995.
Interest income and other for the year ended December 31, 1995 totaled $1.9 million as compared with interest income and other of $1.3 million for the year ended December 31, 1994. The $0.6 million increase in interest income and other resulted primarily from the gain which resulted from the sale of a minority working interest in an oil and gas lease of $1.2 million partially offset by a $0.6 million decrease in the amount of interest earned on the Partnership's cash balances.
Interest and other financing costs for the year ended December 31, 1995 totaled $0.8 million as compared with interest and other financing costs of $0.9 million for the year ended December 31, 1994.
Net income for the year ended December 31, 1995 totaled $23.9 million as compared with $22.1 million for the year ended December 31, 1994 as a result of the items discussed above. Net income per Unit for the year ended December 31, 1995 totaled $0.97 per Unit based on 24,366,894 Units outstanding during the period as compared with $1.02 per Unit based on 21,486,694 Units outstanding during the period for the year ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Cash. The Partnership intends to satisfy its capital requirements and other working capital needs primarily from cash on hand, cash from continuing operations and borrowings under the Partnership Credit Facility (discussed below). Net cash provided by operating activities for the year ended December 31, 1996 totaled $50.2 million. At December 31, 1996, the Partnership had cash and cash equivalents of $16.5 million.
Cash from continuing operations is derived from (i) payments for gathering and transporting gas through the 100% owned pipelines, (ii) platform access and processing fees, (iii) cash distributions from Equity Investees and (iv) the sale of oil and gas attributable to the Partnership's interest in certain producing wells.
The Partnership's cash flows from operations will be affected by the ability of each Equity Investee to make distributions. Distributions from such entities are also subject to the discretion of their respective management committees. Further, each of Stingray, POPCO and Viosca Knoll is party to a credit agreement under which it has outstanding obligations that may restrict the payments of distributions to its owners. Distributions from Equity Investees during 1996 totaled $36.8 million including a one-time distribution of $12.5 million from Viosca Knoll in December 1996.
In December 1995, Stingray amended an existing term loan agreement to provide for aggregate outstanding borrowings of up to $29.0 million in principal amount. The agreement requires the payment of principal by Stingray of $1.45 million per quarter. As of December 31, 1996, Stingray had $23.2 million outstanding under its term loan agreement, which is principally secured by current and future gas transportation contracts between Stingray and its customers.
In April 1996, POPCO entered into a revolving credit facility (the "POPCO Credit Facility") with a group of commercial banks to provide up to $150.0 million for the construction of the second and third phases of Poseidon and for other working capital needs of POPCO. POPCO's ability to borrow money under the facility is subject to certain customary terms and conditions, including borrowing base limitations. As of December 31, 1996, POPCO
had $84.0 million outstanding under the POPCO Credit Facility. As of December 31, 1996, approximately $30.0 million of additional funds are currently available under the POPCO Credit Facility which is secured by a substantial portion of POPCO's assets and matures on April 30, 2001.
In December 1996, Viosca Knoll entered into a revolving credit facility (the "Viosca Knoll Credit Facility") with a syndicate of commercial banks to provide up to $100.0 million for the addition of compression to the Viosca Knoll system and for other working capital needs of Viosca Knoll, including funds for a one time distribution of $25.0 million to its partners. As of December 31, 1996, Viosca Knoll had $33.3 million outstanding under the Viosca Knoll Credit Facility. Viosca Knoll's ability to borrow money under the facility is subject to certain customary terms and conditions, including borrowing base limitations. The Viosca Knoll Credit Facility is secured by a substantial portion of Viosca Knoll's assets and matures on December 20, 2001.
Flextrend Development has initiated production from each of its oil and gas properties. The Viosca Knoll Block 817 project is currently producing a total of approximately 106 MMcf of gas and 340 barrels of oil per day. Flextrend Development owns a 75% working interest in this property, one-half of which is subject to certain reversionary rights. The Garden Banks Block 72 lease, which began producing in May 1996, is currently producing an average of 3,500 barrels of oil, 14 MMcf of gas and 550 barrels of water per day. The Garden Banks Block 117 #1 well, which began producing in July 1996, is currently producing an average of approximately 1,700 barrels of oil, 3 MMcf of gas and 3,700 barrels of water per day. Flextrend Development has drilled a second successful well at Garden Banks Block 117 which should be placed on production in April 1997. Flextrend Development owns a 50% working interest in each of these two properties, one-half of which is subject to certain reversionary rights.
The Partnership Credit Facility, as amended and restated in December 1996, is a revolving credit facility providing for up to $300.0 million of available credit subject to customary terms and conditions, including certain incurrence limitations. Proceeds from the Partnership Credit Facility are available to the Partnership for general partnership purposes, including financing of capital expenditures, for working capital, and subject to certain limitations, for paying distributions to the Unitholders. The Partnership Credit Facility can also be utilized to issue letters of credit as may be required from time to time. As of December 31, 1996, borrowings totaled $227.0 million under the Partnership Credit Facility bearing interest at an average floating rate of 6.6% per annum. There are no letters of credit currently outstanding under the Partnership Credit Facility. The Partnership Credit Facility is guaranteed by Leviathan and all of the Partnership's subsidiaries, is secured by substantially all of the assets of the Partnership and Leviathan's general partnership interest and Leviathan's interest in the Management Agreement and matures in December 1999.
Uses of Cash. The Partnership's capital requirements consist primarily of (i) quarterly distributions to holders of Preference Units and Common Units and to Leviathan as general partner, including incentive distributions, as applicable, (ii) expenditures for the maintenance of the pipelines and related infrastructure and the acquisition and construction of additional pipelines and related facilities for the gathering, transportation and processing of gas and oil in the Gulf, (iii) management fees and other operating expenses, (iv) contributions to Equity Investees and (v) debt service on its outstanding debt. In addition, Flextrend Development's future capital requirements will consist of expenditures related to the completion of the second well at Garden Banks Block 117.
For every full quarter since its inception, the Partnership has declared and subsequently paid a cash distribution to holders of Preference Units and Common Units in an amount equal to or exceeding the Minimum Quarterly Distribution per Unit per quarter. See Item 5. "Market for Registrant's Common Stock and Related Stockholder Matters". At the current distribution rate of $0.40 per Unit, the quarterly Partnership distributions total $10.3 million in respect of the Preference Units, Common Units and general partner interest ($41.3 million on an annual basis, including $12.4 million to Leviathan). The Partnership believes that it will be able to continue to pay at least the current quarterly distribution of $0.40 per Preference and Common Unit for the foreseeable future.
Distributions by the Partnership of its Available Cash are effectively made 98% to Unitholders and 2% to Leviathan, as general partner, subject to the payment of incentive distributions to Leviathan if certain target levels of cash distributions to Unitholders are achieved (the "Incentive Distributions"). As an incentive, the General Partner's interest in the portion of quarterly cash distributions in excess of $0.325 per Unit and less than or equal to $0.375 per Unit is increased to 15%. For quarterly cash distributions over $0.375 per Unit but less than or equal to $0.425 per Unit, the General Partner receives 25% of such incremental amount and for all quarterly cash distributions in excess of $0.425 per Unit, the General Partner receives 50% of the incremental amount. During the year ended
December 31, 1996, the General Partner received Incentive Distributions totaling $285,000. In February 1997, the General Partner received an Incentive Distribution of $381,000.
In February 1996, the Partnership and Texaco formed POPCO to construct, own and operate Poseidon. Pursuant to the terms of the organizational documents, the Partnership initially contributed assets, at net book value, related to the construction of the initial phase of Poseidon as well as certain dedication agreements and Texaco initially contributed an equivalent amount of cash as well as its rights under certain agreements. The Partnership has fully funded its portion of the capital requirements of POPCO for the construction of the first two phases of Poseidon. In July 1996, Marathon joined POPCO by contributing its interest in 58 miles of nearby crude oil pipelines and dedicating its portion of oil reserves attached to such pipelines to Poseidon for transportation. As a result, each of the Partnership and Texaco now owns a 36% interest in POPCO and Marathon owns the remaining 28% interest. The second phase of Poseidon was placed in service in December 1996. POPCO anticipates building a new 24-inch diameter pipeline from Calliou Island to Houma, Louisiana which should be operational in late 1997. The Partnership anticipates that the majority of POPCO's future capital requirements will be funded by borrowings under the POPCO Credit Facility.
In January 1997, the Partnership and affiliates of Marathon and Shell formed Nautilus to build and operate an interstate natural gas pipeline system, and Manta Ray Offshore to acquire, operate and extend an existing gathering system that will be connected to the Nautilus system, once it is constructed. Each of the two new companies was formed to serve growing production areas in the Green Canyon area of the Gulf. The total cost of the two systems, including the Manta Ray Offshore system which was contributed to Manta Ray Offshore by the Partnership, is approximately $270.0 million. The Nautilus system, a new jurisdictional interstate pipeline, will consist of a 30-inch line downstream from Ship Shoal Block 207 connecting to the Exxon Company USA operated Garden City gas processing plant. Upstream of the Ship Shoal 207 terminal, the existing Manta Ray Offshore gathering system will be extended into a broader gathering system that will serve shelf and deepwater production around Ewing Bank Block 873 to the east and Green Canyon Block 65 to the west. Affiliates of Marathon and Shell have committed to each of the Nautilus and Manta Ray Offshore systems significant deep water acreage positions in the area, including the recently announced Troika field (Green Canyon Block 244), and will provide the majority of the capital funding for the new construction. The Partnership will provide some funding in addition to its contribution of the Manta Ray Offshore system.
The Partnership anticipates that its capital expenditures and equity investments for 1997 will relate to continuing acquisition and construction activities as well as the completion of the second well at Garden Banks Block 117. The Partnership anticipates funding such cash requirements primarily with available cash flow and borrowings under the Partnership Credit Facility. The Partnership may contribute existing assets to new joint ventures as partial consideration for its ownership interest therein. The majority of the capital expenditures of POPCO and Viosca Knoll are anticipated to be funded by borrowings under their respective credit facilities. In addition, the majority of the capital requirements of Nautilus and Manta Ray Offshore are anticipated to be funded by the equity contributions of affiliates of Shell and Marathon. The Partnership's capital expenditures and equity investments for 1996 were $101.7 million.
Interest and other financing costs, including capitalized interest, related to the Partnership's credit facilities totaled $17.5 million for the year ended December 31, 1996. Such amount included commitment fees and amortization of debt issue costs of $1.2 million.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data required hereunder are included in this Annual Report as set in Item 14(a).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
GENERAL
The General Partner and the Partnership depend upon the employees of and management services provided by DeepTech under the Management Agreement. The Partnership reimburses the General Partner for reasonable general and administrative expenses, and other reasonable expenses, incurred by the General Partner and its affiliates, including DeepTech, for or on behalf of the Partnership, including, without limitation, fees paid by the General Partner to DeepTech pursuant to the Management Agreement.
Some of the officers and directors of the General Partner are also officers and directors of DeepTech and its affiliates. Such officers and directors may spend a substantial amount of time managing the business and affairs of the General Partner and may face a conflict regarding the allocation of their time between the Partnership and the other business interests of the General Partner, DeepTech and its affiliates. Subject to its fiduciary duties to the Partnership and its limited partners, the General Partner may retain, acquire and invest in businesses that compete with the Partnership, subject to certain limitations.
DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER
The following table sets forth certain information as of March 14, 1997, regarding the executive officers and directors of the General Partner who provide services to the Partnership. The General Partner has appointed each of its officers to serve the Partnership in the same office or offices each such officer holds with the General Partner. Directors are elected annually by the General Partner's sole stockholder, Leviathan Holdings Company ("Leviathan Holdings"), and hold office until their successors are elected and qualified. Each executive officer named in the following table has been elected to serve until his successor is duly appointed or elected or until his or her earlier removal or resignation from office.
There is no family relationship among any of the executive officers or directors of the General Partner, and no arrangement or understanding exists between any executive officer and any other person pursuant to which he or she was or is to be selected as an officer.
Thomas P. Tatham has served as Chairman of the Board of Leviathan and DeepTech since February 1989 and October 1989, respectively. Mr. Tatham served as Chief Executive Officer of Leviathan from February 1989 through June 1995 and has served as Chief Executive Officer of DeepTech since October 1989. In addition, Mr. Tatham has served as Chairman of the Board and Director of Tatham Offshore since its inception in 1988 and as Chief Executive Officer of Tatham Offshore since November 1995. Mr. Tatham has over 27 years experience in the oil and gas industry. He founded Mid American Oil Company in 1970 and served as Chairman of the Board and Chief Executive Officer until he sold his interest therein to Centex Corporation in 1979. In 1979, Mr. Tatham founded Tatham
Corporation to acquire Sugar Bowl Gas Corporation ("Sugar Bowl"), the second largest intrastate pipeline system in Louisiana. He served as Chairman of the Board of Tatham Corporation from 1979 to December 1983, at which time it sold the assets of Sugar Bowl to a joint venture between MidCon Corp. and Texas Oil and Gas, Inc. From 1984 to 1988, Mr. Tatham pursued personal investments in various industries, including the oil and gas industry. Mr. Tatham is also a director of J. Ray McDermott, S.A.
Grant E. Sims served as President of Leviathan from March 1994 through June 1995 and as Chief Executive Officer of Leviathan since July 1995. In addition, Mr. Sims has served as Senior Vice President of DeepTech since July 1993. Mr. Sims has also served as a Director of DeepTech and Leviathan since July 1993 and August 1994, respectively, and Offshore Gas Marketing, Inc., a subsidiary of DeepTech, from December 1992 to March 1994. Prior to joining DeepTech, Mr. Sims spent ten years with Transco in various capacities, most recently directing Transco's non-jurisdictional gas activities. Mr. Sims received a B.A. and Ph.D. in Economics from Texas A&M University.
