References to “EPE Holdings” mean EPE Holdings, LLC, which is the general partner of the parent company.
References to “Enterprise Products Partners” mean the business and operations of Enterprise Products Partners L.P. and its consolidated subsidiaries.
References to “EPGP” mean Enterprise Products GP, LLC, which is the general partner of Enterprise Products Partners.
References to “EPO” mean Enterprise Products Operating LLC (as successor in interest by merger to Enterprise Products Operating L.P.), which is the operating subsidiary of Enterprise Products Partners.
References to “Duncan Energy Partners” mean Duncan Energy Partners L.P., which is a consolidated subsidiary of EPO.
References to “TEPPCO” mean the business and operations of TEPPCO Partners, L.P. and its consolidated subsidiaries.
References to “TEPPCO GP” mean Texas Eastern Products Pipeline Company, LLC, which is the general partner of TEPPCO.
References to “Energy Transfer Equity” mean the business and operations of Energy Transfer Equity, L.P. and its consolidated subsidiaries, which include Energy Transfer Partners, L.P. (“ETP”).
References to “ETEGP” mean LE GP, LLC, which is the general partner of Energy Transfer Equity.
References to “Employee Partnerships” mean EPE Unit L.P. (“EPE Unit I”), EPE Unit II, L.P. (“EPE Unit II”) and EPE Unit III, L.P. (“EPE Unit III”), collectively, which are private company affiliates of EPCO, Inc.
References to “MLP Entities” mean Enterprise Products Partners, TEPPCO and Energy Transfer Equity.
References to “Controlled Entities” mean Enterprise Products Partners and TEPPCO.
References to “Controlled GP Entities” mean TEPPCO GP and EPGP.
References to “EPCO” mean EPCO, Inc., which is a related party affiliate to all of the foregoing named entities.
The parent company, Enterprise Products Partners, EPGP, TEPPCO, TEPPCO GP, the Employee Partnerships and EPCO are affiliates under common control of Mr. Duncan. Enterprise Products Partners and TEPPCO and their respective general partners have been under Mr. Duncan’s indirect control for all periods presented in this quarterly report on Form 10-Q. We do not control Energy Transfer Equity or ETEGP.
Overview of Business
Enterprise GP Holdings L.P., the parent company, is a publicly traded Delaware limited partnership, the common units of which are listed on the NYSE under the ticker symbol “EPE.” The current business of Enterprise GP Holdings L.P. is to own general and limited partner interests of publicly traded partnerships engaged in the midstream energy industry and related businesses.
The parent company was formed in April 2005 and completed its initial public offering of 14,216,784 common units in August 2005. The parent company is owned 99.99% by its limited partners
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and 0.01% by its general partner, EPE Holdings. EPE Holdings is a wholly owned subsidiary of Dan Duncan, LLC, the membership interests of which are owned by Dan L. Duncan.
The parent company has no operations apart from its investing activities. Its primary cash requirements are for general and administrative costs, debt service requirements and distributions to its partners. The parent company’s assets and liabilities are not available to satisfy the debts and other obligations of its investees. Conversely, the assets and liabilities of the parent company’s investees are not available to satisfy the debts and obligations of the parent company. The primary objective of the parent company is to increase cash available for distributions to its unitholders and, accordingly, the value of its limited partner interests.
Enterprise Products Partners
The parent company acquired an investment in Enterprise Products Partners and EPGP in August 2005. The parent company owns 13,454,498 common units of Enterprise Products Partners and 100% of EPGP, which is entitled to 2% of the cash distributions paid by Enterprise Products Partners and holds the associated incentive distribution rights (“IDRs”) of Enterprise Products Partners. As an incentive, EPGP’s percentage interest in Enterprise Products Partners’ quarterly cash distributions is increased after certain specified target levels of distribution rates are met by Enterprise Products Partners.
Enterprise Products Partners is a publicly traded (NYSE: EPD) North American midstream energy company providing a wide range of services to producers and consumers of natural gas, natural gas liquids (“NGLs”), crude oil, and certain petrochemicals. In addition, Enterprise Products Partners is an industry leader in the development of pipeline and other midstream energy infrastructure in the continental United States and Gulf of Mexico. Its midstream energy asset network links producers of natural gas, NGLs and crude oil from some of the largest supply basins in the United States, Canada and the Gulf of Mexico with domestic consumers and international markets.
Enterprise Products Partners transports natural gas, NGLs, crude oil and petrochemical products through more than 35,000 miles of onshore and offshore pipelines. Services include natural gas gathering, processing, transportation and storage; NGL fractionation (or separation), transportation, storage and import and export terminaling; crude oil transportation; offshore production platform services; and petrochemical pipeline and services.
TEPPCO
The parent company acquired 4,400,000 common units of TEPPCO and 100% of the member interests of TEPPCO GP (including related IDRs) on May 7, 2007. TEPPCO GP is entitled to 2% of the cash distributions paid by TEPPCO and holds the associated IDRs of TEPPCO. As an incentive, TEPPCO GP’s percentage interest in TEPPCO’s quarterly cash distributions is increased after certain specified target levels of distribution rates are met by TEPPCO.
TEPPCO is a publicly traded (NYSE: TPP) North American midstream energy company that owns and operates refined products and LPG pipelines; owns and operates petrochemical and NGL pipelines; is engaged in transportation, storage, gathering and marketing of crude oil; owns and operates natural gas gathering systems; and has ownership interests in various joint venture projects including the Seaway and Centennial pipelines. The business purpose of TEPPCO GP is to manage the affairs and operations of TEPPCO. TEPPCO GP has no separate business activities outside of those conducted by TEPPCO. The commercial management of TEPPCO does not overlap with that of Enterprise Products Partners or Energy Transfer Equity.
Energy Transfer Equity
The parent company acquired its non-controlling limited and general partner interests in Energy Transfer Equity and ETEGP on May 7, 2007 from third-parties. On May 7, 2007, the parent company entered into a securities purchase agreement pursuant to which 38,976,090 common units of Energy
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Transfer Equity and approximately 34.9% of the membership interests in ETEGP were acquired for $1.65 billion in cash. ETEGP currently owns an approximate 0.3% general partner interest in Energy Transfer Equity and has no incentive distribution rights in the quarterly cash distributions of Energy Transfer Equity.
Energy Transfer Equity is a publicly traded Delaware limited partnership formed in 2002 that completed its initial public offering in February 2006. Energy Transfer Equity’s only cash generating assets are its direct and indirect investments in limited and general partner interests of ETP. Energy Transfer Equity owns common units and the 2% general partner interest of ETP (including 100% of the incentive distribution rights held by the general partner of ETP).
The business purpose of ETEGP is to manage the affairs and operations of Energy Transfer Equity. ETEGP has no separate business activities outside of those conducted by Energy Transfer Equity. The commercial management of Energy Transfer Equity does not overlap with that of Enterprise Products Partners or TEPPCO.
ETP is a publicly traded partnership owning and operating a diversified portfolio of midstream energy assets. ETP’s natural gas operations include natural gas gathering and transportation pipelines, interstate transmission pipelines, natural gas treating and processing assets located in Texas and Louisiana, and three natural gas storage facilities located in Texas. These assets include approximately 12,200 miles of intrastate pipeline in service, with an additional 500 miles of intrastate pipeline under construction, and 2,400 miles of interstate pipeline. ETP is also one of the three largest retail marketers of propane in the U. S., serving more than one million customers across the country.
Since we do not control Energy Transfer Equity or ETEGP, our equity earnings are based on estimates derived from the public SEC filings of Energy Transfer Equity. The fiscal year of Energy Transfer Equity ends August 31; therefore, their quarterly financial reporting timeframes do not coincide with ours. As a result, we estimate our share of equity earnings based on their published data. Our estimates may differ from those that Energy Transfer Equity might publish if their fiscal periods matched ours.
Recent Developments — Private Placement of units by Parent Company in July 2007
On July 17, 2007, the parent company completed a private placement of 20,134,220 units to third party investors at $37.25 per unit pursuant to the terms of a unit purchase agreement. The net proceeds of this private placement, after giving effect to placement agent fees, were approximately $738.0 million. The net proceeds were used to completely repay the $500.0 million outstanding under the EPE Equity (Debt Bridge) and reduce outstanding principal under the EPE Term Loan (Debt Bridge) by approximately $238.0 million.
The parent company also entered into a registration rights agreement (“registration rights agreement“) with purchasers in this private placement of units. Pursuant to the registration rights agreement, the parent company intends to file a registration statement with the U.S. Securities and Exchange Commission within 90 days after the closing date (i.e. October 15, 2007) and have such registration statement become effective within 150 days of completing the offering (i.e. December 14, 2007). If the registration statement covering the units is not declared effective by the SEC within 150 days after the closing date of the private placement (the “Target Effective Date”), then the parent company will be liable to each Purchaser for liquidated damages, and not as a penalty, of 0.25% of the product of $37.25 (the purchase price) times the number of units purchased by the Purchaser (the “Liquidated Damages Multiplier”) per each non-overlapping 30-day period for the first 60 days following the Target Effective Date, increasing by an additional 0.25% of the Liquidated Damages Multiplier per each non-overlapping 30-day period for each subsequent 60-day period subsequent to the 60 days following the Target Effective Date, up to a maximum of 1.00% of the Liquidated Damages Multiplier per each non-overlapping 30-day period (i.e., 0.25% for 1-60 days; 0.5% for 61-120 days; 0.75% for 121-180 days; and 1.0% thereafter); provided, that the liquidated damages for any period shall be prorated by multiplying the liquidated damages to be paid in a full 30-day period by a fraction, the numerator of which is the number of days for which such liquidated damages are owed, and the denominator of which is 30; and provided further, that
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the aggregate amount of liquidated damages payable by the Partnership under the Registration Rights Agreement to each Purchaser shall not exceed 10.0% of the Liquidated Damages Multiplier with respect to such Purchaser.
The Registration Rights Agreement also provides for the payment of liquidated damages in the event the Partnership suspends the use of the shelf registration statement in excess of permitted periods. In accordance with FASB Staff Position No. EITF 00-19-2, “Accounting for Registration Payment Arrangements,” we have not recorded a liability for this obligation because we believe the likelihood of having to make any payments under this arrangement is remote.
Basis of Presentation
Effective with the second quarter 2007, our consolidated and parent-only financial statements and related notes have been restated to reflect the acquisition of partnership interests in TEPPCO GP and TEPPCO in May 2007 and the resulting reorganization of our business segments.
Generally accepted accounting principles in the United States (“GAAP”) require, in most circumstances, a general partner to consolidate the financial statements of its respective limited partnership due to the general partner’s ability to control the actions of the limited partnership. As a result, our general purpose financial statements reflect the consolidated results of EPGP with those of Enterprise Products Partners and TEPPCO GP with those of TEPPCO. We control both EPGP and TEPPCO GP through our ownership of 100% of the member interests of each.
The acquisition of ownership interests in EPGP, Enterprise Products Partners, TEPPCO and TEPPCO GP were accounted for at historical costs as a reorganization of entities under common control in a manner similar to a pooling of interests. We acquired our ownership interests in EPGP and Enterprise Products Partners in August 2005 from private company affiliates of EPCO. Likewise, we acquired our ownership interests in TEPPCO and TEPPCO GP in May 2007 from private company affiliates of EPCO. The inclusion of TEPPCO and TEPPCO GP in our financial statements was effective January 1, 2005 since affiliates of EPCO under common control with the parent company originally acquired ownership interests in TEPPCO and TEPPCO GP in February 2005.
Our restated Unaudited Condensed Consolidated Financial Statements and Notes continue to reflect the parent company’s share of earnings, cash flows and net assets in Enterprise Products Partners and EPGP as before. With respect to TEPPCO and TEPPCO GP, our consolidated financial statements also reflect the parent company’s deemed investments in TEPPCO and TEPPCO GP. All earnings derived from IDRs and TEPPCO common units in excess of those allocated to the parent company are presented as a component of minority interest in our consolidated financial statements. In addition, the former owners of the TEPPCO and TEPPCO GP interests and rights were allocated all cash receipts from these investments during the periods they owned such interests prior to May 7, 2007. This method of presentation is intended to show how the combination of investments would have affected our business. For additional information regarding this method of presentation, see Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements.
The supplemental financial information we provide for the parent company was prepared using the assumptions outlined above for our general purpose Unaudited Condensed Consolidated Financial Statements.
We revised our business segment disclosures to reflect the fundamental change in the parent company’s investment portfolio resulting from its acquisition of interests in TEPPCO, TEPPCO GP, Energy Transfer Equity and ETEGP on May 7, 2007. Our reorganized business segments reflect the manner in which these investments are managed and reviewed by our chief operating decision maker. The new reportable segments are (i) Investment in Enterprise Products Partners, (ii) Investment in TEPPCO and (iii) Investment in Energy Transfer Equity.
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Results of Operations
As discussed under “Basis of Presentation,” our general purpose Unaudited Condensed Consolidated Financial Statements include the underlying results for EPGP and Enterprise Products Partners and TEPPCO GP and TEPPCO.
Our results of operations and financial condition are subject to a variety of risks. For information regarding some, but not all, of these risk factors, see Part II, Item 1A of this quarterly report on Form 10-Q.
Effective with the period ending June 30, 2007, the Company has three principal operating segments: (i) Investment in Enterprise Products Partners, (ii) Investment in TEPPCO and (iii) Investment in Energy Transfer Equity. Our investing activities are organized into business segments that reflect how the parent company’s chief operating decision maker (i.e. our chief executive officer) routinely monitors the financial performance of its investments. Each investee has separate operating management and boards of directors, with each board having three independent directors.
Our Investment in Enterprise Products Partners business segment reflects the consolidated operations of Enterprise Products and its general partner, EPGP. Our Investment in TEPPCO reflects the consolidated operations of TEPPCO and its general partner, TEPPCO GP. As discussed previously, the Investment in TEPPCO segment represents the historical operations of TEPPCO and TEPPCO GP that were under common control with us prior to our acquisition of these interests in May 2007. TEPPCO and Enterprise Products Partners are joint venture partners in the Jonah Gathering System (“Jonah”), which is a natural gas pipeline located in southwest Wyoming. Within their respective financial statements, Enterprise Products Partners and TEPPCO account for their joint venture in Jonah using the equity method of accounting. As a result of common control at the parent company-level, we classify the assets and results of operations from Jonah within our Investment in TEPPCO segment.
Our Investment in Energy Transfer Equity business segment reflects our non-controlling equity method investment in Energy Transfer Equity and its general partner, ETEGP. Financial information pertaining to this segment is based primarily on publicly available information of Energy Transfer Equity.
We evaluate segment performance based on operating income. In addition, our measure of operating income includes earnings from equity method unconsolidated affiliates. For additional information regarding our business segments, see Note 4 of the Notes to Unaudited Condensed Consolidated Financial Statements included under Item 1 of this quarterly report.
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The following table summarizes our financial information by business segment for the periods indicated (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | | For the Three Months | | For the Six Months |
| | | Ended June 30, | | Ended June 30, |
| | | 2007 | | 2006 | | 2007 | | 2006 |
| | | |
| Revenues: | | | | | | | | | | | | | | | | |
| Investment in Enterprise Products Partners | | $ | 4,212,806 | | | $ | 3,517,853 | | | $ | 7,535,660 | | | $ | 6,767,927 | |
| Investment in TEPPCO | | | 2,095,999 | | | | 2,424,289 | | | | 4,131,151 | | | | 4,966,128 | |
| Eliminations | | | (14,535 | ) | | | (16,978 | ) | | | (32,266 | ) | | | (26,126 | ) |
| | | |
| Total revenues | | | 6,294,270 | | | | 5,925,164 | | | | 11,634,545 | | | | 11,707,929 | |
| | | |
| Costs and expenses: | | | | | | | | | | | | | | | | |
| Investment in Enterprise Products Partners | | | 3,992,146 | | | | 3,342,536 | | | | 7,133,341 | | | | 6,401,679 | |
| Investment in TEPPCO | | | 2,021,599 | | | | 2,366,490 | | | | 3,953,204 | | | | 4,843,850 | |
| Other, non-segment including parent | | | (12,488 | ) | | | (18,133 | ) | | | (21,345 | ) | | | (25,002 | ) |
| | | |
| Total costs and expenses | | | 6,001,257 | | | | 5,690,893 | | | | 11,065,200 | | | | 11,220,527 | |
| | | |
| Equity earnings (loss): | | | | | | | | | | | | | | | | |
| Investment in Enterprise Products Partners | | | (7,311 | ) | | | 8,012 | | | | (2,087 | ) | | | 12,041 | |
| Investment in TEPPCO | | | (2,429 | ) | | | 2,675 | | | | (2,130 | ) | | | 3,664 | |
| Investment in Energy Transfer Equity | | | 2,774 | | | | — | | | | 2,774 | | | | — | |
| | | |
| Total equity earnings (loss) | | | (6,966 | ) | | | 10,687 | | | | (1,443 | ) | | | 15,705 | |
| | | |
| Operating income: | | | | | | | | | | | | | | | | |
| Investment in Enterprise Products Partners | | | 213,349 | | | | 183,329 | | | | 400,232 | | | | 378,289 | |
| Investment in TEPPCO | | | 71,971 | | | | 60,474 | | | | 175,817 | | | | 125,942 | |
| Investment in Energy Transfer Equity | | | 2,774 | | | | — | | | | 2,774 | | | | — | |
| Other, non-segment including parent | | | (2,047 | ) | | | 1,155 | | | | (10,921 | ) | | | (1,124 | ) |
| | | |
| Total operating income | | | 286,047 | | | | 244,958 | | | | 567,902 | | | | 503,107 | |
| Interest expense | | | (116,222 | ) | | | (77,844 | ) | | | (204,347 | ) | | | (159,128 | ) |
| Provision for income taxes | | | 1,651 | | | | (6,785 | ) | | | (7,152 | ) | | | (9,677 | ) |
| Other income, net | | | 3,879 | | | | 3,863 | | | | 66,296 | | | | 6,744 | |
| | | |
| Income before minority interest and accounting change | | | 175,355 | | | | 164,192 | | | | 422,699 | | | | 341,046 | |
| Minority interest | | | (153,852 | ) | | | (133,253 | ) | | | (347,742 | ) | | | (279,540 | ) |
| Cumulative effect of change in accounting principle | | | — | | | | — | | | | — | | | | 96 | |
| | | |
| Net income | | $ | 21,503 | | | $ | 30,939 | | | $ | 74,957 | | | $ | 61,602 | |
| | | |
See Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements for financial information regarding the parent company. The following information is a detailed analysis of our operating income by business segment:
Comparison of Three Months Ended June 30, 2007 with Three Months Ended June 30, 2006
Investment in Enterprise Products Partners. Segment revenues increased $695.0 million quarter-to-quarter primarily due to higher energy commodity sales volumes and prices in the second quarter of 2007 relative to the second quarter of 2006. Revenues for the second quarter of 2007 include $21.5 million of proceeds from business interruption insurance associated with Hurricanes Katrina and Rita in 2005. Revenues for the second quarter of 2006 include $2.0 million of business interruption insurance proceeds associated with Hurricane Ivan in 2004.
