<PAGE>
 
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

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

                         COMMISSION FILE NUMBER 1-10066
                  --------------------------------------------

                    SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
             (Exact name of registrant as specified in its charter)

         DELAWARE                                    95-4191066
 (State of incorporation)               (I.R.S. Employer Identification No.)

                            1100 TOWN & COUNTRY ROAD
                            ORANGE, CALIFORNIA 92868
          (Address of principal executive offices, including zip code)
                                 (714) 560-4400
              (Registrant's telephone number, including area code)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                                    Name of each
  Title of each class                       exchange on which registered
  -------------------                       ----------------------------
COMMON DEPOSITARY UNITS                        NEW YORK STOCK EXCHANGE

        SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

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

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 [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [X]

The aggregate market value of the Common Depositary Units held by non-affiliates
of the registrant as of March 21, 1997 was approximately $425 million.

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<PAGE>
 
                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
                                     PART I
Items 1 and 2.  Business and Properties....................................  1
       General.............................................................  1
       Markets.............................................................  2
       Principal Customers.................................................  3
       Capital Expenditures................................................  3
       Description of the Pipeline System..................................  4
       Description of the Truck Loading Terminals..........................  5
       Maintenance.........................................................  5
       Competition and Business Considerations.............................  6
       Regulation..........................................................  7
       Employees...........................................................  8
Item 3. Legal Proceedings..................................................  8
Item 4. Submission of Matters to a Vote of Security Holders................ 13

                                     PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder 
          Matters.......................................................... 14
Item 6. Selected Financial Data............................................ 14
Item 7. Management's Discussion and Analysis of
           Financial Condition and Results of Operations................... 15
Item 8. Financial Statements and Supplementary Data........................ 21
Item 9. Changes in and Disagreements with Accountants on
           Accounting and Financial Disclosure............................. 21

                                    PART III
Item 10. Directors and Executive Officers of the Registrant................ 21
Item 11. Executive Compensation............................................ 23
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 23
Item 13. Certain Relationships and Related Transactions.................... 23

                                     PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 24
Signatures................................................................. 26
</TABLE>
<PAGE>
 
                    SANTA FE PACIFIC PIPELINE PARTNERS, L.P.

                                     PART I

ITEMS 1 AND 2. BUSINESS AND PROPERTIES.

GENERAL
Santa Fe Pacific Pipeline Partners, L.P. (the "Registrant") is a Delaware
limited partnership formed in 1988 to acquire and operate, through SFPP, L.P.,
formerly Southern Pacific Pipe Lines Partnership, L.P. (the "Operating
Partnership"), the refined petroleum products pipeline business of Santa Fe
Pacific Corporation ("Santa Fe"). The Registrant and the Operating Partnership
are collectively referred to as the "Partnership".

Santa Fe Pacific Pipelines, Inc. (the "General Partner") is the sole general
partner of the Partnership. It owns a 1% general partnership interest in the
Registrant and also owns a 1% general partnership interest in the Operating
Partnership and manages the operations of both partnerships. The General Partner
also owns 8,148,148 common depositary units ("common units"), representing a
41.7% interest, in the Registrant. The General Partner is a wholly owned
subsidiary of SFP Pipeline Holdings, Inc., which is in turn a wholly owned
subsidiary of Santa Fe. In September 1995, Santa Fe and Burlington Northern Inc.
consummated a business combination pursuant to which Santa Fe became a
subsidiary of a new publicly-held company, Burlington Northern Santa Fe
Corporation ("BNSF"). 11,000,000 common units, representing 56.3% of the total
interests in the Partnership, are publicly held and are traded on the New York
Stock Exchange under the symbol "SFL".

The Partnership is one of the largest independent pipeline common carriers of
refined petroleum products ("products") in the United States, and the largest in
the western United States, in terms of product deliveries, barrel miles, and
pipeline mileage, with approximately 3,300 miles of pipeline serving six states.

The Partnership transports products via pipeline, including gasoline, diesel
fuel and commercial and military jet fuel, primarily for major petroleum
companies, independent refiners, the United States military, and marketers and
distributors of such products. The Partnership also operates 14 truck loading
terminals and provides pipeline service to 40 customer-owned terminals, three
commercial airports, and 11 military bases. The Partnership's pipelines
(collectively, the "Pipeline System") are: (1) the South Line, which is composed
of two segments, the West Line, which transports products from Los Angeles to
Phoenix and Tucson, Arizona and various intermediate points, and the East Line,
which transports products from El Paso, Texas to Tucson, Phoenix and various
intermediate points; (2) the North Line, which transports products primarily
from the San Francisco Bay area to various cities in northern California and
western Nevada; (3) the Oregon Line, which transports products between Portland
and Eugene, Oregon, and one intermediate point; and (4) the San Diego Line,
which transports products from Los Angeles to San Diego, California and various
intermediate points. Substantially all of the Pipeline System's transportation
services constitute common carrier operations that are subject to federal or
state tariff regulation.


                                      -1-
<PAGE>
 
The following table reflects the total volumes and barrel miles of products
delivered by the Pipeline System for each of the years indicated:

<TABLE>
<CAPTION>

                                            Total Volumes and Barrel Miles Transported (a)
                           ---------------------------------------------------------------------------------------
                                     1996                          1995                           1994
                           -------------------------     --------------------------     --------------------------
                                           Barrel                         Barrel                         Barrel
                              Volume       Miles          Volume          Miles           Volume         Miles
                           -----------    ----------     -----------     ----------     -----------    -----------
<S>                        <C>            <C>            <C>             <C>            <C>            <C>
South Line
    West Line (b).........      124.4        23,829           121.7         23,439           118.9         22,151
    East Line.............       27.0         9,287            24.5          8,320            25.3          8,819
North Line................      161.6        13,068           155.4         12,709           152.3         12,545
Oregon Line...............       13.7         1,541            13.6          1,529            13.6          1,525
San Diego Line (b)........       38.7         4,102            39.1          4,013            39.7          4,030
                           ===========    ==========     ===========     ==========     ===========    ===========
    Total.................      365.4        51,827           354.3         50,010           349.8         49,070
                           ===========    ==========     ===========     ==========     ===========    ===========
</TABLE>
    
     (a)  Volumes are expressed in millions of barrels of products and barrel
     miles are shown in millions. A barrel mile is the movement of a barrel
     of product for a distance of one mile.

     (b)  Product volumes delivered through the West Line to the San Diego Line
     are in turn delivered through the San Diego Line to the shipper's
     ultimate destination for such volumes. This table reflects such
     volumes only in the San Diego Line, from which ultimate delivery is
     made. 

Although the mix of the products transported varies among the pipeline
segments constituting the Pipeline System, such variation is not
substantial. Tariffs charged for transportation do not vary for
different product types. The following table sets forth the volumes of
gasoline, jet fuels and diesel fuel transported by the Pipeline System
during the years indicated (in millions of barrels):

<TABLE>
<CAPTION>
                              Volumes Delivered by Product Type
                              ---------------------------------
                                1996        1995         1994
                              --------    --------     --------
<S>                           <C>         <C>          <C>
Gasoline....................    229.3       222.7        225.5
Diesel fuel.................     72.7        70.7         67.3
Jet fuels...................     63.4        60.9         57.0
                              --------    --------     --------
      Total.................    365.4       354.3        349.8
                              ========    ========     ========
</TABLE>                                           

MARKETS
The Partnership currently serves approximately 65 shippers in the refined
products market, with the largest customers consisting of major petroleum
companies, independent refiners, the United States military, and independent
marketers and distributors of products. The volume of products transported in
the Pipeline System is directly affected by the level of end-user demand for
such products in the geographic regions served by the Partnership. Such market
demand varies based upon the different end uses to which the products delivered
through the Pipeline System may be applied. A substantial portion of product
volumes transported in the Pipeline System is gasoline, the demand for which is
dependent on such factors as prevailing economic conditions and demographic
changes in the markets served by the Pipeline System and, to a lesser degree,
gasoline prices. Portions of the Partnership's business can experience seasonal
variations; however, overall volumes are only moderately seasonal, with lower
than average volumes typically being transported during the first and fourth
quarters of each year.

                                      -2-
<PAGE>
 
PRINCIPAL CUSTOMERS
Of the approximately 65 shippers served by the Partnership on a system-wide
basis in 1996, the largest shippers on each of the pipeline segments were
generally the same entities. The chart below reflects the percentage of
transportation revenues attributable to the top 10 shippers on the South Line,
North Line, Oregon Line and San Diego Line during each of the periods indicated,
based upon total product volumes shipped during the years indicated.

<TABLE>
<CAPTION>
                                  Revenue Percentage
                          Attributable to Top 10 Shippers
                          -------------------------------
                           1996        1995        1994  
                          -------     -------     -------
<S>                       <C>         <C>         <C>                       
South Line                                      
    West Line............   84%         85%         84%
    East Line............   99          98          95
North Line...............   85          82          80
Oregon Line..............   99         100          99
San Diego Line...........   93          92          92
</TABLE>
                                              
Between 73% and 74% of the refined petroleum products transported in the
Pipeline System during each of the calendar years 1994 through 1996 were shipped
by major petroleum companies. Operating revenues received from ARCO Products
Company and Chevron U.S.A. Products Company accounted for 14.8% and 12.1%,
respectively, of total 1996 revenues. These two customers accounted for 16.3%
and 13.3%, respectively, of total 1995 revenues, and for 16.1% and 12.4%,
respectively, of total 1994 revenues.

Products delivered to military facilities accounted for 4.0%, 4.5% and 4.8% of
total volumes shipped by the Partnership during 1996, 1995 and 1994,
respectively. Military volumes are dependent on the level of activity at
military bases served by the Pipeline System. Since 1991, the United States
Congress has approved plans to reduce the overall level of military activity. As
of year end 1996, several military bases historically served by the Partnership
had been closed and realignment of certain other bases continues to occur, with
the level of activity having decreased at certain bases and increased at others.
No other bases served by the Partnership have been identified for closure or
realignment. In January 1996, the Partnership acquired a pipeline serving
Lemoore Naval Air Station, near Fresno, California.

CAPITAL EXPENDITURES
For the year ended December 31, 1996, Partnership capital expenditures
aggregated $27.7 million, of which approximately $12 million was used for income
enhancing projects, and the balance for sustaining projects. The planned 1997
capital program aggregates approximately $28 million, of which approximately $12
million is planned for income enhancing projects. The Partnership presently
anticipates that ongoing capital expenditures will average approximately $30
million per year over the next five years. This amount could increase or
decrease as the result of changing regulatory requirements or business
opportunities. (See also Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources.)

                                      -3-
<PAGE>
 
DESCRIPTION OF THE PIPELINE SYSTEM

The SOUTH LINE consists of two pipeline segments, the West Line and the East
Line:

The WEST LINE consists of approximately 555 miles of primary pipeline and
currently transports products for approximately 50 shippers from seven
refineries and three pipeline terminals in the Los Angeles Basin to Phoenix and
Tucson, Arizona and various intermediate commercial and military delivery
points. In 1996, 1995 and 1994, the West Line transported averages of 339,900,
333,400 and 325,600 barrels per day, respectively, of which averages of 114,100,
111,700 and 104,000 barrels per day, respectively, were delivered to Phoenix and
Tucson. Also, a significant portion of West Line volumes are transported to
Colton, California for local distribution and for delivery to Calnev Pipeline,
an unaffiliated common carrier of refined petroleum products to Las Vegas,
Nevada and intermediate points. The West Line serves Partnership terminals
located in Colton and Imperial, California as well as in Phoenix and Tucson.

The EAST LINE is comprised of two parallel lines originating in El Paso, Texas
and continuing approximately 300 miles west to the Tucson terminal and one line
continuing northwest approximately 130 miles from Tucson to Phoenix. All
products received by the East Line at El Paso come from [one] refinery in El
Paso or are delivered through connections with non-affiliated pipelines from
refineries in Odessa and Dumas, Texas and Artesia, New Mexico. The East Line
transports refined petroleum products for approximately 17 shippers. In 1996,
1995 and 1994, the East Line transported averages of 73,700, 67,200 and 69,300
barrels per day, respectively, of refined petroleum products, of which averages
of 35,800, 31,500 and 34,100 barrels per day, respectively, were delivered to
Phoenix. Since August 1992, when the second phase of the East Line expansion
became operational, the daily pumping capacity between El Paso and Tucson has
been approximately 95,000 barrels, and the daily pumping capacity from Tucson to
Phoenix has been approximately 55,000 barrels. The East Line serves the
Partnership's terminals located in Tucson and Phoenix.

In late 1995, Diamond Shamrock, Inc. completed construction of a new 10-inch
diameter products pipeline from its refinery near Dumas, Texas to El Paso. In
late 1996, Diamond Shamrock connected this pipeline to the Partnership's East
Line and began shipping products to Tucson and Phoenix.

Longhorn Partners Pipeline is a proposed joint venture project which would
acquire and convert an existing crude oil pipeline to refined products service
and construct a new pipeline extension to transport refined products from
refineries on the Gulf Coast to El Paso and other destinations in Texas.

Increased product supply in the El Paso area could result in some shift of
volumes transported into Arizona from the Partnership's West Line to its East
Line. While increased movements into the Arizona market from El Paso displace
higher tariff volumes supplied from Los Angeles on the West Line, such shift of
supply sourcing has not had, and is not expected to have, a material effect on
the Partnership's results of operations.

The NORTH LINE of the Pipeline System consists of approximately 1,075 miles of
pipeline in six pipeline segments originating in Richmond, Concord and
Bakersfield, California. This line serves Partnership terminals located in
Brisbane, Bradshaw, Chico, Fresno and San Jose, California, and Sparks, Nevada.
The North Line delivers refined petroleum products for approximately 40
shippers. A substantial portion of the products delivered through the North Line
comes from refineries in the San Francisco Bay area. A small percentage of
supply is received from various pipeline and marine terminals that deliver
products from foreign and domestic ports. Substantially all of the products
shipped through the Bakersfield-Fresno segment of the North Line are supplied by
a refinery located in Bakersfield.

                                      -4-
<PAGE>
 
The OREGON LINE is a 114-mile pipeline serving approximately 10 shippers. The
Oregon Line receives products from marine terminals in Portland and from Olympic
Pipeline, a non-affiliated carrier, which transports products from the Puget
Sound area to Portland. From its origination point in Portland, the Oregon Line
extends south and serves Partnership terminals located in Albany and Eugene,
Oregon.

