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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2001
Commission File Number 1-16417
SHAMROCK LOGISTICS , L.P.
Formed under the laws of the State of Delaware
I.R.S. Employer Identification No. 74-2958817
6000 North Loop 1604 West
San Antonio, Texas 78249-1112
Telephone number: (210) 592-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ____ No X
As of July 31, 2001, 9,599,322 common units were outstanding.
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SHAMROCK LOGISTICS, L.P.
FORM 10-Q
MARCH 31, 2001
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Combined Balance Sheets as of March 31, 2001 and December 31, 2000..3
Combined Statements of Income
for the Three Months Ended March 31, 2001 and 2000..............4
Combined Statements of Cash Flows
for the Three Months Ended March 31, 2001 and 2000............. 5
Notes to Combined Financial Statements............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................18
Item 2. Changes in Securities and Use of Proceeds..........................18
Item 3. Defaults Upon Senior Securities....................................19
Item 4. Submission of Matters to a Vote of Security Holders................19
Item 5. Other Information..................................................19
Item 6. Exhibits and Reports on Form 8-K...................................19
SIGNATURE..................................................................19
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SHAMROCK LOGISTICS, L.P.
AND
SHAMROCK LOGISTICS OPERATIONS, L.P.
(successor to the Ultramar Diamond Shamrock Logistics Business)
COMBINED BALANCE SHEETS
(in thousands)
Successor
--------------------------------
March 31, December 31,
2001 2000
---- ----
(unaudited)
Assets
Current assets:
Cash........................................ $ 4 $ 4
Receivable from parent...................... 30,128 22,348
Accounts and notes receivable............... 3,060 2,386
Other current assets......................... 4,083 3,528
-------- --------
Total current assets..................... 37,275 28,266
-------- --------
Property, plant and equipment.................. 389,461 388,537
Less accumulated depreciation and amortization. (111,700) (108,520)
------- -------
Property, plant and equipment, net.......... 277,761 280,017
Goodwill, net.................................. 4,939 5,014
Investment in affiliate........................ 16,217 16,187
-------- --------
Total assets............................... $ 336,192 $ 329,484
======= =======
Liabilities and Partnership Equity
Current liabilities:
Current portion of long-term debt........... $ 608 $ 608
Accounts payable and accrued liabilities.... 2,309 2,685
Taxes other than income taxes............... 1,899 3,601
------- -------
Total current liabilities................ 4,816 6,894
------- -------
Long-term debt, less current portion........... 10,076 10,076
Debt due to parent............................. 107,676 107,676
Commitments and contingencies
Partnership equity:
Limited partners' equity.................... 211,488 202,790
General partners' equity.................... 2,136 2,048
------- -------
Total partnership equity.................. 213,624 204,838
------- -------
Total liabilities and partnership equity.. $ 336,192 $ 329,484
======= =======
See accompanying notes to combined financial statements.
3
SHAMROCK LOGISTICS, L.P.
AND
SHAMROCK LOGISTICS OPERATIONS, L.P.
(successor to the Ultramar Diamond Shamrock Logistics Business)
COMBINED STATEMENTS OF INCOME
(unaudited, in thousands)
.........................
Successor Predecessor
Three Months Three Months
Ended March 31, Ended March 31,
2001 2000
---- ----
Revenues....................................... $ 23,422 $ 21,406
------ ------
Operating costs and expenses:
Operating expenses.......................... 7,640 7,595
General and administrative expenses......... 1,172 901
Depreciation and amortization............... 3,238 3,220
Taxes other than income taxes............... 1,011 1,086
------- ------
Total operating costs and expenses....... 13,061 12,802
------- ------
Operating income............................... 10,361 8,604
Interest expense............................. (2,244) (216)
Equity income from affiliate................. 669 869
------- ------
Income before income taxes..................... 8,786 9,257
Provision for income taxes................... - (3,562)
------- ------
Net income..................................... 8,786 $ 5,695
======
General partners' interest in net income (1%).. (88)
-------
Limited partners' interest in net income....... $ 8,698
=======
See accompanying notes to combined financial statements.
4
SHAMROCK LOGISTICS, L.P.
AND
SHAMROCK LOGISTICS OPERATIONS, L.P.
(successor to the Ultramar Diamond Shamrock Logistics Business)
COMBINED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
.................................................
.................................................
Successor Predecessor
Three Months Three Months
Ended March 31, Ended March 31,
2001 2000
---- ----
Cash Flows from Operating Activities:
Net income ........................................ $ 8,786 $ 5,695
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization.................... 3,238 3,220
Equity income from affiliate..................... (669) (869)
Provision for deferred income taxes.............. - 741
Changes in operating assets and liabilities:
Increase in receivable from parent............. (7,780) -
Decrease (increase) in accounts and notes
receivable................................... (674) 331
Increase in other current assets............... (555) -
Decrease in accounts payable, accrued
liabilities and taxes other than income
taxes........................................ (2,078) (253)
Decrease in other long-term liabilities....... - (26)
------ ------
Net cash provided by operating
activities................................ 268 8,839
------ ------
Cash Flows from Investing Activities:
Maintenance capital expenditures.................... (745) (717)
Expansion capital expenditures...................... (162) (1,090)
Distributions received from affiliate............... 639 726
------ ------
Net cash used in investing activities...... (268) (1,081)
------ ------
Cash Flows from Financing Activities:
Net distributions to parent......................... - (7,475)
Repayment of long-term debt......................... - (283)
------ ------
Net cash used in financing activities...... - (7,758)
------ ------
Net Increase (Decrease) in Cash and Cash Equivalents. - -
Cash at Beginning of Period......................... 4 3
------ ------
Cash at End of Period............................... $ 4 $ 3
====== ======
See accompanying notes to combined financial statements.
