UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
OR
[ ] 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 1-31219
SUNOCO LOGISTICS PARTNERS L.P.
(Exact name of registrant as specified in its charter)
Delaware 23-3096839
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Ten Penn Center
1801 Market Street
Philadelphia, PA 19103-1699
(Address of principal executive offices) (Zip-Code)
(215) 977-3000
(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 No X
--- ---
The number of the registrant's Common Units held by non-affiliates and
outstanding at April 30, 2002 was 5,706,800.
SUNOCO LOGISTICS PARTNERS L.P.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets at March 31, 2002
and December 31, 2001 .......................................... 2
Condensed Statements of Income for the Three
Months Ended March 31, 2002 and 2001 ........................... 3
Condensed Statements of Cash Flows for the Three
Months Ended March 31, 2002 and 2001 ........................... 4
Condensed Statement of Partners' Capital/Net Parent
Investment for the Three Months Ended March 31, 2002 ........... 5
Notes to Condensed Financial Statements ........................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 14
Item 3. Quantitative and Qualitative Disclosures
about Market Risk .............................................. 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 20
Item 2. Changes in Securities and Uses of Proceeds ..................... 20
Item 3. Defaults Upon Senior Securities ................................ 21
Item 4. Submission of Matters to a Vote of Security Holders ............ 21
Item 5. Other Information .............................................. 21
Item 6. Exhibits and Reports on Form 8-K ............................... 21
SIGNATURE .................................................................. 22
1
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
SUNOCO LOGISTICS PARTNERS L.P.
CONDENSED BALANCE SHEETS
(UNAUDITED)
(in thousands)
March 31, December 31,
2002 2001
-------------------------------------
Assets
Current Assets
Cash and cash equivalents ................................. $ 42,589 $ --
Accounts receivable, affiliated companies ................. 89,424 6,245
Accounts receivable, net .................................. 172,273 151,264
Note receivable from affiliate ............................ -- 20,000
Inventories:
Crude oil ............................................... 30,547 19,367
Materials, supplies and other ........................... 1,239 1,239
Deferred income taxes ..................................... -- 2,821
------------------------------------
Total Current Assets ................................... 336,072 200,936
Properties, plants and equipment .......................... 936,890 937,305
Less accumulated depreciation and amortization ............ 374,271 370,946
------------------------------------
Properties, plants and equipment, net ..................... 562,619 566,359
Deferred charges and other assets ......................... 28,621 21,906
------------------------------------
Total Assets ........................................... $ 927,312 $ 789,201
====================================
Liabilities and Partners' Capital/Net Parent Investment
Current Liabilities
Accounts payable .......................................... $ 258,996 $ 235,061
Accrued liabilities ....................................... 9,698 26,628
Advances from affiliate ................................... 29,301 --
Current portion of long-term debt due affiliate ........... -- 75,000
Current portion of long-term debt ......................... 233 228
Taxes payable ............................................. 7,113 20,373
------------------------------------
Total Current Liabilities .............................. 305,341 357,290
Long-term debt due affiliate .............................. -- 65,000
Long-term debt ............................................ 252,829 4,553
Deferred income taxes ..................................... -- 78,140
Other deferred credits and liabilities .................... 920 9,325
Commitments and contingent liabilities
Partners' Capital ......................................... 368,222 --
Net Parent Investment ..................................... -- 274,893
------------------------------------
Total Liabilities and Partners' Capital/Net Parent
Investment ............................................. $ 927,312 $ 789,201
====================================
(See Accompanying Notes)
2
SUNOCO LOGISTICS PARTNERS L.P.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except units and per unit amounts)
Three Months Ended
March 31,
----------------------------------
2002 2001
--------------- ---------------
Revenues
Sales and other operating revenue:
Affiliates ............................................... $ 237,468 $ 290,538
Unaffiliated customers ................................... 107,272 123,866
Other income ................................................ 1,748 1,303
----------------------------------
Total Revenues ........................................... 346,488 415,707
Costs and Expenses
Cost of products sold and operating expenses ................ 313,067 387,936
Depreciation and amortization ............................... 6,239 5,705
Selling, general and administrative expenses ................ 9,737 8,429
----------------------------------
Total Costs and Expenses ................................. 329,043 402,070
----------------------------------
Operating Income ............................................ 17,445 13,637
Net interest cost paid to affiliates ........................ 717 2,780
Other interest cost and debt expense ........................ 2,605 99
Capitalized interest ........................................ (300) (455)
----------------------------------
Income before income tax expense ............................ 14,423 11,213
Income tax expense .......................................... 1,555 4,224
----------------------------------
Net income .................................................. $ 12,868 $ 6,989
==================================
Allocation of First Quarter 2002 Net Income
Portion applicable to January 1 through
February 7, 2002 (period prior to initial public
offering) ................................................ $ 3,421
Portion applicable to February 8 through
March 31, 2002 ........................................... 9,447
-----------
Net income ................................................ $ 12,868
===========
Calculation of Limited Partners' Interest for the period
February 8, 2002 through March 31, 2002
Net Income ................................................ $ 9,447
Less: General Partner's Interest .......................... 189
-----------
Limited Partners' Interest in Net Income .................. $ 9,258
===========
Net income per Unit for the period February 8, 2002
through March 31, 2002 ..................................... $ 0.41
===========
Weighted Average Units Outstanding .......................... 22,767,278
===========
(See Accompanying Notes)
3
SUNOCO LOGISTICS PARTNERS L.P.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Three Months Ended
March 31,
--------------------------------------------
2002 2001
--------------------- -------------------
Increases (Decreases) in Cash and Cash Equivalents
