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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 JUNE 30, 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 Identification
incorporation or organization) No.)
Ten Penn Center
1801 Market Street
Philadelphia, PA 19103-1699
(Address of principal executive (Zip-Code)
offices)
(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 __X__ No _____
The number of the registrant's Common Units held by non-affiliates and
outstanding at July 31, 2002 was 5,706,800.
SUNOCO LOGISTICS PARTNERS L.P.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Statements of Income for the Three Months
Ended June 30, 2002 and 2001 .......................... 2
Condensed Statements of Income for the Six Months
Ended June 30, 2002 and 2001 .......................... 3
Condensed Balance Sheets at June 30, 2002
and December 31, 2001 ................................. 4
Condensed Statements of Cash Flows for the Six Months
Ended June 30, 2002 and 2001 .......................... 5
Condensed Statement of Partners' Capital/Net Parent
Investment for the Six Months Ended June 30, 2002 ..... 6
Notes to Condensed Financial Statements ............... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................... 16
Item 3. Quantitative and Qualitative Disclosures
about Market Risk ..................................... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ..................................... 24
Item 2. Changes in Securities and Uses of Proceeds ............ 24
Item 3. Defaults Upon Senior Securities ....................... 25
Item 4. Submission of Matters to a Vote of Security Holders ... 25
Item 5. Other Information ..................................... 25
Item 6. Exhibits and Reports on Form 8-K ...................... 25
SIGNATURE .............................................................. 27
1
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
SUNOCO LOGISTICS PARTNERS L.P.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except units and per unit amounts)
Partnership Predecessor
------------- -----------
Three Months Ended
June 30,
---------------------------
2002 2001
------------ -----------
Revenues
Sales and other operating revenue:
Affiliates ......................................... $ 307,824 $ 310,220
Unaffiliated customers ............................. 143,363 133,395
Other income ............................................ 1,768 812
----------- -----------
Total Revenues ....................................... 452,955 444,427
----------- -----------
Costs and Expenses
Cost of products sold and operating expenses ............ 419,281 411,392
Depreciation and amortization ........................... 6,473 5,896
Selling, general and administrative expenses ............ 9,674 9,111
----------- -----------
Total Costs and Expenses ............................. 435,428 426,399
----------- -----------
Operating Income ........................................ 17,527 18,028
Net interest cost paid to affiliates .................... 428 3,842
Other interest cost and debt expense, net ............... 4,373 99
Capitalized interest .................................... (245) (493)
----------- -----------
Income before income tax expense ........................ 12,971 14,580
Income tax expense ...................................... -- 5,512
----------- -----------
Net Income .............................................. $ 12,971 $ 9,068
=========== ===========
Calculation of Limited Partners' interest
Net Income ............................................ $ 12,971
Less: General Partners' interest ...................... 259
-----------
Limited Partners' interest in Net Income .............. $ 12,712
===========
Basic and diluted Net Income per Limited Partners'
unit ................................................... $ 0.56
===========
Weighted average units outstanding ...................... 22,767,278
===========
(See Accompanying Notes)
2
SUNOCO LOGISTICS PARTNERS L.P.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except units and per unit amounts)
Partnership
and
Predecessor
Combined Predecessor
----------- -----------
Six Months Ended
June 30,
---------------------------
2002 2001
----------- -----------
Revenues
Sales and other operating revenue:
Affiliates ...................................... $ 545,292 $ 600,758
Unaffiliated customers .......................... 250,635 257,261
Other income ......................................... 3,516 2,115
---------------------------
Total Revenues .................................... 799,443 860,134
---------------------------
Costs and Expenses
Cost of products sold and operating expenses ......... 732,348 799,328
Depreciation and amortization ........................ 12,712 11,601
Selling, general and administrative expenses ......... 19,411 17,540
---------------------------
Total Costs and Expenses .......................... 764,471 828,469
---------------------------
Operating Income ..................................... 34,972 31,665
Net interest cost paid to affiliates ................. 551 6,622
Other interest cost and debt expense, net ............ 7,572 198
Capitalized interest ................................. (545) (948)
---------------------------
Income before income tax expense ..................... 27,394 25,793
Income tax expense ................................... 1,555 9,736
---------------------------
Net Income ........................................... $ 25,839 $ 16,057
===========================
Allocation of 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
June 30, 2002 ..................................... 22,418
-----------
Net Income ......................................... $ 25,839
===========
Calculation of Limited Partners' interest
Net Income ......................................... $ 22,418
Less: General Partners' interest ................... 448
-----------
Limited Partners' interest in Net Income ........... $ 21,970
===========
Basic and diluted Net Income per Limited Partners'
unit for the period of February 8, 2002 through June
30, 2002 ............................................ $ 0.96
===========
Weighted average units outstanding ................... 22,767,278
===========
(See Accompanying Notes)
3
SUNOCO LOGISTICS PARTNERS L.P.
