Enterprise Products Partners L.P.

SEC Filings

10-Q
GULFTERRA ENERGY PARTNERS L P filed this Form 10-Q on 08/13/1996
Entire Document
 


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                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549


                                   FORM 10-Q


              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996

                                       OR

             [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                 FOR THE TRANSITION PERIOD FROM _____ TO _____

                          COMMISSION FILE NO. 1-11680


                     LEVIATHAN GAS PIPELINE PARTNERS, L.P.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


                DELAWARE                                   76-0396023
        (STATE OF ORGANIZATION)                         (I.R.S. EMPLOYER
                                                       IDENTIFICATION NO.)

                                   600 TRAVIS
                                   SUITE 7200
                             HOUSTON, TEXAS  77002
          (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

                                 (713) 224-7400
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)



   INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING TWELVE 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  __


===============================================================================


<PAGE>   2


                     LEVIATHAN GAS PIPELINE PARTNERS, L.P.
                                AND SUBSIDIARIES

                               TABLE OF CONTENTS



<TABLE>
<CAPTION>
                                                                                    Page
                                                                                    ----
<S>                                                                                 <C>

PART I.   FINANCIAL INFORMATION

CONSOLIDATED FINANCIAL STATEMENTS:
   Consolidated Balance Sheet as of June 30, 1996
     (unaudited) and December 31, 1995  . . . . . . . . . . . . . . . . . . . . . .  3
   Unaudited Consolidated Statement of Operations for the
     Three and Six Months Ended June 30, 1996 and 1995, respectively  . . . . . . .  4
   Unaudited Consolidated Statement of Cash Flows for the
     Six Months Ended June 30, 1996 and 1995  . . . . . . . . . . . . . . . . . . .  5
   Consolidated Statement of Partners' Capital for the Six Months
     Ended June 30, 1996 (unaudited)  . . . . . . . . . . . . . . . . . . . . . . .  6
   Notes to Consolidated Financial Statements   . . . . . . . . . . . . . . . . . .  7

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . 13


PART II.   OTHER INFORMATION  . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

   Legal Proceedings
   Changes in Securities
   Defaults Upon Senior Securities
   Submission of Matters to a Vote of Security Holders
   Other Information
   Exhibits and Reports on Form 8-K
</TABLE>




                                       2

<PAGE>   3
             LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                 (In thousands)




<TABLE>
<CAPTION>
                                                                     June 30,         December 31,
                                                                       1996               1995
                                                                     --------         ------------
                                                                    (unaudited)
<S>                                                                 <C>                <C>
            ASSETS
Current assets:
   Cash and cash equivalents                                        $     5,517             15,506
   Accounts receivable                                                    9,528              2,795
   Accounts receivable from affiliates                                   10,097              6,595
   Other current assets                                                     725                762
                                                                    -----------        -----------
      Total current assets                                               25,867             25,658
                                                                    -----------        -----------

Equity investments                                                      119,937             82,441
Property, plant and equipment:
   Pipelines                                                            131,979            181,551
   Platforms and facilities                                              73,341             71,586
   Oil and gas properties, at cost, using
     successful efforts method                                           79,814             47,993
                                                                    -----------        -----------
                                                                        285,134            301,130
   Less accumulated depreciation and depletion                           26,392             15,855
                                                                    -----------        -----------
      Property, plant and equipment, net                                258,742            285,275
                                                                    -----------        -----------
Investment in affiliate                                                   7,500                -
Other noncurrent receivable                                               7,969                -
Other noncurrent assets                                                   5,225              5,322
                                                                    -----------        -----------

      Total assets                                                  $   425,240        $   398,696
                                                                    ===========        ===========


  LIABILITIES AND PARTNERS' CAPITAL

Current liabilities:
   Accounts payable and accrued liabilities                         $    23,967        $    70,717
   Accounts payable to affiliates                                         1,406                178
   Current portion of notes payable                                      10,588              2,000
                                                                    -----------        -----------
      Total current liabilities                                          35,961             72,895
Deferred federal income taxes                                             2,151              2,539
Deferred revenue                                                         11,700                -
Note payable                                                            182,412            135,780
Other noncurrent liabilities                                              1,391                621
                                                                    -----------        -----------
      Total liabilities                                                 233,615            211,835
                                                                    -----------        -----------
Minority interest liability                                                  94                 20
Partners' capital                                                       191,531            186,841
                                                                    -----------        -----------
      Total liabilities and partners' capital                       $   425,240        $   398,696
                                                                    ===========        ===========
</TABLE>


   The accompanying notes are an integral part of this financial statement.

                                       3

<PAGE>   4
             LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
                 UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
                    (In thousands, except per unit amounts)




<TABLE>
<CAPTION>
                                                          For the three months           For the six months
                                                             ended June 30,                ended June 30,
                                                       --------------------------    -------------------------
                                                           1996          1995           1996           1995
                                                       -----------    -----------    -----------    ----------
    <S>                                                <C>            <C>            <C>            <C>
      Revenue:
         Transportation services                       $     5,000    $     4,831    $     9,806    $   10,267
         Equity in earnings                                  4,058          5,750          8,804         8,627
         Oil and gas sales                                   8,619            219         17,926           381
         Platform access and processing fees                   885            -            1,662            -
                                                       -----------    -----------    -----------    ----------
                                                            18,562         10,800         38,198        19,275
                                                       -----------    -----------    -----------    ----------

    Costs and expenses:
         Operating expenses                                  1,867          1,000          3,742         2,085
         Depreciation, depletion and amortization            5,903          1,927         11,227         3,902
         General and administrative expenses and
             management fee                                  2,068          1,919          3,403         3,570
                                                       -----------    -----------    -----------    ----------
                                                             9,838          4,846         18,372         9,557
                                                       -----------    -----------    -----------    ----------

      Operating income                                       8,724          5,954         19,826         9,718
      Gain on sale of asset                                    -            1,247            -           1,247
      Interest income and other                                397            117            733           314
      Interest and other financing costs                       (26)          (203)          (641)         (329)
      Minority interest in income                              (96)           (74)          (230)         (117)
                                                       -----------    -----------    -----------    ---------- 
      Income before income taxes                             8,999          7,041         19,688        10,833
      Income tax benefit                                      (162)           (89)          (385)         (229)
                                                       -----------    -----------    -----------    ---------- 

      Net income                                       $     9,161    $     7,130    $    20,073    $   11,062
                                                       ===========    ===========    ===========    ==========

      Net income per Unit                              $      0.74    $      0.58    $      1.63    $     0.90
                                                       ===========    ===========    ===========    ==========
</TABLE>



   The accompanying notes are an integral part of this financial statement.


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<PAGE>   5
             LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
                 UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                       For the six months ended
                                                                              June 30,
                                                                    ------------------------------
                                                                        1996             1995
                                                                    -------------    -------------
<S>                                                                 <C>              <C>
Cash flows from operating activities:
   Net income                                                       $      20,073    $      11,062
   Adjustments to reconcile net income to net cash
     provided by operating activities:
      Amortization of debt issue costs                                        383              223
      Depreciation, depletion and amortization                             11,227            3,902
      Minority interest in income                                             230              117
      Equity in earnings                                                   (8,804)          (8,627)
      Distributions from equity investments                                11,998            9,308
      Gain on sale of asset                                                   -             (1,247)
      Deferred income taxes                                                  (388)             (87)
      Other noncash deductions                                             (3,654)              85
      Changes in operating working capital (net of effect of
        conveyance):
        Increase in accounts receivable                                    (6,733)         (10,521)
        Increase in accounts receivable from affiliates                    (3,503)             (81)
        Decrease in other current assets                                       37              491
        Decrease in accounts payable and accrued liabilities              (16,990)          (1,271)
        Increase in payable to affiliates                                   1,228           13,962
                                                                    -------------    -------------
          Net cash provided by operating activities                         5,104           17,316
                                                                    -------------    -------------