James H. Lytal has served as a Director of Leviathan since August 1994 and as Senior Vice President of Leviathan from August 1994 to June 1995 and as President of Leviathan since July 1995. Prior to joining Leviathan, Mr. Lytal was Vice President Business - Development for American Pipeline Company from December 1992 to August 1994. Prior thereto, Mr. Lytal served as Vice President - - Business Development for United Gas Pipe Line Company from March 1991 to December 1992. Prior thereto, Mr. Lytal has served in various capacities in the oil and gas exploration and production and gas pipeline industries with Texas Oil and Gas, Inc. and American Pipeline Company from September 1980 to March 1991. Mr. Lytal holds a B.S. in Petroleum Engineering from the University of Texas.
John H. Gray has served as a Director of Leviathan since September 1991, as Chief Operating Officer of Leviathan since March 1994, and as President of Leviathan from August 1991 to March 1994. From August 1990 to August 1991, Mr. Gray was the owner of J.H. Gray Consulting, an oil and gas marketing consulting company. Prior thereto, Mr. Gray served as President of Torch Energy Marketing, Inc., an oil and gas marketing and natural gas pipeline company from August 1989 to August 1990, and Vice President of Oil and Gas Products of Tenneco Oil Exploration and Production from May 1984 to August 1989. Mr. Gray has a B.S. in Engineering from the Colorado School of Mines.
Donald V. Weir has served as a Director of Leviathan since 1989, Secretary of Leviathan since March 1994 and served as Chief Operating Officer of Leviathan from 1989 to March 1994. In addition, Mr. Weir has served as Chief Financial Officer and a Director of DeepTech since June 1991, Vice President of DeepTech since 1989, Secretary of DeepTech from 1989 to August 1993. In addition, Mr. Weir has served as Secretary and a Director of Tatham Offshore from 1988 through September 1995 and as Chief Financial Officer of Tatham Offshore from 1991 through September 1995. From 1988 until 1991, he served as a Vice President of Tatham Offshore. Prior to joining Leviathan, Mr. Weir served in various executive capacities with numerous entities owned and controlled by Mr. Tatham. Prior to joining Mr. Tatham's organizations in 1980, Mr. Weir was with Price Waterhouse LLP for 14 years.
Keith B. Forman has served as the Chief Financial Officer and as a Director of Leviathan since January 1992 and July 1992, respectively. Prior to joining Leviathan, Mr. Forman served as Vice President of the Natural Gas Pipeline Group of Manufacturers Hanover Trust Company which he joined in 1982. His account responsibility included interstate gas transmission companies and gas gathering companies. Mr. Forman has a B.A. in Economics and Political Science from Vanderbilt University.
Janet E. Sikes has served as a Director and Treasurer of Leviathan since September 1991 and as Secretary of DeepTech since August 1993, a Director of DeepTech since July 1993 and Treasurer of DeepTech since May 1991. Ms. Sikes has managed accounting, treasury, cash management and financial reporting functions for various entities owned and controlled by Mr. Tatham since 1981. Prior thereto, Ms. Sikes worked in the audit division of Price Waterhouse LLP, and for two years as the Assistant Controller of Ocean Marine Services, Inc. Ms. Sikes holds a B.B.A. from Texas A&M University and is a certified public accountant.
Dennis A. Kunetka has served as Senior Vice President--Corporate Finance and Investor Relations for DeepTech and Leviathan since August 1993 and as Senior Vice President--Corporate Finance for Tatham Offshore since October 1993. Prior to joining the Company, Mr. Kunetka served as Vice President and Controller of United Gas Pipe Line Company and its parent company, United Gas Holdings Corporation. Prior to joining United in 1984, Mr. Kunetka spent 11 years with Getty Oil Company in various tax, financial and regulatory positions. Mr. Kunetka holds B.B.A. and M.S.A. degrees from the University of Houston and a J.D. degree from South Texas College of Law and is a certified public accountant.
Charles M. Darling, IV has served as a Director of Leviathan and DeepTech since October 1989 and February 1989, respectively. Mr. Darling has been a partner in the law firm of Baker & Botts, L.L.P. since 1980, originally joining the firm in 1974. Mr. Darling has represented companies in the oil and gas industry for over 20 years.
Paul Thompson III has served as a Director of Leviathan and DeepTech since July 1992. Mr. Thompson has served as a Managing Director of Donaldson, Lufkin and Jenrette Securities Corporation ("DLJ") and the Chief Operating Officer of DLJ Bridge Finance, Inc., an affiliate of DLJ since 1987. Prior thereto, Mr. Thompson was a Vice President of The First Boston Corporation. Mr. Thompson is currently a Director of E-Z Serve Corporation, which operates convenience stores. Mr. Thompson received a B.S. degree from the University of Pennsylvania.
George L. Ball has served as a Director of Leviathan since June 1993. Mr. Ball is Chairman of Sanders Morris Mundy Inc. Previously, Mr. Ball served as Senior Executive Vice President at Smith Barney, Harris Upham & Co. Incorporated ("Smith Barney") and as a member of Smith Barney's Executive Committee and Board of Directors. From August 1991 through October 1992, Mr. Ball served as a consultant with J & W Seligman. Mr. Ball served as Chairman of the Board and Chief Executive Officer of Prudential Capital and Investment Services, Inc. and its primary subsidiary, Prudential Securities Incorporated, an investment banking and brokerage firm (collectively, "Prudential") from July 1981 through August 1991. Prior to joining Prudential, Mr. Ball was President of E.F. Hutton Group Inc. and E.F. Hutton Inc. Mr. Ball holds a B.A. degree, with honors, from Brown University.
William A. Bruckmann, III has served as a Director of Leviathan since June 1993. Mr. Bruckmann has served as Managing Director in the Global Oil and Gas Group of Chase Securities Inc. since June 15, 1985. During his 18 years with Chase Securities Inc. and predecessor companies (Chemical Bank and Manufacturer's Hanover Trust Company), Mr. Bruckmann has principally focused on financing domestic natural gas pipelines and independent oil and gas producing companies. Mr. Bruckmann holds a B.A. degree from the University of Virginia.
COMPENSATION OF DIRECTORS
Directors of the General Partner are entitled to reimbursement for their reasonable out-of-pocket expenses in connection with their travel to and from, and attendance at, meetings of the Board of Directors or committees thereof. Messrs. Thompson, Ball and Bruckmann are paid an annual fee of $36,000 plus $1,000 per meeting attended. Officers are elected by, and serve at the discretion of, the Board of Directors.
CONFLICTS AND AUDIT COMMITTEE
Messrs. Thompson, Ball and Bruckmann, who are neither officers nor employees of Leviathan nor any of its affiliates, serve as the Conflicts and Audit Committee of the Board of Directors of the General Partner (the "Conflicts and Audit Committee"). The Conflicts and Audit Committee provides two primary services. First, it advises the Board of Directors in matters regarding the system of internal controls and the annual independent audit, and reviews policies and practices of the General Partner and the Partnership. Second, the Conflicts and Audit Committee at the request of the General Partner, reviews specific matters as to which the General Partner believes there may be a conflict of interest in order to determine if the resolution of such conflict proposed by the General Partner is fair and reasonable to the Partnership. The Conflicts and Audit Committee only reviews matters concerning potential conflicts of interest at the request of the General Partner, which has sole discretion to determine which such matters to submit to such Committee. Any such matters approved by a majority vote of the Conflicts and Audit Committee will be conclusively deemed (i) to be fair and reasonable to the Partnership, (ii) approved by all limited partners of the Partnership and (iii) not a breach by the General Partner of any duties it may owe to the Partnership. However, it is possible that such procedure in itself may constitute a conflict of interest.
COMPENSATION OF THE GENERAL PARTNER AND DEEPTECH
The General Partner receives no remuneration in connection with its management of the Partnership other than: (i) distributions in respect of its general and limited partner interests in the Partnership and its nonmanaging interest in certain subsidiaries of the Partnership; (ii) Incentive Distributions in respect of its general partner interest, as provided in the Partnership Agreement and (iii) reimbursement for all direct and indirect costs and expenses incurred on behalf of the Partnership, all selling, general and administrative expenses incurred by the General Partner for or on behalf of the Partnership and all other expenses necessary or appropriate to the conduct of the business of, and allocable to, the
Partnership, including, but not limited to the management fees paid by the General Partner to DeepTech under the Management Agreement.
LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY; INDEMNIFICATION
The Certificate of Incorporation of Leviathan limits the liability of the directors of Leviathan to Leviathan or its stockholder (in their capacity as directors but not in their capacity as officers) to the fullest extent permitted by the Delaware General Corporation Law (the "DGCL"). Accordingly, pursuant to the terms of the DGCL as presently in effect, directors of Leviathan will not be personally liable for monetary damages for breach of a director's fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to Leviathan or its stockholder, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the DGCL or (iv) for any transaction from which the director derived an improper personal benefit. The Certificate of Incorporation also provides that if the DGCL is amended after the approval of the Certificate of Incorporation to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of Leviathan will be eliminated to the full extent permitted by the DGCL, as so amended.
In addition, the Amended and Restated Bylaws of Leviathan (as amended and restated, the "Bylaws"), in substance, require Leviathan to indemnify each person who is or was a director, officer, employee or agent of Leviathan to the full extent permitted by the laws of the State of Delaware in the event he or she is involved in legal proceedings by reason of the fact that he or she is or was a director, officer, employee or agent of Leviathan, or is or was serving at Leviathan's request as a director, officer, employee or agent of the Partnership and its subsidiaries, another corporation, partnership or other enterprise. Leviathan is also required to advance to such persons payments incurred in defending a proceeding to which indemnification might apply, provided the recipient provides an undertaking agreeing to repay all such advanced amounts if it is ultimately determined that he or she is not entitled to be indemnified. In addition, the Bylaws specifically provide that the indemnification rights granted thereunder are non-exclusive.
Leviathan has entered into indemnification agreements with its directors providing for indemnification to the full extent permitted by the laws of the State of Delaware. These agreements provide for specific procedures to better assure the directors' rights to indemnification, including procedures for directors to submit claims, for determination of directors' entitlement to indemnification (including the allocation of the burden of proof and selection of a reviewing party) and for enforcement of directors' indemnification rights.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The executive officers of Leviathan are compensated by DeepTech and do not receive compensation from Leviathan or the Partnership for their services in such capacities with the exception of awards pursuant to the Unit Rights Appreciation Plan discussed below. However, Leviathan does make certain payments to DeepTech pursuant to the Management Agreement.
UNIT RIGHTS APPRECIATION PLAN
In 1995, the Partnership adopted the Unit Rights Appreciation Plan (the "Plan") to provide the Partnership with the ability of making awards of Unit Rights, as hereinafter defined, to certain officers and key employees of the Partnership or its affiliates as an incentive for these individuals to continue in the service of the Partnership or its affiliates.
Under the Plan, the Partnership may grant to senior officers of the Partnership or its affiliates, excluding the Chairman of the Board of Leviathan, currently Mr. Tatham, the right to purchase, or realize the appreciation in, a Preference Unit (a "Unit Right"), pursuant to the provisions of the Plan.
The Plan is administered by a committee of the Board of Directors of the General Partner (the "Board") comprised of two or more non-employee directors as defined by Rule 16 b-3 of the Exchange Act (the "Committee") provided that during the periods in which no such committee is appointed and empowered under the Plan, the Board shall be the Committee for all purposes under the Plan.
The aggregate number of Preference Units as to which Unit Rights may be issued pursuant to the Plan shall not exceed 400,000 Preference Units per calendar year and 4,000,000 Preference Units over the term of the Plan, subject to adjustment as to both limitations under certain circumstances. No participant may be granted more than 400,000 Unit
Rights in any calendar year. The exercise price of the Preference Units covered by the Unit Rights granted pursuant to the Plan shall be the closing price of the Preference Units as reported on the NYSE or, if the Preference Units are not traded on such exchange, as reported on any other national securities exchange on which the Preference Units are traded, on the date on which Unit Rights are granted pursuant to the Plan.
As of March 14, 1997, a total of 1,200,000 Unit Rights have been granted under the Plan representing 400,000 Unit Rights for each of the calendar years 1995, 1996 and 1997.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of Leviathan's outstanding common stock, par value $0.10 per share, is owned by Leviathan Holdings. The common stock of Leviathan Holdings is owned 85.0% by DeepTech and 13.0% by directors of Leviathan as indicated in the following table, with the remaining 2.0% of the outstanding stock being owned by two individuals. Leviathan Holdings has no other class of capital stock outstanding.
The following table sets forth, as of February 14, 1997, the beneficial ownership of the outstanding equity securities of each of the Partnership, Leviathan Holdings and DeepTech by (i) each person who is known to the Partnership to beneficially own more than 5% of the outstanding Units of the Partnership, (ii) each director of Leviathan and (iii) all directors and executive officers of Leviathan as a group. A public trading market does not currently exist for the capital stock of Leviathan or Leviathan Holdings.
(1) The address for Leviathan is 7200 Texas Commerce Tower, 600 Travis Street, Houston, Texas 77002. Leviathan owns all 6,291,894 Common Units outstanding representing limited partner interests in the Partnership; the 1% general partner interest in the Partnership and a 1.0101% nonmanaging interest in each of the limited liability company subsidiaries of the Partnership, representing an effective 27.3% interest in the Partnership.
(2) The address for DeepTech is 7500 Texas Commerce Tower, 600 Travis Street, Houston, Texas 77002. Through DeepTech's effective 85% ownership of Leviathan through Leviathan Holdings, DeepTech owns an effective 23.2% interest in the Partnership.