5
SHAMROCK LOGISTICS, L.P.
AND
SHAMROCK LOGISTICS OPERATIONS, L.P.
(successor to the Ultramar Diamond Shamrock Logistics Business)
NOTES TO COMBINED FINANCIAL STATEMENTS
March 31, 2001
(unaudited)
NOTE 1: Organization
Shamrock Logistics, L.P. (Shamrock Logistics) and Shamrock Logistics Operations,
L.P. (Shamrock Logistics Operations) are both wholly-owned subsidiaries of
Ultramar Diamond Shamrock Corporation (UDS). UDS is an independent refiner and
retailer of refined products and convenience store merchandise in the central,
southwest and northeast regions of the United States and eastern Canada. UDS
owns and operates seven refineries located in Texas, Oklahoma, California,
Colorado and Quebec, Canada and markets its refined products through 2,030
company-operated convenience stores, 2,543 dealer-operated wholesale outlets and
85 unattended cardlock stations.
UDS' refining operations included various logistics assets (pipelines,
terminals, marine dock facilities, bulk storage facilities, refinery delivery
racks, rail car loading equipment and shipping and trucking operations) that
support UDS' refining and retail operations. A portion of the logistics assets
consists of crude oil and refined product pipelines, refined product terminals
and crude oil storage facilities located in Texas, Oklahoma, New Mexico and
Colorado that support UDS' McKee, Three Rivers and Ardmore refineries located in
Texas and Oklahoma. These pipeline, terminalling and storage assets transport
crude oil and other raw materials to the refineries and transport refined
products from the refineries to terminals for further distribution to
convenience stores owned by UDS or wholesale customers of UDS.
Prior to July 1, 2000, the pipeline, terminalling and storage assets and
operations included in these financial statements were referred to as the
Ultramar Diamond Shamrock Logistics Business as if it had existed as a single
separate entity from UDS. UDS formed Shamrock Logistics Operations to assume
ownership of and to operate the assets of the Ultramar Diamond Shamrock
Logistics Business. Effective July 1, 2000, UDS transferred the crude oil and
refined product pipelines, terminalling and storage assets and certain
liabilities of the Ultramar Diamond Shamrock Logistics Business (predecessor) to
Shamrock Logistics Operations (successor). The transfer of assets and certain
liabilities to Shamrock Logistics Operations represented a reorganization of
entities under common control and was recorded at historical cost.
Effective with the closing of an initial public offering of common units of
Shamrock Logistics on April 16, 2001, the ownership of Shamrock Logistics
Operations held by various subsidiaries of UDS was transferred to Shamrock
Logistics in exchange for the ownership interests (common and subordinated
units) in Shamrock Logistics. This transfer also represented a reorganization of
entities under common control and was recorded at historical cost.
The general partner of Shamrock Logistics and Shamrock Logistics Operations is
Riverwalk Logistics, L.P., a wholly-owned subsidiary of UDS.
The financial statements included in this Form 10-Q represent the combined
financial statements of Shamrock Logistics and Shamrock Logistics Operations
(successor) as of March 31, 2001 and December 31, 2000 and for the three months
ended March 31, 2001, and the combined financial statements of Shamrock
Logistics and the Ultramar Diamond Shamrock Logistics Business (predecessor) for
the three months ended March 31, 2000. This combined financial statement
presentation more clearly reflects our financial position and results of
operations as a result of the most recent reorganization of entities under
common control.
6
NOTE 2: Basis of Presentation
We prepared these unaudited combined financial statements in accordance with
United States' generally accepted accounting principles for interim financial
reporting and with Securities and Exchange Commission rules and regulations for
Form 10-Q. We have included all normal and recurring adjustments considered
necessary for a fair presentation. You should read these combined financial
statements along with the audited financial statements and notes thereto
included in Shamrock Logistics Form S-1 and prospectus dated April 16, 2001.
Operating results for the three months ended March 31, 2001 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001. Our results of operations may be affected by seasonal factors, such as the
demand for petroleum products, which vary during the year; or industry factors
that may be specific to a particular period, such as the demand for refined
products, industry supply capacity and refinery maintenance turnarounds. In
addition, substantially all of our revenues are derived from UDS and its various
subsidiaries, based on the operations of UDS' McKee, Three Rivers and Ardmore
refineries. Accordingly, our results are directly impacted by the operations of
these three refineries of UDS.
NOTE 3: Accounting Pronouncements
FASB Statement No. 133
Effective January 1, 2001, we adopted Statement of Financial Accounting Standard
No. 133, "Accounting for Derivative Instruments and Hedging Activities", as
amended. This statement established accounting and reporting standards for
derivative instruments and for hedging activities. It requires that all
derivative instruments be recognized as either assets or liabilities in the
balance sheet and be measured at their fair value. The statement requires that
changes in the derivative instrument's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. There was no impact
in adopting Statement No. 133, as amended, as we do not hold or trade derivative
instruments.
