Notes to combined financial statements
Eight months ended August 31, 2006, six months ended December 31, 2005 and Years ended June 30, 2005 and 2004
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of business
TransMontaigne Partners (Predecessor) includes the assets, liabilities and results of operations of certain terminal and transportation operations of TransMontaigne Inc. prior to their sale by TransMontaigne Inc. to TransMontaigne Partners L.P. (“Partners” or the “Partnership”). The accompanying combined financial statements include the assets, liabilities and results of operations of the Brownsville, Texas terminaling facility with aggregate active storage capacity of approximately 2.2 million barrels, liquefied petroleum gas terminaling facility with storage capacity of approximately 15,000 barrels, 12 terminaling facilities along the Mississippi and Ohio rivers with aggregate active storage capacity of approximately 2.7 million barrels, Baton Rouge dock facility, and associated improvements, leases, easements, licenses and permits. These terminal and transportation operations were sold to the Partnership on December 29, 2006 in exchange for a cash payment of $135 million.
The Partnership was formed in 2005 as a Delaware master limited partnership initially to own and operate refined petroleum products terminaling and transportation facilities. The Partnership provides integrated terminaling, storage, transportation and related services for companies engaged in the distribution and marketing of refined petroleum products and crude oil, including TransMontaigne Inc.
TransMontaigne Partners is controlled by its general partner, TransMontaigne GP L.L.C., which is a wholly-owned subsidiary of TransMontaigne Inc. Effective September 1, 2006, Morgan Stanley Capital Group Inc., a wholly-owned subsidiary of Morgan Stanley, purchased all of the issued and outstanding capital stock of TransMontaigne Inc. As a result of Morgan Stanley’s acquisition of TransMontaigne Inc., Morgan Stanley became the indirect owner of the Partnership’s general partner. TransMontaigne Inc. and Morgan Stanley have a significant interest in the Partnership through their indirect ownership of a 44.6% limited partnership interest and a 2% general partnership interest.
(b) Change in year end
We adopted a December 31 year end for financial and tax reporting purposes effective December 31, 2005. We previously maintained a June 30 year end for financial and tax reporting purposes.
(c) Basis of presentation and use of estimates
Our accounting and financial reporting policies conform to accounting principles and practices generally accepted in the United States of America. The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. The following estimates, in management’s opinion, are subjective in nature, require the exercise of judgment, and involve complex analyses: allowance for doubtful accounts and accrued environmental obligations. Changes in these estimates and assumptions will occur as a result of the passage of time and the occurrence of future events. Actual results could differ from these estimates.
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All significant inter-company accounts and transactions have been eliminated in the preparation of the accompanying combined financial statements.
(d) Accounting for terminal operations
In connection with our terminal operations, we utilize the accrual method of accounting for revenue and expenses. We generate revenue in our terminal and pipeline operations from throughput fees, storage fees, and fees from other ancillary services. Throughput revenue is recognized when the product is delivered to the customer; storage revenue is recognized ratably over the term of the storage contract; management fee revenue is recognized as the services are performed; and ancillary service revenue is recognized as the services are performed.
(e) Cash and cash equivalents
We consider all short-term investments with a remaining maturity of three months or less at the date of purchase to be cash equivalents.
(f) Property, plant and equipment
Depreciation is computed using the straight-line and double-declining balance methods. Estimated useful lives are 20 to 25 years for plant, which includes buildings, storage tanks, and pipelines, and 3 to 20 years for equipment. All items of property, plant and equipment are carried at cost. Expenditures that increase capacity or extend useful lives are capitalized. Routine repairs and maintenance are expensed as incurred.
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows attributable to that asset. If an asset is impaired, the impairment loss to be recognized is the excess of the carrying amount of the asset over its estimated fair value.
(g) Environmental obligations
We accrue for environmental costs that relate to existing conditions caused by past operations when estimable. Environmental costs include initial site surveys and environmental studies of potentially contaminated sites, costs for remediation and restoration of sites determined to be contaminated and ongoing monitoring costs, as well as fines, damages and other costs, including direct legal costs. Liabilities for environmental costs at a specific site are initially recorded, on an undiscounted basis, when it is probable that we will be liable for such costs, and a reasonable estimate of the associated costs can be made based on available information. Such an estimate includes our share of the liability for each specific site and the sharing of the amounts related to each site that will not be paid by other potentially responsible parties, based on enacted laws and adopted regulations and policies. Adjustments to initial estimates are recorded, from time to time, to reflect changing circumstances and estimates based upon additional information developed in subsequent periods. Estimates of our ultimate liabilities associated with environmental costs are particularly difficult to make with certainty due to the number of variables involved, including the early stage of investigation at certain sites, the lengthy time frames required to complete remediation, technology changes, alternatives available and the evolving nature of environmental laws and regulations. We periodically file claims for insurance recoveries of certain environmental remediation costs with our insurance carriers under our comprehensive liability policies. We recognize our insurance recoveries as a credit to income in the period the insurance recoveries are received.