Segment costs and expenses increased $649.6 million quarter-to-quarter. The increase in consolidated operating costs and expenses is primarily due to an increase in the cost of sales associated with Enterprise Products Partners’ marketing activities. The cost of sales of its NGL, natural gas and petrochemical products increased $423.4 million quarter-to-quarter as a result of an increase in sales volumes and higher energy commodity prices. In addition, the second quarter of 2007 includes $54.0 million of consolidated operating costs and expenses attributable to businesses Enterprise Products Partners acquired or assets it placed in-service after the second quarter of 2006.
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Changes in Enterprise Products Partners’ revenues and costs and expenses quarter-to-quarter are explained in part by changes in energy commodity prices. The weighted-average indicative market price for NGLs was $1.13 per gallon during the second quarter of 2007 versus $1.04 per gallon during the second quarter of 2006. Our determination of the weighted-average indicative market price for NGLs is based on U.S. Gulf Coast prices for such products at Mont Belvieu, Texas, which is the primary industry hub for domestic NGL production. The market price of natural gas (as measured at Henry Hub) averaged $7.55 per MMBtu during the second quarter of 2007 versus $6.80 per MMBtu during the second quarter of 2006.
Segment operating income increased $30.0 million quarter-to-quarter due to strength in the underlying performance of Enterprise Products Partners. Enterprise Products Partners operates in four primary business lines: NGL Pipelines & Services, Onshore Natural Gas Pipelines & Services, Offshore Pipelines & Services and Petrochemical Services.
Segment operating income attributable to NGL Pipelines & Services increased $42.4 million quarter-to-quarter primarily due to strong demand for NGLs in the second quarter of 2007 compared to the 2006 period resulting in higher natural gas processing margins, increased Equity NGL production and higher NGL throughput volumes at certain of Enterprise Products Partners’ pipelines and fractionation facilities. Equity NGL production represents the NGL volumes that Enterprise Products Partners earns and takes title to as a result of providing natural gas processing services. In addition, the change in operating income attributed to NGL Pipelines & Services reflects an $18.2 million increase in proceeds from business interruption insurance claims related to Hurricanes Katrina, Rita and Ivan.
Segment operating income attributable to Onshore Natural Gas Pipelines & Services decreased $10.7 million quarter-to-quarter primarily due to lower natural gas sales margins and higher maintenance and pipeline integrity costs during the second quarter of 2007 compared to the second quarter of 2006.
Segment operating income attributable to Offshore Pipelines & Services increased $5.3 million quarter-to-quarter primarily due to the start-up of Enterprise Products Partners’ Independence project. The second quarter of 2007 includes $13.7 million of demand fee revenues associated with the Independence Hub platform. Also, the second quarter of 2007 includes $1.3 million of business interruption insurance recoveries compared to none in the second quarter of 2006.
Segment operating income attributable to Petrochemical Services decreased $8.4 million quarter-to-quarter primarily due to lower sales margins from Enterprise Products Partners’ octane enhancement business.
Investment in TEPPCO.Segment revenues decreased by $328.3 million quarter-to-quarter primarily due to a decrease in energy commodity prices partially offset by increased volumes transported, gathered and marketed. Sales of crude oil petroleum products, which are part of TEPPCO’s Upstream business line, decreased by $350.0 million as a result of lower crude oil prices and lower terminalling revenues, partially offset by increased volumes marketed. As measured by NYMEX, the average price of crude oil decreased from $70.72 per barrel during 2006 to $65.02 per barrel during 2007. Revenues from TEPPCO’s Downstream business line increased $13.8 million primarily due to colder than normal weather in April 2007 and increased volumes transported. Costs and expenses decreased $344.9 million quarter-to-quarter primarily due to a $350.3 million decrease in the cost of sales primarily associated with TEPPCO’s crude oil marketing activities.
Segment operating income increased $11.5 million quarter-to-quarter due to the underlying results of TEPPCO’s three primary business lines: Downstream, Upstream and Midstream. Segment operating income attributable to Midstream increased $9.6 million quarter-to-quarter primarily due to earnings growth from system expansions on the Jonah Gas Gathering System in Wyoming. Segment operating income attributable to Downstream increased $2.7 million primarily due to an increase in transportation revenues resulting from colder than normal weather in April 2007. Segment operating income attributable to Upstream decreased $3.3 million quarter-to-quarter primarily due to decreased earnings from Seaway as a result of lower transportation volumes, which were negatively impacted by the unexpected temporary shut-down of several regional refineries for maintenance and repairs and other factors.
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Investment in Energy Transfer Equity. We recorded an aggregate $2.8 million of equity earnings (net of $6.6 million of excess cost amortization) from Energy Transfer Equity and ETEGP for the 55 days that we owned an investment in these entities during the three months ended June 30, 2007. Since we do not control Energy Transfer Equity or ETEGP, our equity earnings are based on estimates derived from the public SEC filings of Energy Transfer Equity. See Note 9 of the Notes to Unaudited Condensed Consolidated Financial Statements for information regarding the excess cost amounts associated with our Investment in Energy Transfer Equity.
We received our first cash distribution from Energy Transfer Equity and ETEGP in July 2007 in an amount of $14.6 million.
See “Significant Risks and Uncertainties” for information regarding recent actions taken by the Federal Energy Regulatory Commission (“FERC”) and Commodity Futures Trading Commission (“CFTC”) involving ETP.
Comparison of Six Months Ended June 30, 2007 with Six Months Ended June 30, 2006
Investment in Enterprise Products Partners. Segment revenues increased $767.7 million period-to-period primarily due to higher energy commodity sales volumes and prices in the first six months of 2007 relative to the 2006 period. Revenues for the first six months of 2007 include $22.8 million of proceeds from business interruption insurance associated with Hurricanes Katrina and Rita in 2005. Revenues for the first six months of 2006 include $12.2 million of business interruption insurance proceeds associated with Hurricane Ivan in 2004.
Segment costs and expenses increased $731.7 million period-to-period. The increase in consolidated operating costs and expenses is primarily due to an increase in the cost of sales associated with Enterprise Products Partners’ marketing activities. The cost of sales of its NGL, natural gas and petrochemical products increased $424.9 million period-to-period as a result of an increase in sales volumes and higher energy commodity prices. In addition, the first six months of 2007 includes $98.7 million of consolidated operating costs and expenses attributable to businesses Enterprise Products Partners acquired or assets it placed in-service after the second quarter of 2006.
Changes in Enterprise Products Partners’ revenues and costs and expenses period-to-period are explained in part by changes in energy commodity prices. The weighted-average indicative market price for NGLs was $1.04 per gallon for the six months ended June 30, 2007 versus $0.99 per gallon during the first six months of 2006—a period-to-period increase of 5%. The Henry Hub market price for natural gas averaged $7.16 per MMBtu for the first six months of 2007 versus $7.91 per MMBtu during the 2006 period.
Total segment operating income increased $21.9 million period-to-period. Segment operating income attributable to NGL Pipelines & Services increased $55.6 million period-to-period primarily due to strong demand for NGLs in the first six months of 2007 compared to the 2006 period resulting in higher natural gas processing margins, increased Equity NGL production and fee-based processing volumes and higher NGL throughput volumes at certain of Enterprise Products Partners’ pipelines and fractionation facilities. In addition, the change in operating income attributed to NGL Pipelines & Services reflects an $11.3 million increase in proceeds from business interruption insurance claims related to Hurricanes Katrina, Rita and Ivan.
Segment operating income attributable to Onshore Natural Gas Pipelines & Services decreased $38.3 million period-to-period primarily due to lower natural gas sales margins and higher maintenance and pipeline integrity costs during the first six months of 2007 compared to the first six months of 2006.
Segment operating income attributable to Offshore Pipelines & Services increased $5.3 million period-to-period primarily due to the start-up of the Independence Hub platform. The first six months of 2007 include $17.6 million of demand fee revenues from the Independence Hub platform. Operating
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income attributed to Offshore Pipelines & Services for the first six months of 2007 reflects $1.3 million of proceeds from business interruption insurance claims versus $1.9 million for the first six months of 2006.
Segment operating income attributable to Petrochemical Services increased $0.3 million period-to-period largely due to higher butane isomerization volumes and isooctane production volumes.
Investment in TEPPCO.Segment revenues decreased by $835.0 million period-to-period primarily due to a decrease in energy commodity prices partially offset by increased volumes transported, gathered and marketed. Sales of crude oil petroleum products, which are part of TEPPCO’s Upstream business line, decreased by $909.4 million as a result of lower crude oil prices and the adoption of EITF 04-13 on April 1, 2006, which reduced revenues in 2007 relative to 2006 (and had an offsetting impact on costs and expenses). As measured by NYMEX, the average price of crude oil decreased from $67.10 per barrel during 2006 to $61.65 per barrel during 2007. Revenues from TEPPCO’s Downstream business line increased $34.7 million primarily due to colder than normal weather in 2007 and increased volumes transported. Costs and expenses decreased $890.6 million period-to-period primarily due to a $919.5 million decrease in the cost of sales primarily associated with TEPPCO’s crude oil marketing activities and the adoption of EITF 04-13 on April 1, 2006, lower pipeline operating costs as a result of the migration to a shared services environment with EPCO and lower pipeline inspection and repair costs.
Segment operating income increased $49.9 million period-to-period due to the underlying results of TEPPCO’s three primary business lines: Downstream, Upstream and Midstream. Segment operating income attributable to Downstream increased $33.1 million primarily due to gains recognized from the sale of various assets during 2007, an increase in transportation revenues resulting from colder winter weather in 2007, lower operating costs resulting from the migration into a shared services environment and lower pipeline inspection and repair costs, partially offset by lower earnings from TEPPCO’s investment in Mont Belvieu Storage Partners as a result of its sale on March 1,2007. Segment operating income attributable to Midstream increased $7.0 million period-to-period primarily due to earnings growth from system expansions on the Jonah Gas Gathering System in Wyoming. Segment operating income attributable to Upstream increased $5.3 million period-to-period primarily due to improved margins from crude oil marketing and increased product measurement gains, partially offset by higher pipeline operating and maintenance expense and decreased earnings from Seaway.
Investment in Energy Transfer Equity. We recorded an aggregate $2.8 million of equity earnings (net of $6.6 million of excess cost amortization) from Energy Transfer Equity and ETEGP for the 55 days that we owned an investment in these entities during the second quarter of 2007.
Interest expense
The following table presents the components of interest expense as presented in our Unaudited Condensed Statements of Consolidated Operations for the periods indicated:
| | | | | | | | | | | | | | | | | |
| | | For the Three Months | | For the Six Months |
| | | Ended June 30, | | Ended June 30, |
| | | 2007 | | 2006 | | 2007 | | 2006 |
| | | |
| Interest expense attributable to: | | | | | | | | | | | | | | | | |
| Consolidated debt obligations of Enterprise Products Partners | | $ | 71,275 | | | $ | 56,336 | | | $ | 134,633 | | | $ | 114,410 | |
| Consolidated debt obligations of TEPPCO | | | 22,785 | | | | 19,198 | | | | 44,996 | | | | 40,341 | |
| Parent company debt obligations | | | 22,162 | | | | 2,310 | | | | 24,718 | | | | 4,377 | |
| | | |
| Total interest expense | | $ | 116,222 | | | $ | 77,844 | | | $ | 204,347 | | | $ | 159,128 | |
| | | |
See Note 11 of the Notes to Unaudited Condensed Consolidated Financial Statements for information regarding our consolidated debt obligations, which include the consolidated debt obligations of Enterprise Products Partners and TEPPCO.
Consolidated debt obligations of Enterprise Products Partners. Consolidated borrowings of Enterprise Products Partners have increased period-to-period primarily due to the financing of its capital spending program. Interest expense for the three months ended June 30, 2007 was $14.9 million higher
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than that recorded for the same three month period in 2006. The increase is primarily due to EPO’s issuance of junior subordinated notes during the third quarter of 2006 (principal amount of $550.0 million) and second quarter of 2007 (principal amount of $700.0 million). In addition, Enterprise Products Partners’ consolidated interest expense for the three months ended June 30, 2007 includes $2.4 million associated with Duncan Energy Partners’ credit facility. Interest expense for the six months ended June 30, 2007 increased $20.2 million over that recorded during the same six month period in 2006 primarily due to the issuance of EPO’s junior subordinated notes and borrowings by Duncan Energy Partners.
Consolidated debt obligations of TEPPCO. Interest expense increased $3.6 million for the three months ended June 30, 2007, compared with the three months ended June 30, 2006. The quarter-to-quarter increase is primarily due to expense reductions recorded in the second quarter of 2006 related to interest rate swaps and the issuance by TEPPCO of its junior subordinated notes in May 2007. Interest expense increased $4.7 million for the six months ended June 30, 2007, compared with the six months ended June 30, 2006, for the same reasons.
Parent company debt obligations. Parent company interest expense for the three months ended June 30, 2007 increased $19.9 million over that recorded during the same three month period in 2007. The increase in interest expense is attributable to $1.65 billion borrowed under interim credit facilities in May 2007 in connection with the acquisition of partnership interests in Energy Transfer Equity. Interest expense increased $20.3 million for the six months ended June 30, 2007, compared with the six months ended June 30, 2006, for the same reasons.
Provision for income taxes
Provision for income taxes for the three months ended June 30, 2007 decreased $8.4 million compared to the same period in 2006 primarily due to losses recorded by Dixie Pipeline Company, which is subject to taxation, during the 2007 period and the initial recognition of the Texas Margin Tax during the 2006 period.
Other income, net
On March 1, 2007, TEPPCO sold its 49.5% ownership interest in Mont Belvieu Storage Partners, L.P. (“MB Storage”) and its 50% ownership interest in Mont Belvieu Venture, LLC (the general partner of MB Storage) to Louis Dreyfus for approximately $137.6 million in cash. TEPPCO recognized a gain of approximately $59.6 million related to its sale of these equity interests, which is included in other income for the six months ended June 30, 2007.
Minority interest expense
The following table presents the components of minority interest expense as presented on our Unaudited Condensed Statements of Consolidated Operations for the periods indicated:
| | | | | | | | | | | | | | | | | |
| | | For the Three Months | | For the Six Months |
| | | Ended June 30, | | Ended June 30, |
| | | 2007 | | 2006 | | 2007 | | 2006 |
| | | |
| Limited partners of Enterprise Products Partners | | $ | 110,004 | | | $ | 99,802 | | | $ | 192,408 | | | $ | 206,972 | |
| Limited partners of Duncan Energy Partners | | | 3,283 | | | | — | | | | 6,114 | | | | — | |
| Related party former owners of TEPPCO GP | | | — | | | | 3,631 | | | | — | | | | 8,788 | |
| Limited partners of TEPPCO | | | 38,108 | | | | 29,282 | | | | 143,933 | | | | 61,044 | |
| Joint venture partners | | | 2,457 | | | | 538 | | | | 5,287 | | | | 2,736 | |
| | | |
| Total | | $ | 153,852 | | | $ | 133,253 | | | $ | 347,742 | | | $ | 279,540 | |
| | | |
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Minority interest expense amounts attributable to the limited partners of Enterprise Products Partners, Duncan Energy Partners and TEPPCO primarily represent allocations of earnings by these entities to their unitholders, excluding those earnings allocated to the parent company in connection with its ownership of common units of Enterprise Products Partners and TEPPCO.
Significant Risks and Uncertainties
Weather-Related Risks – Enterprise Products Partners.Certain of Enterprise Products Partners’ key assets are located onshore along the U.S. Gulf Coast and offshore in the Gulf of Mexico. To varying degrees, such locations are vulnerable to weather-related risks such as hurricanes and tropical storms.
The following table summarizes proceeds Enterprise Products Partners received from business interruption and property damage insurance claims with respect to certain named storms.
| | | | | | | | | | | | | | | | | |
| | | For the Three Months | | For the Six Months |
| | | Ended June 30, | | Ended June 30, |
| | | 2007 | | 2006 | | 2007 | | 2006 |
| | | |
| Business interruption (“BI”) proceeds: | | | | | | | | | | | | | | | | |
| Hurricane Ivan | | $ | — | | | $ | 2,021 | | | $ | 377 | | | $ | 12,226 | |
| Hurricane Katrina | | | 13,199 | | | | — | | | | 13,199 | | | | — | |
| Hurricane Rita | | | 8,258 | | | | — | | | | 8,258 | | | | — | |
| Other | | | — | | | | — | | | | 996 | | | | — | |
| | | |
| Total BI proceeds | | | 21,457 | | | | 2,021 | | | | 22,830 | | | | 12,226 | |
| | | |
| Property damage (“PD”) proceeds: | | | | | | | | | | | | | | | | |
| Hurricane Ivan | | | 204 | | | | — | | | | 1,273 | | | | 24,104 | |
| Hurricane Katrina | | | 6,563 | | | | — | | | | 6,563 | | | | — | |
| Other | | | — | | | | — | | | | 184 | | | | — | |
| | | |
| Total PD proceeds | | | 6,767 | | | | — | | | | 8,020 | | | | 24,104 | |
| | | |
| Total | | $ | 28,224 | | | $ | 2,021 | | | $ | 30,850 | | | $ | 36,330 | |
| | | |
To the extent Enterprise Products Partners receives nonrefundable cash proceeds from business interruption insurance claims, they are recorded as a gain in our Unaudited Condensed Statements of Consolidated Operations in the period of receipt.