Cash flows from investing activities:
   Additions to pipelines, platforms and facilities                       (11,701)         (29,935)
   Equity investments                                                     (10,930)          (3,509)
   Acquisition and development of oil and gas properties                  (30,365)         (30,465)
   Proceeds from sale of asset                                                -              1,250
   Other                                                                      -                (38)
                                                                    -------------    ------------- 
          Net cash used in investing activities                           (52,996)         (62,697)
                                                                    -------------    ------------- 

Cash flows from financing activities:
   Increase in restricted cash                                                (59)            (103)
   Debt issue costs                                                        (1,718)          (2,741)
   Proceeds from note payable                                              55,220           54,500
   Distributions to partners                                              (15,540)         (14,919)
                                                                    -------------    ------------- 
          Net cash provided by financing activities                        37,903           36,737
                                                                    -------------    -------------

Decrease in cash and cash equivalents                                      (9,989)          (8,644)
Cash and cash equivalents at beginning of year                             15,506           17,422
                                                                    -------------    -------------
Cash and cash equivalents at end of period                          $       5,517    $       8,778
                                                                    =============    =============

Cash paid for interest, net of amounts capitalized                  $         -      $         648
Cash paid for income taxes                                          $         -      $          13
</TABLE>



   The accompanying notes are an integral part of this financial statement.


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<PAGE>   6
             LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
                  CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
                                 (In thousands)



<TABLE>
<CAPTION>
                                         Preference      Common         General
                                        Unitholders    Unitholders      Partner         Total
                                        -----------    -----------      -------         -----
<S>                                     <C>            <C>            <C>            <C>
Partners' capital at
   December 31, 1995                    $  192,225    $   (5,380)    $       (4)    $   186,841

Net income for the six months
   ended June 30, 1996 (unaudited)          14,733         5,139            201          20,073

Cash distributions (unaudited)             (11,297)       (3,932)          (154)        (15,383)
                                        ----------    ----------     ----------     ----------- 

Partners' capital at
   June 30, 1996 (unaudited)            $  195,661    $   (4,173)    $       43     $   191,531
                                        ==========    ==========     ==========     ===========

Limited partnership Units
   outstanding at December 31, 1995
   and June 30, 1996 (unaudited)             9,038         3,146             (a)         12,184
                                        ==========    ==========     ==========     ===========
</TABLE>



      (a)  Leviathan Gas Pipeline Company owns a 1% general partner interest in
           Leviathan Gas Pipeline Partners, L.P.


   The accompanying notes are an integral part of this financial statement.


                                       6

<PAGE>   7
               LEVIATHAN PIPELINE PARTNERS, L.P. AND SUBSIDIARIES


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)

NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION:

Leviathan Gas Pipeline Partners, L.P. (the "Partnership"), a publicly held
Delaware limited partnership formed in December 1992, is primarily engaged in
the gathering and transportation of natural gas and crude oil through its
pipeline systems located in the Gulf of Mexico (the "Gulf").  The Partnership's
assets include interests in (i) eight natural gas pipeline systems, (ii) a
crude oil pipeline system, (iii) five strategically located multi-purpose
platforms, (iv) three producing oil and gas properties, (v) an overriding
royalty interest and (vi) a dehydration facility.  The Partnership's operating
activities are conducted through twelve approximately 99%-owned limited
liability companies (collectively, the "Operating Companies") and Tarpon
Transmission Company ("Tarpon"), a 100%-owned Texas corporation.  Leviathan Gas
Pipeline Company ("Leviathan"), as general partner, owns the remaining interest
(approximately 1%) in each of the Operating Companies.

Leviathan, a Delaware corporation and wholly-owned subsidiary of Leviathan
Holdings Company ("Leviathan Holdings"), an 85%-owned subsidiary of DeepTech
International Inc. ("DeepTech"), was formed in February 1989 to purchase,
operate and expand offshore pipeline systems.  The remaining 15% of Leviathan
Holdings is principally owned by members of the management of DeepTech.
DeepTech also owns and controls several other operating subsidiaries which are
engaged in various oil and gas related activities.

The Partnership commenced operations on February 19, 1993, the date on which
Leviathan contributed to the Partnership substantially all of its assets and
operations in exchange for a 1% general partner interest in the Partnership, a
34.1% limited partner interest in the Partnership represented by 3,176,250
Common Units (the "Common Units") and an approximate 1% nonmanaging interest in
each of the Operating Companies.  In February 1993, the Partnership completed
an initial public offering of 6,037,500 Preference Units (the "Preference
Units" and together with the Common Units, the "Units").

In June 1994, the Partnership completed the public offering of an additional
3,000,000 Preference Units representing limited partner interests in the
Partnership.  As of June 30, 1996, all of the Preference Units of the
Partnership were held by the public, representing an effective limited partner
interest in the Partnership of 72.7%.  Leviathan, as owner of the Common Units,
its general partner interest and its nonmanaging interest in the Operating
Companies, owned the remaining effective interest in the Partnership of 27.3%.

The accompanying consolidated financial statements have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission.  Accordingly, the statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary for a fair
statement of the results of operations for the period covered by such
statements. These interim financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto contained
in the Partnership's Annual Report on Form 10-K for the year ended December 31,
1995.

NOTE 2 -- OIL AND GAS PROPERTIES:

On June 30, 1995, Flextrend Development Company, L.L.C., ("Flextrend
Development"), an Operating Company, entered into a purchase and sale agreement
(the "Purchase and Sale Agreement") with Tatham Offshore, Inc. ("Tatham
Offshore"), an approximately 39%-owned affiliate of DeepTech.  Pursuant to the
Purchase and Sale Agreement, Flextrend Development acquired, subject to certain
reversionary interests, a 75% working interest in Viosca Knoll Block 817, a 50%
working interest in Garden Banks Block 72 and a





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<PAGE>   8
               LEVIATHAN PIPELINE PARTNERS, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
                                  (unaudited)

50% working interest in Garden Banks Block 117 (the "Assigned Properties") from
Tatham Offshore for $30.0 million.  All of the Assigned Properties are located
offshore in the Gulf.  Flextrend Development is entitled to retain all of the
revenues attributable to the Assigned Properties until it has received net
revenues equal to the Payout Amount (as defined below), whereupon Tatham
Offshore is entitled to receive a reassignment of the Assigned Properties,
subject to reduction and conditions as discussed below. "Payout Amount" is
defined as an amount equal to all costs incurred by Flextrend Development with
respect to the Assigned Properties (including the $30.0 million paid to Tatham
Offshore) plus interest thereon at a rate of 15% per annum.  Effective February
1, 1996, the Partnership entered into an agreement with Tatham Offshore
regarding certain transportation agreements that increases the amount
recoverable from the Payout Amount by $7.5 million plus interest (Note 6).
After having an opportunity to review the initial production history from the
Assigned Properties, Flextrend Development may exercise either of the following
options: (i) to permanently retain 50% of the assigned working interest in
either the Viosca Knoll Block 817 property or the Garden Banks Block 72/Garden
Banks Block 117 properties in exchange for forgiving 25% of the then-existing
Payout Amount or (ii) to permanently retain 50% of the assigned working
interest in all three Assigned Properties in exchange for forgiving 50% of the
then-existing Payout Amount, exclusive of the $7.5 million plus interest added
to the Payout Amount in connection with certain transportation agreements as
discussed above.  In the event Flextrend Development elects to reduce the
Payout Amount, it will become obligated to fund any further development costs
attributable to Tatham Offshore's portion of the working interests, such costs
to be added to the Payout Amount.  Otherwise, any further development costs
will be funded by Flextrend Development on a discretionary basis, such costs to
be added to the Payout Amount.  Further, in the event Flextrend Development
forgoes its right to permanently retain a working interest in all or a portion
of the Assigned Properties, it will be entitled to recover from working
interest revenues in respect of the Assigned Properties all future demand
charges payable for platform access and processing, in their inverse order of
maturity, prior to any reassignment to Tatham Offshore.  If however, Tatham
Offshore (i) satisfies in full the future demand charges payable for platform
access and processing, (ii) delivers evidence that it has received a rating of
BBB-, or better, from at least two reputable rating agencies or (iii) delivers
evidence that an entity with a rating of BBB-, or better, has agreed to
guarantee, assume or, to the reasonable satisfaction of the Partnership,
otherwise become responsible for such future demand charges payable, then
Tatham Offshore would receive a reassignment of the Assigned Properties upon
payout.  In the event payout has occurred but none of the above conditions have
been met, Tatham Offshore is entitled to receive one-third (1/3) of the
revenues, net of operating and platform access and processing fees, until such
time as one of the above conditions is met.