FASB Statement No. 140
In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, a replacement of FASB Statement No. 125."
Statement No. 140 revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of the provisions of Statement No. 125
without reconsideration. Except as otherwise provided, Statement No. 140 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. The statement shall be applied
prospectively; earlier or retroactive application of this statement is not
permitted. We have reviewed the requirements of Statement No. 140 and believe
there is no impact to adopting Statement No. 140, as we have not entered into
transactions covered by Statement No. 140.
FASB Statement No. 141
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
141, " Business Combinations." Statement No. 141 addresses financial accounting
and reporting for business combinations and supersedes APB Opinion No. 16,
"Business Combinations," and Statement No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." All business combinations in the scope
of Statement No. 141 are to be accounted for using the purchase method. The
provisions of Statement No. 141 apply to all business combinations initiated
after June 30, 2001 and applies to all business combinations accounted for using
the purchase method for which the date of acquisition is July 1, 2001 or later.
We have reviewed the requirements of Statement No. 141 and will implement the
statement effective July 1, 2001.
7
FASB Statement No. 142
Also in June 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets." Statement No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, "Intangible Assets." Statement No. 142 addresses how intangible
assets that are acquired individually or with a group of other assets (but not
those acquired in a business combination) should be accounted for in financial
statements upon their acquisition. This statement also addresses how goodwill
and other intangible assets should be accounted for after they have been
initially recognized in the financial statements. The provisions of Statement
No. 142 are required to be applied starting with fiscal years beginning after
December 15, 2001. This statement is required to be applied at the beginning of
an entity's fiscal year and to be applied to all goodwill and other intangible
assets recognized in its financial statements at that date. Impairment losses
for goodwill and indefinite-lived intangible assets that arise due to the
initial application of Statement No. 142 are to be reported as resulting from a
change in accounting principle. We have reviewed the requirements of Statement
No. 142 and the impact of adoption effective January 1, 2002 will result in the
cessation of goodwill amortization beginning January 1, 2002, which amortization
approximates $299,700 annually. In addition, we believe that future reported net
income will be more volatile because impairment losses related to goodwill are
likely to occur irregularly and in varying amounts.
NOTE 4: Commitments and Contingencies
Our operations are subject to environmental laws and regulations adopted by
various federal, state, and local governmental authorities in the jurisdictions
in which we operate. Although we believe our operations are in general
compliance with applicable environmental regulations, risks of additional costs
and liabilities are inherent in pipeline, terminalling and storage operations,
and there can be no assurance that significant costs and liabilities will not be
incurred. Moreover, it is possible that other developments, such as increasingly
stringent environmental laws, regulations, and enforcement policies thereunder,
and claims for damages to property or persons resulting from the operations,
could result in substantial costs and liabilities. Accordingly, we have adopted
policies, practices and procedures in the areas of pollution control, product
safety, occupational health and the handling, storage, use and disposal of
hazardous materials to prevent material environmental or other damage, and to
limit the financial liability which could result from such events. However, some
risk of environmental or other damage is inherent in pipeline, terminalling and
storage operations, as it is with other entities engaged in similar businesses.
Although environmental costs may have a significant impact on results of
operations for any single period, we believe that such costs will not have a
material adverse effect on our financial position.
In connection with the transfer of assets and liabilities from the Ultramar
Diamond Shamrock Logistics Business to Shamrock Logistics Operations on July 1,
2000, UDS has agreed to indemnify Shamrock Logistics Operations for
environmental liabilities that arose prior to April 16, 2001 and are discovered
within 10 years after April 16, 2001. Excluded from this indemnification are
liabilities that result from a change in environmental law after April 16, 2001.
In addition, as an operator or owner of the assets, Shamrock Logistics
Operations could be held liable for pre-April 16, 2001 environmental damage
should UDS be unable to fulfill its obligation. However, Shamrock Logistics and
Shamrock Logistics Operations believe that such situation is remote given UDS'
financial condition.
8
NOTE 5: Related Party Transactions
We have related party transactions with UDS for pipeline tariff and terminalling
fee revenues, certain employee costs, insurance costs, administrative costs, and
interest expense on the debt due to parent (beginning July 1, 2000). The
receivable from parent as of March 31, 2001 and December 31, 2000 represents the
net amount due from UDS for these related party transactions and the net cash
collected under UDS's centralized cash management program on behalf of Shamrock
Logistics Operations.
The following table summarizes transactions with UDS (in thousands):
Successor Predecessor
Three Months Three Months
Ended March 31, Ended March 31,
2001 2000
---- ----
Revenues................................ $ 23,272 $ 21,170
Operating expenses...................... 2,686 2,891
General and administrative expenses..... 1,300 1,026
Interest expense on debt due to parent.. 2,154 -
On July 1, 2000, UDS entered into a Services Agreement with us, whereby UDS has
agreed to provide the corporate functions of legal, accounting, treasury,
information technology and other services for an annual fee of $5,200,000 for a
period of eight years. The $5,200,000 is adjustable annually based on the
Consumer Price Index published by the U.S. Department of Labor. This annual fee
is in addition to the incremental general and administrative costs to be
incurred from third parties as a result of Shamrock Logistics becoming a
publicly held entity. The Services Agreement also requires that Shamrock
Logistics and Shamrock Logistics Operations reimburse UDS for various recurring
costs of employees who work exclusively within the pipeline, terminalling and
storage operations and for certain other costs incurred by UDS relating solely
to Shamrock Logistics and Shamrock Logistics Operations. These employee costs
include salary, wages and benefit costs.
