UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number: 1-14569 PLAINS ALL AMERICAN PIPELINE, L.P. (Exact name of registrant as specified in its charter) DELAWARE 76-0582150 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 DALLAS STREET HOUSTON, TEXAS 77002 (Address of principal executive offices) (Zip Code) (713) 654-1414 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] At May 12, 1999, there were outstanding 20,059,239 Common Units and 10,029,619 Subordinated Units. Page 1 of 17
PLAINS ALL AMERICAN PIPELINE, L.P. AND SUBSIDIARIES TABLE OF CONTENTS PART I. FINANCIAL INFORMATION CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS: <TABLE> <CAPTION> PAGE <S> <C> Consolidated Balance Sheets: March 31, 1999 and December 31, 1998.............................. 3 Consolidated and Combined Statements of Income: For the three months ended March 31, 1999 and 1998 (Predecessor).. 4 Consolidated and Combined Statements of Cash Flows: For the three months ended March 31, 1999 and 1998 (Predecessor).. 5 Notes to Consolidated and Combined Financial Statements............. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS................................... 9 PART II. OTHER INFORMATION............................................ 16 </TABLE> Page 2 of 17
PLAINS ALL AMERICAN PIPELINE, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except unit data) <TABLE> <CAPTION> March 31, December 31, 1999 1998 ---------- ----------- (unaudited) ASSETS <S> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 683 $ 5,503 Accounts receivable 156,159 119,514 Due from affiliates 4,757 3,022 Inventory 24,564 37,711 Prepaid expenses and other 852 1,101 -------- -------- Total current assets 187,015 166,851 -------- -------- PROPERTY AND EQUIPMENT Crude oil pipeline, gathering and terminal assets 380,956 378,254 Other property and equipment 671 581 -------- -------- 381,627 378,835 Less allowance for depreciation and amortization (3,177) (799) -------- -------- 378,450 378,036 -------- -------- OTHER ASSETS Pipeline linefill 57,001 54,511 Other 10,846 10,810 -------- -------- $633,312 $610,208 ======== ======== LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES Accounts payable and other current liabilities $151,385 $135,713 Interest payable 1,356 1,267 Due to affiliates 12,285 10,790 Notes payable 4,100 9,750 -------- -------- Total current liabilities 169,126 157,520 LONG-TERM LIABILITIES Bank debt 181,000 175,000 Other 155 45 -------- -------- Total liabilities 350,281 332,565 -------- -------- PARTNERS' CAPITAL Common unitholders (20,059,239 units outstanding) 260,518 256,997 Subordinated unitholders (10,029,619 units outstanding) 21,214 19,454 General partner 1,299 1,192 -------- -------- 283,031 277,643 -------- -------- $633,312 $610,208 ======== ======== </TABLE> See notes to consolidated and combined financial statements. Page 3 of 17
PLAINS ALL AMERICAN PIPELINE, L.P. AND SUBSIDIARIES CONSOLIDATED AND COMBINED STATEMENTS OF INCOME (unaudited) (in thousands, except per unit data) <TABLE> <CAPTION> Three Months Ended March 31, -------------------------------------- 1999 1998 ------------ -------------- (Predecessor) <S> <C> <C> REVENUES $ 455,760 $ 167,461 COST OF SALES AND OPERATIONS 435,932 163,457 ----------- ----------- Gross Margin 19,828 4,004 ----------- ----------- EXPENSES General and administrative 2,178 986 Depreciation and amortization 2,831 303 ----------- ----------- Total expenses 5,009 1,289 ----------- ----------- Operating income 14,819 2,715 Interest expense 3,193 149 Related party interest expense - 750 Other expense 410 - Interest and other income (97) (177) ----------- ----------- Net income before provision in lieu of income taxes 11,313 1,993 Provision in lieu of income taxes - 753 ----------- ----------- NET INCOME 11,313 1,240 =========== =========== BASIC AND DILUTED NET INCOME PER LIMITED PARTNER UNIT $ 0.37 $ 0.07 =========== =========== WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING 30,088,858 17,003,858 =========== =========== </TABLE> See notes to consolidated and combined financial statements. Page 4 of 17
PLAINS ALL AMERICAN PIPELINE, L.P. AND SUBSIDIARIES CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (unaudited) (in thousands) <TABLE> <CAPTION> Three Months Ended March 31, ---------------------------- 1999 1998 ------------- -------------- (Predecessor) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 11,313 $ 1,240 Items not affecting cash flows from operating activities: Depreciation and amortization 2,831 303 Change in payable in lieu of deferred taxes - 651 Other non cash items 110 - Change in assets and liabilities: Accounts receivable (36,645) 27,605 Inventory 13,147 501 Prepaid expenses and other 249 36 Accounts payable and other current liabilities 15,672 (19,136) Interest payable 89 (48) Pipeline linefill (2,490) - -------- -------- Net cash provided by operating activities 4,276 11,152 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment (2,791) (157) Disposals of property and equipment - 9 Additions to other assets (647) - -------- -------- Net cash used in investing activities (3,438) (148) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Advances from (payments to) affiliates (82) 6,396 Proceeds from long-term debt 14,100 - Proceeds from short-term debt 4,250 750 Principal payments of long-term debt (8,100) - Principal payments of short-term debt (9,900) (18,000) Capital contribution from parent - 28,700 Distribution to unitholders (5,926) - -------- -------- Net cash (used in) provided by financing activities (5,658) 17,846 -------- -------- Net increase (decrease) in cash and cash equivalents (4,820) 28,850 Cash and cash equivalents, beginning of period 5,503 2 -------- -------- Cash and cash equivalents, end of period $ 683 $ 28,852 ======== ========= </TABLE> See notes to consolidated and combined financial statements. Page 5 of 17