Cash Flows from Operating Activities:
Net Income .................................................................. $ 12,868 $ 6,989
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization .......................................... 6,239 5,705
Deferred income tax expense ............................................ 675 8,171
Changes in working capital pertaining to
operating activities:
Accounts receivable, affiliated companies .......................... (83,179) 539
Accounts receivable ................................................ (24,811) 25,428
Inventories ........................................................ (18,169) (8,385)
Accounts payable and accrued liabilities ........................... 17,719 (35,688)
Taxes payable ...................................................... 812 (3,547)
Other .................................................................. (3,978) 2,453
---------------------------------------------
Net cash provided by (used in) operating activities ........................... (91,824) 1,665
---------------------------------------------
Cash Flows from Investing Activities:
Capital expenditures ........................................................ (3,387) (11,571)
Collection of note receivable from affiliate ................................ 20,000 --
Other ....................................................................... -- 853
---------------------------------------------
Net cash provided by (used in) investing activities ........................... 16,613 (10,718)
---------------------------------------------
Cash Flows from Financing Activities:
Advances from affiliate ..................................................... 29,301 --
Net repayments of short-term borrowings due
affiliate .................................................................. -- (45,000)
Repayments of long-term debt due affiliate .................................. (50,000) --
Net proceeds from issuance of long-term debt ................................ 245,573 --
Contributions from Sunoco ................................................... 40,217 54,115
Special distribution to Sunoco .............................................. (245,573) --
Net proceeds from issuance of common units to the public .................... 98,314 --
Other ....................................................................... (32) (62)
---------------------------------------------
Net cash provided by financing activities ..................................... 117,800 9,053
---------------------------------------------
Net increase in cash and cash equivalents ..................................... 42,589 --
Cash and cash equivalents at beginning of period .............................. -- --
---------------------------------------------
Cash and cash equivalents at end of period .................................... $ 42,589 $ --
=============================================
(See Accompanying Notes)
4
SUNOCO LOGISTICS PARTNERS L.P.
CONDENSED STATEMENT OF PARTNERS' CAPITAL/NET PARENT INVESTMENT
(UNAUDITED)
(in thousands, except unit amounts)
Total
PARTNERS' CAPITAL Partners'
------------------------------------------------------------------- Capital/
Net Parent General Net Parent
Investment Limited Partners Partner Investment
-------------- ------------------------------------------------------- ---------- ------------
Common Subordinated
---------------------------- -------------------------
$ units $ units $ $ $
-------------- --------------- ---------- --------------- -------- ---------- ------------
Balance at January 1,
2002 ..................... $ 274,893 -- $ -- -- $ -- $ -- $ 274,893
Net income
applicable to the
period from January 1
through February 7,
2002 ..................... 3,421 3,421
Contribution from
Sunoco ................... 40,217 40,217
Adjustment to
reflect net liabilities not
contributed by
Sunoco to the
Partnership .............. 187,503 187,503
Special distribution
to Sunoco ................ (245,573) (245,573)
-------------- --------------- ---------- --------------- -------- ---------- ------------
Net assets contributed
by Sunoco ................ 260,461 -- -- -- -- -- 260,461
Allocation of net
assets contributed by
Sunoco ................... (260,461) 5,633,639 84,502 11,383,639 170,750 5,209 --
Issuance of units to
the public ............... 5,750,000 98,314 -- -- -- 98,314
Net income
applicable to the
period from February 8
through March 31,
2002 ..................... 4,629 4,629 189 9,447
-------------- --------------- ---------- --------------- -------- ---------- ------------
Balance at March 31,
2002 ..................... $ -- 11,383,639 $187,445 11,383,639 $175,379 $5,398 $ 368,222
============== =============== ========== =============== ======== ========== ============
(See Accompanying Notes)
5
SUNOCO LOGISTICS PARTNERS L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
Sunoco Logistics Partners L.P. (the "Partnership") is a Delaware limited
partnership formed by Sunoco, Inc. in October 2001 to acquire, own, and operate
a substantial portion of Sunoco, Inc.'s logistics business, consisting of
refined product pipelines, terminalling and storage assets, crude oil pipelines,
and crude oil acquisition and marketing assets located in the Northeast, Midwest
and Southwest United States (collectively, "Sunoco Logistics (Predecessor)" or
the "Predecessor").
The accompanying condensed financial statements are presented in accordance
with the requirements of Form 10-Q and accounting principles generally accepted
in the United States for interim financial reporting. They do not include all
disclosures normally made in financial statements contained in Form 10-K. In
management's opinion, all adjustments necessary for a fair presentation of the
results of operations, financial position and cash flows for the periods shown
have been made. All such adjustments are of a normal recurring nature. Results
for the three months ended March 31, 2002 are not necessarily indicative of
results for the full year 2002.
The financial statements of Sunoco Logistics Partners L.P. reflect historical
cost-basis accounts of the Predecessor for periods prior to February 8, 2002,
the closing date of the Partnership's initial public offering (the "IPO") (see
Note 2) and include charges from Sunoco, Inc. and its subsidiaries
(collectively, "Sunoco") for direct costs and allocations of indirect corporate
overhead. Management of the Partnership believes that the allocation methods are
reasonable, and that the allocations are representative of the costs that would
have been incurred on a stand-alone basis. Beginning on February 8, 2002, the
condensed financial statements reflect the financial statements of the
Partnership and its subsidiaries.
2. The Initial Public Offering
On February 8, 2002, Sunoco, Inc., through its subsidiary, Sunoco Partners
LLC, the general partner of the Partnership, contributed the Predecessor to the
Partnership in exchange for: (i) its 2% general partner interest in the
Partnership; (ii) incentive distribution rights (as defined in the Partnership
Agreement); (iii) 5,633,639 common units; (iv) 11,383,639 subordinated units;
and (v) a special interest representing the right to receive from the
Partnership on the closing of the IPO the net proceeds from the issuance of $250
million of ten-year Senior Notes by Sunoco Logistics Partners Operations L.P.