CONDENSED BALANCE SHEETS
(UNAUDITED)
(in thousands)
Partnership Predecessor
----------- -----------
June 30, December 31,
2002 2001
----------- -----------
Assets
Current Assets
Cash and cash equivalents ............................. $ 6,885 $ --
Advances to affiliate (Note 3) ........................ 13,713 --
Accounts receivable, affiliated companies (Note 3)..... 91,266 6,245
Accounts receivable, net .............................. 174,648 151,264
Note receivable from affiliate (Note 3) ............... -- 20,000
Inventories:
Crude oil ........................................... 20,992 19,367
Materials, supplies and other ....................... 1,231 1,239
Deferred income taxes ................................. -- 2,821
----------- -----------
Total Current Assets ............................... 308,735 200,936
Properties, plants and equipment ...................... 949,556 937,305
Less accumulated depreciation and amortization ........ 380,806 370,946
----------- -----------
Properties, plants and equipment, net ................. 568,750 566,359
Deferred charges and other assets ..................... 30,291 21,906
----------- -----------
Total Assets ....................................... $ 907,776 $ 789,201
=========== ===========
Liabilities and Partners' Capital/Net Parent Investment
Current Liabilities
Accounts payable ...................................... $ 251,996 $ 235,061
Accrued liabilities ................................... 17,574 26,628
Current portion of long-term debt due affiliate
(Note 3)............................................. -- 75,000
Current portion of long-term debt (Note 4) ............ 243 228
Taxes payable ......................................... 9,151 20,373
----------- -----------
Total Current Liabilities .......................... 278,964 357,290
Long-term debt due affiliate (Note 3) ................. -- 65,000
Long-term debt (Note 4) ............................... 252,797 4,553
Deferred income taxes ................................. -- 78,140
Other deferred credits and liabilities ................ 862 9,325
Commitments and contingent liabilities (Note 6)
Partners' Capital ..................................... 375,153 --
Net Parent Investment (Note 5) ........................ -- 274,893
----------- -----------
Total Liabilities and Partners' Capital/Net Parent
Investment ......................................... $ 907,776 $ 789,201
=========== ===========
(See Accompanying Notes)
4
SUNOCO LOGISTICS PARTNERS L.P.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Partnership
and
Predecessor
Combined Predecessor
------------ -----------
Six Months Ended
June 30,
------------------------------
2002 2001
------------ ------------
Cash Flows from Operating Activities:
Net income ............................................ $ 25,839 $ 16,057
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Depreciation and amortization .................... 12,712 11,601
Deferred income tax expense ...................... 675 8,771
Changes in working capital pertaining to
operating activities:
Accounts receivable, affiliated companies .... (85,021) (800)
Accounts receivable, net ..................... (27,186) 60,836
Inventories .................................. (8,606) (3,214)
Accounts payable and accrued liabilities ..... 18,595 (88,073)
Taxes payable ................................ 2,850 (2,182)
Other ............................................ (6,455) 1,376
------------ -----------
Net cash provided by/(used in) operating activities ..... (66,597) 4,372
------------ -----------
Cash Flows from Investing Activities:
Capital expenditures .................................. (15,172) (24,937)
Collection of note receivable from affiliate .......... 20,000 --
Other ................................................. -- 1,351
------------ -----------
Net cash provided by/(used in) investing activities ..... 4,828 (23,586)
------------ -----------
Cash Flows from Financing Activities:
Distributions paid to unitholders ..................... (6,040) --
Net proceeds from issuance of common units to the
public ............................................... 98,314 --
Advances to affiliate, net ............................ (13,713) --
Repayments of long-term debt .......................... (124) (120)
Repayments of long-term debt due affiliate ............ (50,000) --
Net proceeds from issuance of long-term debt .......... 245,573 --
Special distribution to Sunoco ........................ (245,573) --
Contributions from /(returns to) Sunoco ............... 40,217 (5,666)
Net proceeds from short-term borrowings due
affiliate ............................................ -- 25,000
------------ -----------
Net cash provided by financing activities ............... 68,654 19,214
------------ -----------
Net increase in cash and cash equivalents ............... 6,885 --
Cash and cash equivalents at beginning of period ........ -- --
------------ -----------
Cash and cash equivalents at end of period .............. $ 6,885 $ --
============ ===========
(See Accompanying Notes)
5
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 common
units to
the public -- 5,750,000 98,314 -- -- -- 98,314
Net income
applicable to
the period from
February 8
through June
30, 2002 -- -- 10,985 -- 10,985 448 22,418
Cash
distributions -- -- (2,960) -- (2,960) (120) (6,040)
---------- ---------- ---------- ---------- ---------- --------- ----------
Balance at June 30, $ -- 11,383,639 $ 190,841 11,383,639 $ 178,775 $ 5,537 $ 375,153
2002 ========== ========== ========== ========== ========== ========= ==========
6
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 and six months ended June 30, 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 consolidated financial statements of
the Partnership and its subsidiaries.