Each of the Assigned Properties is currently producing natural gas and/or oil.
As of June 30, 1996, the Payout Amount was $77.7 million, comprised of (i)
initial acquisition and transaction costs of $32.1 million, (ii) development
and operating costs of $49.3 million, (iii) prepaid demand charges of $7.5
million and (iv) interest of $7.1 million, reduced by net revenue of $18.3
million.

NOTE 3 -- CONSTRUCTION AND ACQUISITION ACTIVITIES:

In February 1996, the Partnership and Texaco, Inc. formed Poseidon Oil Pipeline
Company, L.L.C. ("POPCO"), a Delaware limited liability company, which at
inception, was 50% owned by Poseidon Pipeline Company, L.L.C. ("Poseidon LLC"),
an Operating Company of the Partnership, and 50% owned by Texaco Trading and
Transportation Inc. ("Texaco Trading"), a subsidiary of Texaco, Inc. POPCO was
formed to construct, own and operate the Poseidon Oil Pipeline. Pursuant to the
terms of the organizational documents, Poseidon LLC initially contributed
assets, at net book value, related to the construction of the initial phase of
the Poseidon Oil Pipeline as well as certain dedication agreements with
producers and Texaco Trading initially contributed an equivalent amount of cash
as well as its rights under certain agreements.

The Poseidon Oil Pipeline will ultimately consist of approximately 200 miles of
16 to 24 inch diameter pipeline capable of delivering up to 400,000 barrels per
day of sour crude oil production to multiple markets onshore Louisiana.  The
initial 117-mile segment, which extends easterly from Garden Banks Block 72 to
Ship Shoal Block 332, was placed in service in April 1996.  The second phase,
an 83-mile segment, extending in a northerly direction from the Ship Shoal
Block 332 Platform to Calliou Island, Louisiana, is currently under
construction and is scheduled to be completed by the fourth quarter of 1996.





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<PAGE>   9
               LEVIATHAN PIPELINE PARTNERS, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
                                  (unaudited)

In July 1996, Marathon Oil Company ("Marathon") joined POPCO by contributing
its interest in 58 miles of nearby crude oil pipelines and dedicating its
portion of oil reserves attached to such pipelines to the Poseidon Oil Pipeline
for transportation.  As a result, each of the Partnership and Texaco Trading
now owns a 36% interest in the joint venture and Marathon owns the remaining 28%
interest.

NOTE 4 -- EQUITY INVESTMENTS:

The Partnership owns interests of 50% in Stingray Pipeline Company
("Stingray"), 40% in High Island Offshore System ("HIOS"), 33 1/3% in U-T
Offshore System ("UTOS"), 50% in Viosca Knoll Gathering System ("Viosca
Knoll"), 50% in West Cameron Dehydration Company ("West Cameron Dehy") and 50%
in POPCO (through June 30,1996).  The summarized financial information for
these investments which are accounted for using the equity method is as
follows:

                    SUMMARIZED HISTORICAL OPERATING RESULTS
                                 (In thousands)


<TABLE>
<CAPTION>
                         For the six months ended June 30, 1996        |     For the six months ended June 30, 1995
                     ----------------------------------------------    |  --------------------------------------------
                                          Viosca                       |                                Viosca
                      Stingray   HIOS     Knoll    Other      Total    |  Stingray    HIOS      UTOS    Knoll    Total
<S>                   <C>       <C>      <C>       <C>        <C>      |   <C>      <C>       <C>      <C>      <C>
Operating revenue     $11,882   $22,110  $ 6,055                       |   $11,297  $ 18,546  $ 2,919  $ 3,288
Other income              700        84        -                       |       653       317       26       -
Operating expenses     (6,459)   (8,631)     (42)                      |    (6,497)  (10,530)  (1,620)    (230)
Depreciation           (3,466)   (2,387)  (1,109)                      |    (4,577)   (2,441)    (365)  (1,146)
Other expenses           (886)      (40)      -                        |      (567)     (464)     (31)      -
                      -------   -------  -------                       |   -------   -------   ------   -------
Net earnings            1,771    11,136    4,904                       |       309     5,428      929    1,912
Effective ownership                                                    |
  percentage              50%       40%      50%                       |       50%       40%    33.3%      50%
                      -------   -------  -------                       |   -------   -------   ------   -------
                          885     4,454    2,452                       |       155     2,171      310      956
Adjustments:                                                           |
- - Depreciation (a)        498       455       -                        |     1,043       552       42       -
- - Contract                                                             |
    amortization (a)     (170)      (53)      -                        |        -       (135)       -        -
- - Rate refund reserve       -       (52)      -                        |        -      3,200      333
- - Other                   (24)      (44)      -                        |        -          -        -        -
                      -------   -------  -------                       |   -------   -------   ------   -------               
                                                                       |
Equity in earnings of                                                  |
  partnerships        $ 1,189   $ 4,760  $ 2,452    $ 403(c)  $ 8,804  |   $ 1,198   $ 5,788   $  685   $   956  $8,627
                      =======   =======  =======   ======     =======  |   =======   =======   ======   =======  ======
                                                                       |
Distributions from                                                     |
  partnerships (b)    $ 1,423   $ 5,800  $ 2,700   $2,075(d)  $11,998  |   $ 3,150   $ 4,400   $  333   $ 1,425  $9,308
                      =======   =======  =======   ======     =======  |   =======   =======   ======   =======  ======
</TABLE>


- --------------

  (a) Adjustments result from purchase price adjustments made in accordance
      with Accounting Principles Board No. 16. "Business Combinations".
  (b) Future distributions from partnerships could be restricted by the terms
      of certain partnership credit agreements.
  (c) Includes the Partnership's share of equity earnings (losses) of West
      Cameron Dehy, UTOS and POPCO of $382,000, $121,000 and ($100,000),
      respectively.
  (d) Includes the Partnership's share of distributions from West Cameron Dehy,
      UTOS and POPCO of $275,000, $400,000 and $1,400,000, respectively.




                                       9

<PAGE>   10
               LEVIATHAN PIPELINE PARTNERS, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
                                  (unaudited)

NOTE 5 -- CREDIT FACILITY:

On October 12, 1995, Flextrend Development and a syndicate of commercial
lenders entered into the Flextrend Credit Facility.  The Flextrend Credit
Facility provided for borrowings of up to $32.0 million at any time prior to
March 31, 1996.  As discussed below, all borrowings outstanding under the
Flextrend Credit Facility were repaid on March 26, 1996 from proceeds obtained
under the Partnership Credit Facility, as amended.  For the six months ended
June 30, 1996, interest and amortization of debt issue costs related to the
Flextrend Credit Facility totaled $2.5 million, all of which was capitalized in
connection with drilling activities in progress during the period.