PLAINS ALL AMERICAN PIPELINE, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS MARCH 31, 1999 (UNAUDITED) NOTE 1 -- ORGANIZATION AND ACCOUNTING POLICIES Plains All American Pipeline, L.P. (the "Partnership") is a Delaware limited partnership formed in the third quarter of 1998, to acquire and operate the midstream crude oil business and assets of Plains Resources Inc. ("Plains Resources") and its wholly owned subsidiaries (the "Plains Midstream Subsidiaries" or the "Predecessor"). On November 23, 1998, the Partnership completed the initial public offering ("IPO") and the transactions whereby the Partnership became the successor to the business of the Predecessor. The operations of the Partnership are conducted through Plains Marketing, L.P. and All American Pipeline, L.P. Plains All American Inc., a wholly owned subsidiary of Plains Resources, is the general partner ("General Partner") of the Partnership. The Partnership is engaged in interstate and intrastate crude oil pipeline transportation and crude oil terminalling and storage activities and gathering and marketing activities. The Partnership's operations are primarily conducted in California, Texas, Oklahoma, Louisiana and the Gulf of Mexico. The accompanying financial statements and related notes present the consolidated financial position as of March 31, 1999, of the Partnership and the results of its operations and cash flows for the three months ended March 31, 1999. The combined financial statements of the Predecessor include the accounts of the Plains Midstream Subsidiaries. All significant intercompany transactions have been eliminated. The accompanying unaudited financial statements have been prepared in accordance with the instructions for interim financial reporting as prescribed by the Securities and Exchange Commission ("SEC"). For further information, refer to the consolidated and combined financial statements and notes thereto included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 1998, filed with the SEC. All material adjustments consisting only of normal recurring adjustments which, in the opinion of management, were necessary for a fair statement of the results for the interim periods, have been reflected. Certain reclassifications have been made to the prior year statements to conform with the current year presentation. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 is effective for fiscal years beginning after June 15, 1999. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it Is, the type of hedge transaction. For fair value hedge transactions in which the Partnership is hedging changes in an asset's, liability's, or firm commitment's fair value, changes in the fair value of the derivative instrument will generally be offset in the income statement by changes in the hedged item's fair value. For cash flow hedge transactions, in which the Partnership is hedging the variability of cash flows related to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income. The gains and losses on the derivative instrument that are reported in other comprehensive income will be reclassified as earnings in the periods in which earnings are affected by the variability of the cash flows of the hedged item. The Partnership is required to adopt this statement beginning in 2000. The Partnership has not yet determined the effect that the adoption of SFAS 133 will have on its financial position or results of operations. NOTE 2 -- ACQUISITIONS On May 12, 1999, Plains Scurlock Permian, L.P. ("Plains Scurlock"), a newly formed limited partnership of which Plains All American Inc. is general partner and Plains Marketing, L.P. is the limited partner, completed the acquisition of Scurlock Permian LLC and certain other pipeline assets from Marathon Ashland Petroleum LLC (the "Scurlock Acquisition"). Including working capital adjustments and associated closing and financing costs, the cash purchase price paid at closing was approximately $146 million. Page 6 of 17
Scurlock Permian LLC, a wholly owned subsidiary of Marathon Ashland Petroleum LLC, is engaged in crude oil transportation, trading and marketing, operating in 14 states with more than 2,400 miles of active pipelines, numerous storage terminals and a fleet of more than 225 trucks. Its largest asset is an 800-mile pipeline and gathering system located in the Spraberry Trend in West Texas that extends into Andrews, Glasscock, Martin, Midland, Regan and Upton Counties, Texas. The assets acquired also include approximately 2.4 million barrels of crude oil used for working inventory. Financing for the Scurlock Acquisition was provided through (i) Plains Scurlock's limited recourse bank facility with BankBoston, N.A. (the "Plains Scurlock Credit Facility"), (ii) the sale to the General Partner of 1.3 million Class B Common Units of the Partnership at $19.125 per unit, the price equal to the market value of the Partnership's common units and (ii) a $25 million draw under its existing revolving credit agreement. The Plains Scurlock Credit Facility consists of (i) a five year $130 million term loan and (ii) a three year $35 million revolving credit facility. The Plains Scurlock Credit Facility is nonrecourse to the Partnership, Plains Marketing, L.P. and All American Pipeline, L.P. and is secured by the assets acquired. Borrowings under the term loan bear interest at LIBOR plus 3% and under the revolving credit facility at LIBOR plus 2.75%. A commitment fee equal to one-half of one percent per year is charged on the unused portion of the revolving credit facility. The term loan matures in May 2004 and the revolving credit facility matures in May 2002. No principal payment is scheduled for amortization prior to maturity. In April 1999, the Partnership signed a definitive agreement to acquire a West Texas crude oil pipeline and gathering system from Chevron Pipe Line Company for approximately $40 million (the "Chevron Asset Acquisition"). Principal assets to be acquired include approximately 400 miles of crude oil transmission lines, associated gathering and lateral lines and three million barrels of crude oil storage and terminalling