Exhibit 99.3
TEPPCO PARTNERS, L.P.
TABLE OF CONTENTS
| Page No. | ||||
| Unaudited Condensed Consolidated Balance Sheets | 2 | |||
| Unaudited Condensed Statements of Consolidated Income | 3 | |||
| Unaudited Condensed Statements of Consolidated Comprehensive Income | 4 | |||
| Unaudited Condensed Statements of Consolidated Cash Flows | 5 | |||
| Unaudited Condensed Statements of Consolidated Partners’ Capital | 6 | |||
| Notes to Unaudited Condensed Consolidated Financial Statements: | ||||
| 1. Partnership Organization and Basis of Presentation | 7 | |||
| 2. General Accounting Matters | 8 | |||
| 3. Accounting for Equity Awards | 10 | |||
| 4. Derivative Instruments and Hedging Activities | 12 | |||
| 5. Inventories | 18 | |||
| 6. Property, Plant and Equipment | 18 | |||
| 7. Investments in Unconsolidated Affiliates | 19 | |||
| 8. Business Combination | 21 | |||
| 9. Intangible Assets and Goodwill | 21 | |||
| 10. Debt Obligations | 22 | |||
| 11. Partners’ Capital and Distributions | 23 | |||
| 12. Business Segments | 26 | |||
| 13. Related Party Transactions | 28 | |||
| 14. Earnings Per Unit | 32 | |||
| 15. Commitments and Contingencies | 33 | |||
| 16. Supplemental Cash Flow Information | 40 | |||
| 17. Supplemental Condensed Consolidating Financial Information | 40 | |||
| 18. Subsequent Events | 44 | |||
1
TEPPCO PARTNERS, L.P.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
| June 30, | December 31, | |||||||
| ASSETS | 2009 | 2008 | ||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | -- | $ | -- | ||||
| Accounts receivable, trade (net of allowance for doubtful accounts of | ||||||||
| $2.6 at June 30, 2009 and $2.6 at December 31, 2008) | 984.8 | 790.4 | ||||||
| Accounts receivable, related parties | 10.7 | 15.8 | ||||||
| Inventories | 95.6 | 52.9 | ||||||
| Other | 38.7 | 48.5 | ||||||
| Total current assets | 1,129.8 | 907.6 | ||||||
Property, plant and equipment, at cost (net of accumulated depreciation of | ||||||||
$729.9 at June 30, 2009 and $678.8 at December 31, 2008) | 2,591.6 | 2,439.9 | ||||||
| Investments in unconsolidated affiliates | 1,198.9 | 1,255.9 | ||||||
Intangible assets (net of accumulated amortization of $172.3 at June 30, 2009 and $158.3 at December 31, 2008) | 195.1 | 207.7 | ||||||
| Goodwill | 106.6 | 106.6 | ||||||
| Other assets | 132.9 | 132.1 | ||||||
| Total assets | $ | 5,354.9 | $ | 5,049.8 | ||||
| LIABILITIES AND PARTNERS’ CAPITAL | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | 967.9 | $ | 792.5 | ||||
| Accounts payable, related parties | 40.9 | 17.2 | ||||||
| Accrued interest | 36.0 | 36.4 | ||||||
| Other accrued taxes | 21.0 | 23.0 | ||||||
| Other | 21.1 | 30.9 | ||||||
| Total current liabilities | 1,086.9 | 900.0 | ||||||
| Long-term debt: | ||||||||
| Senior notes | 1,710.9 | 1,713.3 | ||||||
| Junior subordinated notes | 299.6 | 299.6 | ||||||
| Other long-term debt | 723.3 | 516.7 | ||||||
| Total long-term debt | 2,733.8 | 2,529.6 | ||||||
| Other liabilities and deferred credits | 27.8 | 28.7 | ||||||
| Commitments and contingencies | ||||||||
| Partners’ capital: | ||||||||
| Limited partners’ interests: | ||||||||
Limited partner units (104,682,604 units outstanding at June 30, 2009 and 104,547,561 units outstanding at December 31, 2008) | 1,673.8 | 1,746.2 | ||||||
Restricted limited partner units (260,400 units outstanding at June 30, 2009 and 157,300 units outstanding at December 31, 2008) | 1.9 | 1.4 | ||||||
| General partner’s interest | (126.3 | ) | (110.3 | ) | ||||
| Accumulated other comprehensive loss | (43.0 | ) | (45.8 | ) | ||||
| Total partners’ capital | 1,506.4 | 1,591.5 | ||||||
| Total liabilities and partners’ capital | $ | 5,354.9 | $ | 5,049.8 | ||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
2
TEPPCO PARTNERS, L.P.
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Dollars in millions, except per unit amounts)
| For the Three Months | For the Six Months | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Operating revenues: | ||||||||||||||||
| Sales of petroleum products | $ | 1,745.4 | $ | 4,006.5 | $ | 3,023.3 | $ | 6,651.1 | ||||||||
| Transportation – Refined products | 41.1 | 44.1 | 77.0 | 81.4 | ||||||||||||
| Transportation – LPGs | 17.5 | 16.1 | 55.8 | 52.3 | ||||||||||||
| Transportation – Crude oil | 15.2 | 17.4 | 37.1 | 32.7 | ||||||||||||
| Transportation – NGLs | 13.6 | 12.7 | 26.1 | 25.7 | ||||||||||||
| Transportation – Marine | 43.7 | 48.1 | 80.6 | 73.6 | ||||||||||||
| Gathering – Natural gas | 14.4 | 14.8 | 28.0 | 28.2 | ||||||||||||
| Other | 22.3 | 20.8 | 42.9 | 44.0 | ||||||||||||
| Total operating revenues | 1,913.2 | 4,180.5 | 3,370.8 | 6,989.0 | ||||||||||||
| Costs and expenses: | ||||||||||||||||
| Purchases of petroleum products | 1,703.3 | 3,975.7 | 2,938.8 | 6,582.3 | ||||||||||||
| Operating expense | 76.4 | 66.5 | 143.2 | 120.3 | ||||||||||||
| Operating fuel and power | 17.9 | 29.1 | 37.6 | 50.5 | ||||||||||||
| General and administrative | 15.8 | 11.0 | 25.8 | 19.8 | ||||||||||||
| Depreciation and amortization | 36.8 | 31.9 | 69.8 | 60.2 | ||||||||||||
| Taxes – other than income taxes | 7.1 | 7.0 | 14.0 | 13.1 | ||||||||||||
| Total costs and expenses | 1,857.3 | 4,121.2 | 3,229.2 | 6,846.2 | ||||||||||||
| Operating income | 55.9 | 59.3 | 141.6 | 142.8 | ||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (32.3 | ) | (33.0 | ) | (64.4 | ) | (71.6 | ) | ||||||||
| Equity in income (loss) of unconsolidated affiliates | (12.2 | ) | 21.3 | 12.9 | 41.0 | |||||||||||
| Other, net | 0.7 | 1.1 | 1.0 | 1.4 | ||||||||||||
| Income before provision for income taxes | 12.1 | 48.7 | 91.1 | 113.6 | ||||||||||||
| Provision for income taxes | (0.9 | ) | (1.0 | ) | (1.7 | ) | (1.8 | ) | ||||||||
| Net income | $ | 11.2 | $ | 47.7 | $ | 89.4 | $ | 111.8 | ||||||||
| Net income allocated to: | ||||||||||||||||
| Limited partners | $ | 9.3 | $ | 39.7 | $ | 74.3 | $ | 93.1 | ||||||||
| General partner | $ | 1.9 | $ | 8.0 | $ | 15.1 | $ | 18.7 | ||||||||
| Basic and diluted earnings per unit | $ | 0.09 | $ | 0.42 | $ | 0.71 | $ | 0.99 | ||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
TEPPCO PARTNERS, L.P.
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED
COMPREHENSIVE INCOME
(Dollars in millions)
| For the Three Months | For the Six Months | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Net income | $ | 11.2 | $ | 47.7 | $ | 89.4 | $ | 111.8 | ||||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Cash flow hedges: (see Note 4) | ||||||||||||||||
| Change in fair values of interest rate derivative instruments | -- | -- | -- | (23.2 | ) | |||||||||||
| Reclassification adjustment for loss included in net income | ||||||||||||||||
| related to interest rate derivative instruments | 1.4 | -- | 2.8 | (0.1 | ) | |||||||||||
| Changes in fair values of commodity derivative instruments | -- | (20.6 | ) | -- | (27.1 | ) | ||||||||||
| Reclassification adjustment for loss included in net income | ||||||||||||||||
| related to commodity derivative instruments | -- | 9.6 | -- | 19.2 | ||||||||||||
| Total cash flow hedges | 1.4 | (11.0 | ) | 2.8 | (31.2 | ) | ||||||||||
| Total other comprehensive income (loss) | 1.4 | (11.0 | ) | 2.8 | (31.2 | ) | ||||||||||
| Comprehensive income | $ | 12.6 | $ | 36.7 | $ | 92.2 | $ | 80.6 | ||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
4
TEPPCO PARTNERS, L.P.
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in millions)
| For the Six Months | ||||||||
| Ended June 30, | ||||||||
| 2009 | 2008 | |||||||
| Operating activities: | ||||||||
| Net income | $ | 89.4 | $ | 111.8 | ||||
| Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
| Depreciation and amortization | 69.8 | 60.2 | ||||||
| Non-cash impairment charge | 2.3 | -- | ||||||
| Amortization of deferred compensation | 0.1 | 0.7 | ||||||
| Amortization in interest expense | 1.4 | 2.2 | ||||||
| Changes in fair market value of derivative instruments | (0.4 | ) | (0.3 | ) | ||||
| Equity in income of unconsolidated affiliates | (12.9 | ) | (41.0 | ) | ||||
| Distributions received from unconsolidated affiliates | 89.2 | 79.3 | ||||||
| Loss on early extinguishment of debt | -- | 8.7 | ||||||
| Net effect of changes in operating accounts (see Note 16) | (31.4 | ) | (57.5 | ) | ||||
| Net cash provided by operating activities | 207.5 | 164.1 | ||||||
| Investing activities: | ||||||||
| Cash used for business combinations | (50.0 | ) | (345.6 | ) | ||||
| Investment in Jonah Gas Gathering Company | (19.1 | ) | (64.5 | ) | ||||
| Investment in Texas Offshore Port System (see Note 7) | 1.7 | -- | ||||||
| Acquisition of intangible assets | (1.4 | ) | (0.3 | ) | ||||
| Cash paid for linefill classified as other assets | (1.5 | ) | (14.5 | ) | ||||
| Capital expenditures | (164.3 | ) | (139.2 | ) | ||||
| Net cash used in investing activities | (234.6 | ) | (564.1 | ) | ||||
| Financing activities: | ||||||||
| Borrowings under debt agreements | 759.3 | 3,344.4 | ||||||
| Repayments of debt | (552.6 | ) | (2,732.9 | ) | ||||
| Net proceeds from issuance of limited partner units | 3.3 | 5.6 | ||||||
| Debt issuance costs | -- | (9.3 | ) | |||||
| Settlement of interest rate derivative instruments - treasury locks | -- | (52.1 | ) | |||||
| Acquisition of treasury units | (0.1 | ) | -- | |||||
| Distributions paid to partners | (182.8 | ) | (155.7 | ) | ||||
| Net cash provided by financing activities | 27.1 | 400.0 | ||||||
| Net change in cash and cash equivalents | -- | -- | ||||||
| Cash and cash equivalents, January 1 | -- | -- | ||||||
| Cash and cash equivalents, June 30 | $ | -- | $ | -- | ||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
5
TEPPCO PARTNERS, L.P.
UNAUDITED CONDENSED STATEMENTS OF
CONSOLIDATED PARTNERS’ CAPITAL
(Dollars in millions)
| Accumulated | ||||||||||||||||
| Other | ||||||||||||||||
| Limited | General | Comprehensive | ||||||||||||||
| Partners | Partner | Income (Loss) | Total | |||||||||||||
| Balance, December 31, 2008 | $ | 1,747.6 | $ | (110.3 | ) | $ | (45.8 | ) | $ | 1,591.5 | ||||||
| Net proceeds from issuance of limited partner units | 3.3 | -- | -- | 3.3 | ||||||||||||
| Acquisition of treasury units | (0.1 | ) | -- | -- | (0.1 | ) | ||||||||||
| Net income | 74.3 | 15.1 | -- | 89.4 | ||||||||||||
| Cash distributions paid to partners | (151.8 | ) | (31.0 | ) | -- | (182.8 | ) | |||||||||
| Non-cash contributions | 0.3 | -- | -- | 0.3 | ||||||||||||
| Amortization of equity awards | 2.1 | (0.1 | ) | -- | 2.0 | |||||||||||
| Reclassification adjustment for loss included in net | ||||||||||||||||
| income related to interest rate derivative instruments | -- | -- | 2.8 | 2.8 | ||||||||||||
| Balance, June 30, 2009 | $ | 1,675.7 | $ | (126.3 | ) | $ | (43.0 | ) | $ | 1,506.4 | ||||||
| Accumulated | ||||||||||||||||
| Other | �� | |||||||||||||||
| Limited | General | Comprehensive | ||||||||||||||
| Partners | Partner | Income (Loss) | Total | |||||||||||||
| Balance, December 31, 2007 | $ | 1,395.2 | $ | (88.0 | ) | $ | (42.6 | ) | $ | 1,264.6 | ||||||
| Net proceeds from issuance of limited partner units | 5.6 | -- | -- | 5.6 | ||||||||||||
Issuance of limited partner units in connection with Cenac acquisition on February 1, 2008 | 186.6 | -- | -- | 186.6 | ||||||||||||
| Net income | 93.1 | 18.7 | -- | 111.8 | ||||||||||||
| Cash distributions paid to partners | (129.8 | ) | (25.9 | ) | -- | (155.7 | ) | |||||||||
| Non-cash contributions | 0.3 | -- | -- | 0.3 | ||||||||||||
| Amortization of equity awards | 0.5 | -- | -- | 0.5 | ||||||||||||
| Changes in fair values of commodity derivative instruments | -- | -- | (27.1 | ) | (27.1 | ) | ||||||||||
Reclassification adjustment for loss included in net income related to commodity derivative instruments | -- | -- | 19.2 | 19.2 | ||||||||||||
| Changes in fair values of interest rate derivative instruments | -- | -- | (23.2 | ) | (23.2 | ) | ||||||||||
| Balance, June 30, 2008 | $ | 1,551.5 | $ | (95.2 | ) | $ | (73.7 | ) | $ | 1,382.6 | ||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
6
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Except per unit amounts, or as noted within the context of each footnote disclosure, the dollar amounts presented in the tabular data within these footnote disclosures are stated in millions.
Note 1. Partnership Organization and Basis of Presentation
Partnership Organization
TEPPCO Partners, L.P. is a publicly traded, diversified energy logistics partnership with operations that span much of the continental United States. Our limited partner units (“Units”) are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “TPP”. We were formed in March 1990 as a Delaware limited partnership. As used in this Report, “we,” “us,” “our,” the “Partnership” and “TEPPCO” mean TEPPCO Partners, L.P. and, where the context requires, include our subsidiaries.
We operate through TE Products Pipeline Company, LLC (“TE Products”), TCTM, L.P. (“TCTM”), TEPPCO Midstream Companies, LLC (“TEPPCO Midstream”), and beginning February 1, 2008, through TEPPCO Marine Services, LLC (“TEPPCO Marine Services”). Texas Eastern Products Pipeline Company, LLC (the “General Partner”), a Delaware limited liability company, serves as our general partner and owns a 2% general partner interest in us. We hold a 99.999% limited partner interest in TCTM, 99.999% membership interests in each of TE Products and TEPPCO Midstream and a 100% membership interest in TEPPCO Marine Services. TEPPCO GP, Inc., our subsidiary, holds a 0.001% general partner interest in TCTM and a 0.001% managing member interest in each of TE Products and TEPPCO Midstream.
Dan L. Duncan and certain of his affiliates, including Enterprise GP Holdings L.P. (“Enterprise GP Holdings”) and Dan Duncan LLC, a privately held company controlled by him, control us, our General Partner and Enterprise Products Partners L.P. (“Enterprise Products Partners”) and its affiliates, including Duncan Energy Partners L.P. (“Duncan Energy Partners”). Enterprise GP Holdings owns and controls the 2% general partner interest in us and has the right (through its 100% ownership of our General Partner) to receive the incentive distribution rights associated with the general partner interest. Enterprise GP Holdings, DFI GP Holdings L.P. (“DFIGP”) and other entities controlled by Mr. Duncan own 17,073,315 of our Units, which include 2,500,000 of our Units owned by DFIGP. Under an amended and restated administrative services agreement (“ASA”), EPCO, Inc. (“EPCO”), a privately held company also controlled by Mr. Duncan, performs management, administrative and operating functions required for us, and we reimburse EPCO for all direct and indirect expenses that have been incurred in managing us.
On June 28, 2009, we and our General Partner entered into definitive merger agreements with Enterprise Products Partners, its general partner, Enterprise Products GP, LLC (“EPGP”), and two of its subsidiaries. See Note 13 for information regarding the proposed merger with Enterprise Products Partners.
We refer to refined products, liquefied petroleum gases (“LPGs”), petrochemicals, crude oil, lubrication oils and specialty chemicals, natural gas liquids (“NGLs”), natural gas, asphalt, heavy fuel oil, other heated oil products and marine bunker fuel, collectively as “petroleum products” or “products.”
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of our management, of a normal and recurring nature and necessary for a fair statement of our financial position as of June 30, 2009, and the results of our operations and cash flows for the periods presented. The results of operations for the three months and six months ended June 30, 2009 are not necessarily indicative of results of our operations for the full year 2009. The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally
7
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations. You should read these interim financial statements in conjunction with our consolidated financial statements and notes thereto presented in the TEPPCO Partners, L.P. Annual Report on Form 10-K for the year ended December 31, 2008.
Note 2. General Accounting Matters
Estimates
Preparing our financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts presented in the financial statements (e.g. assets, liabilities, revenues and expenses) and disclosures about contingent assets and liabilities. Our actual results could differ from these estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.
Fair Value Information
Cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other current liabilities are carried at amounts which reasonably approximate their fair values due to their short-term nature. The estimated fair values of our fixed rate debt are based on quoted market prices for such debt or debt of similar terms and maturities. The carrying amount of our variable rate debt obligation reasonably approximates its fair value due to its variable interest rate. See Note 4 for fair value information associated with our derivative instruments.
