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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 SEPTEMBER 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 No.)
incorporation or organization)
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 X No _____
-----
The number of the registrant's Common Units held by non-affiliates and
outstanding at October 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 September 30, 2002 and 2001................................... 2
Condensed Statements of Income for the Nine Months
Ended September 30, 2002 and 2001................................... 3
Condensed Balance Sheets at September 30, 2002
and December 31, 2001............................................... 4
Condensed Statements of Cash Flows for the Nine Months
Ended September 30, 2002 and 2001................................... 5
Condensed Statement of Partners' Capital/Net Parent
Investment for the Nine Months Ended September 30, 2002............. 6
Notes to Condensed Financial Statements............................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 18
Item 3. Quantitative and Qualitative Disclosures
about Market Risk................................................... 25
Item 4. Controls and Procedures ............................................ 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 27
Item 2. Changes in Securities and Uses of Proceeds.......................... 28
Item 3. Defaults Upon Senior Securities..................................... 28
Item 4. Submission of Matters to a Vote of Security Holders................. 29
Item 5. Other Information................................................... 29
Item 6. Exhibits and Reports on Form 8-K.................................... 29
SIGNATURE............................................................................ 30
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
September 30,
--------------------------------
2002 2001
----------- -----------
Revenues
Sales and other operating revenue:
Affiliates..................................................... $ 284,903 $ 236,366
Unaffiliated customers......................................... 214,353 156,126
Other income........................................................ 1,448 1,359
----------- -----------
Total Revenues................................................... 500,704 393,851
----------- -----------
Costs and Expenses
Cost of products sold and operating expenses........................ 465,198 365,053
Depreciation and amortization....................................... 6,327 6,081
Selling, general and administrative expenses........................ 10,289 8,673
----------- -----------
Total Costs and Expenses......................................... 481,814 379,807
----------- -----------
Operating Income.................................................... 18,890 14,044
Net interest cost paid to affiliates................................ 81 2,686
Other interest cost and debt expense, net........................... 5,043 98
Capitalized interest................................................ (298) (152)
----------- -----------
Income before income tax expense.................................... 14,064 11,412
Income tax expense.................................................. - 4,184
----------- -----------
Net Income.......................................................... $ 14,064 $ 7,228
=========== ===========
Calculation of Limited Partners' interest in Net Income:
Net Income........................................................ $ 14,064
Less: General Partners' interest in Net Income.................... 281
-----------
Limited Partners' interest in Net Income.......................... $ 13,783
===========
Net Income per Limited Partner unit:
Basic............................................................. $ 0.61
===========
Diluted........................................................... $ 0.60
===========
Weighted average Limited Partners' units outstanding:...............
Basic............................................................. 22,767,278
===========
Diluted........................................................... 22,783,383
===========
(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
----------- -----------
Nine Months Ended
September 30,
--------------------------------
2002 2001
----------- -----------
Revenues
Sales and other operating revenue:
Affiliates............................................................ $ 830,195 $ 837,124
Unaffiliated customers................................................ 464,988 413,387
Other income............................................................... 4,964 3,474
----------- -----------
Total Revenues.......................................................... 1,300,147 1,253,985
----------- -----------
Costs and Expenses
Cost of products sold and operating expenses............................... 1,197,546 1,164,381
Depreciation and amortization.............................................. 19,039 17,682
Selling, general and administrative expenses............................... 29,700 26,213
----------- -----------
Total Costs and Expenses................................................ 1,246,285 1,208,276
----------- -----------
Operating Income........................................................... 53,862 45,709
Net interest cost paid to affiliates....................................... 1,226 9,308
Other interest cost and debt expense, net.................................. 12,021 296
Capitalized interest....................................................... (843) (1,100)
----------- -----------
Income before income tax expense........................................... 41,458 37,205
Income tax expense......................................................... 1,555 13,920
----------- -----------
Net Income................................................................. $ 39,903 $ 23,285
=========== ===========
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
September 30, 2002...................................................... 36,482
-----------
Net Income............................................................... $ 39,903
===========
Calculation of Limited Partners' interest in Net Income:
Net Income............................................................... $ 36,482
Less: General Partners' interest in Net Income........................... 730
-----------
Limited Partners' interest in Net Income................................. $ 35,752
===========
Net Income per Limited Partner unit for the period
from February 8, 2002 through September 30, 2002:..........................
Basic.................................................................... $ 1.57
===========
Diluted.................................................................. $ 1.57
===========
Weighted average Limited Partners' units outstanding:
Basic.................................................................... 22,767,278
===========
Diluted.................................................................. 22,773,583
===========
(See Accompanying Notes)
3
SUNOCO LOGISTICS PARTNERS L.P.