(the "Operating Partnership") which totalled $245.6 million. The Partnership
concurrently issued 5.75 million common units (including 750,000 units issued
pursuant to the underwriters' over-allotment option), representing a 24.8%
limited partnership interest in the Partnership, in an IPO at a price of $20.25
per unit. Proceeds from the IPO, which totalled $98.3 million net of
underwriting discounts and offering expenses, were used by the Partnership to
establish working capital that was not contributed to the Partnership by Sunoco.
6
3. Related Party Transactions
Accounts Receivable, Affiliated Companies
Prior to the IPO, substantially all of the related party transactions
discussed below were settled immediately through the net parent investment
account. Subsequent to the IPO, normal trade terms apply to transactions with
Sunoco as contained in various agreements discussed below which were entered
into concurrent with the IPO.
Affiliated revenues in the condensed statements of income consist of sales
of crude oil as well as the provision of crude oil and refined product pipeline
transportation, terminalling and storage services to Sunoco. Sales of crude oil
are computed using the formula-based pricing mechanism of a supply agreement
with Sunoco. Management of the Partnership believes these terms to be comparable
to those that could be negotiated with an unrelated third party. Pipeline
revenues are generally determined using posted third-party tariffs. Prior to
January 1, 2002, revenues from terminalling and storage were generally equal to
all of the costs incurred for these activities, including operating, maintenance
and environmental remediation expenditures. Concurrent with the closing of the
IPO, the Partnership entered into a pipelines and terminals storage and
throughput agreement with Sunoco, under which the Partnership is charging Sunoco
fees for services provided under these agreements comparable to those charged in
arm's-length, third-party transactions. Under the pipelines and terminals
storage and throughput agreement, Sunoco has agreed to pay the Partnership a
minimum level of revenues for transporting and terminalling refined products.
Sunoco also has agreed to minimum throughputs of refined products and crude oil
in the Partnership's Inkster Terminal, Fort Mifflin Terminal Complex, Marcus
Hook Tank Farm and certain crude oil pipelines. Effective January 1, 2002, fee
arrangements consistent with this contract were used as the basis for the
transfer prices to be used in preparation of Sunoco's segment information.
Accordingly, such fees are reflected in the condensed financial statements
beginning on January 1, 2002. Sunoco also leases from the Partnership the 58
miles of interrefinery pipelines between Sunoco's Philadelphia and Marcus Hook
refineries for a term of 20 years.
Under an omnibus agreement with Sunoco that the Partnership entered into at
the closing of the IPO, Sunoco is continuing to provide centralized corporate
functions such as legal, accounting, treasury, engineering, information
technology, insurance and other corporate services for three years for an annual
administrative fee initially in the amount of $8.0 million, which may be
increased in the second and third years following the IPO by the lesser of 2.5%
or the consumer price index for the applicable year. These costs, which are
reflected in selling, general and administrative expenses, may also increase if
the Partnership makes an acquisition or constructs additional assets that
require an increase in the level of general and administrative services received
by the Partnership from the general partner or Sunoco. This fee does not include
salaries of pipeline and terminal personnel or other employees of the general
partner, including senior executives, or the cost of their employee benefits,
such as 401(k), pension, and health insurance benefits. The Partnership is also
reimbursing Sunoco for these costs and other direct expenses incurred on the
Partnership's behalf.
7
Allocated Sunoco employee benefit plan expenses for employees who wok in
the pipeline, terminalling, storage and crude oil gathering operations,
including senior executives, (e.g. non-contributory defined benefit retirement
plans, defined contribution 401(k) plans, employee and retiree medical, dental
and life insurance plans, incentive compensation plans, and other such benefits)
are reflected primarily in cost of products sold and operating expenses in the
condensed statements of income. In connection with the transfer of the
Predecessor's operations to the Partnership, these employees, including senior
executives, became employees of the Partnership's general partner or its
affiliates, wholly owned subsidiaries of Sunoco, Inc. The Partnership has no
employees.
Note Receivable from Affiliate
Effective October 1, 2000, the Predecessor loaned $20.0 million to Sunoco.
The loan, which was evidenced by a note that was collected on January 1, 2002,
earned interest at a rate based on the short-term applicable federal rate
established by the Internal Revenue Service.
Advances from Affiliate
The Partnership entered into a treasury services agreement with Sunoco at
the closing of the IPO pursuant to which it, among other things, participates in
Sunoco's centralized cash management program. Under this program, all of the
Partnership's cash receipts and cash disbursements are processed, together with
those of Sunoco and its other subsidiaries, through Sunoco's cash accounts with
a corresponding credit or charge to an intercompany account. The intercompany
balances are settled periodically, but no less frequently than at the end of
each month. Amounts due from Sunoco earn interest at a rate equal to the average
rate of the Partnership's third-party money market investments, while amounts
due to Sunoco bear interest at a rate equal to the interest rate provided in the
Partnership's revolving credit facility.
Short-Term Borrowings due Affiliate
At December 31, 2000, the Predecessor had two short-term notes totaling
$45.0 million due Sunoco, which were repaid during 2001. The notes bore interest
at a rate based on the short-term applicable federal rate established by the
Internal Revenue Service.
Long-Term Debt due Affiliate
At December 31, 2001, the Predecessor had four variable-rate notes totaling
$140.0 million due to Sunoco. The notes bore interest at a rate based on the
short-term applicable federal rate established by the Internal Revenue Service.