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At August 31, 2006, December 31, 2005, and June 30, 2005, we are not aware of any existing conditions that may cause us to incur significant expenditures in the future for the remediation of existing contamination. Changes in our estimates and assumptions may occur as a result of the passage of time and the occurrence of future events.
TransMontaigne Inc. has indemnified us through December 2011 against certain potential environmental claims, losses and expenses associated with the operation of the acquired facilities and occurring before December 31, 2006, up to a maximum liability not to exceed $15 million for this indemnification obligation (see Note 2 of Notes to combined financial statements).
(h) Income taxes
No provision for income taxes has been reflected in the accompanying combined financial statements because Partners is treated as a partnership for federal and state income taxes. As a partnership, all income, gains, losses, expenses, deductions and tax credits generated by Partners flow through to the unit holders of the partnership.
(i) Asset retirement obligations
Asset retirement obligations are legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal use of the asset. Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations,” requires that the fair value of a liability related to the retirement of long-lived assets be recorded at the time a legal obligation is incurred. Once an asset retirement obligation is identified and a liability is recorded, a corresponding asset is recorded, which is depreciated over the remaining useful life of the asset. After the initial measurement, the liability is adjusted to reflect changes in the asset retirement obligation’s fair value. If and when it is determined that a legal obligation has been incurred, the fair value of any liability is determined based on estimates and assumptions related to retirement costs, future inflation rates and interest rates. Our long-lived assets consist of above-ground storage facilities and an underground pipeline. We are unable to predict if and when our long-lived assets will become completely obsolete and require dismantlement. Accordingly, we have not recorded an asset retirement obligation, or corresponding asset, because the future dismantlement and removal dates of our long-lived assets, and the amount of any associated costs, are indeterminable. Changes in our estimates and assumptions may occur as a result of the passage of time and the occurrence of future events.
In March 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations—an interpretation of SFAS 143,” which requires companies to recognize a liability for the fair value of a legal obligation to perform asset-retirement activities that are conditional on a future event, if the amount can be reasonably estimated. We adopted the requirements of FIN 47 on January 1, 2006. The adoption of FIN 47 did not have a significant impact on our combined financial statements.
(2) TRANSACTIONS WITH TRANSMONTAIGNE INC.
Omnibus Agreement. Partners entered into an omnibus agreement with TransMontaigne Inc. and Partners’ general partner that expires in May 2008, unless extended. Under the omnibus agreement Partners pays TransMontaigne Inc. an annual administrative fee for the provision of various general and administrative services for the management of Partners’ assets. The omnibus agreement further provides that Partners pays TransMontaigne Inc. an annual insurance reimbursement for premiums on insurance policies covering Partners’ assets. The administrative fee may increase in subsequent years by the percentage increase in the consumer price index for the immediately preceding year, and the insurance reimbursement will increase in accordance with increases in the premiums payable under the relevant policies. In addition, if Partners
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acquires or constructs additional facilities during the term of the agreement, TransMontaigne Inc. will propose a revised administrative fee covering the provision of services for such additional facilities. If the conflicts committee of Partners’ general partner agrees to the revised administrative fee, TransMontaigne Inc. will provide services for the additional facilities pursuant to the agreement. Prior to the expiration of the agreement during May 2008, Partners’ general partner will propose revised general and administrative expenses to be allocated to Partners.
The accompanying combined financial statements include allocated general and administrative charges from TransMontaigne Inc. for indirect corporate overhead. The administrative fee includes expenses incurred by TransMontaigne Inc. to perform centralized corporate functions, such as legal, accounting, treasury, insurance administration and claims processing, health, safety and environmental, information technology, human resources, credit, payroll, taxes and engineering and other corporate services, to the extent such services are not outsourced by TransMontaigne Inc. The administrative fee does not include reimbursements for direct expenses TransMontaigne Inc. incurs on Partners’ behalf, such as salaries of operational personnel performing services on-site at our terminals and pipeline and the cost of their employee benefits, including 401(k), pension, and health insurance benefits. The allocated general and administrative expenses were $2.3 million for the eight months ended August 31, 2006, $1.7 million for the six months ended December 31, 2005 and $3.4 million and $3.3 million for the years ended June 30, 2005 and 2004, respectively.