CONDENSED BALANCE SHEETS
(UNAUDITED)
(in thousands)
Partnership Predecessor
----------- -----------
September 30, December 31,
2002 2001
----------- -----------
Assets
Current Assets
Cash and cash equivalents.............................................. $ 41,331 $ --
Accounts receivable, affiliated companies (Note 3)..................... 85,838 6,245
Accounts receivable, net............................................... 249,996 151,264
Note receivable from affiliate (Note 3)................................ - 20,000
Inventories:
Crude oil............................................................ 22,616 19,367
Materials, supplies and other........................................ 1,227 1,239
Deferred income taxes.................................................. - 2,821
----------- -----------
Total Current Assets................................................ 401,008 200,936
Properties, plants and equipment....................................... 959,818 937,305
Less accumulated depreciation and amortization......................... 386,856 370,946
----------- -----------
Properties, plants and equipment, net.................................. 572,962 566,359
Deferred charges and other assets...................................... 29,378 21,906
----------- -----------
Total Assets........................................................ $ 1,003,348 $ 789,201
=========== ===========
Liabilities and Partners' Capital/Net Parent Investment
Current Liabilities
Accounts payable....................................................... $ 338,707 $ 235,061
Accrued liabilities.................................................... 18,220 26,628
Advances from affiliate (Note 3)....................................... 1,748 --
Current portion of long-term debt due affiliate
(Note 3)............................................................. - 75,000
Current portion of long-term debt (Note 4)............................. 243 228
Taxes payable.......................................................... 11,322 20,373
----------- -----------
Total Current Liabilities........................................... 370,240 357,290
Long-term debt due affiliate (Note 3).................................. - 65,000
Long-term debt (Note 4)................................................ 252,746 4,553
Deferred income taxes.................................................. - 78,140
Other deferred credits and liabilities................................. 816 9,325
Commitments and contingent liabilities (Note 6)........................
Partners' Capital...................................................... 379,546 --
Net Parent Investment (Note 5)......................................... - 274,893
----------- -----------
Total Liabilities and Partners' Capital/Net Parent Investment.......
$ 1,003,348 $ 789,201
=========== ===========
(See Accompanying Notes)
4
SUNOCO LOGISTICS PARTNERS L.P.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Partnership
and
Predecessor
Combined Predecessor
------------- -------------
Nine Months Ended
September 30,
------------------------------------
2002 2001
------------- -------------
Cash Flows from Operating Activities:
Net income.......................................................... $ 39,903 $ 23,285
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Depreciation and amortization.................................. 19,039 17,682
Deferred income tax expense.................................... 675 9,422
Changes in working capital pertaining to
operating activities:
Accounts receivable, affiliated companies.................. (79,593) 829
Accounts receivable, net................................... (100,563) 74,248
Inventories................................................ (10,226) (6,940)
Accounts payable and accrued liabilities................... 105,952 (101,887)
Taxes payable.............................................. 5,021 (644)
Other.......................................................... (3,592) 1,081
------------- -------------
Net cash provided by/(used in) operating activities................... (23,384) 17,076
------------- -------------
Cash Flows from Investing Activities:
Capital expenditures................................................ (26,880) (40,222)
Collection of note receivable from affiliate........................ 20,000 --
Other............................................................... -- (296)
------------- -------------
Net cash used in investing activities................................. (6,880) (40,518)
------------- -------------
Cash Flows from Financing Activities:
Distributions paid to unitholders................................... (16,494) --
Net proceeds from issuance of common units to the public............ 96,341 --
Advances from affiliate, net........................................ 1,748 --
Repayments of long-term debt........................................ (217) (200)
Repayments of long-term debt due affiliate.......................... (50,000) --
Net proceeds from issuance of long-term debt........................ 244,788 --
Special distribution to Sunoco...................................... (244,788) --
Contributions from Sunoco........................................... 40,217 18,642
Net proceeds from short-term borrowings due affiliate............... -- 5,000
------------- -------------
Net cash provided by financing activities............................. 71,595 23,442
------------- -------------
Net increase in cash and cash equivalents............................. 41,331 --
Cash and cash equivalents at beginning of period...................... -- --
------------- -------------
Cash and cash equivalents at end of period............................ $ 41,331 $ --
============= =============
(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 189,474 -- -- -- -- -- 189,474
Special
distribution to
Sunoco (244,788) -- -- -- -- -- (244,788)
---------- ------------ ----------- ------------- ----------- ------- ----------
Net assets
contributed by
Sunoco 263,217 -- -- -- -- -- 263,217
Allocation of net
assets
contributed by
Sunoco (263,217) 5,633,639 85,396 11,383,639 172,557 5,264 --
Issuance of
common units to
the public -- 5,750,000 96,341 -- -- -- 96,341
Net income
applicable to the
period from
February 8
through
September 30,
2002 -- -- 17,876 -- 17,876 730 36,482
Cash distributions -- -- (8,082) -- (8,082) (330) (16,494)
---------- ------------ ----------- ------------- ----------- ------- ----------
Balance at
September 30,
2002 $ -- 11,383,639 $ 191,531 11,383,639 $ 182,351 $ 5,664 $ 379,546
========== ============ =========== ============= =========== ======= ==========
(See Accompanying Notes)
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 nine months ended September 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) a 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 $244.8 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 $96.3 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
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.
Accounts Receivable, Affiliated Companies
Affiliated revenue 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
revenue is generally based on using posted tariffs. Prior to January 1, 2002,
revenue from terminalling and storage was 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 revenue 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. 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, 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.
8
Allocated Sunoco employee benefit plan expenses for employees who work 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, which are 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.
Advances from Affiliate
The Partnership entered into a treasury services agreement with Sunoco at
the closing of the IPO pursuant to which the Partnership, 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).