2. The Initial Public Offering
On February 8, 2002, Sunoco, 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 5,750,000 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.
7
3. Related Party Transactions
Advances to Affiliate
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 described in various agreements discussed below which were entered
into concurrent with the IPO.
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 (see Note 4).
Accounts Receivable, Affiliated Companies
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 our posted 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 for
most terminals, 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 for most terminals 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. The $8.0 million fee
includes expenses incurred by Sunoco to perform the centralized corporate
functions described above. 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.
Allocated Sunoco employee benefit plan expenses for employees who work
in the pipeline, terminalling, storage and crude oil gathering operations,
8
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. 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.
Short-Term Borrowings due Affiliate
At December 31, 2000, the Predecessor had two short-term notes totaling
$45.0 million due to Sunoco. During the six months ended June 30, 2001, the
Predecessor borrowed an additional $25.0 million under another short term note.
As of December 31, 2001, all amounts outstanding under the notes were repaid.
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.
9
4. Long-Term Debt
The components of long-term debt (including current portion) were as
follows (in thousands of dollars):
June 30, December 31,
2002 2001
------------ ------------
Senior Notes ............................... $ 250,000 $ --
Less unamortized note discount ............. 1,617 --
------------ ------------
248,383 --
Other (including current portion) .......... 4,657 4,781
------------ ------------
$ 253,040 $ 4,781
============ ============
In conjunction with the IPO, the Operating Partnership 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 Operating Partnership's ability to
incur certain liens, engage in sale/leaseback transactions, or merge,
consolidate or sell substantially all of its assets. The Operating Partnership
is in compliance with these covenants as of June 30, 2002. In addition, the
Senior Notes are also subject to repurchase by the Operating 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 interests in the Operating Partnership's
subsidiaries. The Credit Facility also 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.
The Operating Partnership is in compliance with these covenants as of June 30,
2002. There were no borrowings against the Credit Facility as of June 30, 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.
10
On April 11, 2002, the Operating Partnership filed an exchange offer
registration statement on SEC Form S-4, in connection with the registration of
the exchange of the Senior Notes and the guarantees covering the Senior Notes.
This registration statement was declared effective on June 28, 2002. The
exchange offer was completed on August 2, 2002, with all $250 million aggregate
principal amount of the Senior Notes being exchanged for a like principal amount
of new publicly tradable notes having substantially identical terms issued
pursuant to the exchange offer registration statement filed under the Securities
Act of 1933, as amended.
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 primarily to its
investments in its wholly owned operating subsidiaries and cash and cash
equivalents of $6.9 million. Except for amounts associated with the Senior
Notes, cash and cash equivalents and advances to affiliate, the assets and
liabilities in the condensed balance sheet at June 30, 2002 and the revenues and
costs and expenses in the condensed statements of income for the quarter and six
months 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
=========
11
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 June 30, 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.