The accompanying combined financial statements also include allocated insurance charges from TransMontaigne Inc. for insurance premiums to cover costs of insuring activities such as property, casualty, pollution, automobile, directors and officers’ liability, and other insurable risks. The allocated insurance charges were $0.4 million for the eight months ended August 31, 2006, $0.3 million for the six months ended December 31, 2005 and $0.6 million and $0.6 million for the years ended June 30, 2005 and 2004, respectively.
Management believes that the allocated general and administrative charges and insurance charges are representative of the costs and expenses incurred by TransMontaigne Inc. for managing the Brownsville and River operations.
Under the omnibus agreement, TransMontaigne Inc. has agreed to indemnify Partners for a stipulated period of time against certain potential environmental claims, losses and expenses associated with the operation of the facilities prior to their acquisition by the Partnership. TransMontaigne Inc. has no indemnification obligations with respect to environmental claims made as a result of additions to or modifications of environmental laws promulgated after the assets are contributed to the Partnership. Partners has agreed to indemnify TransMontaigne Inc. against environmental liabilities related to Partners’ facilities for potential environmental claims, losses and expenses associated with the operation of the facilities after their acquisition by the Partnership.
With respect to the Brownsville and River operations, TransMontaigne Inc.’s maximum liability for environmental indemnification is $15 million and TransMontaigne Inc. has no obligation to indemnify Partners for losses until such aggregate losses exceed $250,000.
(3) ACQUISITION
On August 22, 2006, TransMontaigne Inc. acquired certain liquefied petroleum gas (“LPG”) facilities from Rio Vista Energy Partners L.P. (“Rio Vista”) and Penn Octane Corporation (“Penn Octane”). On December 29, 2006, TransMontaigne Inc. sold the LPG terminaling assets with an aggregate active storage capacity of approximately 15,000 barrels to the Partnership. The sale of the LPG terminaling facilities by TransMontaigne Inc. to us has been recorded at carryover basis in a manner similar to a
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reorganization of entities under common control. As such , the accompanying combined financial statements include the assets, liabilities, and results of operations of the LPG storage assets from August 22, 2006, the date of acquisition by TransMontaigne Inc. from Rio Vista and Penn Octane.
The basis of the assets and liabilities of the LPG terminaling assets sold to us by TransMontaigne Inc. are as follows (in thousands):
| | August 22,
2006 | |
Property, plant and equipment | | $ | 5,001 | |
Accrued liabilities—accrued property taxes | | (22 | ) |
Predecessor equity | | $ | 4,979 | |
(4) CONCENTRATION OF CREDIT RISK AND TRADE ACCOUNTS RECEIVABLE
Our primary market areas are located in Brownsville, Texas and along the Mississippi and Ohio rivers. We have a concentration of trade receivable balances due from companies engaged in the distribution and marketing of refined products, chemicals and other liquids. These concentrations of customers may affect our overall credit risk in that the customers may be similarly affected by changes in economic, regulatory or other factors. Our customers’ historical and future credit positions are analyzed prior to extending credit. We manage our exposure to credit risk through credit analysis, credit approvals, credit limits and monitoring procedures, and for certain transactions we may request letters of credit, prepayments or guarantees. We maintain allowances for potentially uncollectible accounts receivable. At August 31, 2006, December 31, 2005, and June 30, 2005, we are not aware of any existing trade accounts receivable that may not be collected in the future. Changes in our estimates and assumptions may occur as a result of the passage of time and the occurrence of future events.
