ITEM 3. LEGAL PROCEEDINGS
The historical method used by the oil industry in the United States to establish the price at which crude oil is bought and sold is being challenged. Buyers and sellers have traditionally determined the market price of crude oil by reference to "posted prices", which are prices published by certain crude oil buyers such as crude oil refiners and transporters as the price at which they are willing to buy. A number of suits have been brought alleging that posted prices have been set consistently below market value, and that, as a result, royalties have been underpaid.
The Partnership was named as a defendant in such a case filed in state court in Starr County, Texas in April, 1995 and a co-defendant in cases filed in state courts in Lee County, Texas and in Louisiana and Alabama and in federal court in Texas. All of these lawsuits seek certification as class actions on behalf of royalty owners in specific geographic areas, except the Texas and Alabama cases, which seek certification of a nationwide class of royalty owners. These cases also allege that the co-defendants have conspired and acted in concert to establish the price of crude oil in violation of antitrust statutes. These suits are similar to those brought in Texas by the Texas General Land Office, and in New Mexico, Oklahoma and Florida by private royalty owners against major crude oil producers. Suits are also being brought by natural gas royalty interest owners regarding royalty valuation and deductions of post-production costs from royalty.
In addition to these suits, the Minerals Management Service (MMS) of the United States Department of the Interior is challenging the prices on which royalties were assessed. The MMS has claimed that a number of crude oil producers including the Partnership underpaid royalties owed the federal government on California crude oil production from 1980 to 1988 and has sent Orders to Pay to a number of producers including the Partnership. The MMS is also auditing royalty valuation in other parts of the country. The Department of Justice is independently investigating whether oil and gas producers have violated the False Claims Act in connection with royalty payments on production from federal and Indian lands.
While a number of claims and suits against the Partnership and other crude oil and natural gas producers have already been brought by a variety of governmental and private plaintiffs in a number of jurisdictions, the fact that these suits challenge practices common to the industry suggests that additional lawsuits against the Partnership may be filed. The suits filed to date, to include the actions in which the Partnership is a party, are in the preliminary stage. The Partnership believes it has meritorious defenses and intends to defend these claims and lawsuits vigorously.
The Partnership is involved in a number of other legal and administrative proceedings arising in the ordinary course of its oil and gas business. Although the ultimate outcome of these proceedings cannot be ascertained at this time, it is reasonably possible that some of the proceedings could be resolved unfavorably to the Partnership. Management of the Company believes that any liabilities which may arise out of legal claims or proceedings would not be material in relation to its financial position, results of operations or liquidity at December 31, 1997. The Company intends to maintain liability and other insurance for the Partnership of the type customary in the oil and gas business with such coverage limits as the Company deems prudent.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF UNITHOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S LIMITED PARTNERSHIP UNITS AND RELATED SECURITY HOLDER MATTERS
The depositary units of Sun Energy Partners, L.P. are traded on the New York Stock Exchange, Inc. The following table sets forth the high and low sales prices per unit, as reported on the New York Stock Exchange Composite Transactions quotations, for the periods indicated:
The Partnership had approximately 1,662 holders of record of depositary units as of February 28, 1998.
For the years 1997 and 1996, the quarterly cash distributions per unit paid to unitholders were as follows:
The fourth quarter cash distribution for 1997 of $.02 per unit was paid in March 1998. Any future quarterly cash distributions to unitholders are expected to be paid on or about the 10th day of March, June, September and December in each year. Distributions will fluctuate due to oil and gas prices, production volumes, operating costs and the timing and amount of capital expenditures and divestment proceeds. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Cash Distribution Policy.")
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
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(1) Effective January 1, 1994, the Partnership adopted a new policy for determining the ceiling test for its oil and gas properties. A one-time non-cash charge of $577 million for the cumulative effect of the change was recognized in the earnings for 1994. The net income for 1993 includes a $7 million loss from the sale of assets.
(2) In the fourth quarter of 1993, the Company announced that it would no longer purchase newly issued Partnership units to fund the Partnership's capital outlays. The Partnership will fund its capital outlays from internally generated funds and make distributions to partners from the cash flow remaining after such outlays (see Note 11 to the Consolidated Financial Statements).