The Predecessor repaid $50.0 million of this debt prior to the IPO. The
remaining debt was not assumed by the Partnership.
8
4. Long-Term Debt
The components of long-term debt (including current portion) were as
follows (in thousands of dollars):
March 31, December 31,
2002 2001
---------------- ----------------
Senior Notes ................................... $ 250,000 $ --
Less unamortized bond discount ................. 1,660
----------------
248,340
Other (including current portion) .............. 4,722 4,781
---------------- ----------------
$ 253,062 $ 4,781
================ ================
In conjunction with the IPO, Sunoco Logistics Partners Operations L.P.
issued $250.0 million of ten-year, 7.25% Senior Notes (the "Senior Notes") at
99.325% of the principal amount and established a three-year $150.0 million
revolving credit facility (the "Credit Facility"). The Senior Notes are
redeemable, at a make-whole premium, and are not subject to sinking fund
provisions. The Senior Notes contain various covenants limiting the
Partnership's ability to incur certain liens, engage in sale/leaseback
transactions, or merge, consolidate or sell substantially all of its assets. In
addition, the Senior Notes are also subject to repurchase by the Partnership at
a price equal to 100% of their principal amount, plus accrued and unpaid
interest upon a change of control to a non-investment grade entity. The
Operating Partnership distributed the net proceeds of $245.6 million after
offering commissions and issuance expenses from the sale of the outstanding
Senior Notes to the Partnership for distribution to Sunoco.
The $150.0 million Credit Facility matures on January 31, 2005, and is
available to fund the Operating Partnership's working capital requirements, to
finance future acquisitions, and for general partnership purposes. It may also
be used to fund the minimum quarterly distribution to a maximum of $20.0
million. Borrowings under this distribution sublimit must be reduced to zero
each year for a 15-day period. The Credit Facility will bear interest at the
Operating Partnership's option, at either (i) LIBOR plus an applicable margin or
(ii) the higher of the federal funds rate plus 0.50% or the Bank of America
prime rate (each plus the applicable margin). The Credit Facility may be prepaid
at any time. The Credit Facility contains various covenants limiting the
Operating Partnership's ability to incur indebtedness; grant certain liens; make
certain loans, acquisitions and investments; make any material change to the
nature of its business; acquire another company; or enter into a merger or sale
of assets, including the sale or transfer of interest in the Operating
Partnership's subsidiaries. The Credit Facility also
9
contains covenants requiring the Operating Partnership to maintain on a
rolling-four-quarter basis a ratio of total debt to EBITDA (each as defined in
the credit agreement) up to 4:1 ; and an interest coverage ratio (as defined in
the credit agreement) of at least 3.5:1. There were no borrowings against the
Credit Facility as of March 31, 2002.
The Partnership and the operating subsidiaries of the Operating Partnership
serve as joint and several guarantors of the Senior Notes and of any obligations
under the Credit Facility. The guarantees are full and unconditional.
The Partnership has no operations and its only assets are its investments
in its wholly owned partnerships and subsidiaries. The Operating Partnership
also has no operations and its assets are limited to its investments in its
wholly owned operating subsidiaries, cash and cash equivalents of $42.6 million,
and advances from an affiliate of $29.3 million. Except for amounts associated
with the Senior Notes, the cash and cash equivalents and advances from an
affiliate, the assets and liabilities in the condensed pro forma balance sheet
at March 31, 2002 and the revenues and costs and expenses in the condensed
statement of income for the quarter then ended are attributable to the operating
subsidiaries.
5. Net Parent Investment
The Predecessor's net parent investment account represented a net balance
resulting from the settlement of intercompany transactions (including federal
income taxes) between the Predecessor and Sunoco as well as Sunoco's ownership
interest in the net assets of the Predecessor. It also reflects the
Predecessor's participation in Sunoco's central cash management program, wherein
all of the Predecessor's cash receipts were remitted to Sunoco and all cash
disbursements were funded by Sunoco. There were no terms of settlement or
interest charges attributable to this balance. The Predecessor's net parent
investment account excludes amounts loaned to/borrowed from Sunoco evidenced by
interest-bearing notes.
In connection with the contribution of the Predecessor to the Partnership
on February 8, 2002, Sunoco retained certain assets and liabilities. The
following table summarizes the carrying amount of the assets and liabilities
which were not contributed by Sunoco (in thousands of dollars):
Accounts receivable $ 3,802
Inventories 6,989
Deferred income taxes 2,821
Properties, plants and equipment, net 822
---------
14,434
---------
Accrued liabilities 10,714
Taxes payable 14,072
Long-term debt due affiliate 90,000
Deferred income taxes 78,815
Other deferred credits and liabilities 8,336
---------
201,937
---------
Net liabilities retained by Sunoco $ 187,503
=========
10
6. Commitments and Contingent Liabilities
The Partnership is subject to numerous federal, state and local laws which
regulate the discharge of materials into the environment or that otherwise
relate to the protection of the environment. These laws result in liabilities
and loss contingencies for remediation at the Partnership's facilities and at
third-party or formerly owned sites.
Total future costs for environmental remediation activities will depend
upon, among other things, the identification of new sites, the determination of
the extent of the contamination at each site, the timing and nature of required
remedial actions, the technology available and needed to meet the various
existing legal requirements, the nature and extent of future environmental laws,
inflation rates and the determination of the Partnership's liability at
multi-party sites, if any, in light of uncertainties with respect to joint and
several liability, and the number, participation levels and financial viability
of other parties. As discussed below, the Partnership's future costs will also
be impacted by an indemnification from Sunoco.
The Partnership is a party to certain pending and threatened claims.