The following table presents the estimated fair values of our financial instruments at the dates indicated:
| June 30, 2009 | December 31, 2008 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| Financial Instruments | Value | Value | Value | Value | ||||||||||||
| Financial assets: | ||||||||||||||||
| Cash and cash equivalents | $ | -- | $ | -- | $ | -- | $ | -- | ||||||||
| Accounts receivable, trade | 984.8 | 984.8 | 790.4 | 790.4 | ||||||||||||
| Financial liabilities: | ||||||||||||||||
| Accounts payable and accrued liabilities | 967.9 | 967.9 | 792.5 | 792.5 | ||||||||||||
| Other current liabilities | 21.1 | 21.1 | 30.9 | 30.9 | ||||||||||||
| Fixed-rate debt (principal amount) | 2,000.0 | 1,967.0 | 2,000.0 | 1,553.2 | ||||||||||||
| Variable-rate debt | 723.3 | 723.3 | 516.7 | 516.7 | ||||||||||||
Recent Accounting Developments
The following information summarizes recently issued accounting guidance since those reported in our Annual Report on Form 10-K for the year ended December 31, 2008 that will or may affect our future financial statements.
In April 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance in the form of FASB Staff Positions (“FSPs”) in an effort to clarify certain fair value accounting rules. FSP Financial Accounting Standard (“FAS”) 157-4 (Accounting Standards Codification (“ASC”) 820), Determining Fair Value When the Volumes and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, establishes a process to determine whether a market is not active and a transaction is not distressed. FSP FAS 157-4 states that companies should look at several factors and use judgment to ascertain if a formerly active market has become inactive. When estimating fair value, FSP FAS 157-4 requires companies to place more weight on observable transactions determined to be orderly and less weight on transactions for which there is
8
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
insufficient information to determine whether the transaction is orderly (entities do not have to incur undue cost and effort in making this determination). The FASB also issued FSP FAS 107-1 and APB 28-1 (ASC 825), Interim Disclosures About Fair Value of Financial Instruments. This FSP requires that companies provide qualitative and quantitative information about fair value estimates for all financial instruments not measured on the balance sheet at fair value in each interim report. Previously, this was only an annual requirement. We adopted these FSPs effective June 30, 2009. Our adoption of this new guidance did not have a material impact on our financial statements or related disclosures.
In May 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 165 (ASC 855), Subsequent Events, which establishes general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. We adopted SFAS 165 on June 30, 2009. Our adoption of this guidance did not have any impact on our financial position, results of operations or cash flows.
In June 2009, the FASB issued SFAS No. 167 (ASC 810), Amendments to FASB Interpretation No. 46(R), which amended consolidation guidance for variable interest entities (“VIEs”) under FASB Interpretation (“FIN”) No. 46(R) (“FIN 46(R)”) (ASC 810-10) Consolidation of Variable Interest Entities. VIEs are entities whose equity investors do not have sufficient equity capital at risk such that the entity cannot finance its own activities. When a business has a controlling financial interest in a VIE, the assets, liabilities and profit or loss of that entity must be included in consolidation. A business enterprise must consolidate a VIE when that enterprise has a variable interest that will cover most of the entity’s expected losses and/or receive most of the entity’s anticipated residual return. SFAS 167, among other things, eliminates the scope exception for qualifying special-purpose entities, amends certain guidance for determining whether an entity is a VIE, expands the list of events that trigger reconsideration of whether an entity is a VIE, requires a qualitative rather than a quantitative analysis to determine the primary beneficiary of a VIE, requires continuous assessments of whether a company is the primary beneficiary of a VIE and requires enhanced disclosures about a company’s involvement with a VIE. SFAS 167 is effective for us on January 1, 2010. At June 30, 2009, we did not have any VIEs; therefore, our adoption of this new guidance is not expected to have a material impact on our consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168 (ASC 105), The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162, which establishes the ASC as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. The ASC is a reorganization of current GAAP into a topical format that eliminates the current GAAP hierarchy and establishes instead two levels of guidance — authoritative and nonauthoritative. All guidance contained in the ASC carries an equal level of authority. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS 168 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We will adopt SFAS 168 on September 30, 2009. Our adoption of this new guidance is not expected to have any impact on our financial position, results of operations or cash flows. References to specific GAAP in our consolidated financial statements after our adoption of SFAS 168 will refer exclusively to the ASC. We have elected to provide references to the ASC parenthetically in this Quarterly Report.
Subsequent Events
We have evaluated subsequent events through August 6, 2009, which is the date our Unaudited Condensed Consolidated Financial Statements and Notes are being issued.
9
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Accounting for Equity Awards
We account for equity awards in accordance with SFAS No. 123(R) (ASC 718 and 505), Share-Based Payment (“SFAS 123(R)”). Such awards were not material to our consolidated financial position, results of operations or cash flows for all periods presented. The amount of equity-based compensation allocable to us was $1.2 million and $0.8 million for the three months ended June 30, 2009 and 2008, respectively. For the six months ended June 30, 2009 and 2008, the amount of equity-based compensation allocable to us was $2.2 million and $1.2 million, respectively.
Certain key employees of EPCO participate in long-term incentive compensation plans managed by EPCO. The compensation expense we record related to equity awards is based on an allocation of the total cost of such incentive plans to EPCO. We record our pro rata share of such costs based on the percentage of time each employee spends on our business activities.
1999 Phantom Unit Retention Plan
The Texas Eastern Products Pipeline Company, LLC 1999 Phantom Unit Retention Plan (“1999 Plan”) provides for the issuance of phantom unit awards as incentives to key employees. A total of 2,800 phantom units were outstanding under the 1999 Plan at June 30, 2009, which cliff vest in January 2010. During the first quarter of 2009, 2,800 additional phantom units which were outstanding at December 31, 2008 under the 1999 Plan were forfeited. Additionally, in April 2009, 13,000 phantom units vested and $0.3 million was paid out to a participant in April 2009. At June 30, 2009 and December 31, 2008, we had accrued liability balances of $0.1 million and $0.4 million, respectively, for compensation related to the 1999 Plan.
2000 Long Term Incentive Plan
The Texas Eastern Products Pipeline Company, LLC 2000 Long Term Incentive Plan (“2000 LTIP”) provides key employees incentives to achieve improvements in our financial performance. At December 31, 2008, we had an accrued liability balance of $0.2 million for compensation related to the 2000 LTIP. On December 31, 2008, 11,300 phantom units vested and $0.2 million was paid out to participants in the first quarter of 2009. There were no remaining phantom units outstanding under the 2000 LTIP at June 30, 2009.
2005 Phantom Unit Plan
The Texas Eastern Products Pipeline Company, LLC 2005 Phantom Unit Plan (“2005 Phantom Unit Plan”) provides key employees incentives to achieve improvements in our financial performance. At December 31, 2008, we had an accrued liability balance of $0.6 million for compensation related to the 2005 Phantom Unit Plan. On December 31, 2008, a total of 36,600 phantom units vested and $0.6 million was paid out to participants in the first quarter of 2009. There were no remaining phantom units outstanding under the 2005 Phantom Unit Plan at June 30, 2009.
EPCO 2006 Long-Term Incentive Plan
The EPCO, Inc. 2006 TPP Long-Term Incentive Plan (“2006 LTIP”) provides for awards of our Units and other rights to our non-employee directors and to certain employees of EPCO and its affiliates providing services to us. Awards granted under the 2006 LTIP may be in the form of restricted units, phantom units, unit options, unit appreciation rights (“UARs”) and distribution equivalent rights. Subject to adjustment as provided in the 2006 LTIP, awards with respect to up to an aggregate of 5,000,000 Units may be granted under the 2006 LTIP. After giving effect to the issuance or forfeiture of restricted unit awards and option awards through June 30, 2009, a total of 4,161,046 additional Units could be issued under the 2006 LTIP in the future. The merger agreement governing our proposed merger with a
10
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
subsidiary of Enterprise Products Partners contains restrictions on the issuance of additional Units under the 2006 LTIP. See Note 13 for information regarding the proposed merger with Enterprise Products Partners.
Unit option awards. The following table presents unit option activity under the 2006 LTIP for the periods indicated:
| Weighted- | ||||||||||||
| Weighted- | Average | |||||||||||
| Average | Remaining | |||||||||||
| Number | Strike Price | Contractual | ||||||||||
| of Units | (dollars/Unit) | Term (in years) | ||||||||||
| Outstanding at December 31, 2008 | 355,000 | $ | 40.00 | |||||||||
| Granted (1) | 329,000 | $ | 24.84 | |||||||||
| Forfeited | (109,500 | ) | $ | 34.38 | ||||||||
Outstanding at June 30, 2009 (2) | 574,500 | $ | 32.39 | 4.78 | ||||||||
(1) The total grant date fair value of these unit option awards granted in 2009 was $1.3 million based upon the following assumptions: (i) weighted-average expected life of options of 4.8 years; (ii) weighted-average risk-free interest rate of 2.14%; (iii) weighted-average expected distribution yield on our Units of 11.31%; (iv) estimated forfeiture rate of 17.0%; and (v) weighted-average expected unit price volatility on our Units of 59.32%. (2) No unit options were exercisable as of June 30, 2009. | ||||||||||||
At June 30, 2009, the estimated total unrecognized compensation cost related to nonvested unit option awards granted under the 2006 LTIP was $1.5 million. We expect to recognize our share of this cost over a weighted-average period of 3.46 years in accordance with the ASA (see Note 13).
Restricted unit awards. The following table presents restricted unit activity under the 2006 LTIP for the periods indicated:
| Weighted- | ||||||||
| Average Grant | ||||||||
| Number | Date Fair Value | |||||||
| of Units | per Unit (1) | |||||||
| Restricted units at December 31, 2008 | 157,300 | |||||||
| Granted (2) | 140,450 | $ | 23.93 | |||||
| Vested | (5,000 | ) | $ | 34.63 | ||||
| Forfeited | (32,350 | ) | $ | 32.29 | ||||
| Restricted units at June 30, 2009 | 260,400 | |||||||
(1) Determined by dividing the aggregate grant date fair value of awards by the number of awards issued. The weighted-average grant date fair value per Unit for forfeited and vested awards is determined before an allowance for forfeitures. (2) Aggregate grant date fair value of restricted unit awards issued during 2009 was $3.4 million based on grant date market prices ranging from $28.81 to $29.83 per Unit and an estimated forfeiture rate of 17.0%. | ||||||||
The total fair value of our restricted unit awards that vested during the three months and six months ended June 30, 2009 was $0.1 million. At June 30, 2009, the estimated total unrecognized compensation cost related to restricted unit awards under the 2006 LTIP was $6.2 million. We expect to recognize our share of this cost over a weighted-average period of 3.17 years in accordance with the ASA.
Phantom unit awards. At June 30, 2009, a total of 1,647 phantom units were outstanding, which were awarded in 2007 under the 2006 LTIP to three of the then non-executive members of the board of directors. Each participant is entitled to cash distributions equal to the product of the number of phantom units granted to the participant and the per Unit cash distribution that we paid to our unitholders. Phantom unit awards to non-executive directors are accounted for in a manner similar to SFAS 123(R) liability awards.
11
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UAR awards. At June 30, 2009, a total of 392,788 UARs were outstanding, which were awarded in 2007 under the 2006 LTIP to non-executive members of the board of directors and to certain employees providing services directly to us.
| § | Non-Executive Members of the Board of Directors. At June 30, 2009, a total of 95,654 UARs, awarded to non-executive members of the board of directors under the 2006 LTIP, were outstanding at a weighted-average exercise price of $41.82 per Unit (66,225 UARs issued in 2007 at an exercise price of $45.30 per Unit to the then three non-executive members of the board of directors and 29,429 UARs issued in 2008 at an exercise price of $33.98 per Unit to a non-executive member of the board of directors in connection with his election to the board). UARs awarded to non-executive directors are accounted for in a manner similar to SFAS 123(R) liability awards. Mr. Hutchison, who was a non-executive member of the board of directors at the time of issuance of these UARs (and the phantom unit awards discussed above), became interim executive chairman in March 2009. |
| § | Employees. At June 30, 2009, a total of 297,134 UARs, awarded under the 2006 LTIP to certain employees providing services directly to us, were outstanding at an exercise price of $45.35 per Unit. UARs awarded to employees are accounted for as liability awards under SFAS 123(R) since the current intent is to settle the awards in cash. |
Employee Partnerships
In 2008, EPCO formed TEPPCO Unit, L.P. (“TEPPCO Unit”) and TEPPCO Unit II, L.P. (“TEPPCO Unit II”) (collectively, “Employee Partnerships”) to serve as long-term incentive arrangements for key employees of EPCO by providing them with a “profits interest” in the Employee Partnerships. At June 30, 2009, the estimated unrecognized compensation cost related to TEPPCO Unit and TEPPCO Unit II was $1.4 million and $1.2 million, respectively. We expect to recognize our share of these costs over a weighted-average period of 4.27 years in accordance with the ASA.
Note 4. Derivative Instruments and Hedging Activities
In the course of our normal business operations, we are exposed to certain risks, including changes in interest rates and commodity prices. In order to manage risks associated with certain identifiable and anticipated transactions, we use derivative instruments. Derivatives are financial instruments whose fair value is determined by changes in a specified benchmark such as interest rates or commodity prices. Typical derivative instruments include futures, forward contracts, swaps and other instruments with similar characteristics. Substantially all of our derivatives are used for non-trading activities.
SFAS No. 133 (ASC 815), Accounting for Derivative Instruments and Hedging Activities, requires companies to recognize derivative instruments at fair value as either assets or liabilities on the balance sheet. While the standard requires that all derivatives be reported at fair value on the balance sheet, changes in fair value of the derivative instruments will be reported in different ways depending on the nature and effectiveness of the hedging activities to which they are related. After meeting specified conditions, a qualified derivative may be specifically designated as a total or partial hedge of:
| § | Changes in the fair value of a recognized asset or liability, or an unrecognized firm commitment – In a fair value hedge, all gains and losses (of both the derivative instrument and the hedged item) are recognized in income during the period of change. |
| § | Variable cash flows of a forecasted transaction – In a cash flow hedge, the effective portion of the hedge is reported in other comprehensive income and is reclassified into earnings when the forecasted transaction affects earnings. |
12
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
An effective hedge is one in which the change in fair value of a derivative instrument can be expected to offset 80% to 125% of changes in the fair value of a hedged item at inception and throughout the life of the hedging relationship. The effective portion of a hedge is the amount by which the derivative instrument exactly offsets the change in fair value of the hedged item during the reporting period. Conversely, ineffectiveness represents the change in the fair value of the derivative instrument that does not exactly offset the change in the fair value of the hedged item. Any ineffectiveness associated with a hedge is recognized in earnings immediately. Ineffectiveness can be caused by, among other things, changes in the timing of forecasted transactions or a mismatch of terms between the derivative instrument and the hedged item.
On January 1, 2009, we adopted the disclosure requirements of SFAS No. 161 (ASC 815), Disclosures About Derivative Financial Instruments and Hedging Activities. SFAS 161 requires enhanced qualitative and quantitative disclosure requirements regarding derivative instruments. This footnote reflects the new disclosure standard.
Interest Rate Derivative Instruments
We utilize interest rate swaps, treasury locks and similar derivative instruments to manage our exposure to changes in the interest rates of certain debt agreements. This strategy is a component in controlling our cost of capital associated with such borrowings. At June 30, 2009, we had no interest rate derivative instruments outstanding.
At times, we may use treasury lock derivative instruments to hedge the underlying U.S. treasury rates related to forecasted issuances of debt. As cash flow hedges, gains or losses on these instruments are recorded in other comprehensive income and amortized to earnings using the effective interest method over the estimated term of the underlying fixed-rate debt. During March 2008, we terminated treasury locks having a combined notional value of $600.0 million and recognized an aggregate loss of $23.2 million in other comprehensive income during the first quarter of 2008. We recognized approximately $3.6 million of this loss in interest expense during the six months ended June 30, 2008 as a result of interest payments hedged under the treasury locks not occurring as forecasted.
For information regarding fair value amounts and gains and losses on interest rate derivative instruments and related hedged items, see “Tabular Presentation of Fair Value Amounts, and Gains and Losses on Derivative Instruments and Related Hedged Items” within this Note 4.
Commodity Derivative Instruments
We seek to maintain a position that is substantially balanced between crude oil purchases and related sales and future delivery obligations. The price of crude oil is subject to fluctuations in response to changes in supply, demand, general market uncertainty and a variety of additional factors that are beyond our control. In order to manage the price risk associated with crude oil, we enter into commodity derivative instruments such as forwards, basis swaps and futures contracts. The purpose of such hedging strategy is to either balance our inventory position or to lock in a profit margin.
At June 30, 2009, we had no outstanding commodity derivatives designated as hedging instruments under SFAS 133. Currently, our commodity derivative instruments do not meet the hedge accounting requirements of SFAS 133 and are accounted for as economic hedges using mark-to-market accounting. These financial instruments had a minimal impact on our earnings. The following table summarizes our outstanding commodity derivative instruments not designated as hedging instruments under SFAS 133 at June 30, 2009:
13
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Accounting | ||
| Derivative Purpose | Volume (1) | Treatment |
| Derivatives not designated as hedging instruments under SFAS 133: | ||
| Crude oil risk management activities (2) | 4.5 MMBbls | Mark-to-market |
(1) Reflects the absolute value of the derivative notional volumes. (2) Reflects the use of derivative instruments to manage risks associated with our portfolio of crude oil storage assets. These commodity derivative instruments have forward positions through March 2010. | ||
For information regarding fair value amounts and gains and losses on commodity derivative instruments and related hedged items, see “Tabular Presentation of Fair Value Amounts, and Gains and Losses on Derivative Instruments and Related Hedged Items” within this Note 4.
Credit-Risk Related Contingent Features in Derivative Instruments
We have no credit-risk related contingent features in any of our derivative instruments.