FERC Investigation – Energy Transfer Equity.In July 2007, ETP announced that it is under investigation by the FERC and CFTC with respect to whether ETP engaged in manipulation or improper trading activities in the Houston Ship Channel market around the times of the hurricanes in the fall of 2005 and other prior periods in order to benefit financially from commodities derivative positions and from certain of index-priced physical gas purchases in the Houston Ship Channel market. The FERC is also investigating certain of ETP’s intrastate transportation activities.
On July 26, 2007, the FERC announced that it was taking preliminary action against ETP and proposed civil penalties of $97.5 million and disgorgement of profits of $70.1 million. Additionally, in its lawsuit, the CFTC is seeking civil penalties of $130,000 per violation or three times the profit gained from each violation and other specified relief. At this time, ETP is unable to predict the outcome of these matters; however, it is possible that the amount it becomes obligated to pay as a result of the final resolution of these matters, whether on a negotiated settlement basis or otherwise, will exceed the amount of existing accrual related to these matters. See Note 15 of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding this matter.
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Liquidity and Capital Resources
Parent Company Information
The primary sources of cash flow for the parent company are its investments in limited and general partner interests of publicly-traded limited partnerships. The cash distributions the parent company receives from its investments in Enterprise Products Partners, TEPPCO, Energy Transfer Equity and their respective general partners are exposed to certain risks inherent in the underlying business of each investee. See Part II Item 1A, “Risk Factors,” for a discussion of such risks.
The parent company’s primary cash requirements are for general and administrative expenses, debt service costs, investments and distributions to partners. The parent company expects to fund its short-term cash requirements for such amounts as general and administrative expenses using operating cash flows. Debt service requirements are expected to be funded by operating cash flows and/or refinancing arrangements. The parent company expects to fund its cash distributions to partners primarily with operating cash flows.
The parent company received a total of $102.3 million and $87.0 in cash distributions from investments in Enterprise Products Partners and TEPPCO for the six months ended June 30, 2007 and 2006, respectively. Of this amount, the parent company used $63.6 million and $51.1 million to pay distributions to its unitholders during the six months ended June 30, 2007 and 2006, respectively. The following table summarizes the components of cash distributions received from investees and cash distributions paid by the parent company for the periods indicated (dollars in thousands):
| | | | | | | | | |
| | | For the Six Months |
| | | Ended June 30, |
| | | 2007 | | 2006 |
| | | |
Cash distributions from investees: | | | | | | | | |
| Investment in Enterprise Products Partners (“EPD”): | | | | | | | | |
| From 13,454,498 common units of EPD | | $ | 12,681 | | | $ | 11,874 | |
| From 2% general partner interest in EPD | | | 6,362 | | | | 7,193 | |
| From general partner incentive distribution rights in distributions of EPD | | | 53,531 | | | | 40,111 | |
| Investment in TEPPCO: | | | | | | | | |
| From 4,400,000 common units of TEPPCO | | | 5,984 | | | | 5,220 | |
| From 2% general partner interest in TEPPCO | | | 2,492 | | | | 1,928 | |
| From general partner incentive distribution rights in distributions of TEPPCO | | | 21,284 | | | | 20,688 | |
| | | |
| Total cash distributions from unconsolidated affiliates | | $ | 102,334 | | | $ | 87,014 | |
| | | |
| | | | | | | | | |
Distributions by the parent company: | | | | | | | | |
| EPCO and affiliates (91,276,032 units) | | $ | 55,129 | | | $ | 44,334 | |
| Public (11,738,388 units) | | | 8,424 | | | | 6,774 | |
| General partner interest (2% ) | | | 6 | | | | 5 | |
| | | |
| Total distributions by the parent company | | $ | 63,559 | | | $ | 51,113 | |
| | | |
The parent company received its first cash distribution from Energy Transfer Equity and its general partner in July 2007 in the amount of $14.6 million. Also, in addition to the units shown the preceding table, the distribution paid by the parent company in August 2007 will include the 20,134,220 units issued in connection with the parent company’s private placement of equity completed in July 2007 (see “Recent Developments” within this Item 2).
The parent company also distributed $29.8 million and $27.8 million for the six months ended June 30, 2007 and 2006, respectively, to pay affiliates of EPCO that were the former owners of the TEPPCO and TEPPCO GP interests. The remaining balances were used to reduce indebtedness and for general partnership purposes.
At June 30, 2007 and December 31, 2006, the parent company owed $1.8 billion and $155.0 million, respectively under its credit facilities. Effective on May 7, 2007, the parent company executed a $1.9 billion interim credit facility (“the Credit Agreement”) to purchase common units of Energy Transfer
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Equity and membership interests in ETEGP, and to repay $155.0 million of borrowings under the parent company’s then existing revolving credit facility. The amended and restated credit facility provides for a $200.0 million revolving credit facility (the “Revolving Credit Facility”); $1.2 billion of term loans (Debt Bridge) (the “Term Loan (Debt Bridge)”); and $500.0 million of term loans (Equity Bridge) (the “Term Loan (Equity Bridge)”).
On May 7, 2007, the parent company made initial borrowings of $1.8 billion under its Credit Agreement: $1.2 billion under the Term Loan (Debt Bridge) and $500.0 million under the Term Loan (Equity Bridge) to fund the $1.65 billion cash purchase price for the acquisition of membership interests in ETEGP and common units of Energy Transfer Equity, as well as to repay approximately $155.0 million outstanding under the then existing revolving credit facility. The parent company used $738.0 million of net proceeds from a private placement completed in July 2007 (see “Recent Developments”) to repay the $500.0 million Term Loan (Equity Bridge) and to reduce amounts outstanding under the Term Loan (Debt Bridge) by $238.0 million. The remaining balances due under the Revolving Credit Facility and Term Loan (Debt Bridge) all mature on May 6, 2008.
Management is actively pursuing long-term refinancing of amounts due in May 2008 under the parent company’s interim credit facility and expects to accomplish such refinancing prior to the maturity date of such instruments. In July 2007, three debt rating agencies rated the parent company’s proposed long-term $1.2 billion credit facility that would be used to refinance balances due under its interim credit facility. The proposed credit facility was rated Ba2 by Moody’s Investors Service, BB by Fitch Ratings and BB- by Standard and Poor’s.
Consolidated Information
On a consolidated basis, our primary cash requirements, in addition to normal operating expenses and debt service, are for capital expenditures, business acquisitions and distributions to partners and minority interest holders. We expect to fund short-term needs for such items as operating expenses and sustaining capital expenditures with operating cash flows and short-term revolving credit arrangements. Capital expenditures for long-term needs resulting from internal growth projects and business acquisitions are expected to be funded by a variety of sources (either separately or in combination), including cash flows from operating activities, borrowings under credit facilities, the issuance of additional equity and debt securities and proceeds from divestitures of ownership interests in assets to affiliates or third parties. We expect to fund cash distributions to partners primarily with operating cash flows. Our debt service requirements are expected to be funded by operating cash flows and/or refinancing arrangements.
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The following table summarizes key components of our consolidated statement of cash flows for the periods indicated (dollars in thousands):
| | | | | | | | | |
| | | For Six Months Ended June 30, |
| | | 2007 | | 2006 |
| | | |
Net cash flow provided by operating activities | | | | | | | | |
| EPGP and subsidiaries, including Enterprise Products Partners | | $ | 550,601 | | | $ | 570,573 | |
| TEPPCO GP and subsidiaries, including TEPPCO | | | 199,029 | | | | 143,409 | |
| Parent company (2) | | | 85,998 | | | | 76,712 | |
| Eliminations and adjustments (1) | | | (101,370 | ) | | | (75,862 | ) |
| | | |
| Net cash provided by operating activities | | $ | 734,258 | | | $ | 714,832 | |
| | | |
| | | | | | | | | |
Cash used in investing activities: | | | | | | | | |
| EPGP and subsidiaries, including Enterprise Products Partners | | $ | 1,387,188 | | | $ | 689,787 | |
| TEPPCO GP and subsidiaries, including TEPPCO | | | 60,562 | | | | 48,304 | |
| Parent company (2) | | | 1,650,010 | | | | 8,890 | |
| Eliminations and adjustments | | | (7,127 | ) | | | (11,436 | ) |
| | | |
| Cash used in investing activities | | $ | 3,090,633 | | | $ | 735,545 | |
| | | |
| | | | | | | | | |
Cash provided by financing activities: | | | | | | | | |
| EPGP and subsidiaries, including Enterprise Products Partners | | $ | 877,724 | | | $ | 101,599 | |
| TEPPCO GP and subsidiaries, including TEPPCO | | | (138,554 | ) | | | (94,685 | ) |
| Parent company | | | 1,563,725 | | | | (67,967 | ) |
| Eliminations and adjustments (1) | | | 99,788 | | | | 64,424 | |
| | | |
| Cash provided by financing activities | | $ | 2,402,683 | | | $ | 3,371 | |
| | | |
| | | | | | | | | |
Cash on hand at end of period (unrestricted): | | | | | | | | |
| EPGP and subsidiaries, including Enterprise Products Partners | | $ | 63,367 | | | $ | 24,525 | |
| TEPPCO GP and subsidiaries, including TEPPCO, and Jonah | | | 5,345 | | | | 537 | |
| Parent company | | | 496 | | | | 364 | |
| | | |
| Total | | $ | 69,208 | | | $ | 25,426 | |
| | | |
| | |
| (1) | | Distributions received by the Parent Company from its Investments in Enterprise Products Partners and TEPPCO and reflected as operating cash flows are eliminated against cash distributions paid to owners by EPGP, TEPPCO GP and their respective subsidiaries (as reflected in financing activities). |
| |
| (2) | | Equity earnings and distributions from our Investment in Energy Transfer Equity are reflected in net cash flows from operating activities and our initial investment is reflected in investing activities. |
As a result of Enterprise Products Partners’ and TEPPCO’s growth objectives, we expect our investees to access debt and equity capital markets from time-to-time. We believe that Enterprise Products Partners and TEPPCO can obtain debt financing arrangements on reasonable terms in the current market. Furthermore, we believe that maintenance of an investment grade credit rating, continued ready access to debt and equity capital, and sufficient trade credit to operate our businesses efficiently, provides a solid foundation to meet the long and short-term liquidity and capital resource requirements of our investees.
Enterprise Products Partners.At June 30, 2007, EPGP and its consolidated subsidiaries had $63.4 million of unrestricted cash on hand and $751.0 million of available credit under EPO’s Multi-Year Revolving Credit Facility. See Note 11 of the Notes to Unaudited Condensed Consolidated Financial Statements included under Item 1 of this quarterly report for additional information regarding Enterprise Products Partners’ debt obligations.
Enterprise Products Partners may issue additional equity or debt securities to meet its liquidity and capital spending requirements. In March 2005, Enterprise Products Partners filed a universal shelf registration statement for the issuance of up to $4.0 billion of new equity or debt securities. After taking into account the past issuance of securities under this registration statement, Enterprise Products Partners could issue up to $1.4 billion of additional securities under this registration statement as of June 30, 2007.
In April 2007, Enterprise Products Partners filed a registration statement with the SEC authorizing the issuance of up to 25,000,000 common units in connection with its distribution reinvestment plan (“DRIP”). The DRIP provides unitholders of record and beneficial owners of Enterprise Products Partners common units a voluntary means by which they can increase the number of common units they own by reinvesting the quarterly cash distributions they would otherwise receive into the purchase of additional
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common units. A total of 932,800 of Enterprise Products Partners’ common units were issued in February and May 2007 in connection with the DRIP and a related plan. The issuance of these units generated $28.6 million in net proceeds.
On February 5, 2007, Duncan Energy Partners completed its initial public offering of 14,950,000 common units at $21.00 per unit, which generated net proceeds of $291.9 million. In connection with this offering, EPO contributed certain midstream energy businesses to Duncan Energy Partners for which Duncan Energy Partners paid EPO $459.5 million in cash and issued to EPO 5,371,571 common units. EPO used the proceeds it received from Duncan Energy Partners to temporarily reduce principal outstanding under its Multi-Year Revolving Credit Facility. Since EPO owns the general partner of Duncan Energy Partners and due to common control considerations, Duncan Energy Partners is a consolidated subsidiary of Enterprise Products Partners. Enterprise Products Partners may contribute other equity interests in its subsidiaries to Duncan Energy Partners in the near term and use the proceeds for capital spending purposes. Enterprise Products Partners has no obligation or commitment to make such contributions to Duncan Energy Partners.
In May 2007, EPO sold $700.0 million in principal amount of fixed/floating, unsecured, long-term subordinated notes due January 2068. EPO used the proceeds from this subordinated debt to temporarily reduce borrowings outstanding under its Multi-Year Revolving Credit Facility and for general partnership purposes.
EPO and other consolidated subsidiaries of Enterprise Products Partners had $6.3 billion in principal outstanding under various debt agreements at June 30, 2007. EPO’s debt securities were rated as investment-grade at August 1, 2007. Moody’s Investor Service assigned a rating of Baa3 and Standard & Poor’s and Fitch Ratings each assigned a rating of BBB-. At June 30, 2007, the scheduled maturities of EPO’s consolidated debt obligations were $500.0 million due in 2009, $569.1 million due in 2010, $1.6 billion due in 2011 and $3.6 billion thereafter. The unconsolidated affiliates of Enterprise Products Partners had $116.7 million of debt outstanding (off-balance sheet to Enterprise Products Partners). During second quarter 2007, Enterprise Products Partners and its joint venture partner in Cameron Highway contributed cash to Cameron Highway in order for it to repay its debt.
The following information represents a summary analysis of the operating, investing and financing cash flows of EPGP and Enterprise Products Partners for the six months ended June 30, 2007 and 2006:
Net cash flows from operating activities for the six months ended June 30, 2007 decreased $20.0 million from that recorded for the six months ended June 30, 2006. In addition to the timing of cash receipts and disbursements between periods, increased cash distributions received from unconsolidated affiliates and higher segment operating income from Enterprise Products Partners core businesses were the reason for the period-to-period increase in operating cash flows.
Net cash used in investing activities was $1.4 billion for the six months ended June 30, 2007 compared to $689.8 million for the six months ended June 30, 2006. The $697.4 million increase in cash payments is primarily due to a $515.7 million increase in capital expenditures period-to-period. Investments in unconsolidated affiliates increased $182.7 million period-to-period primarily due to capital contributions made to Cameron Highway in May and June 2007 to fund the repayment of its debt.
Net cash provided by financing activities was $877.7 million for the six months ended June 30, 2007 compared to net cash provided by financing activities of $101.6 million for the same period during 2006. Net borrowings under consolidated debt agreements were $985.4 million during for the six months ended June 30, 2007 and were less than $0.1 million for the six months ended June 30, 2006. Enterprise Products Partners capital spending program significantly influences its borrowing amounts. Contributions from minority interests increased $291.0 million year-to-year primarily due to the net proceeds received from Duncan Energy Partners’ initial public offering in February 2007. Net proceeds from issuance of Enterprise Products Partners common units decreased $417.6 million period-to-period. An underwritten equity offering in March 2006 generated $430.0 million in net proceeds reflecting the sale of 18,400,000 units.
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TEPPCO.At June 30, 2007, TEPPCO GP and its consolidated subsidiaries and Jonah had approximately $5.3 million of unrestricted cash on hand and $484.7 million in available credit under TEPPCO’s Revolving Credit Facility. See Note 11 of the Notes to Unaudited Condensed Consolidated Financial Statements included under Item 1 of this quarterly report for additional information regarding TEPPCO’s debt obligations.
TEPPCO may issue additional debt or equity securities to meet its liquidity and capital spending requirements. In November 2003, TEPPCO filed a universal shelf registration statement for the issuance of up to $2.0 billion of new equity or debt securities. In May 2007, TEPPCO issued $300.0 million in principal amount of fixed/floating, unsecured, long-term junior subordinated notes due June 1, 2067. After taking into account the May 2007 debt issuance and other past issuances of securities under this registration statement, TEPPCO could issue up to $1.2 billion of additional securities under this registration statement as of June 30, 2007.
TEPPCO and its other consolidated subsidiaries had $1.6 billion in principal outstanding under various debt agreements at June 30, 2007. TEPPCO’s and its subsidiary’s (e.g. TE Products Pipeline Company, LLC) debt securities were rated as investment-grade at June 30, 2007. TEPPCO’s and TE Products’ senior unsecured debt is rated BBB- by S&P and Baa3 by Moody’s. S&P’s rating is with a stable outlook while Moody’s rating is with a negative outlook. Based upon the characteristics of the fixed/floating unsecured junior subordinated notes that TEPPCO issued in May 2007, the rating agencies assigned partial equity treatment to the notes. Moody’s and S&P each assigned 50% equity treatment to the notes. At June 30, 2007, the scheduled maturities of TEPPCO’s consolidated debt obligations were $200.0 million due in 2011 and $1,390 million due after 2011. The 6.45% Senior Notes due in January 2008 are classified as a long-term liability in our consolidated balance sheet at June 30, 2007, in accordance with SFAS No. 6,Classification of Short-Term Obligations Expected to be Refinanced.TEPPCO has the ability to use available credit capacity under its Revolving Credit Facility to fund the repayment of these Senior Notes. TEPPCO’s unconsolidated affiliate, Centennial, had $140.0 million of debt outstanding (off-balance sheet to TEPPCO).
The following information represents a summary analysis of the operating, investing and financing cash flows of TEPPCO GP and TEPPCO for the six months ended June 30, 2007 and 2006:
Net cash flows from operating activities for 2007 increased $55.6 million over that recorded for 2006. The timing of cash receipts and disbursements between periods and an increase in distributions from equity investments, partially offset by an increase in crude oil inventory were the primary reasons for the year-to-year increase in operating cash flows. As part of TEPPCO’s crude oil marketing activities, TEPPCO purchases crude oil and simultaneously enters into offsetting sales contracts for physical delivery in future periods. The result of these transactions is an increase in the amount of inventory carried on TEPPCO’s books until the crude oil is sold. The substantial majority of inventory related to these contracts as of June 30, 2007, has been contracted for sale in the third quarter of 2007; however, new contracts may be executed, resulting in higher inventory balances being held at future balance sheet periods.