Prior to July 1, 2000, UDS allocated approximately 5% of its general and
administrative expenses incurred in the United States to its pipeline,
terminalling and storage operations to cover costs of centralized corporate
functions and other corporate services. General and administrative costs
allocated to the Ultramar Diamond Shamrock Logistics Business (predecessor) for
the three months ended March 31, 2000 were $1,026,000.
On April 16, 2001, UDS entered into a Pipeline and Terminals Usage Agreement
with us, whereby UDS has agreed to use our pipelines to transport at least 75%
of the crude oil shipped to and at least 75% of the refined products shipped
from the McKee, Three Rivers and Ardmore refineries and to use our refined
product terminals for terminalling services for at least 50% of all refined
products shipped from these refineries for a period of seven years from April
16, 2001.
If market conditions change, with respect to the transportation of crude oil or
refined products or to the end markets in which UDS sells refined products, in a
material manner such that UDS would suffer a material adverse effect if it were
to continue to use our pipelines and terminals at the required levels, UDS's
obligation to us will be suspended during the period of the change in market
conditions to the extent required to avoid the material adverse effect.
9
NOTE 6: Subsequent Events
Closing of Initial Public Offering
On April 16, 2001, Shamrock Logistics completed its initial public offering of
common units, by selling 5,175,000 common units to the public at $24.50 per
unit. Total proceeds before offering costs and underwriters' commissions for the
5,175,000 common units were $126,787,500. After the offering Shamrock Logistics
outstanding equity included 9,599,322 common units, including 4,424,322 held by
subsidiaries of UDS, 9,599,322 subordinated units held by subsidiaries of UDS
and a 2% general partner interest held by Riverwalk Logistics.
Concurrent with the closing of the initial public offering, Shamrock Logistics
Operations borrowed $20,505,900 under its existing revolving credit facility.
The net proceeds from the initial public offering and the borrowings under the
revolving credit facility were used to repay the debt due to parent, make a
distribution to affiliates of UDS for reimbursement of previous capital
expenditures incurred with respect to the assets transferred to us, and for
working capital purposes. A summary of the proceeds received and use of proceeds
is as follows:
Proceeds received:
Sale of common units............................ $ 126,787,500
Borrowing under the revolving credit facility... 20,505,900
-----------
Total proceeds............................... 147,293,400
-----------
Use of proceeds:
Underwriters fees............................... 8,875,100
Professional fees and other offering costs...... 6,000,000
Debt issuance costs............................. 435,700
Repayment of debt due to parent................. 107,676,200
Reimbursement of capital expenditures........... 20,517,000
-----------
Total use of proceeds........................ 143,504,000
-----------
Net proceeds remaining....................... $ 3,789,400
===========
UDS Plan of Merger
On May 7, 2001, UDS announced that it had agreed to be acquired by Valero Energy
Corporation for total consideration of approximately $4.0 billion plus the
assumption of all outstanding debt of approximately $2.0 billion. Under the
terms of the agreement and plan of merger, UDS shareholders will receive, for
each share of UDS common stock they hold, at their election, cash, Valero common
stock or a combination of cash and stock, having a value equal to the sum of
$27.50 plus 0.614 shares of Valero common stock (based on the average Valero
common stock price over a ten trading-day period ending three days prior to
closing). The merger has been approved by the board of directors of both
companies; however, closing of the transaction is subject to regulatory reviews
and the approval of the shareholders of both companies. The merger is expected
to close in the fourth quarter of 2001.
Valero Energy Corporation owns and operates seven refineries in Texas,
Louisiana, New Jersey and California with a combined throughput capacity of more
than 1.1 million barrels per day. Valero markets its gasoline, diesel and other
refined products in 34 states through a bulk and rack marketing network and, in
California, through approximately 350 retail locations. Once the merger is
completed, Valero will become the ultimate parent of Riverwalk Logistics, the
general partner of both Shamrock Logistics and Shamrock Logistics Operations. In
addition, Valero will become the obligor under the various agreements UDS has
with us, including the Services Agreement and the Pipeline and Terminals Usage
Agreement.
10
Three Rivers Refinery Fire
On July 9, 2001, UDS' Three Rivers refinery was shut down due to a fire in the
7,000 barrel per day alkylation unit at the refinery. Management expects that
the alkylation unit will be shut down for approximately 8 weeks, however the
rest of the refinery was restarted on August 6th and processing levels are
expected to increase slowly through the end of August 31, 2001. UDS plans to
operate the Three Rivers refinery at reduced rates during the alkylation unit
shut down, thus volumes of crude oil transported to and refined products
tranported from the refinery will be lower. Management of Shamrock Logistics
does not expect that the lower production at the refinery will significantly
impact Shamrock Logistics results of operations in the third quarter of 2001 as
UDS is transporting refined products from the Gulf Coast into the refinery
through the Corpus Christi to Three Rivers crude oil pipeline, which Shamrock
Logistics has temporarily converted into a refined product pipeline. This
conversion and the reversal of the flow of the Three Rivers to Corpus Christi
refined product pipeline to transport additional refined product from the Gulf
Coast will allow refined products to be transported on to San Antonio and
Laredo, Texas using Shamrock Logistics other pipelines connected to the Three
Rivers refinery.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
Shamrock Logistics, L.P. (Shamrock Logistics), a Delaware limited partnership
and wholly-owned subsidiary of Ultramar Diamond Shamrock Corporation (UDS), was
formed to ultimately acquire Shamrock Logistics Operations, L.P.