capacity in Crane, Ector, Midland, Upton, Ward and Winkler Counties, Texas. Closing of the transaction is subject to regulatory review and approval, consents from third parties, and customary due diligence. Subject to satisfaction of the foregoing conditions, the transaction is expected to close early in the third quarter of 1999. It is anticipated that the Chevron Asset Acquisition will be made by Plains Scurlock, with financing provided by the Plains Scurlock Credit Facility. Chevron will continue transporting crude oil through the pipeline under a contractual arrangement. The Partnership will also enter into a five-year contractual arrangement to sell up to 30,000 barrels of crude oil per day at market prices to another Chevron entity. Such arrangement may be extended by Chevron for up to five additional years. The system is currently moving an aggregate of approximately 98,000 barrels of crude oil per day under various gathering and transportation arrangements. On July 30, 1998, the Predecessor acquired all of the outstanding capital stock of the All American Pipeline Company, Celeron Gathering Corporation and Celeron Trading & Transportation Company (collectively the "Celeron Companies") from Wingfoot, a wholly owned subsidiary of Goodyear, for approximately $400 million, including transaction costs. The principal assets of the entities acquired include the All American Pipeline and the SJV Gathering System, as well as other assets related to such operations. The acquisition was accounted for utilizing the purchase method of accounting with the assets, liabilities and results of operations included in the combined financial statements of the Predecessor effective July 30, 1998. The following unaudited pro forma information is presented to show the Predecessor's pro forma revenues and net income had the acquisition been consummated on January 1, 1998. <TABLE> <CAPTION> Three Months Ended March 31, 1998 ------------------ (in thousands) <S> <C> Revenues $359,389 ======== Net income $ 6,565 ======== Basic and diluted net income per limited partner unit $ 0.38 ======== </TABLE> NOTE 3 -- OPERATING SEGMENTS The Partnership's operations consist of two operating segments: (1) Pipeline Operations engages in interstate and intrastate crude oil pipeline transportation and related gathering and marketing activities; (2) Marketing, Gathering, Terminalling and Storage Operations engages in crude oil terminalling, storage, gathering and marketing activities other than related to Pipeline Operations. Prior to the July 1998 acquisition of the All American Pipeline and SJV Gathering System, the Page 7 of 17
Predecessor had only marketing, gathering, terminalling and storage operations. The Partnership evaluates segment performance based on gross margin, gross profit and income before income taxes and extraordinary items. The following summarizes segment revenues, gross margin, gross profit and income before income taxes and extraordinary items. <TABLE> <CAPTION> Marketing, Gathering, Terminalling (In thousands) Pipeline & Storage Total - ------------------------------------------------------------------------------- <S> <C> <C> <C> THREE MONTHS ENDED MARCH 31, 1999 Revenues: External Customers $154,487 $301,273 $455,760 Intersegment (a) 15,305 55 15,360 Other 66 31 97 -------- -------- -------- Total revenues of reportable segments $169,858 $301,359 $471,217 ======== ======== ======== Segment gross margin (b) $ 12,019 $ 7,809 $ 19,828 Segment gross profit (c) $ 11,224 $ 6,426 $ 17,650 Income before income taxes and extraordinary items $ 5,474 $ 5,839 $ 11,313 - -------------------------------------------------------------------------------- </TABLE> (a) Intersegment sales were conducted on an arm's-length basis. (b) Gross margin is calculated as revenues less cost of sales and operations. (c) Gross profit is calculated as revenues less cost of sales and operations and general and administrative expenses. Page 8 of 17
MANAGEMENT'S DISCUSSION AND ANALYSIS GENERAL The Partnership is a limited partnership formed in the third quarter of 1998, to acquire and operate the midstream crude oil business and assets of Plains Resources Inc. ("Plains Resources") and its wholly owned subsidiaries (the "Plains Midstream Subsidiaries" or the "Predecessor"). The Partnership is engaged in interstate and intrastate crude oil pipeline transportation and crude oil terminalling and storage activities and gathering and marketing activities. The Partnership's operations are conducted primarily in California, Texas, Oklahoma, Louisiana and the Gulf of Mexico. The Partnership owns and operates a 1,233-mile seasonally heated, 30-inch, common carrier crude oil pipeline extending from California to West Texas (the "All American Pipeline") and a 45-mile, 16-inch, crude oil gathering system in the San Joaquin Valley of California (the "SJV Gathering System"), both of which the Predecessor purchased from Wingfoot Ventures Seven, Inc. ("Wingfoot"), a wholly owned subsidiary of The Goodyear Tire & Rubber Company ("Goodyear") in July 1998 for approximately $400 million (the "Acquisition"). Prior to the Acquisition, the Predecessor had only terminalling and storage and gathering and marketing activities. The Partnership also owns and operates a three million barrel, above-ground crude oil terminalling and storage facility in Cushing, Oklahoma, (the "Cushing Terminal"). RESULTS OF OPERATIONS The following table sets forth certain financial and operating information of the Partnership and the Predecessor for the periods presented (unaudited) (in thousands): <TABLE> <CAPTION> Three Months Ended March 31, ------------------------------------------------- 1999 1998 1998 ------------ ------------ ------------ (pro forma) (Predecessor) <S> <C> <C> <C> Operating Results: Revenues $455,760 $359,835 $167,461 ======== ======== ======== Gross margin: Pipeline $ 12,019 $ 17,758 $ - Terminalling and storage and gathering and marketing 7,809 4,450 4,004 --------- ------- -------- Total 19,828 