12
7. Business Segment Information
The following tables sets forth certain statement of income information
concerning the Partnership's business segments and reconciles total segment
operating income to net income for the three-month and six-month periods ended
June 30, 2002 and 2001 (in thousands of dollars):
Three Months Ended
June 30,
---------------------------
2002 2001
-------- --------
Segment Operating Income
Eastern Pipeline System:
Sales and other operating revenue:
Affiliates ...................................................... $ 18,228 $ 18,100
Unaffiliated customers .......................................... 5,621 5,245
Other income ..................................................... 1,767 960
--------- ---------
Total Revenues ................................................... 25,616 24,305
--------- ---------
Cost of products sold and operating expenses ..................... 10,095 10,268
Depreciation and amortization .................................... 2,362 2,426
Selling, general and administrative expenses ..................... 3,980 3,433
--------- ---------
Total Costs and Expenses ......................................... 16,437 16,127
--------- ---------
Operating Income ................................................. $ 9,179 $ 8,178
========= =========
Terminal Facilities:
Sales and other operating revenue:
Affiliates ...................................................... $ 13,460 $ 10,551
Unaffiliated customers .......................................... 7,960 7,254
Other income /(loss) ............................................. -- (136)
--------- ---------
Total Revenues ................................................... 21,420 17,669
--------- ---------
Cost of products sold and operating expenses ..................... 8,565 8,883
Depreciation and amortization .................................... 2,697 2,460
Selling, general and administrative expenses ..................... 2,614 2,434
--------- ---------
Total Costs and Expenses ......................................... 13,876 13,777
--------- ---------
Operating Income ................................................. $ 7,544 $ 3,892
========= =========
Western Pipeline System:
Sales and other operating revenue:
Affiliate ....................................................... $ 276,136 $ 281,569
Unaffiliated customers .......................................... 129,782 120,896
Other income /(loss) ............................................. 1 (12)
--------- ---------
Total Revenues ................................................... 405,919 402,453
--------- ---------
Cost of products sold and operating expenses ..................... 400,621 392,241
Depreciation and amortization .................................... 1,414 1,010
Selling, general and administrative expenses ..................... 3,080 3,244
--------- ---------
Total Costs and Expenses ......................................... 405,115 396,495
--------- ---------
Operating Income ................................................. $ 804 $ 5,958
========= =========
Reconciliation of Segment Operating Income to Net Income
Operating Income:
Eastern Pipeline System ......................................... $ 9,179 $ 8,178
Terminal Facilities ............................................. 7,544 3,892
Western Pipeline System ......................................... 804 5,958
--------- ---------
Total segment operating income ................................... 17,527 18,028
Net interest expense ............................................. 4,556 3,448
Income tax expense ............................................... -- 5,512
--------- ---------
Net Income ....................................................... $ 12,971 $ 9,068
========= =========
13
Six Months Ended
June 30,
---------------------------
2002 2001
-------- --------
Segment Operating Income
Eastern Pipeline System:
Sales and other operating revenue:
Affiliates ...................................................... $ 35,543 $ 35,156
Unaffiliated customers .......................................... 11,057 10,547
Other income ..................................................... 3,511 2,104
--------- ---------
Total Revenues ................................................... 50,111 47,807
--------- ---------
Cost of products sold and operating expenses ..................... 21,531 20,220
Depreciation and amortization .................................... 4,929 4,789
Selling, general and administrative expenses ..................... 8,006 6,404
--------- ---------
Total Costs and Expenses ......................................... 34,466 31,413
--------- ---------
Operating Income ................................................. $ 15,645 $ 16,394
========= =========
Terminal Facilities:
Sales and other operating revenue:
Affiliates ...................................................... $ 27,535 $ 20,328
Unaffiliated customers .......................................... 15,019 13,803
Other income /(loss) ............................................. 2 (67)
--------- ---------
Total Revenues ................................................... 42,556 34,064
--------- ---------
Cost of products sold and operating expenses ..................... 16,068 17,473
Depreciation and amortization .................................... 5,082 4,819
Selling, general and administrative expenses ..................... 5,253 4,741
--------- ---------
Total Costs and Expenses ......................................... 26,403 27,033
--------- ---------
Operating Income ................................................. $ 16,153 $ 7,031
========= =========
Western Pipeline System:
Sales and other operating revenue:
Affiliates ...................................................... $ 482,214 $ 545,274
Unaffiliated customers .......................................... 224,559 232,911
Other income ..................................................... 3 78
--------- ---------
Total Revenues ................................................... 706,776 778,263
--------- ---------
Cost of products sold and operating expenses ..................... 694,749 761,635
Depreciation and amortization .................................... 2,701 1,993
Selling, general and administrative expenses ..................... 6,152 6,395
--------- ---------
Total Costs and Expenses ......................................... 703,602 770,023
--------- ---------
Operating Income ................................................. $ 3,174 $ 8,240
========= =========
Reconciliation of Segment Operating Income to Net Income
Operating Income:
Eastern Pipeline System ......................................... $ 15,645 $ 16,394
Terminal Facilities ............................................. 16,153 7,031
Western Pipeline System ......................................... 3,174 8,240
--------- ---------
Total segment operating income ................................... 34,972 31,665
Net interest expense ............................................. 7,578 5,872
Income tax expense ............................................... 1,555 9,736
--------- ---------
Net Income ....................................................... $ 25,839 $ 16,057
========= =========
14
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 determined during the second
quarter of 2002 that its goodwill is not impaired. The following table sets
forth the reconciliation of net income as reported to net income as adjusted to
exclude amortization of goodwill and indefinite-lived intangible assets (in
thousands of dollars):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income, as reported $12,971 $ 9,068 $25,839 $16,057
Add back:
goodwill amortization -- 106 -- 211
indefinite-lived intangible
asset amortization -- 76 -- 152
------- ------- ------- -------
Net income, as adjusted $12,971 $ 9,250 $25,839 $16,420
======= ======= ======= =======
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 supersedes 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 for the first six months of 2002.