Cash used for investing activities during 2007 increased $12.3 million over that of 2006. Capital spending on property, plant and equipment and linefill increased to $125.0 million in 2007 compared to $83.8 million in 2006. TEPPCO is engaged in a capital spending program to continue the expansion of the Jonah system, expand capacity in new and existing market areas and integrate assets previously acquired. TEPPCO expects its capital spending for 2007 to approximate $301.0 million. The 2007 period includes $165.3 million of proceeds from the sale of assets, of which $137.6 million was from the sale of TEPPCO’s ownership interests in MB Storage and its general partner and $18.5 million for the sale of other assets, all to Louis Dreyfus on March 1, 2007, and $8.0 million for the sale of assets to Enterprise Products Partners in January 2007. Investments in unconsolidated affiliates increased $93.0 million year-to-year primarily due to contributions to the Jonah joint venture with Enterprise Products Partners.
Cash used for financing activities was $138.6 million in 2007 compared to $94.7 million in 2006. A $250.9 million increase in net repayments under TEPPCO’s Revolving Credit Facility and a $12.2 million increase in distribution payments was partially offset by $295.8 million in net proceeds from the issuance in May 2007 of 7.00% Junior Subordinated Notes due June 2067 and $1.6 million in proceeds
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from the termination of treasury locks upon the issuance of the Junior Subordinated Notes. The increase in distribution payments period-to-period is due to an increase in distribution-bearing units outstanding coupled with hired distribution rates per unit.
Critical Accounting Policies
In our financial reporting process, we employ methods, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our financial statements. These methods, estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Investors should be aware that actual results could differ from these estimates if the underlying assumptions prove to be incorrect. The following describes the estimation risk underlying our most significant financial statement items:
Depreciation methods and estimated useful lives of property, plant and equipment
In general, depreciation is the systematic and rational allocation of an asset’s cost, less its residual value (if any), to the periods it benefits. The majority of our property, plant and equipment is depreciated using the straight-line method, which results in depreciation expense being incurred evenly over the life of the assets. Our estimate of depreciation incorporates assumptions regarding the useful economic lives and residual values of our assets. At the time we place our assets in service, we believe such assumptions are reasonable; however, circumstances may develop that would cause us to change these assumptions, which would change our depreciation amounts prospectively. Some of these circumstances include changes in laws and regulations relating to restoration and abandonment requirements; changes in expected costs for dismantlement, restoration and abandonment as a result of changes, or expected changes, in labor, materials and other related costs associated with these activities; changes in the useful life of an asset based on the actual known life of similar assets, changes in technology, or other factors; and changes in expected salvage proceeds as a result of a change, or expected change in the salvage market.
At June 30, 2007 and December 31, 2006, the net book value of our property, plant and equipment was $13.2 billion and $12.1 billion, respectively. We recorded $119.1 million and $107.6 million in depreciation expense for the three months ended June 30, 2007 and 2006, respectively. For the six months ended June 30, 2007 an 2006, we recorded $233.5 million and $211.8 million in depreciation expense, respectively. For additional information regarding our property, plant and equipment, see Note 8 of the Notes to Unaudited Condensed Consolidated Financial Statements included under Item 1 of this quarterly report.
Measuring recoverability of long-lived assets and equity method investments
In general, long-lived assets (including intangible assets with finite useful lives and property, plant and equipment) are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Examples of such events or changes might be production declines that are not replaced by new discoveries or long-term decreases in the demand or price of natural gas, oil or NGLs. Long-lived assets with recorded values that are not expected to be recovered through future expected cash flows are written-down to their estimated fair values. The carrying value of a long-lived asset is not recoverable if it exceeds the sum of undiscounted estimated cash flows expected to result from the use and eventual disposition of the existing asset. Our estimates of such undiscounted cash flows are based on a number of assumptions including anticipated operating margins and volumes; estimated useful life of the asset or asset group; and estimated salvage values. An impairment charge would be recorded for the excess of a long-lived asset’s carrying value over its estimated fair value, which is based on a series of assumptions similar to those used to derive undiscounted cash flows. Those assumptions also include usage of probabilities for a range of possible outcomes, market values and replacement cost estimates.
Equity method investments are evaluated for impairment whenever events or changes in circumstances indicate that there is a possible loss in value for the investment other than a temporary decline. Examples of such events include sustained operating losses of the investee or long-term negative
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changes in the investee’s industry. The carrying value of an equity method investment is not recoverable if it exceeds the sum of discounted estimated cash flows expected to be derived from the investment. This estimate of discounted cash flows is based on a number of assumptions including discount rates; probabilities assigned to different cash flow scenarios; anticipated margins and volumes and estimated useful life of the investment. A significant change in these underlying assumptions could result in our recording an impairment charge.
We did not recognize any non-cash asset impairment charges related to property, plant and equipment for the three and six months ended June 30, 2007 and 2006.
Amortization methods and estimated useful lives of qualifying intangible assets
The specific, identifiable intangible assets of a business enterprise depend largely upon the nature of its operations. Potential intangible assets include intellectual property, such as technology, patents, trademarks and trade names, customer contracts and relationships, non-compete agreements and natural gas transportation agreements, as well as other intangible assets. The method used to value each intangible asset will vary depending upon the nature of the asset, the business in which it is utilized, and the economic returns it is generating or is expected to generate.
Our customer relationship intangible assets primarily represent the customer base we acquired in connection with business combinations and asset purchases. The value we assigned to these customer relationships is being amortized to earnings using methods that closely resemble the pattern in which the economic benefits of the underlying oil and natural gas resource bases from which the customers produce are estimated to be consumed or otherwise used. Our estimate of the useful life of each resource base is based on a number of factors, including third-party reserve estimates, the economic viability of production and exploration activities and other industry factors.
Our contract-based intangible assets represent the rights we own arising from discrete contractual agreements, such as the long-term rights we possess under the Shell natural gas processing agreement. A contract-based intangible asset with a finite life is amortized over its estimated useful life (or term), which is the period over which the asset is expected to contribute directly or indirectly to the cash flows of an entity. Our estimates of useful life are based on a number of factors, including (i) the expected useful life of the related tangible assets (e.g., fractionation facility, pipeline, etc.), (ii) any legal or regulatory developments that would impact such contractual rights, and (iii) any contractual provisions that enable us to renew or extend such agreements.
Our natural gas transportation agreements represent the contracts TEPPCO acquired as part of its acquisitions of Jonah on September 31, 2001 and Val Verde on June 30, 2002. The values assigned to these intangible assets are amortized on a unit-of-production basis, based upon the actual throughput of the system compared to the expected total throughput for the lives of the contracts. On a quarterly basis, TEPPCO updates throughput estimates and evaluates the remaining expected useful life of the contract assets based upon the best available information. Changes in the estimated remaining production will impact the timing of amortization expense for future periods.
If our underlying assumptions regarding the estimated useful life of an intangible asset change, then the amortization period for such asset would be adjusted accordingly. Additionally, if we determine that an intangible asset’s unamortized cost may not be recoverable due to impairment; we may be required to reduce the carrying value and the subsequent useful life of the asset. Any such write-down of the value and unfavorable change in the useful life of an intangible asset would increase operating costs and expenses at that time.
At June 30, 2007 and December 31, 2006, the carrying value of our intangible asset portfolio was $1.9 billion. We recorded $33.3 million and $28.8 million in amortization expense associated with our intangible assets for the three months ended June 30 2007 and 2006, respectively. In the six months ended June 30, 2007 and 2006, we recorded $62.2 million and $57.9 million in amortization expense associated with our intangible assets, respectively.
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For additional information regarding our intangible assets, see Note 10 of the Notes to Unaudited Condensed Consolidated Financial Statements included under Item 1 of this quarterly report.
Methods we employ to measure the fair value of goodwill
Goodwill represents the excess of the purchase prices we paid for certain businesses over their respective fair values and is primarily comprised of $385.9 million associated with the GulfTerra Merger. We do not amortize goodwill; however, the majority of our goodwill (at the reporting unit level) is tested for impairment during the second quarter of each fiscal year (TEPPCO’s goodwill is tested for impairment during the fourth quarter of each fiscal year), and more frequently, if circumstances indicate it is more likely than not that the fair value of goodwill is below its carrying amount. Our goodwill testing involves the determination of a reporting unit’s fair value, which is predicated on our assumptions regarding the future economic prospects of the reporting unit. Such assumptions include (i) discrete financial forecasts for the assets contained within the reporting unit, which rely on management’s estimates of operating margins and transportation and marketing volumes, (ii) long-term growth rates for cash flows beyond the discrete forecast period, and (iii) appropriate discount rates. If the fair value of the reporting unit (including its inherent goodwill) is less than its carrying value, a charge to earnings is required to reduce the carrying value of goodwill to its implied fair value. At June 30, 2007 and December 31, 2006, the carrying value of our goodwill was $807.3 million and $807.0 million, respectively.
For additional information regarding our goodwill, see Note 10 of the Notes to Unaudited Condensed Consolidated Financial Statements included under Item 1 of this quarterly report.
Our revenue recognition policies and use of estimates for revenues and expenses
In general, we recognize revenue from our customers when all of the following criteria are met: (i) persuasive evidence of an exchange arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the buyer’s price is fixed or determinable and (iv) collectibility is reasonably assured. When sales contracts are settled (i.e., either physical delivery of product has taken place or the services designated in the contract have been performed), we record any necessary allowance for doubtful accounts.
Our use of certain estimates for revenues and expenses has increased as a result of SEC regulations that require us to submit financial information on accelerated time frames. Such estimates are necessary due to the timing of compiling actual billing information and receiving third-party data needed to record transactions for financial reporting purposes. One example of such use of estimates is the accrual of an estimate of processing plant revenue and the cost of natural gas for a given month (prior to receiving actual customer and vendor-related plant operating information for the subject period). These estimates reverse in the following month and are offset by the corresponding actual customer billing and vendor-invoiced amounts. Accordingly, we include one month of certain estimated data in our results of operations. Such estimates are generally based on actual volume and price data through the first part of the month and estimated for the remainder of the month, adjusted accordingly for any known or expected changes in volumes or rates through the end of the month.
If the basis of our estimates proves to be substantially incorrect, it could result in material adjustments in results of operations between periods. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.
Reserves for environmental matters
Each of our business segments is subject to federal, state and local laws and regulations governing environmental quality and pollution control. Such laws and regulations may, in certain instances, require us to remediate current or former operating sites where specified substances have been released or disposed of. We accrue reserves for environmental matters when our assessments indicate that it is probable that a liability has been incurred and an amount can be reasonably estimated. Our assessments are based on
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studies, as well as site surveys, to determine the extent of any environmental damage and the necessary requirements to remediate this damage. Future environmental developments, such as increasingly strict environmental laws and additional claims for damages to property, employees and other persons resulting from current or past operations, could result in substantial additional costs beyond our current reserves.
At June 30, 2007 and December 31, 2006, we had a liability for environmental remediation of $30.6 million and $26.0 million, respectively, which was derived from a range of reasonable estimates based upon studies and site surveys. We follow the provisions of AICPA Statement of Position 96-1, which provides key guidance on recognition, measurement and disclosure of remediation liabilities. We have recorded our best estimate of the cost of remediation activities.
Natural gas imbalances
In the pipeline transportation business, natural gas imbalances frequently result from differences in gas volumes received from and delivered to our customers. Such differences occur when a customer delivers more or less gas into our pipelines than is physically redelivered back to them during a particular time period. The vast majority of our settlements are through in-kind arrangements whereby incremental volumes are delivered to a customer (in the case of an imbalance payable) or received from a customer (in the case of an imbalance receivable). Such in-kind deliveries are on-going and take place over several months. In some cases, settlements of imbalances built up over a period of time are ultimately cashed out and are generally negotiated at values which approximate average market prices over a period of time. As a result, for gas imbalances that are ultimately settled over future periods, we estimate the value of such current assets and liabilities using average market prices, which is representative of the estimated value of the imbalances upon final settlement. Changes in natural gas prices may impact our estimates.
At June 30, 2007 and December 31, 2006, our imbalance receivables, net of allowance for doubtful accounts, were $64.8 million and $97.8 million, respectively, and are reflected as a component of “Accounts and notes receivable – trade” on our Unaudited Condensed Consolidated Balance Sheets. At June 30, 2007 and December 31, 2006, our imbalance payables were $46.9 million and $51.2 million, respectively, and are reflected as a component of “Accrued gas payables” on our Unaudited Condensed Consolidated Balance Sheets.
Other Items
Contractual Obligations
The following information updates our contractual obligations as disclosed in our annual report on Form 10-K for the year ended December 31, 2006. Amounts presented in the following tables are in millions of dollars.
The following table presents the parent company’s debt obligations as of June 30, 2007 after giving effect to the repayment of $500.0 million of principal under its Term Loan (Equity Bridge) and $238.0 million under its Term Loan (Debt Bridge) using proceeds from the private placement of 20,134,220 parent company units in July 2007 (see “Recent Developments” within this Item 2). Management expects to refinance on a long-term basis the remaining $1.1 billion of short-term debt outstanding under the parent company’s Term Loan (Debt Bridge) and Revolving Credit Facility prior to the May 2008 maturity date of these obligations.
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Payment or Settlement due by Period |
| | | | | | | Less than | | 1-3 | | 4-5 | | More than |
| Contractual Obligations | | Total | | 1 year | | years | | years | | 5 years |
| |
| Parent company: | | | | | | | | | | | | | | | | | | | | |
| Scheduled maturities of long-term debt | | $ | 1,079.2 | | | $ | 1,079.2 | | | $ | — | | | $ | — | | | $ | — | |
| Estimated cash payments for interest (1) | | | 76.5 | | | | 76.5 | | | | — | | | | — | | | | — | |
| | |
| (1) | | Represents estimates of future cash payments of interest assuming that principal amounts outstanding and the interest rates charged both remain at June 30, 2007 levels. |
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The following table presents TEPPCO’s contractual obligations after giving effect to its issuance of $300.0 million in principal amount of Junior Subordinated Notes in May 2007. Except for such changes in TEPPCO’s debt obligations and related estimates of future cash interest payments, there were no other significant changes in TEPPCO’s contractual obligations since December 31, 2006.
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Payment or Settlement due by Period |
| | | | | | | Less than | | 1-3 | | 4-5 | | More than |
| Contractual Obligations | | Total | | 1 year | | years | | years | | 5 years |
| |
| Investment in TEPPCO: | | | | | | | | | | | | | | | | | | | | |
| Scheduled maturities of long-term debt (1) | | $ | 1,590.0 | | | $ | — | | | $ | — | | | $ | 700.00 | | | $ | 890 | |
| Estimated cash payments for interest (2) | | | 1,920.1 | | | | 111.4 | | | | 197.7 | | | | 191.4 | | | | 1,419.6 | |
| Operating lease obligations (3) | | | 69.7 | | | | 18.7 | | | | 20.5 | | | | 13.6 | | | | 16.9 | |
| Purchase obligations | | | 15.0 | | | | 12.9 | | | | 1.9 | | | | 0.1 | | | | 0.1 | |
| Capital expenditure commitments | | | 9.5 | | | | 9.5 | | | | — | | | | — | | | | — | |
| Other long-term liabilities of TEPPCO | | | 5.2 | | | | — | | | | 3.5 | | | | 0.3 | | | | 1.4 | |
| | |
| (1) | | Represents payment obligations under TEPPCO’s revolving credit facility, junior subordinated notes and senior notes as of June 30, 2007. Amounts presented in the table represent the scheduled future maturities of long-term debt principal for the periods indicated. |
| |
| (2) | | Represents estimates of future cash payments of interest assuming that principal amounts outstanding and the interest rates charged both remain at June 30, 2007 levels. |
| |
| (3) | | Represents minimum cash lease payment obligations under operating leases with terms in excess of one year for the periods indicated. |
| |
| (4) | | Represents commitments and estimated payment obligations under third-party supplier contracts for products and services for the periods indicated. The estimated future payment obligations are based on the contractual price under each contract for products and services at December 31, 2006. |
| |
| (5) | | Represents unconditional payment obligations to pay vendors for services rendered or products purchased relating to capital projects. |
The following table presents Enterprise Products Partners debt obligations and related estimates of cash interest payments after giving effect to its issuance of $700.0 million in principal amount of Junior Subordinated Notes B in May 2007.
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Payment or Settlement due by Period |
| | | | | | | Less than | | 1-3 | | 4-5 | | More than |
| Contractual Obligations | | Total | | 1 year | | years | | years | | 5 years |
| |
| Investment in Enterprise Products Partners: | | | | | | | | | | | | | | | | | | | | |
| Scheduled maturities of long-term debt (1) | | $ | 6,313.9 | | | $ | — | | | $ | 1,069.0 | | | $ | 1,644.9 | | | $ | 3,600.0 | |
| Estimated cash payments for interest (2) | | | 8,612.0 | | | | 381.6 | | | | 733.3 | | | | 530.6 | | | | 6,966.5 | |
| | |
| (1) | | Represents payment obligations under Enterprise Products Partners revolving credit facility, junior subordinated notes and senior notes as of June 30, 2007. Amounts presented in the table represent the scheduled future maturities of long-term debt principal for the periods indicated. |
| |
| (2) | | Represents estimates of future cash payments of interest assuming that principal amounts outstanding and the interest rates charged both remain at June 30, 2007 levels. |
Off-Balance Sheet Arrangements
In May 2007, Enterprise Products Partners made a $191.0 million cash contribution to Cameron Highway. This capital contribution, along with an equal amount contributed by Enterprise Products Partners’ joint venture partner in Cameron Highway, was used by Cameron Highway to repay $365.0 million outstanding under its Series A notes and $16.3 million of related make-whole premiums and accrued interest.
In June 2007, Enterprise Products Partners and its joint venture partner in Cameron Highway made an additional capital contribution to Cameron Highway of approximately $25.5 million each. These capital contributions were used by Cameron Highway to repay $50.9 million due under its Series B notes and accrued interest of approximately $0.9 million. As a result of the May and June 2007 debt repayments, Cameron Highway no longer has any project debt outstanding.
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Summary of Related Party Transactions
For additional information regarding our related party transactions, see Note 13 of the Notes to Unaudited Condensed Consolidated Financial Statements included under Item 1 of this quarterly report.