Tabular Presentation of Fair Value Amounts, and Gains and Losses on
Derivative Instruments and Related Hedged Items
The following table provides a balance sheet overview of our derivative assets and liabilities at the dates indicated:
| Asset Derivatives | Liability Derivatives | |||||||||||||||||||
| June 30, 2009 | December 31, 2008 | June 30, 2009 | December 31, 2008 | |||||||||||||||||
| Balance Sheet | Fair | Balance Sheet | Fair | Balance Sheet | Fair | Balance Sheet | Fair | |||||||||||||
| Location | Value | Location | Value | Location | Value | Location | Value | |||||||||||||
| Derivatives not designated as hedging instruments under SFAS 133 | ||||||||||||||||||||
| Commodity derivatives | Other current assets | $ | 2.7 | Other current assets | $ | 15.7 | Other current liabilities | $ | 2.3 | Other current liabilities | $ | 15.7 | ||||||||
| Total derivatives not | ||||||||||||||||||||
| designated as hedging | ||||||||||||||||||||
| instruments | $ | 2.7 | $ | 15.7 | $ | 2.3 | $ | 15.7 | ||||||||||||
The following table presents the effect of our derivative instruments designated as fair value hedges under SFAS 133 on our condensed consolidated statements of income for the periods indicated:
| Derivatives in SFAS 133 | |||||||||||||||||
| Fair Value | Gain/(Loss) Recognized in | ||||||||||||||||
| Hedging Relationships | Location | Income on Derivative | |||||||||||||||
| For the Three Months | For the Six Months | ||||||||||||||||
| Ended June 30, | Ended June 30, | ||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | ||||||||||||||
| Interest rate derivatives | Interest expense | $ | -- | $ | -- | $ | -- | $ | -- | ||||||||
| Total | $ | -- | $ | -- | $ | -- | $ | -- | |||||||||
| Derivatives in SFAS 133 | |||||||||||||||||
| Fair Value | Gain/(Loss) Recognized in | ||||||||||||||||
| Hedging Relationships | Location | Income on Hedged Item | |||||||||||||||
| For the Three Months | For the Six Months | ||||||||||||||||
| Ended June 30, | Ended June 30, | ||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | ||||||||||||||
| Interest rate derivatives | Interest expense | $ | -- | $ | -- | $ | -- | $ | -- | ||||||||
| Total | $ | -- | $ | -- | $ | -- | $ | -- | |||||||||
14
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the effect of our derivative instruments designated as cash flow hedges under SFAS 133 on our condensed consolidated statements of income for the periods indicated:
| Derivatives | ||||||||||||||||
| in SFAS 133 Cash Flow | Change in Value Recognized in OCI on | |||||||||||||||
| Hedging Relationships | Derivative (Effective Portion) | |||||||||||||||
| For the Three Months | For the Six Months | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Interest rate derivatives | $ | -- | $ | -- | $ | -- | $ | (23.2 | ) | |||||||
| Commodity derivatives | -- | (20.6 | ) | -- | (27.1 | ) | ||||||||||
| Total | $ | -- | $ | (20.6 | ) | $ | -- | $ | (50.3 | ) | ||||||
| Derivatives | Location of Gain/(Loss) | ||||||||||||||||
| in SFAS 133 Cash Flow | Reclassified from AOCI | Amount of Gain/(Loss) Reclassified from AOCI | |||||||||||||||
| Hedging Relationships | into Income (Effective Portion) | to Income (Effective Portion) | |||||||||||||||
| For the Three Months | For the Six Months | ||||||||||||||||
| Ended June 30, | Ended June 30, | ||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | ||||||||||||||
| Interest rate derivatives | Interest expense | $ | (1.4 | ) | $ | -- | $ | (2.8 | ) | $ | 0.1 | ||||||
| Commodity derivatives | Revenue | -- | (9.6 | ) | -- | (19.2 | ) | ||||||||||
| Total | $ | (1.4 | ) | $ | (9.6 | ) | $ | (2.8 | ) | $ | (19.1 | ) | |||||
| Location of Gain/(Loss) | |||||||||||||||||
| Derivatives | Recognized in Income | ||||||||||||||||
| in SFAS 133 Cash Flow | on Ineffective Portion | Amount of Gain/(Loss) Reclassified in Income | |||||||||||||||
| Hedging Relationships | of Derivative | on Ineffective Portion of Derivative | |||||||||||||||
| For the Three Months | For the Six Months | ||||||||||||||||
| Ended June 30, | Ended June 30, | ||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | ||||||||||||||
| Interest rate derivatives | Interest expense | $ | -- | $ | -- | $ | -- | $ | (3.6 | ) | |||||||
| Commodity derivatives | Revenue | -- | -- | -- | -- | ||||||||||||
| Total | $ | -- | $ | -- | $ | -- | $ | (3.6 | ) | ||||||||
Over the next twelve months, we expect to reclassify $6.0 million of accumulated other comprehensive loss attributable to settled treasury locks to earnings as an increase to interest expense.
The following table presents the effect of our derivative instruments not designated as hedging instruments under SFAS 133 on our condensed consolidated statements of income for the periods indicated:
| Derivatives Not | |||||||||||||||||
| Designated as SFAS 133 | Gain/(Loss) Recognized in | ||||||||||||||||
| Hedging Instruments | Location | Income on Derivative | |||||||||||||||
| For the Three Months | For the Six Months | ||||||||||||||||
| Ended June 30, | Ended June 30, | ||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | ||||||||||||||
| Commodity derivatives | Revenue | $ | (0.2 | ) | $ | (0.1 | ) | $ | 0.6 | $ | 0.3 | ||||||
| Total | $ | (0.2 | ) | $ | (0.1 | ) | $ | 0.6 | $ | 0.3 | |||||||
SFAS 157 – Fair Value Measurements
SFAS 157 (ASC 820) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at a specified measurement date. Our fair value estimates are based on either (i) actual market data or (ii) assumptions that other market participants would use in pricing an asset or liability, including estimates of risk. Recognized valuation
15
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
techniques employ inputs such as product prices, operating costs, discount factors and business growth rates. These inputs may be either readily observable, corroborated by market data or generally unobservable. In developing our estimates of fair value, we endeavor to utilize the best information available and apply market-based data to the extent possible. Accordingly, we utilize valuation techniques (such as the market approach) that maximize the use of observable inputs and minimize the use of unobservable inputs.
SFAS 157 established a three-tier hierarchy that classifies fair value amounts recognized or disclosed in the financial statements based on the observability of inputs used to estimate such fair values. The hierarchy considers fair value amounts based on observable inputs (Levels 1 and 2) to be more reliable and predictable than those based primarily on unobservable inputs (Level 3). At each balance sheet reporting date, we categorize our financial assets and liabilities using this hierarchy. The characteristics of fair value amounts classified within each level of the SFAS 157 hierarchy are described as follows:
| § | Level 1 fair values are based on quoted prices, which are available in active markets for identical assets or liabilities as of the measurement date. Active markets are defined as those in which transactions for identical assets or liabilities occur with sufficient frequency so as to provide pricing information on an ongoing basis (e.g., the NYSE or New York Mercantile Exchange). Level 1 primarily consists of financial assets and liabilities such as exchange-traded financial instruments, publicly-traded equity securities and U.S. government treasury securities. At June 30, 2009, we had no Level 1 financial assets and liabilities. |
| § | Level 2 fair values are based on pricing inputs other than quoted prices in active markets (as reflected in Level 1 fair values) and are either directly or indirectly observable as of the measurement date. Level 2 fair values include instruments that are valued using financial models or other appropriate valuation methodologies. Such financial models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, the time value of money, volatility factors for stocks, current market and contractual prices for the underlying instruments and other relevant economic measures. Substantially all of these assumptions are (i) observable in the marketplace throughout the full term of the instrument, (ii) can be derived from observable data or (iii) are validated by inputs other than quoted prices (e.g., interest rates and yield curves at commonly quoted intervals). Our Level 2 fair values primarily consist of commodity forward agreements transacted over-the-counter. The fair values of these derivatives are based on observable price quotes for similar products and locations. |
| § | Level 3 fair values are based on unobservable inputs. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. Unobservable inputs reflect the reporting entity’s own ideas about the assumptions that market participants would use in pricing an asset or liability (including assumptions about risk). Unobservable inputs are based on the best information available in the circumstances, which might include the reporting entity’s internally developed data. The reporting entity must not ignore information about market participant assumptions that is reasonably available without undue cost and effort. Level 3 inputs are typically used in connection with internally developed valuation methodologies where management makes its best estimate of an instrument’s fair value. Our Level 3 fair values largely consist of commodity contracts generally less than one year in term. We rely on broker quotes for these prices due to the limited observability of locational and quality-based pricing differentials. At June 30, 2009, our Level 3 financial assets were less than $0.1 million. |
The following table sets forth, by level within the fair value hierarchy, our financial assets and liabilities measured on a recurring basis at June 30, 2009. These financial assets and liabilities are
16
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value assets and liabilities, in addition to their placement within the fair value hierarchy levels.
| Level 2 | Level 3 | Total | ||||||||||
| Financial assets: | ||||||||||||
| Commodity derivative instruments | $ | 2.7 | $ | -- | $ | 2.7 | ||||||
| Total | $ | 2.7 | $ | -- | $ | 2.7 | ||||||
| Financial liabilities: | ||||||||||||
| Commodity derivative instruments | $ | 2.3 | $ | -- | $ | 2.3 | ||||||
| Total | $ | 2.3 | $ | -- | $ | 2.3 | ||||||
The following table sets forth a reconciliation of changes in the fair value of our Level 3 financial assets and liabilities for the periods indicated:
For the Six Months Ended June 30, | ||||||||
| 2009 | 2008 | |||||||
| Balance, January 1 | $ | (0.1 | ) | $ | (0.4 | ) | ||
| Total gains included in net income | 0.4 | 0.4 | ||||||
| Purchases, issuances, settlements | 0.1 | -- | ||||||
| Balance, March 31 | 0.4 | -- | ||||||
| Total losses included in net income | -- | (0.1 | ) | |||||
| Purchases, issuances, settlements | (0.4 | ) | -- | |||||
| Balance, June 30 | $ | -- | $ | (0.1 | ) | |||
We adopted the provisions of SFAS 157 that apply to nonfinancial assets and liabilities on January 1, 2009. Our adoption of this guidance had no impact on our financial position, results of operations or cash flows.
Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the fair value of an asset carried on the balance sheet by caption and by level within the SFAS 157 valuation hierarchy (as described above) at the date indicated for which a nonrecurring change in fair value has been recorded during the period:
| June 30, 2009 | Level 1 | Level 2 | Level 3 | Total Losses | ||||||||||||||||
| Property, plant and equipment | $ | 3.0 | $ | -- | $ | -- | $ | 3.0 | $ | 2.3 | ||||||||||
As a result of idling a river terminal at Helena, Arkansas, in our Downstream Segment, during the six months ended June 30, 2009, we recorded a non-cash impairment charge of $2.3 million, which is included in operating expense for the three months and six months ended June 30, 2009 (see Note 6). We estimated the fair value of the asset using appropriate valuation techniques.
17
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Inventories
Inventories are valued at the lower of cost (based on weighted-average cost method) or market. The major components of inventories were as follows at the dates indicated:
| June 30, | December 31, | |||||||
| 2009 | 2008 | |||||||
| Crude oil (1) | $ | 58.1 | $ | 32.8 | ||||
| Refined products and LPGs (2) | 17.2 | 0.4 | ||||||
| Lubrication oils and specialty chemicals | 10.2 | 11.1 | ||||||
| Materials and supplies | 10.0 | 8.6 | ||||||
| NGLs | 0.1 | -- | ||||||
| Total | $ | 95.6 | $ | 52.9 | ||||
(1) At June 30, 2009 and December 31, 2008, $57.8 million and $30.7 million, respectively, of our crude oil inventory was subject to forward sales contracts. (2) Refined products and LPGs inventory is managed on a combined basis. | ||||||||
Due to fluctuating commodity prices, we recognize lower of average cost or market (“LCM”) adjustments when the carrying value of our inventories exceeds their net realizable value. These non-cash charges are a component of costs and expenses in the period they are recognized. For the three months ended June 30, 2009 and 2008, we recognized LCM adjustments of approximately $1.1 million and $0.1 million, respectively. We recognized LCM adjustments of $2.1 million and $0.1 million for the six months ended June 30, 2009 and 2008, respectively.
Note 6. Property, Plant and Equipment
Our property, plant and equipment values and accumulated depreciation balances were as follows at the dates indicated:
| Estimated | ||||||||||||
| Useful Life | June 30, | December 31, | ||||||||||
| in Years | 2009 | 2008 | ||||||||||
| Plants and pipelines (1) | 5-40(5) | $ | 1,943.9 | $ | 1,919.7 | |||||||
| Underground and other storage facilities (2) | 5-40(6) | 315.8 | 296.8 | |||||||||
| Transportation equipment (3) | 5-10 | 13.0 | 11.3 | |||||||||
| Marine vessels (4) | 20-30 | 508.6 | 453.0 | |||||||||
| Land and right of way | 144.1 | 143.8 | ||||||||||
| Construction work in progress | 396.1 | 294.1 | ||||||||||
| Total property, plant and equipment | $ | 3,321.5 | $ | 3,118.7 | ||||||||
| Less: accumulated depreciation | 729.9 | 678.8 | ||||||||||
| Property, plant and equipment, net | $ | 2,591.6 | $ | 2,439.9 | ||||||||
(1) Plants and pipelines include refined products, LPGs, NGLs, petrochemical, crude oil and natural gas pipelines; terminal loading and unloading facilities; office furniture and equipment; buildings, laboratory and shop equipment; and related assets. (2) Underground and other storage facilities include underground product storage caverns, storage tanks and other related assets. (3) Transportation equipment includes vehicles and similar assets used in our operations. (4) $50.0 million of the increase relates to the vessels acquired from TransMontaigne Products Services Inc. (see Note 8). (5) The estimated useful lives of major components of this category are as follows: pipelines, 20-40 years (with some equipment at 5 years); terminal facilities, 10-40 years; office furniture and equipment, 5-10 years; buildings, 20-40 years; and laboratory and shop equipment, 5-40 years. (6) The estimated useful lives of major components of this category are as follows: underground storage facilities, 20-40 years (with some components at 5 years); and storage tanks, 20-30 years. | ||||||||||||
18
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes our depreciation expense and capitalized interest amounts for the periods indicated:
| For the Three Months | For the Six Months | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Depreciation expense (1) | $ | 28.4 | $ | 23.9 | $ | 53.8 | $ | 45.8 | ||||||||
| Capitalized interest (2) | 5.2 | 5.5 | 10.5 | 9.9 | ||||||||||||
(1) Depreciation expense is a component of depreciation and amortization expense as presented in our unaudited condensed statements of consolidated income. (2) Capitalized interest (included in interest expense on our unaudited condensed statements of consolidated income) increases the carrying value of the associated asset and reduces interest expense during the period it is recorded. | ||||||||||||||||
During the three months and six months ended June 30, 2009, we recorded a $2.3 million non-cash impairment charge, which is included in operating expense, related to the idling of a river terminal at Helena, Arkansas, in our Downstream Segment.
Asset Retirement Obligations
Asset retirement obligations (“AROs”) are legal obligations associated with the retirement of certain tangible long-lived assets that result from acquisitions, construction, development and/or normal operations or a combination of these factors. Our ARO liability balance at June 30, 2009 and December 31, 2008 was $1.5 million. Accretion expense was less than $0.1 million for each of the three months ended June 30, 2009 and 2008. For each of the six months ended June 30, 2009 and 2008, accretion expense was $0.1 million. Property, plant and equipment at June 30, 2009 include $0.7 million of asset retirement costs capitalized as an increase in the associated long-lived asset.
Note 7. Investments In Unconsolidated Affiliates
We own interests in related businesses that are accounted for using the equity method of accounting. These investments are identified in the following table by reporting business segment (see Note 12 for a general discussion of our business segments). The following table presents our investments in unconsolidated affiliates at the dates indicated:
| Ownership | ||||||||||||
| Percentage at | ||||||||||||
| June 30, | June 30, | December 31, | ||||||||||
| 2009 | 2009 | 2008 | ||||||||||
| Downstream Segment: | ||||||||||||
| Centennial Pipeline LLC (“Centennial”) | 50.0% | $ | 66.4 | $ | 71.8 | |||||||
| Other | 25.0% | 0.4 | 0.4 | |||||||||
| Upstream Segment: | ||||||||||||
| Seaway Crude Pipeline Company (“Seaway”) | 50.0% | 182.9 | 190.1 | |||||||||
| Texas Offshore Port System (“TOPS”) (1) | -- | -- | 35.9 | |||||||||
| Midstream Segment: | ||||||||||||
| Jonah Gas Gathering Company (“Jonah”) | 80.64% | 949.2 | 957.7 | |||||||||
| Total | $ | 1,198.9 | $ | 1,255.9 | ||||||||
(1) In January 2009, we received a $3.1 million refund of our 2008 contributions to TOPS due to a delay in the timing of the expected project spending. In February and March 2009, we then invested an additional $1.4 million in TOPS. In April 2009, we elected to dissociate from TOPS and forfeited our investment. See below for further information. | ||||||||||||
Our investments in Centennial, Seaway and Jonah included excess cost amounts totaling $73.3 million and $72.9 million at June 30, 2009 and December 31, 2008, respectively. The value assigned to our excess investment in Centennial was created upon its formation, the value assigned to our excess investment in Seaway was created upon acquisition of our ownership interest in Seaway and the value assigned to our excess investment in Jonah was created as a result of interest capitalized on the construction of Jonah’s expansion. We amortize such excess cost as a reduction in equity earnings in a manner similar
19
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
to depreciation over the life of applicable contracts or assets acquired or constructed. Amortization of excess cost amounts was $1.1 million and $1.3 million for the three months ended June 30, 2009 and 2008, respectively. For the six months ended June 30, 2009 and 2008, amortization of such excess cost amounts was $2.6 million and $2.4 million, respectively. For the remainder of 2009, amortization expense associated with our excess investments is currently estimated at $3.0 million.
In August 2008, a wholly owned subsidiary of ours, together with a subsidiary of Enterprise Products Partners and Oiltanking Holding Americas, Inc. (“Oiltanking”), formed the TOPS partnership. Effective April 16, 2009, our wholly owned subsidiary dissociated from TOPS. As a result, equity earnings and net income for the second quarter of 2009 include a non-cash charge of $34.2 million. This loss represents our cumulative investment in TOPS through the date of dissociation and reflects our capital contributions to TOPS for construction in progress amounts. We believe that the dissociation discharged our affiliate with respect to further obligations under the TOPS partnership agreement, and accordingly, us from the associated liability under the related parent guarantee; therefore, we have not recorded any amounts related to such guarantee. The wholly owned subsidiary of Enterprise Products Partners that was a partner in TOPS also dissociated from the partnership effective April 16, 2009. See Note 15 for litigation matters associated with our dissociation from TOPS.