Shamrock Logistics Operations, L.P. (Shamrock Logistics Operations), a Delaware
limited partnership and a wholly-owned subsidiary of UDS, was formed to operate
the crude oil and refined product pipeline, terminalling and storage assets of
the Ultramar Diamond Shamrock Logistics Business.
UDS, an independent refiner and retailer, owns and operates seven refineries
located in Texas, California, Oklahoma, Colorado and Quebec, Canada, and markets
its refined products through over 4,500 convenience stores. UDS's refining
operations include various pipeline, terminalling, and storage assets that
transport crude oil and other raw materials to the refineries and transport
refined products from the refineries to terminals for further distribution.
Prior to July 1, 2000, the pipeline, terminalling and storage assets and
operations supporting UDS' McKee, Three Rivers and Ardmore refineries were
referred to as the Ultramar Diamond Shamrock Logistics Business as if it had
existed as a single separate entity from UDS. UDS formed Shamrock Logistics
Operations to assume ownership of and to operate the assets of the Ultramar
Diamond Shamrock Logistics Business. Effective July 1, 2000, UDS transferred the
crude oil and refined product pipelines, terminalling and storage assets and
certain liabilities of the Ultramar Diamond Shamrock Logistics Business
(predecessor) to Shamrock Logistics Operations (successor). The transfer of
assets and certain liabilities to Shamrock Logistics Operations represented a
reorganization of entities under common control and was recorded at historical
cost.
Effective with the closing of Shamrock Logistics initial public offering of
common units on April 16, 2001, the ownership of Shamrock Logistics Operations
was transferred to Shamrock Logistics in exchange for ownership interests
(common and subordinated units) in Shamrock Logistics. This transfer also
represented a reorganization of entities under common control and was recorded
at historical cost.
The following discussion is based on the historical operating results of the
combined financial statements of Shamrock Logistics and Shamrock Logistics
Operations (successor) as of March 31, 2001 and December 31, 2000 and for the
three months ended March 31, 2001 and the combined financial statements of
Shamrock Logistics and the Ultramar Diamond Shamrock Logistics Business
(predecessor) for the three months ended March 31, 2000. This combined financial
statement presentation more clearly reflects our financial position and results
of operations as a result of the most recent reorganization of entities under
common control.
12
Results of Operations
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
Summarized financial and operating data are as follows:
Summarized Financial Data:
Successor Predecessor
Three Months Three Months
Ended March 31, Ended March 31,
2001 2000
---- ----
Statement of Income Data:
Revenues..................................... $ 23,422 $ 21,406
------ ------
Operating costs and expenses:
Operating expenses......................... 7,640 7,595
General and administrative expenses........ 1,172 901
Depreciation and amortization.............. 3,238 3,220
Taxes other than income taxes.............. 1,011 1,086
------ ------
Total operating costs and expenses...... 13,061 12,802
------ ------
Operating income............................. 10,361 8,604
Interest expense........................... (2,244) (216)
Equity income from Skelly-Belvieu.......... 669 869
------ ------
Income before income taxes .................. 8,786 9,257
Provision for income taxes................. - (3,562)
------ ------
Net income................................... $ 8,786 $ 5,695
====== ======
Successor
------------------------------
March 31, December 31,
2001 2000
---- ----
Balance Sheet Data:
Net property, plant and equipment............ $ 277,761 $ 280,017
Total assets................................. 336,192 329,484
Long-term debt, including current portion
and debt due to parent.................... 118,360 118,360
Partnership equity........................... 213,624 204,838
13
Operating Data:
The following table reflects throughput in barrels for our crude oil and refined
product pipelines and the total throughput for all of our refined product
terminals for the three months ended March 31, 2001 and 2000 (in thousands).