9. Distribution to Unitholders
On July 23, 2002, the Partnership declared a cash distribution of $0.45
per unit on its outstanding common and subordinated units. The distribution
represents the minimum quarterly distribution for the quarter ended June 30,
2002. The $10.5 million distribution, including $0.2 million to the General
Partner, will be paid on August 14, 2002 to unitholders of record at the close
of business on August 2, 2002.
On May 15, 2002, the Partnership paid a cash distribution of $0.26 per
unit on its outstanding common and subordinated units to unitholders of record
at the close of business on May 3, 2002. The $6.0 million distribution,
including $0.1 million to the General Partner, represented the
15
minimum quarterly distribution for the 52-day period from February 8, 2002
through March 31, 2002.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations - Three Months Ended June 30, 2002 and 2001
Sunoco Logistics Partners L.P.
Operating Highlights
Three Months Ended June 30, 2002 and 2001
Three Months Ended June 30,
-----------------------------
2002 2001
------------ ------------
Eastern Pipeline System(1):
Pipeline throughput (bpd) (2) .................. 582,449 563,268
Total shipments (barrel miles per day) (3) ..... 54,583,293 55,013,199
Revenue per barrel mile (cents) ................ 0.480 0.466
Terminal Facilities:
Terminal throughput (bpd):
Nederland terminal ............................ 449,083 356,214
Other terminals (4) ........................... 754,000 734,385
Western Pipeline System:
Crude oil pipeline throughput (bpd) ............ 288,219 303,266
Crude oil purchases at wellhead (bpd) .......... 187,918 175,087
Gross margin per barrel of pipeline
throughput (cents)(5) ........................ 14.8 33.4
- ----------
(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 $13.0 million for the three-month period ended June 30,
2002 as compared to $9.1 million for the same period in the prior year, an
increase of $3.9 million. This increase is primarily a result of the absence of
corporate income taxes in the current quarter due to our partnership status,
partially offset by a $1.1 million increase in net interest expense and a $0.5
million decline in operating income. Operating income declined $0.5 million to
$17.5 million for the second quarter of 2002 compared with $18.0 million for the
prior year, due principally to lower
16
gross margins from the Western Pipeline System, partially offset by higher
Terminal Facilities business segment revenues due to the new pricing arrangement
with Sunoco (see Note 3 to the condensed financial statements).
Sales and other operating revenue totaled $451.2 million in the second
quarter of 2002 as compared to $443.6 million for the corresponding 2001 period,
an increase of $7.6 million. The increase was attributable to higher revenues at
the Terminal Facilities business segment due to the new pricing arrangement with
Sunoco discussed earlier and an increase in crude oil sales revenue in the
Western Pipeline System resulting from higher lease acquisition volumes,
partially offset by lower crude oil prices. The average price of West Texas
Intermediate crude oil at Cushing, Oklahoma, the benchmark crude oil in the
United States, dropped to an average price of $26.26 per barrel for the second
quarter of 2002 from $27.97 for the corresponding prior year period. Other
income increased $1.0 million from the prior year primarily due to higher equity
income from Explorer Pipeline, located in the Midwest, as a result of increased
volumes and higher revenues per barrel.