(3) Mr. Tatham's address is 7500 Texas Commerce Tower, 600 Travis Street, Houston, Texas 77002.
(4) Excludes beneficial ownership of 850 shares of common stock owned by DeepTech. Mr. Tatham is Chairman and Chief Executive Officer of DeepTech and beneficially owns 45.5% of the outstanding DeepTech common stock.
(5) Includes warrants or options to purchase 3,291,666 shares of DeepTech common stock.
(6) Includes options to purchase 300,000 shares of DeepTech common stock.
(7) Includes 6,000 Preference Units held by Mr. Darling's wife and 4,000 Preference Units held by a trust for which Mr. Darling acts as trustee but excludes 3,000 Preference Units held in trust for Mr. Darling's children.
(8) Excludes 100,000 shares held in trust for Mr. Darling's children but includes 40,731 shares owned by a corporation of which Mr. Darling is a director and shareholder.
(9) Includes options to purchase 12,500 shares of DeepTech common stock.
(10) Includes options to purchase 75,000 shares of DeepTech common stock.
(11) Includes options to purchase 18,750 shares of DeepTech common stock.
(12) Includes 14,902 shares and warrants to purchase 37,500 shares allocated to employee benefit plans of Mr. Thompson and options to purchase 150,000 shares of DeepTech common stock.
(13) Includes options to purchase 81,250 shares of DeepTech common stock.
(14) Includes options to purchase 12,500 shares of DeepTech common stock.
(15) Includes options to purchase 3,986,666 shares of DeepTech common stock.
* Less than 1%.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A discussion of certain agreements, arrangements and transactions between or among the Partnership, Leviathan, DeepTech, Tatham Offshore and certain other related parties is summarized in the Partnership's "Notes to Consolidated Financial Statements -- Note 3 -- Oil and Gas Properties" and "Notes to Consolidated Financial Statements -- Note 9 -- Related Party Transactions --" located elsewhere in this Annual Report. Also see "Directors and Executive Officers of the Registrant -- Conflicts and Audit Committee."
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report or incorporated by reference:
1. Financial Statements
As to financial statements and supplementary information, reference is made to "Index to Consolidated Financial Statements" on page of this Annual Report on Form 10-K.
2. Financial Statement Schedules
None. All financial statement schedules are omitted because the information is not required, is not material or is otherwise included in the consolidated financial statements or notes thereto included elsewhere in this Annual Report on Form 10-K.
3. (a) Exhibits
Item Description Number - ------
3.1 -- Certificate of Limited Partnership of the Partnership (filed as Exhibit 3.1 to the Partnership's Registration Statement on Form S-1, File No. 33-55642, and incorporated herein by reference).
3.2 -- Amended and Restated Agreement of Limited Partnership of the Partnership (filed as Exhibit 10.41 to Amendment No. 1 to DeepTech's Registration Statement on Form S-1, File No. 33-73538, and incorporated herein by reference).
3.3 -- Amendment Number 1 to the Amended and Restated Agreement of Limited Partnership of the Partnership (filed as Exhibit 10.1 to the Partnership's Current Report on Form 8-K dated December 31, 1996 and incorporated herein by reference).
4.1 -- Form of Certificate Evidencing Preference Units Representing Limited Partner Interests (filed as Exhibit 4.1 to Amendment No. 2 to the Partnership's Registration Statement on Form S-1, File No. 33-55642, and incorporated herein by reference).
4.2 -- Form of Certificate Evidencing Common Units Representing Limited Partner Interests (filed as Exhibit 4.2 to Amendment No. 2 to the Partnership's Registration Statement on Form S-1, File No. 33-55642, and incorporated herein by reference).
10.01 -- Master Gas Dedication Agreement, dated December 10, 1993, between the Partnership and Tatham Offshore (filed as Exhibit 10.29 to Amendment No. 2 to Tatham Offshore's Registration Statement on Form S-1, File No. 33-70120, and incorporated herein by reference).
10.02 -- Amendment to Master Gas Dedication Agreement dated April 21, 1995 between the Partnership and Tatham Offshore (filed as Exhibit 10.26 to DeepTech's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, Commission File Number 0-23934 and incorporated herein by reference).
10.03 -- Amendment to Master Gas Dedication Agreement dated April 21, 1995 between the Partnership and Tatham Offshore (filed as Exhibit 10.27 to DeepTech's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, Commission File Number 0-23934 and incorporated herein by reference).
10.04 -- Gathering Agreement, dated July 1, 1992, among Ewing Bank, Tatham Offshore, and DeepTech (filed as Exhibit 10.16 to Tatham Offshore's Registration Statement on Form S-1, File No. 33-70120, and incorporated herein by reference).
10.05 -- Letter Agreement dated March 22, 1995 between Ewing Bank and Tatham Offshore amending the Gathering Agreement dated July 1, 1992 (filed as Exhibit 10.44 to DeepTech's Annual Report on Form 10-K for the fiscal year ended June 30, 1994, Commission File Number 0-23934 and incorporated herein by reference).
10.06 -- Partnership Agreement of Stingray (filed as Exhibit 10.06 to Amendment No. 1 to the Partnership's Registration Statement on Form S-1, File No. 33-55642, and incorporated herein by reference).
10.07 -- Amended and Restated General Partnership Agreement of UTOS (filed as Exhibit 10.07 to Amendment No. 1 to the Partnership's Registration Statement on Form S-1, File No. 33-55642, and incorporated herein by reference).
10.08 -- Amended and Restated General Partnership Agreement of HIOS (filed as Exhibit 10.08 to Amendment No. 1 to the Partnership's Registration Statement on Form S-1, File No. 33-55642, and incorporated herein by reference).
10.09 -- First Amended and Restated Management Agreement, effective as of July 1, 1992, between the Partnership and Leviathan (filed as Exhibit 10.1 to DeepTech's Annual Report on Form 10-K for the fiscal year ended June 30, 1994, Commission File Number 0-23934 and incorporated herein by reference).
10.10 -- Management Agreement, dated July 1, 1992, between DeepTech and Leviathan (filed as Exhibit 10.10 to Amendment No. 1 to the Partnership's Registration Statement on Form S-1, File No. 33-55642, and incorporated herein by reference).
10.11 -- First Amendment to the Amended and Restated Management Agreement, dated as of January 1, 1995, between the Partnership and DeepTech (filed as Exhibit 10.76 to DeepTech's Registration Statement on Form S-1, File No. 33-88688, and incorporated herein by reference).
10.12 -- Simultaneous Exchange Agreement dated May 27, 1994 by and among Shell Offshore Inc., SOI Royalties Inc. and Forest Oil Corporation (filed as Exhibit 10.21 to the Partnership's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1993 and incorporated herein by reference).
10.13 -- Service Agreement dated January 1, 1994 between LOGS and Deepwater Production Systems regarding Ship Shoal 332A Platform Operation (filed as Exhibit 10.23 to the Partnership's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1993 and incorporated herein by reference).
10.14 -- Service Agreement dated January 1, 1994 between LOGS and Deepwater Production Systems, Inc. regarding Ship Shoal 331/332 Flowlines (filed as Exhibit 10.24 to the Partnership's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1993 and incorporated herein by reference).
10.15 -- Service Agreement dated January 1, 1994 between LOGS and Deepwater Production Systems, Inc. regarding Ship Shoal 332A Platform Modifications (filed as Exhibit 10.25 to the Partnership's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1993 and incorporated herein by reference).
10.16 -- Technology Services Agreement effective as of July 1, 1993 by and between Dover and the Partnership (filed as Exhibit 10.26 to the Partnership's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1993 and incorporated herein by reference).
10.17 -- Letter Agreements dated August 24, 1994, between the Partnership and Placid Oil Company (filed as Exhibit 10.1 to the Partnership's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994 and incorporated herein by reference).
10.18 -- Letter Agreements dated August 24, 1994, between the Partnership and OPUBCO Resources, Inc. and Hi Production Company, Inc. (filed as Exhibit 10.2 to the Partnership's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994 and incorporated herein by reference).
10.19 -- Letter Agreements dated September 23, 1994, between the Partnership and Lamar Hunt Trust Estate (filed as Exhibit 10.4 to the Partnership's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994 and incorporated herein by reference).
10.20 -- Letter Agreements dated September 23, 1994, between the Partnership and Nelson Bunker Hunt Trust Estate (filed as Exhibit 10.5 to the Partnership's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994 and incorporated herein by reference).
10.21 -- Agreement for Purchase and Sale by and between Tatham Offshore, Inc., as Seller, and Flextrend Development Company, L.L.C., as Buyer, dated June 30, 1995 (filed as Exhibit 6(a) to the Partnership's Form 10-Q for the quarterly period ended June 30, 1995, and incorporated herein by reference).
10.22 -- Limited Liability Company Agreement of POPCO (filed as Exhibit 10.39 to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference).
10.23 -- Letter Agreement dated March 27, 1996, between the Partnership and Tatham Offshore related to the settlement of certain demand charges under transportation agreements (filed as Exhibit 10.40 to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference).
10.24* -- Second Amended and Restated Credit Agreement dated December 13, 1996 among Partnership, The Chase Manhattan Bank, as administrative agent, ING (U.S.) Capital Corporation, as co arranger, and the banks and other financial institutions from time to time party thereto.
10.25+ Leviathan Unit Rights Appreciation Plan.
21.1* -- List of Subsidiaries of the Partnership.
24.1 -- Power of Attorney (included on the signature pages of this Annual Report on Form 10-K).
* Filed herewith. + Identifies management contracts or compensatory plans or arrangements required to be filed as an exhibit hereto pursuant to item 14(c) of Form 10-K.
(b) Reports on Form 8-K
On January 13, 1997, the Partnership filed a Current Report on Form 8-K dated December 31, 1996 with the Commission containing information on the split of Preference Units and Common Units under Item 5. "Other Events".
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
LEVIATHAN GAS PIPELINE PARTNERS, L.P., (Registrant)
By: LEVIATHAN GAS PIPELINE COMPANY, its General Partner
By: /s/ GRANT E. SIMS ---------------------------------- Grant E. Sims Chief Executive Officer March 26, 1997
POWERS OF ATTORNEY
The undersigned directors and executive officers of LEVIATHAN GAS PIPELINE COMPANY, as General Partner of LEVIATHAN GAS PIPELINE PARTNERS, L.P. hereby constitute and appoint Thomas P. Tatham, Donald V. Weir and Dennis A. Kunetka, and each of them, with full power to act without the other and with full power of substitution, our true and lawful attorneys-in-fact with full power to execute in our name and behalf in the capacities indicated below any and all amendments (including post-effective amendments and amendments thereto) to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission and hereby ratify and confirm all that such attorneys-in-fact, or either of them, or their substitutes shall lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date(s) indicated. All such capacities are with Leviathan Gas Pipeline Company, General Partner of the Registrant.
/s/ GEORGE L. BALL /s/ KEITH B. FORMAN - ---------------------------------- ------------------------------------- George L. Ball Keith B. Forman Director Director and Chief Financial Officer March 26, 1997 March 26, 1997
/s/ WILLIAM A. BRUCKMANN, III /s/ JOHN H. GRAY - ---------------------------------- ------------------------------------- William A. Bruckmann, III John H. Gray Director Director and Chief Operating Officer March 26, 1997 March 26, 1997
/s/ CHARLES M. DARLING, IV /s/ JAMES H. LYTAL - ---------------------------------- ------------------------------------- Charles M. Darling, IV James H. Lytal Director Director and President March 26, 1997 March 26, 1997
/s/ JANET E. SIKES /s/ PAUL THOMPSON III - ---------------------------------- ------------------------------------- Janet E. Sikes Paul Thompson III Director, Treasurer and Assistant Director Secretary March 26, 1997 March 26, 1997
/s/ GRANT E. SIMS /s/ DONALD V. WEIR - ---------------------------------- ------------------------------------- Grant E. Sims Donald V. Weir Director and Chief Executive Officer Director, Vice President and Secretary March 26, 1997 (Principal Accounting Officer) March 26, 1997
/s/ THOMAS P. TATHAM - ---------------------------------- Thomas P. Tatham Chairman of the Board March 26, 1997
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Unitholders of Leviathan Gas Pipeline Partners, L.P. and the Board of Directors and Stockholders of Leviathan Gas Pipeline Company, as General Partner
In our opinion, the accompanying consolidated balance sheet and related consolidated statements of operations, of cash flows and of partners' capital present fairly, in all material respects, the financial position of Leviathan Gas Pipeline Partners, L.P. and its subsidiaries at December 31, 1996 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas March 21, 1997
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In thousands)
The accompanying notes are an integral part of this financial statement.
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per Unit amounts)
The accompanying notes are an integral part of this financial statement.
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands)
Supplemental disclosures to the statement of cash flows - see Note 12.
The accompanying notes are an integral part of this financial statement.
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (In thousands)
(a) Leviathan Gas Pipeline Company owns a 1% general partner interest in Leviathan Gas Pipeline Partners, L.P.
The accompanying notes are an integral part of this financial statement.
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION:
Leviathan Gas Pipeline Partners, L.P. (the "Partnership"), a publicly held Delaware limited partnership formed in December 1992, is engaged in the gathering and transportation of natural gas and crude oil through its pipeline systems located in the Gulf of Mexico (the "Gulf") and in the development and production of oil and gas reserves from its proved properties. The Partnership's assets include interests in (i) eight natural gas pipeline systems, (ii) a crude oil pipeline system, (iii) five strategically located multi-purpose platforms, (iv) three producing oil and gas properties, (v) an overriding royalty interest and (vi) a dehydration facility. The Partnership's operating activities are conducted through fourteen subsidiaries.
