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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 June 30, 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 X No ____
As of July 31, 2001, 9,599,322 common units were outstanding.
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SHAMROCK LOGISTICS, L.P.
FORM 10-Q
JUNE 30, 2001
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated and Combined Balance Sheets as of June 30, 2001
and December 31, 2000......................................... 3
Consolidated and Combined Statements of Income
for the Three and Six Months Ended June 30, 2001 and 2000..... 4
Consolidated and Combined Statements of Cash Flows
for the Six Months Ended June 30, 2001 and 2000............... 5
Combined Statement of Net Parent Investment
for the Six Months Ended June 30, 2000........................ 6
Consolidated and Combined Statement of Partnership Equity
for the Six Months Ended June 30, 2001........................ 6
Notes to Consolidated and Combined Financial Statements........... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................. 23
Item 2. Changes in Securities and Use of Proceeds......................... 23
Item 3. Defaults Upon Senior Securities................................... 23
Item 4. Submission of Matters to a Vote of Security Holders............... 23
Item 5. Other Information................................................. 23
Item 6. Exhibits and Reports on Form 8-K.................................. 23
SIGNATURE......................................................... 24
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)
CONSOLIDATED AND COMBINED BALANCE SHEETS
(in thousands)
Successor Predecessor
June 30, December 31,
2001 2000
---- ----
(unaudited)
Assets
Current assets:
Cash........................................ $ 17,371 $ 4
Receivable from parent...................... 2,473 22,348
Accounts and notes receivable............... 4,527 2,386
Other current assets......................... - 3,528
------- -------
Total current assets..................... 24,371 28,266
------- -------
Property, plant and equipment.................. 392,800 388,537
Less accumulated depreciation and amortization. (114,876) (108,520)
------- -------
Property, plant and equipment, net.......... 277,924 280,017
Goodwill, net.................................. 4,864 5,014
Investment in affiliate........................ 16,531 16,187
Other noncurrent assets, net................... 432 -
------- -------
Total assets............................... $ 324,122 $ 329,484
======= =======
Liabilities and Partnership Equity
Current liabilities:
Current portion of long-term debt.......... $ 385 $ 608
Accounts payable and accrued liabilities... 3,766 2,685
Taxes other than income taxes.............. 3,014 3,601
------- -------
Total current liabilities............... 7,165 6,894
Long-term debt, less current portion.......... 30,582 10,076
Debt due to parent............................ - 107,676
Commitments and contingencies
Partnership equity:
Limited partners' equity................... 280,648 202,790
General partners' equity................... 5,727 2,048
------- -------
Total partnership equity................. 286,375 204,838
------- -------
Total liabilities and partnership equity. $ 324,122 $ 329,484
======= =======
See accompanying notes to consolidated and combined financial statements.
3
SHAMROCK LOGISTICS, L.P.
AND SHAMROCK LOGISTICS OPERATIONS, L.P.
(successor to the Ultramar Diamond Shamrock Logistics Business)
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(unaudited, in thousands, except share and per share data)
.........................
Successor Predecessor Successor Predecessor
Three Months Three Months Six Months Six Months Ended
Ended June 30, Ended June 30, Ended June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
Revenues.............................................. $ 23,637 $ 23,097 $ 47,059 $ 44,503
------ ------ ------ ------
Operating costs and expenses:
Operating expenses................................. 7,726 7,863 15,366 15,458
General and administrative expenses................ 1,331 1,689 2,503 2,590
Depreciation and amortization...................... 3,251 3,116 6,489 6,336
Taxes other than income taxes...................... 1,010 1,368 2,021 2,454
------- ------- ------- -------
Total operating costs and expenses.............. 13,318 14,036 26,379 26,838
------ ------ ------ ------
Operating income...................................... 10,319 9,061 20,680 17,665
Interest expense.................................... (870) (217) (3,114) (433)
Equity income from affiliate........................ 907 1,057 1,576 1,926
-------- ------- ------- -------
Income before income taxes............................ 10,356 9,901 19,142 19,158
Benefit for income taxes............................ - 34,374 - 30,812
----------- ------ ---------- ------
Net income............................................ $ 10,356 $ 44,275 $ 19,142 $ 49,970
====== ====== ====== ======
Allocation of net income:
Total net income...................................... $ 10,356 $ 19,142
Less net income applicable to the period
January 1 through March 31, 2001................ - (8,786)
Less net income applicable to the period April 1
through April 15, 2001.......................... (1,340) (1,340)
------- -------
Net income applicable to the period April 16
through June 30, 2001............................. 9,016 9,016
General partners' interest in net income applicable
to the period April 16 through June 30, 2001...... 180 180
-------- --------
Limited partners' interest in net income applicable
to the period April 16 through June 30, 2001...... $ 8,836 $ 8,836
======= =======
Basic and diluted net income per limited
partnership unit.................................. $ 0.46 $ 0.46
======= ========
Weighted average number of limited partnership
units outstanding for the period April 16
through June 30, 2001............................. 19,198,644 19,198,644
========== ==========
See accompanying notes to consolidated and combined financial statements.