The following table summarizes equity in income (loss) of unconsolidated affiliates by business segment for the periods indicated:
| For the Three Months | For the Six Months | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Downstream Segment | $ | (4.3 | ) | $ | (3.7 | ) | $ | (7.4 | ) | $ | (7.8 | ) | ||||
| Upstream Segment (1) | (31.3 | ) | 4.2 | (28.0 | ) | 7.2 | ||||||||||
| Midstream Segment | 23.8 | 21.9 | 49.4 | 45.6 | ||||||||||||
| Intersegment eliminations | (0.4 | ) | (1.1 | ) | (1.1 | ) | (4.0 | ) | ||||||||
| Total | $ | (12.2 | ) | $ | 21.3 | $ | 12.9 | $ | 41.0 | |||||||
| (1) 2009 periods include the non-cash charge of $34.2 million related to the dissociation from TOPS. | ||||||||||||||||
On a quarterly basis, we monitor the underlying business fundamentals of our investments in unconsolidated affiliates and test such investments for impairment when impairment indicators are present. As a result of our reviews for the second quarter of 2009, no impairment charges were required. We have the intent and ability to hold these investments, which are integral to our operations.
Summarized Financial Information of Unconsolidated Affiliates
Summarized combined income statement data by reporting segment for the periods indicated is presented in the following table (on a 100% basis):
| Summarized Income Statement Information for the Three Months Ended | ||||||||||||||||||||||||
| June 30, 2009 | June 30, 2008 | |||||||||||||||||||||||
| Operating | Net | Operating | Net | |||||||||||||||||||||
| Revenues | Income (Loss) | Income (Loss) | Revenues | Income | Income (Loss) | |||||||||||||||||||
| Downstream Segment | $ | 7.7 | $ | (2.8 | ) | $ | (5.4 | ) | $ | 10.4 | $ | 1.3 | $ | (1.5 | ) | |||||||||
| Upstream Segment | 21.8 | 10.1 | 10.0 | 27.4 | 15.3 | 15.3 | ||||||||||||||||||
| Midstream Segment | 61.2 | 29.6 | 29.6 | 60.2 | 26.9 | 27.2 | ||||||||||||||||||
| Summarized Income Statement Information for the Six Months Ended | ||||||||||||||||||||||||
| June 30, 2009 | June 30, 2008 | |||||||||||||||||||||||
| Operating | Net | Operating | Net | |||||||||||||||||||||
| Revenues | Income (Loss) | Income (Loss) | Revenues | Income | Income (Loss) | |||||||||||||||||||
| Downstream Segment | $ | 17.4 | $ | (0.6 | ) | $ | (5.8 | ) | $ | 20.0 | $ | 2.2 | $ | (3.3 | ) | |||||||||
| Upstream Segment | 41.5 | 18.8 | 18.8 | 48.0 | 25.7 | 25.7 | ||||||||||||||||||
| Midstream Segment | 120.6 | 61.4 | 61.6 | 118.4 | 56.2 | 56.6 | ||||||||||||||||||
20
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Business Combination
On June 5, 2009, we expanded our Marine Services Segment with the acquisition of 19 tow boats and 28 tank barges from TransMontaigne Product Services Inc. (“TransMontaigne”), for $50.0 million in cash. The acquired vessels provide marine vessel fueling services for cruise liners and cargo ships, referred to as bunkering, and other ship-assist services and transport fuel oil for electric generation plants. The acquisition complements our existing fleet of vessels that currently transport petroleum products along the nation’s inland waterway system and in the Gulf of Mexico. The newly acquired marine assets are generally supported by contracts that have a three to five year term and are based primarily in Miami, Florida, with additional assets located in Mobile, Alabama, and Houston, Texas. We financed the acquisition with borrowings under our revolving credit facility.
The results of operations for the TransMontaigne acquisition are included in our consolidated financial statements beginning at the date of acquisition. This acquisition was accounted for as a business combination using the acquisition method of accounting in accordance with SFAS 141(R) (ASC 805). Under SFAS 141(R), all of the assets acquired in the transaction are recognized at their acquisition-date fair values, while transaction costs associated with the transaction are expensed as incurred. Accordingly, the cost of the acquisition has been recorded as property, plant and equipment based on estimated fair values. Such fair values have been developed using recognized business valuation techniques.
On a pro forma basis, our revenues, costs and expenses, operating income, net income and earnings per Unit amounts would not have differed materially from those we actually reported for the three months and six months ended June 30, 2009 and 2008 due to the immaterial nature of our 2009 business combination transaction.
Note 9. Intangible Assets and Goodwill
Intangible Assets
The following table summarizes intangible assets by business segment being amortized at the dates indicated:
| June 30, 2009 | December 31, 2008 | |||||||||||||||||||||||
| Gross | Accum. | Carrying | Gross | Accum. | Carrying | |||||||||||||||||||
| Value | Amort. | Value | Value | Amort. | Value | |||||||||||||||||||
| Intangible assets: | ||||||||||||||||||||||||
| Downstream Segment: | ||||||||||||||||||||||||
| Transportation agreements | $ | 1.0 | $ | (0.4 | ) | $ | 0.6 | $ | 1.0 | $ | (0.4 | ) | $ | 0.6 | ||||||||||
| Other | 7.0 | (1.0 | ) | 6.0 | 5.6 | (0.8 | ) | 4.8 | ||||||||||||||||
| Subtotal | 8.0 | (1.4 | ) | 6.6 | 6.6 | (1.2 | ) | 5.4 | ||||||||||||||||
| Upstream Segment: | ||||||||||||||||||||||||
| Transportation agreements | 0.9 | (0.4 | ) | 0.5 | 0.9 | (0.4 | ) | 0.5 | ||||||||||||||||
| Other | 10.5 | (3.3 | ) | 7.2 | 10.6 | (3.0 | ) | 7.6 | ||||||||||||||||
| Subtotal | 11.4 | (3.7 | ) | 7.7 | 11.5 | (3.4 | ) | 8.1 | ||||||||||||||||
| Midstream Segment: | ||||||||||||||||||||||||
| Gathering agreements | 239.7 | (134.1 | ) | 105.6 | 239.6 | (125.8 | ) | 113.8 | ||||||||||||||||
| Fractionation agreements | 38.0 | (21.4 | ) | 16.6 | 38.0 | (20.4 | ) | 17.6 | ||||||||||||||||
| Other | 0.3 | (0.2 | ) | 0.1 | 0.3 | (0.1 | ) | 0.2 | ||||||||||||||||
| Subtotal | 278.0 | (155.7 | ) | 122.3 | 277.9 | (146.3 | ) | 131.6 | ||||||||||||||||
| Marine Services Segment: | ||||||||||||||||||||||||
| Customer relationship intangibles | 51.3 | (4.8 | ) | 46.5 | 51.3 | (3.1 | ) | 48.2 | ||||||||||||||||
| Other | 18.7 | (6.7 | ) | 12.0 | 18.7 | (4.3 | ) | 14.4 | ||||||||||||||||
| Subtotal | 70.0 | (11.5 | ) | 58.5 | 70.0 | (7.4 | ) | 62.6 | ||||||||||||||||
| Total intangible assets | $ | 367.4 | $ | (172.3 | ) | $ | 195.1 | $ | 366.0 | $ | (158.3 | ) | $ | 207.7 | ||||||||||
21
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents amortization expense of intangible assets by business segment for the periods indicated:
| For the Three Months | For the Six Months | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Downstream Segment | $ | 0.1 | $ | 0.1 | $ | 0.2 | $ | 0.2 | ||||||||
| Upstream Segment | 0.2 | 0.2 | 0.3 | 0.3 | ||||||||||||
| Midstream Segment | 4.8 | 5.4 | 9.4 | 10.4 | ||||||||||||
| Marine Services Segment | 2.0 | 2.2 | 4.1 | 3.4 | ||||||||||||
| Total | $ | 7.1 | $ | 7.9 | $ | 14.0 | $ | 14.3 | ||||||||
Based on information currently available, we estimate that amortization expense will approximate $13.1 million for the last six months of 2009, $24.6 million for 2010, $22.7 million for 2011, $17.2 million for 2012 and $15.6 million for 2013.
Goodwill
The following table presents the carrying amount of goodwill by business segment at the dates indicated:
| June 30, | December 31, | |||||||
| 2009 | 2008 | |||||||
| Downstream Segment | $ | 1.3 | $ | 1.3 | ||||
| Upstream Segment | 14.9 | 14.9 | ||||||
| Marine Services Segment | 90.4 | 90.4 | ||||||
| Total | $ | 106.6 | $ | 106.6 | ||||
Note 10. Debt Obligations
The following table summarizes the principal amounts outstanding under all of our debt instruments at the dates indicated:
| June 30, | December 31, | |||||||
| 2009 | 2008 | |||||||
| Senior debt obligations: (1) | ||||||||
| Revolving Credit Facility, due December 2012 (2) | $ | 723.3 | $ | 516.7 | ||||
| 7.625% Senior Notes, due February 2012 | 500.0 | 500.0 | ||||||
| 6.125% Senior Notes, due February 2013 | 200.0 | 200.0 | ||||||
| 5.90% Senior Notes, due April 2013 | 250.0 | 250.0 | ||||||
| 6.65% Senior Notes, due April 2018 | 350.0 | 350.0 | ||||||
| 7.55% Senior Notes, due April 2038 | 400.0 | 400.0 | ||||||
| Total principal amount of long-term senior debt obligations | 2,423.3 | 2,216.7 | ||||||
| 7.000% Junior Subordinated Notes, due June 2067 (1) | 300.0 | 300.0 | ||||||
| Total principal amount of long-term debt obligations | 2,723.3 | 2,516.7 | ||||||
| Adjustment to carrying value associated with hedges of fair value and | ||||||||
| unamortized discounts (3) | 10.5 | 12.9 | ||||||
| Total long-term debt obligations | 2,733.8 | 2,529.6 | ||||||
| Total Debt Instruments (3) | $ | 2,733.8 | $ | 2,529.6 | ||||
(1) TE Products, TCTM, TEPPCO Midstream and Val Verde Gas Gathering Company, L.P. (“Val Verde”) (collectively, the “Guarantor Subsidiaries”) have issued full, unconditional, joint and several guarantees of our senior notes, junior subordinated notes and revolving credit facility (“Revolving Credit Facility”). (2) The weighted-average interest rate paid on our variable rate Revolving Credit Facility at June 30, 2009 was 0.92%. (3) From time to time we enter into interest rate swap agreements to hedge our exposure to changes in the fair value on a portion of the debt obligations presented above (see Note 4). At June 30, 2009 and December 31, 2008, amount includes $5.0 million and $5.2 million of unamortized discounts, respectively, and $15.5 million and $18.1 million, respectively, related to fair value hedges. | ||||||||
22
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Except for routine fluctuations in our unsecured Revolving Credit Facility, there have been no material changes in the terms of our debt obligations since those reported in our Annual Report on Form 10-K for the year ended December 31, 2008.
During September 2008, Lehman Brothers Bank, FSB (“Lehman”), which had a 4.05% participation in our Revolving Credit Facility, stopped funding its commitment following the bankruptcy filing of its parent entity. Assuming that future fundings are not received for the Lehman percentage commitment, aggregate available capacity would be reduced by approximately $28.9 million. At June 30, 2009, our available borrowing capacity under the Revolving Credit Facility was approximately $197.8 million.
See Note 18 for a subsequent event regarding a loan agreement we entered into with Enterprise Products Partners.
Covenants
We were in compliance with the covenants of our long-term debt obligations at June 30, 2009.
Debt Obligations of Unconsolidated Affiliates
We have one unconsolidated affiliate, Centennial, with long-term debt obligations. The following table shows the total debt of Centennial at June 30, 2009 (on a 100% basis) and the corresponding scheduled maturities of such debt.
| Our | Scheduled Maturities of Debt | |||||||||||||||||||||||||||||||
| Ownership | After | |||||||||||||||||||||||||||||||
| Interest | Total | 2009 | 2010 | 2011 | 2012 | 2013 | 2013 | |||||||||||||||||||||||||
| Centennial | 50% | $ | 124.8 | $ | 4.8 | $ | 9.1 | $ | 9.0 | $ | 8.9 | $ | 8.6 | $ | 84.4 | |||||||||||||||||
At June 30, 2009 and December 31, 2008, Centennial’s debt obligations consisted of $124.8 million and $129.9 million, respectively, borrowed under a master shelf loan agreement. Borrowings under the master shelf agreement mature in May 2024 and are collateralized by substantially all of Centennial’s assets and severally guaranteed by Centennial’s owners (see Note 15).
There have been no material changes in the terms of the debt obligations of Centennial since those reported in our Annual Report on Form 10-K for the year ended December 31, 2008.
Note 11. Partners’ Capital and Distributions
Our Units represent limited partner interests, which give the holders thereof the right to participate in distributions and to exercise the other rights or privileges available to them under our partnership agreement (“Partnership Agreement”). We are managed by our General Partner.
In accordance with the Partnership Agreement, capital accounts are maintained for our General Partner and limited partners. The capital account provisions of our Partnership Agreement incorporate principles established for U.S. federal income tax purposes and are not comparable to the equity accounts reflected under GAAP in our consolidated financial statements. In connection with the amendment of our Partnership Agreement in December 2006, the General Partner’s obligation to make capital contributions to maintain its 2% capital account was eliminated.
Our Partnership Agreement sets forth the calculation to be used in determining the amount and priority of cash distributions that our limited partners and General Partner will receive. Net income reflected under GAAP in our financial statements is allocated between the General Partner and the limited
23
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
partners in the same proportion as aggregate cash distributions made to the General Partner and the limited partners during the period. Net income determined under our Partnership Agreement, however, incorporates principles established for U.S. federal income tax purposes and is not comparable to net income reflected under GAAP in our financial statements.
Registration Statements
In general, the Partnership Agreement authorizes us to issue an unlimited number of additional limited partner interests and other equity securities for such consideration and on such terms and conditions as may be established by our General Partner in its sole discretion (subject, under certain circumstances, to the approval of our unitholders).
We have a universal shelf registration statement on file with the SEC that allows us to issue an unlimited amount of debt and equity securities.
We also have a registration statement on file with the SEC authorizing the issuance of up to 10,000,000 Units in connection with our distribution reinvestment plan (“DRIP”). A total of 533,936 Units have been issued under this registration statement from inception of the DRIP through June 30, 2009. See Note 18 for information regarding the suspension of the DRIP.
In addition, we have a registration statement on file related to our employee unit purchase plan (“EUPP”), under which we can issue up to 1,000,000 Units. A total of 43,506 Units have been issued to employees under this plan from inception of the EUPP through June 30, 2009. See Note 18 for information regarding the suspension of the EUPP.
During the six months ended June 30, 2009, a total of 131,605 Units were issued in connection with the DRIP and the EUPP. Total net proceeds received during the six months ended June 30, 2009 from these Unit offerings was $3.3 million.
Summary of Changes in Outstanding Units
The following table summarizes changes in our outstanding units since December 31, 2008:
| Limited | |||||
| Partner | Restricted | Treasury | |||
| Units | Units | Units | Total | ||
| Balance, December 31, 2008 | 104,547,561 | 157,300 | -- | 104,704,861 | |
| Units issued in connection with DRIP | 115,703 | -- | -- | 115,703 | |
| Units issued in connection with EUPP | 15,902 | -- | -- | 15,902 | |
| Issuance of restricted units under 2006 LTIP | -- | 140,450 | -- | 140,450 | |
| Conversion of restricted units to Units | 5,000 | (5,000) | -- | -- | |
| Acquisition of treasury units | (1,562) | -- | 1,562 | -- | |
| Cancellation of treasury units | -- | -- | (1,562) | (1,562) | |
| Forfeiture of restricted units | -- | (32,350) | -- | (32,350) | |
| Balance, June 30, 2009 | 104,682,604 | 260,400 | -- | 104,943,004 | |
During the six months ended June 30, 2009, 5,000 restricted unit awards vested and were converted into Units. Of this amount, 1,562 were sold back to us by an employee to cover related withholding tax requirements. The total cost of these treasury units were approximately $0.1 million, which was allocated to our limited partners. Immediately upon acquisition, we cancelled such treasury units.
24
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarterly Distributions of Available Cash
We make quarterly cash distributions of all of our available cash, generally defined in our Partnership Agreement as consolidated cash receipts less consolidated cash disbursements and cash reserves established by the General Partner in its reasonable discretion (“Available Cash”). Pursuant to the Partnership Agreement, the General Partner receives incremental incentive cash distributions when unitholders’ cash distributions exceed certain target thresholds.
The following table reflects the allocation of total distributions paid during the periods indicated:
For the Six Months Ended June 30, | ||||||||
| 2009 | 2008 | |||||||
| Limited Partner Units | $ | 151.8 | $ | 129.8 | ||||
| General Partner Ownership Interest | 3.1 | 2.6 | ||||||
| General Partner Incentive | 27.9 | 23.3 | ||||||
| Total Cash Distributions Paid | $ | 182.8 | $ | 155.7 | ||||
| Total Cash Distributions Paid Per Unit | $ | 1.450 | $ | 1.405 | ||||
Our quarterly cash distributions for 2009 are presented in the following table:
| Distribution | Record | Payment | ||||
| per Unit | Date | Date | ||||
| 1st Quarter 2009 | $ | 0.725 | Apr. 30, 2009 | May 7, 2009 | ||
| 2nd Quarter 2009 (1) | $ | 0.725 | Jul. 31, 2009 | Aug. 7, 2009 | ||
(1) The second quarter 2009 cash distribution will total approximately $91.6 million. | ||||||
General Partner’s Interest
At June 30, 2009 and December 31, 2008, we had deficit balances of $126.3 million and $110.3 million, respectively, in our General Partner’s equity account. These negative balances do not represent assets to us and do not represent obligations of the General Partner to contribute cash or other property to us. According to the Partnership Agreement, in the event of our dissolution, after satisfying our liabilities, our remaining assets would be divided among our limited partners and the General Partner generally in the same proportion as Available Cash but calculated on a cumulative basis over the life of the Partnership. If a deficit balance still remains in the General Partner’s equity account after all allocations are made between the partners, the General Partner would not be required to make whole any such deficit.
Accumulated Other Comprehensive Loss
Our accumulated other comprehensive loss balance consisted of losses of $43.0 million and $45.8 million related to interest rate and treasury lock derivative instruments at June 30, 2009 and December 31, 2008, respectively.