(3) Includes $38 million, $51 million, $62 million, $72 million and $82 million of long-term debt due to the Company.
ITEM 7.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of the Partnership's financial condition and results of operations which follow should be read in conjunction with the Consolidated Financial Statements and Selected Financial Data included in this report.
RESULTS OF OPERATIONS
Net income in 1997 was $239 million. Production volumes increased 2 percent in 1997 compared to 1996 primarily due to offshore development. The realized oil price in 1997 decreased 8 percent to $18.75 per barrel. The realized gas price in 1997 increased 12 percent to $2.40 per mcf. Exploration costs increased 45 percent primarily from increased offshore dry hole costs and increased geological and geophysical expense due to increased activity. Depreciation, depletion and amortization expense increased 19 percent primarily because of additional development and higher production volumes.
Net income in 1996 was $248 million. The realized oil price in 1996 increased 24 percent to $20.43 per barrel. The increase in 1996 followed a 12 percent increase in 1995 compared to 1994. The Partnership's realized gas price in 1996 increased 24 percent to $2.14 per mcf. Total costs and expenses decreased 3 percent to $438 million in 1996. Operating costs decreased 14 percent in 1996 due to cost efficiency measures. Production taxes increased 27 percent in 1996 due to higher prices.
Net income in 1995 was $99 million. In 1995, production volumes decreased 10 percent due to the sale of producing assets. Total costs and expenses decreased 12 percent to $453 million in 1995. Operating costs decreased 17 percent due primarily to cost efficiency measures.
LIQUIDITY AND CAPITAL RESOURCES
ED&A outlays were $427 million in 1997, $317 million in 1996 and $216 million in 1995. In 1997, 71 percent of the Partnership's total ED&A investment was for development and acquisition and 29 percent was for exploration. In 1998, total ED&A outlays are expected to be approximately $460 million of which 64 percent is targeted for development and 36 percent for exploration. In 1997, the Partnership replaced 145 percent of its production at an FD&A cost of $5.99 per eb.
In 1997, cash flow from operating activities increased $143 million compared to 1996 primarily due to favorable increases in cash flow working capital components. Cash flow from investing activities used $421 million in 1997 compared to $323 million in 1996. Capital expenditures were $96 million higher in 1997 while proceeds from divestments were $7 million lower. Cash flow from financing activities used $117 million in 1997 compared to a use of $78 million in 1996. Cash distributions paid to unitholders were $38 million higher in 1997 than 1996.
In 1996, cash flow from operating activities increased $58 million from 1995 primarily due to higher oil and gas prices and lower costs and expenses partially offset by lower production volumes. Cash flow from investing activities used $323 million in 1996 compared to $144 million in 1995. Proceeds from divestments were $67 million lower in 1996 while capital expenditures increased by $108 million. Cash flow used for financing activities decreased by $127 million in 1996 primarily because of the reduced distributions to unitholders.
In 1995, cash flow from operating activities increased $57 million compared to 1994 primarily due to favorable increases in cash flow working capital components. Cash flow from investing activities used $144 million in 1995 compared to a use of $136 million in 1994. Capital expenditures were $40 million higher in 1995 and proceeds from divestments were $33 million higher in 1995. Cash flow from financing activities used $205 million in 1995 compared to a use of $128 million in 1994. Cash distributions paid to unitholders were $80 million higher in 1995 than 1994.
In December 1997, the Partnership adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" and SFAS No. 129, "Disclosure of Information about Capital Structure," resulting in no material change. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," effective for fiscal years beginning after December 15, 1997. The impact of these statements when adopted, will not have a material effect on the Partnership's financial position or results of operations.
In December 1995, the Partnership adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Adoption did not impact results of operations.
During the fourth quarter of 1995, the Partnership, Apache Corporation and Parker & Parsley Petroleum Company formed Producers Energy Marketing Company, LLC (ProEnergy). In 1997, Pioneer Natural Resources Company (formerly Parker & Parsley Petroleum Company) terminated its relationship with ProEnergy. ProEnergy purchases substantially all of the Partnership's gas production at index prices.
