Exhibit 99.1
PLAINS AAP, L.P.
BALANCE SHEET
(in thousands)
(unaudited)
June 30,
2002
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ASSETS
Cash $ 8
Investment in Plains All American Pipeline, L.P. 51,341
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Total Assets $ 51,349
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LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Performance Options Obligation $ 847
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL
Limited Partners $ 50,150
General Partner 352
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Total Partners' Capital $ 50,502
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Total Liabilities and Partners' Capital $ 51,349
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See notes to the financial statement.
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Note 1 - Organization
Plains AAP, L. P. (the "Partnership") is a Delaware limited
partnership, which was formed on May 21, 2001, and, through a series of
transactions, was capitalized on June 8, 2001. Through these series of
transactions Plains Holdings Inc. (formerly known as Plains All American Inc.)
conveyed to the Partnership its general partner interest in Plains All American
Pipeline, L.P. ("PAA") and subsequently sold a portion of its interest in the
newly formed partnership to certain investors. The ownership interests in the
Partnership (collectively, the "Partners") at June 30, 2002, are comprised of a
1% general partner interest held by Plains All American GP LLC (the "General
Partner") and the following limited partner interests:
. Plains Holdings Inc. - 43.560%
. Sable Investments, L.P. - 19.800%
. KAFU Holdings, L.P. - 16.253%
. E-Holdings III, L.P. - 8.910%
. Mark E. Strome - 2.113%
. PAA Management L.P. - 3.960%
. Strome Hedgecap Fund, L.P. - 1.055%
. First Union Investors - 3.349%
As of June 30, 2002, the Partnership owns a 2% general partner interest
in PAA and an approximate 1% limited partner interest, consisting of 450,000
subordinated units (see Note 3). PAA was formed in September of 1998, and in the
fourth quarter of 1998 completed its initial public offering and the
transactions whereby it became the successor to the midstream crude oil business
and assets of Plains Resources Inc. and its midstream subsidiaries. PAA's
operations are concentrated in Texas, California, Oklahoma and Louisiana and in
the Canadian provinces of Alberta and Saskatchewan, and can be categorized into
two primary business activities:
. Pipeline Operations. PAA owns and operates gathering and mainline crude
oil pipelines located throughout the United States and Canada. Its
activities from pipeline operations generally consist of transporting
third-party volumes of crude oil for a fee, third party leases of
pipeline capacity, barrel exchanges and buy/sell arrangements. PAA also
utilizes their pipelines in their merchant activities conducted under
their gathering and marketing business.
. Gathering, Marketing, Terminalling and Storage Operations. In
connection with its terminalling and storage activities, PAA owns and
operates aboveground crude oil terminalling and storage facilities,
including the terminalling and storage facility at Cushing, Oklahoma.
PAA's terminalling and storage operations generate revenue through a
combination of storage and throughput charges to third parties. PAA
also utilizes its storage tanks to counter-cyclically balance its
gathering and marketing operations and to execute different hedging
strategies to stabilize profits and reduce the negative impact of crude
oil market volatility. Its gathering and marketing operations include:
the purchase of crude oil at the wellhead, and the bulk purchase of
crude oil at pipeline and terminal facilities; the transportation of
crude oil on trucks, barges or pipelines; the subsequent resale or
exchange of crude oil at various points along the crude oil
distribution chain; and, the purchase of liquefied petroleum gas
("LPG") from producers, refiners and other marketers, and sale of LPG
to end users and retailers.
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Note 2 -Investment in PAA
The Partnership's investment in PAA at June 30, 2002, is $51.3 million.
The summarized financial information of PAA at June 30, 2002, is presented below
(in thousands):
Current assets $587,115
Non - current assets $750,889
Current liabilities $553,692
Long-term debt and other long-term liabilities $386,376
Partners' capital $397,936
At the date of inception, the Partnership's investment in PAA exceeded
its share of the underlying equity in the net assets of PAA by $44.5 million.
This excess is related to the fair value of PAA's crude oil pipeline and other
assets and is amortized on a straight-line basis over their estimated useful
life of 30 years.
Note 3 - Contribution of Subordinated Units
On June 8, 2001, certain of our limited partners contributed to the
Partnership an aggregate of 450,000 subordinated units of PAA. These
subordinated units are intended for use in connection with an option plan (see
Note 5) pursuant to which certain members of the management of our general
partner will, subject to the satisfaction of vesting criteria, have a right to
purchase a portion of such subordinated units. Until the exercise of such
options, we will continue to own and receive any distributions paid by PAA with
respect to such subordinated units. Any distributions we make as a result of the
receipt of distributions on the subordinated units will be paid to our limited
partners in proportion to the original contribution of such subordinated units.
Note 4 - Partners' Capital
The Partnership distributes all of its available cash, less reserves
established by management, on a quarterly basis. Except as described in Note 3,
distributions are paid to the partners in proportion to their percentage
interest in the Partnership.