Total cost of products sold and operating expenses increased $7.9
million to $419.3 million for the three months ended June 30, 2002 from $411.4
million in the prior year primarily due to an increase in the Western Pipeline
System's lease acquisition volumes, more than offsetting a decline in crude oil
prices from the prior year. Depreciation and amortization increased $0.6 million
from the prior year due to higher capital expenditures at the end of 2001
including the acquisition of a crude oil pipeline in Texas and a crude oil
acquisition business from GulfMark Energy, Inc. in November 2001.
Selling, general and administrative expenses increased $0.6 million to
$9.7 million for the second quarter of 2002 from $9.1 million in the prior year
due primarily to incremental public company costs and increased insurance
premiums.
Net interest expense increased $1.2 million to $4.6 million for second
quarter of 2002 from $3.4 million in the prior year due to the interest expense
on the $250 million ten-year, 7.25% Senior Notes (see notes 2 and 4 to the
condensed financial statements) issued on February 8 being at a higher interest
rate than the debt due to Sunoco in the prior year, which was primarily at a
floating rate, and a higher debt level in 2002 compared with the prior year. The
debt due to Sunoco in the prior year was either repaid or not assumed by the
Partnership.
There was no income tax expense for the three months ended June 30,
2002 compared to $5.5 million in the prior year 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 $9.2 million for
the second quarter of 2002 compared to $8.2 million in the prior year. The $1.0
million increase was primarily the result of a $0.8 million increase in other
income and a $0.5 million increase in sales and other operating revenue,
partially offset by a $0.5 million increase in selling, general and
administrative expenses. The increase in other income was due to higher equity
income from the Explorer Pipeline resulting from increased volumes and higher
revenues per barrel. Total sales and other operating revenue
17
increased slightly compared to last year due to increased revenues per barrel
mile, which more than offset the decline in total shipments between the periods.
The $0.5 million increase in selling, general and administrative expenses was
due to incremental public company costs and increased insurance premiums.
Terminal Facilities
Operating income in our Terminal Facilities was $7.5 million for the
three months ended June 30, 2002 compared to $3.9 million in the prior year.
This $3.6 million increase was due to a $3.8 million increase in total revenues
as a result of the new pricing arrangement with Sunoco discussed earlier, and a
new tank brought into service at the beginning of the quarter at Nederland.
These amounts were partially offset by a $0.2 million increase in depreciation
and amortization expense due to higher capital expenditures at the end of 2001
and a $0.2 million increase in selling, general and administration expenses due
to incremental public company costs and higher insurance costs.
Western Pipeline System
Operating income in our Western Pipeline System was $0.8 million for
the second quarter of 2002, a $5.2 million decline from $6.0 million in the
prior year. This was primarily the result of a decline in lease acquisition
margins as well as a decline in gathering volumes, partly offset by an increase
in lease acquisition volumes. Depreciation expense also increased $0.4 million
from the prior year to $1.4 million for the second quarter of 2002 due to higher
capital expenditures at the end of 2001 including the GulfMark acquisition noted
earlier.
Results of Operations - Six Months Ended June 30, 2002 and 2001
Sunoco Logistics Partners L.P.
Operating Highlights
Six Months Ended June 30, 2002 and 2001
Six Months Ended June 30,
-----------------------------
2002 2001
------------ ------------
Eastern Pipeline System(1):
Pipeline throughput (bpd) (2) .................. 566,273 562,739
Total shipments (barrel miles per day) (3) ..... 54,581,522 56,827,067
Revenue per barrel mile (cents) ................ 0.472 0.444
Terminal Facilities:
Terminal throughput (bpd):
Nederland terminal ............................ 432,542 428,132
Other terminals (4) ........................... 748,973 737,440
Western Pipeline System:
Crude oil pipeline throughput (bpd) ............ 282,889 287,116
Crude oil purchases at wellhead (bpd) .......... 189,414 174,231
Gross margin per barrel of pipeline
throughput (cents)(5) ......................... 18.2 31.8
- ----------
18
(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 $25.8 million for the six-month period ended June 30,
2002 as compared to $16.1 million for the same period in the prior year, an
increase of $9.7 million. This $8.1 million increase is primarily the result of
the benefit from the absence of corporate income taxes and a $3.3 million
increase in operating income, partially offset by a $1.7 million increase in net
interest expense. Operating income was $3.3 million higher than the first six
months of 2001 due principally to higher revenues at the Terminal Facilities
business segment. The increase in revenues is the result of a new pricing
arrangement with Sunoco discussed earlier. Partially offsetting the revenue
increase were public company costs, one-time startup costs, charges associated
with a pipeline leak in January 2002, lower gross margins from the Western
Pipeline System and an increase in net interest expense.