The Partnership's investing levels will be governed by its cash flow from operating activities which will continue to be affected by prevailing oil and gas prices, cost levels and production volumes. Volatility in oil and gas prices experienced over the past several years is expected to continue. Any shortfall in expected cash flow from operating activities may require adjustment of the business plans. Options include deferral of discretionary ED&A outlays and the sale of Partnership units. The Partnership's long-term cash generation capability is ultimately tied to the value of proved reserves.
RESERVE REPLACEMENT
The ability to sustain cash flow is dependent, among other things, on the level of the Partnership's oil and gas reserves, oil and gas prices and cost containment. Replacement of proved reserves through extensions and discoveries, improved recovery, purchases and revisions to prior reserve estimates in 1997 was 185 percent of liquids production and 119 percent of gas production. Reserve replacement rates of liquids and gas were 122 and 49 percent in 1996 and 79 and 112 percent in 1995.
HEDGING ARRANGEMENTS
The Partnership, from time to time, enters into commodity futures contracts to manage its crude oil and natural gas price risk and to maintain specified margins. The Partnership has entered into collar agreements to hedge approximately 10 percent of its 1998 crude production at an average floor price of $19.87 WTI per barrel and an average ceiling price of $21.15 WTI per barrel. Approximately 25 percent of its estimated 1998 gas production is under hedging agreements using collars at an average floor price of $2.21 HH per mmbtu and an average ceiling price of $2.42 HH per mmbtu.
The Partnership utilizes sensitivity analysis to evaluate the effect that changes in the market value of crude oil and natural gas will have on the fair value of its derivative instruments. This analysis measures the impact on the commodity derivative instruments and thereby, does not consider the underlying exposure related to the commodity. At December 31, 1997, the Partnership estimates that a 10 percent change in its average crude price would result in a corresponding $3 million change in net income and a 10 percent per mmbtu change in its average natural gas sales price would result in a corresponding $5 million change in net income. (See Note 2 to the Consolidated Financial Statements.)
YEAR 2000 PROJECT
The Partnership has determined that it will be required to modify significant portions of its software to utilize dates beyond December 31, 1999. The Partnership presently believes that with modifications to its existing software, the Year 2000 issue can be managed.
The Partnership is communicating with its significant suppliers, large customers and partners to determine the extent to which the Partnership is vulnerable to those third parties' failure to remediate their Year 2000 issue. The Partnership's total Year 2000 Project cost includes the estimated costs and time associated with the impact of a third party's Year 2000 issue and are based on presently available information. However, there can be no guarantee that a failure to timely convert by another company would not have a material adverse effect on the Partnership.
The Partnership will utilize both internal and external resources to reprogram and test the software for Year 2000 modification. The Partnership plans to complete the Year 2000 Project no later than December 31, 1999. The total cost of the Year 2000 Project is estimated at $3 million and is being funded through operating cash flows. To date the Partnership has incurred no significant costs related to the Year 2000 Project.
ENVIRONMENTAL
The Partnership's oil and gas operations are subject to stringent environmental regulations. The Company is dedicated to the preservation of the environment and has committed significant resources to comply with such regulations. Although the Partnership has been named as a potentially responsible party at sites related to past operations, the Company believes the Partnership is in general compliance with applicable governmental regulations and that the potential costs to it, in the aggregate, are not material to its financial condition. However, risks of substantial costs and liabilities are inherent in the oil and gas business. Should other developments occur, such as increasingly strict environmental laws, regulations and enforcement policies or claims for damages resulting from the Partnership's operations, they could result in additional costs and liabilities in the future. (See Note 12 to the Consolidated Financial Statements.)
CASH DISTRIBUTION POLICY
In the fourth quarter of 1993, the Company's Board of Directors elected to change the Company's investment policy concerning purchase of additional Partnership units. Effective in 1994, the Company no longer routinely purchases newly issued Partnership units to fund capital outlays. The Partnership now funds its capital outlays from internally generated funds, including cash proceeds from asset sales and makes distributions of only that cash remaining after such outlays. The policy reduces the cash paid to unitholders but also ends the ownership dilution caused by the issuance of additional units.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL AND OPERATING INFORMATION
SUN ENERGY PARTNERS, L.P. REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Sun Energy Partners, L.P. and the Board of Directors of Oryx Energy Company:
We have audited the accompanying consolidated balance sheets of Sun Energy Partners, L.P. and its Subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of income and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of Oryx Energy Company'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 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. 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sun Energy Partners, L.P. and its Subsidiaries as of December 31, 1997 and 1996 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND, L.L.P.