The SAN DIEGO LINE is a 135-mile pipeline serving major population areas in
Orange County (immediately south of Los Angeles) and San Diego. Approximately 20
shippers transport products on this line, supplied by the same refineries and
terminals that supply the West Line. The San Diego Line originates from the
pumping station at Norwalk, California on the West Line and extends south to
serve Partnership terminals in the cities of Orange and San Diego.

DESCRIPTION OF THE TRUCK LOADING TERMINALS
The Partnership's operations include 14 truck loading terminals with an
aggregate usable tankage capacity of approximately 8.2 million barrels.
Terminals are located at destination points on each of the lines as well as at
certain intermediate points along each line where deliveries are made. These
terminals furnish short-term product storage, truck loading and ancillary
services, such as vapor recovery, additive injection, oxygenate blending, and
quality control. The truck loading capacity of the terminals ranges from two to
12 trucks at a time. Between 128 million and 129 million barrels of products
were delivered to commercial customers at such terminals during each of the past
three years, resulting in Partnership storage and terminaling revenues of $35.0
million, $34.3 million and $33.8 million during the years 1996, 1995 and 1994,
respectively.

Capacity of the Partnership's terminaling facilities varies throughout the
Pipeline System. The Partnership does not own terminal facilities at all
pipeline delivery locations. At certain locations, product deliveries are made
to facilities owned by shippers or independent terminal operators.

Truck loading and other terminal services are provided by the Partnership as an
additional service, and a separate fee (in addition to transportation tariffs)
is charged. Rates charged for terminaling services are not economically
regulated by the Federal Energy Regulatory Commission ("FERC") or any state
agency.

MAINTENANCE
Routine preventive maintenance is performed to prolong the useful life of the
Pipeline System and terminals. Such maintenance includes cathodic protection to
prevent corrosion, periodic internal pipeline inspections and, when required,
pipeline reconditioning. In addition, the Pipeline System's rights-of-way are
patrolled at regular intervals to identify excavation or other activities by
third parties which, if left unchecked, could result in damage to the pipeline.

A computer-based pipeline monitoring system ("SCADA") continuously monitors
pipeline operating conditions, including pressures, temperatures, pumping rates
and equipment configuration, on a real-time basis. In addition to providing
remote monitoring and control of certain operating equipment, SCADA
automatically alerts operating personnel, who are on duty on a 24-hour basis, if
changes in flow conditions require attention. Use of this information by
operating personnel allows them to respond quickly to system problems.

                                      -5-
<PAGE>
 
COMPETITION AND BUSINESS CONSIDERATIONS
The Partnership conducts its operations without the benefit of exclusive
franchises from government entities. In addition, the Partnership provides
common carrier transportation services through the Pipeline System at posted
tariffs, and, in virtually all cases, without long-term contracts for
transportation service with its customers. Demand for the Partnership's
transportation services is principally a function of product consumption and
competition in markets served by the Pipeline System. Product consumption is
primarily a function of prevailing economic and demographic conditions, and, to
a lesser extent, product prices paid by end users, while the Partnership's
market share within competitive markets is primarily a function of the
availability and attractiveness (in terms of cost and service) of alternate
modes of transportation, alternate product sources, service capabilities and
pricing.

Utilization of and demand for the Partnership's terminaling services varies
widely throughout the Pipeline System. Certain of the major petroleum companies
as well as independent terminal operators are presently in direct competition
with the Partnership at several terminal locations. At those locations, market
share is primarily a function of pricing, service capabilities and available
tankage.

Because pipelines are generally the lowest cost method for intermediate and
long-haul overland product movement, the Pipeline System's most significant
competitors are proprietary pipelines owned and operated by major oil companies
in the areas where the Pipeline System delivers products, refineries within the
Partnership's market areas and related trucking arrangements. The Partnership
believes that high capital costs, tariff regulation and environmental permitting
considerations make it unlikely that a competing pipeline system comparable in
size and scope to the Pipeline System will be built in the foreseeable future,
provided that the Pipeline System has available capacity to satisfy demand and
its tariffs remain at reasonable levels. However, the possibility of pipelines
being constructed to serve specific markets is a continuing competitive factor.
Trucks may competitively deliver products in certain markets and, in 1996, the
Partnership continued to experience minor but notable reductions in product
volumes delivered to certain shorter-haul destinations, primarily Orange and
Colton, California, due to increased utilization of trucking by major oil
companies. Management cannot predict with certainty whether this trend towards
increased short-haul trucking will continue in the future.

For more than ten years, an entrepreneur, either individually or associated with
Maricopa Refining Co. ("Maricopa"), has attempted to gain investor support for a
petroleum products refinery in the Phoenix area. Because of the perceived risk
of this venture, and the large investment required, this project has not been
undertaken to date. In late 1996, Maricopa Refining announced that it is in the
process of arranging financing to build a 55,000 barrel per day refinery
approximately 30 miles outside Phoenix. It is unknown as to whether Maricopa has
secured, or can secure, crude oil supply and product sales agreements necessary
to support such financing. Maricopa has announced that it has obtained all
necessary permits and, assuming financing is completed in the first quarter of
1997, that the refinery could be operational by late 1999. Should such a
refinery be constructed, the Partnership's throughput on the South Line would be
negatively affected. It is possible that a portion of any revenue reduction
could be recovered through rate increases.


                                    -6-
<PAGE>
 
REGULATION

TARIFF REGULATION
Substantially all of the Partnership's pipeline operations are common carrier
operations that are subject to federal or state rate regulation.

The Partnership's interstate common carrier pipeline operations are subject to
rate regulation by the Federal Energy Regulatory Commission ("FERC") under the
Interstate Commerce Act which requires, among other things, that petroleum
product pipeline rates be "just and reasonable" and nondiscriminatory. In
general, the FERC has evaluated the justness and reasonableness of petroleum
product pipeline rates under a "cost of service" approach that permits a
pipeline to establish its tariffs, based on projected volumes, at levels
sufficient to recover its cost of service. Under this approach, a pipeline's
cost of service includes the following components: (a) operating expenses, (b)
depreciation and amortization, (c) federal and state income taxes and (d) an
overall allowed rate of return on the pipeline's "rate base." Generally, rate
base is a measure of the investment in, and value of, the common carrier assets
of a petroleum products pipeline.

Under a "trended original cost" ("TOC") methodology adopted by the FERC in 1985
for establishing a liquid petroleum pipeline's tariffs, after a starting rate
base has been determined, a pipeline's rate base is to be (i) increased by an
amount equal to the equity portion of the rate base multiplied or "trended" by
an inflation factor, (ii) increased by property additions at cost and (iii)
decreased by property retirements, depreciation and amortization of the rate
base write-ups reflecting inflation. A petroleum product pipeline's capital
structure (i.e., the relative proportions of debt and equity in its total
capitalization) affects (i) its starting rate base, (ii) the proportion of the
rate base that is trended to reflect inflation under the TOC methodology and
(iii) other factors that bear on the determination of just and reasonable
pipeline rates.

The TOC methodology is subject to clarification and reconsideration in
individual cases and leaves many issues, including the appropriate rate of
return, for determination on a case-by-case basis. Alternatively, pipelines that
can demonstrate that they operate in competitive markets may be allowed to
establish tariffs under a less stringent form of "light-handed" rate regulation.
Pipelines may also be allowed to increase, or required to decrease, their
interstate rates in accordance with an inflation index (the Producer Price Index
for Finished Goods minus one percent) published annually by the FERC.

Intrastate common carrier operations of the Pipeline System in California are
subject to regulation by the California Public Utilities Commission ("CPUC")
under a "depreciated book plant" methodology, which is based on an original cost
measure of investment. Intrastate tariffs filed by the Partnership with the CPUC
have been established on the basis of revenues, expenses and investments
allocated as applicable to the intrastate portion of the Partnership's business.
In this regard, the operations of the San Diego Line are wholly intrastate and
the operations of certain portions of the North and South Lines are intrastate.

Tariff rates with respect to intrastate pipeline service in California are
subject to challenge by complaint by interested parties or by independent action
of the CPUC. A variety of factors can affect the rates of return permitted by
the CPUC and certain other issues similar to those which have arisen with
respect to the Partnership's FERC regulated rates could also arise with respect
to the Partnership's intrastate rates.


                                      -7-
<PAGE>
 
(See also Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Other Matters - Rate Regulation.)

ENVIRONMENTAL AND SAFETY REGULATION
The Partnership's operations are subject to federal, state and local laws and
regulations relating to protection of the environment, including laws and
regulations relating to water, air, solid waste and hazardous substances. The
discharge of, or contamination of property by, hazardous materials may arise
from transportation and storage of such materials in the Pipeline System. The
normal operations of the Pipeline System expose the Partnership to claims and
potential liability for injuries to employees, other persons, property and the
environment. (See also Item 3. Legal Proceedings and Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations - Other
Matters - Environmental Matters.) The Partnership's operations are also subject
to operating and safety regulation by the Department of Transportation and
various other federal, state and local agencies.

EMPLOYEES
The Partnership does not have any employees, officers or directors. The General
Partner is responsible for management and operation of the Partnership. As of
December 31, 1996, regular, full-time employees of the General Partner numbered
435.


ITEM 3. LEGAL PROCEEDINGS.

EAST LINE CIVIL LITIGATION AND FERC PROCEEDINGS
In August 1992, two East Line refiners, Navajo Refining Company ("Navajo") and
El Paso Refinery, L.P. ("El Paso"), filed separate, though similar, civil
lawsuits (the "East Line Civil Litigation") against the Partnership arising from
the Partnership's alleged failure to provide additional pipeline capacity from
El Paso, Texas to Tucson and Phoenix, Arizona. In addition, El Paso filed a
protest/complaint with the FERC in September 1992 seeking to block the reversal
of the direction of flow of the six-inch pipeline between Phoenix and Tucson and
challenging the Partnership's proration policy, as well as the Partnership's
existing East Line rates (the "FERC Proceeding").

EAST LINE CIVIL LITIGATION
--------------------------
The civil actions brought by Navajo and El Paso (El Paso Refining, Inc., and El
Paso Refinery, L.P. v. Santa Fe Pacific Pipelines, Inc. and Santa Fe Pacific
Pipeline Partners, L.P., No. 92-9144, County Court No. 5, El Paso County, filed
August 1992) were filed in New Mexico and Texas, respectively, seeking actual,
punitive and consequential damages alleged to have been caused by the
Partnership's failure to provide additional pipeline capacity from El Paso to
Tucson and Phoenix. Generally, the lawsuits allege that the refiners proceeded
with significant refinery expansions under the belief that the Partnership would
provide additional pipeline capacity to transport their product into Arizona,
and that they were damaged by their inability to ship additional volumes into
that highly competitive market when the Partnership did not provide such
additional capacity. The belief of Navajo and El Paso was purportedly based on
alleged oral representations made by General Partner personnel and from language
contained in a January 1989 settlement agreement with Navajo, relating to a 1985
FERC rate case.

In July 1993, the Partnership reached a settlement with Navajo whereby Navajo
agreed to dismiss its civil litigation in New Mexico and the Partnership agreed
to make certain cash payments to Navajo over three years and to undertake and
complete an additional pipeline capacity expansion between 

                                      -8-
<PAGE>
 
El Paso and Phoenix if certain events related to volume levels and proration of
pipeline capacity should occur within five years of the date of the agreement.

El Paso's August 1992 civil action, as amended, claims unspecified actual
damages, which appear to include the alleged $190 million cost of its refinery
expansion, plus punitive and consequential damages. In addition, in October
1995, El Paso's general partner, El Paso Refining, Inc. ("EPRI"), filed a Second
Amended Petition seeking unspecified damages arising from alleged unfulfilled
representations of Partnership management with respect to future East Line
capacity, alleging that such representations had been relied upon in negotiating
the terms by which EPRI exchanged its refinery assets for ownership interests in
El Paso in 1989.

In October 1992, El Paso filed a petition for reorganization under Chapter 11 of
the federal bankruptcy laws and halted refinery operations and, in November
1993, the bankruptcy was converted to a Chapter 7 liquidation proceeding. During
1994, the bankruptcy trustee for El Paso retained legal counsel for purposes of
pursuing El Paso's litigation against the Partnership. Depositions and written
discovery have been conducted by both parties since late 1994. To date, there
have been no hearings before the court and there is no pre-trial schedule.

On February 25, 1997, the Partnership entered into an agreement with the El Paso
bankruptcy trustee which, subject to the approval of the bankruptcy court, would
settle El Paso's and EPRI's claims in these civil matters in exchange for the
payment of $16 million by the Partnership in two equal installments. This
proposed settlement was submitted to the bankruptcy court overseeing the estates
of El Paso and EPRI for approval on March 18, 1997.

FERC PROCEEDINGS
----------------
At various dates following El Paso's September 1992 filing, other shippers on
the Partnership's South System, including Chevron U.S.A. Products Company
("Chevron"), Navajo, ARCO Products Company ("ARCO"), Texaco Refining and
Marketing Inc. ("Texaco"), Refinery Holding Company, L.P. (a partnership formed
by El Paso's long-term secured creditors that purchased El Paso's refinery in
May 1993), Mobil Oil Corporation and Tosco Corporation, have filed separate
complaints, and/or motions to intervene in proceedings initiated by others,
challenging the Partnership's rates on its East and West Lines. Certain of these
parties also claim that a gathering enhancement charge at the Partnership's
Watson, California pump station is in violation of the Interstate Commerce Act.
In subsequent procedural rulings, the FERC has consolidated these challenges
(Docket Nos. OR92-8-000, et al.) and ruled that they must proceed as a complaint
                         -- --  
proceeding, with the burden of proof being placed on the complaining parties.
Such parties must show that the Partnership's rates and practices at issue
violate the requirements of the Interstate Commerce Act.