The Partnership Credit Facility, as amended and restated on March 26, 1996, is
a revolving and term credit facility with a syndicate of commercial banks
providing for up to $220.0 million of available credit in the form of a $145.0
million revolving credit facility and a $75.0 million term loan facility.  The
revolving credit facility has an initial maturity of three years, which
maturity can be extended in one-year increments, but not beyond March 31, 2001.
The $75.0 million term loan facility has a final maturity of March 31, 2001.
The first principal payment, in an amount of $2.0 million, is due on December
31, 1996. Subsequent payments are to be made quarterly in the amount of $4.3
million.  The proceeds of the term loan were used to repay all of the
indebtedness incurred under the Flextrend Credit Facility and to repay a
portion of the debt outstanding under the former revolving credit facility.
All amounts advanced under the revolving credit facility and the term loan
facility will accrue interest at a variable rate selected by the Partnership
and determined by reference to the reserve-adjusted London interbank offer
rate, the average certificate of deposit rate or the prime rate.  The current
average interest rate on both revolving credit and term loans is 7.2% per
annum.  A commitment fee is charged on the unused and available to be borrowed
portion of the revolving credit facility.  This fee varies between 0.25% and
0.375% per annum and is currently 0.375% per annum.  All amounts due under the
Partnership Credit Facility are guaranteed by Leviathan and each of the
Operating Companies and Tarpon, and are secured by Leviathan's 1% general
partner interest in the Partnership, all of Leviathan's and the Partnership's
equity interests in the Operating Companies and Tarpon and most of the
equipment, negotiable instruments and inventory and other personal property of
the Operating Companies and Tarpon.  The Partnership incurred additional debt
issue costs related to the amended and restated credit facility of $1.5 million
which have been capitalized and are being amortized over the five- year
remaining life of the credit facility.  As of June 30, 1996, borrowings totaled
$75.0 million under the term facility and $118.0 million under the revolving
credit facility.  For the six months ended June 30, 1996, interest expense
related to the Partnership Credit Facility totaled $0.6 million, which included
commitment fees and amortization of debt issue costs of $0.2 million.
Additional interest expense and amortization of debt issue costs related to the
Partnership Credit Facility of $6.0 million was capitalized in connection with
construction projects and drilling activities in progress during the period.
As of August 12, 1996, borrowings totaled $75.0 million under the term facility
and $131.0 million under the revolving credit facility.  There are no letters
of credit currently outstanding under the revolving credit facility.

NOTE 6 -- RELATED PARTY TRANSACTIONS:

Management fees.  For the six months ended June 30, 1996, Leviathan charged the
Partnership $3.1 million pursuant to the Partnership Agreement which provides
for reimbursement of expenses Leviathan incurs as general partner of the
Partnership, including reimbursement of expenses incurred by DeepTech in
providing management services to Leviathan and the Partnership.  In addition,
the management agreement requires a payment by Leviathan to compensate DeepTech
for certain tax liabilities resulting from, among other things, additional
taxable income allocated to Leviathan due to (i) the issuance of additional
Preference Units (including the sale of the Preference Units by the Partnership
pursuant to the secondary offering) and (ii) the investment of such proceeds in
additional acquisitions or construction projects.  During the six months ended
June 30, 1996, Leviathan charged the Partnership $1.0 million to compensate
DeepTech for





                                       10

<PAGE>   11
               LEVIATHAN PIPELINE PARTNERS, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
                                  (unaudited)

additional taxable income allocated to Leviathan.  The management agreement has
an initial term expiring on June 30, 1997, and may thereafter be terminated on
90 days' notice by either party.

Transportation and platform access agreements.  Tatham Offshore was obligated
to make demand charge payments to the Partnership pursuant to certain
transportation agreements.  Under these agreements, the Partnership was
entitled to receive demand charges of $8.1 million in 1996, $6.0 million in
1997, $3.0 million in 1998 and $0.7 million in 1999.  In addition to the demand
charges, Tatham Offshore is obligated to pay commodity charges, based on the
volume of oil and gas transported or processed, under these agreements.  Also,
for the year ending December 31, 1996, Tatham Offshore is obligated to pay $1.6
million in platform access fees.  

Production problems at Ship Shoal Block 331 and reduced oil production from the
Ewing Bank 914 #2 well have affected Tatham Offshore's ability to pay the demand
charge obligations under these agreements. Effective February 1, 1996, the
Partnership agreed to release Tatham Offshore from all remaining demand charge
payments under the transportation agreements, a total of $17.8 million.  Tatham
Offshore remains obligated to pay the commodity charges under these agreements
as well as all platform access and processing fees associated with the Viosca
Knoll Block 817 lease.  In exchange, the Partnership received 7,500 shares of
Tatham Offshore senior preferred stock (the "Senior Preferred Stock"), which is
presented on the accompanying consolidated balance sheet at June 30, 1996 as
investment in affiliate.  Each share of the Senior Preferred Stock has a
liquidation preference of $1,000 per share, is senior in liquidation preference
to all other classes of Tatham Offshore stock and has a 9% cumulative dividend,
payable quarterly.  Commencing on October 1, 1998 and for a period of 90 days
thereafter, the Partnership has the option to exchange the remaining liquidation
preference amount and accrued but unpaid dividends for shares of Tatham
Offshore's Series A Convertible Exchangeable Preferred Stock (the "Convertible
Exchangeable Preferred Stock") with an equivalent market value.  Further, the
Partnership has made an irrevocable offer to Tatham Offshore to sell all or any
portion of the Senior Preferred Stock to Tatham Offshore or its designee at a
price equal to $1,000 per share, plus interest thereon at 9% per annum less the
sum of any dividends paid thereon.  The Convertible Exchangeable Preferred Stock
is convertible into Tatham Offshore common stock based on a fraction, the
numerator of which is the liquidation preference value plus all accrued but
unpaid dividends and the denominator of $0.653 per share which was based on the
lowest average of consecutive five day closing prices for Tatham Offshore's
common stock between December 26, 1995 and July 1, 1996.  In addition, the sum
of $7.5 million was added to the Payout Amount under the Purchase and Sale
Agreement. By adding $7.5 million to the Payout Amount, the Partnership is
entitled to an additional $7.5 million plus interest at the rate of 15% per
annum from revenue attributable to the Assigned Properties prior to reconveying
any interest in the Assigned Properties to Tatham Offshore. Tatham Offshore
waived its remaining option to prepay the then-existing Payout Amount and
receive a reassignment of its working interests.  Tatham Offshore and the
Partnership also agreed that in the event Tatham Offshore furnishes the
Partnership with a financing commitment from a lender with a credit rating of
BBB- or better covering 100% of the then outstanding Payout Amount, the interest
rate utilized to compute the Payout Amount shall be adjusted from and after the
date of such commitment to the interest rate specified in such commitment,
whether utilized or not.  Tatham Offshore also agreed to grant the Partnership
the right to utilize the Ship Shoal Block 331 platform and related facilities at
a rental rate of $1.00 per annum for such period as the platform is owned by
Tatham Offshore and located on Ship Shoal Block 331, provided such use, at the
time proposed, does not interfere with lease operations or other activities of
Tatham Offshore.  In addition, Tatham Offshore granted the Partnership a right
of first refusal relative to a sale of the platform.

Oil and gas sales.  The Partnership has agreed to sell all of its oil and gas
production to Offshore Gas Marketing, Inc.  ("Offshore Marketing"), an
affiliate of the Partnership, on a month to month basis.  The agreement with
Offshore Marketing provides for marketing fees equal to 2% of the sales value
of crude oil





                                       11

<PAGE>   12
               LEVIATHAN PIPELINE PARTNERS, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
                                  (unaudited)

and condensate and $0.015 per dekatherm of natural gas for selling the
Partnership's production.  During the six months ended June 30, 1996,
substantially all of the Partnership's oil and gas sales were derived from
sales to Offshore Marketing.

Other.  POPCO has entered into certain additional agreements with an Operating
Company of the Partnership to provide for use by POPCO of certain pipelines and
platforms owned by the Operating Company for fees which consist of a monthly
rental fee of $100,000 per month for a minimum of six months and reimbursement
of certain actual capital expenditures not to exceed $2,000,000 incurred in
readying one of the platforms for use.