Leviathan Gas Pipeline Company ("Leviathan"), a Delaware corporation and wholly-owned subsidiary of Leviathan Holdings Company ("Leviathan Holdings"), an 85%-owned subsidiary of DeepTech International Inc. ("DeepTech"), is the general partner of the Partnership. The remaining 15% of Leviathan Holdings is principally owned by members of the management of DeepTech. DeepTech also owns and controls several other operating subsidiaries which are engaged in various oil and gas related activities.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The accompanying consolidated financial statements include the accounts of those 50% or more owned subsidiaries controlled by the Partnership and Leviathan. Leviathan's approximate 1% nonmanaging interest in certain subsidiaries of the Partnership represents the minority interest in the Partnership's consolidated financial statements. Investments in which the Partnership owns a 20% to 50% ownership interest are accounted for using the equity method. All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts from the prior year have been reclassified to conform to the current year's presentation. In addition, all number of Units and per Unit disclosures have been restated to reflect a two for one Preference and Common Unit split approved by the Board of Directors of Leviathan in December 1996 for the Unitholders of record as of the close of business on December 31, 1996.
Cash and cash equivalents
All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents.
Debt issue costs
Debt issue costs are capitalized and amortized over the life of the related indebtedness.
Property and equipment
Gathering pipelines, platforms and related facilities are recorded at cost and are depreciated on a straight-line basis over their estimated useful lives ranging from 7 to 30 years. Maintenance and repair costs are expensed as incurred; additions, improvements and replacements are capitalized.
The Partnership accounts for its oil and gas exploration and production activities using the successful efforts method of accounting. Under this method, costs of successful exploratory wells, development wells and acquisitions of mineral leasehold interests are capitalized. Production, exploratory dry hole and other exploration costs, including geological and geophysical costs and delay rentals, are expensed as incurred. Unproved properties are assessed periodically and any impairment in value is recognized currently as depreciation, depletion and amortization expense.
Depreciation, depletion and amortization of the capitalized costs of producing oil and gas properties, consisting principally of tangible and intangible costs incurred in developing a property and costs of productive leasehold interests, are computed on the unit-of-production method. Unit-of-production rates are based on annual estimates of remaining
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
proved developed reserves or proved reserves, as appropriate, for each property. Repair and maintenance costs are charged to expense as incurred; additions, improvements and replacements are capitalized.
The Partnership adopted Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed Of", effective January 1, 1996. SFAS No. 121 requires recognition of impairment losses on long-lived assets (including proved properties, wells, equipment and related facilities) if the carrying amount of such assets, grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows from other assets, exceeds the estimated undiscounted future cash flows of such assets. Measurement of any impairment loss is based on the fair value of the assets. Implementation of SFAS No. 121 did not have a material effect on the Partnership's financial position or results of operations.
Capitalization of interest
Interest and other financing costs are capitalized in connection with major construction and drilling activities as part of the cost of the asset and amortized over the related asset's estimated useful life.
Revenue recognition
Revenue from pipeline transportation of hydrocarbons is recognized upon receipt of the hydrocarbons into the pipeline systems. Revenue from oil and gas sales is recognized upon delivery in the period of production. Revenue from platform access and processing services is recognized in the period the services are provided.
Income taxes
The Partnership and its subsidiaries are not taxable entities. However, the taxable income or loss resulting from the operations of the Partnership will ultimately be included in the federal and state income tax returns of the general and limited partners and may vary substantially from the income or loss reported for financial reporting purposes.
Tarpon Transmission Company ("Tarpon") is and Manta Ray Gathering Systems, Inc. ("Manta Ray") was, prior to its liquidation in May 1996, a subsidiary of the Partnership subject to federal corporate income taxation. The Partnership accounts for income taxes of Tarpon and Manta Ray in accordance with SFAS No. 109, "Accounting for Income Taxes", which utilizes an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax bases of other assets and liabilities. Resulting tax liabilities, if any, are borne by the Partnership.
Net income per unit
Net income per Unit is computed based upon the net income of the Partnership less an allocation of approximately 1% of the Partnership's net income to the general partner. The weighted average number of Units outstanding for the years ended December 31, 1996, 1995 and 1994 was 24,366,894 Units, 24,366,894 Units and 21,486,694 Units, respectively.
Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the related reported amounts of revenue and expenses during the reporting period. Such estimates and assumptions include those made in the areas of (i) Federal Energy Regulatory Commission ("FERC") regulations, (ii) oil and gas reserve disclosure, (iii) estimated useful lives of depreciable assets and (iv) potential environmental liabilities. Actual results could differ from those estimates. Management believes that its estimates are reasonable.
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Other
The fair values of the financial instruments included in the Partnership's assets and liabilities approximate their carrying values.
The Partnership enters into commodity derivative transactions to hedge its exposure to price fluctuations on anticipated natural gas and crude oil sales transactions. Gains and losses on hedging activities are deferred and included in the results of operations in the period in which the hedged production is sold. See Note 11.
NOTE 3 - OIL AND GAS PROPERTIES:
On June 30, 1995, Flextrend Development Company, L.L.C. ("Flextrend Development"), a subsidiary of the Partnership, entered into a purchase and sale agreement (the "Purchase and Sale Agreement") with Tatham Offshore, Inc. ("Tatham Offshore"), an approximately 37%-owned affiliate of DeepTech. Pursuant to the Purchase and Sale Agreement, Flextrend Development acquired, subject to certain reversionary rights, a 75% working interest in Viosca Knoll Block 817, a 50% working interest in Garden Banks Block 72 and a 50% working interest in Garden Banks Block 117 (the "Assigned Properties") from Tatham Offshore for $30,000,000. All of the Assigned Properties are located offshore in the Gulf. Flextrend Development is entitled to retain all of the revenues attributable to the Assigned Properties until it has received net revenues equal to the Payout Amount (as defined below), whereupon Tatham Offshore is entitled to receive a reassignment of the Assigned Properties, subject to reduction and conditions as discussed below. "Payout Amount" is defined as an amount equal to all costs incurred by Flextrend Development with respect to the Assigned Properties (including the $30,000,000 acquisition cost paid to Tatham Offshore) plus interest thereon at a rate of 15% per annum. Effective February 1, 1996, the Partnership entered into an agreement with Tatham Offshore regarding certain transportation agreements that increases the amount recoverable from the Payout Amount by $7,500,000 plus interest (Note 9).
Effective December 10, 1996, Flextrend Development exercised its option to permanently retain 50% of the acquired working interest in all three Assigned Properties in exchange for forgiving 50% of the then-existing Payout Amount exclusive of the $7,500,000 plus interest added to the Payout Amount in connection with the restructuring of certain transportation agreements discussed above. Flextrend Development remains obligated to fund any further development costs attributable to Tatham Offshore's portion of the working interests, such costs to be added to the Payout Amount. Flextrend Development's election to retain 50% of the acquired working interest in all three of the Assigned Properties reduced the Payout Amount from $94,020,000 to $50,760,000. Subsequent to December 10, 1996, only 50% of the development and operating costs attributable to the Assigned Properties are added to the Payout Amount and 50% of the net revenue from the Assigned Properties will reduce the Payout Amount. As of December 31, 1996, the Payout Amount was $49,591,000 comprised of (a) the sum of (i) initial acquisition and transaction costs of $32,089,000, (ii) development and operating costs of $84,637,000, (iii) prepaid demand charges of $7,500,000 and (iv) interest of $13,094,000, reduced by (b) the sum of (i) net revenue of $44,469,000 and (ii) forgiveness of $43,260,000 of the Payout Amount as a result of Flextrend Development's decision to retain 50% of the acquired working interest in the Assigned Properties. Tatham Offshore and the Partnership have agreed that in the event Tatham Offshore furnishes the Partnership with a financing commitment from a lender with a credit rating BBB- or better covering 100% of the then outstanding Payout Amount, the interest rate utilized to compute the Payout Amount shall be adjusted from and after the date of such commitment to the interest rate specified in such commitment.
Presented below are costs incurred in the Partnership's oil and gas property acquisition, exploration and development activities, whether capitalized or expensed at the time these costs were incurred:
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(a) Includes $6,296,000 of capitalized interest costs. (b) Includes $740,000 of capitalized interest costs.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Investments in oil and gas properties at December 31, 1996 and 1995 were comprised of the following:
NOTE 4 - EQUITY INVESTMENTS:
The Partnership owns interests of 50% in Viosca Knoll Gathering Company ("Viosca Knoll"), 36% in Poseidon Oil Pipeline Company, L.L.C. ("POPCO"), 50% in Stingray Pipeline Company ("Stingray"), 40% in High Island Offshore System ("HIOS"), 33 1/3% in U-T Offshore System ("UTOS") and 50% in West Cameron Dehydration Company ("West Cameron Dehy").
Leviathan contributed the equity interests in Stingray, HIOS and UTOS to the Partnership at its carrying value on February 19, 1993. The excess of the carrying amount of the investments accounted for using the equity method over the underlying equity in net assets as of December 31, 1996 is $31,125,000. Leviathan accounted for its acquisition of its interest in Stingray, HIOS and UTOS using the purchase method of accounting. The difference between the cost of the investments accounted for on the equity method and the underlying equity in net assets of Stingray, HIOS and UTOS at acquisition was assigned to property, plant and equipment and favorable firm transportation contracts and is being depreciated on a straight-line basis over the estimated 20-year lives of such property, plant and equipment and the lives of the related contracts, respectively. The majority of such contracts expired by December 1993. The 20-year depreciable life used for the regulated pipeline assets may be impacted by future rates approved by the FERC.
In May 1994, VK Deepwater Gathering Company, L.L.C. ("VK Deepwater"), a subsidiary of the Partnership, and EPEC Deepwater Gathering Company ("EPEC Deepwater"), a subsidiary of El Paso Tennessee Pipeline Co., formed Viosca Knoll, a Delaware general partnership owned 50% by VK Deepwater and 50% by EPEC Deepwater, to construct, own and operate an approximate 100-mile gathering system and related facilities extending from the Main Pass area through the Viosca Knoll area and terminating at points of interconnection with existing interstate pipelines. Viosca Knoll began the construction and installation of the pipeline system in June 1994 and placed the system in service in November 1994.
In February 1996, the Partnership and Texaco, Inc. formed POPCO, a Delaware limited liability company, which, at inception, was 50% owned by Poseidon Pipeline Company, L.L.C. ("Poseidon LLC"), a subsidiary of the Partnership, and 50% owned by Texaco Trading and Transportation Inc. ("Texaco Trading"), a subsidiary of Texaco, Inc. POPCO was formed to construct, own and operate the Poseidon Oil Pipeline ("Poseidon"). Pursuant to the terms of the organizational documents, Poseidon LLC initially contributed assets, at net book value, related to the construction of the initial phase of Poseidon as well as certain dedication agreements with producers and Texaco Trading initially contributed an equivalent amount of cash as well as its rights under certain agreements. In July 1996, Marathon Oil Company ("Marathon") joined POPCO by contributing its interest in 58 miles of nearby crude oil pipelines and dedicating its portion of oil reserves attached to such pipelines to Poseidon for transportation. As a result, each of the Partnership and Texaco Trading now owns a 36% interest in POPCO and Marathon owns the remaining 28% interest. Poseidon consists of approximately 200 miles of 16 to 24 inch diameter pipeline capable of delivering up to 400,000 barrels per day of sour crude oil production to multiple markets onshore Louisiana. The initial 117- mile segment, which extends easterly from Garden Banks Block 72 to Ship Shoal Block 332, was placed in service in April 1996. The second phase, an 83-mile segment, extending in a northerly direction from the Ship Shoal Block 332 Platform to Calliou Island, Louisiana, was placed in service in December 1996.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The summarized financial information for investments which are accounted for using the equity method is as follows:
SUMMARIZED HISTORICAL OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1996 (In thousands)
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(a) Adjustments result from purchase price adjustments made in accordance with Accounting Principles Board ("APB") No. 16, "Business Combinations". (b) Future distributions could be restricted by the terms of the equity investees' respective credit agreements.
SUMMARIZED HISTORICAL OPERATING RESULTS (In thousands)
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(a) Adjustments result from purchase price adjustments made in accordance with APB No. 16, "Business Combinations". (b) Includes the results of West Cameron Dehy for December 1995 (inception of operations).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUMMARIZED HISTORICAL BALANCE SHEETS (In thousands)
NOTE 5 - REGULATORY MATTERS:
The FERC has jurisdiction over Tarpon (through March 13, 1997), Stingray, HIOS and UTOS (the "Regulated Pipelines") with respect to transportation of gas, rates and charges, construction of new facilities, extension or abandonment of service and facilities, accounts and records, depreciation and amortization policies and certain other matters. The Partnership's remaining systems (the "Unregulated Pipelines") are gathering facilities and as such are not currently subject to rate and certificate regulation by the FERC. However, the FERC has asserted that it has rate jurisdiction under the Natural Gas Act of 1938, as amended (the "NGA"), over services performed through gathering facilities owned by a natural gas company (as defined in the NGA) when such services were performed "in connection with" transportation services provided by such natural gas company. Whether, and to what extent, the FERC should exercise any NGA rate jurisdiction it may be found to have over gathering facilities owned either by natural gas companies or affiliates thereof is subject to case-by-case review by the FERC. Based on current FERC policy and precedent, the Partnership does not anticipate that the FERC will assert or exercise any NGA rate jurisdiction over the Unregulated Pipelines so long as the services provided through such lines are not performed "in connection with" transportation services performed through any of the Regulated Pipelines.