We have an extensive and ongoing relationship with EPCO and its affiliates. Our revenues from EPCO and affiliates are primarily associated with sales of NGL products. Our expenses with EPCO and affiliates are primarily due to (i) reimbursements we pay EPCO in connection with an administrative services agreement and (ii) purchases of NGL products.
Many of our unconsolidated affiliates perform supporting or complementary roles to our consolidated business operations. The majority of our revenues from unconsolidated affiliates for the three and six months ended June 30, 2007 and 2006 relate to Enterprise Products Partners’ natural gas sales to a Louisiana affiliate. The majority of our expenses with unconsolidated affiliates pertain to payments Enterprise Products Partners made to K/D/S Promix, L.L.C. for NGL transportation, storage and fractionation services.
We acquired equity method investments in Energy Transfer Equity and its general partner in May 2007. As a result, Energy Transfer Equity and its consolidated subsidiaries became related parties to our consolidated businesses. The majority of our revenues from Energy Transfer Equity relate to the sale of NGLs to ETP and its subsidiaries. The majority of our operating costs and expenses with Energy Transfer Equity relate to Enterprise Products Partners’ purchase of natural gas.
Cumulative effect of change in accounting principle
Net income for the first quarter of 2006 included a non-cash benefit of $1.5 million, of which $1.4 million is included in minority interest expense, related to the cumulative effect of a change in accounting principle resulting from our adoption of SFAS 123(R) on January 1, 2006.
Recent Accounting Pronouncements
See discussion of new accounting pronouncements in Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements included under Item 1 of this quarterly report.
Item 3.Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to financial market risks, including changes in commodity prices and interest rates. In addition, we are exposed to fluctuations in exchange rates between the U.S. dollar and Canadian dollar. We may use financial instruments (i.e., futures, forwards, swaps, options and other financial instruments with similar characteristics) to mitigate the risks of certain identifiable and anticipated transactions. In general, the type of risks we attempt to hedge are those related to (i) variability of future earnings, (ii) fair values of certain debt instruments and (iii) cash flows resulting from changes in applicable interest rates, commodity prices or exchange rates. As a matter of policy, we do not use financial instruments for speculative (or “trading”) purposes.
Interest Rate Risk Hedging Program
Enterprise Products Partners.Enterprise Products Partners interest rate exposure results from variable and fixed interest rate borrowings under various debt agreements, primarily those of EPO. A portion of its interest rate exposure is managed by utilizing interest rate swaps and similar arrangements, which allows the conversion of a portion of fixed rate debt into variable rate debt or a portion of variable rate debt into fixed rate debt. See Note 12 of the Notes to Unaudited Condensed Consolidated Financial Statements for information regarding the debt obligations of EPO.
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Enterprise Products Partners had interest rate swaps outstanding at June 30, 2007 that were accounted for as fair value hedges. These agreements had a combined notional value of $1.05 billion and match the maturity dates of the underlying fixed rate debt being hedged. The aggregate fair value of these interest rate swaps at June 30, 2007 and December 31, 2006 was a liability of $49.7 million and $29.1 million, respectively.
The following table shows the effect of hypothetical price movements on the estimated fair value of Enterprise Products Partners’ interest rate swap portfolio and the related change in fair value of the underlying debt at the dates indicated (dollars in thousands). Income is not affected by changes in the fair value of these swaps; however, these swaps effectively convert the hedged portion of fixed-rate debt to variable-rate debt. As a result, interest expense (and related cash outlays for debt service) will increase or decrease with the change in the periodic reset rate associated with the respective swap.
| | | | | | | | | | | | | |
| | | Resulting | | Swap Fair Value at |
| Scenario | | Classification | | June 30, 2007 | | July 24, 2007 |
| |
| FV assuming no change in underlying interest rates | | Liability | | $ | (49,720 | ) | | $ | (45,344 | ) |
| FV assuming 10% increase in underlying interest rates | | Liability | | $ | (79,392 | ) | | $ | (74,663 | ) |
| FV assuming 10% decrease in underlying interest rates | | Liability | | $ | (20,048 | ) | | $ | (16,025 | ) |
The change in fair value between July 24, 2007 and June 30, 2007 was not material to us or Enterprise Products Partners.
Enterprise Products Partners routinely enters into treasury lock transactions to hedge the underlying U.S. treasury rate related to the anticipated issuance of debt. A treasury lock is a specialized agreement that fixes the price (or yield) on a specific treasury security for an established period of time. A treasury lock purchaser is protected from a rise in the yield of the underlying treasury security during the lock period.
During the second quarter of 2007, Enterprise Products Partners terminated treasury locks having an aggregate $875.0 million in notional value in connection with the anticipated issuance of debt. The termination of the treasury locks resulted in cash gains of $42.3 million, which will be amortized into earnings over the term of the underlying debt. At June 30, 2007, Enterprise Products Partners had one treasury lock outstanding, which has a notional value of $125.0 million and a fair value of $9.3 million (an asset). The remaining treasury lock extends through October 15, 2007. Enterprise Products Partners accounted for these treasury lock transactions as cash flow hedges.
In August 2007, Enterprise Products Partners entered into two additional treasury locks having an aggregate $125.0 million in notional value and extending through October 15, 2007.
TEPPCO.TEPPCO also utilizes interest rate swap agreements to manage its cost of borrowing. TEPPCO had one interest rate swap outstanding at June 30, 2007 that was accounted for as a fair value hedge. This swap agreement has a notional value of $210 million and matches the maturity date of the underlying fixed rate debt being hedged. The fair value of this interest rate swap at June 30, 2007 and December 31, 2006 was a liability of $9.3 million and $2.6 million, respectively.
TEPPCO also has interest rate swap agreements outstanding at June 30, 2007 that are accounted for using mark-to-market accounting. These swap agreements have an aggregate notional amount of $200 million and mature in January 2008. The aggregate fair value of these interest rate swaps at June 30, 2007 and December 31, 2006 was an asset of $1.0 million and $1.4 million, respectively. The following table shows the effect of hypothetical price movements on the estimated fair value of these interest rate swaps at the dates indicated (dollars in thousands).
| | | | | | | | | | | | | |
| | | Resulting | | Swap Fair Value at |
| Scenario | | Classification | | June 30, 2007 | | July 26, 2007 |
| |
| FV assuming no change in underlying interest rates | | Asset | | $ | 1,013 | | | $ | 665 | |
| FV assuming 10% increase in underlying interest rates | | Asset | | $ | 1,553 | | | $ | 930 | |
| FV assuming 10% decrease in underlying interest rates | | Asset | | $ | 473 | | | $ | 401 | |
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TEPPCO also utilizes treasury locks to hedge the underlying U.S. treasury rate related to its anticipated issuances of debt. In May 2007, TEPPCO terminated treasury locks having an aggregate $300.0 million notional value in connection with the anticipated issuance of debt. The termination of the treasury locks resulted in a cash gain of $1.4 million, which will be amortized into earnings over the term of the underlying debt. In June and July 2007, TEPPCO executed treasury locks having a notional amount of $100.0 million that extend through January 2008. In August 2007, TEPPCO executed additional treasury locks having a notional value of $50.0 million. TEPPCO accounts for these financial instruments as cash flow hedges. At June 30, 2007, the fair value of treasury locks outstanding was a liability of $0.2 million.
Parent company. In August 2007, the parent Company entered into interest rate swaps having a notional value of $250 million that swapped floating interest rates charged under its interim credit facility for a fixed rate of approximately 5.0%.
Commodity Risk Hedging Program
Enterprise Products Partners. The prices of natural gas, NGLs and certain petrochemical products are subject to fluctuations in response to changes in supply, market uncertainty and a variety of additional factors that are beyond the control of Enterprise Products Partners. In order to manage the price risks associated with such products, Enterprise Products Partners may enter into commodity financial instruments.
The primary purpose of Enterprise Products Partners’ commodity risk management activities is to hedge its exposure to price risks associated with (i) natural gas purchases and gas injected into storage, (ii) the value of NGL production and inventories, (iii) related firm commitments, (iv) fluctuations in transportation revenues where the underlying fees are based on natural gas index prices and (v) certain anticipated transactions involving either natural gas, NGLs or certain petrochemical products. The commodity financial instruments utilized by Enterprise Products Partner may be settled in cash or with another financial instrument.
At June 30, 2007 and December 31, 2006, Enterprise Products Partners had a limited number of commodity financial instruments in its portfolio, which primarily consisted of cash flow hedges. The fair value of its commodity financial instrument portfolio at June 30, 2007 and December 31, 2006 was a liability of $1.0 million and $3.2 million, respectively.
Enterprise Products Partners assesses the risk of its commodity financial instrument portfolio using a sensitivity analysis model. The sensitivity analysis applied to this portfolio measures the potential income or loss (i.e., the change in fair value of the portfolio) based upon a hypothetical 10% movement in the underlying quoted market prices of the commodity financial instruments outstanding at selected dates. The following table shows the effect of hypothetical price movements on the estimated fair value (“FV”) of this portfolio at the dates shown (dollars in thousands):
| | | | | | | | | | | |
| | | | | Commodity Financial Instrument |
| | | Resulting | | Portfolio FV |
| Scenario | | Classification | | June 30, 2007 | | July 24, 2007 |
| |
| FV assuming no change in underlying commodity prices | | Liability | | $ | (1,049 | ) | | $ | (4,731 | ) |
| FV assuming 10% increase in underlying commodity prices | | Asset (Liability) | | $ | 1,777 | | | $ | (2,625 | ) |
| FV assuming 10% decrease in underlying commodity prices | | Liability | | $ | (3,875 | ) | | $ | (6,836 | ) |
The change in fair value between July 24, 2007 and June 30, 2007 was not material to us or Enterprise Products Partners.
TEPPCO.TEPPCO seeks to maintain a position that is substantially balanced between crude oil purchases and related sales and future delivery obligations. As part of its crude oil marketing business, TEPPCO enters into financial instruments such as swaps and other hedging instruments. The purpose of such hedging activity is to either balance TEPPCO’s inventory position or to lock in a profit margin and, as such, the financial instruments do not expose TEPPCO to significant market risk.
At June 30, 2007, TEPPCO had a limited number of commodity financial instruments in its portfolio. The fair value of the open positions at June 30, 2007 was $1.3 million.
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Foreign Currency Hedging Program – Enterprise Products Partners
Enterprise Products Partners owns an NGL marketing business located in Canada and has entered into construction agreements where payments are indexed to the Canadian dollar. As a result, Enterprise Products Partners could be adversely affected by fluctuations in the foreign currency exchange rate between the U.S. dollar and the Canadian dollar. Enterprise Products Partners attempts to hedge this risk by using foreign exchange purchase contracts to fix the exchange rate. Due to the limited duration of these contracts, Enterprise Products Partners utilizes mark-to-market accounting for these transactions, the effect of which has had a minimal impact on earnings. Enterprise Products Partners had $3.1 million of such contracts outstanding at June 30, 2007 that settled in July 2007.
Item 4.Controls and Procedures.
Our management, with the participation of the chief executive officer (“CEO”) and chief financial officer (“CFO”) of EPE Holdings, has evaluated the effectiveness of our disclosure controls and procedures, including internal controls over financial reporting, as of the end of the period covered by this report. Based on their evaluation, the CEO and CFO of EPE Holdings have concluded that our disclosure controls and procedures are effective to ensure that material information relating to our partnership is made known to management on a timely basis. Our CEO and CFO noted no material weaknesses in the design or operation of our internal controls over financial reporting that are likely to adversely affect our ability to record, process, summarize and report financial information. Also, they detected no fraud involving management or employees who have a significant role in our internal controls over financial reporting.
There have been no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that have not been evaluated by management and no other factors that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
Collectively, these disclosure controls and procedures are designed to provide us with reasonable assurance that the information required to be disclosed in our periodic reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures. Our management does not expect that our disclosure controls and procedures will prevent all errors and all fraud. Based on the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
The certifications of our general partner’s CEO and CFO required under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 have been included as exhibits to this quarterly report on Form 10-Q.
PART II. OTHER INFORMATION.
Item 1.Legal Proceedings.
See Part I, Item 1, Financial Statements, Note 16,“Commitments and Contingencies – Litigation,” of the Notes to Unaudited Condensed Consolidated Financial Statements included under Item 1 of this quarterly report, which is incorporated herein by reference.
Item 1A.Risk Factors.
In light of our recent acquisition of ownership interests in TEPPCO, Energy Transfer Equity and their respective general partners, we have restated our risk factors to include these new investments. The following information represents our current risk factors as of the date of this filing.
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Our Risk Factors
An investment in our units involves certain risks. If any of these risks were to occur, our business, results of operations, cash flows and financial condition could be materially adversely affected. In that case, the trading price of our units could decline, and you could lose part or all of your investment.
We acquired equity interests in TEPPCO and Energy Transfer Equity and their respective general partners in May 2007. These acquisitions result in us having a different level of materiality and additional risk factors compared to the risk factors presented in Item 1A of our Form 10-K for the year ended December 31, 2006. The following section lists what we believe are the key risk factors that may have a direct impact on our current business, results of operations, cash flows and financial condition. The items are presented by category of risk and are not listed in terms of importance or level of risk. We also encourage prospective investors and our unitholders to review the risk factors contained in Item 1A of the Form 10-Ks and Form 10-Qs filed by each of the MLP Entities for a more detailed and current summary of risk factors specific to each of the MLP Entities.
Risks Inherent in an Investment in Us
The parent company’s operating cash flow is derived primarily from cash distributions it receives from each of the MLP Entities and the Controlled GP Entities.
The parent company’s operating cash flow is derived primarily from cash distributions it receives from each of the MLP Entities and the Controlled GP Entities. The amount of cash that each MLP Entity can distribute to its partners, including us and its general partner, each quarter principally depends upon the amount of cash it generates from its operations, which will fluctuate from quarter to quarter based on, among other things, the:
| | § | | amount of hydrocarbons transported in its gathering and transmission pipelines; |
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| | § | | throughput volumes in its processing and treating operations; |
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| | § | | fees it charges and the margins it realizes for its services; |
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| | § | | price of natural gas; |
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| | § | | relationships among crude oil, natural gas and NGL prices; |
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| | § | | fluctuations in its working capital needs; |
| |
| | § | | level of its operating costs, including reimbursements to its general partner; |
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| | § | | prevailing economic conditions; and |
| |
| | § | | level of competition in its business segments. |
In addition, the actual amount of cash the MLP Entities will have available for distribution will depend on other factors, including:
| | § | | the level of sustaining capital expenditures it makes; |
| |
| | § | | the cost of any capital projects and acquisitions; |
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| | § | | its debt service requirements and restrictions contained in its obligations for borrowed money; and |
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| | § | | the amount of cash reserves established by EPGP, TEPPCO GP and ETEGP for the proper conduct of Enterprise Products Partners’, TEPPCO’s and Energy Transfer Equity’s businesses, respectively. |
We do not have any direct or indirect control over the cash distribution policies of Energy Transfer Equity or its general partner, ETEGP.
Because of these factors, the MLP Entities may not have sufficient available cash each quarter to continue paying distributions at their current levels. Furthermore, the amount of cash that each of the MLP Entities has available for distribution depends primarily upon its cash flow, including cash flow from financial reserves and working capital borrowings, and is not solely a function of profitability, which will be affected by non-cash items such as depreciation, amortization and provisions for asset impairments. As a result, the MLP Entities may be able to make cash distributions during periods when it records losses and may not be able to make cash distributions during periods when it records net income. See “Risks Related to the MLP Entities’ Businesses” as well as sections relating to specific risk factors of each of the MLP Entities included below for a discussion of further risks affecting the MLP Entities’ ability to generate distributable cash flow.
In the future, we may not have sufficient cash to pay distributions at our current distribution level or to increase distributions.
Because our primary source of operating cash flow is conditioned upon cash distributions from the MLP Entities, the amount of distributions we are able to make to our unitholders may fluctuate based on the level of distributions the MLP Entities makes to its partners. We cannot assure you that the MLP Entities will continue to make quarterly distributions at their current levels or will increase its quarterly distributions in the future. In addition, while we would expect to increase or decrease distributions to our unitholders if the distributions of the MLP Entities increase or decrease, the timing and amount of such changes in distributions, if any, will not necessarily be comparable to the timing and amount of any changes in distributions made by the MLP Entities. Factors such as capital contributions, debt service requirements, general, administrative and other expenses, reserves for future distributions and other cash reserves established by the board of directors of EPE Holdings may affect the distributions we make to our unitholders. Prior to making any distributions to our unitholders, we will reimburse EPE Holdings and its affiliates for all direct and indirect expenses incurred by them on our behalf. EPE Holdings has the sole discretion to determine the amount of these reimbursed expenses. The reimbursement of these expenses, in addition to the other factors listed above, could adversely affect the level of distributions we make to our unitholders. We cannot guarantee that in the future we will be able to pay distributions or that any distributions we do make will be at or above our current quarterly distribution. The actual amount of cash that is available for distribution to our unitholders will depend on numerous factors, many of which are beyond our control or the control of EPE Holdings.
Restrictions in our credit facility could limit our ability to make distributions to our unitholders.
Our credit facility contains covenants limiting our ability to take certain actions. This credit facility also contains covenants requiring us to maintain certain financial ratios. We are prohibited from making any distribution to our unitholders if such distribution would cause an event of default or otherwise violate a covenant under this credit facility. For more information about our credit facility, see Note 11 of the Notes to Unaudited Condensed Consolidated Financial Statements included in this quarterly report.
Our unitholders do not elect our general partner or vote on our general partner’s officers or directors. Affiliates of our general partner currently own a sufficient number of units to block any attempt to remove EPE Holdings as our general partner.
Unlike the holders of common stock in a corporation, our unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Our unitholders do not have the ability to elect our general partner or the officers or directors of our general partner. Dan L. Duncan, through his control of Dan Duncan LLC, the sole
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member of EPE Holdings, controls our general partner and the election of all of the officers and directors of our general partner.
Furthermore, if our unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner or the officers or directors of our general partner. Our general partner may not be removed except upon the vote of the holders of at least 66 2/3% of our outstanding units. Because affiliates of EPE Holdings own more than one-third of our outstanding units, EPE Holdings currently cannot be removed without the consent of such affiliates. As a result, the price at which our units will trade may be lower because of the absence or reduction of a takeover premium in the trading price.