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 nine months ended September 30, 2001,
the Predecessor borrowed an additional $5.0 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):
September 30, December 31,
2002 2001
------------ ------------
Senior Notes.................................... $ 250,000 $ --
Less unamortized bond discount.................. 1,575 --
------------ ------------
248,425 --
Other (including current portion)............... 4,564 4,781
------------ ------------
$ 252,989 $ 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 September 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 $244.8 million, after offering
commissions and issuance expenses, from the sale of the outstanding Senior Notes
to the Partnership, which were then distributed 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 September
30, 2002. At September 30, 2002, the Partnership's ratio of total debt to EBITDA
was 2.8 to 1 and the interest coverage ratio was 4.6 to 1. There were no
borrowings against the Credit Facility as of September 30, 2002.
10
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.
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
$41.3 million. Except for amounts associated with the Senior Notes, cash and
cash equivalents and advances from affiliate, the assets and liabilities in the
condensed balance sheet at September 30, 2002 and the revenues and costs and
expenses in the condensed statements of income for the quarter and nine 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 $ 1,831
Inventories 6,989
Deferred income taxes 2,821
Properties, plants and equipment, net 822
---------
12,463
---------
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 $ 189,474
=========
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 any 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 September 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 nine-month periods ended
September 30, 2002 and 2001 (in thousands of dollars):
Three Months Ended
September 30,
---------------------------
2002 2001
--------- ---------
Segment Operating Income
Eastern Pipeline System:
Sales and other operating revenue:
Affiliates ............................................................ $ 17,996 $ 17,296
Unaffiliated customers................................................. 5,664 4,997
Other income ........................................................... 1,585 1,366
--------- ---------
Total Revenues.......................................................... 25,245 23,659
--------- ---------
Operating expenses...................................................... 11,680 10,227
Depreciation and amortization........................................... 2,423 2,446
Selling, general and administrative expenses............................ 3,756 3,070
--------- ---------
Total Costs and Expenses................................................ 17,859 15,743
--------- ---------
Operating Income........................................................ $ 7,386 $ 7,916
========= =========
Terminal Facilities:
Sales and other operating revenue:
Affiliates ............................................................ $ 13,872 $ 11,046
Unaffiliated customers................................................. 8,882 8,464
Other income /(loss).................................................... -- (31)
--------- ---------
Total Revenues.......................................................... 22,754 19,479
--------- ---------
Operating expenses...................................................... 9,158 8,393
Depreciation and amortization........................................... 2,646 2,352
Selling, general and administrative expenses............................ 3,206 2,651
--------- ---------
Total Costs and Expenses................................................ 15,010 13,396
--------- ---------
Operating Income........................................................ $ 7,744 $ 6,083
========= =========
Western Pipeline System:
Sales and other operating revenue:
Affiliate ............................................................. $ 253,035 $ 208,024
Unaffiliated customers................................................. 199,807 142,665
Other income /(loss).................................................... (137) 24
--------- ---------
Total Revenues.......................................................... 452,705 350,713
--------- ---------
Cost of products sold and operating expenses............................ 444,360 346,433
Depreciation and amortization........................................... 1,258 1,283
Selling, general and administrative expenses............................ 3,327 2,952
--------- ---------
Total Costs and Expenses................................................ 448,945 350,668
--------- ---------
Operating Income........................................................ $ 3,760 $ 45
========= =========
Reconciliation of Segment Operating Income to Net Income:
Operating Income:
Eastern Pipeline System................................................ $ 7,386 $ 7,916
Terminal Facilities.................................................... 7,744 6,083
Western Pipeline System................................................ 3,760 45
--------- ---------
Total segment operating income.......................................... 18,890 14,044
Net interest expense.................................................... 4,826 2,632
Income tax expense...................................................... -- 4,184
--------- ---------
Net Income.............................................................. $ 14,064 $ 7,228
========= =========
13
Nine Months Ended
September 30,
--------------------------------
2002 2001
----------- -----------
Segment Operating Income
Eastern Pipeline System:
Sales and other operating revenue:
Affiliates ............................................................ $ 53,539 $ 52,452
Unaffiliated customers................................................. 16,721 15,544
Other income ........................................................... 5,096 3,470
----------- -----------
Total Revenues.......................................................... 75,356 71,466
----------- -----------
Operating expenses...................................................... 33,211 30,447
Depreciation and amortization........................................... 7,352 7,235
Selling, general and administrative expenses............................ 11,762 9,474
----------- -----------
Total Costs and Expenses................................................ 52,325 47,156
----------- -----------
Operating Income........................................................ $ 23,031 $ 24,310
=========== ===========
Terminal Facilities:
Sales and other operating revenue:
Affiliates ............................................................ $ 41,407 $ 31,374
Unaffiliated customers................................................. 23,901 22,267
Other income /(loss).................................................... 2 (98)
----------- -----------
Total Revenues.......................................................... 65,310 53,543
----------- -----------
Operating expenses...................................................... 25,226 25,866
Depreciation and amortization........................................... 7,728 7,171
Selling, general and administrative expenses............................ 8,459 7,392