Although the ultimate outcome of these claims cannot be ascertained at this
time, it is reasonably possible that some portion of them could be resolved
unfavorably to the Partnership. Management of the Partnership does not believe
that any liabilities which may arise from such claims and the environmental
matters discussed above would be material in relation to the financial position
of the Partnership at March 31, 2002. Furthermore, management of the Partnership
does not believe that the overall costs for such matters will have a material
impact, over an extended period of time, on the Partnership's operations, cash
flows or liquidity.
Sunoco has indemnified the Partnership for 30 years for environmental and
toxic tort liabilities related to the assets contributed to the Partnership that
arise from the operation of such assets prior to the closing of the IPO. Sunoco
has indemnified the Partnership for 100% of all losses asserted within the
first 21 years of closing. Sunoco's share of liability for claims asserted
thereafter will decrease by 10% a year. For example, for a claim asserted during
the twenty-third year after closing, Sunoco would be required to indemnify the
Partnership for 80% of its loss. There is no monetary cap on the amount of
indemnity coverage provided by Sunoco. The Partnership has agreed to indemnify
Sunoco and its affiliates for events and conditions associated with the
operation of the Partnership's assets that occur on or after the closing of the
IPO and for environmental and toxic tort liabilities to the extent Sunoco is not
required to indemnify the Partnership.
Sunoco also has indemnified the Partnership for liabilities other than
environmental and toxic tort liabilities related to the assets contributed to
the Partnership, that arise out of Sunoco and its affiliates' ownership and
operation of the assets prior to the closing of the IPO and that are asserted
within 10 years after closing.
11
7. Business Segment Information
The following table sets forth certain income statement information concerning
the Partnership's business segments and reconciles total segment operating
income to net income for the three-month periods ended March 31, 2002 and 2001
(in thousands of dollars):
Three Months Ended
March 31,
-------------------
2002 2001
-------- --------
Segment Operating Income
Eastern Pipeline System:
Sales and other operating revenue:
Affiliates .............................................. $ 17,315 $ 17,056
Unaffiliated Customers .................................. 5,436 5,302
Other income ............................................. 1,744 1,144
-------- --------
Total revenues ........................................... 24,495 23,502
-------- --------
Cost of products sold and operating expenses ............. 11,436 9,952
Depreciation and amortization ............................ 2,567 2,363
Selling, general and administrative expenses ............. 4,026 2,971
-------- --------
Total costs and expenses ................................. 18,029 15,286
-------- --------
Operating Income ......................................... $ 6,466 $ 8,216
======== ========
Terminal Facilities:
Sales and other operating revenue:
Affiliates .............................................. $ 14,075 $ 9,777
Unaffiliated Customers .................................. 7,059 6,549
Other income ............................................. 2 69
-------- --------
Total revenues ........................................... 21,136 16,395
-------- --------
Cost of products sold and operating expenses ............. 7,503 8,590
Depreciation and amortization ............................ 2,385 2,359
Selling, general and administrative expenses ............. 2,639 2,307
-------- --------
Total costs and expenses ................................. 12,527 13,256
-------- --------
Operating Income ......................................... $ 8,609 $ 3,139
======== ========
Western Pipeline System:
Sales and other operating revenue:
Affiliates .............................................. $206,078 $263,705
Unaffiliated Customers .................................. 94,777 112,015
Other income ............................................. 2 90
-------- --------
Total revenues ........................................... 300,857 375,810
-------- --------
Cost of products sold and operating expenses ............. 294,128 369,394
Depreciation and amortization ............................ 1,287 983
Selling, general and administrative expenses ............. 3,072 3,151
-------- --------
Total costs and expenses ................................. 298,487 373,528
-------- --------
Operating Income ......................................... $ 2,370 $ 2,282
======== ========
Reconciliation of Segment Operating Income to Net Income
Operating income:
Eastern Pipeline System ................................. $ 6,466 $ 8,216
Terminal Facilities ..................................... 8,609 3,139
Western Pipeline System ................................. 2,370 2,282
-------- --------
Total segment operating income ........................... 17,445 13,637
Net interest expense ..................................... 3,022 2,424
Income tax expense ....................................... 1,555 4,224
-------- --------
Net income ............................................... $ 12,868 $ 6,989
======== ========
12
8. New Accounting Standards
Effective January 1, 2002, Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), was adopted. SFAS
No. 142 requires the testing of goodwill and indefinite-lived intangible assets
for impairment rather than amortizing them. The Partnership ceased amortizing
goodwill effective January 1, 2002 and will test goodwill for impairment during
the second quarter of 2002. Amortization of goodwill and indefinite-lived
intangible assets was $0.2 million during the first quarter of 2001.
In August 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS No. 143"), was issued. This
statement significantly changes the method of accruing for costs that an entity
is legally obligated to incur associated with the retirement of fixed assets.
The Partnership will evaluate the impact and timing of implementing SFAS No.
143, which is required no later than January 1, 2003.
In August 2001, Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"), was issued. Among other things, SFAS No. 144 significantly changes the
criteria that would have to be met to classify an asset as held-for-sale. SFAS
No. 144 supercedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of," and the provisions of Accounting Principles Board Opinion 30,
"Reporting The Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," that relate to reporting the effects of a disposal of
a segment of a business. The Partnership adopted SFAS No. 144 effective January
1, 2002 when adoption was mandatory. This new standard had no impact on the
Partnership's condensed financial statements during the first quarter of
2002.
9. Distribution to Unitholders
On April 23, 2002, the Partnership declared a cash distribution of $0.26
per unit on its outstanding common and subordinated units. The distribution
represents the minimum quarterly distribution for the 52-day period from
February 8, 2002 through March 31, 2002. The $6.0 million distribution will be
paid on May 15, 2002 to unitholders of record at the close of business on May 3,
2002.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Sunoco Logistics Partners L.P.