Successor Predecessor
Three Months Three Months
Ended March 31, Ended March 31,
2001 2000
---- ----
Crude oil pipelines:
Dixon to McKee............................... 5,459 5,809
Wasson to Ardmore (both pipelines)........... 7,393 6,373
Ringgold to Wasson........................... 2,911 1,433
Corpus Christi to Three Rivers............... 7,973 7,642
Other crude oil pipelines.................... 4,012 3,766
------ ------
Total crude oil pipelines.................. 27,748 25,023
------ ------
Refined product pipelines:
McKee to Colorado Springs to Denver.......... 2,261 1,584
McKee to El Paso............................. 5,758 5,858
McKee to Amarillo (both pipelines)
to Abernathy................................ 3,846 3,525
Amarillo to Albuquerque...................... 1,176 1,189
McKee to Denver.............................. 1,081 1,059
Ardmore to Wynnewood......................... 5,487 4,820
Three Rivers to Laredo....................... 1,085 1,503
Three Rivers to San Antonio.................. 2,455 2,420
Other refined product pipelines.............. 5,423 5,801
------ ------
Total refined product pipelines............ 28,572 27,759
Refined product terminals....................... 15,103 15,337
------ ------
Total throughput................................ 71,423 68,119
====== ======
Revenues for the quarter ended March 31, 2001 were $23,422,000 as compared to
$21,406,000 for the quarter ended March 31, 2000, an increase of 9% or
$2,016,000. This increase in revenues is primarily due to the following items:
o revenues for the Ringgold to Wasson and the Wasson to Ardmore crude oil
pipelines increased $667,000 due to a combined 32% increase in throughput
barrels, resulting from UDS purchasing greater quantities of crude oil from
third parties near Ringgold instead of gathering crude oil barrels near
Wasson. In March 2001, UDS sold its Oklahoma crude oil gathering operation;
o revenues for the Corpus Christi to Three Rivers crude oil pipeline
increased $262,000 primarily due to an increase in the pipeline tariff
rate. The tariff rate was increased to cover the additional costs (dockage
and wharfage fees) associated with operating a marine crude oil storage
facility;
o revenues for the McKee to Colorado Springs to Denver refined product
pipeline increased $1,221,000 due to a 43% increase in throughput barrels
primarily in the Colorado Springs to Denver segment of the pipeline. Since
completing the expansion of the McKee to Colorado Springs segment of the
pipeline, UDS has supplied the greater demand for refined products in
Denver from its McKee refinery, thus increasing throughput in the entire
pipeline;
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o revenues for the Ardmore to Wynnewood refined product pipeline remained
comparable with 2000's first quarter even though throughput barrels
increased 14%. The tariff rate for the Ardmore to Wynnewood refined product
pipeline varies depending upon the ultimate destination to which the
refined products are shipped over the connecting common carrier pipeline.
In the first quarter of 2001, refined products were transported over
shorter distances, reducing revenues in 2001; and
o revenues for the Three Rivers to Laredo refined product pipeline decreased
$215,000 due to a 28% decrease in throughput barrels resulting from the
expansion of Pemex's Monterrey refinery that increased the supply of
refined products to Nuevo Laredo, Mexico, which is across the border from
Laredo, Texas.
Operating expenses increased $45,000, or 1%, for the quarter ended March 31,
2001 as compared to the quarter ended March 31, 2000 primarily due to the
following items:
o during the quarter ended March 31, 2000, the Ultramar Diamond Shamrock
Logistics Business recognized a loss of $698,000 due to the impact of
volumetric expansions, contractions, and measurement discrepancies in the
various pipelines. Beginning July 1, 2000, the impact of volumetric
expansions, contractions and measurement discrepancies in the pipelines is
borne by the shippers and is therefore no longer reflected in operating
expenses;
o utility expenses increased by $952,000 due to higher electricity rates in
the first quarter of 2001 as a result of higher natural gas costs; and
o other operating expenses decreased due to lower rental expenses for fleet
vehicles, satellite communications and safety equipment as a result of more
favorable leasing arrangements.
General and administrative expenses increased 30% for the quarter ended March
31, 2001 as compared to 2000 due to increased general and administrative costs
allocated to us from UDS. Prior to July 1, 2000, UDS allocated approximately 5%
of its general and administrative expenses incurred in the United States to its
pipeline, terminalling and storage operations to cover costs of centralized
corporate functions such as legal, accounting, treasury, engineering,
information technology and other corporate services. Effective July 1, 2000, UDS
entered into a Services Agreement with Shamrock Logistics Operations to provide
the general and administrative services noted above for an annual fee of
$5,200,000, payable monthly. For the three months ended March 31, 2001, general
and administrative expenses of $1,172,000 reflects $1,300,000, or one-fourth of
the annual fee less $128,000 reimbursed by partners on jointly owned pipelines.
For the three months ended March 31, 2000, general and administrative expenses
of $901,000 reflects $1,026,000, or the 5% allocation of UDS's general and
administrative expenses less $125,000 reimbursed by partners on jointly owned
pipelines.
Interest expense for the quarter ended March 31, 2001 was $2,244,000 as compared
to $216,000 for the same period in 2000. The additional interest expense relates
to the $107,676,000 of debt due to parent that was assumed by Shamrock Logistics
Operations on July 1, 2000. Interest expense prior to July 1, 2000, relates only
to the debt due to the Port of Corpus Christi Authority of Nueces County, Texas.
Equity income from affiliate represents the 50% interest in the net income of
Skelly-Belvieu Pipeline Company, which operates the Skellytown to Mont Belvieu
refined product pipeline. Equity income from affiliate for the quarter ended
March 31, 2001 was $669,000 or 23% lower than in 2000 due to a 25% decrease in
throughput barrels in the Skellytown to Mont Belvieu refined product pipeline.
The decreased throughput in the first quarter of 2001 is due to both UDS and
Phillips Petroleum Company utilizing greater quantities of natural gas to run
their refining operations instead of selling the natural gas to outside parties
in Mont Belvieu.