22,208 4,004 General and administrative expense (2,178) (1,521) (986) --------- ------- -------- Gross profit $17,650 $20,687 $3,018 ======== ======== ======== Net Income $11,313 $14,881 $1,240 ======== ======== ======== Average Daily Volumes (barrels): Pipeline tariff activities 126 146 - Pipeline margin activities 47 50 - --------- ------- -------- Total 173 196 - ======== ======== ======== Lease gathering 121 106 81 Bulk purchases 94 95 95 Terminal throughput 75 66 66 </TABLE> Historical Results of Operations for the Three Months Ended March 31, 1999 (Partnership) and the Three Months Ended March 31, 1998 (Predecessor) On November 23, 1998, the Partnership completed the initial public offering ("IPO") and the transactions whereby the Partnership became the successor to the business of the Predecessor. The historical results of operations discussed below are derived from the historical financial statements of the Partnership for the three months ended March 31, 1999, and the combined financial statements of the Predecessor for the three months ended March 31, 1998. The results of operations of the Predecessor for the three months ended March 31, 1998, do not include the results of operations of the All American Pipeline and the SJV Gathering System which were acquired from Goodyear in July 1998. Page 9 of 17
Pro Forma Results of Operations for the Three Months Ended March 31, 1998 The pro forma results of operations discussed below are derived from the historical financial statements of Wingfoot (which reflect the historical operating results of the All American Pipeline and the SJV Gathering System) and the Predecessor. The pro forma results of operations reflect certain pro forma adjustments to the historical results of operations as if the Partnership had been formed and the acquisition of the All American Pipeline and the SJV Gathering System had taken place on January 1, 1998. The pro forma adjustments include: (i) pro forma depreciation and amortization expense based on the purchase price of the Wingfoot assets by the Predecessor; (ii) the elimination of interest expense on loans from Goodyear to Wingfoot as all such debt was extinguished in connection with the Acquisition, (iii) the reduction in compensation and benefits expense due to the termination of personnel in connection with the Acquisition; (iv) the elimination of interest expense of the Predecessor related to debt owed to Plains Resources as such debt was extinguished in connection with the IPO; (v) pro forma interest on debt assumed by the Partnership on the closing date of the IPO and (vi) the elimination of income tax expense as income taxes will be borne by the partners and not the Partnership. The pro forma adjustments do not include additional general and administrative expenses that the General Partner believes will be incurred by the Partnership as a result of its being a separate public entity. Three month periods ended March 31, 1999 and 1998 For the three months ended March 31, 1999, the Partnership reported net income of $11.3 million on total revenue of $455.8 million. This compares to pro forma net income of $14.9 million on total revenues of $359.8 million and Predecessor net income of $1.2 million on total revenues of $167.5 million for the 1998 first quarter. Pipeline Operations. Gross margin from pipeline activities was $12.0 million for the first quarter of 1999, compared to $17.8 million for the comparative period of 1998 on a pro forma basis. Tariff revenues were $13.1 million for the three months ended March 31, 1999, a 28% decline from the $17.4 million reported for the same period of 1998 on a pro forma basis. The decrease in tariff revenues resulted primarily from a 14% decrease in tariff transport volumes from 146,000 barrels per day for the three months ended March 31, 1998, to 126,000 barrels per day for the same period in 1999 due to a decline in average daily production from the Santa Ynez field and the Point Arguello field. Volumes related to margin activities decreased 6% to an average of approximately 47,000 barrels per day. The margin between revenue and direct cost of crude purchased decreased from $7.4 million for the three months ended March 31, 1998, to $5.0 million for the same period of 1999 as a result of a decline in margins between prices paid in California and prices received in West Texas. Operations and maintenance expenses were $3.0 million for the first quarter of 1999 compared to $3.5 million for the same period of 1998. As noted above, the Predecessor results for the first quarter of 1998 do not include the results of operations of the All American Pipeline and the SJV Gathering System which were acquired effective July 30, 1998. The following table sets forth the All American Pipeline average deliveries per day within and outside California. <TABLE> <CAPTION> Three Months Ended March 31, --------------------------------------------------------- 1999 1998 1998 ------------ ------------- -------------- (pro forma) (Predecessor) (in thousands) <S> <C> <C> <C> DELIVERIES: AVERAGE DAILY VOLUMES (BARRELS): Within California 112 122 - Outside California 61 74 - --- --- --- Total 173 196 - === === === </TABLE> Terminalling and Storage Activities and Gathering and Marketing Activities. Gross margin from terminalling and storage and gathering and marketing activities was $7.8 million for the quarter ended March 31, 1999, reflecting a 75% increase over the $4.5 million reported for the 1998 period on a pro forma basis and an approximate 95% increase over the $4.0 million reported by the Predecessor for the first quarter of 1998. Net of interest expense associated with contango inventory transactions, gross margin for the first quarter of 1999 was $7.6 million, representing an increase of approximately 78% over the 1998 first quarter pro forma amount, likewise net of contango interest. The increase in gross margin was primarily attributable to an increase in the volumes gathered and marketed in West Texas, Louisiana and the Gulf of Mexico and activities at the Cushing Terminal. Page 10 of 17