Trade accounts receivable, net consists of the following (in thousands):
| | August 31,
2006 | | December 31,
2005 | | June 30,
2005 | |
Trade accounts receivable | | $ | 2,420 | | $ | 1,377 | | $ | 1,102 | |
Less allowance for doubtful accounts | | — | | — | | — | |
| | $ | 2,420 | | $ | 1,377 | | $ | 1,102 | |
The following customers accounted for at least 10% of our combined revenues during one of the periods presented in the accompanying combined statements of operations (percentage of combined revenues for the respective period):
| | Eight months
ended
August 31,
2006 | | Six months
ended
December 31,
2005 | | Year
ended
June 30,
2005 | | Year
ended
June 30,
2004 | |
| | | | | | | | | |
TransMontaigne Inc. | | 1 | % | 8 | % | 16 | % | 29 | % |
Valero Supply and Marketing Company | | 36 | % | 13 | % | 10 | % | 4 | % |
P.M.I. Trading Limited | | 17 | % | 20 | % | 17 | % | 17 | % |
Glencore LTD | | 9 | % | 13 | % | 8 | % | 1 | % |
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(5) OTHER CURRENT ASSETS
Other current assets are as follows (in thousands):
| | August 31,
2006 | | December 31,
2005 | | June 30,
2005 | |
Additive detergent | | $ | 114 | | $ | 256 | | $ | 318 | |
Miscellaneous receivables and other | | 12 | | — | | 22 | |
| | $ | 126 | | $ | 256 | | $ | 340 | |
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net is as follows (in thousands):
| | August 31,
2006 | | December 31,
2005 | | June 30,
2005 | |
Land | | $ | 1,432 | | $ | 1,432 | | $ | 1,432 | |
Terminals, pipelines and equipment | | 86,598 | | 80,173 | | 79,990 | |
Technology and equipment | | 1,367 | | 1,367 | | 1,367 | |
Furniture, fixtures and equipment | | 257 | | 257 | | 257 | |
Construction in progress | | 4,537 | | 952 | | 167 | |
| | 94,191 | | 84,181 | | 83,213 | |
Less accumulated depreciation | | (30,409 | ) | (27,508 | ) | (25,380 | ) |
| | $ | 63,782 | | $ | 56,673 | | $ | 57,833 | |
(7) OTHER ASSETS
Other assets are as follows (in thousands):
| | August 31,
2006 | | December 31,
2005 | | June 30,
2005 | |
Goodwill | | $ | 6,853 | | $ | 6,853 | | $ | 6,853 | |
Deposits | | 3 | | 3 | | 3 | |
| | $ | 6,856 | | $ | 6,856 | | $ | 6,856 | |
Goodwill represents the excess of the aggregate purchase price over the fair value of the identifiable net assets acquired in connection with TransMontaigne Inc.’s November 1997 acquisition of the ITAPCO terminals. Goodwill is not amortized, but instead tested for impairment on an annual basis during the three months ended June 30.
(8) ACCRUED LIABILITIES
Accrued liabilities are as follows (in thousands):
| | August 31,
2006 | | December 31,
2005 | | June 30,
2005 | |
Accrued property taxes | | $ | 381 | | $ | 10 | | $ | 229 | |
Customer advances and deposits | | 114 | | 152 | | 116 | |
Other accrued liabilities | | 25 | | 25 | | 25 | |
| | $ | 520 | | $ | 187 | | $ | 370 | |
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(9) COMMITMENTS AND CONTINGENCIES
Operating Leases. We lease property and equipment under non-cancelable operating leases that extend through December 2010. At August 31, 2006, future minimum lease payments under these non-cancelable operating leases are as follows (in thousands):
Years ending December 31: | | Property and
equipment | |
2006 (remainder of the year) | | $ | 119 | |
2007 | | 357 | |
2008 | | 357 | |
2009 | | 357 | |
2010 | | 357 | |
Thereafter | | — | |
| | $ | 1,547 | |
Rental expense under operating leases was approximately $0.2 million, $0.2 million, $0.4 million and $0.4 million for the eight months ended August 31, 2006, six months ended December 31, 2005 and years ended June 30, 2005 and 2004, respectively.
(10) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of financial instruments at August 31, 2006, December 31, 2005 and June 30, 2005.
Cash and Cash Equivalents, Trade Receivables and Trade Accounts Payable. The carrying amount approximates fair value because of the short-term maturity of these instruments.
(11) BUSINESS SEGMENTS
We provide integrated terminaling, storage, and related services to companies engaged in the distribution and marketing of refined petroleum products, chemicals and other liquids. Our chief operating decision maker is TransMontaigne Inc.’s chief executive officer (“CEO”). TransMontaigne Inc.’s CEO reviews the financial performance of our business segments using disaggregated financial information about “net margins” for purposes of making operating decisions and assessing financial performance. “Net margins” is composed of revenues less direct operating costs and expenses. Accordingly, we present “net margins” for each of our two business segments: (i) Brownsville terminal and (ii) River terminal system.
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