Operating Highlights
Three Months Ended March 31,
------------------------------
2002 2001
-------------- --------------
Eastern Pipeline System/(1)/:
Pipeline throughput (bpd)/(2)/ ................. 549,920 562,210
Total shipments (barrel miles per day)/(3)/ .... 54,579,732 58,640,935
Tariffs per barrel mile (cents) ................ 0.463 0.424
Terminal Facilities:
Terminal throughput (bpd):
Nederland Terminal ............................ 416,000 500,050
Other terminals/(4)/ .......................... 743,946 740,495
Western Pipeline System:
Crude oil pipeline throughput (bpd) ............ 277,500 270,966
Crude oil purchases at wellhead (bpd) .......... 190,910 173,375
Gross margin per barrel of pipeline
throughput (cents)/(5)/ ....................... 21.8 21.9
- ----------
(1) Excludes amounts attributable to our 9.4% ownership interest in the
Explorer Pipeline Company joint venture.
(2) Excludes Toledo, Twin Oaks, and Linden transfer pipelines, which transport
large volumes of refined products over short distances and generate minimal
revenues.
(3) Represents total average daily pipeline throughput multiplied by the number
of miles of pipeline through which each barrel has been shipped.
(4) Includes the Partnership's refined product terminals, the Fort Mifflin
Terminal Complex and the Marcus Hook Tank Farm.
(5) Represents total segment sales and other operating revenue minus the cost
of products sold and operating expenses and depreciation and amortization
divided by crude oil pipeline throughput.
Analysis of Statements of Income
Net income was $12.9 million for the three-month period ended March 31,
2002 as compared to $7.0 million for the same period in the prior year, an
increase of $5.9 million. Operating income was $3.8 million higher than the
first quarter of 2001 due to higher sales and other operating revenue at our
Terminal Facilities resulting from a new pricing arrangement with Sunoco which
became effective on January 1, 2002. This arrangement, which management believes
has market-based terms, replaces a pricing methodology that enabled us to
recover our costs but not to generate any profits. Partially offsetting the
revenue increase were expenses associated with a pipeline leak which occurred in
January 2002 and one-time startup costs associated with the formation of the
Partnership.
14
Sales and other operating revenue totaled $344.7 million in the first
three months of 2002 as compared to $414.4 million for the corresponding 2001
period, a decline of $69.7 million. The decrease was largely attributable to
lower crude oil sales revenue resulting from lower crude oil prices. During the
first three months of 2002, the average price of West Texas Intermediate crude
oil, at Cushing, Oklahoma, the benchmark crude oil in the United States, dropped
to $21.67 per barrel from $28.69 per barrel. Other income increased $0.4 million
due to higher equity income from Explorer Pipeline Company.
Total cost of products sold and operating expenses decreased $74.8 million
to $313.1 for the first three months of 2002 from $387.9 primarily due to the
decrease in crude oil prices described above. Depreciation and amortization
increased $0.5 million in the first three months of 2002 primarily due to recent
capital expenditures.
Selling, general and administrative expenses increased $1.3 million due
primarily to the one-time start-up costs, charges associated with the pipeline
leak in January 2002, for which the Partnership is indemnified by Sunoco,
increases in general and administrative costs associated with operating as a
public company and increases in insurance premiums.
Net interest expense increased $0.6 million in the first quarter of 2002
versus the same period in 2001. Prior to the inception of the Partnership,
interest expense was primarily attributable to notes payable to an affiliate of
Sunoco. The debt due affiliate was not assumed by us. The interest expense
applicable to the period from February 8, 2002 through March 31, 2002 relates
primarily to the $250 million ten-year, 7.25% Senior Notes issued concurrent
with the IPO. The increased interest expense is due to the resulting higher net
borrowing position in the first quarter of 2002.
Income taxes for the first quarter of 2002 are $2.7 million lower than the
first quarter of 2001 principally due to the Partnership not being subject to
income taxes from its inception on February 8, 2002.
Analysis of Segment Operating Income
Eastern Pipeline System. Operating income in our Eastern Pipeline System was
$6.5 million in the first quarter of 2002 compared to $8.2 million in the first
quarter of 2001. This $1.7 million decrease was due to a $2.7 million increase
in total costs and expenses, partially offset by a $0.4 million increase in
sales and other operating revenue and a $0.6 million increase in other income.
Total pipeline throughput in the first quarter of 2002 decreased 12,290 bpd, or
2%, compared to the same period in 2001, while shipments in barrel miles
decreased 7%. The average tariff per barrel mile increased to 0.463 cents in the
first quarter of 2002 from 0.424 cents in the same period in 2001, due to an
increase in the shipment of higher tariff barrels. The increase in other income
was due to higher equity income from Explorer Pipeline Company.
The $2.7 million increase in total costs and expenses was due to an
increase in cost of products sold and operating expenses of $1.5 million, an
increase in selling, general and administrative expenses of $1.0 million and an
increase in depreciation and amortization of $0.2 million. The increase in cost
of products sold and operating expenses was due principally to higher
environmental remediation costs resulting from the pipeline leak that occurred
in January 2002. The increase in selling, general and administrative expenses is
largely due to costs associated with the formation and operation of the
Partnership and higher insurance premiums.
Terminal Facilities. Operating income in our Terminal Facilities was $8.6
million in the first quarter of 2002 compared to $3.1 million in the first
quarter of 2001. This $5.5 million increase was due to a $4.7 million increase
in sales and other operating revenue and a $1.1 million decrease in cost of
products sold and operating expenses, partially offset by a $0.3 million
increase in selling, general and administrative expenses.