General and administrative expenses were $2.2 million for the three months ended March 31, 1999, compared to $1.5 million and $1.0 million for the first quarter of 1998 on a pro forma basis and for the Predecessor, respectively. The increase in 1999 as compared to the 1998 pro forma amount is due to expenses related to the operation of the Partnership as a public entity (approximately $300,000) and to increased personnel as a result of the continued expansion of the Partnership's terminalling and storage activities and gathering and marketing activities. These increases, in addition to G&A associated with the acquisition of the All American Pipeline and the SJV Gathering System account for the increase in G&A from 1998 first quarter Predecessor amount. Depreciation and amortization was $2.8 million for the three months ended March 31, 1999, and the three months ended March 31, 1998, on a pro forma basis. Depreciation and amortization was $0.3 million in the first quarter of 1998 for the Predecessor. The increase in depreciation and amortization from the Predecessor amount is due to the acquisition of the All American Pipeline and the SJV Gathering System in July 1998. In March 1999, the Partnership adopted a plan to reduce staff in its pipeline operations and to relocate certain functions. The Partnership incurred a charge to first quarter earnings of approximately $410,000 in connection with such plan. Such amount is reflected as other expense in the accompanying consolidated income statement for the quarter ended March 31, 1999. Interest expense was $3.2 million for the first quarter of 1999 and the first quarter of 1998 on a pro forma basis. The Predecessor reported interest expense of approximately $0.9 million for the first quarter of 1998. The increase in interest expense from the Predecessor level is due to interest associated with the debt incurred for the acquisition of the All American Pipeline and the SJV Gathering System. During the first quarter of 1999, the Partnership capitalized interest of approximately $63,000 related to the expansion of the Cushing Terminal. Interest expense related to contango market inventory transactions was $164,000 and $149,000 for the first quarter of 1999 and 1998 (pro forma and historical for the Predecessor), respectively. CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL CONDITION Acquisitions On May 12, 1999, Plains Scurlock Permian, L.P. ("Plains Scurlock"), a newly formed limited partnership of which Plains All American Inc. is general partner and Plains Marketing, L.P. is the limited partner, completed the acquisition of Scurlock Permian LLC and certain other pipeline assets from Marathon Ashland Petroleum LLC (the "Scurlock Acquisition"). Including working capital adjustments and associated closing and financing costs, the cash purchase price paid at closing was approximately $146 million. Scurlock Permian LLC, a wholly owned subsidiary of Marathon Ashland Petroleum LLC, is engaged in crude oil transportation, trading and marketing, operating in 14 states with more than 2,400 miles of active pipelines, numerous storage terminals and a fleet of more than 225 trucks. Its largest asset is an 800-mile pipeline and gathering system located in the Spraberry Trend in West Texas that extends into Andrews, Glasscock, Martin, Midland, Regan and Upton Counties, Texas. The assets acquired also include approximately 2.4 million barrels of crude oil used for working inventory. Financing for the Scurlock Acquisition was provided through (i) Plains Scurlock's limited recourse bank facility with BankBoston, N.A. (the "Plains Scurlock Credit Facility"), (ii) the sale to the General Partner of 1.3 million Class B Common Units of the Partnership at $19.125 per unit, the price equal to the market value of the Partnership's common units and (ii) a $25 million draw under its existing revolving credit agreement. The Plains Scurlock Credit Facility consists of (i) a five year $130 million term loan and (ii) a three year $35 million revolving credit facility. The Plains Scurlock Credit Facility is nonrecourse to the Partnership, Plains Marketing, L.P. and All American Pipeline, L.P. and is secured by the assets acquired. Borrowings under the term loan bear interest at LIBOR plus 3% and under the revolving credit facility at LIBOR plus 2.75%. A commitment fee equal to one-half of one percent per year is charged on the unused portion of the revolving credit facility. The term loan matures in May 2004 and the revolving credit facility matures in May 2002. No principal payment is scheduled for amortization prior to maturity. In April 1999, the Partnership signed a definitive agreement to acquire a West Texas crude oil pipeline and gathering system from Chevron Pipe Line Company for approximately $40 million (the "Chevron Asset Acquisition"). Principal assets to be acquired include approximately 400 miles of crude oil transmission lines, associated gathering and lateral lines and three million barrels of crude oil storage and terminalling capacity in Crane, Ector, Midland, Upton, Ward and Winkler Counties, Page 11 of 17