The General Partner manages the business and affairs of the
Partnership. Except for situations in which the approval of the limited partners
is expressly required by the Partnership agreement, or by nonwaivable provisions
of applicable law, the General Partner has full and complete authority, power
and discretion to manage and control the business, affairs and property of the
Partnership, to make all decisions regarding those matters and to perform any
and all other acts or activities customary or incident to the management of the
Partnership's business, including the execution of contracts and management of
litigation. The General Partner employs all officers and personnel involved in
the operation and management of PAA and its subsidiaries. PAA reimburses the
General Partner for all expenses, including compensation expenses, related to
such operation and management. The Partnership has no commitment or intent to
fund cash flow deficits or furnish other financial assistance to PAA.
Note 5 - Performance Option Plan
In June 2001, the Performance Option Plan (the "Plan") was approved by
the General Partner to grant options to purchase up to 450,000 subordinated
units of PAA (See Note 3) to employees of the General Partner. As of June 30,
2002, options to purchase 365,000 units have been granted under the Plan. The
options have been granted with a per unit exercise price of $22, less 80% of any
per unit distribution on a subordinated unit from the date of grant until the
date of exercise. As of June 30, 2002, the exercise price has been reduced to
$20.36 for distributions made since the date of grant.
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The options have a ten-year term and vest in 25% increments upon PAA
achieving quarterly distribution levels as follows:
Quarterly Annual
Distribution Distribution
Vesting % Level Level
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25% $ 0.525 $ 2.10
50% $ 0.575 $ 2.30
75% $ 0.625 $ 2.50
100% $ 0.675 $ 2.70
The Partnership accounts for these options in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 requires that companies use a fair value based
method to account for equity instruments issued to non-employees. These
options are considered performance awards and are accounted for at fair value
upon vesting and revalued at each financial statement date. As of the date of
declaration of the first quarter 2002 distribution (April 22, 2002) PAA attained
the distribution level necessary for 25% of the options to vest. This resulted
in a reduction of the Partners' capital accounts and corresponding increase in
performance option obligation of $0.8 million. The following fair values for the
options were calculated using the "Black-Scholes Model" based upon the indicated
assumptions:
Assumptions
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Expected
Options Percent Options Interest Expected Expected Dividend Fair
Grant Date Granted Vested Vested Rate Life Volatility Yield (1) Value
- ---------- ------- ------- ------- -------- -------- ---------- ---------- -----
June 7, 2001 350,000 25% 87,500 4.09% 4.9 30.50% 2.02% $ 9.26
May 8, 2002 15,000 25% 3,750 4.52% 5.9 30.50% 2.02% $ 9.85
(1) Reflects 20% of anticipated dividend yield. The adjustment is to provide for
the reduction in the exercise price of the options equal to 80% of
distributions.
Note 6 - Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities."
SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred rather than at
the date of the exit plan. This Statement is effective for exit or disposal
activities that are initiated after December 31, 2002. SFAS No. 146 will only
impact the Partnership to the extent PAA is affected. Therefore, we do not
believe that the adoption of this rule will have a material effect on either our
financial position, results of operations, or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds, updates, clarifies and simplifies existing
accounting pronouncements. Among other things, SFAS No. 145 rescinds SFAS No. 4,
which required all gains and losses from extinguishment of debt to be aggregated
and, if material, classified as an extraordinary item, net of related income tax
effect. Under SFAS No. 145, the criteria in Accounting Principles Board No. 30
will now be used to classify those gains and losses. The adoption of this and
the remaining provisions of SFAS No. 145 did not have a material effect on our
financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143 "Asset Retirement
Obligations." SFAS No. 143 establishes accounting requirements for retirement
obligations associated with tangible long-lived assets, including (1) the time
of the liability recognition, (2) initial measurement of the liability, (3)
allocation of asset retirement cost to expense, (4) subsequent measurement of
the liability and (5) financial statement disclosures. SFAS No. 143 requires
that an asset retirement cost should be capitalized as part of the cost of the
related long-lived asset and subsequently allocated to expense using a
systematic and rational method. We will adopt the statement effective January 1,
2003, as required. The transition adjustment resulting from the adoption of SFAS
No. 143 will be reported as a cumulative effect of a change in
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accounting principle. SFAS No. 143 will impact the Partnership to the extent PAA
is effected. PAA is in the process of evaluating the impact of adoption, but at
this time, we cannot reasonably estimate the effect of the adoption of this
statement on either our financial position, results of operations or cash flows.
Note 7 - Subsequent Events
During August 2002, PAA completed the issuance and sale of 6,325,000
Common Units at a public offering price of $23.50 per unit. In conjunction with
that offering, the Partnership received additional investments from the Partners
and made a contribution to PAA totaling approximately $3.0 million.
In addition, subsequent to June 30, 2002, PAA declared cash
distributions to the Partnership of $1.4 million and $1.6 million for the second
and third quarter of 2002, respectively. The second quarter distribution, which
was declared on July 23, 2002, was received on August 14, 2002. The third
quarter distribution, which was declared on October 24, 2002, is to be paid by
PAA on November 14, 2002.
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