Dallas, Texas February 17, 1998
SUN ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME (MILLIONS OF DOLLARS, EXCEPT PER UNIT AMOUNTS)
(See Accompanying Notes)
SUN ENERGY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS (MILLIONS OF DOLLARS)
ASSETS
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The successful efforts method of accounting is followed.
(See Accompanying Notes)
SUN ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS (MILLIONS OF DOLLARS)
(See Accompanying Notes)
SUN ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Control
Sun Energy Partners, L.P. (Sun Energy Partners), a Delaware limited partnership, was formed on October 1, 1985 and prior to December 1, 1985 had no operations and nominal assets and equity. Effective as of December 1, 1985, Sun Energy Partners succeeded to all the domestic oil and gas operations of Oryx Energy Company and certain of its affiliates (collectively, the Company). These operations consist of the exploration for and development of oil and natural gas reserves in the United States.
Sun Energy Partners is controlled by the Company, which is the managing general partner. As of December 31, 1997, the Company had a partnership interest of 98.2 percent in Sun Energy Partners. The remaining 1.8 percent limited partnership interest is held by public unitholders in the form of depositary units. Eighty-five percent of the Company's Board of Directors must approve any additional issuance, sale or transfer of units which would reduce the Company's holdings in Sun Energy Partners below 85 percent.
Sun Energy Partners operates through Sun Operating Limited Partnership, a Delaware limited partnership, and several other operating partnerships (collectively, the Operating Partnerships). In all of the partnerships which comprise the Operating Partnerships, Sun Energy Partners holds a 99 percent interest as the sole limited partner, while the Company holds a 1 percent interest as the managing general partner.
Sun Energy Partners and the Operating Partnerships (collectively, the Partnership) have no officers or employees. The officers and employees of the Company perform all management functions.
Basis of Presentation
The Partnership's consolidated financial statements have been prepared using the proportionate method of consolidation for Sun Energy Partners and its 99 percent interest in the Operating Partnerships. Such financial statements are prepared in accordance with generally accepted accounting principles which is different from the basis used for reporting taxable income or loss to unitholders.
Cash Equivalents
The Partnership considers highly liquid investments with original maturities of less than 3 months to be cash equivalents. Cash equivalents are stated at cost which approximates market value.
Properties, Plants and Equipment
The successful efforts method of accounting is followed for costs incurred in oil and gas operations.
Capitalization Policy. Acquisition costs are capitalized when incurred. Costs of unproved properties are transferred to proved properties when proved reserves are added. Exploration costs, including geological and geophysical costs and costs of carrying unproved properties, are charged against income as incurred. Exploratory drilling costs are capitalized initially; however, if it is determined that an exploratory well did not find proved reserves, such capitalized costs are charged to expense, as dry hole costs, at that time. Development costs are capitalized. Costs incurred to operate and maintain wells and equipment are expensed.
Leasehold Impairment and Depreciation, Depletion and Amortization. Periodic valuation provisions for impairment of capitalized costs of unproved properties are expensed. The acquisition costs of proved properties are depleted by the unit-of-production method based on proved reserves by field. Capitalized exploratory drilling costs which result in the addition of proved reserves and development costs are amortized by the unit-of-production method based on proved developed reserves by field. In addition,
SUN ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) unamortized capital costs at a field level are reduced to fair value if the sum of expected undiscounted future cash flows is less than net book value.
Dismantlement, Restoration and Abandonment Costs. Such costs are estimated and accrued as a component of depreciation, depletion and amortization expense; actual costs are charged to the accrual.
Retirements. Gains and losses on the disposals of fixed assets are generally reflected in income. For certain property groups, the cost less salvage value of property sold or abandoned is charged to accumulated depreciation, depletion and amortization except that gains and losses for these groups are taken into income for unusual retirements or retirements involving an entire property group.