25
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Business Segments
We have four reporting segments:
| § | Our Downstream Segment, which is engaged in the pipeline transportation, marketing and storage of refined products, LPGs and petrochemicals; |
| § | Our Upstream Segment, which is engaged in the gathering, pipeline transportation, marketing and storage of crude oil, distribution of lubrication oils and specialty chemicals and fuel transportation services; |
| § | Our Midstream Segment, which is engaged in the gathering of natural gas, fractionation of NGLs and pipeline transportation of NGLs; and |
| § | Our Marine Services Segment, which is engaged in the marine transportation of petroleum products and provision of marine vessel fueling and other ship-assist services. |
The following table presents our measurement of earnings before interest expense for the periods indicated:
| For the Three Months | For the Six Months | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Total operating revenues | $ | 1,913.2 | $ | 4,180.5 | $ | 3,370.8 | $ | 6,989.0 | ||||||||
| Less: Total costs and expenses | 1,857.3 | 4,121.2 | 3,229.2 | 6,846.2 | ||||||||||||
| Operating income | 55.9 | 59.3 | 141.6 | 142.8 | ||||||||||||
| Add: Equity in income (loss) of unconsolidated affiliates | (12.2 | ) | 21.3 | 12.9 | 41.0 | |||||||||||
| Other, net | 0.7 | 1.1 | 1.0 | 1.4 | ||||||||||||
| Earnings before interest expense and provision for income taxes | $ | 44.4 | $ | 81.7 | $ | 155.5 | $ | 185.2 | ||||||||
A reconciliation of our earnings before interest expense and provision for income taxes to net income for the periods indicated is as follows:
| For the Three Months | For the Six Months | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Earnings before interest expense and provision for income taxes | $ | 44.4 | $ | 81.7 | $ | 155.5 | $ | 185.2 | ||||||||
| Interest expense | (32.3 | ) | (33.0 | ) | (64.4 | ) | (71.6 | ) | ||||||||
| Income before provision for income taxes | 12.1 | 48.7 | 91.1 | 113.6 | ||||||||||||
| Provision for income taxes | (0.9 | ) | (1.0 | ) | (1.7 | ) | (1.8 | ) | ||||||||
| Net income | $ | 11.2 | $ | 47.7 | $ | 89.4 | $ | 111.8 | ||||||||
Amounts indicated in the following table as “Partnership and Other” for income and expense items (including operating income) relate primarily to intersegment eliminations from activities among our reporting segments. Amounts indicated in the following table as “Partnership and Other” for assets and capital expenditures include the elimination of intersegment related party receivables and investment balances among our reporting segments and assets that we hold that have not been allocated to any of our reporting segments (including such items as corporate furniture and fixtures, vehicles, computer hardware and software, prepaid insurance and unamortized debt issuance costs on debt issued at the Partnership level).
26
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table includes information by segment, together with reconciliations to our consolidated totals, for the periods indicated:
| Reportable Segments | ||||||||||||||||||||||||
| Marine | ||||||||||||||||||||||||
| Downstream | Upstream | Midstream | Services | Partnership | ||||||||||||||||||||
| Segment | Segment | Segment | Segment | and Other | Consolidated | |||||||||||||||||||
| Revenues from third parties: | ||||||||||||||||||||||||
| Three months ended June 30, 2009 | $ | 79.0 | $ | 1,751.4 | $ | 27.6 | $ | 43.7 | $ | -- | $ | 1,901.7 | ||||||||||||
| Three months ended June 30, 2008 | 75.1 | 4,025.2 | 27.2 | 48.1 | -- | 4,175.6 | ||||||||||||||||||
| Six months ended June 30, 2009 | 155.6 | 3,047.5 | 52.8 | 80.6 | -- | 3,336.5 | ||||||||||||||||||
| Six months ended June 30, 2008 | 169.7 | 6,680.3 | 53.8 | 73.6 | -- | 6,977.4 | ||||||||||||||||||
| Revenues from related parties: | ||||||||||||||||||||||||
| Three months ended June 30, 2009 | 7.9 | 0.2 | 3.5 | -- | (0.1 | ) | 11.5 | |||||||||||||||||
| Three months ended June 30, 2008 | 1.3 | 0.2 | 3.4 | -- | -- | 4.9 | ||||||||||||||||||
| Six months ended June 30, 2009 | 26.8 | 0.3 | 7.3 | -- | (0.1 | ) | 34.3 | |||||||||||||||||
| Six months ended June 30, 2008 | 4.4 | 0.4 | 6.9 | -- | (0.1 | ) | 11.6 | |||||||||||||||||
| Total revenues: | ||||||||||||||||||||||||
| Three months ended June 30, 2009 | 86.9 | 1,751.6 | 31.1 | 43.7 | (0.1 | ) | 1,913.2 | |||||||||||||||||
| Three months ended June 30, 2008 | 76.4 | 4,025.4 | 30.6 | 48.1 | -- | 4,180.5 | ||||||||||||||||||
| Six months ended June 30, 2009 | 182.4 | 3,047.8 | 60.1 | 80.6 | (0.1 | ) | 3,370.8 | |||||||||||||||||
| Six months ended June 30, 2008 | 174.1 | 6,680.7 | 60.7 | 73.6 | (0.1 | ) | 6,989.0 | |||||||||||||||||
| Depreciation and amortization: | ||||||||||||||||||||||||
| Three months ended June 30, 2009 | 13.3 | 6.7 | 10.3 | 6.5 | -- | 36.8 | ||||||||||||||||||
| Three months ended June 30, 2008 | 10.5 | 5.0 | 10.0 | 6.4 | -- | 31.9 | ||||||||||||||||||
| Six months ended June 30, 2009 | 24.8 | 12.3 | 19.8 | 12.9 | -- | 69.8 | ||||||||||||||||||
| Six months ended June 30, 2008 | 20.7 | 9.8 | 19.6 | 10.1 | -- | 60.2 | ||||||||||||||||||
| Operating income: | ||||||||||||||||||||||||
| Three months ended June 30, 2009 | 13.5 | 29.9 | 3.8 | 8.3 | 0.4 | 55.9 | ||||||||||||||||||
| Three months ended June 30, 2008 | 15.7 | 25.6 | 8.3 | 8.6 | 1.1 | 59.3 | ||||||||||||||||||
| Six months ended June 30, 2009 | 47.9 | 70.8 | 8.3 | 13.5 | 1.1 | 141.6 | ||||||||||||||||||
| Six months ended June 30, 2008 | 52.0 | 54.9 | 16.7 | 15.2 | 4.0 | 142.8 | ||||||||||||||||||
| Equity in income (loss) of unconsolidated affiliates: | ||||||||||||||||||||||||
| Three months ended June 30, 2009 | (4.3 | ) | (31.3 | ) | 23.8 | -- | (0.4 | ) | (12.2 | ) | ||||||||||||||
| Three months ended June 30, 2008 | (3.7 | ) | 4.2 | 21.9 | -- | (1.1 | ) | 21.3 | ||||||||||||||||
| Six months ended June 30, 2009 | (7.4 | ) | (28.0 | ) | 49.4 | -- | (1.1 | ) | 12.9 | |||||||||||||||
| Six months ended June 30, 2008 | (7.8 | ) | 7.2 | 45.6 | -- | (4.0 | ) | 41.0 | ||||||||||||||||
| Earnings before interest expense and provision for income taxes: | ||||||||||||||||||||||||
| Three months ended June 30, 2009 | 9.4 | (0.9 | ) | 27.6 | 8.3 | -- | 44.4 | |||||||||||||||||
| Three months ended June 30, 2008 | 12.4 | 30.4 | 30.3 | 8.6 | -- | 81.7 | ||||||||||||||||||
| Six months ended June 30, 2009 | 41.0 | 43.3 | 57.7 | 13.5 | -- | 155.5 | ||||||||||||||||||
| Six months ended June 30, 2008 | 44.8 | 62.7 | 62.5 | 15.2 | -- | 185.2 | ||||||||||||||||||
| Capital expenditures: | ||||||||||||||||||||||||
| Six months ended June 30, 2009 | 120.7 | 16.5 | 7.3 | 18.3 | 1.5 | 164.3 | ||||||||||||||||||
| Year ended December 31, 2008 | 209.8 | 33.4 | 5.2 | 43.6 | 8.5 | 300.5 | ||||||||||||||||||
| Segment assets: | ||||||||||||||||||||||||
| At June 30, 2009 | 1,417.9 | 1,697.8 | 1,517.8 | 703.1 | 18.3 | 5,354.9 | ||||||||||||||||||
| At December 31, 2008 | 1,320.9 | 1,586.3 | 1,529.1 | 653.3 | (39.8 | ) | 5,049.8 | |||||||||||||||||
| Investments in unconsolidated affiliates: | ||||||||||||||||||||||||
| At June 30, 2009 | 58.1 | 182.9 | 949.2 | -- | 8.7 | 1,198.9 | ||||||||||||||||||
| At December 31, 2008 | 63.2 | 226.0 | 957.7 | -- | 9.0 | 1,255.9 | ||||||||||||||||||
| Intangible assets, net: | ||||||||||||||||||||||||
| At June 30, 2009 | 6.6 | 7.7 | 122.3 | 58.5 | -- | 195.1 | ||||||||||||||||||
| At December 31, 2008 | 5.4 | 8.1 | 131.6 | 62.6 | -- | 207.7 | ||||||||||||||||||
| Goodwill: | ||||||||||||||||||||||||
| At June 30, 2009 | 1.3 | 14.9 | -- | 90.4 | -- | 106.6 | ||||||||||||||||||
| At December 31, 2008 | 1.3 | 14.9 | -- | 90.4 | -- | 106.6 | ||||||||||||||||||
27
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Related Party Transactions
The following table summarizes related party transactions for the periods indicated:
| For the Three Months | For the Six Months | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Revenues from EPCO and affiliates: | ||||||||||||||||
| Sales of petroleum products (1) | $ | 0.2 | $ | 0.3 | $ | 0.3 | $ | 0.9 | ||||||||
| Transportation – NGLs (2) | 3.5 | 3.4 | 7.3 | 6.8 | ||||||||||||
| Transportation – LPGs (3) | 1.5 | 1.0 | 6.4 | 3.3 | ||||||||||||
| Other operating revenues (4) | 6.3 | 0.2 | 20.3 | 0.6 | ||||||||||||
| Related party revenues | $ | 11.5 | $ | 4.9 | $ | 34.3 | $ | 11.6 | ||||||||
| Costs and Expenses from EPCO and affiliates: | ||||||||||||||||
| Purchases of petroleum products (5) | $ | 45.2 | $ | 30.5 | $ | 71.9 | $ | 50.2 | ||||||||
| Operating expense (6) | 29.5 | 26.7 | 58.1 | 48.2 | ||||||||||||
| General and administrative (7) | 7.4 | 8.0 | 15.5 | 16.8 | ||||||||||||
| Costs and Expenses from unconsolidated affiliates: | ||||||||||||||||
| Purchases of petroleum products (8) | 0.7 | 2.0 | -- | 3.5 | ||||||||||||
| Operating expense (9) | 0.6 | 1.6 | 2.2 | 3.9 | ||||||||||||
| Costs and Expenses from Cenac and affiliates: | ||||||||||||||||
| Operating expense (10) | 13.6 | 9.8 | 27.0 | 17.2 | ||||||||||||
| General and administrative (11) | 0.5 | 0.8 | 1.6 | 1.3 | ||||||||||||
| Related party costs and expenses | $ | 97.5 | $ | 79.4 | $ | 176.3 | $ | 141.1 | ||||||||
(1) Includes sales from Lubrication Services, LLC (“LSI”) to Enterprise Products Partners and certain of its subsidiaries. (2) Includes revenues from NGL transportation on the Chaparral Pipeline Company, LLC and Quanah Pipeline Company, LLC (collectively referred to as “Chaparral” or “Chaparral NGL system”) and Panola Pipeline Company, LLC (“Panola Pipeline”) NGL pipelines from Enterprise Products Partners and certain of its subsidiaries. (3) Includes revenues from LPG transportation on the TE Products pipeline from Enterprise Products Partners and certain of its subsidiaries. (4) Includes sales of product inventory from TE Products to Enterprise Products Partners and other operating revenues on the TE Products pipeline from Enterprise Products Partners and certain of its subsidiaries. (5) Includes TEPPCO Crude Oil, LLC (“TCO”) purchases of petroleum products of $35.2 million and $25.9 million for the three months ended June 30, 2009 and 2008, respectively, from Enterprise Products Partners and certain of its subsidiaries and Energy Transfer Equity, L.P. and certain of its subsidiaries. For the six months ended June 30, 2009 and 2008, such amounts were $55.8 million and $41.5 million, respectively. (6) Includes operating payroll, payroll related expenses and other operating expenses, including reimbursements related to employee benefits and employee benefit plans, incurred by EPCO in managing us and our subsidiaries in accordance with the ASA and expenses related to Chaparral’s use of transportation services of a subsidiary of Enterprise Products Partners. Also includes insurance expense for the three months ended June 30, 2009 and 2008, of $1.9 million and $2.2 million, respectively, related to premiums paid by EPCO on our behalf. For the six months ended June 30, 2009 and 2008, such amounts were $5.1 million and $5.2 million, respectively. The majority of our insurance coverage, including property, liability, business interruption, auto and directors’ and officers’ liability insurance, is obtained through EPCO. (7) Includes administrative payroll, payroll related expenses and other administrative expenses, including reimbursements related to employee benefits and employee benefit plans, incurred by EPCO in managing and operating us and our subsidiaries in accordance with the ASA. (8) Includes TCO purchases of petroleum products from Jonah and Seaway and pipeline transportation expense from Seaway. (9) Includes rental expense and other operating expense. (10) Includes reimbursement for operating payroll, payroll related expenses, certain repairs and maintenance expenses and insurance premiums on our equipment under the transitional operating agreement with Cenac Towing Co., Inc., Cenac Offshore, L.L.C. and Mr. Arlen B. Cenac, Jr. (collectively, "Cenac") pursuant to which, our fleet of acquired tow boats and tank barges (including those acquired from Horizon Maritime, L.L.C. (“Horizon”) and TransMontaigne) are operated by employees of Cenac for a period of up to two years following the Cenac acquisition. See Note 18 for information regarding the termination of the transitional operating agreement. (11) Includes reimbursement for administrative payroll and payroll related expenses, as well as payment of a $42 thousand monthly service fee and a 5% overhead fee charged on direct costs incurred by Cenac to operate the marine assets in accordance with the transitional operating agreement. | ||||||||||||||||
28
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes our related party receivable and payable amounts at the dates indicated:
| June 30, | December 31, | |||||||
| 2009 | 2008 | |||||||
| Accounts receivable, related parties (1) | $ | 10.7 | $ | 15.8 | ||||
| Accounts payable, related parties (2) | 40.9 | 17.2 | ||||||
(1) Relates to sales and transportation services provided to Enterprise Products Partners and certain of its subsidiaries and EPCO and certain of its affiliates and direct payroll, payroll related costs and other operational expenses charged to unconsolidated affiliates. (2) Relates to direct payroll, payroll related costs and other operational related charges from Enterprise Products Partners and certain of its subsidiaries and EPCO and certain of its affiliates, transportation and other services provided by unconsolidated affiliates, advances from Seaway for operating expenses and $3.0 million related to operational related charges from Cenac. | ||||||||
As an affiliate of EPCO and other companies controlled by Mr. Duncan, our transactions and agreements with them are not necessarily on an arm’s length basis. As a result, we cannot provide assurance that the terms and provisions of such transactions or agreements are at least as favorable to us as we could have obtained from unaffiliated third parties.
Relationship with EPCO and affiliates
We have an extensive and ongoing relationship with EPCO and its affiliates, which include the following significant entities that are not a part of our consolidated group of companies:
| § | EPCO and its privately-held affiliates; |
| § | Texas Eastern Products Pipeline Company, LLC, our General Partner; |
| § | Enterprise GP Holdings, which owns and controls our General Partner; |
| § | Enterprise Products Partners, which is controlled by affiliates of EPCO, including Enterprise GP Holdings; |
| § | Duncan Energy Partners, which is controlled by affiliates of EPCO; |
| § | Enterprise Gas Processing LLC, which is controlled by affiliates of EPCO and is our joint venture partner in Jonah; and |
| § | the Employee Partnerships, which are controlled by EPCO (see Note 3). |
See Note 18 for a subsequent event regarding a loan agreement we entered into with Enterprise Products Partners.
Dan L. Duncan directly owns and controls EPCO and, through Dan Duncan LLC, owns and controls EPE Holdings, LLC, the general partner of Enterprise GP Holdings. Enterprise GP Holdings owns all of the membership interests of our General Partner. The principal business activity of our General Partner is to act as our managing partner. The executive officers of our General Partner are employees of EPCO (see Note 1).
We and our General Partner are both separate legal entities apart from each other and apart from EPCO and its other affiliates, with assets and liabilities that are separate from those of EPCO and its other affiliates. EPCO and its consolidated privately-held affiliates depend on the cash distributions they receive from our General Partner and other investments to fund their operations and to meet their debt obligations. We paid cash distributions to our General Partner of $31.0 million and $25.9 million during the six months ended June 30, 2009 and 2008, respectively.
The limited partner interests in us that are owned or controlled by EPCO and certain of its affiliates, other than those interests owned by Dan Duncan LLC and certain trusts affiliated with Dan L. Duncan, are pledged as security under the credit facility of a privately-held affiliate of EPCO. All of the membership interests in our General Partner and the limited partner interests in us that are owned or
29
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
controlled by Enterprise GP Holdings are pledged as security under its credit facility. If Enterprise GP Holdings were to default under its credit facility, its lender banks could own our General Partner.
In August 2008, we, together with Enterprise Products Partners and Oiltanking, announced the formation of TOPS. On April 16, 2009, we, along with a subsidiary of Enterprise Products Partners, dissociated ourselves from TOPS (see Note 7).
EPCO ASA. We have no employees. We are managed by our General Partner, and all of our management, administrative and operating functions are performed by employees of EPCO, pursuant to the ASA or by other service providers. We, Enterprise Products Partners, Duncan Energy Partners, Enterprise GP Holdings and our respective general partners are among the parties to the ASA. The Audit, Conflicts and Governance Committee (“ACG Committee”) of each general partner has approved the ASA.