On August 30, 1996, Ultramar Inc. ("Ultramar") filed a complaint concerning
charges associated with the use of the Partnership's Watson gathering
enhancement facilities (Docket No. OR96-15-000) and, on October 21, 1996, filed
an additional complaint against the Partnership's West Line rates (Docket No.
OR97-2-000), presenting largely the same issues raised by the West Line shippers
in the existing FERC proceedings. Management does not believe these complaints
raise significant additional issues. These complaints have been held in abeyance
pending a ruling in Docket Nos. OR92-8-000, et al.
                                            -- --

In June 1994, the complainants filed their cases-in-chief with the FERC, seeking
reparations for shipments between 1990 and 1993 aggregating in the range of $15
million to $20 million, as well as tariff rate reductions of between 40% and 50%
for future shipments. In August 1994, the FERC Staff submitted its case-in-chief
in the FERC proceeding, employing rate-making methodologies similar in 

                                      -9-
<PAGE>
 
several respects to those presented by the complainants. In subsequent filings,
the complainants revised their requested relief to seek reparations for
shipments between 1990 and 1994 aggregating approximately $35 million, as well
as rate reductions of between 30% and 40% for shipments in 1995 and thereafter.

Both the FERC Staff and several of the complainants argued, among other things,
against the Partnership's entitlement to an income tax allowance in its cost of
service. They also utilized the Partnership's capital structure at the time of
its formation in December 1988, or a hypothetical capital structure, for the
purpose of establishing the Partnership's 1985 starting rate base under FERC
Opinion 154-B. In addition, the FERC Staff and the complainants would generally
exclude most or all of the Partnership's civil and regulatory litigation expense
from its cost of service calculations. Each of these positions is adverse to the
Partnership's position regarding its existing rate structure.

As discussed in the Partnership's 1995 Form 10-K, in June 1995, the FERC issued
a decision in an unrelated rate proceeding involving Lakehead Pipe Line Company,
Limited Partnership ("Lakehead"), ruling that Lakehead could not include an
income tax allowance in its cost of service with respect to partnership income
that is attributable to limited partnership interests held by individuals. On
May 17, 1996, the FERC issued an order on rehearing in that proceeding (the
"Lakehead Order") that reaffirmed and clarified the June 1995 decision and
further limited Lakehead's entitlement to an income tax allowance by excluding
from Lakehead's cost of service the taxes attributable to curative allocations
of income to Lakehead's general partner under Section 704 (c) of the Internal
Revenue Code. If upheld and applied in the Partnership's FERC Proceeding, the
Partnership's entitlement to an income tax allowance in its cost of service
could also be limited by the principles stated in the Lakehead Order.

Successive rounds of testimony were filed by the respective parties, including
the Partnership, regarding the above summarized issues and other matters
relevant to the appropriateness of the Partnership's tariffs and rates. Among
other things, certain of the parties submitted revised cases based on the
Partnership's 1994 costs and revenues. The Partnership's surrebuttal
presentation responded to those cases, defending the Partnership's current rates
based on 1994 data, with certain normalizing adjustments, including a
significant adjustment to reflect an extensive pipe reconditioning program that
was begun in 1994.

Hearings in the FERC Proceeding commenced on April 9, 1996 and concluded on July
19, 1996. The parties completed the filing of their post-hearing briefs on
December 9, 1996. An initial decision by the FERC Administrative Law Judge is
expected in 1997.

The Energy Policy Act of 1992 ("EPACT") provided that existing oil pipeline
rates that were in effect without challenge for 365 days prior to the bill's
enactment in October 1992 are deemed to be "just and reasonable," with an
exception being allowed for parties, such as Navajo, that were prohibited from
filing challenges during that period due to the terms of settlement agreements.
In October 1993, with respect to Chevron's complaint, the FERC ruled that the
Partnership's West Line rates are deemed "just and reasonable" under EPACT
(i.e., are "grandfathered") and may only be challenged upon a showing of a
substantial change in the economic circumstances which were the basis for the
rate ("changed circumstances"). In December 1994, ARCO, Texaco and Chevron filed
testimony in which they sought to demonstrate the required "changed
circumstances" in order to challenge the Partnership's West Line rates, citing
such factors as increased West Line volumes. In April 1995, the United States
Court of Appeals for the District of Columbia Circuit dismissed petitions for
review of the FERC's grandfathering rulings that had been filed by ARCO and
Texaco, on the grounds that the FERC rulings are not yet final orders and,
therefore, are not yet subject to judicial review.

                                      -10-
<PAGE>
 
In December 1995, Texaco filed an additional FERC complaint, which involves the
question of whether a tariff filing is required for movements on certain of the
Partnership's lines upstream of its Watson, California station origin point and,
if so, whether those rates may be set in this proceeding and what those rates
should be. Texaco's initial complaint was followed by several other West Line
shippers filing similar complaints and/or motions to intervene, all of which
have been consolidated into Docket Nos. 96-2-000 et al. Hearings before an
                                                 -----
Administrative Law Judge were held in December 1996 and the parties completed
the filing of final post-hearing briefs on January 31, 1997. An initial decision
is expected during 1997.

In June 1996, the Partnership entered into an agreement with the El Paso
bankruptcy trustee to settle El Paso's claims in the FERC Proceeding with a
payment by the Partnership of $1,250,000. The agreement subsequently was
approved by the bankruptcy court, and the presiding FERC Administrative Law
Judge permitted El Paso to withdraw its complaint. This settlement does not
affect El Paso's civil litigation against the Partnership.

In September 1996, the Partnership and Navajo reached an agreement whereby
Navajo agreed to withdraw its complaint against the Partnership's West Line
rates in exchange for a cash payment of $1,000,000. Navajo's request to withdraw
its West Line complaint was submitted to the FERC for approval in November 1996
and is currently pending. This settlement would not affect Navajo's remaining
complaint against the Partnership's East Line rates.

During 1996, the Partnership also presented settlement offers to all of the
remaining complainants in the FERC proceedings, including Navajo with respect to
East Line rates. The terms of the existing settlement agreements with El Paso
and Navajo do not provide for rate reductions, but other offers that have been
extended do include proposed prospective reductions in the rates at issue in the
proceedings.

During the quarter ended September 30, 1996, the Partnership recorded an $8
million provision to increase its existing reserves to reflect the total amount
that would be payable under the settlement offers that had been extended as of
that date, including those offers that have been accepted by El Paso and Navajo
and, during the quarter ended December 31, 1996, recorded an additional $15
million provision to increase its reserves to reflect management's current
estimate of the ultimate costs of resolution of the FERC proceedings. The
Partnership is not able to predict with certainty whether settlement agreements
will be completed with some or all of the remaining complainants, the final
terms of any such additional settlement agreements that may be consummated, or
the final outcome of the FERC proceedings should they be carried through to
their conclusions. However, the ultimate resolution of the FERC proceedings
could have a material adverse effect on the Partnership's results of operations,
financial condition, liquidity and ability to maintain its quarterly cash
distribution at the current level.

ENVIRONMENTAL MATTERS
The Partnership is subject to environmental cleanup and enforcement actions from
time to time. In particular, the federal Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA" or "Superfund" law) generally imposes
joint and several liability for cleanup and enforcement costs, without regard to
fault or the legality of the original conduct, on current or predecessor owners
and operators of a site. 

Since August 1991, the Partnership, along with several other respondents, has
been involved in one cleanup ordered by the United States Environmental
Protection Agency ("EPA") related to ground water contamination in the vicinity
of the Partnership's storage facilities and truck loading terminal at 

                                      -11-
<PAGE>
 
Sparks, Nevada. The EPA approved the respondents' remediation plan in September
1992 and the remediation system began operations in September 1995. In addition,
the Partnership is presently involved in 18 ground water hydrocarbon remediation
efforts under administrative orders issued by the California Regional Water
Quality Control Board and two other state agencies.

The investigation and remediation at and adjacent to the Partnership's storage
facilities and truck loading terminal in Sparks, Nevada was also the subject of
a lawsuit brought against the Partnership and other terminal operators in
January 1991 entitled Nevada Division of Environmental Protection v. Santa Fe
Pacific Pipelines, Inc. et al., Case No. CV91-546, in the Second Judicial
                        -----
District Court of the State of Nevada. This lawsuit was subsequently joined by
the County of Washoe Health District and the City of Sparks. These parties
sought remediation of the contamination at and adjacent to the Sparks terminal
as well as unspecified, but potentially significant, damages and statutory
penalties. In addition, the Partnership was named as one of the defendants in a
number of other lawsuits brought by property owners seeking unspecified, but
potentially substantial, damages for, among other things, alleged property value
diminishment attributable to soil or groundwater contamination arising from the
defendants' operations.

During 1995, the Partnership and seven other defendants (the "defendant group")
entered into settlement agreements with the State of Nevada, the City of Sparks
and the County of Washoe which settled the claims of these parties in exchange
for specified cash payments and other consideration, the details of which were
reported in the Partnership's 1995 Form 10-K. Among other things, the defendant 
group agreed to use its best efforts to install an enhanced remediation system 
to accelerate the cleanup of the environmental site. In that regard, the
Partnership is currently in discussions with both the EPA and Nevada Division
of Environmental Protection on possible enhancements to the existing remediation
system. In addition, during late 1995 and early 1996, the defendant group
reached final agreements to settle the claims of the seven property owners who
had filed lawsuits seeking damages alleged to be attributable to the
environmental contamination. These settlement agreements involve various terms,
including cash payments, environmental and property value diminishment
indemnifications, loan guarantees and the purchase of certain properties. All of
the lawsuits have now been dismissed. The Partnership's share of the costs of
all of the settlement agreements associated with the Sparks litigation was
included in its 1995 provisions for environmental costs aggregating $24 million.

During the quarter ended December 31, 1996, the Partnership entered into a
settlement agreement with the California Air Resources Board and Imperial County
Air Pollution Control District to settle all of the agencies' claims arising
from violations noted during compliance inspections of the Partnership's storage
tanks at its Niland and Imperial, California facilities. In accordance with this
agreement, in November 1996, the Partnership paid approximately $80,000 in fines
and approximately $100,000 in support of projects designed to improve air
quality in Imperial County, and reimbursed approximately $30,000 in oversight
costs to the two governmental agencies.

The Partnership is negotiating with certain governmental agencies to settle
claims arising from product releases from Partnership facilities. Management
does not believe that the total cost of any fines or other amounts payable
associated with these product releases, either individually or in the aggregate,
will be material to the Partnership's results of operations or financial
condition, but such amounts may be in excess of $100,000 per occurrence.


                                      -12-
<PAGE>

The Partnership and the General Partner have initiated two legal actions against
a total of 34 past and present insurance carriers (SFPP, L.P., Santa Fe Pacific
Pipeline Partners, L.P. and Santa Fe Pacific Pipelines, Inc. vs. Agricultural
Insurance Company, et al. and SFPP, L.P., Santa Fe Pacific Pipeline Partners,
                   ------
L.P. and Santa Fe Pacific Pipelines, Inc. vs. Associated International Insurance
Company, et al., Superior Court of the State of California for the County of San
         ------
Mateo, Docket Nos. 395109 and 395121, respectively, filed January 1996). These
actions seek a judicial determination that the insurance policies issued by the
defendant insurers provide coverage to the Partnership and the General Partner
for certain costs, liabilities and settlements relating to approximately 25
environmental sites, including Sparks, Nevada. To date, the costs at issue in
these actions have been borne by the Partnership and its predecessor companies.
The defendant insurers have filed initial responsive pleadings in these actions,
and discovery is in progress.

OTHER
The Partnership and Southern Pacific Transportation Company ("SPTC") are engaged
in a judicial reference proceeding to determine the extent, if any, to which the
rent payable by the Partnership for the use of pipeline easements on
rights-of-way held by SPTC should be adjusted pursuant to existing contractual
arrangements (Southern Pacific Transportation Company vs. Santa Fe Pacific
Corporation, SFP Properties, Inc., Santa Fe Pacific Pipelines, Inc., SFPP, L.P.,
et al., Superior Court of the State of California for the County of San
------
Francisco, filed August 31, 1994). Under an agreement entered into among the
parties in 1994, the amount of annual rent for such easements for the first year
of the ten-year period that began January 1, 1994 is to be based on the fair
market value of the easements, with the rent for subsequent years to be subject
to annual inflation adjustments. This matter was tried in the latter part of
1996 and the court issued its Statement of Tentative Decision in January 1997.
The Statement of Tentative Decision indicated that the court intended to
establish a new base annual rental for the subject rights-of-way at a level,
subject to inflation adjustments, that is adequately provided for by the amounts
that had been accrued by the Partnership through December 31, 1996. This
tentative decision could be modified by the trial court prior to its entry of
final judgment in the matter and the trial court's judgment will be subject to
appeal by SPTC once it is entered.

The Partnership is party to a number of other legal actions arising in the
ordinary course of business. While the final outcome of these other matters
cannot be predicted with certainty, it is the opinion of management that none of
these other legal actions, either individually or in the aggregate, when finally
resolved, will have a material adverse effect on the Partnership's annual
results of operations, financial condition, liquidity or ability to maintain its
quarterly cash distribution at the current level.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.


                                      -13-
<PAGE>
 
                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Information as to the principal markets on which the Registrant's common units
are traded, the high and low sales prices of such units and distributions
declared on such units for the two years ended December 31, 1996, and the
approximate number of record holders of such units is set forth in Note 8 to the
Partnership's consolidated financial statements on page F-15 of this Report.


ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial data for the
Partnership:
<TABLE>
<CAPTION>

                                                              Year ended December 31,
                                             ----------------------------------------------------
(in thousands, except per unit data)           1996       1995       1994       1993       1992
                                             --------   --------   --------   --------   --------
<S>                                          <C>        <C>        <C>        <C>        <C>  
INCOME STATEMENT DATA:
Total revenues.............................. $240,142   $233,677   $228,066   $219,471   $205,025
Operating expenses (excluding provisions
  and depreciation & amortization)..........  107,941    103,196     97,199     95,178     85,340
Provisions for environmental
  and litigation costs......................   23,000     34,000        --      27,000     10,000
Depreciation & amortization.................   21,080     20,500     19,820     18,971     18,327
Operating income............................   88,121     75,981    111,047     78,322     91,358
Interest expense............................   36,518     37,247     37,570     37,086     36,937
Income before cumulative
  effect of accounting change (a)...........   52,275     40,367     76,885     41,616     54,118
Cumulative effect of accounting change......      --         --         --         --     (16,407)
Net income.................................. $ 52,275   $ 40,367   $ 76,885   $ 41,616   $ 37,711

PER UNIT DATA:
Income before cumulative
    effect of accounting change............. $   2.64   $   2.04   $   3.93   $   2.13   $   2.77
Cumulative effect of accounting change......      --         --         --         --       (0.84)
Net income..................................     2.64       2.04       3.93       2.13       1.93
Cash distributions paid.....................     3.00       2.95       2.80       2.80       2.80
Cash distributions declared.................     3.00       3.00       2.80       2.80       2.80

CAPITAL EXPENDITURES........................ $ 27,686   $ 31,431   $ 17,913   $ 21,084   $ 30,931

BALANCE SHEET DATA (AT YEAR END):
Properties, plant and equipment, net........ $628,694   $623,318   $613,039   $616,610   $618,098
Total assets................................  725,818    720,854    714,772    696,980    684,852
Long-term debt..............................  355,000    355,000    355,000    355,000    355,000
Total partners' capital.....................  262,915    270,065    287,961    265,851    279,010
</TABLE>

(a) Effective January 1, 1992, the Partnership adopted new accounting standards
for postretirement and postemployment benefits (Statements of Financial
Accounting Standards Nos. 106 and 112).

                                      -14-
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

RESULTS OF OPERATIONS

1996 COMPARED WITH 1995
-----------------------
The Partnership reported 1996 net income of $52.3 million, or $2.64 per unit,
compared to net income of $40.4 million, or $2.04 per unit, in 1995, with the
variance being primarily attributable to special items recorded in both years.
Results of operations included provisions for litigation costs aggregating $23.0
million in 1996 and provisions for environmental and litigation costs
aggregating $34.0 million in 1995. Excluding these provisions, adjusted net
income was $74.5 million, or $3.76 per unit, in 1996, compared to $73.3 million,
or $3.70 per unit, in 1995.

Total 1996 revenues of $240.1 million were approximately 3% above 1995 levels.
Trunk revenues of $189.2 million were $6.0 million higher than in 1995 primarily
due to growth in total volumes transported. Commercial volumes were about 3.5%
higher, and military volumes 7.5% lower, than in 1995, and the average length of
haul was slightly greater. Commercial deliveries to all of the major markets
served by the Partnership, including Southern California, increased during 1996.
The reduction in military volumes was largely attributable to the downsizing and
realignment of military bases served by the Partnership. Storage and terminaling
revenues were about 2% higher than in 1995. Other revenues were 1% lower than in
1995.

Total operating expenses of $152.0 million were $5.7 million lower than in 1995.
Excluding the provisions described above, operating expenses would have been
$5.3 million, or about 4.5%, higher than in 1995, with higher field operating
expenses ($4.4 million), general and administrative expenses ($2.8 million) and
depreciation and amortization ($0.6 million), being partially offset by lower
facilities costs ($1.8 million) and power costs ($0.7 million). The increase in
field operating expenses was largely attributable to higher pipeline repairs and
maintenance, including pipeline reconditioning projects, and higher
environmental costs, partially offset by reductions in certain other field
costs. General and administrative expenses were higher due to outside legal
costs, primarily associated with the East Line civil litigation, the FERC
proceedings, and environmental insurance litigation, higher employee health care
and other benefit costs, and business process redesign costs. The increase in
depreciation and amortization resulted from the Partnership's expanding capital
asset base. The decrease in facilities costs is largely attributable to
approximately $3 million in property tax refunds, partially offset by higher
insurance premiums and right-of-way rental costs. The decrease in power costs
resulted from periodic fuel cost adjustments received at several locations and
savings from power transmission capital investments. Excluding provisions,
environmental remediation and East Line litigation costs recorded as operating
expense aggregated $9.6 million in 1996 and $7.0 million in 1995.

Other income, net decreased $0.6 million compared to 1995, primarily due to
lower interest income, attributable to lower cash balances, partially offset by
a gain on the sale of excess land.

1995 COMPARED WITH 1994
-----------------------
The Partnership reported 1995 net income of $40.4 million, or $2.04 per unit,
compared to net income of $76.9 million, or $3.93 per unit, in 1994, with the
variance being primarily attributable to special items recorded in both years.
Results of operations included provisions for environmental and litigation costs
aggregating $34.0 million in 1995 and a $3.1 million credit resulting from
changes in eligibility requirements for postretirement medical benefits in 1994.
Excluding the 1995 provisions and the 1994 credit, adjusted net income was $73.3
million, or $3.70 per unit, in 1995, compared to $73.9 million, or $3.78 per
unit, in 1994.

                                      -15-
<PAGE>
 
Total 1995 revenues of $233.7 million were 2.5% above 1994 levels. Trunk
revenues of $183.3 million were $3.9 million higher than in 1994 primarily due
to growth in total volumes transported. Commercial volumes were about 1.5%
higher, and military volumes 5% lower, than in 1994, and the average length of
haul was slightly greater. Deliveries to most of the markets served by the
Partnership increased during 1995, although Southern California deliveries were
lower as a result of competition from short-haul trucking to Los Angeles area
terminals. The reduction in military volumes was largely attributable to the
closure of Castle Air Force Base, in Central California. Storage and terminaling
revenues were 1% higher than in 1994. Other revenues increased $1.3 million
primarily due to new detergent additive services.

Total operating expenses of $157.7 million were $40.7 million higher in 1995
than in 1994, due largely to 1995 provisions for environmental and litigation
costs aggregating $34.0 million. Excluding the 1995 provisions, operating
expenses would have been $6.7 million, or 6%, higher than in 1994, with higher
general and administrative expenses ($4.7 million), power costs ($1.0 million),
depreciation and amortization ($0.7 million) and field operating expenses ($0.5
million), partially offset by lower facilities costs ($0.3 million), accounting
for that increase. General and administrative expenses were higher due to
outside legal and consulting costs, primarily related to the FERC proceeding and
litigation associated with the Sparks, Nevada environmental site, partially
offset by lower employee health care and postretirement benefit costs. Power
costs increased as the result of increased volumes and greater use of drag
reducing agent to increase pipeline capacity on selected routes. The increase in
depreciation and amortization resulted from the Partnership's expanding capital
asset base, particularly short-lived software costs. The increase in field
operating expenses is largely attributable to higher repairs and maintenance,
including pipeline reconditioning. The decrease in facilities costs is largely
attributable to lower property tax assessments and insurance premiums, partially
offset by higher right-of-way rental costs. Excluding provisions, environmental
remediation and East Line litigation costs recorded as operating expense
aggregated $7.0 million in 1995 and $3.8 million in 1994.

Other income, net decreased $2.1 million compared to 1994, primarily due to the
$3.1 million postretirement benefit credit recorded in 1994, partially offset by
higher interest income, which resulted from higher interest rates and cash
balances.


FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1996, cash flow from operations totaled $87.2
million, compared to $83.7 million in 1995. Working capital cash requirements
decreased $7.7 million in 1996 due to timing differences in collections of trade
and nontrade accounts receivable and payment of accrued obligations. Proceeds
from property sales totaled $2.7 million. Significant uses of cash in 1996
included cash distributions of $61.4 million and capital expenditures of $27.7
million, resulting in a net increase in cash and cash equivalents of $0.9
million for the year. Total cash and cash equivalents of $42.1 million at
December 31, 1996 included $15.4 million for the fourth quarter 1996 cash
distribution, which was paid in February 1997.

Since the useful lives of the pipeline system and terminal properties are
generally long and technological change is limited, replacement of facilities is
relatively infrequent. The principal need for capital, therefore, has been in
connection with capacity expansions, service enhancements, compliance with
increasingly stringent environmental and safety regulations and installation of
Supervisory Control and Data Acquisition ("SCADA") equipment and related
operations systems software.

                                      -16-
<PAGE>
 
For the year ended December 31, 1996, Partnership capital expenditures
aggregated $27.7 million. Capital expenditures for income enhancement projects,
including capacity expansions, service enhancements and system upgrades,
aggregated approximately $12 million in 1996, with approximately $6 million of
that total reflecting the purchase of a 35-mile, 6-inch diameter pipeline that
extends from the Partnership's Fresno, California terminal to Lemoore Naval Air
Station. Capital expenditures for environmental and safety projects included
additions and modifications to storage tanks and vapor recovery systems to
comply with more stringent regulations, oily water handling facilities and fire
protection improvements. Such expenditures aggregated approximately $6 million
in 1996 and are expected to increase over time in response to increasingly
rigorous environmental and safety standards.

The planned 1997 capital program aggregates approximately $28 million, of which
$16 million will be invested in facility upgrades and environmental, safety and
regulatory-driven projects. The Partnership presently anticipates that ongoing
capital expenditures will average approximately $30 million per year over the
next five years. This amount could increase or decrease as the result of
changing regulatory requirements or business opportunities associated with
pipeline and facility expansions and acquisitions.

The Partnership expects that it will generally finance its ongoing capital
program with internally generated funds; however, the Partnership may use
borrowed funds or proceeds from additional equity offerings to finance a portion
of significant capital expenditures. Future capital expenditures will continue
to depend on numerous factors, some of which are beyond the Partnership's
control, including demand for refined petroleum products in the pipeline
system's market areas, changes in product supply patterns, governmental
regulations and the availability of sufficient funds from operations to fund
such expenditures.

During 1996, the Partnership continued to review the feasibility of providing
pipeline service from the San Francisco Bay area to Colton, in Southern
California, by expanding the existing capacity on its North Line and building a
new pipeline between Fresno and Colton. Due to supply and market uncertainties,
the level of shipper throughput commitments has not been sufficient to proceed
and places the viability of this project in doubt.

Long-term debt aggregated $355 million at December 31, 1996 and consisted of
$305 million of First Mortgage Notes (the "Notes") and a $50 million borrowing
under the Partnership's bank term credit facility. The Partnership intends to
refinance some or all of the Notes as the various series become payable. To
facilitate such refinancing and provide for additional financial flexibility,
the Partnership presently has available the multi-year term credit facility,
with a $60 million aggregate limit, and a $20 million working capital facility
with three banks. The term facility may also be used to finance capital
projects, while the working capital facility is available for general short-term
borrowing purposes. Management has held discussions with the three lenders, and
the lenders have presented proposals, to significantly expand the Partnership's
borrowing capacity under, and extend the term of, the existing term credit
facility. Management expects that an expansion and extension of the facility's
provisions will be completed during the first half of 1997.


                                      -17-
<PAGE>
 
OTHER MATTERS

RATE REGULATION
The Partnership's interstate common carrier pipeline operations are subject to
rate regulation by the Federal Energy Regulatory Commission ("FERC"). Intrastate
common carrier operations in California are subject to regulation by the
California Public Utilities Commission ("CPUC"). In 1996, rates subject to FERC
and CPUC regulation accounted for approximately 57% and 43% of total
transportation revenues, respectively.

In 1985, the FERC adopted a cost-based methodology for establishing allowable
rates for liquid petroleum pipelines; however, this methodology continues to be
subject to clarification in individual cases and leaves many issues for
determination on a case-by-case basis. Effective January 1995, the FERC
established a new rate-making methodology that allows oil pipelines to adjust
their transportation rates as long as those rates do not exceed prescribed
ceiling levels determined by applying an index equal to annual changes in the
Producer Price Index for Finished Goods, minus one percent. Under this
methodology, pipelines may apply for cost of service-based rates in those cases
where the carrier can demonstrate that a "substantial divergence" exists between
the rates that would be allowed under cost-based rate-making and the rates
produced by indexation. In addition, carriers may establish market-based rates
for those markets in which it can be demonstrated that they do not have
significant market power. The access to cost-based and market-based rates is
significant because the Partnership believes the index selected by the FERC does
not adequately reflect historical cost of service increases and, accordingly,
the Partnership may need to pursue cost-based or selective market-based rate
adjustments in future rate filings. Interstate rate indexing had a minimal
impact on Partnership revenues in 1996 and management does not expect that
indexing will have a significant impact on trunk revenues in 1997.

EAST LINE CIVIL LITIGATION AND FERC PROCEEDINGS
Certain of the Partnership's shippers have filed civil suits and initiated FERC
complaint proceedings alleging, among other things, that the shippers were
damaged by the Partnership's failure to fulfill alleged promises to expand the
East Line's capacity between El Paso, Texas and Phoenix, Arizona to meet shipper
demand. The FERC proceedings also involve claims, among other things, that
certain of the Partnership's rates and charges on its East and West Lines are
excessive. To date, the complainants have filed testimony in the FERC proceeding
seeking reparations for shipments between 1990 and 1994 aggregating
approximately $35 million, as well as rate reductions of between 30% and 40% for
shipments in 1995 and thereafter. The remaining civil action, brought by El Paso
Refinery, L.P. ("El Paso") and its general partner, El Paso Refining, Inc.,
claims unspecified actual damages, which appear to include the $190 million cost
of a refinery expansion completed in 1992, plus punitive and consequential
damages.

During 1996, the Partnership pursued settlement efforts to resolve the claims
raised in the FERC proceedings and reached agreements with El Paso regarding its
challenge of the Partnership's East Line rates and with Navajo Refining Company
("Navajo") regarding its challenge of the Partnership's West Line rates. The
Partnership has also presented settlement offers to all of the remaining
complainants in the FERC proceedings, including Navajo with respect to the
Partnership's East Line rates. The terms of the settlement agreements with El
Paso and Navajo do not provide for rate reductions, but other offers that have
been extended do include proposed prospective reductions in the rates at issue
in the proceedings.


                                      -18-
<PAGE>
 
During the quarter ended September 30, 1996, the Partnership recorded an $8
million provision for litigation costs to increase its existing reserves to
reflect the total amount that would be payable under the settlement offers that
had been extended as of that date, including the offers that have been accepted
by El Paso and Navajo and, during the quarter ended December 31, 1996, recorded
an additional $15 million provision to increase its reserves to reflect
management's current estimate of the ultimate costs of resolution of the FERC
proceedings. Previously, during the quarter ended December 31, 1995, the
Partnership recorded a $10 million provision to increase its existing reserves
relating to the FERC proceedings, the El Paso action and certain other matters.