Investment in Affiliate
Effective in 1988, the Company issued three million shares of its $1 par value common stock to an operating partnership of the Partnership in exchange for certain assets. These shares are not entitled to vote at the Company's annual meetings of shareholders. The Partnership accounts for this investment under the cost method, whereby investment income is recognized by the Partnership if and when common dividends are received from the Company. In January 1994, Oryx Energy Company suspended the payment of quarterly dividends to holders of its common stock.
Capitalized Interest
The Partnership capitalizes interest costs incurred as a result of the acquisition and installation of significant assets.
Income Taxes
The Operating Partnerships and Sun Energy Partners are treated as partnerships for income tax purposes and, as a result, income or loss of the Partnership is includable in the tax returns of the individual unitholders. Accordingly, no recognition has been given to income taxes in the financial statements.
At December 31, 1997, 1996 and 1995, the Partnership's financial reporting bases of assets and liabilities exceeded the tax bases of its assets and liabilities (net temporary differences) by $758 million, $596 million and $537 million.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents includes cash, highly liquid investments with remaining maturities of less than 3 months (see "Cash Equivalents", above) and advances to affiliate.
Interest paid totaled $15 million, $17 million and $13 million in 1997, 1996 and 1995.
Sales of Oil and Gas
Sales of oil and gas are recorded on the entitlement method. Differences between actual production and entitlements result in a receivable when underproduction occurs and a payable when overproduction occurs.
During 1997 and 1996, sales of oil to the Partnership's top purchaser totaled approximately 18 percent and 8 percent, and sales of natural gas to the top purchaser totaled 52 percent and 51 percent. During 1995, no individual customer accounted for more than 10 percent of the Partnership's oil or natural gas revenue. The Partnership believes that the loss of any major purchaser would not have a material adverse effect on its business.
SUN ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Oil and Gas Price Hedging Activity
The Partnership, from time to time, enters into arrangements to hedge the impact of price fluctuations on anticipated crude oil and natural gas sales. Gains or losses on hedging activities are recognized in oil and gas revenues in the period in which the hedged production is sold (Note 2).
Environmental Costs
The Partnership establishes reserves for environmental liabilities as incurred (Note 12).
Statement Presentation
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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2) FINANCIAL INSTRUMENTS
Derivatives
As discussed in Note 1, the Partnership enters into hedging arrangements for crude oil and natural gas prices with major financial institutions. The Partnership does not enter into derivative transactions for trading purposes.
At December 31, 1997, the Partnership was a party to crude oil contracts to hedge about 9 percent of its estimated 1998 crude oil production at an average price of $20.17 per barrel. Approximately 20 percent of its estimated 1998 natural gas production was hedged at $2.19 per mmbtu. At December 31, 1996, the Partnership was a party to crude oil and natural gas contracts to hedge about 20 percent of its estimated 1997 crude oil production at $20.30 per barrel and 31 percent of its estimated 1997 natural gas production at $2.24 per mmbtu. These arrangements serve to reduce the volatility associated with prices of crude oil and natural gas. The aggregate carrying values of these assets at December 31, 1997 and 1996 were $2 million and $10 million, and the aggregate fair values, subject to daily fluctuation, based on quotes from brokers, were approximately $5 million and $2 million.
The above mentioned derivative contracts expose the Partnership to credit risk. The Partnership has established controls to manage this risk and closely monitors the creditworthiness of its counterparties which are major financial institutions. In the normal course of business, collateral is not required for financial instruments with credit risk. The Partnership believes that losses from nonperformance are unlikely to occur.
Other Financial Instruments
At December 31, 1997 and 1996, the carrying values of the Partnership's long-term debt, including amounts due within one year, were $52 million and $64 million (Note 8). At December 31, 1997 and 1996, the aggregate fair values of the Partnership's long-term debt were approximately $55 million and $68 million, estimated primarily based on current rates offered to the Partnership for debt of the same remaining maturities.
SUN ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3) RELATED PARTY TRANSACTIONS
Advances to/from Affiliate
The Company has served as the Partnership's lender and borrower of funds and a clearing-house for the settlement of intercompany receivables and payables. Deposits earn interest at a rate equal to the rate paid by a major money market fund. Demand loans bear interest at a rate based on the prime rate.
Long-Term Debt Due Affiliate
The Partnership is indebted to the Company under a 9.75% note due 1998-2001 (Note 8).