----------- -----------
Total Costs and Expenses................................................ 41,413 40,429
----------- -----------
Operating Income........................................................ $ 23,897 $ 13,114
=========== ===========
Western Pipeline System:
Sales and other operating revenue:
Affiliates ............................................................ $ 735,249 $ 753,298
Unaffiliated customers................................................. 424,366 375,576
Other income / (loss)................................................... (134) 102
----------- -----------
Total Revenues.......................................................... 1,159,481 1,128,976
----------- -----------
Cost of products sold and operating expenses............................ 1,139,109 1,108,068
Depreciation and amortization........................................... 3,959 3,276
Selling, general and administrative expenses............................ 9,479 9,347
----------- -----------
Total Costs and Expenses................................................ 1,152,547 1,120,691
----------- -----------
Operating Income........................................................ $ 6,934 $ 8,285
=========== ===========
Reconciliation of Segment Operating Income to Net Income:
Operating Income:
Eastern Pipeline System................................................ $ 23,031 $ 24,310
Terminal Facilities.................................................... 23,897 13,114
Western Pipeline System................................................ 6,934 8,285
----------- -----------
Total segment operating income.......................................... 53,862 45,709
Net interest expense.................................................... 12,404 8,504
Income tax expense...................................................... 1,555 13,920
----------- -----------
Net Income.............................................................. $ 39,903 $ 23,285
=========== ===========
14
8. Net Income Per Unit Data
Prior to the Partnership's IPO on February 8, 2002, there were no limited
partner units outstanding. As such, net income per unit is not presented for the
three-month and nine-month periods ended September 30, 2001. The following table
sets forth the reconciliation of the weighted average number of limited partner
units used to compute basic net income per limited partner unit to those used to
compute diluted net income per limited partner unit for the three-month and
nine-month periods ended September 30, 2002:
Three Months Ended Nine Months Ended
September 30, 2002 September 30, 2002
------------------ ------------------
Weighted average number of
limited partner units
outstanding - basic 22,767,278 22,767,278
Add effect of dilutive stock
incentive awards 16,105 6,305
---------- ----------
Weighted average number of
limited partner units - diluted 22,783,383 22,773,583
========== ==========
9. Long-Term Incentive Plan
In July 2002, Sunoco Partners LLC, the general partner of the Partnership,
adopted a long-term incentive plan under which restricted units (rights to
receive common units), unit options, and distribution equivalent rights ("DERs")
of Sunoco Logistics Partners L.P. may be awarded to directors, executives and
key employees of the general partner providing services to the Partnership.
DERs, granted in tandem with specific restricted unit awards, are contingent
rights to receive an amount in cash equal to the cash distributions made by the
Partnership during the period such restricted units are outstanding. The plan
permits the grant of awards covering an aggregate of 1,250,000 common units. In
July 2002, the general partner granted 185,625 restricted units with DERs under
the plan to directors, executives and key employees of the general partner. The
ultimate number of common units to be issued at the end of the three-year
vesting period could increase or decrease based upon the achievement of certain
performance goals set forth by general partner's board of directors. The
Partnership recognized $0.3 million of compensation expense for the three and
nine months ended September 2002 associated with management's estimate of the
number of common units expected to be issued at the end of the vesting period.
The fair market value of the restricted units granted was $3.7 million on the
date of grant.
10. 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 and indefinite-lived intangible assets effective January 1, 2002 and
determined during 2002 that the value was not impaired. The following table sets
forth the reconciliation of net
15
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 Nine Months Ended
September 30, September 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income, as reported $ 14,064 $ 7,228 $ 39,903 $ 23,285
Add back:
goodwill amortization - 106 - 317
indefinite-lived intangible
asset amortization - 76 - 228
-------- -------- -------- --------
Net income, as adjusted $ 14,064 $ 7,410 $ 39,903 $ 23,830
======== ======== ======== ========
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.
Under SFAS No. 143, the fair value of a liability for an asset retirement
obligation will be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs will be capitalized as part of the carrying amount of the fixed asset and
depreciated over its estimated useful life. Under existing accounting
principles, a liability for an asset retirement obligation is recognized using a
cost-accumulation measurement approach. Management of the Partnership has not
completed its evaluation of SFAS No. 143 and, therefore, is unable to estimate
the impact on the Partnership's financial statements at this time.
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 nine months of 2002.
16
11. Distribution to Unitholders
On October 22, 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 September
30, 2002. The $10.5 million distribution, including $0.2 million to the General
Partner, will be paid on November 14, 2002 to unitholders of record at the close
of business on November 1, 2002.
Distributions paid by the Partnership since the IPO on February 8, 2002
were as follows:
Total Cash Total Cash
Date Cash Per Unit Cash Distribution Distribution
Distribution Distribution to the Limited to the General
Paid Amount Partners Partner
--------------- ----------- --------------- ----------------
($ millions) ($ millions)
August 14, 2002 $ 0.45 $ 10.3 $ 0.2
May 15, 2002 $ 0.26 $ 5.9 $ 0.1
The distribution paid on May 15, 2002 represented the minimum quarterly
distribution for the 52-day period from the date of the IPO, February 8, 2002,
through March 31, 2002.
12. Subsequent Event
In October 2002, the Partnership entered into a definitive agreement to
purchase an interest in three Midwestern and Western United States pipeline
companies from an affiliate of Union Oil Company of California ("Unocal") for
$54.0 million. These interests consist of 31.5 percent of Wolverine Pipeline
Company, 9.2 percent of West Shore Pipeline Company, and 14.0 percent of
Yellowstone Pipeline Company. Closing of the transaction is expected to occur
before year-end, subject to regulatory approval and customary closing
conditions. The transaction is expected to be initially funded through
borrowings under the $150 million Credit Facility.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations - Three Months Ended September 30, 2002 and 2001
Sunoco Logistics Partners L.P.