On February 25, 1997, the Partnership entered into an agreement with the El Paso
bankruptcy trustee which, subject to the approval of the bankruptcy court, would
settle all of the claims raised by El Paso and its general partner in the civil
litigation in exchange for the payment of $16 million by the Partnership in two
equal installments. As the amount of the proposed settlement exceeds the amount
that had previously been reserved for this matter, management anticipates that
the Partnership will record a provision of approximately $6 million to reflect
this settlement during the first quarter of 1997.

While the Partnership believes it has meritorious defenses in these matters, the
complainants and plaintiffs are seeking amounts that, in the aggregate,
substantially exceed the Partnership's reserves and, because of the
uncertainties associated with litigation and the FERC rate-making methodology,
management cannot predict with certainty the ultimate outcome of these matters.
The Partnership is also not able to predict with certainty whether settlement
agreements will be completed with some or all of the parties to the FERC
Proceeding or the El Paso civil action or the final terms of any such additional
settlement agreements that may be consummated. As additional information becomes
available, it may be necessary for the Partnership to record additional charges
to earnings to maintain its reserves at a level deemed adequate at that time,
and the costs associated with the ultimate resolution of these matters could
have a material adverse effect on the Partnership's results of operations,
financial condition, liquidity and ability to maintain its quarterly cash
distribution at the current level.

ENVIRONMENTAL
The Partnership's transportation and terminal operations are subject to
extensive regulation under federal, state and local environmental laws
concerning, among other things, the generation, handling, transportation and
disposal of hazardous materials and the Partnership is, from time to time,
subject to environmental cleanup and enforcement actions. In particular, the
federal Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA" or "Superfund" law) generally imposes joint and several liability for
cleanup and enforcement costs, without regard to fault or the legality of the
original conduct, on current or predecessor owners and operators of a site.

Along with several other respondents, the Partnership is presently involved in a
cleanup ordered by the United States Environmental Protection Agency related to
soil and groundwater contamination in the vicinity of the Partnership's storage
facilities and truck loading terminal at Sparks, Nevada. In addition, the
Partnership is presently involved in 18 groundwater hydrocarbon remediation
efforts under administrative orders issued by the California Regional Water
Quality Control Board and two other state agencies and, from time to time, may
be involved in groundwater investigations or remediations at the direction of
other governmental agencies. The Partnership is also involved in soil and
groundwater remediation projects, at and adjacent to various other terminal and
pipeline locations, that have not been mandated by government agencies but are
conducted in the ordinary course of business. 


                                      -19-
<PAGE>
 
In a number of remediation projects, the Partnership is participating with other
entities ranging from large integrated petroleum companies to certain less
financially sound parties. 

The Partnership accrues for environmental costs that relate to existing
conditions caused by past operations. Environmental costs include initial site
surveys and environmental studies of potentially contaminated sites, costs for
remediation and restoration of sites determined to be contaminated and ongoing
monitoring costs, as well as fines, damages and other costs, when estimable. The
Partnership's environmental reserves are monitored on a regular basis by
management. Liabilities for environmental costs at a specific site are initially
recorded when the Partnership's liability for such costs is probable and a
reasonable estimate of the associated costs can be made. Adjustments to initial
estimates are recorded, from time to time, to reflect changing circumstances and
estimates based upon additional information developed in subsequent periods.
Estimates of the Partnership's ultimate liabilities associated with
environmental costs are particularly difficult to make with certainty due to the
number of variables involved, including the early stage of investigation at
certain sites, the lengthy time frames required to complete remediation at most
locations, the number of parties involved, the number of remediation
alternatives available, the uncertainty of potential recoveries from third
parties and the evolving nature of environmental laws and regulations.

During 1995 and 1996, the Partnership, as a member of a defendant group, settled
all of the claims for penalties and damages that had been asserted by several
governmental agencies and property owners in lawsuits associated with the soil
and groundwater contamination present in the vicinity of the Sparks, Nevada
environmental site. The Partnership recorded provisions for environmental costs
aggregating $24 million during 1995 largely to reflect its share of all of these
settlement costs.

The Partnership's balance sheet at December 31, 1996 and 1995 includes reserves
for environmental costs aggregating $25.1 million and $37.1 million,
respectively, which reflect the estimated cost of completing all remediation
projects presently known to be required, either by government mandate or in the
ordinary course of business, and the cost of performing preliminary
environmental investigations at several locations, as well as environmental
damage claims, primarily associated with the Sparks environmental site. With
respect to the costs accrued at December 31, 1996, the Partnership estimates
that approximately $8.5 million will be paid in 1997, approximately $2 million
to $4 million will be paid per year over the following four years, and
approximately $1 million or less will be paid per year over the subsequent five
years.

Based on the information presently available, it is the opinion of management
that the Partnership's environmental costs, to the extent they exceed recorded
liabilities, will not have a material adverse effect on the Partnership's
financial condition, liquidity or ability to maintain its quarterly cash
distribution at the current level; nevertheless, it is possible that the
Partnership's results of operations in particular quarterly or annual periods
could be materially affected as additional information becomes available.

DEMAND FOR REFINED PETROLEUM PRODUCTS
Demand for transportation and terminaling services is principally a function of
product consumption and competition in markets served by the pipeline system.
Commercial volumes are generally dependent upon such factors as prevailing
economic conditions, demographic changes, transportation and terminaling
alternatives and, to a lesser degree, product prices paid by end-users. Military
volumes are dependent upon the level of activity at military bases served by the
Partnership.


                                      -20-
<PAGE>
 
During 1996, the pipeline systems, on average, operated at approximately 75% of
capacity. While capacity utilization on individual system segments generally
ranged from 70% to 90% of capacity, the lines from the Los Angeles area to San
Diego and Colton, California and from the San Francisco Bay area to Sacramento,
California and Reno, Nevada operated at or near full capacity for a portion of
the year. Overall, volumes have been moderately seasonal, with somewhat lower
than average volumes being transported during the first and fourth quarters of
each year, although deliveries to specific locations also experience seasonal
variations.

OTHER
The Partnership leases certain rights-of-way under an agreement that became
subject to renegotiation effective January 1, 1994 and the Partnership and the
lessor were unable to reach an agreement on a new base annual rental payment for
the next ten-year period. In the years 1994 through 1996, the Partnership
accrued for an increase in the annual rental for these rights-of-way. In January
1997, a tentative decision was rendered in the judicial reference proceeding
held to resolve this matter. This tentative decision would establish the new
base annual rental for these rights-of-way at a level, subject to inflation
adjustments, that is adequately provided for by the amounts that had been
accrued through December 31, 1996.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Partnership's consolidated financial statements, together with the report
thereon of Price Waterhouse LLP dated January 31, 1997, are set forth on pages
F-1 through F-15 of this Report.


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE. 
None.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Registrant has no officers, directors or employees. Set forth below is
certain information concerning the directors and executive officers of the
General Partner.

Orval M. Adam, age 66, is a director of the General Partner, Chairman of the
Compensation and Benefits Committee and a member of the Audit Committee and
Committee on Directors. He retired in January 1991 from his position as Senior
Vice President and Chief Financial Officer of Santa Fe. Mr. Adam is also a
director of SFP Pipeline Holdings, Inc., the sole shareholder of the General
Partner.

Wilford D. Godbold, Jr., age 58, is a director of the General Partner, Chairman
of the Audit Committee and a member of the Compensation and Benefits Committee
and Committee on Directors. Mr. Godbold has served as President and Chief
Executive Officer of ZERO Corporation (container manufacturer) since 1984. Mr.
Godbold is also a director of ZERO Corporation, Pacific Enterprises and Southern
California Gas Company.

Michael A. Morphy, age 64, is a director of the General Partner and a member of
the Audit Committee and Compensation and Benefits Committee. Mr. Morphy retired
in 1985 from his position as Chairman and Chief Executive Officer of California
Portland Cement Company (cement manufacturer). Mr. 


                                      -21-
<PAGE>
 
Morphy is also a director of SFP Pipeline Holdings, Inc., the sole shareholder
of the General Partner, Santa Fe Energy Resources, Inc. and Cyprus Amax Minerals
Company.

Robert D. Krebs, age 54, is a director of the General Partner, Chairman of the
Committee on Directors and a member of the Compensation and Benefits Committee.
Mr. Krebs has served as President and Chief Executive Officer of Burlington
Northern Santa Fe Corporation ("BNSF") since September 1995. He previously
served as Chairman, President and Chief Executive Officer of Santa Fe since
1988. Mr. Krebs is also a director of BNSF, Santa Fe Pacific Gold Corporation,
Phelps Dodge Corporation and Northern Trust Corporation.

Denis E. Springer, age 51, is a director of the General Partner and a member of
the Compensation and Benefits Committee and Committee on Directors. Mr. Springer
has been Senior Vice President and Chief Financial Officer of BNSF since
September 1995 and, previously, served in those same positions at Santa Fe since
October 1993. Mr. Springer previously served Santa Fe as Senior Vice President,
Treasurer and Chief Financial Officer since January 1992. Mr. Springer is also a
director of SFP Pipeline Holdings, Inc., the sole shareholder of the General
Partner.

Irvin Toole, Jr., age 55, is President, Chief Executive Officer and Chairman of
the Board of Directors of the General Partner. From November 1988 until election
to his present position in September 1991, Mr. Toole served as Senior Vice
President, Treasurer and Chief Financial Officer. Mr. Toole is also Chairman of
the Board of Directors of SFP Pipeline Holdings, Inc., the sole shareholder of
the General Partner.

Robert L. Edwards, age 41, is a director of the General Partner and has been
Senior Vice President-Business Development and Planning of the General Partner
since January 1995. Previously, Mr. Edwards was Senior Vice President, Treasurer
and Chief Financial Officer from December 1991 through January 1995. Mr. Edwards
is also a director of SFP Pipeline Holdings, Inc., the sole shareholder of the
General Partner.

Barry R. Pearl, age 47, has been Senior Vice President, Treasurer and Chief
Financial Officer of the General Partner since January 1995. Mr. Pearl
previously served as Senior Vice President-Business Development and Planning
between January 1992 and January 1995.

John M. Abboud, age 54, has been Senior Vice President-Operations and
Engineering of the General Partner since 1985.

Lyle B. Boarts, age 53, has been Vice President-Human Resources of the General
Partner since November 1988.

R. Gregory Cunningham, age 51, has been Vice President-General Counsel since
January 1994. Previously, he served as General Counsel of the General Partner
since January 1991.

Burnell H. DeVos III, age 43, has served as Controller and Secretary of the
General Partner since January 1993. Mr. DeVos was Assistant Controller of the
General Partner from May 1989 through December 1992.

William M. White, age 51, has served as Vice President-Engineering of the
General Partner since January 1993. Mr. White previously was Manager-Northern
District from May 1986 through December 1992.

                                      -22-
<PAGE>
 
ITEM 11. EXECUTIVE COMPENSATION.
The directors, officers and employees of the General Partner receive no direct
compensation from the Partnership for their services to the Partnership. The
Partnership reimburses the General Partner for all direct costs incurred in
managing the Partnership and all indirect costs (principally salaries and other
general and administrative costs) allocable to the Partnership.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

(a) Security Ownership of Certain Beneficial Owners

To the best of the General Partner's knowledge, the following persons are the
only persons who are beneficial owners of more than five percent of the
Registrant's equity securities:

<TABLE>
<CAPTION>
                                                           Number      Percent
 Title of Class             Name and Address              of Units     of Class
---------------   ------------------------------------   -----------   --------
<C>               <S>                                    <C>           <C>
  Common units    Santa Fe Pacific Pipelines, Inc. (1)    8,148,148     42.6%
                  1100 Town & Country Road                           
                  Orange, CA 92868                                  
                                                                     
  Common units    J. P. Morgan & Co., Incorporated (2)    3,010,471     15.7%
                  60 Wall Street                                     
                  New York, NY 10260                                
                                                                     
  Common units    Pioneering Management Corporation (3)   1,234,200      6.4%
                  60 State Street                                    
                  Boston, MA 02109                                  
</TABLE>                                                                   
(1)  As discussed in Items 1 and 2 of this Report, Santa Fe Pacific Pipelines,
     Inc. is also the general partner of the Partnership, referred to herein as
     the "General Partner," and is a wholly owned indirect subsidiary of Santa
     Fe Pacific Corporation ("Santa Fe") which, as the result of a business
     combination in September 1995, is a wholly owned subsidiary of Burlington
     Northern Santa Fe Corporation.

(2)  This information is based on a Securities and Exchange Commission Schedule
     13-G report by J. P. Morgan & Co., Incorporated, dated and filed on January
     31, 1997.

(3)  This information is based on a Securities and Exchange Commission Schedule
     13-G report by Pioneering Management Corporation, dated and filed on
     January 27, 1997.

(b) Security Ownership of Management

As of February 28, 1997, common units beneficially held by all directors and
officers as a group represented less than 1% of the Partnership's outstanding
units.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Registrant and the Operating Partnership are managed by the General Partner
pursuant to the Amended and Restated Agreement of Limited Partnership of the
Partnership (the "Partnership Agreement"), and the Amended and Restated
Agreement of Limited Partnership of the Operating Partnership (the "Operating
Partnership Agreement"). Under the Partnership Agreement and Operating
Partnership Agreement, the General Partner and certain related parties are
entitled to reimbursement of all direct and indirect costs and expenses related
to the business activities of the Partnership and the Operating Partnership.
These costs and expenses include compensation and benefits payable to officers
and employees of the General Partner, payroll taxes, corporate office building
rentals, general and 


                                      -23-
<PAGE>
 
administrative costs, and legal and other professional services fees. These
costs to the Partnership totaled $50.4 million, $45.8 million and $40.6 million
in 1996, 1995 and 1994, respectively.

The Partnership Agreement provides for incentive distribution payments to the
General Partner out of the Partnership's "Available Cash" (as defined in the
Partnership Agreement) which increase as quarterly distributions to unitholders
exceed certain specified targets. The incremental incentive distributions
payable to the General Partner are 8%, 18% and 28% of all distributions of
Available Cash that exceed, respectively, $0.60, $0.65 and $0.70 per unit. Such
incentive distributions aggregated $2,735,000 in 1996, $2,350,000 in 1995 and
$1,200,000 in 1994.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) The following documents are filed as a part of this Report:
<TABLE>
<CAPTION> 
                                                                            Page
                                                                            ----
<S>                                                                         <C>
   (1) Financial Statements:
         Report of Independent Accountants.................................  F-1
         Consolidated Balance Sheet as of December 31, 1996 and 1995.......  F-2
         Consolidated Statement of Income for the three years ended
                December 31, 1996..........................................  F-3
         Consolidated Statement of Cash Flows for the three years
                ended December 31, 1996....................................  F-4
         Notes to Consolidated Financial Statements........................  F-5
</TABLE>
   (2) Financial Statement Schedules: None.