4
SHAMROCK LOGISTICS, L.P.
AND SHAMROCK LOGISTICS OPERATIONS, L.P.
(successor to the Ultramar Diamond Shamrock Logistics Business)
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Successor Predecessor
Six Months Ended Six Months Ended
June 30, 2001 June 30, 2000
------------- -------------
Cash Flows from Operating Activities:
Net income .................................................. $ 19,142 $ 49,970
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization............................. 6,489 6,336
Amortization of debt issuance costs....................... 29 -
Equity income from affiliate.............................. (1,576) (1,926)
Benefit for deferred income taxes......................... - (36,677)
Changes in operating assets and liabilities:
Decrease in receivable from parent...................... 19,875 -
Decrease (increase) in accounts and notes receivable.... (2,141) 263
Decrease in other current assets........................ 3,528 -
Increase in accounts payable, accrued liabilities
and taxes other than income taxes...................... 494 492
Increase in other noncurrent assets....................... (461) -
Decrease in other long-term liabilities................... - (137)
------------ ---------
Net cash provided by operating activities........... 45,379 18,321
------- --------
Cash Flows from Investing Activities:
Maintenance capital expenditures............................. (1,843) (1,699)
Expansion capital expenditures............................... (2,403) (3,186)
Distributions received from affiliate........................ 1,232 2,306
-------- --------
Net cash used in investing activities............... (3,014) (2,579)
------- --------
Cash Flows from Financing Activities:
Proceeds from long-term debt borrowings...................... 20,506 -
Repayment of long-term debt.................................. (223) (284)
Distributions to parent and affiliates....................... (29,000) (15,458)
Net proceeds from sales of common units to the public........ 111,912 -
Distribution to affiliates of Ultramar Diamond Shamrock
Corporation for reimbursement of capital expenditures...... (20,517) -
Repayment of debt due to parent.............................. (107,676) -
-------- -----------
Net cash used in financing activities............... (24,998) (15,742)
--------- -------
Net Increase in Cash and Cash Equivalents.................... 17,367 -
Cash at Beginning of Period.................................. 4 3
------------- -----------
Cash at End of Period........................................ $ 17,371 $ 3
========= ===========
Non-Cash Activities:
Increase in debt due to parent............................ $ - $ 107,676
Decrease in accrued liabilities and other long-term
liabilities (environmental)............................ - (2,507)
-------------- --------
Total non-cash activities........................... $ - $ 105,169
============== =======
See accompanying notes to consolidated and combined financial statements.
5
SHAMROCK LOGISTICS, L.P.
AND
THE ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS (Predecessor)
COMBINED STATEMENT OF NET PARENT INVESTMENT
Six Months Ended June 30, 2000
(unaudited, in thousands)
Balance at January 1, 2000
$ 254,807
Net income........................................... 49,970
Net change in parent advances........................ (15,458)
Formalization of the terms of debt due to parent..... (107,676)
-------
Balance at June 30, 2000.................................. $ 181,643
=======
SHAMROCK LOGISTICS, L.P.
AND
SHAMROCK LOGISTICS OPERATIONS, L.P.