Poseidon is subject to regulation under the Hazardous Liquid Pipeline Safety Act ("HLPSA"). Operations in offshore federal waters are regulated by the Department of the Interior. In addition, under the Outer Continental Shelf Lands Act ("OCSLA"), as implemented by the FERC, pipelines that transport crude oil across the Outer Continental Shelf ("OCS") must offer nondiscriminatory access to other potential shippers of crude. Poseidon is located in federal waters in the Gulf, and its right-of-way was granted by the federal government. Therefore, the FERC may assert that it has jurisdiction to compel Poseidon to grant access under OCSLA to other shippers of crude oil and to apportion the capacity of the line among owner and non-owner shippers.
The FERC has generally disclaimed jurisdiction to set rates for oil pipelines in the OCS under the Interstate Commerce Act ("ICA"). Therefore, unless the FERC's jurisdiction is successfully invoked under OCSLA to remedy a denial of non-discriminatory access, or the FERC reverses its decision that the ICA does not apply to OCS oil pipelines, commencement of service on Poseidon will not subject it to rate regulation.
Rate Cases
Tarpon. On May 28, 1992, Tarpon filed a petition requesting the FERC to declare its offshore system to be a gathering facility exempt from FERC's jurisdiction and to vacate the order certificating the facilities. On July 20, 1992, the FERC denied Tarpon's petition. Tarpon filed a request for rehearing on November 17, 1992, and the FERC denied such request. Tarpon appealed the FERC's decision to the United States Court of Appeals for the District of Columbia Circuit (the "D.C. Circuit") on November 20, 1992. The proceedings before the D.C. Circuit have been stayed pending action by the FERC with respect to a motion filed by Tarpon on February 23, 1993 requesting the FERC reopen and reconsider its orders rejecting Tarpon's petition, which motion was renewed on June 25, 1996. On March 13, 1997, the FERC issued an order declaring Tarpon's facilities exempt from NGA regulation under the gathering exception. Tarpon has agreed to continue service for its shippers on the terms and conditions, and at the rates reflected in its current tariff for at least two years from the date of the order.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Other. Each of Stingray, HIOS, and UTOS are currently operating under agreements with their respective customers that provide for rates that have been approved by the FERC and which should remain in effect through at least the fourth quarter of 1998. Stingray, HIOS and UTOS have each agreed to file a new rate case in the fourth quarter of 1998.
NOTE 6 - INDEBTEDNESS:
In February 1993, the Partnership entered into a revolving credit facility with a syndicate of commercial banks that provided a maximum $50.0 million commitment for borrowings, subject to certain borrowing base limitations (the "Partnership Credit Facility"). The Partnership Credit Facility was amended and restated in March 1995, February 1996, March 1996 and December 1996 and currently provides up to $300.0 million of available credit, subject to certain incurrence limitations. As of December 31, 1996 and 1995, funds borrowed under the Partnership Credit Facility totaled $227,000,000 and $113,500,000, respectively. The Partnership Credit Facility has a maturity of three years, which maturity can be extended in one-year increments for an additional three years. At the election of the Partnership, interest under the Partnership Credit Facility is determined by reference to the reserve- adjusted London interbank offer rate ("LIBOR"), the prime rate or the 90-day average certificate of deposit. The interest rate at December 31, 1996 and 1995 was 6.6% and 7.8% per annum, respectively. A commitment fee is charged on the unused and available to be borrowed portion of the credit facility. This fee varies between 0.25% and 0.375% per annum and is currently 0.30% per annum. Amounts advanced under the Partnership Credit Facility were used (i) to finance the Partnership's capital expenditures, including construction of platforms and pipelines, investments in equity investees and the acquisition and development of oil and gas properties and (ii) to repay all of the indebtedness incurred under the Flextrend Credit Facility (discussed below). Amounts remaining under the Partnership Credit Facility are available to the Partnership for general partnership purposes, including financing capital expenditures, for working capital, and subject to certain limitations, for paying distributions to Unitholders. The Partnership Credit Facility can also be utilized to issue letters of credit as may be required from time to time; however, no letters of credit are currently outstanding. All amounts due under the Partnership Credit Facility are guaranteed by Leviathan and each of the Partnership's subsidiaries, and are secured by Leviathan's 1% general partner interest in the Partnership, all of Leviathan's and the Partnership's equity interest in the Partnership's subsidiaries and most of the equipment, negotiable instruments and inventory and other personal property of the Partnership's subsidiaries.
On October 12, 1995, Flextrend Development and a syndicate of commercial lenders entered into a multiple-draw, term loan facility (the "Flextrend Credit Facility"). Subject to customary conditions and covenants, the Flextrend Credit Facility provided for borrowings of up to $32,000,000 (including a letter of credit facility of up to $5,000,000) at any time prior to March 31, 1996. Each loan under the credit facility accrued interest at a variable rate selected by Flextrend Development and determined by reference to LIBOR or the prime rate. As of December 31, 1995, $24,280,000 in principal was outstanding under the Flextrend Credit Facility and the interest rate related thereto was 11.9% per annum. As discussed above, all borrowings under the Flextrend Credit Facility were repaid in March 1996 in connection with the amendment and restatement of the Partnership Credit Facility.
Interest costs incurred by the Partnership in connection with its credit facilities totaled $17,470,000, $6,082,000 and $910,000 for the years ended December 31, 1996, 1995 and 1994, respectively. During the years ended December 31, 1996 and 1995, the Partnership capitalized $11,910,000 and $5,269,000, respectively, of such interest costs in connection with construction projects and drilling activities in progress during such periods. At December 31, 1996 and 1995, the unamortized portion of debt issue costs totaled $4,616,000 and $4,579,000, respectively.
NOTE 7 - PARTNERS' CAPITAL:
In June 1994, the Partnership completed the public offering of additional Preference Units representing limited partner interests in the Partnership. The net proceeds from the offering of $84,145,000 were utilized by the Partnership to fund a portion of certain capital projects, including its investment in Viosca Knoll and the construction of a platform facility.
In 1995, the Partnership adopted the Unit Rights Appreciation Plan (the "Plan") to provide the Partnership with the ability of making awards of Unit Rights, as hereinafter defined, to certain officers and key employees of the Partnership or its affiliates as an incentive for these individuals to continue in the service of the Partnership or its affiliates. Under
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
the Plan, the Partnership may grant to senior officers of the Partnership or its affiliates, excluding the Chairman of the Board of Leviathan, currently Mr. Thomas P. Tatham, with the right to purchase, or realize the appreciation of, a Preference Unit (a "Unit Right"), pursuant to the provisions of the Plan. The aggregate number of Preference Units as to which Unit Rights may be issued pursuant to the Plan shall not exceed 400,000 Preference Units per calendar year and 4,000,000 Preference Units over the term of the Plan, subject to adjustment as to both limitations under certain circumstances. No participant may be granted more than 400,000 Unit Rights in any calendar year. The exercise price of the Preference Units covered by the Unit Rights granted pursuant to the Plan shall be the closing price of the Preference Units as reported on the New York Stock Exchange or, if the Preference Units are not traded on such exchange, as reported on any other national securities exchange on which the Preference Units are traded, on the date on which Unit Rights are granted pursuant to the Plan. As of March 14, 1997, a total of 1,200,000 Unit Rights have been granted under the Plan representing 400,000 Unit Rights for each of the calendar years 1995, 1996 and 1997.
As of December 31, 1996, 1995 and 1994, all of the Preference Units of the Partnership were held by the public, representing an effective limited partner interest in the Partnership of 72.7%. Leviathan, as owner of the Common Units, its general partner interest and its nonmanaging interest in certain subsidiaries of the Partnership, owned the remaining effective interest in the Partnership of 27.3%.
NOTE 8 - CASH DISTRIBUTIONS:
The Partnership makes quarterly distributions of 100% of its Available Cash, as defined in the Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement"), to the Unitholders and Leviathan. Available Cash consists generally of all the cash receipts of the Partnership plus reductions in reserves less all of its cash disbursements and net additions to reserves. Leviathan has broad discretion to establish cash reserves that it determines are necessary or appropriate to provide for the proper conduct of the business of the Partnership including cash reserves for future capital expenditures, to stabilize distributions of cash to the Unitholders and Leviathan, to reduce debt or as necessary to comply with the terms of any agreement or obligation of the Partnership. The Partnership expects to make distributions of Available Cash within 45 days after the end of each quarter to Unitholders of record on the applicable record date, which will generally be the last business day of the month following the close of such calendar quarter.
The distribution of Available Cash of the Partnership for each quarter within the Preference Period, as defined in the Partnership Agreement, is subject to the preferential rights of the holders of Preference Units to receive the Minimum Quarterly Distribution, as defined in the Partnership Agreement, for such quarter, plus any arrearages in the payment of the Minimum Quarterly Distribution for prior quarters, before any distribution of Available Cash is made to holders of Common Units for such quarter. The Common Units are not entitled to arrearages in the payment of the Minimum Quarterly Distribution. In general, the Preference Period is defined to mean the period commencing on February 19, 1993 and continuing through at least March 31, 1998.
Since commencement of operations on February 19, 1993 through December 31, 1996, the Partnership has made distributions to the Unitholders equal to and in excess of the Minimum Quarterly Distribution of $0.275 per Unit. See Note 17.
Distributions by the Partnership of its Available Cash are effectively made 98% to Unitholders and 2% to Leviathan, subject to the payment of incentive distributions to Leviathan if certain target levels of cash distributions to Unitholders are achieved (the "Incentive Distributions"). As an incentive, the general partner's interest in the portion of quarterly cash distributions in excess of $0.325 per Unit and less than or equal to $0.375 per Unit is increased to 15%. For quarterly cash distributions over $0.375 per Unit but less than or equal to $0.425 per Unit, the general partner receives 25% of such incremental amount and for all quarterly cash distributions in excess of $0.425 per Unit, the general partner receives 50% of the incremental amount. During the year ended December 31, 1996, the general partner received Incentive Distributions totaling $285,000. In January 1997, the Partnership declared a cash distribution of $0.40 per Unit. As a result, in February 1997, the general partner received an Incentive Distribution of $381,000.
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 9 - RELATED PARTY TRANSACTIONS:
Management Fees
Substantially all of the individuals who perform the day-to-day financial, administrative, accounting and operational functions for Leviathan as well as those who are responsible for the direction and control of the Partnership are employed by DeepTech. DeepTech entered into management agreements with each of its subsidiaries including Leviathan in its capacity as general partner of the Partnership. The management fee charged to Leviathan is intended to approximate the amount of resources allocated by DeepTech in providing various operational, financial, accounting and administrative services on behalf of Leviathan and the Partnership. The management agreement has an initial term expiring on June 30, 1997, and may be terminated thereafter upon 90 days notice by either party. Pursuant to the terms of the Partnership Agreement, Leviathan is entitled to reimbursement of all reasonable general and administrative expenses and other reasonable expenses incurred by Leviathan and its affiliates for or on behalf of the Partnership including, but not limited to, amounts payable by Leviathan to DeepTech under the management agreement.
In connection with the completion of the offering of additional Preference Units in June 1994, Leviathan amended its management agreement with DeepTech effective July 1, 1994 in consideration for the increase in management services associated with the planned expansion of facilities and to more accurately provide for the reimbursement of expenses incurred by DeepTech in providing management services to Leviathan and the Partnership. As amended, the management agreement provided for a management fee of $2,000,000 a year plus 40% of DeepTech's unreimbursed selling, general and administrative expenses. Effective November 1, 1995 and July 1, 1996, primarily as a result of the increased oil and gas activities of the Partnership, Leviathan again amended its management agreement with DeepTech to provide for an annual management fee of 45.3% and 54%, respectively, of DeepTech's overhead. Leviathan charged the Partnership $6,590,000, $5,796,000 and $3,139,000 pursuant to its management agreement with DeepTech for the years ended December 31, 1996, 1995 and 1994, respectively.
Leviathan is also required to reimburse DeepTech for certain tax liabilities resulting from, among other things, additional taxable income allocated to Leviathan due to (i) the issuance of additional Preference Units (including the sale of the Preference Units by the Partnership pursuant to the second public offering) and (ii) the investment of such proceeds in additional acquisitions or construction projects. During the year ended December 31, 1996, Leviathan charged the Partnership $1,162,000 to compensate DeepTech for additional taxable income allocated to Leviathan.
Effective July 1, 1995, DeepTech established deferred mandatory compensation arrangements for the Chief Executive Officer and certain senior executives of DeepTech. Pursuant to the terms of such arrangements, participants deferred all or a portion of their cash salary until no later than July 1, 1996. During each month in the deferral period, each participant was entitled to receive options to purchase a number of shares of either DeepTech or Tatham Offshore or Preference Units of the Partnership equal to a percentage (ranging from 100% to 300% times their cash salary) divided by the lesser of the closing price on June 30, 1995 (DeepTech - $4.00, Tatham Offshore - $3.50 and the Partnership - $23.75) or the average closing price for the applicable month. Options were exercisable only by cancellation of the participant's cash salary. Each participant earned credits equal to a multiple, based on the option elected, of their deferred cash salary. Any participant, except the Chief Executive Officer of DeepTech, could have received all or a portion of their salary in cash if they did not elect to exercise any options. Upon termination of the compensation arrangements in June 1996, no options had been exercised to purchase any of the Preference Units of the Partnership.
Sales, Transportation and Platform Access Agreements
General. In December 1993, the Partnership entered into a master gas dedication arrangement with Tatham Offshore (the "Master Dedication Agreement"). Under the Master Dedication Agreement, Tatham Offshore has dedicated all production from its Garden Banks, Viosca Knoll, Ewing Bank and Ship Shoal leases as well as certain adjoining areas of mutual interest to the Partnership for transportation. In exchange, the Partnership has agreed to install the pipeline facilities necessary to transport production from the areas and certain related facilities and to provide transportation services with respect to such production. Tatham Offshore has agreed to pay certain fees for transportation services and facilities access provided under the Master Dedication Agreement. Pursuant to the terms of the Purchase and Sale
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Agreement with Tatham Offshore (Note 3), Flextrend Development has assumed all of Tatham Offshore's obligations under the Master Dedication Agreement and certain ancillary agreements with respect to the Assigned Properties.