Poseidon LLC managed the construction and installation of the initial 117 mile
segment of the Poseidon Oil Pipeline, which was placed in service in April
1996, and Texaco Trading is managing the construction and installation of the
remaining pipelines and facilities comprising the Poseidon Oil Pipeline. Each
of Poseidon LLC and Texaco Trading will earn a performance fee of $1,400,000
for managing the construction of a portion of the Poseidon Oil Pipeline, which
fee may be adjusted if either party manages the construction of any additional
facilities.  Through June 30, 1996, Poseidon LLC has received $1,330,000 in
performance fees from POPCO.

NOTE 7 -- CASH DISTRIBUTIONS:

On January 22, 1996, the Partnership declared a cash distribution of $0.60 per
Preference and Common Unit for the period from October 1, 1995 through December
31, 1995.  This distribution was paid on February 14, 1996 to Unitholders of
record as of January 31, 1996.

On March 26, 1996, the Partnership declared a cash distribution of $0.65 per
Preference and Common Unit for the period from January 1, 1996 through March
31, 1996.  This distribution was paid on May 15, 1996 to Unitholders of record
as of April 30, 1996.

On July 18, 1996, the Partnership declared a cash distribution of $0.70 per
Preference and Common Unit for the period from April 1, 1996 through June 30,
1996.  This distribution will be paid on August 14, 1996 to Unitholders of
record as of July 31, 1996.

NOTE 8 -- SUBSEQUENT EVENTS:

On July 8, 1996, the Partnership and affiliates of Marathon and Shell Oil
Company ("Shell") announced plans to build and operate an interstate natural gas
pipeline system and a connecting gathering system to serve growing production
areas in the Green Canyon area of the Gulf.  The total cost of the two systems,
including the Combined Manta Ray System currently owned by the Partnership, is
approximately $270.0 million.  The new jurisdictional interstate pipeline, named
"Nautilus", consists of a 30-inch line downstream from Ship Shoal Block 207
connecting to the Marathon operated Burns Point Gas Plant and other area gas
plants. Upstream of the Ship Shoal 207 terminal, the Combined Manta Ray System
will be extended into a broader gathering system that will serve shelf and
deepwater production around Ewing Bank Block 873 to the east and Green Canyon
Block 65 to the west.  Marathon and Shell have significant deep water acreage
positions in the area, including the recently announced Troika field (Green
Canyon Block 244), and will provide the majority of the capital funding for the
new construction. Leviathan will provide some funding along with the
contribution of Combined Manta Ray System assets.





                                       12

<PAGE>   13
I
TEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Partnership's
consolidated financial statements and notes thereto included in Part I of this
quarterly report.  Unless the context otherwise requires, all references herein
to the Partnership with respect to the operations and ownership of the
Partnership's assets are also references to its subsidiaries, the Operating
Companies and Leviathan's nonmanaging interest in certain of the Partnership's
subsidiaries.

OVERVIEW

The Partnership's assets include interests in (i) eight natural gas pipeline
systems (the "Pipelines"), (ii) a crude oil pipeline system (the "Poseidon Oil
Pipeline"), (iii) five strategically located multi-purpose platforms, (iv)
three producing oil and gas properties, (v) an overriding royalty interest and
(vi) a dehydration facility.

The Pipelines include 981 miles of pipeline with a throughput capacity of 5.6
billion cubic feet ("Bcf") of gas per day.  The Pipelines are strategically
located offshore Louisiana and eastern Texas and gather and transport natural
gas for producers, marketers, pipelines and end-users for a fee.  The
Partnership's interest in the Pipelines is owned through 100% interests in each
of Ewing Bank Gathering Company, L.L.C., a Delaware limited liability company
("Ewing Bank"), Louisiana Offshore Gathering Systems, L.L.C., a Delaware limited
liability company ("LOGS"), Green Canyon Pipe Line Company, L.L.C., a Delaware
limited liability company ("Green Canyon"), Tarpon Transmission Company, a Texas
corporation ("Tarpon") and, indirectly through LOGS and Manta Ray Pipeline
Holding Company, L.L.C. ("Manta Ray"), the Manta Ray System; a 50% partnership
interest in each of Stingray Pipeline Company, a Louisiana general partnership
("Stingray") and Viosca Knoll Gathering Company, a Delaware general partnership
("Viosca Knoll"); a 40% partnership interest in High Island Offshore System, a
Delaware general partnership ("HIOS"); and a 33 1/3% partnership interest in U-T
Offshore System, a Delaware general partnership ("UTOS").  In May 1996, LOGS was
merged with and into Manta Ray and the LOGS system, the Manta Ray System and the
respective assets of such entities were integrated to form the Combined Manta
Ray System.  Concurrently, LOGS changed its name to Manta Ray Gathering Company,
L.L.C.

At inception, the Partnership owned a 50% interest in POPCO.  POPCO was formed
to construct, own and operate the Poseidon Oil Pipeline.  As designed, the
Poseidon Oil Pipeline will consist of approximately 200 miles of pipeline with a
maximum capacity of 400,000 barrels per day of sour crude oil.  The first phase
of the system, consisting of approximately 117 miles of pipeline extending from
a platform in Garden Banks Block 72 in an easterly direction to a platform in
Ship Shoal Block 332, was placed in service in April 1996 with a maximum
hydraulic capacity of 200,000 barrels of oil per day.  The second phase of the
system, which is currently under construction and scheduled to be completed by
the fourth quarter of 1996, will consist of approximately 83 miles of pipeline
extending from the platform in Ship Shoal Block 332 in a northerly direction to
a terminus located in southern Louisiana.  In July 1996, Marathon joined POPCO
by contributing its interest in 58 miles of nearby crude oil pipelines and
dedicating its portion of oil reserves attached to such pipelines to the
Poseidon Oil Pipeline for transportation.  As a result, each of the Partnership
and Texaco Trading now owns a 36% interest in the joint venture and Marathon
owns the remaining 28% interest.

The Partnership owns interests in five strategically located multi-purpose
platforms in the Gulf that have processing capabilities which complement the
Partnership's pipeline operations. The multi-purpose platforms serve as
junctions in the pipeline grid and enable the Partnership to perform
maintenance functions on its pipelines. In addition, the multi- purpose
platforms serve as landing sites for deeper water production and as sites for
the location of gas compression facilities and drilling operations.





                                       13

<PAGE>   14
The Partnership owns an interest in and is operator of three producing leases
in the Gulf which were acquired by the Partnership on June 30, 1995 from Tatham
Offshore.  The properties, which are subject to certain reversionary rights,
include a 75% working interest in Viosca Knoll Block 817, a 50% working
interest in Garden Banks Block 72 and a 50% working interest in Garden Banks
Block 117.  The Viosca Knoll Block 817 lease is currently producing a total of
approximately 90 million cubic feet ("MMcf") of gas per day, when platform
drilling activities permit.  The well deliverability from the Viosca Knoll 817
project is in excess of 90 MMcf per day but is limited to such amount by the
production equipment currently located on the production platform.  The
Partnership is currently taking steps to increase the total capacity of such
production equipment to approximately 140 MMcf per day.  Once such expansion
occurs, the Partnership intends to complete and place on production at least
three additional wells which it has already drilled and possibly a fourth well,
which it is currently drilling.  In addition, the Partnership has placed on
production two wells on the Garden Banks Block 72 lease and one well on Garden
Banks Block 117.  The Garden Banks Block 72 A-1 and A-2 wells, which began
producing in May 1996, are currently producing an average of 3,000 barrels of
oil and 6.0 MMcf of gas per day.  The Partnership has drilled a third well on
Garden Banks Block 72 and is in the process of drilling a fourth well.  The
Garden Banks Block 72 A-3 well will be completed and placed on production
following the completion of drilling activities on the Garden Banks Block 72
A-4 well.  The Garden Banks Block 117 #1 well, which began producing in July
1996, is currently producing an average of 5,400 barrels of oil and 9.7 MMcf of
gas per day.  The Partnership is in the process of drilling a second well on
the Garden Banks Block 117 lease which, if successful, the Partnership intends
to complete and place on production during the fourth quarter of 1996.