(successor to the Ultramar Diamond Shamrock Logistics Business)
CONSOLIDATED AND COMBINED STATEMENT OF PARTNERSHIP EQUITY
Six Months Ended June 30, 2001
(unaudited, in thousands)
Total
Limited Partner General Partnership
-------------------------------------
Common Subordinated Partner Equity
Balance at January 1, 2001..................... $ 202,790 $ - $ 2,048 $ 204,838
Net income applicable to the period
January 1 to April 15, 2001............... 10,025 - 101 10,126
Distributions to affiliates of Ultramar
Diamond Shamrock Corporation of
net income applicable to the period
July 1, 2000 to April 15, 2001............ (28,710) - (290) (29,000)
Distribution to affiliates of Ultramar
Diamond Shamrock Corporation for
reimbursement of capital (20,517) - - (20,517)
expenditures...of capital expenditures.........
Issuance of Shamrock Logistics' units for
the contribution of Shamrock Logistics
Operations' limited partner interest...... (113,141) 109,453 3,688 -
net assets.....................................
Sale of common units to the public ......... 111,912 - - 111,912
Net income applicable to the period
April 16 to June 30, 2001................. 4,418 4,418 180 9,016
------- ------- ----- -------
Balance at June 30, 2001....................... $ 166,777 $ 113,871 $ 5,727 $ 286,375
======= ======= ===== =======
See accompanying notes to consolidated and combined financial statements.
6
SHAMROCK LOGISTICS, L.P.
AND
SHAMROCK LOGISTICS OPERATIONS, L.P.
(successor to the Ultramar Diamond Shamrock Logistics Business)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
June 30, 2001
(unaudited)
NOTE 1: Organization
Shamrock Logistics, L.P. (Shamrock Logistics) and Shamrock Logistics Operations,
L.P. (Shamrock Logistics Operations) are both 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 consolidated
and combined financial statements of Shamrock Logistics, Shamrock Logistics
Operations (successor) and the Ultramar Diamond Shamrock Logistics Business
(predecessor) as follows:
o consolidated financial statements of Shamrock Logistics and Shamrock
Logistics Operations (successor) as of and for the three months ended June
30, 2001;
o combined financial statements of Shamrock Logistics and Shamrock Logistics
Operations (successor) as of December 31, 2000 and for the six months ended
June 30, 2001; and
o combined financial statements of Shamrock Logistics and the Ultramar
Diamond Shamrock Logistics Business for the three and six months ended June
30, 2000.
7
This consolidated and 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.
NOTE 2: Basis of Presentation
We prepared these unaudited consolidated and 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
consolidated and combined financial statements along with the audited financial
statements and notes thereto included in Shamrock Logistics Form S-1 dated April
16, 2001.
Operating results for the six months ended June 30, 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 UDS refineries.
NOTE 3: Accounting Pronouncements
FASB Statement No. 141
In June 2001, the Financial Accounting Standards Board (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 implemented Statement No. 141 on July
1, 2001, and the acquisition of the Southlake refined product terminal has been
accounted for under the purchase method required by Statement No. 141 (see Note
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 $300,000 annually. In addition, we believe that future reported net
income may be more volatile because impairment losses related to goodwill are
likely to occur irregularly and in varying amounts.
8
FASB Statement No. 143
In June 2001, the FASB also issued Statement No. 143, "Accounting for Asset
Retirement Obligations." This statement establishes standards for accounting for
an obligation associated with the retirement of a tangible long-lived asset. An
asset retirement obligation liability should be recognized in the financial
statements in the period in which it meets the definition of a liability as
defined in FASB Concepts Statement No. 6, "Elements of Financial Statements."
The amount of the liability would initially be measured at fair value.
Subsequent to initial measurement, an entity would recognize changes in the
amount of the liability resulting from (a) the passage of time and (b) revisions
to either the timing or amount of estimated cash flows. Statement No. 143 also
establishes standards for accounting for the cost associated with an asset
retirement obligation. It requires that, upon initial recognition of a liability
for an asset retirement obligation, an entity capitalize that cost by
recognizing an increase in the carrying amount of the related long-lived asset.