Under the ASA, we reimburse EPCO for all costs and expenses it incurs in providing management, administrative and operating services for us, including compensation of employees (i.e., salaries, medical benefits and retirement benefits) (see Note 1). Since the vast majority of such expenses are charged to us on an actual basis (i.e., no mark-up or subsidy is charged or received by EPCO), we believe that such expenses are representative of what the amounts would have been on a standalone basis. With respect to allocated costs, we believe that the proportional direct allocation method employed by EPCO is reasonable and reflective of the estimated level of costs we would have incurred on a standalone basis.
On January 30, 2009, we entered into the Fifth Amended and Restated ASA, which amended the previous ASA to provide for the cash reimbursement to EPCO by us of distributions of cash or securities, if any, made by TEPPCO Unit II to its Class B limited partner, Mr. Jerry Thompson, our chief executive officer and an employee of EPCO. The Fifth Amended and Restated ASA also extends the term of EPCO’s service obligations from December 2010 to December 2013.
Proposed Merger with Enterprise Products Partners. On June 28, 2009, we and our General Partner entered into definitive merger agreements with Enterprise Products Partners, EPGP, and two of its subsidiaries. Under the terms of the definitive agreements, we and our General Partner would become wholly owned subsidiaries of Enterprise Products Partners, and each of our outstanding Units, other than 3,645,509 of our Units owned by a privately-held affiliate of EPCO, would be cancelled and converted into the right to receive 1.24 Enterprise Products Partners common units. The 3,645,509 Units owned by a privately-held affiliate of EPCO would be converted, based on the 1.24 exchange ratio, into the right to receive 4,520,431 of Enterprise Products Partners Class B units (“Class B Units”). The Class B Units would not be entitled to regular quarterly cash distributions of Enterprise Products Partners for sixteen quarters following the closing of the merger and, except for the payment of distributions, would have the same rights and privileges as Enterprise Products Partners common units. The Class B Units would convert automatically into the same number of Enterprise Products Partners common units on the date immediately following the payment date for the sixteenth quarterly distribution following the closing of the merger. No fractional Enterprise Products Partners common units would be issued in the proposed merger, and our unitholders would, instead, receive cash in lieu of fractional Enterprise Products Partners common units, if any.
Under the terms of the definitive agreements, Enterprise GP Holdings would receive 1,331,681 common units of Enterprise Products Partners and an increase in the capital account of EPGP to maintain its 2% general partner interest in Enterprise Products Partners as consideration for 100% of the membership interests of our General Partner.
A Special Committee of the ACG Committee of our General Partner unanimously determined that the merger is fair and reasonable to us and our unaffiliated unitholders and recommended that the merger be approved by our unaffiliated unitholders, the ACG Committee of our General Partner and our General
30
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Partner’s board of directors. Based upon such determination and recommendation, the ACG Committee of our General Partner unanimously determined that the merger is fair and reasonable to us and our unaffiliated unitholders and approved the merger, such approval constituting “Special Approval” under our Partnership Agreement. The ACG Committee of our General Partner also recommended that our General Partner’s board of directors approve the merger. Based on the Special Committee’s determination and recommendation, as well as the ACG Committee’s determination, Special Approval and recommendation, our General Partner’s board of directors unanimously approved the merger and recommended that our unaffiliated unitholders vote in favor of the merger proposal. In addition, the ACG Committee of the general partner of each of Enterprise Products Partners and Enterprise GP Holdings also approved the transaction.
Completion of the proposed merger is subject to the approval of holders of at least a majority of our outstanding Units. In addition, pursuant to the merger agreement providing for the merger of our Partnership, the number of votes cast in favor of the merger agreement by our unitholders (excluding certain unitholders affiliated with EPCO and other specified officers and directors of our General Partner, Enterprise GP Holdings and Enterprise Products Partners) must exceed the votes cast against the merger agreement by such unitholders. Affiliates of EPCO, including Enterprise GP Holdings, have executed a support agreement with Enterprise Products Partners in which they have agreed to vote their Units in favor of the merger agreement. The closing is also subject to customary regulatory approvals, including that under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Subject to the receipt of regulatory and unitholder approvals, completion of the proposed merger is expected to occur during the fourth quarter of 2009. See Note 15 for information regarding litigation matters associated with the proposed merger.
The merger agreement providing for the merger of our Partnership contains provisions granting both us and Enterprise Products Partners the right to terminate the agreement for certain reasons, including, among others, (i) if our merger into its subsidiary has not occurred on or before December 31, 2009, and (ii) our failure to obtain unitholder approval as described above.
We incurred $6.8 million of merger-related expenses during the second quarter of 2009 that are reflected as a component of general and administrative costs.
Jonah Joint Venture. Enterprise Products Partners (through an affiliate) is our joint venture partner in Jonah, the partnership through which we have owned our interest in the system serving the Jonah and Pinedale fields. Through June 30, 2009, we have reimbursed Enterprise Products Partners $308.3 million ($1.8 million in 2009, $44.9 million in 2008, $152.2 million in 2007 and $109.4 million in 2006) for our share of the Phase V cost incurred by it (including its cost of capital incurred prior to the formation of the joint venture of $1.3 million). At June 30, 2009 and December 31, 2008, we had payables to Enterprise Products Partners for costs incurred of less than $0.1 million and $1.0 million, respectively. At June 30, 2009 and December 31, 2008, we had receivables from Jonah of $9.2 million and $4.7 million, respectively, for operating expenses. During the six months ended June 30, 2009 and 2008, we received distributions from Jonah of $76.0 million and $75.9 million, respectively. During each of the six months ended June 30, 2009 and 2008, Jonah paid distributions of $18.2 million to the affiliate of Enterprise Products Partners that is our joint venture partner.
Ownership of our General Partner by Enterprise GP Holdings; Relationship with Energy Transfer Equity. Enterprise GP Holdings owns and controls the 2% general partner interest in us and has the right (through its 100% ownership of our General Partner) to receive the incentive distribution rights associated with the general partner interest. Enterprise GP Holdings, DFIGP and other entities controlled by Mr. Duncan own 17,073,315 of our Units.
31
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Enterprise GP Holdings acquired equity method investments in Energy Transfer Equity, L.P. (“Energy Transfer Equity”) and its general partner in May 2007. As a result, Energy Transfer Equity and its consolidated subsidiaries became related parties to us.
Relationship with Unconsolidated Affiliates
Our significant related party revenues and expense transactions with unconsolidated affiliates consist of management, rental and other revenues, transportation expense related to movements on Centennial and Seaway and rental expense related to the lease of pipeline capacity on Centennial. For additional information regarding our unconsolidated affiliates, see Note 7.
See “Jonah Joint Venture” within this Note 13 for a description of ongoing transactions involving our Jonah joint venture with Enterprise Products Partners.
Note 14. Earnings Per Unit
The following table presents the net income available to our General Partner for the periods indicated for purposes of calculating earnings per Unit:
| For the Three Months | For the Six Months | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Net income attributable to TEPPCO Partners, L.P. | $ | 11.2 | $ | 47.7 | $ | 89.4 | $ | 111.8 | ||||||||
| Distributions Declared During Quarter: | ||||||||||||||||
Distributions to General Partner (including incentive distributions) | $ | 15.6 | $ | 13.5 | $ | 31.0 | $ | 27.1 | ||||||||
| Distributions to limited partners | 76.0 | 67.5 | 152.0 | 134.8 | ||||||||||||
| Total distributions declared during quarter | $ | 91.6 | $ | 81.0 | $ | 183.0 | $ | 161.9 | ||||||||
| Excess of distributions over net income | $ | (80.4 | ) | $ | (33.3 | ) | $ | (93.6 | ) | $ | (50.1 | ) | ||||
| General Partner’s interest in net income | 16.93 | % | 16.74 | % | 16.93 | % | 16.74 | % | ||||||||
Earnings allocation adjustment to General Partner under EITF 07-4 (1) | $ | (13.7 | ) | $ | (5.5 | ) | $ | (15.9 | ) | $ | (8.4 | ) | ||||
Distributions to General Partner (including incentive distributions) | $ | 15.6 | $ | 13.5 | $ | 31.0 | $ | 27.1 | ||||||||
Earnings allocation adjustment to General Partner under EITF 07-4 | (13.7 | ) | (5.5 | ) | (15.9 | ) | (8.4 | ) | ||||||||
| Net income available to our General Partner | $ | 1.9 | $ | 8.0 | $ | 15.1 | $ | 18.7 | ||||||||
(1) For purposes of computing basic and diluted earnings per Unit, we apply the provisions of EITF 07-4 (ASC 260), Application of the Two-Class Method under FASB Statement No. 128 to Master Limited Partnerships. Our earnings are allocated on a basis consistent with distributions declared during the quarter (see Note 11). | ||||||||||||||||
32
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents our calculation of basic and diluted earnings per Unit for the periods indicated:
| For the Three Months | For the Six Months | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| BASIC EARNINGS PER UNIT: | ||||||||||||||||
| Numerator: | ||||||||||||||||
| Limited partners’ interest in net income | $ | 9.3 | $ | 39.7 | $ | 74.3 | $ | 93.1 | ||||||||
| Denominator: | ||||||||||||||||
| Weighted-average Units | 104.7 | 94.8 | 104.6 | 94.0 | ||||||||||||
| Weighted-average time-vested restricted units | 0.2 | 0.1 | 0.2 | -- | ||||||||||||
| Total | 104.9 | 94.9 | 104.8 | 94.0 | ||||||||||||
| Basic earnings per Unit: | ||||||||||||||||
| Net income attributable to TEPPCO Partners, L.P. | $ | 0.11 | $ | 0.50 | $ | 0.85 | $ | 1.19 | ||||||||
| General Partner’s interest in net income | (0.02 | ) | (0.08 | ) | (0.14 | ) | (0.20 | ) | ||||||||
| Limited partners’ interest in net income | $ | 0.09 | $ | 0.42 | $ | 0.71 | $ | 0.99 | ||||||||
| DILUTED EARNINGS PER UNIT: | ||||||||||||||||
| Numerator: | ||||||||||||||||
| Limited partners’ interest in net income | $ | 9.3 | $ | 39.7 | $ | 74.3 | $ | 93.1 | ||||||||
| Denominator: | ||||||||||||||||
| Weighted-average Units | 104.7 | 94.8 | 104.6 | 94.0 | ||||||||||||
| Weighted-average time-vested restricted units | 0.2 | 0.1 | 0.2 | -- | ||||||||||||
| Weighted-average incremental option units | * | -- | * | * | ||||||||||||
| Total | 104.9 | 94.9 | 104.8 | 94.0 | ||||||||||||
| Diluted earnings per Unit: | ||||||||||||||||
| Net income attributable to TEPPCO Partners, L.P. | $ | 0.11 | $ | 0.50 | $ | 0.85 | $ | 1.19 | ||||||||
| General Partner’s interest in net income | (0.02 | ) | (0.08 | ) | (0.14 | ) | (0.20 | ) | ||||||||
| Limited partners’ interest in net income | $ | 0.09 | $ | 0.42 | $ | 0.71 | $ | 0.99 | ||||||||
| *Amount is negligible. | ||||||||||||||||
Our General Partner’s percentage interest in our net income increases as cash distributions paid per Unit increase, in accordance with our Partnership Agreement. At June 30, 2009 and 2008, we had outstanding 104,943,004 and 95,022,897 Units, respectively.
Note 15. Commitments and Contingencies
Litigation
In 1991, we were named as a defendant in a matter styled Jimmy R. Green, et al. v. Cities Service Refinery, et al. as filed in the 26th Judicial District Court of Bossier Parish, Louisiana. The plaintiffs in this matter reside or formerly resided on land that was once the site of a refinery owned by one of our co-defendants. The former refinery is located near our Bossier City facility. Plaintiffs have claimed personal injuries and property damage arising from alleged contamination of the refinery property. The plaintiffs have pursued certification as a class and their last demand had been approximately $175.0 million. Following a hearing, the trial court ruled that the prerequisites for certifying a class do not exist. We expect that a final order dismissing the matter is forthcoming. Accordingly, we do not believe that the outcome of this lawsuit will have a material adverse effect on our financial position, results of operations or cash flows.
In October 2005, Williams Gas Processing, n/k/a Williams Field Services Company, LLC (“Williams”) notified Jonah that the gas delivered to Williams’ Opal Gas Processing Plant (“Opal Plant”) allegedly failed to conform to quality specifications of the Interconnect and Operator Balancing Agreement (“Interconnect Agreement”) which has allegedly caused damages to the Opal Plant in excess of $28.0 million. On July 24, 2007, Jonah filed suit against Williams in Harris County, Texas seeking a declaratory order that Jonah was not liable to Williams. In addition, on August 24, 2007, Williams filed a complaint in
33
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
the 3rd Judicial District Court of Lincoln County, Wyoming alleging that Jonah was delivering non-conforming gas from its gathering customers in the Jonah system to the Opal Plant, in violation of the Interconnect Agreement. Jonah denies any liability to Williams. Discovery is ongoing.
On September 18, 2006, Peter Brinckerhoff, a purported unitholder of TEPPCO, filed a complaint in the Court of Chancery of the State of Delaware (the “Delaware Court”), in his individual capacity, as a putative class action on behalf of our other unitholders, and derivatively on our behalf, concerning proposals made to our unitholders in our definitive proxy statement filed with the SEC on September 11, 2006 (“Proxy Statement”) and other transactions involving us and Enterprise Products Partners or its affiliates. Mr. Brinckerhoff filed an amended complaint on July 12, 2007. The amended complaint names as defendants the General Partner; the board of directors of our General Partner; EPCO; Enterprise Products Partners and certain of its affiliates and Dan L. Duncan. We are named as a nominal defendant.
The amended complaint alleges, among other things, that certain of the transactions adopted at a special meeting of our unitholders on December 8, 2006, including a reduction of the General Partner’s maximum percentage interest in our distributions in exchange for Units (the “Issuance Proposal”), were unfair to our unitholders and constituted a breach by the defendants of fiduciary duties owed to our unitholders and that the Proxy Statement failed to provide our unitholders with all material facts necessary for them to make an informed decision whether to vote in favor of or against the proposals. The amended complaint further alleges that, since Mr. Duncan acquired control of the General Partner in 2005, the defendants, in breach of their fiduciary duties to us and our unitholders, have caused us to enter into certain transactions with Enterprise Products Partners or its affiliates that were unfair to us or otherwise unfairly favored Enterprise Products Partners or its affiliates over us. The amended complaint alleges that such transactions include the Jonah joint venture entered into by us and an Enterprise Products Partners' affiliate in August 2006 (citing the fact that our ACG Committee did not obtain a fairness opinion from an independent investment banking firm in approving the transaction and alleging we did not receive fair value for Enterprise Products Partners' participation in the joint venture), and the sale by us to an Enterprise Products Partners’ affiliate of the Pioneer plant in March 2006 (alleging that the purchase price did not provide fair value for the purchased assets to us). As more fully described in the Proxy Statement, the ACG Committee recommended the Issuance Proposal for approval by the board of directors of the General Partner. The amended complaint also alleges that Richard S. Snell, Michael B. Bracy and Murray H. Hutchison, constituting the three members of the ACG Committee at the time, cannot be considered independent because of their alleged ownership of securities in Enterprise Products Partners and its affiliates and/or their relationships with Mr. Duncan.
The amended complaint seeks relief (i) awarding damages for profits and special benefits allegedly obtained by defendants as a result of the alleged wrongdoings in the complaint; (ii) rescinding all actions taken pursuant to the Proxy vote; and (iii) awarding plaintiff costs of the action, including fees and expenses of his attorneys and experts. By its Opinion and Order dated November 25, 2008, the Delaware Court dismissed Mr. Brinckerhoff’s individual and putative class action claims with respect to the amendments to our Partnership Agreement. We refer to this action and the remaining claims in this action as the “Derivative Action.”
On April 29, 2009, Peter Brinckerhoff and Renee Horowitz, as Attorney in Fact for Rae Kenrow, purported unitholders of TEPPCO, filed separate complaints in the Delaware Court as putative class actions on behalf of our other unitholders, concerning the proposed merger of us and our General Partner with Enterprise Products Partners (see Note 13). On May 11, 2009, these actions were consolidated under the caption Texas Eastern Products Pipeline Company, LLC Merger Litigation, C.A. No. 4548-VCL (“Merger Action”). The complaints name as defendants our General Partner; Enterprise Products Partners and its general partner; EPCO; Dan L. Duncan; and each of the directors of our General Partner.
The Merger Action complaints allege, among other things, that the terms of the merger (as proposed as of the time the Merger Action complaints were filed) are grossly unfair to our unitholders, that Mr. Duncan and other defendants who control us have acted to drive down the price of our Units and that the proposed merger is an attempt to extinguish the Derivative Action without consideration and without
34
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
adequate information having been provided to our unitholders to cast a vote with respect to the proposed merger. The complaints further allege that the process through which the Special Committee of our ACG Committee was appointed to consider the proposed merger is contrary to the spirit and intent of our Partnership Agreement and constitutes a breach of the implied covenant of fair dealing.
The complaints seek relief (i) enjoining the defendants and all persons acting in concert with them from pursuing the proposed merger; (ii) rescinding the proposed merger to the extent it is consummated, or awarding rescissory damages in respect thereof; (iii) directing the defendants to account for all damages suffered or to be suffered by the plaintiffs and the purposed class as a result of the defendants’ alleged wrongful conduct; and (iv) awarding plaintiffs’ costs of the actions, including fees and expenses of their attorneys and experts.
On June 28, 2009, the parties entered into a Memorandum of Understanding pursuant to which we, our General Partner, Enterprise Products Partners, EPCO, all other individual defendants and the plaintiffs have proposed to settle the Merger Action and the Derivative Action. On August 5, 2009, the parties entered into a Stipulation and Agreement of Compromise, Settlement and Release (the “Settlement Agreement”) contemplated by the Memorandum of Understanding. Pursuant to the Settlement Agreement, the board of directors of our General Partner will recommend to our unitholders that they approve the adoption of the merger agreement and take all necessary steps to seek unitholder approval for the merger as soon as practicable. Pursuant to the Settlement Agreement, approval of the merger will require, in addition to votes required under our Partnership Agreement, that the actual votes cast in favor of the proposal by holders of our outstanding Units, excluding those held by defendants to the Derivative Action, exceed the actual votes cast against the proposal by those holders. The Settlement Agreement further provides that the Derivative Action was considered by the Special Committee to be a significant benefit of ours for which fair value was obtained in the merger consideration.