We may issue an unlimited number of limited partner interests without the consent of our unitholders, which will dilute your ownership interest in us and may increase the risk that we will not have sufficient available cash to maintain or increase our per unit distribution level.
Our partnership agreement provides that we may issue an unlimited number of limited partner interests without the consent of our unitholders. Such units may be issued on the terms and conditions established in the sole discretion of our general partner. Any issuance of additional units would result in a corresponding decrease in the proportionate ownership interest in us represented by, and could adversely affect market price of, units outstanding prior to such issuance. The payment of distributions on these additional units may increase the risk that we will be unable to maintain or increase our current quarterly distribution.
The market price of our units could be adversely affected by sales of substantial amounts of our units in the public markets, including sales by our existing unitholders.
Sales by any of our existing unitholders of a substantial number of our units in the public markets, or the perception that such sales might occur, could have a material adverse effect on the price of our units or could impair our ability to obtain capital through an offering of equity securities. We do not know whether any such sale would be made in the public market or in a private placement, nor do we know what impact such potential or actual sales would have on our unit price in the future.
Risks arising in connection with the execution of our business strategy may adversely affect our ability to make or increase distributions and/or the market price of our units.
In addition to seeking to maximize distributions from the Controlled Entities, a principal focus of our business strategy includes acquiring general partner interests and associated incentive distribution rights and limited partner interests in publicly traded partnerships and, subject to our business opportunity agreements, acquiring assets and businesses that may or may not relate to the MLP Entities’ businesses. However, we may not be able to grow through acquisitions if we are unable to identify attractive acquisition opportunities or acquire identified targets. In addition, increased competition for acquisition opportunities may increase our cost of making acquisitions or cause us to refrain from making acquisitions.
If we are able to make future acquisitions, we may not be successful in integrating our acquisitions into our existing or future assets and businesses. Risks related to our acquisition strategy include but not limited to:
| | § | | the creation of conflicts of interests and competing fiduciary obligations that may inhibit our ability to grow or make additional acquisitions; |
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| | § | | additional or increased regulatory or compliance obligations, including financial reporting obligations; |
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| | § | | delays or unforeseen operational difficulties or diminished financial performance associated with the integration of new acquisitions, and the resulting delayed or diminished cash flows from such acquisitions; |
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| | § | | inefficiencies and complexities that may arise due to unfamiliarity with new assets, businesses or markets; |
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| | § | | conflicts with regard to the sharing of management responsibilities and allocation of time among overlapping officers, directors and other personnel; |
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| | § | | the inability to hire, train and retain qualified personnel to manage and operate our growing business; and |
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| | § | | the inability to obtain required financing for our existing business and new investment opportunities. |
To the extent we pursue an acquisition that causes us to incur unexpected costs, or that fails to generate expected returns, our results of operations, cash flows and financial condition may be adversely affected, and our ability to make distributions and/or the market price of our units may be negatively impacted.
The control of our general partner may be transferred to a third party without unitholder consent.
Our general partner may transfer its general partner interest in us to a third party in a merger or in a sale of all or substantially all of its assets without the consent of our unitholders. Furthermore, there is no restriction in our partnership agreement on the ability of Dan Duncan LLC, as the sole member of EPE Holdings, to sell or transfer all or part of its ownership interest in EPE Holdings to a third party. The new owner of our general partner would then be in a position to replace the directors and officers of EPE Holdings.
All of our units that are owned by EPCO and its affiliates and substantially all of the common units of Enterprise Products Partners and TEPPCO that are owned by EPCO and its affiliates are pledged as security under the credit facility of an affiliate of EPCO. Upon an event of default under this credit facility, a change in ownership or control of us, Enterprise Products Partners or TEPPCO could result.
All of our units that are owned by EPCO and its affiliates and substantially all of the common units of Enterprise Products Partners (other than the 13,454,498 common units we own) and TEPPCO that are owned or controlled by EPCO and its affiliates, other than Dan Duncan LLC and certain trusts affiliated with Dan L. Duncan, are pledged as security under a credit facility of EPCO Holdings, Inc., a wholly owned subsidiary of EPCO. This credit facility contains customary and other events of default relating to certain defaults of the borrower, us, Enterprise Products Partners, TEPPCO and other affiliates of EPCO. Upon an event of default, a change in control or ownership of us or Enterprise Products Partners or TEPPCO could result.
All of our assets are pledged under our credit facility.
The 13,454,498 common units of Enterprise Products Partners and the 100% membership interest in EPGP owned by us are pledged as security under our credit facility. In addition, 4,400,000 common units of TEPPCO and the 100% membership interest in TEPPCO GP, and 38,976,090 common units of Energy Transfer Equity and the 34.9% membership interest in ETEGP owned by us are pledged as security under our credit facility. Our credit facility contains customary and other events of default. Upon an event of default, the lenders under our credit facility could foreclose on our assets, which would have a material adverse effect on our business, financial condition and results of operations.
Our general partner has a limited call right that may require you to sell your units at an undesirable time or price.
If at any time our general partner and its affiliates own more than 90% of our outstanding units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or
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to us, to acquire all, but not less than all, of the units held by unaffiliated persons at a price not less than their then-current market price. As a result, our unitholders may be required to sell their units at an undesirable time or price and may not receive any return on their investment. Our unitholders may also incur a tax liability upon a sale of their units. At August 1, 2007, affiliates of EPE Holdings, including the Employee Partnerships, owned approximately 77.1% of our outstanding units (including units issued upon conversion of the Class B units on July 12, 2007).
We depend on the leadership and involvement of Dan L. Duncan and other key personnel for the success of our businesses.
We depend on the leadership, involvement and services of Dan L. Duncan, the founder of EPCO and the chairman of each of EPE Holdings and EPGP. Mr. Duncan has been integral to our success and the success of EPCO due in part to his ability to identify and develop business opportunities, make strategic decisions and attract and retain key personnel. The loss of his leadership and involvement or the services of any key members of our senior management team could have a material adverse effect on our business, results of operations, cash flows, market price of our securities and financial condition.
An increase in interest rates may cause the market price of our units to decline.
As interest rates rise, the ability of investors to obtain higher risk-adjusted rates of return by purchasing government-backed debt securities may cause a corresponding decline in demand for riskier investments generally, including yield-based equity investments such as publicly traded limited partnership interests. Reduced demand for our units resulting from investors seeking other more favorable investment opportunities may cause the trading price of our units to decline.
The MLP Entities may issue additional common units, which may increase the risk that the MLP Entities will not have sufficient available cash to maintain or increase their per unit distribution level.
Each of the MLP Entities has wide latitude to issue additional common units on terms and conditions established by each of their respective general partners. The payment of distributions on those additional common units may increase the risk that the MLP Entities will be unable to maintain or increase their per unit distribution level, which in turn may impact the available cash that we have to distribute to our unitholders.
Unitholders’ liability as a limited partner may not be limited, and our unitholders may have to repay distributions or make additional contributions to us under certain circumstances.
As a limited partner in a partnership organized under Delaware law, our unitholders could be held liable for our obligations to the same extent as a general partner if they participate in the “control” of our business. EPE Holdings generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to EPE Holdings. Additionally, the limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in many jurisdictions.
Under certain circumstances, our unitholders may have to repay amounts wrongfully distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, neither we nor any of the MLP Entities may make a distribution to our unitholders if the distribution would cause our or the MLP Entities’ respective liabilities to exceed the fair value of our respective assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the partnership for the distribution amount. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.
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We may have to take actions that are disruptive to our business strategy to avoid registration under the Investment Company Act of 1940.
The Investment Company Act of 1940, or Investment Company Act, requires registration for companies that are engaged primarily in the business of investing, reinvesting, owning, holding or trading in securities. Registration as an investment company would subject us to restrictions that are inconsistent with our fundamental business strategy.
A company may be deemed to be an investment company if it owns investment securities with a fair value exceeding 40% of the fair value of its total assets (excluding governmental securities and cash items) on an unconsolidated basis, unless an exemption or safe harbor applies. Securities issued by companies other than majority-owned subsidiaries are generally counted as investment securities for purposes of the Investment Company Act. We own minority equity interests in certain entities, including Energy Transfer Equity and ETEGP, that could be counted as investment securities. Based on our general partner’s board of directors’ determination of the value of our subsidiaries, we estimate that less than 40% of the fair value of our total assets consist of investment securities. However, in the event we acquire additional investment securities in the future, or if the fair value of our interests in companies that we do not control were to increase relative to the fair value of our Controlled Subsidiaries, we might be required to divest some of our non-controlled business interests, or take other action, in order to avoid being classified as an investment company. Similarly, we may be limited in our strategy to make future acquisitions of general partner interests and related limited partner interests to the extent they are counted as investment securities.
If we cease to manage and control either of the Controlled Entities and are deemed to be an investment company under the Investment Company Act of 1940, we may either have to register as an investment company under the Investment Company Act, obtain exemptive relief from the Securities and Exchange Commission, or modify our organizational structure or our contract rights to fall outside the definition of an investment company. Registering as an investment company could, among other things, materially limit our ability to engage in transactions with affiliates, including the purchase and sale of certain securities or other property to or from our affiliates, restrict our ability to borrow funds or engage in other transactions involving leverage and require us to add additional directors who are independent of us or our affiliates.
Our partnership agreement restricts the rights of unitholders owning 20% or more of our units.
Our unitholders’ voting rights are restricted by the provision in our partnership agreement generally providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than EPE Holdings and its affiliates, cannot be voted on any matter. In addition, our partnership agreement contains provisions limiting the ability of our unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting our unitholders’ ability to influence the manner or direction of our management. As a result, the price at which our units will trade may be lower because of the absence or reduction of a takeover premium in the trading price.
Risks Relating to Conflicts of Interest
Conflicts of interest exist and may arise among us, Enterprise Products Partners, TEPPCO and our respective general partners and affiliates and entities affiliated with any general partner interests that we may acquire in the future.
Conflicts of interest exist and may arise in the future as a result of the relationships among us, Enterprise Products Partners, TEPPCO and our respective general partners and affiliates. EPE Holdings is controlled by Dan Duncan LLC, of which Dan L. Duncan is the sole member. Accordingly, Mr. Duncan has the ability to elect, remove and replace the directors and officers of EPE Holdings. Similarly, through his indirect control of the general partner of each of Enterprise Products Partners and TEPPCO, Mr. Duncan has the ability to elect, remove and replace the directors and officers of the general partner of each
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of Enterprise Products Partners and TEPPCO. The assets of Enterprise Products Partners and TEPPCO overlap in certain areas, which may result in various conflicts of interest in the future.
EPE Holdings’ directors and officers have fiduciary duties to manage our business in a manner beneficial to us and our partners. However, all of EPE Holdings’ executive officers and non-independent directors (excluding O.S. Andras and Randa Duncan Williams) also serve as executive officers or directors of EPGP and, as a result, have fiduciary duties to manage the business of Enterprise Products Partners in a manner beneficial to Enterprise Products Partners and its partners. Consequently, these directors and officers may encounter situations in which their fiduciary obligations to Enterprise Products Partners, on the one hand, and us, on the other hand, are in conflict. The resolution of these conflicts may not always be in our best interest or that of our unitholders.
Future conflicts of interest may arise among us and any entities whose general partner interests we or our affiliates acquire or among Enterprise Products Partners, TEPPCO and such entities. It is not possible to predict the nature or extent of these potential future conflicts of interest at this time, nor is it possible to determine how we will address and resolve any such future conflicts of interest. However, the resolution of these conflicts may not always be in our best interest or that of our unitholders.
If we are presented with certain business opportunities, Enterprise Products Partners (for itself or Duncan Energy Partners) will have the first right to pursue such opportunities.
Pursuant to an administrative services agreement, we have agreed to certain business opportunity arrangements to address potential conflicts that may arise among us, Enterprise Products Partners and the EPCO Group (which includes EPCO and its affiliates, excluding EPGP, Enterprise Products Partners and its subsidiaries (including Duncan Energy Partners), us and EPE Holdings and TEPPCO, its general partner and their controlled affiliates). If a business opportunity in respect of any assets other than equity securities, which we generally define to include general partner interests in publicly traded partnerships and similar interests and associated incentive distribution rights and limited partner interests or similar interests owned by the owner of such general partner or its affiliates, is presented to the EPCO Group, us, EPE Holdings, EPGP or Enterprise Products Partners, then Enterprise Products Partners (for itself or Duncan Energy Partners) will have the first right to acquire such assets. The administrative services agreement provides, among other things, that Enterprise Products Partners (for itself or Duncan Energy Partners) will be presumed to desire to acquire the assets until such time as it advises the EPCO Group and us that it has abandoned the pursuit of such business opportunity, and we may not pursue the acquisition of such assets prior to that time. These business opportunity arrangements limit our ability to pursue acquisitions of assets that are not “equity securities.”
Our general partner’s affiliates may compete with us.
Our partnership agreement provides that our general partner will be restricted from engaging in any business activities other than acting as our general partner and those activities incidental to its ownership of interests in us. Except as provided in our partnership agreement and subject to certain business opportunity agreements, affiliates of our general partner are not prohibited from engaging in other businesses or activities, including those that might be in direct competition with us.
Potential conflicts of interest may arise among our general partner, its affiliates and us. Our general partner and its affiliates have limited fiduciary duties to us and our unitholders, which may permit them to favor their own interests to the detriment of us and our unitholders.
At August 1, 2007, Dan L. Duncan, EPCO and their controlled affiliates, including the Employee Partnerships, owned approximately 77.1% of our outstanding units (including units issued upon conversion of the Class B units on July 12, 2007), and Dan Duncan LLC owned 100% of EPE Holdings. Dan Duncan serves as EPE Holdings’ Chairman as well as the Chairman of EPGP. Conflicts of interest may arise among EPE Holdings and its affiliates, including TEPPCO, on the one hand, and us and our unitholders, on the other hand. As a result of these conflicts, EPE Holdings may favor its own interests and the interests of its affiliates over the interests of our unitholders. These conflicts include, among others, the following:
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| | § | | EPE Holdings is allowed to take into account the interests of parties other than us, including EPCO, EPGP, Enterprise Products Partners, TEPPCO GP, TEPPCO and their respective affiliates and any future general partners and limited partnerships acquired in the future in resolving conflicts of interest, which has the effect of limiting its fiduciary duty to our unitholders; |
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| | § | | our general partner has limited its liability and reduced its fiduciary duties under our partnership agreement, while also restricting the remedies available to our unitholders for actions that, without these limitations, might constitute breaches of fiduciary duty. As a result of purchasing our units, unitholders consent to various actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under applicable state law; |
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| | § | | our general partner determines the amount and timing of our investment transactions, borrowings, issuances of additional partnership securities and reserves, each of which can affect the amount of cash that is available for distribution to our unitholders; |
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| | § | | our general partner determines which costs incurred by it and its affiliates are reimbursable by us; |
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| | § | | our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered, or from entering into additional contractual arrangements with any of these entities on our behalf, so long as the terms of any such payments or additional contractual arrangements are fair and reasonable to us; |
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| | § | | our general partner controls the enforcement of obligations owed to us by it and its affiliates; and |
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| | § | | our general partner decides whether to retain separate counsel, accountants or others to perform services for us. |
Our partnership agreement limits our general partner’s fiduciary duties to us and our unitholders and restricts the remedies available to our unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.
Our partnership agreement contains provisions that reduce the standards to which our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement:
| | § | | permits EPE Holdings to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner. This entitles EPE Holdings to consider only the interests and factors that it desires, and it has no duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or any limited partner; |
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| | § | | provides that our general partner is entitled to make other decisions in “good faith” if it reasonably believes that the decision is in our best interests; |
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| | § | | generally provides that affiliated transactions and resolutions of conflicts of interest not approved by the Audit, Conflicts and Governance Committee of the board of directors of our general partner and not involving a vote of unitholders must be on terms no less favorable to us than those generally being provided to or available from unrelated third parties or be “fair and reasonable” to us and that, in determining whether a transaction or resolution is “fair and reasonable,” our general partner may consider the totality of the relationships among the parties involved, including other transactions that may be particularly advantageous or beneficial to us; and |
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| | § | | provides that our general partner and its officers and directors will not be liable for monetary damages to us, our limited partners or assignees for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that |
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| | | | the general partner or those other persons acted in bad faith or engaged in fraud, willful misconduct or gross negligence. |
In order to become a limited partner of our partnership, our unitholders are required to agree to be bound by the provisions in the partnership agreement, including the provisions discussed above.
Each of the Controlled GP Entities controls its respective Controlled Entity and may influence cash distributed to us.
Although we are the sole member of each of the Controlled GP Entities, our control over the Controlled Entities’ actions is limited. The fiduciary duties owed by each of the Controlled GP Entities to each of their respective Controlled Entities and its unitholders prevent us from influencing the Controlled GP Entities to take any action that would benefit us to the detriment of the Controlled Entities or its unitholders. For example, each of the Controlled GP Entities makes business determinations on behalf of their respective Controlled Entities that impact the amount of cash distributed by each of the Controlled Entities to its unitholders and to its respective Controlled GP Entities, which in turn, affects the amount of cash distributions we receive from the Controlled Entities and the Controlled GP Entities and consequently, the amount of distributions we can pay to our unitholders.
EPCO’s employees may be subjected to conflicts in managing our business and the allocation of time and compensation costs between our business and the business of EPCO and its other affiliates.
We have no officers or employees and rely solely on officers of our general partner and employees of EPCO. Certain of our officers are also officers of EPCO and other affiliates of EPCO. These relationships may create conflicts of interest regarding corporate opportunities and other matters, and the resolution of any such conflicts may not always be in our or our unitholders’ best interests. In addition, these overlapping officers allocate their time among us, EPCO and other affiliates of EPCO. These officers face potential conflicts regarding the allocation of their time, which may adversely affect our business, results of operations and financial condition.
We have entered into an administrative services agreement that governs business opportunities among entities controlled by EPCO, which includes us and our general, Enterprise Products Partners and its general partner, Duncan Energy Partners and its general partner and TEPPCO and its general partner. For information regarding how business opportunities are handled within the EPCO group of companies, see Item 13 of our annual report on Form 10-K for the year ended December 31, 2006.