The $4.7 million increase in sales and other operating revenue was due
principally to the change in the fee arrangement for terminalling and throughput
services provided to Sunoco, discussed above. Also contributing to the increase
were favorable contract rates at our Nederland Terminal.
15
The $1.1 million decrease in cost of products sold and operating expenses
is primarily due to lower environmental remediation, utility, and maintenance
expenses. The $0.3 million increase in selling, general and administrative costs
is largely due to costs associated with the formation and operation of the
Partnership and higher insurance premiums.
Western Pipeline System. Operating income in our Western Pipeline System was
$2.4 million in the first quarter of 2002, essentially unchanged from the $2.3
million earned in the first quarter of 2001. Gross margin was unchanged in 2002
compared to 2001 as an increase in crude oil acquisition and marketing margins
was offset by a decrease in margins from crude oil pipeline operations. The
increase in crude oil acquisition and marketing margins was due principally to
the November 2001 acquisition of a crude oil pipeline in Texas and the related
crude oil acquisition and marketing business from GulfMark Energy, Inc.,
partially offset by a $0.3 million increase in depreciation and amortization
expense.
The decrease in crude oil pipeline gross margin was mainly due to lower
crude oil pipeline volumes reflecting reduced gathering volumes and reduced
shipments of crude oil through our Nederland to Longview pipeline.
Liquidity and Capital Resources
Cash Flows and Financial Capacity
Net cash used in operating activities for the first quarter of 2002 was
$91.8 million compared to $1.7 million of cash provided by operating activities
for the same period in 2001. The $93.5 million decrease in net cash provided by
operating activities in the first quarter of 2002 was primarily due to the use
of the net proceeds from the IPO to replenish working capital that was not
contributed by Sunoco to the Partnership. This replenishment of working capital
consisted primarily of $81.0 million of affiliated company accounts receivable
and $13.5 million of crude oil inventory.
Net cash provided by investing activities was $16.6 million in the first
quarter of 2002 compared to a use of cash of $10.7 million in the first quarter
of 2001. The change is primarily due to collection of a $20.0 million note
receivable from an affiliate and an $8.2 million reduction in capital
expenditures caused by the absence of several one-time projects incurred in the
first quarter of 2001.
Net cash provided by financing activities for the quarter ended March 31,
2002 and 2001 was $117.8 million and $9.1 million, respectively. The change is
due mainly to the net proceeds of $98.3 million from the IPO and $29.3 million
of advances from affiliate in the first quarter of 2002. In addition, net
proceeds of $245.6 million from the issuance of the Senior Notes in connection
with the IPO were distributed to Sunoco. For a more detailed discussion of the
IPO and related transactions, see Notes 2 and 4 to the condensed financial
statements.
Under the treasury services agreement with Sunoco, we, among other things,
participate in Sunoco's centralized cash management program. The $29.3 million
of advances from affiliate represent amounts due to Sunoco under this treasury
services agreement.
16
Capital Expenditures
The following table summarizes maintenance and expansion capital
expenditures for the three-month periods ended March 31, 2002 and 2001 (in
thousands of dollars):
Three Months Ended
March 31,
---------------------------
2002 2001
------- --------
Maintenance ................. $ 2,336 $ 8,272
Expansion ................... 1,051 3,299
------- --------
$ 3,387 $ 11,571
======= ========
Maintenance capital expenditures declined by $6.0 million from $8.3 million
in the first quarter of 2001 to $2.3 million in the first quarter of 2002 due to
the absence of several non-recurring expenditures to upgrade our technology,
increase reliability and lower our cost structure. During 2001, in the area of
technology, we undertook an automation project in our Western Pipeline System,
upgraded our network systems and enhanced various software programs in all areas
of our business. In the Eastern Pipeline System, a crude oil transfer line
between our Darby Creek Tank Farm and our Hog Island Wharf was upgrades and
several additional line testing projects related to the Department of
Transportation's recently adopted pipeline integrity management rule were
undertaken. We also undertook several projects to reduce our cost structure,
including rebuilding and upgrading pump stations.
Expansion capital expenditures declined by $2.2 million, from $3.3 million
in the first quarter of 2001 to $1.1 million in the first quarter of 2002. In
2001, two new tanks were constructed at our Eastern Pipeline System's Montello
facility and an ethanol blending project at our refined product terminals
was completed.
The Partnership's management believes that cash flow from operations will
be sufficient to satisfy our ongoing capital requirements and to pay the minimum
quarterly distributions. We may also supplement the cash generated with the
proceeds of borrowings under our $150.0 million Credit Facility (see Note 4 to
the condensed financial statements) or other debt instruments or the issuance of
additional common units.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to various market risks, including volatility in crude oil
commodity prices and interest rates. To manage such exposure, we monitor our
inventory levels and our expectations of future commodity prices and
17
interest rates when making decisions with respect to risk management. We have
not entered into derivative transactions that would expose us to price risk.
Our $150.0 million Credit Facility, although currently undrawn, would
expose us to interest rate risk, since this facility bears interest at a
variable rate.
Forward-Looking Statements
Certain matters discussed in this quarterly report on Form 10-Q, excluding
historical information, include forward-looking statements made in reliance on
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995.
Forward-looking statements discuss expected future results, based on
current and pending business operations and may be identified by words such as
"anticipates," "believes," "expects," "planned," "scheduled" or similar
expressions. Although we believe these forward-looking statements are
reasonable, they are based upon a number of assumptions concerning future
conditions, any or all of which may ultimately prove to be inaccurate.
Statements made regarding future results are subject to numerous assumptions,
uncertainties and risks that may cause future results to be materially different
from the results stated or implied in this document.