The capitalized asset retirement cost would then be allocated to expense using a
systematic and rational method. Statement No. 143 will be effective for
financial statements issued for fiscal years beginning after June 15, 2002, with
earlier application encouraged. We are currently evaluating the impact of
adopting this new statement.
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, we believe that such a
situation is remote given UDS' financial condition.
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 (for the period July 1, 2000 to April
15, 2001). The receivable from parent as of 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 our behalf.
9
The following table summarizes transactions with UDS (in thousands):
Successor Predecessor Successor Predecessor
Three Months Three Months Six Months Ended Six Months Ended
Ended June 30, Ended June 30, June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
Revenues........................................$.23,488 $ 23,017 $ 46,760 $ 44,187
Operating expenses.................................2,727 2,502 5,413 5,393
General and administrative expenses................1,300 1,813 2,600 2,839
Interest expense on debt due to parent...............358 - 2,512 -
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 us becoming a publicly-held entity.
The Services Agreement also requires that we 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 us. 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 and six months ended June 30, 2000 were $1,813,000 and $2,839,000,
respectively.
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.
NOTE 6: Initial Public Offering
On April 16, 2001, we completed our 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, our 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:
10
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' commissions....................... 8,875,100
Professional fees and other 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
===========
NOTE 7: Subsequent Events
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 Valero common 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 its subsidiary 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.
Purchase of Southlake refined product terminal
On July 2, 2001, we acquired the Southlake refined product terminal located in
Dallas, Texas from UDS for $5,600,000. The Southlake terminal has averaged
25,000 barrels per day of throughput in 2001 and it is expected to increase our
operating income by approximately $500,000 in the last six months of 2001.
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. UDS' management expects
that the alkylation unit will be shut down for approximately eight 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 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. Our management does not expect that
the lower production at the refinery will significantly impact our 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 we have 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 to San Antonio
and Laredo, Texas using our other pipelines connected to the Three Rivers
refinery.
11
Declaration of Distribution
On July 19, 2001, we declared a quarterly partnership distribution of $0.5011
per unit payable on August 14, 2001 to unitholders of record on August 1, 2001.
12
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 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 subsidiary of Shamrock Logistics, 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
consolidated and combined financial statements of Shamrock Logistics, Shamrock
Logistics Operations (successor) and the Ultramar Diamond Shamrock Logistics
Business (predecessor) as follows:
o consolidated financial statements of Shamrock Logistics and Shamrock
Logistics Operations (successor) as of and for the three months ended June
30, 2001;
o combined financial statements of Shamrock Logistics and Shamrock Logistics
Operations (successor) as of December 31, 2000 and for the six months ended
June 30, 2001; and
o combined financial statements of Shamrock Logistics and the Ultramar
Diamond Shamrock Logistics Business for the three and six months ended June
30, 2000.
This consolidated and 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.
13
Results of Operations
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Summarized financial and operating data are as follows (in thousands):
Summarized Financial Data:
Successor Predecessor
Three Months Ended Three Months
June 30, Ended June 30,
2001 2000
---- ----
Statement of Income Data:
Revenues................................... $ 23,637 $ 23,097
------ ------
Operating costs and expenses:
Operating expenses....................... 7,726 7,863
General and administrative expenses...... 1,331 1,689
Depreciation and amortization............ 3,251 3,116
Taxes other than income taxes............ 1,010 1,368
------ ------
Total operating costs and expenses.... 13,318 14,036
------ ------
Operating income........................... 10,319 9,061
Interest expense......................... (870) (217)
Equity income from affiliate............. 907 1,057
----- ------
Income before income taxes ................ 10,356 9,901
Benefit for income taxes................. - 34,374
------ ------
Net income................................. $ 10,356 $ 44,275
====== ======
14
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 June 30, 2001 and 2000 (in thousands).