We do not have an independent compensation committee, and aspects of the compensation of our executive officers and other key employees, including base salary, are not reviewed or approved by our independent directors. The determination of executive officer and key employee compensation could involve conflicts of interest resulting in economically unfavorable arrangements for us.
Risks Relating to the MLP Entities’ Business
Since our cash flows primarily consist exclusively of distributions from the MLP Entities, risks to the MLP Entities’ businesses are also risks to us. We have set forth below some, but not all, of the key risks to the MLP Entities’ businesses, the occurrence of which could have negative impact on the MLP Entities’ financial performance and decrease the amount of cash they are able to distribute to us, thereby impacting the amount of cash that we are able to distribute to our unitholders. These key risks are not in terms of importance or level of risk. In some instances, each of the MLP Entities share similar risks. However, in some cases, certain risks are specific to the businesses of Enterprise Products Partners, TEPPCO and Energy Transfer Equity. These risks will be discussed separately, when necessary. Any risks related to Energy Transfer Equity will refer to the business of ETP since the business of Energy Transfer Equity is to receive distributions from ETP.
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The interruption of distributions to the MLP Entities from their respective subsidiaries and joint ventures may affect their ability to satisfy their obligations and to make distributions to their partners.
Each of the MLP Entities is a partnership holding company with no business operations and its operating subsidiaries conduct all of its operations and own all of its operating assets. The only significant assets that each MLP Entity owns are the ownership interests in its subsidiaries and joint ventures. As a result, each MLP Entity depends upon the earnings and cash flow of its subsidiaries and joint ventures and the distribution of that cash in order to meet its obligations and to allow it to make distributions to its partners. The ability of an MLP Entity’s subsidiaries and joint ventures to make distributions may be restricted by, among other things, the provisions of existing and future indebtedness, applicable state partnership and limited liability company laws and other laws and regulations, including FERC policies.
In addition, the charter documents governing each of the MLP Entities’ joint ventures typically allow their respective joint venture management committees sole discretion regarding the occurrence and amount of distributions. Some of the joint ventures in which such MLP Entity participates has separate credit agreements that contain various restrictive covenants. Among other things, those covenants may limit or restrict the joint venture’s ability to make distributions to the MLP Entities under certain circumstances. Accordingly, each of the MLP Entities’ joint ventures may be unable to make distributions to it at current levels, if at all.
Changes in demand for and production of hydrocarbon products may materially adversely affect the MLP Entities’ results of operations, cash flows and financial condition.
The MLP Entities operate predominantly in the midstream energy sector, which includes gathering, transporting, processing, fractionating and storing natural gas, NGLs, crude oil and refined products. As such, the results of operations, cash flows and financial condition of each of the MLP Entities may be materially adversely affected by changes in the prices of these hydrocarbon products and by changes in the relative price levels among these hydrocarbon products.
Changes in prices and changes in the relative price levels may impact demand for hydrocarbon products, which in turn may impact production and volumes of product for which each of the MLP Entities provide services. An MLP Entity may also incur price risk to the extent counterparties do not perform in connection with its marketing of crude oil, natural gas, NGLs and propylene, as applicable.
In the past, the prices of natural gas have been extremely volatile, and this volatility may continue. The NYMEX daily settlement price for natural gas for the prompt month contract in 2004 ranged from a high of $8.75 per MMBtu to a low of $4.57 per MMBtu. In 2005, the same index ranged from a high of $15.38 per MMBtu to a low of $5.79 per MMBtu. In 2006, the same index ranged from a high of $10.63 per MMBtu to a low of $4.20 per MMBtu.
Generally, the prices of natural gas, NGLs, crude oil and other hydrocarbon products are subject to fluctuations in response to changes in supply, demand, market uncertainty and a variety of additional factors that are impossible to control. These factors include but are not limited to:
| | § | | the level of domestic production; |
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| | § | | the availability of imported oil and natural gas; |
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| | § | | actions taken by foreign oil and natural gas producing nations; |
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| | § | | the availability of transportation systems with adequate capacity; |
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| | § | | the availability of competitive fuels; |
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| | § | | fluctuating and seasonal demand for oil, natural gas and NGLs; |
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| | § | | the impact of conservation efforts; |
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| | § | | the extent of governmental regulation and taxation of production; and |
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| | § | | the overall economic environment. |
A decline in the volume of natural gas, NGLs and crude oil delivered to the MLP Entities’ facilities could adversely affect its results of operations, cash flows and financial condition.
The MLP Entities’ profitability could be materially impacted by a decline in the volume of natural gas, NGLs and crude oil transported, gathered or processed at their facilities. A material decrease in natural gas or crude oil production or crude oil refining, as a result of depressed commodity prices, a decrease in exploration and development activities or otherwise, could result in a decline in the volume of natural gas, NGLs and crude oil handled by its facilities.
The crude oil, natural gas and NGLs available to the MLP Entities’ facilities will be derived from reserves produced from existing wells, which reserves naturally decline over time. To offset this natural decline, the MLP Entities’ facilities will need access to additional reserves. Additionally, some of their facilities will be dependent on reserves that are expected to be produced from newly discovered properties that are currently being developed.
Exploration and development of new oil and natural gas reserves is capital intensive, particularly offshore in the Gulf of Mexico. Many economic and business factors are beyond the MLP Entities’ control and can adversely affect the decision by producers to explore for and develop new reserves. These factors could include relatively low oil and natural gas prices, cost and availability of equipment and labor, regulatory changes, capital budget limitations, the lack of available capital or the probability of success in finding hydrocarbons. For example, a sustained decline in the price of natural gas and crude oil could result in a decrease in natural gas and crude oil exploration and development activities in the regions where the MLP Entities’ facilities are located. This could result in a decrease in volumes available for transportation or processing, which would have a material adverse affect on the MLP Entities’ results of operations, cash flows and financial position. Additional reserves, if discovered, may not be developed in the near future or at all.
Acquisitions that appear to be accretive may nevertheless reduce the MLP Entities’ cash from operations on a per unit basis.
Even if the MLP Entities make acquisitions that they believe will be accretive, these acquisitions may nevertheless reduce cash from operations on a per unit basis. Any acquisition involves potential risks, including, among other things:
| | § | | mistaken assumptions about volumes, revenues and costs, including synergies; |
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| | § | | an inability to integrate successfully the acquired businesses; |
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| | § | | decreased liquidity as a result of using a significant portion of available cash or borrowing capacity to finance the acquisition; |
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| | § | | a significant increase in interest expense or financial leverage if additional debt is incurred to finance the acquisition; |
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| | § | | the assumption of known or unknown liabilities for which there is no indemnification or for which indemnity is inadequate or limited; |
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| | § | | an inability to hire, train or retain qualified personnel to manage and operate new businesses and assets; |
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| | § | | mistaken assumptions about the overall costs of equity or debt; |
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| | § | | the diversion of management’s and employees’ attention from other business concerns; |
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| | § | | unforeseen difficulties operating in new product areas or new geographic areas; and |
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| | § | | customer or key employee losses at the acquired businesses. |
If any of the MLP Entities consummates any future acquisitions, its capitalization and results of operations may change significantly, and you will not have the opportunity to evaluate the economic, financial and other relevant information that it will consider in determining the application of these funds and other resources.
The MLP Entities may not be able to fully execute their growth strategies if they encounter illiquid capital markets or increased competition for investment opportunities.
Each of the MLP Entities’ have a strategy that contemplates growth through the development and acquisition of a wide range of midstream and other energy infrastructure assets while maintaining a strong balance sheet. These strategies include constructing and acquiring additional assets and businesses to enhance the ability to compete effectively and diversifying its asset portfolio, thereby providing more stable cash flow. Each of the MLP Entities regularly considers and enters into discussions regarding, and is currently contemplating and/or pursuing, potential joint ventures, stand alone projects or other transactions that it believes will present opportunities to realize synergies, expand its role in the energy infrastructure business and increase its market position.
Each of the MLP Entities will require substantial new capital to finance the future development and acquisition of assets and businesses. Any limitations on any MLP Entity’s access to capital will impair its ability to execute its strategy. If the cost of such capital becomes too expensive, the MLP Entity’s ability to develop or acquire accretive assets will be limited. The MLP Entities may not be able to raise the necessary funds on satisfactory terms, if at all. The primary factors that influence each MLP Entity’s initial cost of equity include market conditions, fees it pays to underwriters and other offering costs, which include amounts it pays for legal and accounting services. The primary factors influencing cost of borrowing include interest rates, credit spreads, covenants, underwriting or loan origination fees and similar charges it pays to lenders.
In addition, each of the MLP Entities is experiencing increased competition for the types of assets and businesses it has historically purchased or acquired. Increased competition for a limited pool of assets could result in the MLP Entities losing to other bidders more often or acquiring assets at less attractive prices. Either occurrence would limit the affected MLP Entity’s ability to fully execute its growth strategy. The inability of any MLP Entity to execute its growth strategy may materially adversely affect its ability to maintain or pay higher distributions in the future.
The MLP Entities face competition from third parties in their midstream businesses.
Even if reserves exist in the areas accessed by the MLP Entities’ facilities and are ultimately produced, the MLP Entities may not be chosen by the producers in these areas to gather, transport, process, fractionate, store or otherwise handle the hydrocarbons that are produced. The MLP Entities compete with others, including producers of oil and natural gas, for any such production on the basis of many factors, including but not limited to:
| | § | | geographic proximity to the production; |
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| | § | | costs of connection; |
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| | § | | available capacity; |
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| | § | | rates; and |
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The MLP Entities’ refined products transportation business competes with other pipelines in the areas where it deliver products. The MLP Entities also compete with trucks, barges and railroads in some of the areas it serves. Competitive pressures may adversely affect the MLP Entities’ tariff rates or volumes shipped. The crude oil gathering and marketing business can be characterized by thin margins and intense competition for supplies of crude oil at the wellhead. A decline in domestic crude oil production has intensified competition among gatherers and marketers. Enterprise Products Partners’ and TEPPCO’s crude oil transportation business competes with common carriers and proprietary pipelines owned and operated by major oil companies, large independent pipeline companies and other companies in the areas where such MLP Entities’ pipeline systems deliver crude oil and NGLs.
In the MLP Entities’ natural gas gathering business, new supplies of natural gas are necessary to offset natural declines in production from wells connected to its gathering systems and to increase throughput volume, and it encounters competition in obtaining contracts to gather natural gas supplies. Competition in natural gas gathering is based in large part on reputation, efficiency, system reliability, gathering system capacity and price arrangements. The MLP Entities’ key competitors in the gas gathering segment include independent gas gatherers and major integrated energy companies. Alternate gathering facilities are available to producers they serve, and those producers may also elect to construct proprietary gas gathering systems. If the production delivered to any of the MLP Entities’ gathering system declines, its revenues from such operations will decline.
The use of derivative financial instruments could result in material financial losses by each of the MLP Entities.
Each of the MLP Entities historically has sought to limit a portion of the adverse effects resulting from changes in oil and natural gas commodity prices and interest rates by using financial derivative instruments and other hedging mechanisms from time to time. To the extent that any of the MLP Entities hedges its commodity price and interest rate exposures, it will forego the benefits it would otherwise experience if commodity prices or interest rates were to change in its favor. In addition, even though monitored by management, hedging activities can result in losses. Such losses could occur under various circumstances, including if a counterparty does not perform its obligations under the hedge arrangement, the hedge is imperfect, or hedging policies and procedures are not followed.
The MLP Entities’ construction of new assets is subject to regulatory, environmental, political, legal and economic risks, which may result in delays, increased costs or decreased cash flows.
One of the ways each of the MLP Entities intend to grow its business is through the construction of new midstream energy assets. The construction of new assets involves numerous operational, regulatory, environmental, political and legal risks beyond its control and may require the expenditure of significant amounts of capital. These potential risks include, among other things, the following:
| | § | | the MLP Entity may be unable to complete construction projects on schedule or at the budgeted cost due to the unavailability of required construction personnel or materials, accidents, weather conditions or an inability to obtain necessary permits; |
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| | § | | the MLP Entity will not receive any material increases in revenues until the project is completed, even though it may have expended considerable funds during the construction phase, which may be prolonged; |
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| | § | | the MLP Entity may construct facilities to capture anticipated future growth in production in a region in which such growth does not materialize; |
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| | § | | since the MLP Entities are not engaged in the exploration for and development of natural gas reserves, it may not have access to third-party estimates of reserves in an area prior to its |
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| | | | constructing facilities in the area. As a result, the MLP Entities may construct facilities in an area where the reserves are materially lower than it anticipate; |
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| | § | | where the MLP Entities do rely on third-party estimates of reserves in making a decision to construct facilities, these estimates may prove to be inaccurate because there are numerous uncertainties inherent in estimating reserves; and |
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| | § | | the MLP Entities may be unable to obtain rights-of-way to construct additional pipelines or the cost to do so may not be economical. |
A materialization of any of these risks could adversely affect any of the MLP Entities’ ability to achieve growth in the level of its cash flows or realize benefits from expansion opportunities or construction projects.
The MLP Entities’ growth strategy may adversely affect its results of operations if it does not successfully integrate the businesses that it acquires or if it substantially increases its indebtedness and contingent liabilities to make acquisitions.
Each of the MLP Entities’ growth strategy includes making accretive acquisitions. As a result, from time to time, each of the MLP Entities will evaluate and acquire assets and businesses that it believes complement its existing operations. Any of the MLP Entities may be unable to integrate successfully businesses it acquires in the future. Any of the MLP Entities may incur substantial expenses or encounter delays or other problems in connection with its growth strategy that could negatively impact its results of operations, cash flows and financial condition. Moreover, acquisitions and business expansions involve numerous risks, including but not limited to:
| | § | | difficulties in the assimilation of the operations, technologies, services and products of the acquired companies or business segments; |
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| | § | | establishing the internal controls and procedures required to be maintained under the Sarbanes-Oxley Act of 2002; |
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| | § | | managing relationships with new joint venture partners; |
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| | § | | inefficiencies and complexities that can arise because of unfamiliarity with new assets and the businesses associated with them, including with their markets; and |
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| | § | | diversion of the attention of management and other personnel from day-to-day business to the development or acquisition of new businesses and other business opportunities. |
If consummated, any acquisition or investment would also likely result in the incurrence of indebtedness and contingent liabilities and an increase in interest expense and depreciation, depletion and amortization expenses. As a result, the MLP Entities’ capitalization and results of operations may change significantly following an acquisition. A substantial increase in any of the MLP Entities’ indebtedness and contingent liabilities could have a material adverse effect on its results of operations, cash flows and financial condition. In addition, any anticipated benefits of a material acquisition, such as expected cost savings, may not be fully realized, if at all.
A natural disaster, catastrophe or other event could result in severe personal injury, property damage and environmental damage, which could curtail the MLP Entities’ operations and otherwise materially adversely affect cash flow and, accordingly, affect the market price of their common units.
Some of the MLP Entities’ operations involve risks of personal injury, property damage and environmental damage, which could curtail their operations and otherwise materially adversely affect cash flow. For example, natural gas facilities operate at high pressures, sometimes in excess of 1,100 pounds
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per square inch. Enterprise Products Partners also operates oil and natural gas facilities located underwater in the Gulf of Mexico, which can involve complexities, such as extreme water pressure. Virtually all of the MLP Entities’ operations are exposed to potential natural disasters, including hurricanes, tornadoes, storms, floods and/or earthquakes. The location of their assets and customers’ assets in the U.S. Gulf Coast region makes them particularly vulnerable to hurricane risk.
If one or more facilities that are owned by the MLP Entities or that deliver oil, natural gas or other products to them are damaged by severe weather or any other disaster, accident, catastrophe or event, the MLP Entities’ operations could be significantly interrupted. Similar interruptions could result from damage to production or other facilities that supply the MLP Entities’ facilities or other stoppages arising from factors beyond their control. These interruptions might involve significant damage to people, property or the environment, and repairs might take from a week or less for a minor incident to six months or more for a major interruption. Additionally, some of the storage contracts that the MLP Entities are a party to obligate such MLP Entities’ to indemnify customers for any damage or injury occurring during the period in which the customers’ natural gas is in their possession. Any event that interrupts the revenues generated by the MLP Entities’ operations, or which causes them to make significant expenditures not covered by insurance, could reduce cash available for paying distributions and, accordingly, adversely affect the market price of their common units.
We believe that the MLP Entities have adequate insurance coverage, although insurance will not cover many types of interruptions that might occur and will not cover amounts up to applicable deductibles. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially, and in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. For example, change in the insurance markets subsequent to the terrorist attacks on September 11, 2001 and the hurricanes in 2005 have made it more difficult for the Controlled Entities to obtain certain types of coverage. As a result, EPCO and ETEGP may not be able to renew existing insurance policies on behalf of the MLP Entities or procure other desirable insurance on commercially reasonable terms, if at all. If the MLP Entities were to incur a significant liability for which they were not fully insured, a material adverse effect on their financial position and results of operations could occur. In addition, the proceeds of any such insurance may not be paid in a timely manner and may be insufficient if such an event were to occur.
Federal or state regulation could materially adversely affect the MLP Entities’ business, results of operations, cash flows and financial condition.
The FERC, pursuant to the Interstate Commerce Act of 1887, as amended (the “ICA”), the Energy Policy Act of 1992 (“Energy Policy Act”) and rules and orders promulgated thereunder, regulates the tariff rates for the MLP Entities’ interstate common carrier pipeline operations, including the transportation of crude oil, NGLs, petrochemical products and refined products. Pursuant to the Natural Gas Act of 1938 (the “NGA”), the FERC also regulates the MLP Entities’ interstate natural gas pipeline and storage facilities. The Surface Transportation Board (“STB”), pursuant to the ICA, regulates interstate propylene pipelines. State regulatory agencies, such as the Texas Railroad Commission (TRRC), regulate the MLP Entities’ intrastate natural gas and NGL pipelines, intrastate natural gas storage facilities and natural gas gathering lines.
Under the ICA, interstate tariffs must be just and reasonable and must not be unduly discriminatory or confer an undue preference upon any shipper. In addition, interstate transportation rates must be filed with the FERC and publicly posted. 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 pursuant to rates that are ultimately found to be unlawful. The FERC and interested parties may 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 the rates charged by the MLP Entities could adversely affect their revenues.