Texas. Closing of the transaction is subject to regulatory review and approval, consents from third parties, and customary due diligence. Subject to satisfaction of the foregoing conditions, the transaction is expected to close early in the third quarter of 1999. It is anticipated that the Chevron Asset Acquisition will be made by Plains Scurlock, with financing provided by the Plains Scurlock Credit Facility. Chevron will continue transporting crude oil through the pipeline under a contractual arrangement. The Partnership will also enter into a five-year contractual arrangement to sell up to 30,000 barrels of crude oil per day at market prices to another Chevron entity. Such arrangement may be extended by Chevron for up to five additional years. The system is currently moving an aggregate of approximately 98,000 barrels of crude oil per day under various gathering and transportation arrangements. Credit Agreements Concurrently with the closing of the IPO, the Partnership entered into a $225 million bank credit agreement (the "Bank Credit Agreement") that includes a $175 million term loan facility (the "Term Loan Facility") and a $50 million revolving credit facility (the "Revolving Credit Facility"). The Partnership may borrow up to $50 million under the Revolving Credit Facility for acquisitions, capital improvements, working capital and general business purposes. At March 31, 1999, the Partnership had $175 million outstanding under the Term Loan Facility, representing indebtedness assumed from the General Partner and $6 million outstanding under the Revolving Credit Facility. The Term Loan Facility matures in 2005, and no principal is scheduled for payment prior to maturity. The Term Loan Facility may be prepaid at any time without penalty. The Revolving Credit Facility expires in November 2000. The Partnership has a $175 million letter of credit and borrowing facility (the "Letter of Credit Facility"), the purpose of which is to provide (i) standby letters of credit to support the purchase and exchange of crude oil for resale and (ii) borrowings to finance crude oil inventory which has been hedged against future price risk or designated as working inventory. Aggregate availability under the Letter of Credit Facility for direct borrowings and letters of credit is limited to a borrowing base which is determined monthly based on certain current assets and current liabilities of the Partnership, primarily crude oil inventory and accounts receivable and accounts payable related to the purchase and sale of crude oil. At March 31, 1999, the borrowing base under the Letter of Credit Facility was $175 million. The Letter of Credit Facility has a $40 million sublimit for borrowings to finance crude oil purchased in connection with operations at the Partnership's crude oil terminal and storage facilities. At March 31, 1999, there were letters of credit of approximately $73 million and borrowings of $4.1 million outstanding under the Letter of Credit Facility. Partnership Distributions The Partnership will distribute 100% of its Available Cash within 45 days after the end of each quarter to Unitholders of record and to the General partner. Available Cash is generally defined as all cash and cash equivalents of the Partnership on hand at the end of each quarter less reserves established by the General partner for future requirements. Distributions of Available Cash to holders of Subordinated units are subject to the prior rights of holders of Common Units to receive the minimum quarterly distribution ("MQD") for each quarter during the Subordination Period (which will not end earlier than December 31, 2003) and to receive any arrearages in the distribution of the MQD on the Common Units for the prior quarters during the Subordination Period. The MQD is $0.45 per unit ($1.80 per unit on an annual basis). Upon expiration of the Subordination Period, all Subordinated Units will be converted on a one-for- one basis into Common Units and will participate pro rata with all other Common Units in future distributions of Available Cash. Under certain circumstances, up to 50% of the Subordinated Units may convert into Common Units prior to the expiration of the Subordination Period. Common Units will not accrue arrearages with respect to distributions for any quarter after the Subordination Period and Subordinated Units will not accrue any arrearages with respect to distributions for any quarter. If quarterly distributions of Available Cash exceed the MQD or the Target Distribution Levels (as defined), the General Partner will receive distributions which are generally equal to 15%, then 25% and then 50% of the distributions of Available Cash that exceed the MQD or Target Distribution Level. The Target Distribution Levels are based on the amounts of Available Cash from the Partnership's Operating Surplus (as defined) distributed with respect to a given quarter that exceed distributions made with respect to the MQD and Common Unit arrearages, if any. On February 12, 1999, the Partnership paid a cash distribution of $0.193 per unit on its outstanding Common Units and Subordinated Units. The $5.8 million distribution was paid to Unitholders of record at the close of business on January 29, 1999. A distribution of approximately $118,000 was paid to the General Partner. The distributions represented a partial quarterly distribution for the 39-day period from November 23, 1998, the closing of the IPO, through December 31, 1998. Page 12 of 17
On April 19, 1999, the Partnership declared a cash distribution of $0.45 per unit on its outstanding Common Units and Subordinated Units. This distribution is the first full quarterly distribution since the Partnership was formed. The distribution is payable on May 14, 1999, to holders of record of Common Units and Subordinated Units at the close of business on May 3, 1999. Investing and Financing Activities Net cash flows used in investing activities were $3.4 million and $0.1 million for the three months ended March 31, 1999 and 1998, respectively. Investing activities include payments for expansion capital of $2.6 million and maintenance capital of $0.2 million for the three months ended March 31, 1999. Approximately $2.4 million related to the expansion of the Cushing Terminal is included in 1999 payments. Payments for maintenance capital were $0.2 million for the three months ended March 31, 1998. Maintenance capital expenditures are capital expenditures made to replace partially or fully depreciated assets to maintain the existing operating capacity of existing assets or extend their useful lives. Capital expenditures made to expand capacity, whether through construction or acquisition, are not considered maintenance capital expenditures. Repair and maintenance expenditures associated with existing assets that do not extend the useful life or expand the operating capacity are charged to expense as incurred. Net cash flows used in financing activities were $5.7 million for the three months ended March 31, 1999. Net cash provided by financing activities amounted to $17.8 million for the three months ended March 31, 1998. Financing activities include approximately $4.3 million and $0.8 million in short-term borrowings for the three months ended March 31, 1999 and 1998, respectively, and approximately $9.9 million and $18 million of repayments for the respective periods, related to contango crude oil inventory transactions at the Cushing Terminal. Proceeds and repayments under the Revolving Credit Facility were $14.1 million and $8.1 million, respectively, for the three months ended March 31, 1999. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 is effective for fiscal years beginning after June 15, 1999. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it Is, the type of hedge transaction. For fair value hedge transactions in which the Partnership is hedging changes in an asset's, liability's, or firm commitment's fair value, changes in the fair value of the derivative instrument will generally be offset in the income statement by changes in the hedged item's fair value. For cash flow hedge transactions, in which the Partnership is hedging the variability of cash flows related to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income. The gains and losses on the derivative instrument that are reported in other comprehensive income will be reclassified as earnings in the periods in which earnings are affected by the variability of the cash flows of the hedged item. The Partnership is required to adopt this statement beginning in 2000. The Partnership has not yet determined the effect that the adoption of SFAS 133 will have on its financial position or results of operations. Year 2000 Year 2000 Issue. Some software applications, hardware and equipment and embedded chip systems identify dates using only the last two digits of the year. These products may be unable to distinguish between dates in the Year 2000 and dates in the year 1900. That inability (referred to as the "Year 2000" issue), if not addressed, could cause applications, equipment or systems to fail or provide incorrect information after December 31, 1999, or when using dates after December 31, 1999. This in turn could have an adverse effect on the Partnership, because the Partnership directly depends on its own applications, equipment and systems and indirectly depends on those of other entities with which the Partnership must interact. Compliance Program. In order to address the Year 2000 issues, the Partnership is participating in the Year 2000 project which Plains Resources has implemented for all of its business units. A project team has been established to coordinate the six phases of this Year 2000 project to assure that key automated systems and related processes will remain functional through Year 2000. Those phases include: (i) awareness, (ii) assessment, (iii) remediation, (iv) testing, (v) implementation of the necessary modifications and (vi) contingency planning. The key automated systems consist of (a) financial systems applications, (b) hardware and equipment, (c) embedded chip systems and (d) third-party developed software. The evaluation of the Year 2000 issue includes the evaluation of the Year 2000 exposure of third parties material to the operations of the Partnership or any of its business units. Plains Resources retained a Year 2000 consulting firm to review the operations of all Page 13 of 17
of its business units and to assess the impact of the Year 2000 issue on such operations. Such review has been completed and the consultant's recommendations are being utilized in the Year 2000 project. The Partnership's State of Readiness. The awareness phase of the Year 2000 project has begun with a company-wide awareness program which will continue to be updated throughout the life of the project. The portion of the assessment phase related to financial systems applications has been completed and the necessary modifications and conversions are underway. The portion of the assessment phase which will determine the nature and impact of the Year 2000 issue for hardware and equipment, embedded chip systems, and third-party developed software is substantially complete. The Partnership has retained a Year 2000 consulting firm which is currently identifying and evaluating field equipment which has embedded chip systems. The assessment phase of the project involves, among other things, efforts to obtain representations and assurances from third parties, including third party vendors, that their hardware and equipment, embedded chip systems, and software being used by or impacting the Partnership or any of its business units are or will be modified to be Year 2000 compliant. To date, the responses from such third parties are inconclusive. As a result, management cannot predict the potential consequences if these or other third parties are not Year 2000 compliant. The exposure associated with the Partnership's interaction with third parties is currently being evaluated. Management expects that the remediation, testing and implementation phases will be substantially completed within the third quarter of 1999. Contingency Planning. As part of the Year 2000 project, the Partnership will seek to determine which of its business activities may be vulnerable to a Year 2000 disruption. Appropriate contingency plans will then be developed for each "at risk" business activity to provide an alternative means of functioning which minimizes the effect of the potential Year 2000 disruption, both internally and on those with whom it does business. Such contingency plans are expected to be completed by the fourth quarter of 1999. Costs to Address Year 2000 Compliance Issues. Through March 31, 1999, the Partnership has borne approximately $320,000 as its share of expenses for the Year 2000 project. While the