Operating Highlights
Three Months Ended September 30, 2002 and 2001
Three Months Ended
September 30,
-----------------------
2002 2001
---------- ----------
Eastern Pipeline System /(1)/:
Pipeline throughput (bpd) /(2)/ ............................ 581,765 529,920
Total shipments (barrel miles per day) /(3)/ ............... 57,271,321 53,046,186
Revenue per barrel mile (cents) ............................ 0.449 0.457
Terminal Facilities:
Terminal throughput (bpd):
Nederland terminal ........................................ 400,039 456,975
Other terminals /(4)/ ..................................... 728,415 730,096
Western Pipeline System:
Crude oil pipeline throughput (bpd) ........................ 291,750 294,178
Crude oil purchases at wellhead (bpd) ...................... 188,879 183,088
Gross margin per barrel of pipeline throughput
(cents)/(5)/ ............................................ 26.9 11.0
___________
(1) Excludes amounts attributable to the 9.4% ownership interest in the
Explorer Pipeline Company joint venture.
(2) Excludes Toledo, Twin Oaks, and Linden transfer pipelines, which transport
large volume of refined products over short distances and generate minimal
revenue.
(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 $14.1 million for the three-month period ended September
30, 2002 as compared with $7.2 million for the same period in the prior year, an
increase of $6.9 million. This increase was primarily the result of a $4.9
million increase in operating income and a $4.2 million decrease in corporate
income taxes due to the partnership status in the current quarter, partially
offset by a $2.2 million increase in net interest expense. Operating income
increased $4.9 million to $18.9 million for the third quarter of 2002 compared
with $14.0 million for the prior year due principally to higher gross margins
from the Western Pipeline System and higher Terminal Facilities business segment
revenue due to the new pricing arrangement with Sunoco, Inc. and its
subsidiaries (collectively, "Sunoco"). Effective January 1, 2002, Sunoco
Logistics began to charge Sunoco market-
18
based fees for most terminalling and throughput services. Prior to this date,
most of the terminalling and throughput services provided to Sunoco were at fees
that enabled Sunoco Logistics to recover costs but not generate any profits (see
Note 3 to the condensed financial statements).
Sales and other operating revenue totaled $499.3 million for the third
quarter of 2002 as compared with $392.5 million for the corresponding 2001
period, an increase of $106.8 million. The change was attributable to increased
revenue at the Western Pipeline System resulting from higher lease acquisition
volume and higher crude oil prices. Revenue at the Terminal Facilities business
segment was also higher due to the new pricing arrangement with Sunoco discussed
earlier. The average price of West Texas Intermediate crude oil at Cushing,
Oklahoma, the benchmark crude oil in the United States, increased to an average
price of $28.25 per barrel for the third quarter of 2002 from $26.76 for the
corresponding prior year period.
Total cost of products sold and operating expenses increased $100.1 million
to $465.2 million for the three months ended September 30, 2002 from $365.1
million for the prior year primarily due to an increase in the Western Pipeline
System's lease acquisition volume and rising crude oil prices from the prior
year. Depreciation and amortization increased $0.2 million from the prior year
to $6.3 million for the third quarter of 2002 due to higher capital expenditures
at the end of 2001, including the acquisition of GulfMark Energy, Inc.'s crude
oil pipeline in Texas and its crude oil acquisition business in November 2001.
Selling, general and administrative expenses increased $1.6 million to
$10.3 million for the third quarter of 2002 from $8.7 million for the prior year
due primarily to public company costs and increased insurance premiums.
Net interest expense increased $2.2 million to $4.8 million for the third
quarter of 2002 from $2.6 million for the prior year due to 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 September 30,
2002 compared to $4.2 million for 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 for the Eastern Pipeline System was $7.4 million for the
third quarter of 2002 compared with $7.9 million for the prior year. The $0.5
million decrease was primarily the result of a $2.2 million increase in total
costs and expenses, partially offset by a $1.4 million increase in sales and
other operating revenue and a $0.2 million increase in other income. The
increase in sales and other operating revenue compared with last year's period
was due to an increase in total shipments, which more than offset a decrease in
revenue per barrel mile. Other income was higher due to an increase in equity
income from the Explorer Pipeline resulting from increased volume and higher
revenue per barrel.
19
The $2.2 million increase in total costs and expenses was due to an
increase in operating expenses of $1.5 million and an increase in selling,
general and administrative expenses of $0.7 million. Operating expenses
increased to $11.7 million for the third quarter of 2002 from $10.2 million for
the prior year due to higher pipeline maintenance expenditures in the current
period. Selling, general and administrative expenses rose to $3.8 million for
the three months ended September 2002 from $3.1 million for the prior year due
to allocated public company costs and increased insurance premiums.
Terminal Facilities
Operating income for the Terminal Facilities was $7.7 million for the three
months ended September 30, 2002 compared with $6.1 million for the prior year.
The $1.6 million increase was due to a $3.3 million increase in total revenue,
partially offset by a $0.8 million increase in operating expenses, $0.5 million
in selling, general and administrative expenses, and $0.2 million in
depreciation and amortization.
The $3.3 million increase in total revenue was due principally to the
change in the fee arrangement for terminalling and throughput services provided
to Sunoco, as discussed earlier, and higher tank rental revenue at the Nederland
Terminal from a new tank brought into service at the beginning of the second
quarter 2002. This was partially offset by a decline in volume at Nederland as a
result of rising prices of foreign crude oil relative to domestic crude oil.
The increase in operating expenses to $9.2 million for the third quarter
2002 compared with $8.4 million for the prior year was due to higher maintenance
expenses in the current period. The increase in selling, general and
administrative expenses to $3.2 million for the three months ended September
2002 from $2.7 million for the prior year was due to allocated public company
costs and increased insurance premiums.