Successor Predecessor
Three Months Ended Three Months Ended
June 30, June 30,
2001 2000
---- ----
Crude oil pipelines:
Dixon to McKee............................ 5,724 5,817
Wasson to Ardmore (both pipelines)........ 7,389 7,321
Ringgold to Wasson........................ 3,887 3,546
Corpus Christi to Three Rivers............ 8,256 8,059
Other crude oil pipelines................. 3,657 3,749
------ ------
Total crude oil pipelines............... 28,913 28,492
------ ------
Refined product pipelines:
McKee to Colorado Springs to Denver....... 2,138 2,446
McKee to El Paso.......................... 6,597 5,579
McKee to Amarillo (both pipelines)
to Abernathy............................ 3,028 3,306
Amarillo to Albuquerque................... 1,116 1,063
McKee to Denver........................... 1,060 1,110
Ardmore to Wynnewood...................... 5,227 5,294
Three Rivers to Laredo.................... 1,119 1,467
Three Rivers to San Antonio............... 2,641 2,566
Other refined product pipelines........... 5,823 6,332
------ ------
Total refined product pipelines......... 28,749 29,163
Refined product terminals.................... 14,515 15,317
------ ------
Total throughput............................. 72,177 72,972
====== ======
Revenues for the quarter ended June 30, 2001 were $23,637,000 as compared to
$23,097,000 for the quarter ended June 30, 2000, an increase of 2%, or $540,000.
This increase in revenues is primarily due to the following items:
o revenues for the Corpus Christi to Three Rivers crude oil pipeline
increased $406,000 primarily due to an increase in the pipeline tariff rate
coupled with an increase in throughput. 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 decreased $424,000 due to a 13% decrease in throughput barrels
primarily in the Colorado Springs to Denver segment of the pipeline. UDS
has supplied the greater demand for refined products in Denver from its
Denver refinery, thus decreasing the throughput in the entire pipeline;
o revenues for the McKee to El Paso refined product pipeline increased
$557,000 primarily due to an 18% increase in throughput barrels resulting
from an increase in UDS' sales into the Arizona market via the connecting
common carrier pipeline from El Paso to Phoenix; and
15
o revenues for the Three Rivers to Laredo refined product pipeline decreased
by $179,000 due to a 24% 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 decreased $137,000, or 2%, for the quarter ended June 30,
2001 as compared to the quarter ended June 30, 2000 primarily due to the
following items:
o during the quarter ended June 30, 2000, the Ultramar Diamond Shamrock
Logistics Business (predecessor) recognized a loss of $218,000 due to the
impact of volumetric expansions, contractions and measurement discrepancies
in our 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; and
o utility expenses increased by $427,000 due to higher electricity rates in
the second quarter of 2001 as a result of higher natural gas costs.
General and administrative expenses decreased 21% for the quarter ended June 30,
2001 as compared to 2000 due to decreased 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 us to provide the general and
administrative services noted above for an annual fee of $5,200,000, payable
monthly. For the three months ended June 30, 2001, general and administrative
expenses of $1,331,000 reflect $1,300,000, or one-fourth of the annual fee, less
$68,000 reimbursed by partners on jointly-owned pipelines plus $99,000 of public
company expenses. For the three months ended June 30, 2000, general and
administrative expenses of $1,689,000 reflect $1,813,000, or the 5% allocation
of UDS's general and administrative expenses, less $124,000 reimbursed by
partners on jointly-owned pipelines.
Interest expense for the quarter ended June 30, 2001 was $870,000 as compared to
$217,000 for the same period in 2000. During the second quarter of 2001, we
incurred $358,000 of interest expense related to the $107,676,000 of debt due to
parent that we assumed on July 1, 2000 and paid off on April 16, 2001. In
addition, beginning April 16, 2001, Shamrock Logistics Operations borrowed
$20,506,000 under the revolving credit facility resulting in $315,000 of
aditional interest expense for the quarter ended June 30, 2001. Interest expense
prior to July 1, 2000 relates only to the debt due to the Port of Corpus Christi
Authority of Nueces County, Texas. Interest expense subsequent to April 16, 2001
relates to the borrowings under the revolving credit facility and the debt due
to the Port of Corpus Christi Authority.
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
June 30, 2001 remained comparable to the same period in 2000 as throughput
levels in the pipeline were comparable.