   (3) Exhibits: The following exhibits are filed as a part of this Report. With
       the exception of Exhibits 21, 24 and 27, all exhibits listed herein are
       incorporated by reference, with the location of the exhibit in the
       Registrant's previous filing being indicated parenthetically.

<TABLE>
<CAPTION>
Exhibit
 Number                              Description
--------  ----------------------------------------------------------------------
<C>       <S>
  3.1     Amended and Restated Agreement of Limited Partnership of the
          Registrant, dated as of December 19, 1988. 
          (1988 Form 10-K - (Exhibit 3.1)
  3.2     Amended and Restated Agreement of Limited Partnership of the
          Operating Partnership, dated as of December 19, 1988. 
          (1988 Form 10-K - Exhibit 3.2)
  3.3     Certificate of Limited Partnership of the Registrant, dated as of
          August 23, 1988. (1988 Form 10-K -Exhibit 3.3)
  3.4     Certificate of Limited Partnership of the Operating Partnership,
          dated as of August 23, 1988. (1988 Form 10-K - Exhibit 3.5)
  3.5     Assumption Agreement between the Registrant and Santa Fe Pacific
          Pipelines, Inc., dated as of December 7, 1989. 
          (1989 Form 10-K - Exhibit 3.4)
  3.6     Amendment No. 1 to Amended and Restated Agreement of Limited
          Partnership of the Registrant, dated as of December 7, 1989.
          (1989 Form 10-K - Exhibit 3.2)
  3.7     Certificate of Amendment to Certificate of Limited Partnership
          of the Registrant, dated as of December 7, 1989.
          (1989 Form 10-K - Exhibit 3.3)
  3.8     Amendment No. 1 to Amended and Restated Agreement of Limited
          Partnership of the Operating Partnership, dated as of December 7,
          1989. (1989 Form 10-K - Exhibit 3.5)
</TABLE>

                                      -24-
<PAGE>
 
<TABLE>
<CAPTION>
Exhibit
 Number                              Description
--------  ----------------------------------------------------------------------
<C>       <S>
  3.9     Certificate of Amendment to Certificate of Limited Partnership of the
          Operating Partnership, dated as of December 7, 1989. 
          (1989 Form 10-K - Exhibit 3.6)
  3.10    Amendment No. 2 to Amended and Restated Agreement of Limited 
          Partnership of the Operating Partnership, dated as of January 24, 
          1990. (1989 Form 10-K - Exhibit 3.8)
  3.11    Certificate of Amendment No. 2 to Certificate of Limited Partnership 
          of the Operating Partnership, dated as of January 30, 1990. 
          (1989 Form 10-K - Exhibit 3.9)
  4.1     Form of Deposit Agreement between the Registrant, American Stock 
          Transfer & Trust Company and the General Partner, as attorney-in-fact
          Statement No. 33-24395 - Exhibit 4.1)
  4.2     First Mortgage Note Agreement, dated December 8, 1988 (a conformed 
          composite of 54 separate agreements, identical except for signatures)
          (1988 Form 10-K - Exhibit 4.2)
  4.3     Deed of Trust, Security Agreement and Fixture Filing, dated December 
          8, 1988, between the Operating Partnership, the General Partner, 
          Chicago Title Insurance Company and Security Pacific National Bank. 
          (1988 Form 10-K - Exhibit 4.3)
  4.4     Trust Agreement, dated December 19, 1988, between the Operating
          Partnership, the General Partner and Security Pacific National Bank.
          (1988 Form 10-K - Exhibit 4.4)
  4.5     The Operating Partnership has established a $60 million term
          credit facility with three banks, dated as of October 14, 1993. As 
          the maximum allowable borrowings under this facility do not exceed 
          10% of the Registrant's total assets, this instrument is not filed as
          an exhibit to this Report, however, the Registrant hereby agrees to
          furnish a copy of such instrument to the Securities and Exchange 
          Commission upon request.
 21       Subsidiaries of the Registrant*
 24       Powers of attorney*
 27       Financial Data Schedule as of and for the year ended December 31,
          1996*
</TABLE>

            * Filed herewith.


(b) Reports on Form 8-K filed during the quarter ended December 31, 1996: None

                                      -25-
<PAGE>
 
                                   SIGNATURES

Santa Fe Pacific Pipeline Partners, L.P., pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized.

                                 SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
                                               (Registrant)
                       By: Santa Fe Pacific Pipelines, Inc., as General Partner

Dated: March 24, 1997  By:                  /s/ IRVIN TOOLE, JR.
                          ------------------------------------------------------
                                             Irvin Toole, Jr.
                              Chairman, President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities with Santa Fe Pacific Pipelines, Inc., as General Partner, and
on the date indicated.
<TABLE>
<CAPTION>
         Signature                                  Title
---------------------------    -----------------------------------------------
<S>                            <C>
   /s/ IRVIN TOOLE, JR.        Chairman, President and Chief Executive Officer
---------------------------             (Principal Executive Officer)         
     Irvin Toole, Jr.                           and Director
                               
                                      
    /s/ BARRY R. PEARL               Senior Vice President, Treasurer    
---------------------------              and Chief Financial Officer
      Barry R. Pearl                    (Principal Financial Officer)

 /s/ BURNELL H. DeVOS III                 Controller and Secretary
---------------------------            (Principal Accounting Officer)
   Burnell H. DeVos III                

                                      
   /s/ ROBERT L. EDWARDS                  Senior Vice President-       
---------------------------          Business Development and Planning 
     Robert L. Edwards                         and Director
                                     
      ORVAL M. ADAM*
---------------------------                       Director
       Orval M. Adam                              

 WILFORD D. GODBOLD, JR.*
---------------------------                       Director
  Wilford D. Godbold, Jr.                         

    MICHAEL A. MORPHY*
---------------------------                       Director
     Michael A. Morphy                            

     ROBERT D. KREBS*
---------------------------                       Director
      Robert D. Krebs                             

    DENIS E. SPRINGER*
---------------------------                       Director
     Denis E. Springer                            
</TABLE>

*By:        /s/ BARRY R. PEARL
     ---------------------------------
      Barry R. Pearl, attorney in fact

Dated: March 24, 1997

                                      -26-
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS



TO THE PARTNERS OF SANTA FE PACIFIC PIPELINE PARTNERS, L.P.

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 24 present fairly, in all material
respects, the financial position of Santa Fe Pacific Pipeline Partners, L.P. and
its majority-owned operating partnership at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

/s/ PRICE WATERHOUSE LLP

PRICE WATERHOUSE LLP

Los Angeles, California
January 31, 1997

                                      F-1
<PAGE>
                   SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
                          CONSOLIDATED BALANCE SHEET
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                        December 31,
                                                   ----------------------
                                                      1996        1995 
                                                   ----------  ----------
<S>                                                <C>         <C>
                ASSETS
Current assets
  Cash and cash equivalents..................      $  42,122   $  41,219
  Accounts receivable, net...................         33,563      38,897
  Other current assets.......................          2,224       2,139
                                                   ----------  ----------
     Total current assets....................         77,909      82,255
                                                   ----------  ----------
Properties, plant and equipment..............        738,395     716,197
  Less accumulated depreciation..............        109,701      92,879
                                                   ----------  ----------
     Net properties, plant and equipment.....        628,694     623,318
Other assets.................................         19,215      15,281
                                                   ----------  ----------
     Total assets............................      $ 725,818   $ 720,854
                                                   ==========  ==========

     LIABILITIES AND PARTNERS' CAPITAL

Current liabilities
  Accounts payable...........................      $   3,212   $   3,466
  Accrued liabilities........................         32,333      30,609
                                                   ----------  ----------
     Total current liabilities...............         35,545      34,075
Long-term debt...............................        355,000     355,000
Other long-term liabilities..................         71,351      60,468
                                                   ----------  ----------
     Total liabilities.......................        461,896     449,543
                                                   ----------  ----------
Minority interest............................          1,007       1,246
                                                   ----------  ----------
Commitments and contingencies (Note 4).......           --          --
                                                   ----------  ----------
Partners' capital
  General partner............................          1,007       1,246
  Limited partners...........................        261,908     268,819
                                                   ----------  ----------
     Total partners' capital.................        262,915     270,065
                                                   ----------  ----------
     Total liabilities and partners' capital.      $ 725,818   $ 720,854
                                                   ==========  ==========
</TABLE> 

                See Notes to Consolidated Financial Statements.

                                      F-2
<PAGE>
 
                   SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
                       CONSOLIDATED STATEMENT OF INCOME

                    (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)

<TABLE> 
<CAPTION> 
                                                           Year Ended December 31,
                                                        -------------------------------
                                                          1996        1995       1994
                                                        --------    --------   --------
<S>                                                     <C>         <C>        <C>
Operating revenues
   Trunk revenues.....................................  $189,207    $183,255   $179,339
   Storage and terminaling revenues...................    38,302      37,653     37,262
   Other revenues.....................................    12,633      12,769     11,465
                                                        --------    --------   --------
         Total operating revenues.....................   240,142     233,677    228,066
                                                        --------    --------   --------
Operating expenses
   Field operating expenses...........................    37,375      33,013     32,492
   General and administrative expenses................    30,260      27,462     22,753
   Depreciation and amortization......................    21,080      20,500     19,820
   Power costs........................................    21,062      21,715     20,698
   Facilities costs...................................    19,244      21,006     21,256
   Provisions for environmental and litigation costs
    (Note 4)..........................................    23,000      34,000       --
                                                        --------    --------   --------
         Total operating expenses.....................   152,021     157,696    117,019
                                                        --------    --------   --------
Operating income......................................    88,121      75,981    111,047
Interest expense......................................    36,518      37,247     37,570
Other income, net.....................................     2,415       2,978      5,037
                                                        --------    --------   --------
Net income before minority interest...................    54,018      41,712     78,514
Less minority interest in net income..................    (1,743)     (1,345)    (1,629)
                                                        --------    --------   --------
Net income............................................  $ 52,275    $ 40,367   $ 76,885
                                                        ========    ========   ======== 
Income per unit.......................................  $   2.64    $   2.04   $   3.93
                                                        ========    ========   ======== 

Operating expense reflected above include
 the following expenses incurred by, and
 reimbursed to, the General Partner (Note 5)..........  $ 50,425    $ 45,845   $ 40,565
                                                        ========    ========   ========  
</TABLE> 

               See Notes to Consolidated Financial Statements.


                                      F-3

<PAGE>
 
                   SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
                     CONSOLIDATED STATEMENT OF CASH FLOWS

                                (IN THOUSANDS)

<TABLE> 
<CAPTION> 
                                                              Year ended December 31, 
                                                         ---------------------------------
                                                            1996        1995        1994
                                                         ---------   ---------   ---------
<S>                                                      <C>         <C>         <C>
Cash flows from operating activities:
  Net income..........................................   $  52,275   $  40,367   $  76,885
                                                         ---------   ---------   ---------
  Adjustments to reconcile net income to net
   cash provided by operating activities--
     Depreciation and amortization....................      21,080      20,500      19,820
     Minority interest in net income..................       1,743       1,345       1,629
     Net additions to (payments against)
      environmental and litigation reserves...........       8,816      24,738      (5,914)
     Other, net.......................................      (4,392)       (429)      1,296
     Changes in:
        Accounts receivable...........................       5,334      (2,427)     (3,683)
        Accounts payable and accrued liabilities......       2,475        (634)       (399)
        Other current assets..........................         (84)        281         381
                                                         ---------   ---------   ---------
            Total adjustments.........................      34,972      43,374      13,130
                                                         ---------   ---------   ---------
            Net cash provided by operating activities.      87,247      83,741      90,015
                                                         ---------   ---------   ---------
Cash flows from investing activities:
  Capital expenditures................................     (27,686)    (31,431)    (17,913)
  Proceeds from property sales and other..............       2,749        --           620
                                                         ---------   ---------   ---------
            Net cash used by investing activities.....     (24,937)    (31,431)    (17,293)
                                                         ---------   ---------   ---------
Cash flows from financing activities:
  Cash distributions..................................     (61,407)    (60,039)    (55,936)
  Repayment of long-term debt.........................     (22,000)    (17,000)    (11,000)
  Proceeds from issuance of long-term debt............      22,000      17,000      11,000
                                                         ---------   ---------   ---------
            Net cash used by financing activities.....     (61,407)    (60,039)    (55,936)
                                                         ---------   ---------   ---------

Increase (decrease) in cash and cash equivalents......         903      (7,729)     16,786

Cash and cash equivalents--
  Beginning of year...................................      41,219      48,948      32,162
                                                         ---------   ---------   ---------
  End of year.........................................   $  42,122   $  41,219   $  48,948
                                                         =========   =========   =========
</TABLE> 

                See Notes to Consolidated Financial Statements.

                                      F-4
  
 



<PAGE>
 
                   SANTA FE PACIFIC PIPELINE PARTNERS, L.P.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
ORGANIZATION AND BASIS OF ACCOUNTING - The accompanying consolidated financial
statements include the accounts of Santa Fe Pacific Pipeline Partners, L.P. (the
"Trading Partnership") and SFPP, L.P., (the "Operating Partnership"),
collectively referred to as the "Partnership", on a consolidated basis. The
Trading Partnership is a publicly traded limited partnership organized under the
laws of the state of Delaware in 1988 which owns a 99% limited partnership
interest in the Operating Partnership, through which the Partnership conducts
all its operations. The Operating Partnership was acquired by the Trading
Partnership in December 1988 and is engaged in the transportation of refined
petroleum products and related services.