Western Pipeline System
Operating income for the Western Pipeline System was $3.8 million for the
third quarter of 2002, a $3.7 million increase from the prior year. This
increase was primarily the result of higher lease acquisition volume and
margins, partly offset by a decline in gathered volume. Selling, general and
administrative expenses increased $0.3 million to $3.3 million for the quarter
ended September 2002 from $3.0 million for the prior year due to allocated
public company costs and increased insurance premiums.
20
Results of Operations - Nine Months Ended September 30, 2002 and 2001
Sunoco Logistics Partners L.P.
Operating Highlights
Nine Months Ended September 30, 2002 and 2001
Nine Months Ended
September 30,
-----------------------
2002 2001
---------- ----------
Eastern Pipeline System/(1)/:
Pipeline throughput (bpd) /(2)/ ............................... 571,494 551,681
Total shipments (barrel miles per day) /(3)/ .................. 56,522,115 55,552,924
Revenue per barrel mile (cents)................................ 0.455 0.448
Terminal Facilities:
Terminal throughput (bpd):
Nederland terminal............................................ 421,649 437,852
Other terminals /(4)/ ........................................ 742,117 734,965
Western Pipeline System:
Crude oil pipeline throughput (bpd) ........................... 285,875 289,496
Crude oil purchases at wellhead (bpd) ......................... 189,234 177,189
Gross margin per barrel of pipeline throughput (cents)/(5)/ ... 21.2 22.2
__________
(1) Excludes amounts attributable to the 9.4% ownership interest in the
Explorer Pipeline Company joint venture.
(2) Excludes Toledo, Twin Oaks, and Linden transfer pipelines, which transport
large volume of refined products over short distances and generate minimal
revenue.
(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 $39.9 million for the nine-month period ended September 30,
2002 as compared with $23.3 million for the same period in the prior year, an
increase of $16.6 million. This increase was primarily the result of a $12.3
million decrease in corporate income taxes subsequent to the IPO and an $8.2
million increase in operating income, partially offset by a $3.9 million
increase in net interest expense. Operating income was $8.2 million higher in
the current year compared with the first nine months of 2001 due principally to
higher revenue at the Terminal Facilities business segment. The increase in
revenue was primarily the result of a new pricing arrangement with Sunoco
discussed earlier. Partially offsetting the revenue increase was public company
costs, one-time start-up costs, increased insurance premiums, and charges
associated with a pipeline leak in January 2002, prior to the date of the IPO.
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.
21
Sales and other operating revenue totaled $1,295.2 million for the first
nine months of 2002 as compared with $1,250.5 million for the corresponding 2001
period, an increase of $44.7 million. The increase was largely attributable to
higher lease acquisition volume, partially offset by a decrease in crude oil
prices. The average price of West Texas Intermediate crude oil at Cushing,
Oklahoma, declined to an average price of $25.42 per barrel for the first nine
months of 2002 from $27.80 for the corresponding prior year period. Other income
increased $1.5 million from the prior year to $5.0 million for the first nine
months of 2002 as a result of higher equity income from Explorer Pipeline due to
increased volume and revenue per barrel.
Total cost of products sold and operating expenses increased $33.1 million
to $1,197.5 million for the first nine months of 2002 from $1,164.4 million for
the prior year due primarily to an increase in lease acquisition volume, partly
offset by the decline in crude oil prices described above. Depreciation and
amortization increased $1.3 million to $19.0 million for the first nine months
of 2002 compared with $17.7 million for the prior year due to higher capital
expenditures at the end of 2001 including the acquisition of GulfMark discussed
earlier.
Selling, general and administrative expenses increased $3.5 million to
$29.7 million for the first nine months of 2002 from $26.2 million for the prior
year due primarily to public company costs, one-time start-up costs and
increased insurance premiums.
Net interest expense increased $3.9 million to $12.4 million for the first
nine months of 2002 from $8.5 million for the prior year due to 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.
Income tax expense for the nine months ended September 30, 2002 of $1.6
million represents a $12.3 million decrease from $13.9 million for the prior
year 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 for the Eastern Pipeline System was $23.0 million for the
first nine months of 2002 compared with $24.3 million for the prior year. The
$1.3 million decrease was primarily the result of a $5.1 million increase in
total costs and expenses, partially offset by a $2.3 million increase in sales
and other operating revenue and a $1.6 million increase in other income. Total
sales and other operating revenue increased compared with the prior year due to
higher volume and revenue per barrel mile. The increase in other income was due
to higher equity income from the Explorer Pipeline resulting from increased
volume and revenue per barrel.
The $5.1 million increase in total costs and expenses was due to an
increase in operating expenses of $2.8 million and an increase in selling,
general and administrative expenses of $2.3 million. The increase in operating
expenses was due to charges associated with a pipeline leak in January 2002 and
higher pipeline maintenance expenses. As this pipeline leak
22
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. The increase in selling, general
and administrative expenses was due to allocated public company costs, one-time
startup costs and higher insurance premiums.
Terminal Facilities
Operating income for the Terminal Facilities was $23.9 million for the nine
months ended September 30, 2002 compared with $13.1 million for the prior year.
The $10.8 million increase was due to an $11.8 million increase in total revenue
and a $0.7 million decrease in operating expenses, partially offset by increases
of $1.1 million for selling, general and administrative expenses and $0.5
million for depreciation and amortization.