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. Due to this change
in tax status, the deferred income tax liability of $38,217,000 as of June 30,
2000 was written off in the statement of income of the Ultramar Diamond Shamrock
Logistics Business (predecessor) for the three months ended June 30, 2000. The
resulting net benefit for income taxes of $34,374,000 for the three months ended
June 30, 2000, includes the write-off of the deferred income tax liability less
the provision for income taxes of $3,843,000 for the three months ended June 30,
2000. The income tax provision for the quarter ended June 30, 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.
16
Net income for the quarter ended June 30, 2001 was $10,356,000 as compared to
$44,275,000 for the quarter ended June 30, 2000. The decrease of $33,919,000 is
primarily due to the change in tax status effective July 1, 2000.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Summarized financial and operating data are as follows (in thousands):
Summarized Financial Data:
Successor Predecessor
Six Months Six Months
Ended June 30, Ended June 30,
2001 2000
---- ----
Statement of Income Data:
Revenues................................ $ 47,059 $ 44,503
------ ------
Operating costs and expenses:
Operating expenses.................... 15,366 15,458
General and administrative expenses... 2,503 2,590
Depreciation and amortization......... 6,489 6,336
Taxes other than income taxes......... 2,021 2,454
------ ------
Total operating costs and expenses. 26,379 26,838
------ ------
Operating income........................ 20,680 17,665
Interest expense...................... (3,114) (433)
Equity income from affiliate.......... 1,576 1,926
------ ------
Income before income taxes ............. 19,142 19,158
Provision for income taxes............ - 30,812
------ ------
Net income.............................. $ 19,142 $ 49,970
====== ======
Successor
--------------------------------
June 30, December 31,
2001 2000
---- ----
Balance Sheet Data:
Net property, plant and equipment............... $ 277,924 $ 280,017
Total assets.................................... 324,122 329,484
Long-term debt, including current portion and
debt due to parent........................... 30,967 118,360
Total partnership equity........................ 286,375 204,838
17
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 six months ended June 30, 2001 and 2000 (in thousands).
Successor Predecessor
Six Months Ended Six Months Ended
June 30, June 30,
2001 2000
---- ----
Crude oil pipelines:
Dixon to McKee........................... 11,183 11,626
Wasson to Ardmore (both pipelines)....... 14,782 13,694
Ringgold to Wasson....................... 6,798 4,979
Corpus Christi to Three Rivers........... 16,229 15,701
Other crude oil pipelines................ 7,669 7,515
------- -------
Total crude oil pipelines.............. 56,661 53,515
------- -------
Refined product pipelines:
McKee to Colorado Springs to Denver...... 4,399 4,030
McKee to El Paso......................... 12,355 11,437
McKee to Amarillo (both pipelines)
to Abernathy........................... 6,874 6,831
Amarillo to Albuquerque.................. 2,292 2,252
McKee to Denver.......................... 2,141 2,169
Ardmore to Wynnewood..................... 10,714 10,114
Three Rivers to Laredo................... 2,204 2,970
Three Rivers to San Antonio.............. 5,096 4,986
Other refined product pipelines.......... 11,246 12,133
------- -------
Total refined product pipelines........ 57,321 56,922
Refined product terminals................... 29,618 30,654
------- -------
Total throughput............................ 143,600 141,091
======= =======
Revenues for the six months ended June 30, 2001 were $47,059,000 as compared to
$44,503,000 for the six months ended June 30, 2000, an increase of 6%, or
$2,556,000. 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 $752,000 due to a combined 16% 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 $668,000 primarily due to an increase in the pipeline tariff rate
coupled with an increase in throughput. 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 $797,000 due to a 9% increase in throughput barrels
primarily in the Colorado Springs to Denver segment of the pipeline in the
first quarter of 2001. 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, especially
turbine fuel which is not produced at the Denver refinery. In the second
quarter of 2001, less turbine fuel was transported to Denver as adequate
supplies were on hand at the Denver refined product terminal;
18
o revenues for the McKee to El Paso refined product pipeline increased
$489,000 primarily due to an 8% increase in throughput barrels resulting
from an increase in UDS' sales into the Arizona market;
o revenues for the Three Rivers to Laredo refined product pipeline decreased
by $394,000 due to a 26% 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;
o revenues for the Ardmore to Wynnewood refined product pipeline remained
comparable with the first six months of 2000 even though throughput barrels
increased 6%. 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 six months of 2001, refined products were transported over
short distances, reducing revenues in 2001; and
o revenues for the refined product terminals increased $225,000 primarily due
to an increase in the terminalling fee charged at our marine-based refined
product terminals. The terminalling fee was increased to cover the
additional costs (dockage and wharfage fees) associated with operating a
marine refined product storage facility.