The Operating Partnership is managed by its general partner, Santa Fe Pacific
Pipelines, Inc. (the "General Partner"), which, by virtue of its 1% general
partner interest, represents the minority interest in the Partnership's
consolidated financial statements. The General Partner also holds a 1% general
partner interest in the Trading Partnership and, therefore, in total, holds a 2%
general partner interest in the Partnership on a consolidated basis. In
addition, the General Partner owns 8,148,148 Partnership common units,
representing an approximate 42% limited partner interest in the Trading
Partnership. The remaining approximate 56% limited partner ownership in the
Trading Partnership is represented by 11,000,000 publicly traded common units.

The General Partner is a wholly owned indirect subsidiary of Santa Fe Pacific
Corporation ("Santa Fe") which, as the result of a business combination in
September 1995, is a wholly owned subsidiary of Burlington Northern Santa Fe
Corporation ("BNSF"). 

The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the periods presented.
Actual results could differ from those estimates.

REVENUE RECOGNITION - Substantially all revenues are derived from pipeline
transportation and storage and terminaling charges and are recognized in income
upon delivery. Other revenues, primarily incidental service charges and tank and
land rentals, are recognized as earned. 

Operating revenues received from ARCO Products Company and Chevron U.S.A.
Products Company accounted for 14.8% and 12.1%, respectively, of total 1996
revenues. These two customers accounted for 16.3% and 13.3%, respectively, of
total 1995 revenues, and for 16.1% and 12.4%, respectively, of total 1994
revenues.

The Partnership's interstate common carrier pipeline operations are subject to
rate regulation by the Federal Energy Regulatory Commission ("FERC") under a
rate-making methodology that is subject to clarification and reconsideration in
individual cases and leaves many issues for determination on a case-by-case
basis. The Partnership's California intrastate common carrier pipeline
operations are subject to rate regulation by the California Public Utilities
Commission.

                                      F-5
<PAGE>
 
PROPERTIES, PLANT AND EQUIPMENT - Properties are stated at cost and include
capitalized interest on borrowed funds. Additions and replacements are
capitalized. Expenditures for maintenance and repairs are charged to income.
Upon sale or retirement of depreciable properties, cost less salvage is charged
to accumulated depreciation. 

Properties are depreciated on a straight-line basis over the estimated service
lives of the related assets. Rates for the Partnership's interstate pipeline
properties are prescribed by the FERC. The Partnership's intrastate pipeline
properties and its terminal properties are depreciated using similar rates. The
following annual rates were used in computing depreciation:computing
depreciation:
<TABLE>

  <S>                                               <C>  
  Rights-of-way....................................          2.60%
  Line pipe, fittings and pipeline construction.... 2.22% to 2.60%
  Buildings and field equipment.................... 2.95% to 4.00%
  Storage tanks and delivery facilities............ 3.10% to 3.20%
  Vehicles, office and communications equipment.... 3.00% to 15.70%
</TABLE>

Depreciation expense aggregated $18,600,000 in 1996, $17,680,000 in 1995 and
$17,445,000 in 1994.

ENVIRONMENTAL COSTS - Environmental expenditures that relate to current or
future revenues are expensed or capitalized, as appropriate. Expenditures that
relate to an existing condition caused by past operations, and do not contribute
to current or future revenue generation, are expensed. Liabilities are recorded
when environmental assessments and/or clean-ups are probable and the costs can
be reasonably estimated.

INCOME PER UNIT - Income per unit is computed based upon net income of the
Partnership less an allocation of income to the general partner of the Trading
Partnership in accordance with the partnership agreement, and is based upon
19,148,148 common units. The quarterly allocation of net income to the general
partner of the Trading Partnership (which is always equivalent to the minority
interest in net income) is based on its percentage of cash distributions from
Available Cash at the end of each quarter (see Note 7). The general partner of
the Trading Partnership was allocated 3.23%, 3.23% and 2.07% of net income
before minority interest for the years 1996, 1995 and 1994, respectively.

INCOME TAX - For federal and state income tax purposes, the Partnership is not a
taxable entity. Accordingly, the taxable income or loss resulting from the
operations of the Partnership is ultimately includable in the federal and state
income tax returns of the general and limited partners, and may vary
substantially from the income or loss reported for financial reporting purposes.

CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - The Partnership considers all
highly liquid investments with a maturity of three months or less when purchased
to be cash equivalents.

RECLASSIFICATIONS - Certain comparative prior year amounts have been
reclassified to conform with the current year presentation.

                                      F-6
<PAGE>
 
NOTE 2 - DETAIL OF SELECTED BALANCE SHEET ACCOUNTS
--------------------------------------------------
<TABLE>
<CAPTION>

                                                                           December 31,
                                                                 -------------------------------
(In thousands)                                                       1996              1995
                                                                 --------------    -------------
<S>                                                              <C>               <C>
ACCOUNTS RECEIVABLE:
    Trade accounts receivable..................................   $     20,675      $    22,071
    Recollectible construction and maintenance expenditures....          7,197            7,333
    Environmental insurance claims.............................          4,464            4,477
    Other......................................................          1,227            5,016
                                                                 --------------    -------------

                                                                  $    33,563       $    38,897
                                                                 ==============    =============

PROPERTIES, PLANT AND EQUIPMENT:
    Land.......................................................   $     53,730      $    55,984
    Rights-of-way..............................................         12,758           12,680
    Line pipe, fittings and pipeline construction..............        300,403          293,858
    Buildings and equipment....................................        176,733          168,361
    Storage tanks and delivery facilities......................        165,592          162,470
    Construction in progress...................................         29,179           22,844
                                                                 --------------    -------------

                                                                       738,395          716,197

    Less accumulated depreciation..............................        109,701           92,879
                                                                 --------------    -------------

                                                                  $    628,694      $   623,318
                                                                 ==============    =============

ACCRUED LIABILITIES:
    Environmental costs........................................   $      8,500      $    12,500
    Right-of-way rents.........................................          6,545            4,315
    Capital expenditures and major maintenance.................          3,610            4,441
    Property taxes.............................................          3,433            3,019
    East Line litigation costs.................................          3,000              -- 
    Interest...................................................          1,547            2,171
    Other......................................................          5,698            4,163
                                                                 --------------    -------------

                                                                  $     32,333       $   30,609
                                                                 ==============    =============
</TABLE>

                                      F-7
<PAGE>
 
NOTE 3 - LONG-TERM DEBT
-----------------------

Long-term debt consists of the following:
<TABLE>
<CAPTION>
                                                               December 31,
                                                        ------------------------
(In thousands)                                             1996          1995
                                                        ----------    ----------
<S>                                                     <C>           <C>   
First Mortgage Notes:
      Series C 10.05% due December 1996................  $    --       $ 22,000
      Series D 10.15% due December 1997................    28,500        28,500
      Series E 10.25% due December 1998................    32,500        32,500
      Series F 10.70% due December 1999 through 2004...   244,000       244,000
                                                        ----------    ----------
      Bank term loans, due April 1999 through 
      September 2001...................................   305,000       327,000
                                                           50,000        28,000 
                                                        ----------    ----------
                                                         $355,000      $355,000 
                                                        ==========    ==========

</TABLE>
The Partnership intends to refinance the Series D Notes on a long-term basis
upon their maturity and, therefore, has included them in long-term debt at
December 31, 1996. The Series F Notes become payable in annual installments,
including $31.5 million in 1999, $32.5 million in 2000 and $39.5 million in
2001. The Notes may also be prepaid beginning in 1999 in full or in part at a
price equal to par plus, in certain circumstances, a premium.

The First Mortgage Notes (the "Notes") are secured by mortgages on substantially
all of the properties of the Partnership (the "Mortgaged Property"). The Notes
contain covenants specifying certain limitations on the Partnership's
operations, including the amount of additional debt or equity that may be
issued, cash distributions, investments and property dispositions. Management
does not believe such limitations will adversely affect the Partnership's
ability to fund its operations or planned capital expenditures.

The Partnership presently has available a $60 million multi-year term credit
facility and a $20 million working capital facility with three banks. The
existing term facility is available for refinancing portions of the
Partnership's long-term debt and capital projects, and may be utilized on a
revolving basis through October 1998, at which time the outstanding balance will
be converted to a three-year amortizing term loan. Borrowings under the term
facility are also secured by the Mortgaged Property and are generally subject to
the same terms and conditions as the Notes. To date, the Partnership has
refinanced the first three series of the Notes by borrowing an aggregate of $50
million under this facility. The Partnership has selected an interest rate on
these loans that is presently determined by reference to a short-term Eurodollar
rate, and was 6-1/32% at December 31, 1996. Management has held discussions with
the three lenders, and the lenders have presented proposals, to significantly
expand the Partnership's borrowing capacity under, and extend the term of, the
existing term credit facility. Management expects that an expansion and
extension of the facility's provisions will be completed during the first half
of 1997.

Advances under the $20 million working capital credit facility can be used for
general Partnership purposes and would be secured by certain of the
Partnership's accounts receivable. This facility, which is subject to 
annual renewal, has been extended through late January 1998. The facility may
not be utilized for a 45-day period, the designation of such period to be at the
Partnership's discretion, during each calendar year. In addition, the facility
provides for certain interest rate options and is subject to 

                                       F-8
<PAGE>
 
other reasonable and customary terms and conditions. To date, the working
capital facility has not been utilized.

Interest on the Notes is payable semiannually in June and December. Interest on
the bank term loans is generally payable quarterly. Total interest paid was
$36,285,000 during 1996, $36,985,000 during 1995 and $37,325,000 during 1994.
Interest capitalized during the years 1996, 1995 and 1994 aggregated $515,000,
$405,000 and $205,000, respectively.

The fair value of the Partnership's long-term debt was approximately $400
million at December 31, 1996. Such estimate represents the present value of
interest and principal payments on the Notes discounted at present market
yields, and assumes that options to prepay a total of $60 million of Series F
Notes at par will be exercised in 1999 and 2000. The fair market value of the
term loans is considered to be equal to their $50 million principal amount.

NOTE 4 - COMMITMENTS AND CONTINGENCIES
--------------------------------------

EAST LINE CIVIL LITIGATION AND FERC PROCEEDINGS
Certain of the Partnership's shippers have filed civil suits and initiated
Federal Energy Regulatory Commission ("FERC") complaint proceedings alleging,
among other things, that the shippers were damaged by the Partnership's failure
to fulfill alleged promises to expand the East Line's capacity between El Paso,
Texas and Phoenix, Arizona to meet shipper demand. The FERC proceedings also
involve claims, among other things, that certain of the Partnership's rates and
charges on its East and West Lines are excessive. To date, the complainants have
filed testimony in the FERC proceeding seeking reparations for shipments between
1990 and 1994 aggregating approximately $35 million, as well as rate reductions
of between 30% and 40% for shipments in 1995 and thereafter. The remaining civil
action, brought by El Paso Refinery, L.P. ("El Paso") and its general partner,
El Paso Refining, Inc., claims unspecified actual damages, which appear to
include the $190 million cost of a refinery expansion completed in 1992, plus
punitive and consequential damages.

During 1996, the Partnership pursued settlement efforts to resolve the claims
raised in the FERC proceedings ands reached agreements with El Paso regarding
its challenge of the Partnership's East Line rates and with Navajo Refining
Company ("Navajo") regarding its challenge of the Partnership's West Line rates.
The Partnership has also presented settlement offers to all of the remaining
complainants in the FERC proceedings, including Navajo with respect to the
Partnership's East Line rates. The terms of the settlement agreements with El
Paso and Navajo do not provide for rate reductions, but other offers that have
been extended do include proposed prospective reductions in the rates at issue
in the proceedings.

During the quarter ended September 30, 1996, the Partnership recorded an $8
million provision for litigation costs to increase its existing reserves to
reflect the total amount that would be payable under the settlement offers that
had been extended as of that date, including the offers that have been accepted
by El Paso and Navajo and, during the quarter ended December 31, 1996, recorded
an additional $15 million provision to increase its reserves to reflect
management's current estimate of the ultimate costs of resolution of the FERC
proceedings. Previously, during the quarter ended December 31, 1995, the
Partnership recorded a $10 million provision to increase its existing reserves
relating to the FERC proceedings, the El Paso action and certain other matters.
The Partnership's accompanying balance sheet also includes reserves for costs
related to the resolution of the El Paso civil action.

                                      F-9
<PAGE>
 
While the Partnership believes it has meritorious defenses in these matters, the
complainants and plaintiffs are seeking amounts that, in the aggregate,
substantially exceed the Partnership's reserves and, because of the
uncertainties associated with litigation and the FERC rate-making methodology,
management cannot predict with certainty the ultimate outcome of these matters.
The Partnership is also not able to predict with certainty whether settlement
agreements will be completed with some or all of the parties to the FERC
proceedings or the El Paso civil action or the final terms of any such
additional settlement agreements that may be consummated. As additional
information becomes available, it may be necessary for the Partnership to record
additional charges to earnings to maintain its reserves at a level deemed
adequate at that time, and the costs associated with the ultimate resolution of
these matters could have a material adverse effect on the Partnership's results
of operations, financial condition, liquidity and ability to maintain its
quarterly cash distribution at the current level.

ENVIRONMENTAL
The Partnership's transportation and terminal operations are subject to
extensive regulation under federal, state and local environmental laws
concerning, among other things, the generation, handling, transportation and
disposal of hazardous materials and the Partnership is, from time to time,
subject to environmental cleanup and enforcement actions. In particular, the
federal Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA" or "Superfund" law) generally imposes joint and several liability for
cleanup and enforcement costs, without regard to fault or the legality of the
original conduct, on current or predecessor owners and operators of a site.

Along with several other respondents, the Partnership is presently involved in a
cleanup ordered by the United States Environmental Protection Agency related to
soil and groundwater contamination in the vicinity of the Partnership's storage
facilities and truck loading terminal at Sparks, Nevada. In addition, the
Partnership is presently involved in 18 groundwater hydrocarbon remediation
efforts under administrative orders issued by the California Regional Water
Quality Control Board and two other state agencies and, from time to time, may
be involved in groundwater investigations or remediations at the direction of
other governmental agencies. The Partnership is also involved in soil and
groundwater remediation projects, at and adjacent to various other terminal and
pipeline locations, that have not been mandated by government agencies but are
conducted in the ordinary course of business. In a number of remediation
projects, the Partnership is participating with other entities ranging from
large integrated petroleum companies to certain less financially sound parties.