Effective July 1, 2000, UDS transferred the assets and certain liabilities of
the Ultramar Diamond Shamrock Logistics Business (predecessor) to Shamrock
Logistics Operations (successor). As a limited partnership, Shamrock Logistics
Operations is not subject to federal or state income taxes. The income tax
provision for the quarter ended March 31, 2000 was based upon the effective
income tax rate for the Ultramar Diamond Shamrock Logistics Business of 38%. The
effective income tax rate exceeds the U.S. federal statutory income tax rate due
to state income taxes.
15
Net income for the quarter ended March 31, 2001 was $8,786,000 as compared to
$5,695,000 for the quarter ended March 31, 2000. The increase of $3,091,000 is
primarily due to increased revenues as a result of higher throughput barrels in
our pipelines. Although interest expense for 2001 was higher than in 2000, that
increase was offset by the decrease in income tax expense, which is no longer
required to be accrued due to the change in tax status.
Three Rivers Refinery Fire
On July 9, 2001, UDS's 95,000 barrel per day capacity Three Rivers refinery was
shut down due to a fire in the 7,000 barrel per day alkylation unit at the
refinery. Management expects that the alkylation unit will be shut down for
approximately 8 weeks. The majority of refinery units were retarted on August
6th and processing levels are expected to increase to full capacity by August
31, 2001. UDS plans to operate the Three Rivers refinery at reduced rates during
the alkylation unit shut down, thus volumes of crude oil transported to and
refined product tranported from the refinery will be lower. Management of
Shamrock Logistics does not expect that the lower production at the refinery
will significantly impact Shamrock Logistics results of operations in the third
quarter of 2001, as UDS is transporting refined products from other locations
using our pipelines.
Liquidity and Capital Resources
Financing
On December 15, 2000, Shamrock Logistics Operations entered into a $120 million
revolving credit facility with The Chase Manhattan Bank and other lenders. The
revolving credit facility expires on January 15, 2006 and borrowings under the
revolving credit facility bear interest at either the alternative base rate or
the LIBOR rate at the option of Shamrock Logistics Operations. The revolving
credit facility requires that Shamrock Logistics Operations maintain certain
financial ratios and other restrictive covenants, including a prohibition on
distributions by Shamrock Logistics Operations if any default, as defined in the
revolving credit facility, exists or would result from the distribution.
Management believes that Shamrock Logistics Operations is in compliance with all
of these ratios and covenants.
As of March 31, 2001, Shamrock Logistics Operations had no outstanding
borrowings under the $120 million revolving credit facility. However, in
conjunction with the initial public offering of common units by Shamrock
Logistics on April 16, 2001, Shamrock Logistics Operations borrowed $20,505,900
under the revolving credit facility. See discussion below related to the initial
public offering and use of proceeds.
Shamrock Logistics' ability to complete future debt and equity offerings and the
timing of any such offerings will depend upon various factors including
prevailing market conditions, interest rates and the financial condition of
Shamrock Logistics and Shamrock Logistics Operations.
Initial Public Offering by Shamrock Logistics
On April 16, 2001, Shamrock Logistics completed its initial public offering of
5,175,000 common units at a price of $24.50 per unit. Total proceeds for the
5,175,000 common units were $126,787,500 before offering costs and underwriters
commissions.
16
A summary of the proceeds received and use of proceeds is as follows:
Proceeds received:
Sale of common units............................ $ 126,787,500
Borrowing under the revolving credit facility... 20,505,900
-----------
Total proceeds............................... 147,293,400
-----------
Use of proceeds:
Underwriters fees............................... 8,875,100
Professional fees and other offering costs...... 6,000,000
Debt issuance costs............................. 435,700
Repayment of debt due to parent................. 107,676,200
Reimbursement of capital expenditures........... 20,517,000
-----------
Total use of proceeds........................ 143,504,000
-----------
Net proceeds................................. $ 3,789,400
===========
The net proceeds $3,789,400 will be used for working capital and general
corporate purposes.
Capital Requirements
The pipeline, terminalling and storage business is capital-intensive, requiring
significant investments to upgrade or enhance existing operations and to meet
environmental regulations. Our capital expenditures consist primarily of: o
maintenance capital expenditures, such as those required to maintain
equipment reliability and safety and to address environmental regulations;
and
o expansion capital expenditures, such as those to expand and upgrade
pipeline capacity and to construct new pipelines, terminals and storage
facilities to meet UDS' needs. In addition, expansion capital expenditures
will include acquisitions of pipelines, terminals or storage assets owned
by UDS or other third parties.
Shamrock Logistics expects to fund its capital expenditures from cash provided
by operations and to the extent necessary, from proceeds of borrowings under the
revolving credit facility.
During the quarter ended March 31, 2001, we incurred maintenance capital
expenditures of $745,000 primarily related to tank upgrades at the terminals and
cathodic (corrosion) protection upgrades for both refined product and crude oil
pipelines. Also during the quarter ended March 31, 2001, we incurred $162,000 of
expansion capital expenditures.
On July 1, 2001, Shamrock Logistics exercised its option to acquire the
Southlake refined products terminal located in Dallas, Texas from UDS for
$5,600,000. Shamrock Logistics used available cash on hand to acquire the
terminal.