The following are among the important factors that could cause actual
results to differ materially from any results projected, forecasted, estimated
or budgeted:
... Changes in demand for crude oil and refined petroleum products that we
store and distribute;
... Changes in demand for storage in our petroleum product terminals;
... The loss of Sunoco as a customer or a significant reduction in its current
level of throughput and storage with us;
... An increase in the competition encountered by our petroleum products
terminals, pipelines and crude oil acquisition and marketing operations;
... Changes in the throughput on petroleum product pipelines owned and operated
by third parties and connected to our petroleum product pipelines and
terminals;
... Changes in the general economic conditions in the United States;
... Changes in laws and regulations to which we are subject, including federal,
state, and local tax laws, safety, environmental and employment laws;
... Changes to existing or future state or federal government regulations
banning or restricting the use of MTBE in gasoline;
18
... Improvements in energy efficiency and technology resulting in reduced
demand;
... Our ability to manage rapid growth;
... Our ability to control costs;
... The effect of changes in accounting principles;
... Global and domestic economic repercussions from terrorist activities and
the government's response thereto;
... The occurrence of operational hazards or unforeseen interruption for which
we may not be adequately insured;
... Changes in the reliability and efficiency of our operating facilities or
those of Sunoco or third parties;
... Changes in the expected level of environmental remediation spending;
... Changes in insurance markets resulting in increased costs and reductions in
the level and types of coverage available; and
... Changes in the status of litigation to which we are a party.
These factors are not necessarily all of the important factors that could
cause actual results to differ materially from those expressed in any of our
forward-looking statements. Other unknown or unpredictable factors could also
have material adverse effects on future results. We undertake no obligation to
update publicly any forward-looking statement whether as a result of new
information or future events.
19
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
There are various legal and administrative proceedings pending against
Sunoco, affiliated predecessors and us (as successor to certain liabilities of
those predecessors). Although the ultimate outcome of these proceedings cannot
be ascertained at this time, it is reasonably possible that some of them may be
resolved unfavorably. Sunoco has agreed to indemnify us for any losses which we
incurred prior to the IPO, which we may suffer as a result of such currently
pending legal actions. As a result, we believe that any liabilities arising from
such currently pending proceedings are not likely to be material in relation to
our financial position at March 31, 2002.
Item 2. Changes in Securities and Uses of Proceeds
On February 4, 2002, our Registration Statement on Form S-1 (Registration
No. 333-71968), filed with the Securities and Exchange Commission, became
effective. Pursuant to the Registration Statement, on February 5, 2002, we sold
5,000,000 common units to the public at a price of $20.25 per unit for aggregate
gross proceeds of $101.3 million. Subsequent to the IPO, the underwriters
exercised their over-allotment option for 750,000 additional common units at a
price of $20.25 per unit for aggregate gross proceeds of $15.1 million.
Underwriting fees paid in connection with these transactions were $6.7 million
and $1.0 million, respectively. On February 8, 2002, the closing date of our
IPO, we received proceeds of $108.7 million (including proceeds of the
over-allotment option). The aggregate-offering price of 5,750,000 Common Units
was $116.4 million, and the aggregate underwriting fees were $7.7 million. We
used approximately $10.4 million of the net proceeds to pay expenses associated
with the IPO and related formation transactions, which consisted primarily of
legal, accounting and other professional service costs. The remaining $98.3
million of net proceeds was used to increase working capital to the level
necessary for the operation of our business, thereby establishing working
capital that was not contributed to us by Sunoco in connection with our
formation. The underwriters of our IPO were Lehman Brothers, Salomon Smith
Barney, UBS Warburg, Banc of America Securities, Wachovia Securities and Credit
Suisse First Boston.
In addition, concurrent with the closing of the IPO, Sunoco Logistics
Partners Operations L.P., our wholly owned operating subsidiary, issued, in an
offering exempt from registration under the Securities Act of 1933, $250.0
million of 7.25% Senior Notes due 2012 ("Senior Notes"), in the United States to
qualified institutional buyers pursuant to Rule 144A under the Securities Act of
1933. The Senior Notes were issued at a price of 99.325% of their principal
amount. Gross proceeds from this offering were $248.3 million and aggregate
underwriting discounts and commissions were $1.6 million. Net proceeds were
$245.6 million after deducting expenses incurred in connection with the issuance
of the Senior Notes of approximately $1.1 million, which consisted primarily of
legal, accounting and other professional services costs. The initial purchasers
of the Senior Notes were Lehman Brothers, Credit Suisse
20
First Boston, Salomon Smith Barney, UBS Warburg, Banc of America Securities and
Wachovia Securities. The $245.6 million of net proceeds from the sale of the
Senior Notes were distributed to Sunoco. The Senior Notes have been guaranteed
by the Partnership and the Operating Partnership's subsidiaries. Although the
initial offering of the Senior Notes was not registered under the Securities Act
of 1933, the Operating Partnership entered into a registration rights agreement
giving the holders of the Senior Notes certain registration rights. The
Operating Partnership filed an exchange offer registration statement on SEC Form
S-4 on April 11, 2002 and a first amendment on May 8, 2002 in connection with
the registration of the Senior Notes and the guarantees covering the Senior
Notes.
Item 3. Defaults Upon 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
Exhibit 3.1: Second Amended and Restated Limited Liability Company
Agreement of Sunoco Partners LLC, dated as of
April 30, 2002.
(b) Reports on Form 8-K
None
21
SIGNATURE
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 thereunto duly authorized.
Sunoco Logistics Partners L.P.
By /s/ Colin A. Oerton
--------------------
Colin A. Oerton
Vice President &
Chief Financial Officer
Date May 15, 2002
22