The Partnership owns an overriding royalty interest in the six-lease block
Ewing Bank 915 Unit, which is operated by Tatham Offshore, as well as certain
other minority interests in oil and gas leases which are not material to the
business of the Partnership.  The Partnership also owns a 50% interest in West
Cameron Dehydration Company, L.L.C., a Delaware limited liability company
("West Cameron Dehy"), which owns a dehydration facility located at the
terminus of the Stingray pipeline, onshore Louisiana.

The Partnership accounts for its oil and gas exploration and production
activities using the successful efforts method of accounting.  Under this
method, costs of successful exploratory wells, development wells and
acquisitions of mineral leasehold interests are capitalized. Production,
exploratory dry hole and other exploration costs, including geological and
geophysical costs and delay rentals, are expensed as incurred. Unproved
properties are assessed periodically and any impairment in value is recognized
currently as depreciation, depletion, amortization and impairment expense.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1996 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1995

Total revenue for the three months ended June 30, 1996 was $18.6 million as
compared with $10.8 million for the three months ended June 30, 1995.  Revenue
from transportation services totaled $5.0 million for the three months ended
June 30, 1996 as compared with $4.8 million for the three months ended June 30,
1995. The increase in transportation revenue of $0.2 million is a result of an
increase of $0.6 million from the Green Canyon system attributable to the
connection of a new gas field located in Green Canyon Block 136 to the system
offset by a decrease of $0.4 million related to the Ewing Bank system due to
the restructuring of the demand charges payable to Ewing Bank from Tatham
Offshore. Revenue from the Partnership's equity interest in Stingray, HIOS,
UTOS, Viosca Knoll, POPCO and West Cameron Dehy (the "Joint Venture Companies")
totaled $4.1 million for the three months ended June 30, 1996 as compared with
$5.8 million for the three months ended June 30, 1995.  The decrease of $1.7
million in revenue from the Partnership's equity interest in the Joint Venture
Companies primarily reflects decreases





                                       14

<PAGE>   15
of $2.6 million related to HIOS and UTOS as a result of lower rates during 1996
offset by increases of $0.7 million from Viosca Knoll as a result of increased
throughput and $0.2 million from West Cameron Dehy, which was placed in service
in November 1995.  Revenue from oil and gas sales totaled $8.6 million for the
three months ended June 30, 1996 as compared with $0.2 million for the three
months ended June 30, 1995. The increase in oil and gas sales of $8.4 million
is primarily attributable to the initiation of production from the
Partnership's Viosca Knoll Block 817 lease in December 1995 and the Garden
Banks Block 72 lease in May 1996.  During the three months ended June 30, 1996,
the Partnership sold 3,378 MMcf of gas and 25,216 barrels of oil at average
prices of $2.31 per thousand cubic feet ("Mcf") and $21.57 per barrel,
respectively.  Revenue related to the Partnership's Viosca Knoll Block 817
Platform, which was placed in service during the third quarter of 1995, totaled
$0.9 million for the three months ended June 30, 1996.

Total transportation volumes for the Joint Venture Companies increased 10.4%
from the three months ended June 30, 1995 to the three months ended June 30,
1996 primarily as a result of increased throughput on the Viosca Knoll, HIOS,
UTOS and Stingray systems.  Total transportation volumes for the Gathering
Systems (Green Canyon, Tarpon, Ewing Bank and Combined Manta Ray) increased
13.8% from the three months ended June 30, 1995 to the three months ended June
30, 1996.  This increase is primarily a result of increased throughput on the
Green Canyon system as a result of the addition of Green Canyon Block 136
partially offset by lower production from the producing fields attached to the 
Tarpon and Combined Manta Ray systems.

Total costs and expenses for the three months ended June 30, 1996 totaled $9.8
million as compared with $4.8 million for the three months ended June 30, 1995.
The $5.0 million increase in costs and expenses was attributable to increases
in (i) depreciation, depletion and amortization of $4.0 million, (ii) operating
expenses of $0.9 million and (iii) the Partnership's management fees and other
general and administrative expenses of $0.1 million.  The increase in
depreciation, depletion and amortization results primarily from accelerated
depreciation on the Ewing Bank flow lines, depreciation on additional platforms
and facilities constructed by the Partnership and depreciation and depletion on
the oil and gas wells and facilities located on Viosca Knoll Block 817 and
Garden Banks Block 72.  The increase in operating expenses is primarily
attributable to the operation of new pipelines, platforms and leases by the
Partnership.  The increase in the Partnership's management fees and other
general and administrative expenses primarily reflects a $0.2 million
reimbursement to DeepTech for certain tax liabilities incurred by DeepTech as a
result of the Partnership's public offering of an additional 3,000,000
Preference Units in June 1994.

During the three months ended June 30, 1995, the Partnership recognized a $1.2
million gain on sale of certain oil and gas mineral leaseholds.

Interest income and other totaled $0.4 million for the three months ended June
30, 1996 as compared with $0.1 million for the three months ended June 30, 1995.
The increase in interest income is due to accrued interest of $0.3 million
related to the $7.5 million that was added to the Payout Amount in connection
with restructuring the demand charges payable to the Partnership from Tatham
Offshore.  Interest and other financing costs, net of capitalized interest, for
the three months ended June 30, 1996 totaled $26,000 as compared with $0.2
million for the three months ended June 30, 1995.  Interest and fees associated
with the Partnership Credit Facility of $3.7 million were capitalized in
conneciton with construction projects and drilling activities in progress during
the second quarter of 1996.

Net income for the three months ended June 30, 1996 totaled $9.2 million as
compared with $7.1 million for the three months ended June 30, 1995 as a result
of the items discussed above. Net income per Unit for the three months ended
June 30, 1996 totaled $0.74 per Unit as compared with $0.58 per Unit for the
three months ended June 30, 1995.





                                       15

<PAGE>   16
SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1995

Total revenue for the six months ended June 30, 1996 was $38.2 million as
compared with $19.3 million for the six months ended June 30, 1995.  Revenue
from transportation services totaled $9.8 million for the six months ended June
30, 1996 as compared with $10.3 million for the six months ended June 30, 1995.
The decrease in transportation revenue of $0.5 million was comprised primarily
of (i) a $1.2 million increase from the Green Canyon system attributable to the
connection of a new gas field located in Green Canyon Block 136 to the system
and (ii) a decrease of $1.7 million attributable to decreases in throughput on
the Combined Manta Ray, Tarpon and Ewing Bank systems due to normal production
decline from the wells attached to such systems and the restructuring of the
demand charges payable to the Partnership from Tatham Offshore.  Revenue from
the Partnership's equity interest in the Joint Venture Companies totaled $8.8
million for the six months ended June 30, 1996 as compared with $8.6 million
for the six months ended June 30, 1995.  The increase of $0.2 million in
revenue from the Partnership's equity interest in the Joint Venture Companies
primarily reflects increases of (i) $1.5 million from Viosca Knoll as a result
of increased throughput on the Viosca Knoll Gathering System and (ii) $0.4
million from West Cameron Dehy, which was placed in service in November 1995
offset by decreases of $1.7 million related primarily to HIOS and UTOS.  Revenue
from oil and gas sales totaled $17.9 million for the six months ended June 30,
1996 as compared with $0.4 million for the six months ended June 30, 1995.  The
increase in oil and gas sales of $17.5 million is primarily attributable to the
initiation of production from the Partnership's Viosca Knoll Block 817 lease in
December 1995 and the Garden Banks Block 72 lease in May 1996. During the six
months ended June 30, 1996, the Partnership sold 6,376 MMcf of gas and 25,216
barrels of oil at average prices of $2.64 per Mcf and $21.57 per barrel,
respectively.  Revenue related to the Partnership's Viosca Knoll Block 817
Platform, which was placed in service during the third quarter of 1995, totaled
$1.7 million for the six months ended June 30, 1996.