Sales of Natural Gas
During the fourth quarter of 1995, the Partnership, Apache Corporation and Parker & Parsley Petroleum Company formed Producers Energy Marketing, LLC (ProEnergy) to jointly market natural gas. In 1997, Pioneer Natural Resources Company (formerly Parker and Parsley Petroleum Company) terminated its relationship with ProEnergy. As of December 31, 1997 the Partnership had an ownership interest of 40 percent in ProEnergy; however, ownership varies based on the Partnership's share of natural gas throughput for the preceding quarter. The Partnership accounts for its investment in ProEnergy using the equity method, and as of December 31, 1997 had an investment in ProEnergy of $4 million. The Partnership sells substantially all of its natural gas production to ProEnergy at index prices. Full operations commenced in April 1996 and natural gas sales to ProEnergy totaled $219 million and $193 million for the year ended December 31, 1997 and the nine months ended December 31, 1996. At December 31, 1997 and 1996, the Partnership had an outstanding receivable balance of $22 million and $48 million from ProEnergy.
Direct and Indirect Cost
The Company is reimbursed by the Partnership for all direct costs incurred in performing management functions and indirect costs (including payroll and payroll related costs and the cost of postemployment benefits and management incentive plans) allocable to the Partnership. The full cost of direct and indirect costs incurred on behalf of the Partnership by the Company is allocated to the Partnership based on services rendered and extent of use. Such costs, which are charged principally to production cost, exploration cost and general and administrative expense, totaled $61 million, $61 million and $68 million for the years 1997, 1996 and 1995. The Company does not receive any carried interests, promotions, back-ins or other similar compensation as the general partner of the Partnership.
Interest Income
Interest income received from the Company, which is reflected in "Other -- net" in the Consolidated Statements of Income, was earned on advances to the Company and totaled $4 million, $4 million and $2 million during the years 1997, 1996 and 1995.
Interest Cost
Interest cost paid to the Company, which is included in "Interest and debt expense" in the Consolidated Statements of Income, was primarily incurred on long-term debt and advances due the Company and totaled $14 million, $16 million and $12 million during the years 1997, 1996 and 1995 (Note 8).
SUN ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4) OTHER -- NET
Other -- net consisted of the following:
5) PRODUCTION TAXES
Production taxes consisted of the following:
6) PROPERTIES, PLANTS AND EQUIPMENT
At December 31, the Partnership's properties, plants and equipment and accumulated depreciation, depletion and amortization were as follows:
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* Includes $28 million and $30 million for dismantlement, restoration and abandonment at December 31, 1997 and 1996.
SUN ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7) ACCRUED LIABILITIES
At December 31, the Partnership's accrued liabilities were comprised of the following:
8) LONG-TERM DEBT
At December 31, the Partnership's long-term debt consisted of the following:
Repayment obligations under the Partnership's long-term debt due affiliate are $13 million, $14 million, $16 million and $8 million in 1998, 1999, 2000 and 2001.
9) COMMITMENTS AND CONTINGENT LIABILITIES
The Partnership has operating leases for office space and other property and equipment. Total rental expense for such leases for the years 1997, 1996 and 1995 was $12 million, $15 million and $38 million. Under contracts existing as of December 31, 1997, future minimum annual rentals applicable to noncancellable operating leases that have initial or remaining lease terms in excess of 1 year were as follows (in millions of dollars):
Several legal and administrative proceedings are pending against the Partnership. Although the ultimate outcome of these proceedings cannot be ascertained at this time, and it is reasonably possible that some of them could be resolved unfavorably to the Partnership, management of the Company believes that any liabilities which may arise would not be material to the Partnership's financial position, results of operations or liquidity.
SUN ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10) PARTNERS' CAPITAL
11) CASH DISTRIBUTIONS
Distributable cash is defined as revenues (including interest income) less operating costs; seismic, geological and geophysical costs (including related costs); payments of principal of and interest on debt; general and administrative expenses including reimbursements to the Company as managing general partner; capital expenditures (net of proceeds from divestments); and cash exploration costs. No deduction is made for depreciation, depletion and amortization.
Sun Energy Partners' quarterly cash distributions per unit for the years 1997, 1996 and 1995 were as follows:
Cash distributions included $.27 per unit related to proceeds from asset sales in 1995.