Ewing Bank Gathering System. Pursuant to a gathering agreement (the "Ewing Bank Gathering Agreement") among Tatham Offshore, DeepTech, and a subsidiary of the Partnership, Tatham Offshore has dedicated all natural gas and crude oil produced from eight of its Ewing Bank leases for gathering and redelivery by the Partnership and is obligated to pay a demand and a commodity rate for shipment of all oil and gas under this agreement. The Ewing Bank Gathering Agreement requires Tatham Offshore to pay certain demand charges and a commodity charge equal to 4% of the market price of production actually transported. For the years ended December 31, 1996, 1995 and 1994, Tatham Offshore paid the Partnership demand and commodity charges of $349,000, $7,626,000 and $6,232,000, respectively, under this agreement. The Partnership also receives revenue from the oil and gas production from the Ewing Bank 914 #2 well as a result of its 7.13% overriding royalty interest in the well. In March 1996, the Partnership settled all remaining unpaid demand charge obligations under the Ewing Bank Gathering Agreement in exchange for certain consideration as discussed below.
Ship Shoal. Pursuant to the Master Dedication Agreement, the Partnership and Tatham Offshore have entered into a gathering and processing agreement (the "Ship Shoal Agreement") pursuant to which the Partnership constructed a gathering line from Tatham Offshore's Ship Shoal Block 331 lease to interconnect with a third-party pipeline at the Partnership's platform located on Ship Shoal Block 332. In addition, the Partnership is operating the refurbished platform located at Ship Shoal Block 332 to process production from Ship Shoal Block 331. Pursuant to the terms of the Ship Shoal Agreement, and in consideration for constructing the interconnect, refurbishing the platform and for providing access to the processing facilities, Tatham Offshore was required to pay the Partnership a demand charge of $113,000 per month over a five-year period ending June 1999 and has dedicated all production from its Ship Shoal 331 lease and eight additional surrounding leases for gathering and processing by the Partnership. The Ship Shoal Agreement remains in effect for the productive life of the reserves or, if earlier, the expiration of 20 years from date of first production. During late 1994, all of Tatham Offshore's wells at Ship Shoal 331 experienced completion and production problems. As a result, the Partnership received only demand charges under this agreement during 1995. For the years ended December 31, 1995 and 1994, the Partnership received $1,360,000 and $728,000, respectively, from Tatham Offshore for fees related to the Ship Shoal Agreement. In March 1996, the Partnership settled all remaining unpaid demand charge obligations under this transportation agreement in exchange for certain consideration as discussed below.
VK 817 Platform. Tatham Offshore is also obligated to pay certain platform access and processing fees to the Partnership. For the years ended December 31, 1996 and 1995, the Partnership received $1,896,000 and $823,000, respectively, from Tatham Offshore as platform access and processing fees related to the Partnership's platform located in Viosca Knoll Block 817.
Transportation Agreements Settled. Tatham Offshore was obligated to make demand charge payments to the Partnership pursuant to certain transportation agreements discussed above. Under these agreements, the Partnership was entitled to receive demand charges of $8,100,000 in 1996, $6,000,000 in 1997, $3,000,000 in 1998 and $700,000 in 1999. In addition to the demand charges, Tatham Offshore is obligated to pay commodity charges, based on the volume of oil and gas transported or processed, under these agreements.
Production problems at Ship Shoal Block 331 and reduced oil production from the Ewing Bank 914 #2 well affected Tatham Offshore's ability to pay the demand charge obligations under agreements relative to these properties. As a result, effective February 1, 1996, the Partnership agreed to release Tatham Offshore from all remaining demand charge payments under the Ewing Bank Gathering Agreement and the Ship Shoal Agreement, a total of $17,800,000. Tatham Offshore remains obligated to pay the commodity charges under these agreements as well as all platform access and processing fees associated with the Viosca Knoll Block 817 lease. In exchange, the Partnership received 7,500 shares of Tatham Offshore Senior Preferred Stock (the "Senior Preferred Stock"), which is presented on the accompanying consolidated balance sheet at December 31, 1996 as investment in affiliate. The Senior Preferred Stock has a liquidation preference of $1,000 per share, is senior in liquidation preference to all other classes of Tatham Offshore stock and has a 9% cumulative dividend, payable quarterly. Commencing on October 1, 1998 and for a period of 90 days thereafter, the Partnership has the option to exchange the remaining liquidation preference amount and accrued
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
but unpaid dividends for shares of Tatham Offshore's Series A 12% Convertible Exchangeable Preferred Stock (the "Series A Preferred Stock") with an equivalent market value. Further, the Partnership has made an irrevocable offer to Tatham Offshore to sell all or any portion of the Senior Preferred Stock to Tatham Offshore or its designee at a price equal to $1,000 per share, plus interest thereon at 9% per annum less the sum of any dividends paid thereon. The Series A Preferred Stock is convertible into Tatham Offshore common stock based on a fraction, the numerator of which is the liquidation preference value plus all accrued but unpaid dividends and the denominator of which is $0.653 per share. In addition, the sum of $7,500,000 was added to the Payout Amount under the Purchase and Sale Agreement. By adding $7,500,000 to the Payout Amount, the Partnership is entitled to an additional $7,500,000 plus interest at the rate of 15% per annum from revenue attributable to the Assigned Properties prior to reconveying any interest in the Assigned Properties to Tatham Offshore. In addition, Tatham Offshore waived its remaining option to prepay the then-existing Payout Amount and receive a reassignment of its working interests. Tatham Offshore and the Partnership also agreed that in the event Tatham Offshore furnishes the Partnership with a financing commitment from a lender with a credit rating of BBB- or better covering 100% of the then outstanding Payout Amount, then the interest rate utilized to compute the Payout Amount shall be adjusted from and after the date of such commitment to the interest rate specified in such commitment. Tatham Offshore granted the Partnership the right to utilize the Ship Shoal Block 331 platform and related facilities at a rental rate of $1.00 per annum for such period as the platform is owned by Tatham Offshore and located on Ship Shoal Block 331, provided such use does not interfere with lease operations or other activities of Tatham Offshore. In addition, Tatham Offshore granted the Partnership a right of first refusal relative to a sale of the platform.
Oil and gas sales. The Partnership has agreed to sell all of its oil and gas production to Offshore Gas Marketing, Inc. ("Offshore Marketing"), an affiliate of the Partnership, on a month to month basis. The agreement with Offshore Marketing provides Offshore Marketing fees equal to 2% of the sales value of crude oil and condensate and $0.015 per dekatherm of natural gas for selling the Partnership's production. During the years ended December 31, 1996 and 1995, the Partnership had oil and gas sales to Offshore Marketing in the amount of $46,296,000 and $922,000, respectively.
Other
POPCO entered into certain additional agreements with a subsidiary of the Partnership which provide for POPCO's use of certain pipelines and platforms owned by such subsidiary for fees which consisted of a monthly rental fee of $100,000 per month for the period from February 1996 to January 1997 and reimbursement of $2,000,000 of capital expenditures incurred in readying one of the platforms for use.
Poseidon LLC managed the construction and installation of the initial 117 mile segment of Poseidon, which was placed in service in April 1996, and Texaco Trading managed the construction and installation of the remaining pipelines and facilities comprising Poseidon, which was placed in service in December 1996. Each of Poseidon LLC and Texaco Trading earned a performance fee of $1,400,000 for managing the construction of a portion of Poseidon, which fee may be adjusted if either party manages the construction of any additional facilities. Through December 31, 1996, Poseidon LLC has received $1,400,000 in performance fees from POPCO.
During the years ended December 31, 1996 and 1995, Viosca Knoll charged Flextrend Development $3,229,000 and $86,000, respectively, for transportation services related to transporting production from the Viosca Knoll Block 817 lease. During the year ended December 31, 1996, POPCO charged Flextrend Development $1,056,000 for transportation services related to transporting production from the Garden Banks Block 72 and 117 leases.
In addition, for the year ended December 31, 1996, Viosca Knoll reimbursed $254,000 to the Partnership for costs incurred by the Partnership in connection with the acquisition and installation of a booster compressor on the Partnership's Viosca Knoll 817 platform.
For the year ended December 31, 1996, the Partnership charged Viosca Knoll $249,000 for platform access fees related to the Viosca Knoll 817 platform.
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Pursuant to a management agreement between Viosca Knoll and the Partnership, the Partnership charges Viosca Knoll a base fee of $100,000 annually in exchange for Leviathan providing financial, accounting and administrative services on behalf of Viosca Knoll. For each of the years ended December 31, 1996 and 1995, Leviathan charged Viosca Knoll $100,000 in accordance with this management agreement.
During the year ended December 31, 1996, Flextrend Development was charged $7,223,000 by Sedco Forex Division of Schlumberger Technology Corporation ("Sedco Forex") for contract drilling services rendered by the semisubmersible drilling rig, the FPS Laffit Pincay, at its Garden Banks Block 117 project. The FPS Laffit Pincay is owned by an affiliate of DeepTech and managed by Sedco Forex.
The Chairman of the Board of Leviathan and DeepTech, Mr. Tatham, also serves as a director of J. Ray McDermott, S.A. ("McDermott"). Certain of the Partnership's subsidiaries have contracted with certain subsidiaries of McDermott for construction and installation of pipelines and related facilities in the ordinary course of business. As of December 31, 1996 and 1995, the Partnership owed such subsidiaries $152,000 and $46,242,000, respectively. During the years ended December 31, 1996 and 1995, the Partnership had incurred $30,627,000 and $56,821,000, respectively, pursuant to such contractual arrangements.
Mr. Charles M. Darling IV, a director of Leviathan and DeepTech, is a partner in a legal firm that provides legal services to the Partnership. During the years ended December 31, 1996 and 1995, the Partnership incurred $203,000 and $116,000, respectively, for these services.
Leviathan is also entitled to distributions in respect of its general and limited partner interests in the Partnership, its nonmanaging interest in certain subsidiaries of the Partnership, and Incentive Distributions in respect to its general partner interest in the Partnership (Note 8).
During the year ended December 31, 1994, Deepwater Production Systems, Inc., a subsidiary of DeepTech, provided certain engineering services with regard to the construction and installation of the Ship Shoal area gathering lines and refurbishment of a platform in the aggregate amount of $654,000. In addition, Dover Technology, Inc., which is 50% owned by DeepTech, performed certain technical and geophysical services for the Partnership in the aggregate amount of $240,000, $58,000 and $93,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
NOTE 10 - INCOME TAXES:
The Partnership (other than its subsidiaries, Tarpon and Manta Ray) is not subject to federal income taxes. Therefore, no recognition has been given to income taxes other than income taxes related to Tarpon and Manta Ray. The tax returns of the Partnership are subject to examination and if such examinations result in adjustments to distributive shares of taxable income or loss, the tax liability of partners could be adjusted accordingly.
The tax attributes of the Partnership's net assets flow directly to each individual partner. Individual partners will have different investment bases depending upon the timing and price of acquisition of partnership units. Further, each partner's tax accounting, which is partially dependent upon his/her tax position, may differ from the accounting followed in the consolidated financial statements. Accordingly, there could be significant differences between each individual partner's tax basis and his/her share of the net assets reported in the consolidated financial statements.
SFAS No. 109 requires the use of the liability method under which deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Partnership does not have access to information about each individual partner's tax attributes in the Partnership, and the aggregate tax bases cannot be readily determined. Accordingly, management does not believe that, in the Partnership's circumstances, the aggregate difference would be meaningful information.
Tarpon is and Manta Ray was, prior to its liquidation in May 1996, a subsidiary of the Partnership which files separate federal income tax returns. The income tax benefit recorded for the years ended December 31, 1996, 1995 and 1994 equals $801,000, $603,000 and $136,000, respectively, and is entirely related to Tarpon. The benefit equals Tarpon's
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
book loss times the effective statutory rate for such period. The Partnership's deferred income tax liability at December 31, 1996 and 1995 of $1,722,000 and $2,539,000, respectively, is entirely related to the differences in the tax and book bases of the pipeline assets of Tarpon. In May 1996, Manta Ray was merged with and into a subsidiary of the Partnership. Manta Ray had no taxable income for the respective periods prior to its liquidation.
NOTE 11 - COMMITMENTS AND CONTINGENCIES:
Credit Facilities
Each of Stingray, POPCO and Viosca Knoll are parties to a credit agreement under which it has outstanding obligations that may restrict the payment of distributions to its partners.
In December 1995, Stingray amended an existing term loan agreement (the "Stingray Credit Agreement") to provide for aggregate outstanding borrowings of up to $29,000,000 in principal amount. The Stingray Credit Agreement requires the payment of principal by Stingray of $1,450,000 per quarter. As of December 31, 1996, Stingray had $23,200,000 outstanding under the Stingray Credit Agreement at a related interest rate of 6.22% per annum. On the earlier to occur of December 31, 2000 or the accelerated due date pursuant to the Stingray Credit Agreement, if Stingray has not settled all amounts due under the Stingray Credit Agreement, the Partnership is obligated to pay the lesser of (i) $8,500,000, (ii) the aggregate amount of distributions received from Stingray subsequent to December 1, 1993, or (iii) its 50% partnership interest in any outstanding amounts due pursuant to the Stingray Credit Agreement.