Operating expenses decreased $92,000, or less than 1%, for the six months ended
June 30, 2001 as compared to the six months ended June 30, 2000 primarily due to
the following items:
o during the six months ended June 30, 2000, the Ultramar Diamond Shamrock
Logistics Business recognized a loss of $916,000 due to the impact of
volumetric expansions, contractions and measurement discrepancies in our
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 $1,379,000 due to higher electricity rates in
the first six months 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 decreased 3% for the six months ended June
30, 2001 as compared to 2000 due to decreased 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 us to provide the general and
administrative services noted above for an annual fee of $5,200,000, payable
monthly. For the six months ended June 30, 2001, general and administrative
expenses of $2,503,000 reflect $2,600,000, or one-half of the annual fee, less
$196,000 reimbursed by partners on jointly-owned pipelines plus $99,000 of
public company expenses. For the six months ended June 30, 2000, general and
administrative expenses of $2,590,000 reflect $2,839,000, or the 5% allocation
of UDS's general and administrative expenses, less $249,000 reimbursed by
partners on jointly-owned pipelines.
Interest expense for the six months ended June 30, 2001 was $3,114,000 as
compared to $433,000 for the same period in 2000. During the period from January
1, 2001 to April 16, 2001, we incurred $2,512,000 of interest expense related to
the $107,676,000 of debt due to parent that we assumed on July 1, 2000 and paid
off on April 16, 2001. In addition, beginning April 16, 2001, Shamrock Logistics
Operations borrowed $20,506,000 under the revolving credit facility resulting in
$315,000 of additional interest expense for the quarter ending June 30, 2001.
Interest expense prior to July 1, 2000 relates only to the debt due to the Port
of Corpus Christi Authority of Nueces County, Texas. Interest expense subsequent
to April 16, 2001 relates to the borrowings under the revolving credit facility
and the debt due to the Port of Corpus Christi Authority.
19
Equity income from affiliate for the six months ended June 30, 2001 decreased
$350,000, or 18% as compared to the same period in 2000 due to a 16% decrease in
throughput barrels in the Skellytown to Mont Belvieu refined product pipeline.
The decreased throughput in the first six months 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 third 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. Due to this change
in tax status, the deferred income tax liability of $38,217,000 as of June 30,
2000 was written off in the statement of income of the Ultramar Diamond Shamrock
Logistics Business (predecessor) for the six months ended June 30, 2000. The
resulting net benefit for income taxes of $30,812,000 for the six months ended
June 30, 2000, includes the write-off of the deferred income tax liability less
the provision for income taxes of $7,405,000 for the six months ended June 30,
2000. The income tax provision for the six months ended June 30, 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.
Net income for the six months ended June 30, 2001 was $19,142,000 as compared to
$49,970,000 for the six months ended June 30, 2000. The decrease of $30,828,000
is primarily due to the change in tax status effective July 1, 2000. The
increase in revenues resulting from higher throughput barrels in our pipelines
is offset by the increase in interest expense for the first six months of 2001
as compared to 2000.
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. UDS' management expects that the alkylation unit will be shut down for
approximately eight weeks. The majority of refinery units were restarted 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. Our management
does not expect that the lower production at the refinery will significantly
impact our 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 $120,000,000
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.
In conjunction with the initial public offering of our common units 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.
Our 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 our financial condition.
20
Initial Public Offering
On April 16, 2001, we completed our 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.
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' commissions....................... 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 were used for working capital and general corporate
purposes.
Equity
On July 19, 2001, we declared a quarterly partnership distribution of $0.5011
per unit payable on August 14, 2001 to unitholders of record on August 1, 2001.
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.