12) DEFERRED CREDITS AND OTHER LIABILITIES
At December 31, the Partnership's deferred credits and other liabilities were comprised of the following:
Environmental cleanup costs have been accrued in response to the identification of several sites that require cleanup based on environmental pollution, some of which have been designated as superfund sites by
SUN ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12) DEFERRED CREDITS AND OTHER LIABILITIES (CONTINUED) the Environmental Protection Agency (EPA). The Partnership has been named as a Potentially Responsible Party (PRP) at four sites pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. At two of these sites, the Partnership has been named as a de minimis party and therefore expects its liability to be small. At a third site, the Partnership is reviewing its options and anticipates that it will participate in steering committee activities with the EPA. At the fourth and largest site, the Operating Industries, Inc. site in California, the Partnership has participated in a steering committee consisting of 139 companies. The steering committee and other PRPs previously entered into two partial consent decrees with the EPA providing for remedial actions which have been or are to be completed. The steering committee has successfully negotiated a third partial consent decree which provides for the following remedial actions: a clay cover, methane capturing wells and leachate destruction facilities. The remaining work at the site involves groundwater evaluation and long-term operation and maintenance. The Partnership is a member of the group that is responsible for carrying out the first phase of the work, which is expected to take 5 to 8 years. Completion of all phases is estimated to take up to 30 years. The maximum liability of the group, which is joint and several for each member of the group, is expected to range from approximately $450 million to $600 million, of which the Partnership's share is expected to be approximately $11 million. Cleanup costs are payable over the period that the work is completed.
Based on the facts outlined above and the Partnership's ongoing analyses of the actions where it has been identified as a PRP, the Partnership believes that it has accrued sufficient reserves to absorb the ultimate cost of such actions and that such costs therefore will not have a material impact on the Partnership's liquidity, capital resources or financial condition. While liability at superfund sites is typically joint and several, the Partnership has no reason to believe that defaults by other PRPs will result in liability of the Partnership materially larger than expected.
In October 1996, Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities," was issued. It required companies to recognize the costs of environmental remediation on an accrual basis. The Partnership was and continues to recognize the costs required by the SOP, therefore, adoption in 1997 had no material impact on its financial position or results of operations.
SUN ENERGY PARTNERS, L.P.
SUPPLEMENTARY FINANCIAL AND OPERATING INFORMATION (UNAUDITED)
OIL AND GAS DATA
CAPITALIZED COSTS
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
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* Excludes capitalized interest of $15 million, $16 million and $10 million for 1997, 1996 and 1995.
EXPLORATION COSTS
ESTIMATED NET QUANTITIES OF PROVED OIL AND GAS RESERVES
Proved reserve quantities were based on estimates prepared by Company engineers in accordance with guidelines established by the Securities and Exchange Commission and were reviewed by Gaffney, Cline & Associates, Inc., independent petroleum engineers. The Partnership considers such estimates to be reasonable; however, due to inherent uncertainties and the limited nature of reservoir data, estimates of underground reserves are imprecise and subject to change over time as additional information becomes available.
There has been no favorable or adverse event that has caused a significant change in estimated proved reserves since December 31, 1997. The Partnership has no long-term supply agreements or contracts with governments or authorities in which it acts as producer nor does it have any interest in oil and gas operations accounted for by the equity method. All reserves are located onshore and offshore within the United States.
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* Natural gas reserve volumes include liquefiable hydrocarbons approximating 5 percent of total gas reserves which are recoverable downstream. Such recoverable liquids also have been included in natural gas liquids reserve volumes.
STANDARDIZED MEASURE
The standardized measure of discounted future net cash flows from estimated production of proved oil and gas reserves is presented in accordance with the provisions of Statement of Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing Activities" (SFAS No. 69). In computing this data, assumptions other than those mandated by SFAS No. 69 could produce substantially different results. The Partnership cautions against viewing this information as a forecast of future economic conditions or revenues.
The standardized measure has been prepared assuming year-end selling prices adjusted for future fixed and determinable contractual price changes, year-end development and production costs and a 10 percent annual discount rate. No future income tax expense has been provided for the Partnership since it incurs no income tax liability. (See Summary of Significant Accounting Policies -- Income Taxes in Note 1 to the
Consolidated Financial Statements.) The year-end realized prices were $17.16 and $23.65 per barrel of oil and $2.29 and $4.09 per mcf of gas for 1997 and 1996.