total cost to the Partnership of the Year 2000 project is still being evaluated, management currently estimates that the costs to be incurred in 1999 and 2000 associated with assessing, testing, modifying or replacing financial system applications, hardware and equipment, embedded chip systems and third party developed software is between $350,000 and $450,000. The Partnership expects to fund these expenditures with cash from operations or borrowings. Based upon these estimates, the Partnership does not expect the costs of its Year 2000 project to have a material adverse effect on its financial position, results of operation or cash flows. Risk of Non-Compliance. The major applications that pose the greatest Year 2000 risks for the Partnership if implementation of the Year 2000 compliance program is not successful are the Partnership's financial systems applications and the Partnership's SCADA computer systems and embedded chip systems in field equipment. The potential problems if the Year 2000 compliance program is not successful are disruptions of the Partnership's revenue gathering from and distribution to its customers and vendors and the inability to perform its other financial and accounting functions. Failures of embedded chip systems in field equipment of the Partnership or its customers could disrupt the Partnership's crude oil transportation, terminalling and storage activities and gathering and marketing activities. While the Partnership believes that its Year 2000 project will substantially reduce the risks associated with the Year 2000 issue, there can be no assurance that it will be successful in completing each and every aspect of the project on schedule, and if successful, the project will have the expected results. Due to the general uncertainty inherent in the Year 2000 issues, the Partnership cannot conclude that its failure or the failure of third parties to achieve Year 2000 compliance will not adversely affect its financial position, results of operations or cash flows. Quantitative and Qualitative Disclosures about Market Risks The Partnership is exposed to various market risks, including volatility in crude oil commodity prices and interest rates. To manage such exposure, the Partnership monitors its inventory levels, current economic conditions and its expectations of future commodity prices and interest rates when making decisions with respect to risk management. The Partnership does not enter into derivative transactions for speculative trading purposes. Substantially all the Partnership's derivative contracts are exchanged or traded with major financial institutions and the risk of credit loss is considered remote. Page 14 of 17
The fair value of outstanding derivative commodity instruments and the change in fair value that would be expected from a 10 percent adverse price change are shown in the table below: <TABLE> <CAPTION> Change in Fair Fair Value from 10% At March 31, 1999 Value Adverse Price Change - ----------------------- ----------------- ----------------------- (in millions) <S> <C> <C> Crude oil futures contracts $(2.6) $(4.9) </TABLE> At March 31, 1999, the Partnership's interest rate risk has not changed materially from that presented in the Partnership's 1998 Form 10-K. FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS All statements, other than statements of historical fact, included in this Report are forward-looking statements, including, but not limited to, statements identified by the words "anticipate," "believe," "estimate," "expect," "plan," "intend" and "forecast" and similar expressions and statements regarding the Partnership's business strategy, plans and objectives of management of the Partnership for future operations. Such statements reflect the current views of the Partnership and the General Partner with respect to future events, based on what they believe are reasonable assumptions. These statements, however, are subject to certain risks, uncertainties and assumptions, including, but not limited to (i) the availability of adequate supplies of and demand for crude oil in the areas in which the Partnership operates, (ii) the impact of crude oil price fluctuations, (iii) the effects of competition, (iv) the success of the Partnership's risk management activities, (v) the availability (or lack thereof) of acquisition or combination opportunities, (vi) the impact of current and future laws and governmental regulations, (vii) environmental liabilities that are not covered by an indemnity or insurance, (viii) general economic, market or business conditions and (ix) uncertainties inherent in the Year 2000 Issue. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, actual results may vary materially from those in the forward-looking statements. Except as required by applicable securities laws, the Partnership does not intend to update these forward-looking statements and information. Page 15 of 17
PART II. OTHER INFORMATION Item 1 - Legal Proceedings None Item 2 - Material Modification of Rights of Registrant's Securities None Item 3 - Defaults on Senior Securities None Item 4 - Submission of Matters to a Vote of Security Holders None Item 5 - Other Information None Item 6 Exhibits and Reports on Form 8-K A. Exhibits 3.7 Agreement of Limited Partnership of Plains Scurlock Permian, L.P. dated as of April 29, 1999. 10.17 Asset Sales Agreement between Chevron Pipe Line Company and Plains Marketing, L.P. dated April 16, 1999. 10.18 Credit Agreement dated as of May 12, 1999, between Plains Scurlock Permian, L.P., BankBoston, N.A. and certain financial institutions. 27. Financial Data Schedule B. Report on Form 8-K None Page 16 of 17
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned and thereunto duly authorized. PLAINS ALL AMERICAN PIPELINE, L.P.. By: PLAINS ALL AMERICAN INC., Its General Partner Date: May 14, 1999 By: /s/ Cynthia A. Feeback -------------------------------------- Cynthia A. Feeback, Treasurer (Principal Accounting Officer) of the General Partner Page 17 of 17