Sales and other operating revenue totaled $795.9 million in the first
six months of 2002 as compared to $858.0 million for the corresponding 2001
period, a decline of $62.1 million. The decrease was largely attributable to
lower crude oil sales revenue resulting from lower crude oil prices. The average
price of West Texas Intermediate crude oil at Cushing, Oklahoma, dropped to an
average price of $23.98 per barrel for the first six months of 2002 from $28.34
for the corresponding prior year period. Other income increased $1.4 million as
a result of higher equity income from Explorer Pipeline due to increased volumes
and higher revenues per barrel.
Total cost of products sold and operating expenses decreased $67.0
million to $732.3 million for the first six months of 2002 from $799.3 million
primarily due to the decrease in crude oil prices described above. Depreciation
and amortization increased $1.1 million due to higher capital expenditures at
the end of 2001 including the acquisition of GulfMark discussed earlier.
Selling, general and administrative expenses increased $1.9 million to
$19.4 million for the first six months of 2002 from $17.5 million in the prior
year due primarily to incremental public company costs, one-time startup costs
and increased insurance premiums.
Net interest expense increased $1.7 million to $7.6 million for the
first six months of 2002 from $5.9 million in the prior year due to the interest
expense on the Senior Notes being at a higher interest rate than the debt due to
Sunoco in the prior year, which was primarily at a floating rate, and a higher
debt level in 2002 compared with the prior year. The debt due to Sunoco in the
prior year was either repaid or not assumed by the Partnership.
19
Income taxes for the six months ended June 30, 2002 of $1.6 million
represent an $8.1 million decrease from the prior year amount of $9.7 million
due principally 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 $15.6 million for
the first six months of 2002 compared to $16.4 million in the prior year. The
$0.8 million decrease was primarily the result of a $3.1 million increase in
total costs and expenses, offset by a $1.4 million increase in other income and
a $0.9 million increase in sales and other operating revenue. The increase in
other income was due to higher equity income from the Explorer Pipeline
resulting from increased volumes and higher revenues per barrel. Total sales and
other operating revenue increased compared to last year due to increased
revenues per barrel mile, which more than offset a decline in total shipments
between the periods.
The $3.1 million increase in total costs and expenses was due to an
increase in selling, general and administrative expenses of $1.6 million and an
increase in cost of products sold and operating expenses of $1.3 million. The
increase in selling, general and administrative expenses was due to incremental
public company costs, one-time startup costs and increased insurance premiums.
The increase in cost of products sold and operating expenses was due to charges
associated with a pipeline leak in January 2002. As this pipeline leak occurred
prior to the IPO and the Partnership is indemnified by Sunoco for liabilities
associated with the incident, there was no impact on the Partnership's
post-February 8, 2002 results.
Terminal Facilities
Operating income in our Terminal Facilities was $16.2 million for the
six months ended June 30, 2002 compared to $7.0 million in the prior year. This
$9.2 million increase was due to an $8.5 million increase in total revenues and
a $1.4 million decrease in cost of products sold and operating expenses, offset
by increases of $0.5 million for selling, general and administrative expenses
and $0.3 million for depreciation expense.
The $8.5 million increase in total revenues was due principally to the
change in the fee arrangement for terminalling and throughput services provided
to Sunoco, as discussed above. Also, revenues increased as a result of a new
tank that was brought into service at the beginning of the second quarter at our
Nederland facility.
The $1.4 million decrease in cost of products sold and operating
expenses is primarily due to lower environmental remediation and other expenses
incurred in the first half of 2001. The $0.5 million increase in selling,
general and administrative expenses is largely due to incremental public company
costs and higher insurance premiums.
Western Pipeline System
Operating income in our Western Pipeline System was $3.2 million for the
first half of 2002, a $5.0 million decrease from the $8.2 million of operating
income in the prior year. This decrease was primarily the result of lower lease
acquisition margins and a decline in gathering volumes, partially offset by an
increase in lease acquisition volumes. Total
20
revenues and cost of products sold and operating expenses both declined due to a
decline in the price of crude oil, as discussed above. Depreciation expense
increased $0.7 million from the prior year to $2.7 million for the first six
months of 2002 due to higher capital expenditures in 2001 including the
acquisition of GulfMark noted earlier.