SUMMARY OF CHANGES IN THE STANDARDIZED MEASURE
QUARTERLY FINANCIAL INFORMATION
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* Gross profit equals oil and gas revenues plus gas plant margins less production cost, exploration cost and depreciation, depletion and amortization.
QUARTERLY OPERATING INFORMATION
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
The Partnership has no employees. The Company, as the managing general partner of the Partnership, has the responsibility for the Partnership's conduct of operations. Set forth below is information concerning the 11 current directors of the Company and the 12 current executive officers of the Company (3 of which are also directors). All elected executive officers of the Company are elected annually by the Board of Directors of the Company. The directors are divided into 3 classes with approximately one-third of the directors constituting the Board being elected each year to serve a three-year term. Class I directors (whose term expires in 1998) are Mr. Genever-Watling, Mr. Gill, Mr. Hollingsworth and Mr. Pistor. Class II directors (whose term expires in 1999) are Mr. Keiser, Mr. Seegers and Mr. White-Thomson. Class III directors (whose term expires in 2000) are Mr. Box, Mr. Bradford, Dr. Earle and Mr. Moneypenny.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The directors, officers and employees of the Company (the managing general partner) receive no direct compensation from the Partnership for their services to the Partnership. Such persons receive compensation from the Company, a substantial portion of which is generally reimbursed to the Company by the Partnership as costs allocable to it. (See Note 3 to the Consolidated Financial Statements.)
The Partnership reimburses the Company for all direct costs and indirect costs associated with the Partnership's activities. For the year 1997, the Company received $61 million as reimbursement of costs allocable to the Partnership. Such amounts included salaries of employees and allocations of certain executive and administrative expenses. The aggregate amount reimbursed by the Partnership to the Company in 1997 for the salaries of the Chief Executive Officer of the Partnership and each of the four most highly compensated executive officers of the Partnership other than the Chief Executive Officer was approximately $1 million.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides certain information regarding beneficial ownership of the limited partnership units of Sun Energy Partners, L.P. as of December 31, 1997.
UNITS OF SUN ENERGY PARTNERS, L.P.
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* Assumes that Oryx Energy Company's 292,000,000 general partnership units are converted into limited partnership units of Sun Energy Partners, L.P.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In its capacity as managing general partner of the Partnership, the Company controls the Partnership and its operations and has served as a lender and borrower of funds for the Partnership. Following is a table which
summarizes lending activities between the Partnership and the Company during the year ended December 31, 1997:
During 1997, the largest balance owed to the Partnership by the Company for variable rate advances was $62 million. The largest balance owed to the Company by the Partnership during 1997 resulting from advances from Oryx Energy Company and amounts due under the 9.75% Note Payable was $104 million. Certain information required by this section is included in Notes to the Consolidated Financial Statements. See Notes 1, 3 and 8 included elsewhere in this Form 10-K.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following Documents are filed as a part of this report:
1. Financial Statements:
See Index to Financial Statements, Supplementary Financial and Operating Information on page 14.
2. Exhibits:
(b) Reports on Form 8-K:
The Partnership did not file any reports on Form 8-K during the quarter ended December 31, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SUN ENERGY PARTNERS, L.P.
By: ORYX ENERGY COMPANY (Managing General Partner)
*By: /s/ EDWARD W. MONEYPENNY ---------------------------------- Edward W. Moneypenny Executive Vice President, Finance, Chief Financial Officer and Director
Date: March 20, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by or on behalf of the following persons on behalf of the Registrant and in the capacities with Oryx Energy Company, Managing General Partner, and on the date indicated:
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* Attorney-in-Fact pursuant to Resolution of the Board of Directors of the Managing General Partner which is being filed as an Exhibit to this Form 10-K.
** Original powers of attorney authorizing Robert L. Keiser and Edward W. Moneypenny or any one of them, to sign this Form 10-K Annual Report on behalf of Sun Energy Partners, L.P., is being filed as an Exhibit to this Form 10-K.
INDEX TO EXHIBITS