In April 1996, POPCO entered into a revolving credit facility (the "POPCO Credit Facility") with a group of commercial banks to provide up to $150.0 million for the construction of the second and third phases of Poseidon and for other working capital needs of POPCO. As of December 31, 1996, POPCO had $84,000,000 outstanding under the POPCO Credit Facility bearing interest at a floating rate of approximately 6.9% per annum. POPCO's ability to borrow money under the facility is subject to certain customary terms and conditions, including borrowing base limitations. The POPCO Credit Facility is secured by a substantial portion of POPCO's assets and matures on April 30, 2001.
In December 1996, Viosca Knoll entered into a revolving credit facility (the "Viosca Knoll Credit Facility) with a syndicate of commercial banks to provide up to $100,000,000 for the addition of compression to the Viosca Knoll system and for other working capital needs of Viosca Knoll, including funds for a one time distribution of $25,000,000 to its partners. In December 1996, the Partnership received a $12,500,000 distribution from Viosca Knoll as a result of its 50% working interest. As of December 31, 1996, Viosca Knoll has $33,300,000 outstanding under the Viosca Knoll Credit Facility bearing interest at a floating rate of approximately 6.69% per annum. Viosca Knoll's ability to borrow money under the Viosca Knoll Credit Facility is subject to certain customary terms and conditions, including borrowing base limitations. The Viosca Knoll Credit Facility is secured by a substantial portion of Viosca Knoll's assets and matures on December 20, 2001. If Viosca Knoll fails to pay any principal, interest or other amounts due pursuant to the Viosca Knoll Credit Facility, the Partnership is obligated to pay up to a maximum of $2,500,000 in settlement of 50% of Viosca Knoll's obligations under the Viosca Knoll Credit Facility Agreement.
Hedging Activities
The Partnership hedges a portion of its oil and natural gas production to reduce the Partnership's exposure to fluctuations in market prices of oil and natural gas and to meet certain requirements of the Partnership Credit Facility. The Partnership uses various financial instruments whereby monthly settlements are based on differences between the prices specified in the instruments and the settlement prices of certain futures contracts quoted on the New York Mercantile Exchange ("NYMEX") or certain other indices. The Partnership settles the instruments by paying the negative difference or receiving the positive difference between the applicable settlement price and the price specified in the contract. The instruments utilized by the Partnership differ from futures contracts in that there is no contractual obligation which requires or allows for the future delivery of the product. Gains or losses on hedging activities are recognized as oil and gas sales in the period in which the hedged production is sold.
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At December 31, 1996, the Partnership had open natural gas hedges on approximately 47,300 MMbtu of natural gas per day for calendar 1997 at an average price of $2.45 per MMbtu. In addition, as of December 31, 1996, the Partnership had entered into commodity swap transactions for a total of 10,000 MMbtu per day for calendar 1998 at a fixed price to be determined at the Partnership's option equal to the December 1997 Natural Gas Futures Contract on the NYMEX as quoted at any time during 1997 to and including the last three trading days of the December 1997 contract minus $0.14 per MMbtu. Subsequent to December 31, 1996, the Partnership hedged an additional 10,000 MMbtu per day for calendar 1998 at an average fixed price of $2.20 per MMbtu.
At December 31, 1996, the Partnership had open crude oil hedges on approximately 660 barrels per day for calendar 1997 at an average price of $21.00 per barrel. In January 1997, the Partnership hedged an additional 400 barrels of oil per day for the period March 1997 through December 1997 at an average price of $23.04 per barrel. In February 1997, the Partnership hedged 250 barrels of oil per day for calendar year 1998. This February 1997 contract allows the Partnership to determine the contract price as follows: (i) a one-time election of a price equal to the January 1998 Natural Gas Futures Contract on the NYMEX as quoted at any time during 1997 to and including the last three trading days of the January 1998 contract multiplied by 8.5 or (ii) the arithmetic average of the closing settlement price of the NYMEX West Texas Intermediate for the applicable pricing period.
If the Partnership had settled its open natural gas and crude oil hedging positions as of December 31, 1996, based on the settlement prices of the NYMEX futures contracts applicable to the Partnership's open hedging positions of natural gas and crude oil at December 31, 1996, the Partnership would have recognized a loss of approximately $2.3 million. Through March 10, 1997, the Partnership has paid $4.6 million to settle open hedging positions for January through March 1997. If the Partnership's remaining open natural gas and crude oil hedging positions were settled as of March 10, 1997, based on the settlement prices of the NYMEX futures contracts applicable to the Partnership's open hedging positions of natural gas and crude oil as of that date, the Partnership would have recognized a gain of $1.5 million. The actual gains or losses realized by the Partnership from its hedging activities may vary significantly from the foregoing estimates due to the volatility of the futures markets.
Other
In the ordinary course of business, the Partnership is subject to various laws and regulations. In the opinion of management, compliance with existing laws and regulations will not materially affect the financial position or operations of the Partnership. Various legal actions which have arisen in the ordinary course of business are pending with respect to the pipeline interests and other assets of the Partnership. Management believes that the ultimate disposition of these actions, either individually or in the aggregate, will not have a material adverse effect on the consolidated financial position or results of operations of the Partnership.
NOTE 12 - SUPPLEMENTAL DISCLOSURES TO THE STATEMENTS OF CASH FLOWS:
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Supplemental disclosures of noncash investing and financing activities:
NOTE 13 - MAJOR CUSTOMERS:
Transportation revenue from major customers was as follows:
- --------------------
(a) Expressed as a percentage of historical transportation revenue for each entity for each period. See Note 4 for operating revenue and equity in earnings of Stingray, HIOS, UTOS, Viosca Knoll and POPCO for the year ended December 31, 1996.
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
---------------------------
(a) Expressed as a percentage of historical transportation revenue for each partnership for each period. See Note 4 for operating revenue and equity in earnings of Stingray, HIOS and Viosca Knoll for the year ended December 31, 1995. (b) Expressed as a percentage of historical transportation revenue for each partnership for each period. See Note 4 for operating revenue and equity in earnings of Stingray, HIOS, UTOS and Viosca Knoll for the year ended December 31, 1994. (c) Stingray's transportation contracts with Natural Gas Pipeline Company of America and Trunkline Gas Company expired on November 29, 1994.
NOTE 14 - BUSINESS SEGMENT INFORMATION
The Partnership's operations consist of two segments: (i) pipeline transportation and platform services and (ii) development and production of proved oil and gas reserves. All of the Partnership's operations are conducted in the Gulf. The following table summarizes certain financial information for each business segment.
(a) The Partnership's activities related to the production of oil and gas reserves commenced in December 1995 and therefore financial information for each business segment is only presented for the year ended December 31, 1996.
NOTE 15 - SUBSEQUENT EVENTS (UNAUDITED):
In January 1997, the Partnership and affiliates of Marathon and Shell Oil Company ("Shell") formed Nautilus Pipeline Company, L.L.C. ("Nautilus") to acquire, build and operate an interstate natural gas pipeline system, and Manta Ray Offshore Gathering Company, L.L.C. ("Manta Ray Offshore") to acquire, operate and extend an existing gathering system that will be connected to the Nautilus system, once it is constructed. Each of the two new companies was formed to serve growing production areas in the Green Canyon area of the Gulf. The total cost of the two systems, including the Manta Ray Offshore system which was contributed to Manta Ray Offshore by the Partnership, is approximately $270.0 million. The Nautilus system, a new jurisdictional interstate pipeline, will consist of a 30-inch
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
line downstream from Ship Shoal Block 207 connecting to the Exxon Company USA operated Garden City gas processing plant. Upstream of the Ship Shoal 207 terminal, the existing Manta Ray Offshore gathering system will be extended into a broader gathering system that would serve shelf and deepwater production around Ewing Bank Block 873 to the east and Green Canyon Block 65 to the west. Affiliates of Marathon and Shell have committed to each of the Nautilus and Manta Ray Offshore systems significant deep water acreage positions in the area, including the recently announced Troika field (Green Canyon Block 244), and will provide the majority of the capital funding for the new construction. The Partnership will provide some funding in addition to the contribution of the Manta Ray Offshore system.
NOTE 16 - SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED):
Oil and gas reserves
The following table represents the Partnership's net interest in estimated quantities of developed and undeveloped reserves of crude oil, condensate and natural gas and changes in such quantities at fiscal year end 1996 and 1995. Estimates of the Partnership's reserves at December 31, 1996 and 1995 have been made by the independent engineering consulting firm, Netherland & Sewell Associates, Inc., and by the Partnership's reservoir engineers. Net proved reserves are the estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are proved reserve volumes that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are proved reserve volumes that are expected to be recovered from new wells on undrilled acreage or from existing wells where a significant expenditure is required for recompletion.
Estimates of reserve quantities are based on sound geological and engineering principles, but, by their very nature, are still estimates that are subject to substantial upward or downward revision as additional information regarding producing fields and technology becomes available.
In general, estimates of economically recoverable oil and natural gas reserves and of the future net revenue therefrom are based upon a number of variable factors and assumptions, such as historical production from the subject properties, the assumed effects of regulation by governmental agencies and assumptions concerning future oil and gas prices, future operating costs and future plugging and abandonment costs, all of which may vary considerably from actual results. All such estimates are to some degree speculative, and classifications of reserves are only attempts to define the degree of speculation involved. For these reasons, estimates of the economically recoverable oil and natural gas reserves attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of the future net revenue expected therefrom, prepared by different engineers or by the same engineers at
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
different times, may vary substantially. The meaningfulness of such estimates is highly dependent upon the assumptions upon which they are based.
Furthermore, the Partnership's wells have only been producing for a short period of time and, accordingly, estimates of future production are based on this limited history. Estimates with respect to proved undeveloped reserves that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reserves rather than upon actual production history. Estimates based on these methods are generally less reliable than those based on actual production history. Subsequent evaluation of the same reserves based upon production history will result in variations, which may be substantial, in the estimated reserves. A significant portion of the Partnership's reserves is based upon volumetric calculations.
Future net cash flows
The standardized measure of discounted future net cash flows relating to the Partnership's proved oil and gas reserves is calculated and presented in accordance with SFAS No. 69, "Disclosures about Oil and Gas Producing Activities." Accordingly, future cash inflows were determined by applying year-end oil and gas prices, as adjusted for hedging and other fixed price contracts in effect, to the Partnership's estimated share of future production from proved oil and gas reserves. The average prices utilized in the calculation of the standardized measure of discounted future net cash flows at December 31, 1996 were $22.55 per barrel of oil and $2.88 per MCF of gas. The Partnership received an average of $22.24 per barrel and $2.42 per MCF for its February 1997 oil and gas production, respectively. Future production and development costs were computed by applying year-end costs to future years. As the Partnership is not a taxable entity, no future income taxes were provided. A prescribed 10% discount factor was applied to the future net cash flows.
In the Partnership's opinion, this standardized measure is not a representative measure of fair market value, and the standardized measure presented for the Partnership's proved oil and gas reserves is not representative of the reserve value. The standardized measure is intended only to assist financial statement users in making comparisons between companies.
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following are the principal sources of change in the standardized measure:
- --------------------------------
(a) Excludes aggregate capital costs of $62,900,000 attributable to multipurpose platforms completed during 1995 at Viosca Knoll Block 817 and Garden Banks Block 72 which are to function as both drilling and production platforms as well as pipeline junction platforms for the Partnerships' transportation operations. (b) See Note 3 for discussion of Purchase and Sale Agreement with Tatham Offshore.
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 17 - SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
- -------------------
(a) Represent revenue less operating and depreciation, depletion and amortization expenses.
[DELOITTE & TOUCHE LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Management Committee High Island Offshore System Detroit, Michigan
We have audited the accompanying statements of financial position of High Island Offshore System as of December 31, 1996 and 1995, and the related statements of income, changes in partners' equity, and cash flows for the years then ended. These financial statements are the responsibility of the High Island Offshore System's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of High Island Offshore System as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
February 14, 1997
HIGH ISLAND OFFSHORE SYSTEM
STATEMENTS OF FINANCIAL POSITION AS OF DECEMBER 31, 1996 AND 1995 - --------------------------------------------------------------------------------
See notes to the financial statements.
HIGH ISLAND OFFSHORE SYSTEM
STATEMENTS OF INCOME AND STATEMENTS OF PARTNERS' EQUITY YEARS ENDED DECEMBER 31, 1996 AND 1995 - --------------------------------------------------------------------------------
See notes to the financial statements.
HIGH ISLAND OFFSHORE SYSTEM
STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996 AND 1995 - --------------------------------------------------------------------------------
See notes to the financial statements.
HIGH ISLAND OFFSHORE SYSTEM
NOTES TO THE FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996 AND 1995 - --------------------------------------------------------------------------------
1. FORMATION AND OWNERSHIP STRUCTURE
Description and Business Purpose
High Island Offshore System ("HIOS" or the "Company" ) is a Delaware partnership. The partners, each of which has a 20% interest in HIOS, are companies affiliated with three pipeline companies as follows:
HIOS owns a 203.4 mile undersea gas transmission system in the Gulf of Mexico which provides transportation services as authorized by the Federal Energy Regulatory Commission ("FERC"). HIOS' major transportation customers include natural gas marketers and producers, and interstate natural gas pipeline companies. The Company extends credit for transportation services provided to these customers. The concentrations of customers, described above, may affect the Company's overall credit risk in that the customers may be similarly affected by changes in economic, regulatory and other factors.
HIOS is managed by a committee consisting of representatives from each of the partner companies. HIOS has no employees. ANR Pipeline Company ("ANR") operates the system on behalf of HIOS under an agreement which provides that services rendered to HIOS will be reimbursed at cost ($9.6 million for 1996 and $10.6 million for 1995).