The $11.8 million increase in total revenue was due principally to the
change in the fee arrangement for terminalling and throughput services provided
to Sunoco as discussed earlier, and higher tank rental revenue at the Nederland
Terminal as a result of a new tank that was brought into service at the
beginning of the second quarter. These increases were partially offset by lower
volume at the Nederland Terminal due to rising prices of foreign crude oil
relative to domestic crude oil.
The $0.7 million decrease in operating expenses was primarily due to lower
maintenance expenses for the first nine months of 2002 compared with the prior
year. The $1.1 million increase in selling, general and administrative expenses
was attributable to allocated public company costs, one-time start-up costs, and
higher insurance premiums.
Western Pipeline System
Operating income for the Western Pipeline System was $6.9 million for the
first nine months of 2002, a $1.4 million decrease from $8.3 million for the
prior year. This decrease was primarily the result of a decline in gathered
volume, partially offset by an increase in lease acquisition volume and margins.
Total revenue and cost of products sold and operating expenses both increased
due to an increase in lease acquisition volume, partly offset by a decline in
the price of crude oil, as discussed above. Depreciation and amortization
increased $0.7 million from the prior year to $4.0 million for the first nine
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 nine months of 2002 was
$23.4 million compared with $17.1 million of cash provided by operating
activities for the same period in 2001. The $23.4 million of net cash used in
operating activities for the nine months ended September 2002 was primarily the
result of the replacement of working capital that was not contributed by Sunoco
to the Partnership upon formation. The net proceeds of the IPO were used to
replenish this working capital shortfall. The working capital not contributed
consisted primarily of $81.0 million of affiliated company accounts receivable
and $13.5 million of crude oil inventory.
Net cash used in investing activities was $6.9 million for the nine months
ended September 30, 2002 compared with $40.5 million for the prior
23
year. The change was primarily due to the collection of a $20.0 million note
receivable from an affiliate and a $13.3 million reduction of capital
expenditures due to fewer one-time projects undertaken during the first nine
months of 2002 compared to the same period in 2001.
Net cash provided by financing activities for the first nine months of 2002
was $71.6 million, compared with $23.4 million for the prior year. The change
between periods was due mainly to the net proceeds of $96.3 million from the
IPO, partially offset by $16.5 million of distributions paid to unitholders and
the general partner. In addition, net proceeds of $244.8 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, the Partnership, among
other things, participates in Sunoco's centralized cash management program. The
$1.7 million of advances from affiliate represent amounts due to Sunoco under
this treasury services agreement.
Capital Requirements
The following table summarizes maintenance and expansion capital
expenditures for the periods presented (in thousands of dollars):
Nine Months Ended September 30,
-------------------------------
2002 2001
---------- ----------
Maintenance.......... $ 17,624 28,898
Expansion............ 9,256 11,324
---------- ----------
$ 26,880 40,222
========== ==========
Maintenance capital expenditures declined by $11.3 million from $28.9
million for the first nine months of 2001 to $17.6 million for the first nine
months of 2002 due to several non-recurring expenditures in 2001 to upgrade
technology resources, increase reliability and lower the Partnership's cost
structure. During 2001, in the area of technology, an automation project was
undertaken for the Western Pipeline System, network systems were upgraded and
various software programs for all areas of the business were enhanced. For the
Eastern Pipeline System, a crude oil transfer line between the Darby Creek Tank
Farm and Hog Island Wharf was replaced, and higher one-time line testing
projects were undertaken related to the Department of Transportation's pipeline
integrity management rule adopted in 2001. For the Western Pipeline System,
several crude oil transport trucks were purchased. Several other projects were
undertaken to reduce the existing cost structure, including rebuilding and
upgrading pump stations.
Expansion capital expenditures declined by $2.0 million from $11.3 million
for the first nine months of 2001 to $9.3 million for the first nine months of
2002. During 2001, two new tanks were constructed for the Eastern Pipeline's
Montello facility and an ethanol blending project for the refined product
terminals was completed. During 2002, the construction of two new
24
tanks at the Nederland Terminal will add 1.3 million barrels of storage capacity
and is expected to be operational by the second quarter of 2003. Nederland is
also in the process of constructing a vapor recovery unit that should be
completed before the current year end.
The Partnership's management believes that cash flow from operations
will be sufficient to satisfy ongoing capital requirements and to pay the
minimum quarterly distributions. The Partnership may also supplement the cash
generated with the proceeds of borrowings under the $150.0 million Credit
Facility (see Note 4 to the condensed financial statements), or other debt
instruments or the issuance of additional common units.
In October 2002, the Partnership entered into a definitive agreement to
purchase an interest in three Midwestern and Western United States pipeline
companies from an affiliate of Union Oil Company of California ("Unocal") for
$54.0 million. These interests consist of 31.5 percent of Wolverine Pipeline
Company, 9.2 percent of West Shore Pipeline Company, and 14.0 percent of
Yellowstone Pipeline Company. Closing of the transaction is expected to occur
before year-end, subject to regulatory approval and customary closing
conditions. The transaction is expected to be initially funded through
borrowings under the $150 million Credit Facility, and management expects to
keep the Partnership investment grade rating by maintaining a conservative
capital structure over the medium and long-term.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Partnership is exposed to various market risks, including
volatility in crude oil commodity prices and interest rates. To manage such
exposure, inventory levels and expectations of future commodity prices and
interest rates are monitored when making decisions with respect to risk
management. The Partnership has not entered into derivative transactions that
would expose it to price risk.