Currently, Shamrock Logistics intends to exercise its option to purchase the
Ringgold crude oil storage facility in the third quarter of 2001 at a cost of
$6,500,000 and the Wichita Falls to McKee crude oil pipeline and storage
facility by the first quarter of 2002 at a cost of $64,000,000, upon completion
of construction. Shamrock Logistics intends to fund these acquisitions with
borrowings under its revolving credit facilities.
Shamrock Logistics anticipates that it will continue to have adequate liquidity
to fund future recurring operating, investing and financing activities. Cash
distributions are expected to be funded with internally generated cash.
UDS Plan of Merger
On May 7, 2001, UDS announced that it had agreed to be acquired by Valero Energy
Corporation for total consideration of approximately $4.0 billion plus the
assumption of all outstanding debt of approximately $2.0 billion. Under the
terms of the agreement and plan of merger, UDS shareholders will receive, for
each share of UDS common stock they hold, at their election, cash, Valero common
stock or a combination of cash and stock, having a value equal to the sum of
$27.50 plus 0.614 shares of Valero common stock (based on the average Valero
common stock price over a ten trading-day period ending three days prior to
closing). The merger has been approved by the board of directors of both
companies; however, closing of the transaction is subject to regulatory reviews
and the approval of the shareholders of both companies. The merger is expected
to close in the fourth quarter of 2001.
17
Valero Energy Corporation owns and operates seven refineries in Texas,
Louisiana, New Jersey and California with a combined throughput capacity of more
than 1.1 million barrels per day. Valero markets its gasoline, diesel and other
refined products in 34 states through a bulk and rack marketing network and, in
California, through approximately 350 retail locations. Once the merger is
completed, Valero will become the ultimate parent of Riverwalk Logistics, the
general partner of both Shamrock Logistics and Shamrock Logistics Operations. In
addition, Valero will become the obligor under the various agreements UDS has
with us, including the Services Agreement and the Pipeline and Terminals Usage
Agreement.
Certain Forward-Looking Statements
This quarterly report on Form 10-Q contains certain "forward-looking" statements
as such term is defined in Section 27A of the Securities Act of 1933 and Section
21E of the Securities Act of 1934, and information relating to us that is based
on the beliefs of management as well as assumptions made by and information
currently available to management. When used in this report, the words
"anticipate," "believe," "estimate," "expect," and "intend" and words or phrases
of similar expressions, as they relate to us or management, identify
forward-looking statements. Such statements reflect the current views of
management with respect to future events and are subject to certain risks,
uncertainties and assumptions relating to the operations and results of
operations, including as a result of competitive factors and pricing pressures,
shifts in market demand and general economic conditions and other factors.
Should one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results or outcomes may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The principal market risk (i.e., the risk of loss arising from the adverse
changes in market rates and prices) to which we are exposed is interest rate
risk on our debt. We manage our debt considering various financing alternatives
available in the market. Since the current debt is fixed rate debt with an 8%
interest rate and the total of this debt is not material to financial position
or performance, there is currently minimal impact to market interest rate risk.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
No material litigation has been filed or is pending against Shamrock Logistics
or Shamrock Logistics Operations during the quarter ended March 31, 2001.
Item 2. Changes in Securities and Use of Proceeds
On April 9, 2001, Shamrock Logistics registration statement relating to its
initial public offering on Form S-1 (Registration No. 333-43668) filed with the
Securities and Exchange Commission became effective. The managing underwriter
for the initial public offering was Goldman, Sachs & Co. Under the registration
statement, Shamrock Logistics issued 9,599,322 common units and 9,599,322
subordinated units, of which 4,424,322 common units and all of the subordinated
units were issued to UDS Logistics, L.L.C., an affiliate of Shamrock Logistics
general partner, Riverwalk Logistics, L.P.
The closing date of Shamrock Logistics initial public offering was April 16,
2001 and on that date it sold 5,175,000 common units (including the underwriters
over-allotment option on 675,000 common units) to the public at a price of
$24.50 per unit, or $126,787,500. Underwriters commissions on this sale were
$8,875,100. In addition, concurrent with the closing of the initial public
offering, Shamrock Logistics Operations borrowed $20,505,900 under its revolving
credit facility with The Chase Manhattan Bank and other lenders and incurred
$435,700 of debt issuance costs.
18
Net proceeds from the sale of common units, after underwriters commissions, were
$117,912,400 and net proceeds from the borrowings under the revolving credit
facility with The Chase Manhattan Bank and other lenders were $20,070,200.
Shamrock Logistics used $6,000,000 of the net proceeds to pay legal, accounting
and other professional service costs associated with the initial public
offering. Another $128,193,200 of the net proceeds were used to pay off the
$107,676,200 outstanding debt due to parent and $20,517,000 was used to
reimburse affiliates of UDS for previous capital expenditures. The remaining net
proceeds of $3,789,400 will be used for working capital and general corporate
purposes.
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:
None.
(b) Reports on Form 8-K
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, Shamrock
Logistics has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHAMROCK LOGISTICS, L.P.
By: Riverwalk Logistics GP, L.P., its general partner
By: Shamrock Logistics GP, L.L.C., its general partner
By: /s/ Steven S. Blank
-----------------------------------------------------------------------
STEVEN S. BLANK
CHIEF FINANCIAL OFFICER
August 8, 2001
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