HIGH ISLAND OFFSHORE SYSTEM NOTES TO THE FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company is regulated by and subject to the regulations and accounting procedures of the FERC. In addition, the Company meets the criteria and, accordingly, follows the accounting and reporting requirements of Statement of Financial Accounting Standards No. 71 for regulated enterprises.
Use Of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates.
Depreciation
Annual depreciation and negative salvage provisions are computed on a straight-line basis using rates of depreciation which vary by type of property. The annual composite depreciation rates were approximately 1.29% and 1.33% for 1996 and 1995, respectively, which include a provision for negative salvage of .2% for offshore facilities.
Income Taxes
Income taxes are the responsibility of the partners and are not normally reflected in the financial statements of partnerships. The FERC requires that HIOS record an allowance for income taxes computed as if it were a corporation.
Statement of Cash Flows
For purposes of these financial statements, the Company considers short- term investments to be cash equivalents. The Company had short-term investments in the amount of $3.1 million and $1.5 million at December 31, 1996 and 1995 respectively. The Company made no cash payments for interest in 1996 and paid $.1 million in 1995.
HIGH ISLAND OFFSHORE SYSTEM NOTES TO THE FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
3. REGULATORY MATTERS
The settlement of Docket No. RP92-50 on December 28, 1992, provided that HIOS was obligated to refund to its shippers certain reimbursements it received from U-T Offshore System (UTOS) and from ANR related to charges HIOS paid for liquid separation, dehydration and natural gas measurement facilities at UTOS' Cameron Meadows plant and ANR's Grand Chenier plant. UTOS is equally owned by affiliates of ANR, Natural Gas Pipeline Company of America, and Leviathan Gas Pipeline Partners L.P. The disposition of reimbursements received by HIOS in 1993 was subject to a revised refund plan filed by HIOS with the FERC. As a result of a settlement reached in September 1996, HIOS made refunds of $442,000.
On June 11, 1993, HIOS filed a settlement with the FERC to recover the cost of purchasing line pack gas owned by HIOS's firm shippers to assist it in complying with FERC Order No. 636. The settlement was approved by the FERC on October 12, 1993. Under the terms of the settlement, HIOS compensated the firm shippers who previously owned the line pack through periodic payments totaling $1,129,834 which HIOS collected from the current shippers via a limited term surcharge which was placed in effect on November 1, 1993.
On April 22, 1996, HIOS filed with the FERC final reports of line pack surcharge collections and payments which reflect the completion of the line pack cost recovery and disbursement process. Revised tariff sheets were also filed to reflect the removal of the line pack commodity surcharge provisions contained in Section 15 of the General Terms and Conditions and related provisions of HIOS' tariff.
On March 1, 1994, HIOS submitted a rate filing at Docket No. RP94-162 to the FERC to increase its transportation rates with a requested effective date of April 1, 1994. On March 31, 1994, the FERC issued an order which suspended the effectiveness of these rates until September 1, 1994, subject to refund.
HIGH ISLAND OFFSHORE SYSTEM NOTES TO THE FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
On September 18, 1995 the FERC issued an Order accepting the settlement of the rate filing at Docket No. RP94-162 and on October 16, 1995 the FERC issued a clarification that approved rates would be placed into effect on December 1, 1995. Accordingly, HIOS filed revised tariff sheets on November 17, 1995, to be effective on December 1, 1995. The settlement provided for a lower cost of service than filed, a reduction in transportation rates and conversion of HIOS' tariff from a volumetric to a thermal based tariff. In addition, the settlement provided that no refund would be required for amounts collected for transportation services provided from September 1, 1994 through November 30. 1995. As a result of the settlement, HIOS restored $4.1 million, net of tax, reserved in 1994 for potential rate refunds, to income in 1995.
4. INCOME TAXES
Federal income taxes are included in the Statements of Income as follows:
A reconciliation of the statutory Federal income tax rate to total Federal income taxes payable by partners is as follows:
HIGH ISLAND OFFSHORE SYSTEM NOTES TO THE FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
Deferred income taxes are provided for all significant transactions recognized as a component of income in different periods for financial and tax reporting purposes. As these differences reverse the related deferrals are credited or charged to income. Following is a summary of all deferred income taxes provided:
5. BANK CREDIT AGREEMENT
As of July 28, 1995, HIOS paid the final installment of $750,000 and retired its Bank Credit Agreement, the interest rate on which was fixed through a swap agreement at 5.65%.
6. VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash invested on a temporary basis at short term market rates of interest approximates the fair market value of the investments.
7. RELATED PARTY TRANSACTIONS
Transportation revenues derived from affiliated pipeline companies were $16.7 million for 1996 and $17.7 million for 1995. Accounts receivable balances due from these affiliates for transportation services amounted to $1.5 million at December 31, 1996, and $1.1 million at December 31, 1995.
Both ANR and UTOS provide separation, dehydration and measurement services to HIOS. HIOS incurred charges for these services of $2.8 million in 1996 and $3.6 million in 1995 from ANR and $1.4 million in 1996 and $2.3 million in 1995 from UTOS. The agreements under which these services were provided expired in May 1995.
HIGH ISLAND OFFSHORE SYSTEM NOTES TO THE FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
In February 1996, the Company reached an agreement with ANR, which was approved by the FERC, which provides that rates charged by ANR would be $2.8 million for calendar year 1996, $2.5 million per year for calendar years 1997, 1998 and 1999 and $2.2 million for calendar year 2000. The rate would be negotiated for calendar year 2001 and thereafter.
The Company agreed with UTOS to an interim extension of the agreement on a month to month basis pending the completion of new agreement.
Amounts due to ANR were $27,000 and $400,000 at December 31, 1996, and 1995 respectively and amounts due to UTOS were $86,000 and $104,000 at December 31 1996, and 1995, respectively.
8. LITIGATION
Lawsuits and other proceedings which have arisen in the ordinary course of business are pending or threatened against the Company. A natural gas producer has filed a claim on behalf of the U.S. government in the U.S. District Court for the District of Columbia under the federal False Claims Act. The Second Amended Complaint filed on May 24, 1996, against seventy defendants, including HIOS, alleges that the defendants' methods of measuring the heating content and volume of natural gas purchased from federally-owned or Indian properties have caused underpayment of royalties to the U.S. government. HIOS, together with the other pipeline defendants has filed a motion to dismiss. The Court will hear oral arguments on this motion on March 12, 1997. Although no assurances can be given and no determination can be made at this time as to the outcome of any particular lawsuit or proceeding, the Company believes there are meritorious defenses to substantially all such claims and that any liability which may finally be determined should not have a material adverse effect on the Company's financial position or results of operations.
INDEX TO EXHIBITS
Exhibit Number Description - ------ -----------
3.1 -- Certificate of Limited Partnership of the Partnership (filed as Exhibit 3.1 to the Partnership's Registration Statement on Form S-1, File No. 33-55642, and incorporated herein by reference).
3.2 -- Amended and Restated Agreement of Limited Partnership of the Partnership (filed as Exhibit 10.41 to Amendment No. 1 to DeepTech's Registration Statement on Form S-1, File No. 33-73538, and incorporated herein by reference).
3.3 -- Amendment Number 1 to the Amended and Restated Agreement of Limited Partnership of the Partnership (filed as Exhibit 10.1 to the Partnership's Current Report on Form 8-K dated December 31, 1996 and incorporated herein by reference).
4.1 -- Form of Certificate Evidencing Preference Units Representing Limited Partner Interests (filed as Exhibit 4.1 to Amendment No. 2 to the Partnership's Registration Statement on Form S-1, File No. 33-55642, and incorporated herein by reference).
4.2 -- Form of Certificate Evidencing Common Units Representing Limited Partner Interests (filed as Exhibit 4.2 to Amendment No. 2 to the Partnership's Registration Statement on Form S-1, File No. 33-55642, and incorporated herein by reference).
10.01 -- Master Gas Dedication Agreement, dated December 10, 1993, between the Partnership and Tatham Offshore (filed as Exhibit 10.29 to Amendment No. 2 to Tatham Offshore's Registration Statement on Form S-1, File No. 33-70120, and incorporated herein by reference).
10.02 -- Amendment to Master Gas Dedication Agreement dated April 21, 1995 between the Partnership and Tatham Offshore (filed as Exhibit 10.26 to DeepTech's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, Commission File Number 0-23934 and incorporated herein by reference).
10.03 -- Amendment to Master Gas Dedication Agreement dated April 21, 1995 between the Partnership and Tatham Offshore (filed as Exhibit 10.27 to DeepTech's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, Commission File Number 0-23934 and incorporated herein by reference).
10.04 -- Gathering Agreement, dated July 1, 1992, among Ewing Bank, Tatham Offshore, and DeepTech (filed as Exhibit 10.16 to Tatham Offshore's Registration Statement on Form S-1, File No. 33-70120, and incorporated herein by reference).
10.05 -- Letter Agreement dated March 22, 1995 between Ewing Bank and Tatham Offshore amending the Gathering Agreement dated July 1, 1992 (filed as Exhibit 10.44 to DeepTech's Annual Report on Form 10-K for the fiscal year ended June 30, 1994, Commission File Number 0-23934 and incorporated herein by reference).
10.06 -- Partnership Agreement of Stingray (filed as Exhibit 10.06 to Amendment No. 1 to the Partnership's Registration Statement on Form S-1, File No. 33-55642, and incorporated herein by reference).
10.07 -- Amended and Restated General Partnership Agreement of UTOS (filed as Exhibit 10.07 to Amendment No. 1 to the Partnership's Registration Statement on Form S-1, File No. 33-55642, and incorporated herein by reference).
10.08 -- Amended and Restated General Partnership Agreement of HIOS (filed as Exhibit 10.08 to Amendment No. 1 to the Partnership's Registration Statement on Form S-1, File No. 33-55642, and incorporated herein by reference).
10.09 -- First Amended and Restated Management Agreement, effective as of July 1, 1992, between the Partnership and Leviathan (filed as Exhibit 10.1 to DeepTech's Annual Report on Form 10-K for the fiscal year ended June 30, 1994, Commission File Number 0-23934 and incorporated herein by reference).
10.10 -- Management Agreement, dated July 1, 1992, between DeepTech and Leviathan (filed as Exhibit 10.10 to Amendment No. 1 to the Partnership's Registration Statement on Form S-1, File No. 33-55642, and incorporated herein by reference).
10.11 -- First Amendment to the Amended and Restated Management Agreement, dated as of January 1, 1995, between the Partnership and DeepTech (filed as Exhibit 10.76 to DeepTech's Registration Statement on Form S-1, File No. 33-88688, and incorporated herein by reference).
10.12 -- Simultaneous Exchange Agreement dated May 27, 1994 by and among Shell Offshore Inc., SOI Royalties Inc. and Forest Oil Corporation (filed as Exhibit 10.21 to the Partnership's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1993 and incorporated herein by reference).
10.13 -- Service Agreement dated January 1, 1994 between LOGS and Deepwater Production Systems regarding Ship Shoal 332A Platform Operation (filed as Exhibit 10.23 to the Partnership's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1993 and incorporated herein by reference).
10.14 -- Service Agreement dated January 1, 1994 between LOGS and Deepwater Production Systems, Inc. regarding Ship Shoal 331/332 Flowlines (filed as Exhibit 10.24 to the Partnership's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1993 and incorporated herein by reference).
10.15 -- Service Agreement dated January 1, 1994 between LOGS and Deepwater Production Systems, Inc. regarding Ship Shoal 332A Platform Modifications (filed as Exhibit 10.25 to the Partnership's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1993 and incorporated herein by reference).
10.16 -- Technology Services Agreement effective as of July 1, 1993 by and between Dover and the Partnership (filed as Exhibit 10.26 to the Partnership's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1993 and incorporated herein by reference).
10.17 -- Letter Agreements dated August 24, 1994, between the Partnership and Placid Oil Company (filed as Exhibit 10.1 to the Partnership's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994 and incorporated herein by reference).
10.18 -- Letter Agreements dated August 24, 1994, between the Partnership and OPUBCO Resources, Inc. and Hi Production Company, Inc. (filed as Exhibit 10.2 to the Partnership's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994 and incorporated herein by reference).
10.19 -- Letter Agreements dated September 23, 1994, between the Partnership and Lamar Hunt Trust Estate (filed as Exhibit 10.4 to the Partnership's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994 and incorporated herein by reference).
10.20 -- Letter Agreements dated September 23, 1994, between the Partnership and Nelson Bunker Hunt Trust Estate (filed as Exhibit 10.5 to the Partnership's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994 and incorporated herein by reference).
10.21 -- Agreement for Purchase and Sale by and between Tatham Offshore, Inc., as Seller, and Flextrend Development Company, L.L.C., as Buyer, dated June 30, 1995 (filed as Exhibit 6(a) to the Partnership's Form 10-Q for the quarterly period ended June 30, 1995, and incorporated herein by reference).
10.22 -- Limited Liability Company Agreement of POPCO (filed as Exhibit 10.39 to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference).
10.23 -- Letter Agreement dated March 27, 1996, between the Partnership and Tatham Offshore related to the settlement of certain demand charges under transportation agreements (filed as Exhibit 10.40 to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference).
10.24* -- Second Amended and Restated Credit Agreement dated December 13, 1996 among Partnership, The Chase Manhattan Bank, as administrative agent, ING (U.S.) Capital Corporation, as co arranger, and the banks and other financial institutions from time to time party thereto.
10.25+ Leviathan Unit Rights Appreciation Plan.
21.1* -- List of Subsidiaries of the Partnership.
24.1 -- Power of Attorney (included on the signature pages of this Annual Report on Form 10-K).
27* -- Financial Data Schedule.
* Filed herewith. + Identifies management contracts or compensatory plans or arrangements required to be filed as an exhibit hereto pursuant to item 14(c) of Form 10-K.