The Partnership accrues for environmental costs that relate to existing
conditions caused by past operations. Environmental costs include initial site
surveys and environmental studies of potentially contaminated sites, costs for
remediation and restoration of sites determined to be contaminated and ongoing
monitoring costs, as well as fines, damages and other costs, when estimable. The
Partnership's environmental reserves are monitored on a regular basis by
management. Liabilities for environmental costs at a specific site are initially
recorded when the Partnership's liability for such costs is probable and a
reasonable estimate of the associated costs can be made. Adjustments to initial
estimates are recorded, from time to time, to reflect changing circumstances and
estimates based upon additional information developed in subsequent periods.
Estimates of the Partnership's ultimate liabilities associated with
environmental costs are particularly difficult to make with certainty due to the
number of variables involved, including the early stage of investigation at
certain sites, the lengthy time frames required to complete remediation at most
locations, the number of parties involved, the number of remediation
alternatives available, the uncertainty of potential recoveries from third
parties and the evolving nature of environmental laws and regulations. 

                                     F-10
<PAGE>
 
During 1995 and 1996, the Partnership, as a member of a defendant group, settled
all of the claims for penalties and damages that had been asserted by several
governmental agencies and property owners in lawsuits associated with the soil
and groundwater contamination present in the vicinity of the Sparks, Nevada
environmental site. The Partnership recorded provisions for environmental costs
aggregating $24 million during 1995 largely to reflect its share of all of these
settlement costs.

The Partnership's balance sheet at December 31, 1996 and 1995 includes reserves
for environmental costs aggregating $25.1 million and $37.1 million,
respectively, which reflect the estimated cost of completing all remediation
projects presently known to be required, either by government mandate or in the
ordinary course of business, and the cost of performing preliminary
environmental investigations at several locations, as well as environmental
damage claims, primarily associated with the Sparks environmental site. With
respect to the costs accrued at December 31, 1996, the Partnership estimates
that approximately $8.5 million will be paid in 1997, approximately $2 million
to $4 million will be paid per year over the following four years, and
approximately $1 million or less will be paid per year over the subsequent five
years.

Based on the information presently available, it is the opinion of management
that the Partnership's environmental costs, to the extent they exceed recorded
liabilities, will not have a material adverse effect on the Partnership's
financial condition, liquidity or ability to maintain its quarterly cash
distribution at the current level; nevertheless, it is possible that the
Partnership's results of operations in particular quarterly or annual periods
could be materially affected as additional information becomes available.

OTHER CLAIMS AND LITIGATION
The Partnership is party to a number of other legal actions arising in the
ordinary course of business. While the final outcome of these other matters
cannot be predicted with certainty, it is the opinion of management that none of
these other legal actions, either individually or in the aggregate, when finally
resolved, will have a material adverse effect on the Partnership's annual
results of operations, financial condition, liquidity or ability to maintain its
quarterly cash distribution at the current level.

LEASE COMMITMENTS
The Partnership and the General Partner lease space in office buildings and
certain computer equipment. Total lease commitments not subject to cancellation
at December 31, 1996 are as follows: $1,215,000 in 1997, $1,105,000 in 1998,
$1,215,000 in 1999, $1,225,000 in 2000, $1,365,000 in 2001 and $16,700,000
thereafter.

The Partnership also leases certain rights-of-way and land under agreements that
can be canceled at any time should they not be required for operations. The
annual payments associated with these leases aggregated approximately $5 million
in 1993, however a substantial portion of this amount became subject to
renegotiation effective January 1, 1994 and the Partnership and the lessor were
unable to reach an agreement on a new base annual rental payment for the next
ten-year period. In the years 1994 through 1996, the Partnership accrued for an
increase in the annual rental for these rights-of-way. In January 1997, a
tentative decision was rendered in the judicial reference proceeding held to
resolve this matter. This tentative decision would establish the new base annual
rental for these rights-of-way at a level, subject to inflation adjustments,
that is adequately provided for by the amounts that had been accrued through
December 31, 1996. Rental expense recorded for all operating leases was
$8,975,000 in 1996, $8,850,000 in 1995 and $8,335,000 in 1994.

                                     F-11
<PAGE>
 
NOTE 5 - RELATED PARTY TRANSACTIONS
-----------------------------------

The Partnership has no employees and is managed by the General Partner. Under
certain partnership and management agreements, the General Partner, Santa Fe and
BNSF are entitled to reimbursement of all direct and indirect costs related to
the business activities of the Partnership. These expenses, which are included
in field operating and general and administrative expenses in the Partnership's
statement of income, totaled $50.4 million, $45.8 million and $40.6 million for
the years 1996, 1995 and 1994, respectively, and include compensation and
benefits payable to officers and employees of the General Partner, payroll
taxes, corporate office building rentals, general and administrative costs, tax
information and reporting costs and legal and other professional services fees.

NOTE 6 - PENSION AND POSTRETIREMENT PLANS
-----------------------------------------

The General Partner is included with certain other affiliates in the Burlington
Northern Santa Fe Retirement Plan, a noncontributory defined benefit pension
plan established October 1, 1996 (the "Plan") to effect the consolidation of the
Santa Fe Pacific Retirement Plan and the Burlington Northern Inc. Pension Plan.
The Plan covers substantially all officers and employees of BNSF and its
subsidiaries not covered by collective bargaining agreements. Benefits payable
under the Plan are based on years of credited service and the highest five-year
average compensation levels. The General Partner's funding policy is to
contribute annually at a rate not less than the regulatory minimum, and not more
than the maximum amount deductible for income tax purposes. Since the General
Partner is included with certain other affiliates, detailed Plan information for
the General Partner is not available in all cases; however, as of September 30,
1996, the fair value of Plan assets allocated to employees associated with the
Partnership's operations was $57.4 million, and the actuarial present value of
projected Plan obligations, discounted at 7.75%, was $49.5 million. The expected
return on the market value of Plan assets was 9.5% and compensation levels were
assumed to increase at 4.0% per year. Primarily as a result of the excess of the
General Partner's plan assets over liabilities, pension income of $460,000,
$470,000 and $200,000 was recognized in 1996, 1995 and 1994, respectively.

Salaried employees who have rendered ten years of service after attaining age 45
are eligible for both medical benefits and life insurance coverage during
retirement. The retiree medical plan is contributory and provides benefits to
retirees, their covered dependents and beneficiaries. Retiree contributions are
adjusted annually. The plan also contains fixed deductibles, coinsurance and
out-of-pocket limitations. The life insurance plan is non-contributory and
covers retirees only.

                                     F-12
<PAGE>
 
Net periodic postretirement benefit cost was $1,000,000, $770,000 and $1,500,000
in 1996, 1995 and 1994, respectively, and included the following components:

<TABLE>
<CAPTION>
                                      Medical Plan            Life Insurance Plan
                                -------------------------   ----------------------
  (In thousands)                 1996     1995     1994       1996   1995    1994
                                ------- ------- ---------   -------  -----  ------
  <S>                           <C>     <C>     <C>         <C>      <C>    <C>
  Service cost................. $  610  $  490  $    660    $   40   $  25  $   40
  Interest cost................    735     710       970       215     205     240
  Net amortization
      and deferral.............   (620)   (660)     (410)       20      --      --
                                ------- ------- ---------   -------  -----  ------
  Net periodic postretirement
      benefit cost............. $  725  $  540  $  1,220    $  275   $ 230  $  280
                                ======= ======= =========   =======  =====  ======
</TABLE>

The Partnership's policy is to fund benefits payable under the medical and life
insurance plans as they come due. The following table shows the reconciliation
of the plans' obligations, using a September 30 measurement date, to amounts
accrued at December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                                 Medical Plan     Life Insurance Plan
                                             -------------------  -------------------
 (In thousands)                                1996       1995     1996       1995
                                             -------     -------  -------    ------
 <S>                                         <C>         <C>      <C>        <C>
 Accumulated postretirement                                                 
  benefit obligation:                                                       
   Retirees................................. $ 3,435     $ 4,325  $2,205     $2,330
   Fully eligible active plan participants..   1,365       1,040      30         30
   Other active plan participants...........   5,030       5,460     665        600
                                             -------     -------  -------    ------
                                               9,830      10,825   2,900      2,960
                                                                            
 Unrecognized prior service credit.........    3,255       3,750     --         --
 Unrecognized net gain (loss)..............    2,260         675    (525)      (680)
                                             -------     -------  -------    ------
 Accrued postretirement liability..........  $15,345     $15,250  $2,375     $2,280
                                             =======     =======  =======    ======
</TABLE>
                                                                            
The unrecognized prior service credit will be amortized straight-line over the
average future service to full eligibility of the active population. For 1996,
the assumed health care cost trend rate for managed care medical costs is 10.5%
and is assumed to decrease gradually to 5% by 2006 and remain constant
thereafter. For medical costs not in managed care, the assumed health care cost
trend is 12% in 1996 and is assumed to decrease gradually to 5% by 2006 and
remain constant thereafter. Increasing the assumed health care cost trend rates
by one percentage point in each year would increase the accumulated
postretirement benefit obligation for the medical plan by $1.4 million and the
combined service and interest components of net periodic post retirement benefit
cost recognized in 1996 by $225,000. For 1996, the weighted-average discount
rate assumed in determining the accumulated postretirement benefit obligation
was 7.75% and the assumed weighted-average salary increase was 4.0%.
                                                       
                                     F-13
<PAGE>
 
NOTE 7 - PARTNERS' CAPITAL AND CASH DISTRIBUTIONS      
-------------------------------------------------
                                                       
Changes in partners' capital were as follows:          
<TABLE>
<CAPTION>
                                                   
                                               General   Limited    
 (In thousands)                                Partner   Partners    Total
                                              --------   ---------  --------
 <S>                                          <C>        <C>        <C>
 Partners' capital at December 31, 1993......  $1,208    $264,643   $265,851

 1994 net income.............................   1,629      75,256     76,885
 1994 cash distributions.....................  (1,161)    (53,614)   (54,775)
                                              --------   ---------  --------

 Partners' capital at December 31, 1994......   1,676     286,285    287,961

 1995 net income.............................   1,346      39,021     40,367
 1995 cash distributions.....................  (1,776)    (56,487)   (58,263)
                                              --------   ---------  --------

 Partners' capital at December 31, 1995......   1,246     268,819    270,065

 1996 net income.............................   1,743      50,532     52,275
 1996 cash distributions.....................  (1,982)    (57,443)   (59,425)
                                              --------   ---------  --------

 Partners' capital at December 31, 1996......  $1,007    $261,908   $262,915
                                              ========   ========   ========
</TABLE>

The Partnership makes quarterly cash distributions of substantially all of its
"available cash", which is generally defined as consolidated cash receipts less
consolidated cash expenditures and such retentions for working capital,
anticipated capital expenditures and contingencies as the General Partner deems
appropriate or as are required by the terms of the Notes. Distributions are made
98% to the common unitholders and 2% to the general partner of the Trading
Partnership and Operating Partnership, subject to the payment of incentive
distributions to the general partners that increase as quarterly distributions
to unitholders exceed certain specified target levels. The incremental incentive
distributions payable to the general partners are 8%, 18% and 28% of all
quarterly distributions of available cash that exceed, respectively, $0.60,
$0.65 and $0.70 per unit. Such incentive distributions aggregated $2,735,000 in
1996, $2,350,000 in 1995 and $1,200,000 in 1994.

Cash distributions declared aggregated $3.00 per unit in 1996 and 1995 and $2.80
per unit in 1994. In January 1997, the Partnership announced a fourth quarter
1996 distribution of $0.75 per unit, payable in February 1997.

                                       F-14
<PAGE>
 
NOTE 8 - SUMMARIZED QUARTERLY OPERATING RESULTS
-----------------------------------------------
         AND COMMON UNIT INFORMATION (UNAUDITED)
         --------------------------------------- 

Quarterly results of operations are summarized below:
<TABLE>
<CAPTION>
                                             First    Second    Third      Fourth  
   (In thousands, except per unit amounts)  Quarter   Quarter   Quarter   Quarter  
                                            -------  --------  --------   -------  
   <S>                                      <C>      <C>       <C>        <C>      
   1996                                                                            
       Net revenues........................ $56,596   $60,795   $62,323   $60,428  
       Operating income....................  24,666    29,148    20,755    13,552  
       Net income..........................  15,448    19,833    11,579     5,415  
                                                                                   
       Income per unit..................... $  0.78   $  1.00   $  0.58   $  0.27  
                                                                                   
   1995                                                                            
       Net revenues........................ $54,200   $60,554   $60,795   $58,128  
       Operating income....................  23,633    21,267    26,978     4,103  
       Net income (loss)...................  14,642    12,325    17,677    (4,277) 
                                                                                   
       Income (loss) per unit.............. $  0.74   $  0.62   $  0.89   $ (0.21) 
</TABLE>                                                                        

   Notes: 1996 operating results included provisions for litigation costs of
   $8.0 million in the third quarter and $15.0 million in the fourth quarter.
   1995 operating results included provisions for environmental and litigation
   costs of $9.0 million in the second quarter and $25.0 million in the fourth
   quarter. The sum of net income per unit for the four quarters of 1996 does
   not equal net income per unit for the full year due to the effect of rounding
   differences.

Santa Fe Pacific Pipeline Partners, L.P. common units are traded on the New York
Stock Exchange, under the symbol SFL. The quarterly price range per unit and
cash distributions declared per unit for 1996 and 1995 are summarized below:

<TABLE>
<CAPTION>
                                       First    Second     Third    Fourth  
                                      Quarter   Quarter   Quarter   Quarter 
                                      -------  --------  --------   ------- 
  <S>                                 <C>      <C>       <C>        <C>     
  1996                                                                      
      High unit price...............   38-5/8    38-1/8   36-5/8     38-1/8 
      Low unit price................   36        34       34-1/2     35-1/2 
                                                                            
      Cash distributions declared...  $ 0.75   $  0.75   $ 0.75     $ 0.75  
                                                                            
  1995                                                                      
      High unit price...............   36-7/8    37-7/8   37         37-3/8 
      Low unit price................   33-1/8    30-1/2   34-3/8     34-1/4 
                                                                            
      Cash distributions declared...  $ 0.75   $  0.75   $ 0.75     $ 0.75   
</TABLE>


As of January 31, 1997, there were approximately 18,000 unitholders.

                                       15