The $150 million Credit Facility, although currently undrawn, would
expose the Partnership to interest rate risk, since this Credit 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 management of the Partnership believes 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:
25
.. Changes in demand for crude oil and refined petroleum products that is
stored and distributed;
.. Changes in demand for storage in petroleum product terminals;
.. The loss of Sunoco as a customer or a significant reduction in its current
level of throughput and storage with the Partnership;
.. An increase in the competition encountered by the Partnership's 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 the Partnership's petroleum product
pipelines and terminals;
.. Changes in the general economic conditions in the United States;
.. Changes in laws and regulations to which the Partnership is 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;
.. The Partnership's ability to manage rapid growth;
.. The Partnership's ability to control costs;
.. The effect of changes in accounting principles;
.. Global and domestic economic repercussions from terrorist activities and
international hostilities and the government's response thereto;
.. The occurrence of operational hazards or unforeseen interruption for which
the Partnership may not be adequately insured;
.. Changes in the reliability and efficiency of the Partnership's 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;
.. The ability of announced acquisitions or expansions to be cash-accretive;
.. The Partnership's ability to successfully consummate announced acquisitions
or expansions and integrate them into existing business operations;
.. Risks related to labor relations;
.. Non-performance by a major customer or supplier; and
26
.. Changes in the status of litigation to which the Partnership is 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 the
forward-looking statements. Other unknown or unpredictable factors could also
have material adverse effects on future results. The Partnership undertakes no
obligation to update publicly any forward-looking statement whether as a result
of new information or future events.
Item 4. Controls and Procedures
(a) Within the 90 days prior to the date of this report, the Partnership
carried out an evaluation, under the supervision and with the participation of
the management of Sunoco Partners LLC, the Partnership's general partner
(including the President and Chief Executive Officer of Sunoco Partners LLC, and
the Vice President and Chief Financial Officer of Sunoco Partners LLC), of the
effectiveness of the design and operation of the Partnership's disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the President and Chief Executive Officer of Sunoco Partners LLC,
and the Vice President and Chief Financial Officer of Sunoco Partners LLC
concluded that the Partnership's disclosure controls and procedures are
effective.
(b) There have been no significant changes in the Partnership's internal
controls or in other factors that could significantly affect internal controls
subsequent to this evaluation.
(c) Disclosure controls and procedures are designed to ensure that
information required to be disclosed in Partnership reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the rules and forms of the Securities and Exchange
Commission. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in Partnership reports under the Exchange Act is accumulated and
communicated to management, including the President and Chief Executive Officer
of Sunoco Partners LLC, and the Vice President and Chief Financial Officer of
Sunoco Partners LLC, as appropriate, to allow timely decisions regarding
required disclosure.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
There are various legal and administrative proceedings pending against
Sunoco, affiliated predecessors and the Partnership (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 the
Partnership for any losses incurred prior to the IPO, which may be suffered as a
result of such currently pending legal actions. Management believes that any
liabilities arising from such currently pending proceedings are not likely to be
material in relation to the Partnership's business or financial position at
September 30, 2002.
27
Item 2. Changes in Securities and Uses of Proceeds
On February 4, 2002, the Partnership's 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,
5,000,000 common units were sold 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
the IPO, the Partnership 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.
The Partnership used approximately $12.4 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 $96.3 million of net proceeds was used to increase working capital
to the level necessary for the operation of the business, thereby establishing
working capital that was not contributed to the Partnership by Sunoco in
connection with its formation. The underwriters of the 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., the Partnership's 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 $244.8 million after deducting expenses incurred in connection
with the issuance of the Senior Notes of approximately $1.9 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 $244.8 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
28
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
99.1: Certification of Periodic Report
99.2: Certification of Periodic Report
(b) Reports on Form 8-K
The Partnership filed a report on Form 8-K on October 31, 2002 to
disclose under Item 5--"Other Events" a press release issued by the
Partnership announcing that it had signed a definitive agreement to
purchase interests in Wolverine Pipeline Company, West Shore Pipeline
Company, and Yellowstone Pipeline Company from an affiliate of Union
Oil Company of California.
We are pleased to furnish this Form 10-Q to unitholders who request it by
writing to:
Sunoco Logistics Partners L.P.
Investor relations
Ten Penn Center
1801 Market Street
Philadelphia, PA 19103-1699
29
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 November 8, 2002
30
CERTIFICATION
OF
PERIODIC FINANCIAL REPORT
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Deborah M. Fretz, President and Chief Executive Officer of Sunoco
Partners LLC, the general partner of the registrant Sunoco Logistics Partners
L.P., hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sunoco Logistics
Partners L.P.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ DEBORAH M. FRETZ
-----------------------------
Name: Deborah M. Fretz
Title: President and Chief Executive Officer
Date: November 8, 2002
CERTIFICATION
OF
PERIODIC FINANCIAL REPORT
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Colin A. Oerton, Vice President and Chief Financial Officer of Sunoco
Partners LLC, the general partner of the registrant Sunoco Logistics Partners
L.P., hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sunoco Logistics
Partners L.P.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ COLIN A. OERTON
-----------------------------
Name: Colin A. Oerton
Title: Vice President and Chief Financial Officer
Date: November 8, 2002