Total transportation volumes for the Joint Venture Companies increased 9.9%
from the six months ended June 30, 1995 to the six months ended June 30, 1996
primarily as a result of increased throughput on the Viosca Knoll, HIOS and
Stingray systems.  Total transportation volumes for the Gathering Systems
increased 8.9% from the six months ended June 30, 1995 to the six months ended
June 30, 1996.  This increase is primarily a result of increased throughput on
the Green Canyon system as a result of the addition of Green Canyon Block 136
partially offset by lower production from the producing fields attached to the
Ewing Bank, Tarpon and Combined Manta Ray systems.

Total costs and expenses for the six months ended June 30, 1996 totaled $18.4
million as compared with $9.6 million for the six months ended June 30, 1995.
The $8.8 million increase in costs and expenses was primarily attributable to
an increase in depreciation, depletion and amortization of $7.3 million and
operating expenses of $1.7 million, partially offset by a $0.2 million decrease
in the Partnership's management fees and other general and administrative
expenses.  The increase in depreciation, depletion and amortization results
primarily from accelerated depreciation on the Ewing Bank flow lines,
depreciation on additional platforms and facilities constructed by the
Partnership and depreciation and depletion on the oil and gas wells and
facilities located on the Viosca Knoll Block 817 and Garden Banks Block 72
leases. The increase in operating expenses is primarily attributable to the
operation of new pipelines, platforms and leases by the Partnership.  The
decrease in the Partnership's management fees and other general and
administrative expenses reflects a $1.0 million reimbursement to DeepTech for
certain tax liabilities incurred by DeepTech as a result of the Partnership's
public offering of an additional 3,000,000 Preference Units in June 1994 offset
by a $1.3 million reimbursement from POPCO as a result of the Partnership's
management of the initial phase of the construction of the Poseidon Oil
Pipeline.

During the six months ended June 30, 1995, the Partnership recognized a $1.2
million gain on sale of certain oil and gas mineral leaseholds.





                                       16

<PAGE>   17
Interest income and other totaled $0.7 million for the six months ended June
30, 1996 as compared with $0.3 million for the six months ended June 30, 1995.
The increase in interest income is primarily due to accrued interest of $0.5
million related to the $7.5 million that was added to the Payout Amount in
connection with restructuring the demand charges payable to the Partnership
from Tatham Offshore. Interest and other financing costs, net of capitalized
interest, for the six months ended June 30, 1996 totaled $0.6 million as
compared with $0.3 million for the six months ended June 30, 1995.  Interest
and fees associated with the Partnership's credit facilities of $8.5 million
were capitalized in connection with construction projects and drilling
activities in progress during the six months ended June 30, 1996.

Net income for the six months ended June 30, 1996 totaled $20.1 million as
compared with $11.1 million for the six months ended June 30, 1995 as a result
of the items discussed above. Net income per Unit for the six months ended June
30, 1996 totaled $1.63 per Unit as compared with $0.90 per Unit for the six
months ended June 30, 1995.

LIQUIDITY AND CAPITAL RESOURCES

Sources of Cash.  The Partnership intends to satisfy its capital requirements
and other working capital needs primarily from cash on hand, cash from
continuing operations and borrowings under the Partnership Credit Facility.
Net cash provided by operating activities for the six months ended June 30,
1996 totaled $5.1 million.  At June 30, 1996, the Partnership had cash and cash
equivalents of $5.5 million.

Cash from continuing operations is derived from (i) payments for transporting
gas through the 100% owned pipelines, (ii) cash distributions from the
Stingray, HIOS, UTOS and Viosca Knoll partnerships and from POPCO and West
Cameron Dehy, (iii) platform access and processing fees and (iv) the sale of
oil and gas attributable to the Partnership's interest in certain producing
wells.

Stingray, HIOS, UTOS and Viosca Knoll are partnerships and POPCO and West
Cameron Dehy are limited liability companies in which the Partnership owns an
interest.  The Partnership's cash flows from operations will be affected by the
ability of such entities to make distributions.  Distributions from such
entities are also subject to the discretion of their respective management
committees.  Further, each of Stingray and POPCO is party to a credit agreement
under which it has outstanding obligations that may restrict the payments of
distributions to its owners.  In December 1995, Stingray amended an existing
term loan agreement to provide for aggregate outstanding borrowings of up to
$29.0 million in principal amount.  The agreement requires the payment of
principal by Stingray of $1.45 million per quarter.  As of June 30, 1996,
interest accrued at the rate of approximately 6.4% per annum and is payable
quarterly.  As of June 30, 1996, Stingray had $27.55 million outstanding under
its term loan agreement.

In April 1996, POPCO entered into a revolving credit facility (the "POPCO
Credit Facility") with a group of commercial banks to provide up to $150.0
million for the construction of the second phase of the Poseidon Oil Pipeline
and for other working capital needs of POPCO.  As of June 30, 1996, POPCO had
$40.0 million outstanding under the POPCO Credit Facility bearing interest at
6.7% per annum. POPCO's ability to borrow money under the facility is subject
to certain customary terms and conditions, including borrowing base
limitations.  The POPCO Credit Facility is secured by a substantial portion of
POPCO's assets and matures on April 30, 2001.

Flextrend Development has initiated production from the each of the Assigned
Properties.  The Viosca Knoll Block 817 lease is currently producing a total of
approximately 90 MMcf of gas per day when platform drilling activities permit.
Flextrend Development owns a 75% working interest in this property, subject to
certain reversionary interests.  The Garden Banks Block 72 lease, which began
producing in May





                                       17

<PAGE>   18
1996, is currently producing an average of 3,000 barrels of oil and 6.0 MMcf of
gas per day.  The Garden Banks Block 117 #1 well, which began producing in July
1996, is currently producing an average of 5,400 barrels of oil and 9.7 MMcf of
gas per day.  Flextrend Development owns a 50% working interest in each of
these properties, subject to certain reversionary interests.

Tatham Offshore was obligated to make demand charge payments to the Partnership
pursuant to certain transportation agreements.  Production problems at Ship
Shoal Block 331 and reduced oil production from the Ewing Bank 914 #2 well have
adversely affected Tatham Offshore's ability to pay demand charges under these
agreements.  Effective February 1, 1996, the Partnership agreed to release
Tatham Offshore from all remaining demand charge payments under certain
transportation agreements, a total of $17.8 million. Under these agreements, the
Partnership was entitled to receive demand charges of $8.1 million in 1996, $6.0
million in 1997, $3.0 million in 1998 and $0.7 million in 1999.  In exchange,
the Partnership received 7,500 shares of Tatham Offshore Senior Preferred Stock.
Each share of the Senior Preferred Stock has a liquidation preference of $1,000
per share, is senior in liquidation preference to all other classes of Tatham
Offshore stock and has a 9% cumulative dividend, payable quarterly.  Commencing
on October 1, 1998 and for a period of 90 days thereafter, the Partnership has
the option to exchange the remaining liquidation preference amount and accrued
but unpaid dividends for shares of Tatham Offshore's Convertible Exchangeable
Preferred Stock with an equivalent market value.  Further, the Partnership has
made an irrevocable offer to Tatham Offshore to sell all or any portion of the
Senior Preferred Stock to Tatham Offshore or its designee at a price equal to
$1,000 per share, plus interest thereon at 9% per annum less the sum of any
dividends paid thereon.  The Convertible Exchangeable Preferred Stock is
convertible into Tatham Offshore common stock based on a fraction, the numerator
of which is the liquidation preference value plus all accrued but unpaid
dividends and the denominator of which is $0.653 per share.  In addition, the
sum of $7.5 million was added to the Payout Amount under the Purchase and Sale
Agreement.  By adding $7.5 million to the Payout Amount, the Partnership is
entitled to an additional $7.5 million plus interest at the rate of 15% per
annum from revenue attributable to the Assigned Properties prior to reconveying
any interest in the Assigned Properties to Tatham Offshore.  Tatham Offshore
waived its remaining option to prepay the then-existing Payout Amount and
receive a reassignment of its working interests.  Tatham Offshore and the
Partnership also agreed that in the event Tatham Offshore furnishes the
Partnership with a financing commitment from a lender with a credit rating of
BBB- or better covering 100% of the then outstanding Payout Amount, the interest
rate utilized to compute the Payout Amount shall be adjusted from and after the
date of such commitment to the interest rate specified in such commitment,
whether utilized or not.  Tatham Offshore also agreed to grant the Partnership
the right to utilize the Ship Shoal Block 331 platform and related facilities at
a rental rate of $1.00 per annum for such period as the platform is owned by
Tatham Offshore and located on Ship Shoal Block 331, provided such use, at the
time proposed, does not interfere with lease operations or other activities of
Tatham Offshore.  In addition, Tatham Offshore granted the Partnership a right
of first refusal relative to a sale of the platform.  Tatham Offshore remains
obligated to pay the commodity charges under these agreements as well as all
platform access and processing fees associated with the Viosca Knoll Block 817
lease.  For the year ending December 31, 1996, Tatham Offshore is obligated to
pay $1.6 million in platform access fees.