Liquidity and Capital Resources
Cash Flows and Financial Capacity
Net cash used in operating activities for the first half of 2002 was
$66.6 million compared to the $4.4 million of cash provided by operating
activities for the same period in 2001. The $66.6 million of net cash used in
operating activities in the first half of 2002 was primarily due to the working
capital that was not contributed by Sunoco to the Partnership upon formation for
which the net proceeds of the IPO were used to replenish. The working capital
not contributed consisted primarily of $81.0 million of the affiliated company
accounts receivable and $13.5 million of crude oil inventory.
Net cash provided by investing activities was $4.8 million in the six
months ended June 30, 2002 compared to a use of cash of $23.6 million in the
prior year. The change is primarily due to collection of a $20.0 million note
receivable from an affiliate and an $9.7 million reduction in capital
expenditures caused by the absence of several one-time projects incurred in the
first half of 2001.
Net cash provided by financing activities for the first six months of
2002 was $68.7 million, compared with $19.2 million in the prior year. The
change between periods is due mainly to the net proceeds of $98.3 million from
the IPO, offset by $13.7 million of repayment of advances to affiliate and the
$6.0 million distribution paid to unitholders and the general partner. In
addition, net proceeds of $245.6 million from the issuance of the Senior Notes
in conjunction 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 $13.7
million of advances to affiliate represent amounts due from Sunoco under this
treasury services agreement.
21
Capital Requirements
The following table summarizes maintenance and expansion capital
expenditures for the periods presented (in thousands of dollars):
Six Months Ended June 30,
---------------------------
2002 2001
-------- --------
Maintenance .............. $10,057 $18,279
Expansion ................ 5,115 6,658
------- -------
$15,172 $24,937
======= =======
Maintenance capital expenditures declined by $8.2 million from $18.3
million in the first half of 2001 to $10.1 million in the first half of 2002 due
to 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, we replaced a crude oil
transfer line between our Darby Creek Tank Farm, and our Hog Island Wharf, and
undertook several additional line testing projects related to the Department of
Transportation's recently adopted pipeline integrity management rule. In the
Western Pipeline System, we purchased several crude oil transport trucks. We
also undertook several projects to reduce our cost structure, including
rebuilding and upgrading pump stations.
Expansion capital expenditures declined by $1.6 million from $6.7
million in the first half of 2001 to $5.1 million in the first half of 2002. In
2001, we constructed two new tanks at our Eastern Pipeline's Montello facility
and completed an ethanol blending project at our refined product terminals. In
2002, we are currently in the process of constructing two new tanks at our
Nederland terminal which will add 1.3 million barrels of storage capacity and is
expected to be operational by the first quarter of 2003.
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 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 million Credit Facility, although currently undrawn, would
expose us to interest rate risk, since this Credit Facility bears interest at a
variable rate.
22
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;
.. 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;
23
.. 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;
.. Changes in financial markets resulting in increased pension expense; 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.
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 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 June 30, 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
24
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 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. In connection with the
registration of the exchange of the Senior Notes and the guarantees covering the
Senior Notes, the Operating Partnership filed an exchange offer registration
statement on SEC Form S-4. This registration statement was declared effective on
June 28, 2002. The exchange offer was completed on August 2, 2002, with all $250
million aggregate principal amount of the Senior Notes being exchanged for a
like principal amount of new publicly tradable notes having substantially
identical terms issued pursuant to the exchange offer registration statement
filed under the Securities Act of 1993, as amended.
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
3.1: Amendment No. 1 to First Amended and Restated Agreement of
Limited Partnership of Sunoco Logistics Partners L.P.,
dated as of February 8, 2002 (incorporated by reference
to Exhibit 4.2 to the Form S-8, File No. 333-71968, filed
July 22, 2002)
25
10.1: Sunoco Partners LLC Long-Term Incentive Plan (amended and
restated as of July 22, 2002) (incorporated by reference
to Exhibit 4.1 to the Form S-8, File No. 333-71968, filed
July 22, 2002)
10.2: Sunoco Partners LLC Directors' Deferred Compensation Plan
12.1: Statement of Computation of Ratio of Earnings to Fixed
Charges
99.1: Certification of Periodic Report
99.2: Certification of Periodic Report
(b) Reports on Form 8-K
None
26
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 August 14, 2002