The Settlement Agreement is subject to customary conditions, including Delaware Court approval. There can be no assurance that the Delaware Court will approve the settlement in the Settlement Agreement. In such event, the proposed settlement as contemplated by the Settlement Agreement may be terminated. Among other things, the plaintiffs’ agreement to settle the Derivative Action and Merger Action litigation, including their agreement to the fairness of the proposed terms and process of the merger negotiations is subject to (i) the drafting and execution of other such documentation as may be required to obtain final Delaware Court approval and dismissal of the actions, (ii) Delaware Court approval and the mailing of the notice of settlement which sets forth the terms of settlement to our unitholders, (iii) consummation of the proposed merger and (iv) final Delaware Court certification and approval of the settlement and dismissal of the actions. See Note 13 for additional information regarding our relationship with Enterprise Products Partners, including information related to the proposed merger.
Additionally, on June 29 and 30, 2009, respectively, M. Lee Arnold and Sharon Olesky, purported unitholders of TEPPCO, filed separate complaints in the District Courts of Harris County, Texas, as putative class actions on behalf of our other unitholders, concerning the proposed merger of us with Enterprise Products Partners. The complaints name as defendants us; our General Partner; Enterprise Products Partners and its general partner; EPCO; Dan L. Duncan; Jerry Thompson; and the board of directors of our General Partner. These allegations in the complaints are similar to the complaints filed in Delaware on April 29, 2009 and seek similar relief.
In connection with the dissociation of Enterprise Products Partners and us from TOPS (see Note 7), Oiltanking has filed an original petition against Enterprise Offshore Port System, LLC, Enterprise Products Operating, LLC, TEPPCO O/S Port System, LLC, us and our General Partner in the District Court of Harris County, Texas, 61st Judicial District (Cause No. 2009-31367), asserting, among other things, that the dissociation was wrongful and in breach of the TOPS partnership agreement, citing provisions of the agreement that, if applicable, would continue to obligate us and Enterprise Products Partners to make capital contributions to fund the project and impose liabilities on us and Enterprise Products Partners.
35
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Since we believe that our actions in dissociating from TOPS are expressly permitted by, and in accordance with, the terms of the TOPS partnership agreement, we intend to vigorously defend such actions. We have not recorded any reserves for potential liabilities relating to this litigation, although we may determine in future periods that an accrual of reserves for potential liabilities (including costs of litigation) should be made. If these payments are substantial, we could experience a material adverse impact on our results of operations and our liquidity.
In addition to the proceedings discussed above, we have been, in the ordinary course of business, a defendant in various lawsuits and a party to various other legal proceedings, some of which are covered in whole or in part by insurance. We believe that the outcome of these other proceedings will not individually or in the aggregate have a future material adverse effect on our consolidated financial position, results of operations or cash flows.
We evaluate our ongoing litigation based upon a combination of litigation and settlement alternatives. These reviews are updated as the facts and combinations of the cases develop or change. Assessing and predicting the outcome of these matters involves substantial uncertainties. In the event that the assumptions we used to evaluate these matters change in future periods or new information becomes available, we may be required to record a liability for an adverse outcome. In an effort to mitigate potential adverse consequences of litigation, we could also seek to settle legal proceedings brought against us. We have not recorded any significant reserves for any litigation in our financial statements.
Regulatory Matters
Our pipelines and other facilities are subject to multiple environmental obligations and potential liabilities under a variety of federal, state and local laws and regulations. These include, without limitation: the Comprehensive Environmental Response, Compensation, and Liability Act; the Resource Conservation and Recovery Act; the Clean Air Act; the Federal Water Pollution Control Act or the Clean Water Act; the Oil Pollution Act; and analogous state and local laws and regulations. Such laws and regulations affect many aspects of our present and future operations, and generally require us to obtain and comply with a wide variety of environmental registrations, licenses, permits, inspections and other approvals, with respect to air emissions, water quality, wastewater discharges, and solid and hazardous waste management. Failure to comply with these requirements may expose us to fines, penalties and/or interruptions in our operations that could influence our results of operations. If an accidental leak, spill or release of hazardous substances occurs at any facilities that we own, operate or otherwise use, or where we send materials for treatment or disposal, we could be held jointly and severally liable for all resulting liabilities, including investigation, remedial and clean-up costs. Likewise, we could be required to remove or remediate previously disposed wastes or property contamination, including groundwater contamination. Any or all of this could materially affect our results of operations and cash flows.
We believe that our operations and facilities are in substantial compliance with applicable environmental laws and regulations, and that the cost of compliance with such laws and regulations will not have a material adverse effect on our results of operations or financial position. We cannot ensure, however, that existing environmental regulations will not be revised or that new regulations will not be adopted or become applicable to us. The clear trend in environmental regulation is to place more restrictions and limitations on activities that may be perceived to affect the environment; and thus there can be no assurance as to the amount or timing of future expenditures for environmental regulation compliance or remediation, and actual future expenditures may be different from the amounts we currently anticipate. Revised or additional regulations that result in increased compliance costs or additional operating restrictions, particularly if those costs are not fully recoverable from our customers, could have a material adverse effect on our business, financial position, results of operations and cash flows. At June 30, 2009 and December 31, 2008, our accrued liabilities for environmental remediation projects totaled $6.2 million and $6.9 million, respectively.
36
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In 1999, our Arcadia, Louisiana facility and adjacent terminals were directed by the Remediation Services Division of the Louisiana Department of Environmental Quality (“LDEQ”) to pursue remediation of environmental contamination. Effective March 2004, we executed an access agreement with an adjacent industrial landowner who is located upgradient of the Arcadia facility. This agreement enables the landowner to proceed with remediation activities at our Arcadia facility for which it has accepted shared responsibility. At June 30, 2009, we have an accrued liability of $0.5 million for remediation costs at our Arcadia facility. We do not expect that the completion of the remediation program proposed to the LDEQ will have a future material adverse effect on our financial position, results of operations or cash flows.
We received a notice of probable violation from the U.S. Department of Transportation on April 25, 2005 for alleged violations of pipeline safety regulations at our Todhunter facility, with a proposed $0.4 million civil penalty. We responded on June 30, 2005 by admitting certain of the alleged violations, contesting others and requesting a reduction in the proposed civil penalty. In June 2009, we paid $0.4 million to the U.S. Department of Transportation in settlement of the matter. This settlement did not have a material adverse effect on our financial position, results of operations or cash flows.
The Federal Energy Regulatory Commission (“FERC”), pursuant to the Interstate Commerce Act of 1887, as amended, the Energy Policy Act of 1992 and rules and orders promulgated thereunder, regulates the tariff rates for our interstate common carrier pipeline operations. To be lawful under that Act, interstate tariff rates, terms and conditions of service must be just and reasonable and not unduly discriminatory, and must be on file with FERC. In addition, pipelines may not confer any undue preference upon any shipper. Shippers may protest, and the FERC may investigate, the lawfulness of new or changed tariff rates. The FERC can suspend those tariff rates for up to seven months. It can also require refunds of amounts collected with interest pursuant to rates that are ultimately found to be unlawful. The FERC and interested parties can also challenge tariff rates that have become final and effective. Because of the complexity of rate making, the lawfulness of any rate is never assured. A successful challenge of our rates could adversely affect our revenues.
The FERC uses prescribed rate methodologies for approving regulated tariff rates for transporting crude oil and refined products. Our interstate tariff rates are either market-based or derived in accordance with the FERC’s indexing methodology, which currently allows a pipeline to increase its rates by a percentage linked to the producer price index for finished goods. These methodologies may limit our ability to set rates based on our actual costs or may delay the use of rates reflecting increased costs. Changes in the FERC’s approved methodology for approving rates could adversely affect us. Adverse decisions by the FERC in approving our regulated rates could adversely affect our cash flow.
The intrastate liquids pipeline transportation and gas gathering services we provide are subject to various state laws and regulations that apply to the rates we charge and the terms and conditions of the services we offer. Although state regulation typically is less onerous than FERC regulation, the rates we charge and the provision of our services may be subject to challenge.
Although our natural gas gathering systems are generally exempt from FERC regulation under the Natural Gas Act of 1938, FERC regulation still significantly affects our natural gas gathering business. Our natural gas gathering operations could be adversely affected in the future should they become subject to the application of federal regulation of rates and services or if the states in which we operate adopt policies imposing more onerous regulation on gathering. Additional rules and legislation pertaining to these matters are considered and adopted from time to time at both state and federal levels. We cannot predict what effect, if any, such regulatory changes and legislation might have on our operations or revenues.
Recent scientific studies have suggested that emissions of certain gases, commonly referred to as “greenhouse gases” or “GHGs” and including carbon dioxide and methane, may be contributing to climate change. On April 17, 2009, the U.S. Environmental Protection Agency (“EPA”) issued a notice of its
37
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
proposed finding and determination that emission of carbon dioxide, methane, and other GHGs present an endangerment to human health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth’s atmosphere. The EPA’s finding and determination would allow it to begin regulating emissions of GHGs under existing provisions of the federal Clean Air Act. Although it may take the EPA several years to adopt and impose regulations limiting emissions of GHGs, any such regulation could require us to incur costs to reduce emissions of GHGs associated with our operations. In addition, on June 26, 2009, the U.S. House of Representatives approved adoption of the “American Clean Energy and Security Act of 2009,” also known as the “Waxman-Markey cap-and-trade legislation” or “ACESA.” ACESA would establish an economy-wide cap on emissions of GHGs in the United States and would require most sources of GHG emissions to obtain GHG emission “allowances” corresponding to their annual emissions of GHGs. The U.S. Senate has also begun work on its own legislation for controlling and reducing emissions of GHGs in the United States. Any laws or regulations that may be adopted to restrict or reduce emissions of GHGs would likely require us to incur increased operating costs, and may have an adverse effect on our business, financial position, demand for our products, results of operations and cash flows.
Contractual Obligations
Scheduled maturities of long-term debt. With the exception of routine fluctuations in the balance of our Revolving Credit Facility, there have been no material changes in our scheduled maturities of long-term debt since those reported in our Annual Report on Form 10-K for the year ended December 31, 2008.
Operating lease obligations. Lease and rental expense was $4.6 million and $5.1 million during the three months ended June 30, 2009 and 2008, respectively. For the six months ended June 30, 2009 and 2008, lease and rental expense was $9.1 million and $10.3 million, respectively. There have been no material changes in our operating lease commitments since December 31, 2008.
Purchase obligations. Apart from that discussed below, there have been no material changes in our purchase obligations since December 31, 2008.
Due to our dissociation from TOPS, our capital expenditure commitments decreased by an estimated $68.0 million. See Note 7 for additional information regarding our dissociation from TOPS.
Other
Guarantees. At June 30, 2009 and December 31, 2008, Centennial’s debt obligations consisted of $124.8 million and $129.9 million, respectively, borrowed under a master shelf loan agreement. We, TE Products, TEPPCO Midstream and TCTM (collectively, the “TEPPCO Guarantors”) are required, on a joint and several basis, to pay 50% of any past-due amount under Centennial’s master shelf loan agreement not paid by Centennial. We may be required to provide additional credit support in the form of a letter of credit or pay certain fees if either of our credit ratings from Standard & Poor’s Ratings Group and Moody’s Investors Service, Inc. falls below investment grade levels. If Centennial defaults on its debt obligations, the estimated maximum potential amount of future payments for the TEPPCO Guarantors and Marathon Petroleum Company LLC (“Marathon”) is $62.4 million each at June 30, 2009. At June 30, 2009, we have a liability of $8.7 million, which is based upon the expected present value of amounts we would have to pay under the guarantee.
TE Products, Marathon and Centennial have also entered into a limited cash call agreement, which allows each member to contribute cash in lieu of Centennial procuring separate insurance in the event of a third-party liability arising from a catastrophic event. There is an indefinite term for the agreement and each member is to contribute cash in proportion to its ownership interest, up to a maximum of $50.0 million each. As a result of the catastrophic event guarantee, at June 30, 2009, TE Products has a liability of $3.7 million, which is based upon the expected present value of amounts we would have to pay under the
38
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
guarantee. If a catastrophic event were to occur and we were required to contribute cash to Centennial, such contributions might be covered by our insurance (net of deductible), depending upon the nature of the catastrophic event.
Motiva Project. In December 2006, we signed an agreement with Motiva Enterprises, LLC (“Motiva”) for us to construct and operate a new refined products storage facility to support the expansion of Motiva’s refinery in Port Arthur, Texas. Under the terms of the agreement, we are constructing a 5.4 million barrel refined products storage facility for gasoline and distillates. The agreement also provides for a 15-year throughput and dedication of volume, which will commence upon completion of the refinery expansion or July 1, 2010, whichever comes first. Through June 30, 2009, we have spent approximately $245.6 million on this construction project. Under the terms of the agreement, if Motiva cancels the agreement prior to the commencement date of the project, Motiva will reimburse us the actual reasonable expenses we have incurred after the effective date of the agreement, including both internal and external costs that would be capitalized as a part of the project, plus a ten percent cancellation fee.
TOPS. We, through a subsidiary, owned a one-third interest in TOPS until April 16, 2009. We had guaranteed up to approximately $700.0 million of the project costs to be incurred by this partnership. Upon our dissociation (see Note 7), our obligations under this commitment terminated.
Insurance Matters
EPCO completed its annual insurance renewal process during the second quarter of 2009. In light of recent hurricane and other weather-related events, the renewal of policies for weather-related risks resulted in significant increases in premiums and certain deductibles, as well as changes in the scope of coverage.
EPCO’s deductible for onshore physical damage from windstorms increased from $10.0 million per storm to $25.0 million per storm. EPCO’s onshore program currently provides $150.0 million per occurrence for named windstorm events compared to $175.0 million per occurrence in the prior year. For non-windstorm events, EPCO’s deductible for onshore physical damage remained at $5.0 million per occurrence. Business interruption coverage in connection with a windstorm event remained unchanged for onshore assets. Onshore assets covered by business interruption insurance must be out-of-service in excess of 60 days before any losses from business interruption will be covered. Furthermore, pursuant to the current policy, we will now absorb 50% of the first $50.0 million of any loss in excess of deductible amounts for our onshore assets. There were no changes to insurance coverage for our marine transportation assets.
39
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Supplemental Cash Flow Information
The following table provides information regarding (i) the net effect of changes in our operating assets and liabilities, (ii) non-cash investing and financing activities and (iii) cash payments for interest for the periods indicated:
| For the Six Months | ||||||||
| Ended June 30, | ||||||||
| 2009 | 2008 | |||||||
| Decrease (increase) in: | ||||||||
| Accounts receivable, trade | $ | (194.4 | ) | $ | (586.7 | ) | ||
| Accounts receivable, related parties | 6.1 | (6.1 | ) | |||||
| Inventories | (42.8 | ) | (43.7 | ) | ||||
| Other current assets | (3.2 | ) | (9.9 | ) | ||||
| Other | (3.3 | ) | (7.7 | ) | ||||
| Increase (decrease) in: | ||||||||
| Accounts payable and accrued liabilities | 181.6 | 610.8 | ||||||
| Accounts payable, related parties | 23.8 | (12.1 | ) | |||||
| Other | 0.8 | (2.1 | ) | |||||
| Net effect of changes in operating accounts | $ | (31.4 | ) | $ | (57.5 | ) | ||
| Non-cash investing activities: | ||||||||
Payable to Enterprise Gas Processing, LLC for spending for Phase V expansion of Jonah Gas Gathering Company | $ | -- | $ | 2.8 | ||||
| Liabilities for construction work in progress | $ | 10.7 | $ | 22.5 | ||||
| Non-cash financing activities: | ||||||||
| Issuance of Units in Cenac acquisition | $ | -- | $ | 186.6 | ||||
| Supplemental disclosure of cash flows: | ||||||||
| Cash paid for interest (net of amounts capitalized) | $ | 63.4 | $ | 56.9 | ||||
Note 17. Supplemental Condensed Consolidating Financial Information
The Guarantor Subsidiaries have issued full, unconditional, and joint and several guarantees of our senior notes, our Junior Subordinated Notes (collectively “the Guaranteed Debt”) and our Revolving Credit Facility.
The following supplemental condensed consolidating financial information reflects our separate accounts, the combined accounts of the Guarantor Subsidiaries, the combined accounts of our other non-guarantor subsidiaries, the combined consolidating adjustments and eliminations and our consolidated accounts for the dates and periods indicated. For purposes of the following consolidating information, our investments in our subsidiaries and the Guarantor Subsidiaries’ investments in their subsidiaries are accounted for under the equity method of accounting. Earnings of subsidiaries are therefore reflected in the Partnership’s and Guarantor Subsidiaries’ investment accounts and earnings. The elimination entries presented herein eliminate investments in subsidiaries and intercompany balances and transactions.