The Partnership Credit Facility, as amended and restated on March 26, 1996, is
a revolving and term credit facility providing for up to $220.0 million of
available credit in the form of a $145.0 million revolving credit facility and
$75.0 million term loan facility.  Proceeds from the revolving credit facility
are available to the Partnership for general partnership purposes, including
financing of capital expenditures, for working capital, and subject to certain
limitations, for paying the Minimum Quarterly Distribution, as defined in the
Partnership Agreement.  The revolving credit facility can also be utilized to
issue letters of credit as may be required from time to time.  As of June 30,
1996, borrowings totaled $75.0 million under the term facility and $118.0 
million under the revolving credit facility.  As of August 12, 1996, borrowings
totaled $75.0 





                                       18

<PAGE>   19
million under the term facility and $131.0 million under the revolving credit
facility.  There are no letters of credit currently outstanding under the
revolving credit facility.

Uses of Cash.  The Partnership's capital requirements consist primarily of (i)
quarterly distributions to holders of Preference Units and Common Units and to
Leviathan as general partner, (ii) expenditures for the maintenance of the
pipelines and related infrastructure and the construction of additional
pipelines and related facilities for the transportation and processing of gas
and oil in the Gulf, including the second phase of the Poseidon Oil Pipeline,
(iii) management fees and other operating expenses and (iv) debt service on its
outstanding debt.  In addition, Flextrend Development's future capital
requirements will consist of expenditures related to the continued development
of the Viosca Knoll Block 817, Garden Banks Block 72 and Garden Banks Block 117
leases.

For every full quarter since its inception, the Partnership has declared and
subsequently paid a cash distribution to holders of Preference Units and Common
Units in an amount equal to or exceeding the Minimum Quarterly Distribution of
$0.55 per Unit per quarter ($2.20 per Unit on an annualized basis). Commencing
in the third quarter of 1993, the Partnership increased the quarterly
distribution to $0.60 per Unit.  Beginning with the quarter ending March 31,
1996, the Partnership increased the quarterly distribution to $0.65 per Unit.
For the quarter ending June 30, 1996, the Partnership increased the quarterly
distribution to $0.70 per Unit.  This distribution will be paid on August 14,
1996 to Unitholders of record as of July 31, 1996.  At the current distribution
rate of $0.70 per Unit, the Partnership anticipates making quarterly
Partnership distributions of $8.8 million in respect of the Preference Units,
Common Units and general partner interest ($35.2 million on an annual basis).
The Partnership believes that it will be able to continue to pay at least the
current quarterly distribution of $0.70 per Preference Unit for the foreseeable
future.

In February 1996, Poseidon LLC and Texaco Trading formed POPCO to construct,
own and operate the Poseidon Oil Pipeline.  Pursuant to the terms of the
organizational documents, Poseidon LLC initially contributed assets, at net
book value, related to the construction of the initial phase of the Poseidon
Oil Pipeline as well as certain dedication agreements and Texaco Trading
initially contributed an equivalent amount of cash as well as its rights under
certain agreements.  The Partnership has fully funded its portion of the
capital requirements of POPCO for the construction of the first phase of the
Poseidon Oil Pipeline. In July 1996, Marathon joined POPCO by contributing its
interest in 58 miles of nearby crude oil pipelines and dedicating its portion
of oil reserves attached to such pipelines to the Poseidon Oil Pipeline for
transportation.  As a result, each of the Partnership and Texaco Trading now
owns a 36% interest in the joint venture and Marathon owns the remaining 28%
interest.  The Partnership anticipates that POPCO's future capital
requirements, including amounts necessary to complete the second phase of the
system, will be funded by borrowings under the POPCO Credit Facility.

On July 8, 1996, the Partnership and affiliates of Marathon and Shell announced
plans to build and operate an interstate natural gas pipeline system and a
connecting gathering system to serve growing production areas in the Green
Canyon area of the Gulf.  The total cost of the two systems, including the
Combined Manta Ray System currently owned by the Partnership, is approximately
$270.0 million.  The new jurisdictional interstate pipeline, named "Nautilus",
consists of a 30-inch line downstream from Ship Shoal Block 207 connecting to
the Marathon operated Burns Point Gas Plant and other area gas plants.  Upstream
of the Ship Shoal 207 terminal, the Combined Manta Ray System will be extended
into a broader gathering system that will serve shelf and deepwater production
around Ewing Bank Block 873 to the east and Green Canyon Block 65 to the west.
Marathon and Shell have significant deep water acreage positions in the area,
including the recently announced Troika field (Green Canyon Block 244), and will
provide the majority of the capital funding for the new construction. Leviathan
will provide some funding along with the contribution of Combined Manta Ray
System assets.





                                       19

<PAGE>   20
The Partnership anticipates that capital expenditures in connection with the
maintenance and enhancement of the service capabilities of the Ewing Bank and
Green Canyon systems will aggregate approximately $0.5 million per year
although the actual level of these capital expenditures may change from time to
time for many reasons, some of which may be beyond the control of the
Partnership. Total capital expenditures and equity investments for 1995 were
$173.6 million.  The Partnership anticipates that its total capital
expenditures for 1996 will relate to continuing construction and drilling
activities.  The Partnership anticipates funding such costs primarily with
available cash flow and borrowings under the Partnership Credit Facility.
Capital expenditures of POPCO are anticipated to be funded by borrowings under
the POPCO Credit Facility.

Interest and other financing costs, net of capitalized interest, related to the
Partnership Credit Facility totaled $0.6 million for the six months ended June
30, 1996.  Such amount included commitment fees and amortization of debt issue
costs of $0.2 million. During the six months ended June 30, 1996, the
Partnership capitalized $6.0 million of interest costs in connection with
construction projects and drilling activities in progress during the period.





                                       20

<PAGE>   21
P
ART II.   OTHER INFORMATION


Item 1.          Legal Proceedings
        None.


Item 2.          Changes in Securities
        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

               27   Financial Data Schedule.

        (b)    Reports on Form 8-K

               None.





                                       21

<PAGE>   22

                                   SIGNATURE


        Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned and thereunto duly authorized.


      LEVIATHAN GAS PIPELINE    
      PARTNERS, L.P.            
      (Registrant)              
                                
      By:                              LEVIATHAN GAS PIPELINE
                                       COMPANY, its General Partner
                                
                                
                                
      Date:  August 13, 1996           By:   /s/ KEITH B. FORMAN
                                             -------------------
                                       Keith B. Forman
                                       Chief Financial Officer
                                
                                
                                
      Date:  August 13, 1996           By:   /s/ DENNIS A. KUNETKA
                                             ---------------------
                                       Dennis A. Kunetka
                                       Senior Vice President - Corporate Finance
                                       (Principal Accounting Officer)
                                




                                       22

<PAGE>   23

                              INDEX TO EXHIBITS



        27 --   Financial Data Schedule