We expect to fund our capital expenditures from cash provided by operations and
to the extent necessary, from proceeds of borrowings under the revolving credit
facility.
During the six months ended June 30, 2001, we incurred maintenance capital
expenditures of $1,843,000 primarily related to tank upgrades at the refined
product terminals and cathodic (corrosion) protection upgrades for both refined
product and crude oil pipelines. Also during the six months ended June 30, 2001,
we incurred $2,403,000 for various expansion capital expenditures, including
$1,813,000 for rights of way related to the expansion of the Amarillo to
Albuquerque refined product pipeline and $280,000 for the expansion of the McKee
to Colorado Springs refined product pipeline. The rights of way amount is net of
Phillips Petroleum Company's 50% share of such cost.
On July 1, 2001, we exercised our option to acquire the Southlake refined
product terminal located in Dallas, Texas from UDS for $5,600,000. We used
available cash on hand to acquire the terminal.
Currently, we intend to exercise our 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. We
intend to fund these acquisitions with borrowings under our revolving credit
facility.
21
We anticipate that we 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 Valero common 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, our
general partner. 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. Borrowings under our revolving credit facility do not
give rise to significant interest rate risk because the interest rate on
borrowings under the facility float with market rates. Thus the carrying amount
of outstanding borrowings under the revolving credit facility approximates fair
value. Additionally, the remaining debt is fixed rate debt with an 8% interest
rate. The estimated fair value of our fixed rate debt at June 30, 2001 was
$10,856,000 as compared to the carrying value of $10,461,000. The fair value was
estimated using discounted cash flow analysis, based on current incremental
borrowing rates for similar types of borrowing arrangements. Since the total of
this fixed rate debt is not material to our financial position or performance,
there is currently minimal impact to market interest rate risk.
22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
No material litigation has been filed or is pending against Shamrock Logistics
or Shamrock Logistics Operations as of June 30, 2001.
Item 2. Changes in Securities and Use of Proceeds
None.
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:
4.1 First Amendment to Second Amended and Restated Agreement of Limited
Partnership of Shamrock Logistics Operations, L.P. as of April 16,
2001.
(b) Reports on Form 8-K
None.
23
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, L.P., its general partner
By: Shamrock Logistics GP, LLC, its general partner
By: /s/ Steven A. Blank
----------------------------------------------------
STEVEN A. BLANK
CHIEF FINANCIAL OFFICER
August 13, 2001
24
First Amendment to Second Amended and Restated
Agreement of Limited Partnership
of
Shamrock Logistics Operations, L.P.
Pursuant to the power granted it in Section 13.1(d)(i) of the Second
Amended and Restated Agreement of Limited Partnership of Shamrock Logistics
Operations, L.P. (the "Partnership Agreement"), the undersigned General Partner
of Shamrock Logistics Operations, L.P. hereby amends Section 11.2 of the
Partnership Agreement to read as follows:
SECTION 11.2 Removal of the General Partner
(a) The General Partner shall be removed if the General Partner is removed as
the general partner of the MLP pursuant to Section 11.2 of the MLP Agreement.
Such removal shall be effective concurrently with the effectiveness of the
removal of the General Partner as the general partner of the MLP pursuant to the
terms of the MLP Agreement. If a successor general partner for the MLP is
elected in connection with the removal of the General Partner, such successor
general partner of the MLP shall, upon admission pursuant to Article X,
automatically become the successor General Partner of the Partnership. The
admission of any such successor General Partner to the Partnership shall be
subject to the provisions of Section 10.4.
(b) The General Partner may be removed by majority vote of the Limited Partners.
Upon removal of the General Partner by the Limited Partners, the Limited
Partners shall elect a successor General Partner for the Partnership. The
admission of such successor General Partner to the Partnership shall be subject
to the provisions of Section 10.4.
IN WITNESS WHEREOF, the undersigned has set its hand hereto, to be
effective as of April 16, 2001.
RIVERWALK LOGISTICS, L.P.
By: SHAMROCK LOGISTICS GP, LLC,
its General Partner
By: /s/ Curtis V. Anastasio
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Curtis V. Anastasio, its President and Chief
Executive Officer