40
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| June 30, 2009 | ||||||||||||||||||||
| TEPPCO Partners, L.P. | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | TEPPCO Partners, L.P. Consolidated | ||||||||||||||||
| Assets | ||||||||||||||||||||
| Current assets | $ | 15.8 | $ | 79.6 | $ | 1,357.9 | $ | (323.5 | ) | $ | 1,129.8 | |||||||||
| Property, plant and equipment – net | 14.0 | 1,378.2 | 1,199.4 | -- | 2,591.6 | |||||||||||||||
| Investments in unconsolidated affiliates | 8.7 | 1,007.3 | 182.9 | -- | 1,198.9 | |||||||||||||||
| Investments in consolidated affiliates | 1,592.5 | 430.6 | -- | (2,023.1 | ) | -- | ||||||||||||||
| Goodwill | -- | -- | 106.6 | -- | 106.6 | |||||||||||||||
| Intercompany notes receivable | 2,843.9 | -- | -- | (2,843.9 | ) | -- | ||||||||||||||
| Intangible assets | -- | 110.8 | 84.3 | -- | 195.1 | |||||||||||||||
| Other assets | 13.5 | 33.7 | 85.7 | -- | 132.9 | |||||||||||||||
| Total assets | $ | 4,488.4 | $ | 3,040.2 | $ | 3,016.8 | $ | (5,190.5 | ) | $ | 5,354.9 | |||||||||
| Liabilities and partners’ capital | ||||||||||||||||||||
| Current liabilities | $ | 239.7 | $ | 152.7 | $ | 1,018.0 | $ | (323.5 | ) | $ | 1,086.9 | |||||||||
| Long-term debt | 2,733.8 | 1,552.7 | 1,291.2 | (2,843.9 | ) | 2,733.8 | ||||||||||||||
| Intercompany notes payable | -- | -- | -- | -- | -- | |||||||||||||||
| Other long-term liabilities | 8.5 | 16.7 | 2.6 | -- | 27.8 | |||||||||||||||
| Total partners’ capital | 1,506.4 | 1,318.1 | 705.0 | (2,023.1 | ) | 1,506.4 | ||||||||||||||
| Total liabilities and partners’ capital | $ | 4,488.4 | $ | 3,040.2 | $ | 3,016.8 | $ | (5,190.5 | ) | $ | 5,354.9 | |||||||||
| December 31, 2008 | ||||||||||||||||||||
| TEPPCO Partners, L.P. | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | TEPPCO Partners, L.P. Consolidated | ||||||||||||||||
| Assets | ||||||||||||||||||||
| Current assets | $ | 23.1 | $ | 145.2 | $ | 1,148.0 | $ | (408.7 | ) | $ | 907.6 | |||||||||
| Property, plant and equipment – net | 13.5 | 1,294.8 | 1,131.6 | -- | 2,439.9 | |||||||||||||||
| Investments in unconsolidated affiliates | 9.0 | 1,020.9 | 226.0 | -- | 1,255.9 | |||||||||||||||
| Investments in consolidated affiliates | 1,686.0 | 399.0 | -- | (2,085.0 | ) | -- | ||||||||||||||
| Goodwill | -- | -- | 106.6 | -- | 106.6 | |||||||||||||||
| Intercompany notes receivable | 2,628.3 | -- | -- | (2,628.3 | ) | -- | ||||||||||||||
| Intangible assets | -- | 118.0 | 89.7 | -- | 207.7 | |||||||||||||||
| Other assets | 14.4 | 33.3 | 84.4 | -- | 132.1 | |||||||||||||||
| Total assets | $ | 4,374.3 | $ | 3,011.2 | $ | 2,786.3 | $ | (5,122.0 | ) | $ | 5,049.8 | |||||||||
| Liabilities and partners’ capital | ||||||||||||||||||||
| Current liabilities | $ | 244.5 | $ | 215.4 | $ | 848.8 | $ | (408.7 | ) | $ | 900.0 | |||||||||
| Long-term debt | 2,529.6 | -- | -- | -- | 2,529.6 | |||||||||||||||
| Intercompany notes payable | -- | 1,424.3 | 1,204.0 | (2,628.3 | ) | -- | ||||||||||||||
| Other long-term liabilities | 8.7 | 17.0 | 3.0 | -- | 28.7 | |||||||||||||||
| Total partners’ capital | 1,591.5 | 1,354.5 | 730.5 | (2,085.0 | ) | 1,591.5 | ||||||||||||||
| Total liabilities and partners’ capital | $ | 4,374.3 | $ | 3,011.2 | $ | 2,786.3 | $ | (5,122.0 | ) | $ | 5,049.8 | |||||||||
41
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| For the Three Months Ended June 30, 2009 | ||||||||||||||||||||
| TEPPCO Partners, L.P. | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | TEPPCO Partners, L.P. Consolidated | ||||||||||||||||
| Operating revenues | $ | -- | $ | 86.7 | $ | 1,826.6 | $ | (0.1 | ) | $ | 1,913.2 | |||||||||
| Costs and expenses | -- | 78.1 | 1,779.7 | (0.5 | ) | 1,857.3 | ||||||||||||||
| Operating income | -- | 8.6 | 46.9 | 0.4 | 55.9 | |||||||||||||||
| Interest expense | -- | (20.1 | ) | (12.2 | ) | -- | (32.3 | ) | ||||||||||||
| Equity in income (loss) of unconsolidated affiliates | 11.2 | 19.0 | (31.3 | ) | (11.1 | ) | (12.2 | ) | ||||||||||||
| Other, net | -- | 0.2 | 0.5 | -- | 0.7 | |||||||||||||||
| Income before provision for income taxes | 11.2 | 7.7 | 3.9 | (10.7 | ) | 12.1 | ||||||||||||||
| Provision for income taxes | -- | (0.1 | ) | (0.8 | ) | -- | (0.9 | ) | ||||||||||||
| Net income | $ | 11.2 | $ | 7.6 | $ | 3.1 | $ | (10.7 | ) | $ | 11.2 | |||||||||
| For the Three Months Ended June 30, 2008 | ||||||||||||||||||||
| TEPPCO Partners, L.P. | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | TEPPCO Partners, L.P. Consolidated | ||||||||||||||||
| Operating revenues | $ | -- | $ | 88.3 | $ | 4,092.3 | $ | (0.1 | ) | $ | 4,180.5 | |||||||||
| Costs and expenses | -- | 70.4 | 4,052.0 | (1.2 | ) | 4,121.2 | ||||||||||||||
| Operating income | -- | 17.9 | 40.3 | 1.1 | 59.3 | |||||||||||||||
| Interest expense | -- | (17.3 | ) | (15.7 | ) | -- | (33.0 | ) | ||||||||||||
| Equity in income of unconsolidated affiliates | 47.7 | 44.9 | 4.2 | (75.5 | ) | 21.3 | ||||||||||||||
| Other, net | -- | 0.3 | 0.8 | -- | 1.1 | |||||||||||||||
| Income before provision for income taxes | 47.7 | 45.8 | 29.6 | (74.4 | ) | 48.7 | ||||||||||||||
| Provision for income taxes | -- | (0.3 | ) | (0.7 | ) | -- | (1.0 | ) | ||||||||||||
| Net income | $ | 47.7 | $ | 45.5 | $ | 28.9 | $ | (74.4 | ) | $ | 47.7 | |||||||||
| For the Six Months Ended June 30, 2009 | ||||||||||||||||||||
| TEPPCO Partners, L.P. | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | TEPPCO Partners, L.P. Consolidated | ||||||||||||||||
| Operating revenues | $ | -- | $ | 187.4 | $ | 3,183.5 | $ | (0.1 | ) | $ | 3,370.8 | |||||||||
| Costs and expenses | -- | 146.2 | 3,084.2 | (1.2 | ) | 3,229.2 | ||||||||||||||
| Operating income | -- | 41.2 | 99.3 | 1.1 | 141.6 | |||||||||||||||
| Interest expense | -- | (40.3 | ) | (24.1 | ) | -- | (64.4 | ) | ||||||||||||
| Equity in income (loss) of unconsolidated affiliates | 89.4 | 84.3 | (28.0 | ) | (132.8 | ) | 12.9 | |||||||||||||
| Other, net | -- | 0.5 | 0.5 | -- | 1.0 | |||||||||||||||
| Income before provision for income taxes | 89.4 | 85.7 | 47.7 | (131.7 | ) | 91.1 | ||||||||||||||
| Provision for income taxes | -- | (0.4 | ) | (1.3 | ) | -- | (1.7 | ) | ||||||||||||
| Net income | $ | 89.4 | $ | 85.3 | $ | 46.4 | $ | (131.7 | ) | $ | 89.4 | |||||||||
| For the Six Months Ended June 30, 2008 | ||||||||||||||||||||
| TEPPCO Partners, L.P. | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | TEPPCO Partners, L.P. Consolidated | ||||||||||||||||
| Operating revenues | $ | -- | $ | 191.2 | $ | 6,797.9 | $ | (0.1 | ) | $ | 6,989.0 | |||||||||
| Costs and expenses | -- | 138.3 | 6,712.0 | (4.1 | ) | 6,846.2 | ||||||||||||||
| Operating income | -- | 52.9 | 85.9 | 4.0 | 142.8 | |||||||||||||||
| Interest expense | -- | (44.1 | ) | (27.5 | ) | -- | (71.6 | ) | ||||||||||||
| Equity in income of unconsolidated affiliates | 111.8 | 97.9 | 7.2 | (175.9 | ) | 41.0 | ||||||||||||||
| Other, net | -- | 0.6 | 0.8 | -- | 1.4 | |||||||||||||||
| Income before provision for income taxes | 111.8 | 107.3 | 66.4 | (171.9 | ) | 113.6 | ||||||||||||||
| Provision for income taxes | -- | (0.5 | ) | (1.3 | ) | -- | (1.8 | ) | ||||||||||||
| Net income | $ | 111.8 | $ | 106.8 | $ | 65.1 | $ | (171.9 | ) | $ | 111.8 | |||||||||
42
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| For the Six Months Ended June 30, 2009 | ||||||||||||||||||||
| TEPPCO Partners, L.P. | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | TEPPCO Partners, L.P. Consolidated | ||||||||||||||||
| Operating activities: | ||||||||||||||||||||
| Net income | $ | 89.4 | $ | 85.3 | $ | 46.4 | $ | (131.7 | ) | $ | 89.4 | |||||||||
| Adjustments to reconcile net income to net cash | ||||||||||||||||||||
| from operating activities: | ||||||||||||||||||||
| Depreciation and amortization | -- | 37.9 | 31.9 | -- | 69.8 | |||||||||||||||
| Non-cash impairment charge | -- | 2.3 | -- | -- | 2.3 | |||||||||||||||
| Equity in income (loss) of unconsolidated affiliates | 93.4 | (49.5 | ) | 28.0 | (84.8 | ) | (12.9 | ) | ||||||||||||
| Distributions received from unconsolidated affiliates | -- | 76.0 | 13.2 | -- | 89.2 | |||||||||||||||
| Other, net | (15.4 | ) | 9.3 | (42.8 | ) | 18.6 | (30.3 | ) | ||||||||||||
| Net cash from operating activities | 167.4 | 161.3 | 76.7 | (197.9 | ) | 207.5 | ||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Cash used for business combinations | -- | -- | (50.0 | ) | -- | (50.0 | ) | |||||||||||||
| Investment in Jonah | -- | (19.1 | ) | -- | -- | (19.1 | ) | |||||||||||||
| Investment in Texas Offshore Port System | -- | -- | 1.7 | -- | 1.7 | |||||||||||||||
| Capital expenditures | -- | (119.2 | ) | (45.1 | ) | -- | (164.3 | ) | ||||||||||||
| Other, net | -- | (1.4 | ) | (1.5 | ) | -- | (2.9 | ) | ||||||||||||
| Net cash flows from investing activities | -- | (139.7 | ) | (94.9 | ) | -- | (234.6 | ) | ||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Borrowings under debt agreements | 759.3 | -- | -- | -- | 759.3 | |||||||||||||||
| Repayments of debt | (552.6 | ) | -- | -- | -- | (552.6 | ) | |||||||||||||
| Net proceeds from issuance of limited partner units | 3.3 | -- | -- | -- | 3.3 | |||||||||||||||
| Intercompany debt activities | (206.7 | ) | 123.7 | 90.5 | (7.5 | ) | -- | |||||||||||||
| Repurchase of restricted units | (0.1 | ) | -- | -- | (0.1 | ) | ||||||||||||||
| Distributions paid to partners | (182.8 | ) | (145.3 | ) | (72.3 | ) | 217.6 | (182.8 | ) | |||||||||||
| Net cash flows from financing activities | (179.6 | ) | (21.6 | ) | 18.2 | 210.1 | 27.1 | |||||||||||||
| Net change in cash and cash equivalents | (12.2 | ) | -- | -- | 12.2 | -- | ||||||||||||||
| Cash and cash equivalents, January 1 | 16.1 | -- | -- | (16.1 | ) | -- | ||||||||||||||
| Cash and cash equivalents, June 30 | $ | 3.9 | $ | -- | $ | -- | $ | (3.9 | ) | $ | -- | |||||||||
43
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| For the Six Months Ended June 30, 2008 | ||||||||||||||||||||
| TEPPCO Partners, L.P. | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | TEPPCO Partners, L.P. Consolidated | ||||||||||||||||
| Operating activities: | ||||||||||||||||||||
| Net income | $ | 111.8 | $ | 106.8 | $ | 65.1 | $ | (171.9 | ) | $ | 111.8 | |||||||||
| Adjustments to reconcile net income to net cash | ||||||||||||||||||||
| from operating activities: | ||||||||||||||||||||
| Depreciation and amortization | -- | 34.6 | 25.6 | -- | 60.2 | |||||||||||||||
| Equity in income (loss) of unconsolidated affiliates | -- | (37.8 | ) | (7.2 | ) | 4.0 | (41.0 | ) | ||||||||||||
| Distributions received from unconsolidated affiliates | -- | 75.9 | 3.4 | -- | 79.3 | |||||||||||||||
| Other, net | 109.2 | 20.8 | (124.6 | ) | (51.6 | ) | (46.2 | ) | ||||||||||||
| Net cash from operating activities | 221.0 | 200.3 | (37.7 | ) | (219.5 | ) | 164.1 | |||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Cash used for business combinations | -- | -- | (345.6 | ) | -- | (345.6 | ) | |||||||||||||
| Investment in Jonah | -- | (64.5 | ) | -- | -- | (64.5 | ) | |||||||||||||
| Capital expenditures | -- | (98.5 | ) | (40.7 | ) | -- | (139.2 | ) | ||||||||||||
| Other, net | -- | (0.3 | ) | (14.5 | ) | -- | (14.8 | ) | ||||||||||||
| Net cash flows from investing activities | -- | (163.3 | ) | (400.8 | ) | -- | (564.1 | ) | ||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Borrowings under debt agreements | 3,344.4 | -- | -- | -- | 3,344.4 | |||||||||||||||
| Repayments of debt | (2,308.1 | ) | (361.6 | ) | (63.2 | ) | -- | (2,732.9 | ) | |||||||||||
| Net proceeds from issuance of limited partner units | 5.6 | -- | -- | -- | 5.6 | |||||||||||||||
| Debt issuance costs | (9.3 | ) | -- | -- | -- | (9.3 | ) | |||||||||||||
| Settlement of interest rate derivative instruments – treasury locks | (52.1 | ) | -- | -- | -- | (52.1 | ) | |||||||||||||
| Intercompany debt activities | (1,036.4 | ) | 480.3 | 548.7 | 7.4 | -- | ||||||||||||||
| Distributions paid to partners | (155.7 | ) | (155.7 | ) | (47.0 | ) | 202.7 | (155.7 | ) | |||||||||||
| Net cash flows from financing activities | (211.6 | ) | (37.0 | ) | 438.5 | 210.1 | 400.0 | |||||||||||||
| Net change in cash and cash equivalents | 9.4 | -- | -- | (9.4 | ) | -- | ||||||||||||||
| Cash and cash equivalents, January 1 | 8.2 | -- | -- | (8.2 | ) | -- | ||||||||||||||
| Cash and cash equivalents, June 30 | $ | 17.6 | $ | -- | $ | -- | $ | (17.6 | ) | $ | -- | |||||||||
Note 18. Subsequent Events
Suspension of DRIP and EUPP
In July 2009, we suspended the opportunity for investors to acquire additional Units under our DRIP, pursuant to the terms of the definitive merger agreements with Enterprise Products Partners (see Note 13). We expect this suspension to remain in place pursuant to such terms while the transaction is pending. Additionally, the EUPP will suspend operations in August 2009 pursuant to the terms of the definitive merger agreements.
Loan Agreement with Enterprise Products Operating LLC
On August 5, 2009, we entered into a Loan Agreement (the “Loan Agreement”) with Enterprise Products Operating LLC (“EPO”), a wholly owned subsidiary of Enterprise Products Partners, under which EPO agreed to make an unsecured revolving loan to us in an aggregate maximum outstanding principal amount not to exceed $100.0 million. Borrowings under the Loan Agreement mature on the earliest to occur of (i) the consummation of our proposed merger with Enterprise Products Partners, (ii) the termination of the related merger agreement in accordance with the provisions thereof, (iii) December 31, 2009, (iv) the date upon which the maturity of the loan is otherwise accelerated upon an event of default, and (v) the date upon which EPO’s commitment to make the loan is terminated by us pursuant to the Loan
44
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Agreement. Borrowings under the Loan Agreement will bear interest at a floating rate equivalent to the one-month LIBOR Rate (as defined in the Loan Agreement) plus 2.00%. Interest is payable monthly.
The Loan Agreement provides that amounts borrowed are non-recourse to our General Partner and our limited partners. The Loan Agreement contains customary events of default, including (i) nonpayment of principal when due or nonpayment of interest or other amounts within three business days of when due; (ii) bankruptcy or insolvency with respect to us; (iii) a change of control; or (iv) an event of default under our Revolving Credit Facility. Any amounts due by us under the Loan Agreement will be unconditionally and irrevocably guaranteed by our Guarantor Subsidiaries that guarantee our obligations under our Revolving Credit Facility. EPO’s obligation to fund any borrowings under the Loan Agreement is subject to specified conditions, including the condition that, on and as of the applicable date of funding, no additional amounts are available to us pursuant to our Revolving Credit Facility (either as borrowings or under any letters of credit). The ACG Committee reviewed and approved the Loan Agreement, such approval constituting “Special Approval” under the conflict of interest provisions of our Partnership Agreement. The execution of the Loan Agreement was also unanimously approved by the ACG Committee of EPGP.
Settlement Agreement
On August 5, 2009, the parties to the Merger Action and the Derivative Action described in Note 15 entered into a Settlement Agreement contemplated by the Memorandum of Understanding. Pursuant to the Settlement Agreement, the board of directors of our General Partner will recommend to our unitholders that they approve the adoption of the merger agreement governing our proposed merger with a subsidiary of Enterprise Products Partners and take all necessary steps to seek unitholder approval for the merger as soon as practicable. Pursuant to the Settlement Agreement, approval of the merger will require, in addition to votes required under our Partnership Agreement, that the actual votes cast in favor of the proposal by holders of our outstanding Units, excluding those held by defendants to the Derivative Action, exceed the actual votes cast against the proposal by those holders. The Settlement Agreement further provides that the Derivative Action was considered by the Special Committee to be a significant benefit of ours for which fair value was obtained in the merger consideration.
The Settlement Agreement is subject to customary conditions, including Delaware Court approval. There can be no assurance that the Delaware Court will approve the settlement in the Settlement Agreement. In such event, the proposed settlement as contemplated by the Settlement Agreement may be terminated. See Note 13 for additional information regarding our relationship with Enterprise Products Partners, including information related to the proposed merger. See Note 15 for additional information related to the Merger Action and the Derivative Action, including the Settlement Agreement.
Borrowing under Revolving Credit Facility
On August 4, 2009, we submitted a request for borrowings under our Revolving Credit Facility expected to be received on August 7, 2009 in an aggregate amount of $95.9 million. Such borrowings will be used to pay the $91.6 million aggregate amount of our previously disclosed cash distribution on our outstanding Units with respect to the quarter ended June 30, 2009 and for general partnership purposes. Immediately following the payment of such distribution, we expect to have approximately $820 million principal amount outstanding under our Revolving Credit Facility.
45