The Energy Policy Act deemed liquid pipeline rates that were in effect for the twelve months preceding enactment and that had not been subject to complaint, protest or investigation, just and
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reasonable under the Energy Policy Act (i.e., grandfathered). Some, but not all, of the MLP Entities’ interstate rates are considered grandfathered rates under the Energy Policy Act. A person challenging a grandfathered rate must, as a threshold matter, establish a substantial change since the date of enactment of the Energy Policy Act, in either the economic circumstances or the nature of the service that formed the basis of the rate. In May 2007, the D. C. Circuit upheld the FERC’s view that a substantial change in the economic circumstances requires a change to the pipeline’s total cost of service rather than to a single cost element. A successful challenge to the grandfathered rates charged by the MLP Entities could adversely affect their revenues.
The FERC uses several prescribed rate methodologies for approving regulated tariff rates under the ICA. Some of the MLP Entities’ interstate tariff rates are market-based and others are 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 the ability to set rates based on 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 the MLP Entities. Adverse decisions by the FERC in approving any of the MLP Entities’ regulated rates could adversely affect their cash flow.
In July 2004, the D.C. Circuit issued its opinion inBP West Coast Products, LLC v. FERC, which upheld, among other things, the FERC’s determination that certain rates of an interstate petroleum products pipeline, Santa Fe Pacific Pipeline (“SFPP”), were grandfathered rates under the Energy Policy Act of 1992 and that SFPP’s shippers had not demonstrated substantially changed circumstances that would justify modification to those rates. The Court also vacated the portion of the FERC’s decision applying theLakeheadpolicy. In theLakeheaddecision, the FERC allowed an oil pipeline publicly traded partnership to include in its cost-of-service an income tax allowance to the extent that its unitholders were corporations subject to income tax. In 2005, the FERC issued a statement of general policy, as well as an order on remand ofBP West Coast, in which the FERC stated it will permit pipelines to include in cost of service a tax allowance to reflect actual or potential tax liability on their public utility income attributable to all partnership or limited liability company interests, if the ultimate owner of the interest has an actual or potential income tax liability on such income. Whether a pipeline’s owners have such actual or potential income tax liability will be reviewed by the FERC on a case-by-case basis. Although the new policy is generally favorable for pipelines that are organized as pass-through entities, it still entails rate risk due to the case-by-case review requirement. In December 2005, the FERC concluded that for tax allowance purposes, the FERC would apply a rebuttable presumption that corporate partners of pass-through entities pay the maximum marginal tax rate of 35% and that non-corporate partners of pass-through entities pay a marginal rate of 28%. The FERC indicated that it would address the income tax allowance issues further in the context of SFPP’s compliance filing submitted in March 2006. In December 2006, the FERC ruled on some of the issues raised as to the March 2006 SFPP compliance filing, upholding most of its determinations in the December 2005 order. However, the FERC did revise its rebuttable presumption as to corporate partners’ marginal tax rate from 35% to 34%. The FERC’sBP West Coastremand decision, the new tax allowance policy and the December 2005 order were appealed to the D.C. Circuit. In May 2007, the D.C. Circuit affirmed FERC’s tax allowance policy. Therefore, the MLP Entities may include in an income tax allowance in their cost of service to the extent they are able to comply with FERC policy.
Under the Natural Gas Act, the FERC has authority to regulate natural gas companies that provide natural gas pipeline transportation services in interstate commerce. Its authority to regulate those services is comprehensive and includes the rates charged for the services, terms and condition of service and certification and construction of new facilities. To be lawful under the Natural Gas 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. Existing pipeline rates may be challenged by customer complaint or by the FERC Staff and proposed rate increases may be challenged by protest. The FERC can require refunds of amounts collected pursuant to rates that are ultimately found to be unlawful. Because of the complexity of rate making, the lawfulness of any rate is never assured. A successful challenge of the MLP Entities’ interstate natural gas transportation rates could adversely affect their revenues.
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Under the ICA, the STB regulates interstate common carrier propylene pipelines. If the STB finds that a pipeline’s rates are not just and reasonable or are unduly discriminatory or preferential, the STB may prescribe a reasonable rate. In addition, if the STB determines that effective competitive alternatives are not available to a shipper and a pipeline holds market power, then Enterprise Products Partners may be required to show that the rates are just and reasonable.
The MLP Entities’ intrastate NGL and natural gas pipelines are subject to regulation in many states, including Alabama, Colorado, Louisiana, Mississippi, New Mexico and Texas, and by the FERC pursuant to Section 311 of the Natural Gas Policy Act. Amounts charged in excess of fair and equitable rates for Section 311 service are subject to refund with interest and the terms and conditions of service, set forth in the pipeline’s Statement of Operating Conditions, are subject to FERC approval. The MLP Entities also have intrastate natural gas underground storage facilities in Louisiana, Mississippi and Texas. Although state regulation is typically less onerous than at the FERC, proposed and existing rates subject to state regulation and the provision of services on a non-discriminatory basis are also subject to challenge by protest and complaint, respectively.
The MLP Entities’ intrastate pipelines and natural gas gathering systems are generally exempt from FERC regulation under the NGA, however FERC regulation still significantly affects the natural gas gathering business. In recent years, the FERC has pursued pro-competition policies in its regulation of interstate natural gas pipelines. If the FERC does not continue this approach, it could have an adverse effect on the rates the MLP Entities’ are able to charge in the future. In addition, its 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. Additional rules and legislation pertaining to these matters are considered and adopted from time to time. We cannot predict what effect, if any, such regulatory changes and legislation might have on the MLP Entities’ operations, but they could be required to incur additional capital expenditures.
Enterprise Products Partners has interests in natural gas pipeline facilities offshore from Texas and Louisiana. These facilities are subject to regulation by the FERC and other federal agencies, including the Department of Interior, under the Outer Continental Shelf Lands Act, and by the Department of Transportation’s Office of Pipeline Safety under the Natural Gas Pipeline Safety Act.
ETP’s pipeline operations are subject to ratable take and common purchaser statutes in Texas and Louisiana. Ratable take statutes generally require gatherers to take, without undue discrimination, natural gas production that may be tendered to the gatherer for handling. Similarly, common purchaser statutes generally require gatherers to purchase without undue discrimination as to source of supply or producer. These statutes have the effect of restricting ETP’s right as an owner of gathering facilities to decide with whom it contracts to purchase or transport natural gas. Federal law leaves any economic regulation of natural gas gathering to the states, and some of the states in which ETP operates have adopted complaint-based or other limited economic regulation of natural gas gathering activities which generally allow natural gas producers and shippers to file complaints with state regulators in an effort to resolve grievances relating to natural gas gathering rates and access. Other state and local regulations also affect ETP’s business.
ETP’s and Enterprise Products Partners’ intrastate storage facilities are subject to the jurisdiction of the TRRC. Generally, the TRRC has jurisdiction over all underground storage of natural gas in Texas, unless the facility is part of an interstate gas pipeline facility. Because ETP’s ET Fuel System and the Houston Pipeline System natural gas storage facilities are only connected to intrastate gas pipelines, they fall within the TRRC’s jurisdiction and must be operated pursuant to TRRC permit. Certain changes in ownership or operation of TRCC–jurisdictional storage facilities, such as facility expansions and increases in the maximum operating pressure, must be approved by the TRRC through an amendment to the facility’s existing permit. In addition, the TRRC must approve transfers of the permits. The TRRC’s regulations also require all natural gas storage facilities to be operated to prevent waste, the uncontrolled escape of gas, pollution and danger to life or property. Accordingly, the TRRC requires natural gas storage facilities to implement certain safety, monitoring, reporting and record-keeping measures. Violations of the terms and provisions of a TRRC permit or a TRRC order or regulation can result in the modification, cancellation or suspension of an operating permit and/or civil penalties, injunctive relief, or both. The TRRC’s jurisdiction
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extends to both rates and pipeline safety. The rates the MLP Entities charge for transportation and storage services are deemed just and reasonable under Texas law unless challenged in a complaint. Should a complaint be filed or should regulation become more active, the MLP Entities’ business may be adversely affected.
Increases in interest rates could materially adversely affect the MLP Entities’ business, results of operations, cash flows and financial condition.
In addition to the MLP Entities’ exposure to commodity prices, they have significant exposure to increases in interest rates. At June 30, 2007, Enterprise Products Partners had $6.3 billion of consolidated debt, of which $4.6 billion was at fixed interest rates and $1.7 billion was at variable interest rates, after giving effect to existing interest rate swap arrangements. At June 30, 2007, TEPPCO had $1.6 billion of consolidated debt, of which $1.4 billion was at fixed interest rates and $0.2 billion was at variable interest rates, after giving effect to existing interest rate swap arrangements. Energy Transfer Equity reported $5.0 billion of consolidated debt on their quarterly repot on Form 10-Q for the period ended May 31, 2007.
From time to time, any of the MLP Entities may enter into additional interest rate swap arrangements, which could increase their exposure to variable interest rates. As a result, its results of operations, cash flows and financial condition, could be materially adversely affected by significant increases in interest rates.
An increase in interest rates may also cause a corresponding decline in demand for equity investments, in general, and in particular for yield-based equity investments such as the MLP Entities’ common units. Any such reduction in demand for the MLP Entities’ common units resulting from other more attractive investment opportunities may cause the trading price of their common units to decline.
The MLP Entities’ future debt level may limit their flexibility to obtain additional financing and pursue other business opportunities.
The amount of any of the MLP Entities’ future debt could have significant effects on its operations, including, among other things:
| | § | | a substantial portion of the MLP Entities’ cash flow, including that of Duncan Energy Partners to Enterprise Products Partners, could be dedicated to the payment of principal and interest on its future debt and may not be available for other purposes, including the payment of distributions on its common units and capital expenditures; |
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| | § | | credit rating agencies may view its debt level negatively; |
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| | § | | covenants contained in its existing and future credit and debt arrangements will require it to continue to meet financial tests that may adversely affect its flexibility in planning for and reacting to changes in its business, including possible acquisition opportunities; |
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| | § | | its ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired or such financing may not be available on favorable terms; |
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| | § | | it may be at a competitive disadvantage relative to similar companies that have less debt; and |
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| | § | | it may be more vulnerable to adverse economic and industry conditions as a result of its significant debt level. |
Each of the MLP Entities’ ability to access capital markets to raise capital on favorable terms will be affected by its debt level, the amount of its debt maturing in the next several years and current maturities, and by prevailing market conditions. Moreover, if the rating agencies were to downgrade any of the MLP Entities’ credit rating, then the MLP Entity could experience an increase in its borrowing costs,
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difficulty assessing capital markets or a reduction in the market price of its common units. Such a development could adversely affect the MLP Entity’s ability to obtain financing for working capital, capital expenditures or acquisitions or to refinance existing indebtedness. If any of the MLP Entities’ is unable to access the capital markets on favorable terms in the future, it might be forced to seek extensions for some of its short-term securities or to refinance some of its debt obligations through bank credit, as opposed to long-term public debt securities or equity securities. The price and terms upon which the MLP Entities might receive such extensions or additional bank credit, if at all, could be more onerous than those contained in existing debt agreements. Any such arrangements could, in turn, increase the risk that such MLP Entity’s leverage may adversely affect its future financial and operating flexibility and thereby impact its ability to pay cash distributions at expected rates.
The MLP Entities’ pipeline integrity programs may impose significant costs and liabilities on them.
The U.S. Department of Transportation issued final rules (effective March 2001 with respect to hazardous liquid pipelines and February 2004 with respect to natural gas pipelines) requiring pipeline operators to develop integrity management programs to comprehensively evaluate their pipelines, and take measures to protect pipeline segments located in what the rules refer to as “high consequence areas.” The final rule resulted from the enactment of the Pipeline Safety Improvement Act of 2002. At this time, we cannot predict the ultimate costs of compliance with this rule because those costs will depend on the number and extent of any repairs found to be necessary as a result of the pipeline integrity testing that is required by the rule. The MLP Entities will continue their pipeline integrity testing programs to assess and maintain the integrity of their pipelines. The results of these tests could cause the MLP Entities to incur significant and unanticipated capital and operating expenditures for repairs or upgrades deemed necessary to ensure the continued safe and reliable operation of their pipelines.
Environmental costs and liabilities and changing environmental regulation could materially affect the MLP Entities’ results of operations, cash flows and financial condition.
The MLP Entities’ operations are subject to extensive federal, state and local regulatory requirements relating to environmental affairs, health and safety, waste management and chemical and petroleum products. Governmental authorities have the power to enforce compliance with applicable regulations and permits and to subject violators to civil and criminal penalties, including substantial fines, injunctions or both. Certain environmental laws, including CERCLA and analogous state laws and regulations, impose strict, joint and several liability for costs required to cleanup and restore sites where hazardous substances or hydrocarbons have been disposed or otherwise released. Moreover, third parties, including neighboring landowners, may also have the right to pursue legal actions to enforce compliance or to recover for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment.
Each of the MLP Entities will make expenditures in connection with environmental matters as part of normal capital expenditure programs. However, future environmental law developments, such as stricter laws, regulations, permits or enforcement policies, could significantly increase some costs of the MLP Entities’ operations, including the handling, manufacture, use, emission or disposal of substances and wastes.
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The MLP Entities are subject to strict regulations at many of their facilities regarding employee safety, and failure to comply with these regulations could adversely affect their ability to make distributions to us and the Controlled GP Entities.
The workplaces associated with the MLP Entities’ facilities are subject to the requirements of the federal Occupational Safety and Health Act, or OSHA, and comparable state statutes that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that each MLP Entity maintains information about hazardous materials used or produced in its operations and that it provide this information to employees, state and local governmental authorities and local residents. The failure to comply with OSHA requirements or general industry standards, keep adequate records or monitor occupational exposure to regulated substances could have a material adverse effect on the MLP Entities’ business, financial condition, results of operations and ability to make distributions to us and the Controlled GP Entities.
An impairment of goodwill and intangible assets could reduce the MLP Entities’ net income.
At June 30, 2007, Enterprise Products Partners’ balance sheet reflected $590.6 million of goodwill and $950.3 million of intangible assets. At June 30, 2007, TEPPCO’s balance sheet reflected $15.5 million of goodwill and $176.1 million of intangible assets. At May 31, 2007, Energy Transfer Equity’s balance sheet reflected $746.0 million of goodwill and $262.3 million of intangible assets. Additionally, we have recorded $198.1 million of goodwill and $606.9 million of indefinite-lived intangible assets related to the parent company’s investment in TEPPCO.
Goodwill is recorded when the purchase price of a business exceeds the fair market value of the tangible and separately measurable intangible net assets. GAAP requires the MLP Entities to test goodwill and indefinite-lived intangible assets for impairment on an annual basis or when events or circumstances occur indicating that goodwill might be impaired. Long-lived assets such as intangible assets with finite useful lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If any of the MLP Entities determines that any of its goodwill or intangible assets were impaired, it would be required to take an immediate charge to earnings with a correlative effect on partners’ equity and balance sheet leverage as measured by debt to total capitalization.
The MLP Entities may be unable to cause their joint ventures to take or not to take certain actions unless some or all of the joint venture participants agree.
The MLP Entities participate in several joint ventures. Due to the nature of some of these arrangements, the participants have made substantial investments and, accordingly, have required that the relevant charter documents contain certain features designed to provide each participant with the opportunity to participate in the management of the joint venture and to protect its investment, as well as any other assets which may be substantially dependent on or otherwise affected by the activities of that joint venture. These participation and protective features customarily include a corporate governance structure that requires at least a majority-in-interest vote to authorize many basic activities and requires a greater voting interest (sometimes up to 100%) to authorize more significant activities. Examples of these more significant activities are large expenditures or contractual commitments, the construction or acquisition of assets, borrowing money or otherwise raising capital, transactions with affiliates of a joint venture participant, litigation and transactions not in the ordinary course of business, among others. Thus, without the concurrence of joint venture participants with enough voting interests, the affected MLP Entity may be unable to cause any of its joint ventures to take or not to take certain actions, even though those actions may be in the best interest of the affected MLP Entity or the particular joint venture.
Moreover, any joint venture owner may sell, transfer or otherwise modify its ownership interest in a joint venture, whether in a transaction involving third parties or the other joint venture owners. Any such transaction could result in the affected MLP Entity being required to partner with different or additional parties.
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Terrorist attacks aimed at any of the MLP Entities’ facilities could adversely affect their business, results of operations, cash flows and financial condition.
Since the September 11, 2001 terrorist attacks on the United States, the United States government has issued warnings that energy assets, including our nation’s pipeline infrastructure, may be the future target of terrorist organizations. Any terrorist attack on the MLP Entities’ facilities or pipelines or those of their customers could have a material adverse effect on their business.
Risks Relating to Energy Transfer Equity and ETP
The following risks are specific to Energy Transfer Equity and ETP. The following summaries are derived from the risk factors presented by Energy Transfer Equity in its filings with the SEC. We do not control Energy Transfer Equity or ETP, and accordingly rely in large part on information, including risk factors, provided by Energy Transfer Equity in identifying and describing the risks set forth below.
A reduction in ETP’s distributions will disproportionately affect the amount of cash distributions to which Energy Transfer Equity and we are entitled.
Energy Transfer Equity’s direct and indirect ownership of 100% of the incentive distribution rights in ETP (50% prior to November 1, 2006), through its ownership of equity interests in ETP GP, the holder of the incentive distribution rights, entitles Energy Transfer Equity to receive its pro rata share of specified percentages of total cash distributions made by ETP as it reaches established target cash distribution levels. The amount of the cash distributions that Energy Transfer Equity received from ETP during its fiscal year 2006 related to its ownership interest in the incentive distribution rights has increased at a more rapid rate than the amount of the cash distributions related to its 2% General Partner interest in ETP and its common units of ETP. Energy Transfer Equity currently receives its pro rata share of cash distributions from ETP based on the highest incremental percentage, 48%, to which ETP GP is entitled pursuant to its incentive distribution rights in ETP. A decrease in the amount of distributions by ETP to less than $0.4125 per ETP common unit per quarter would reduce ETP GP’s percentage of the incremental cash distributions above $0.3175 per Common Unit per quarter from 48% to 23%. As a result, any such reduction in quarterly cash distributions from ETP would have the effect of disproportionately reducing the amount of all distributions that Energy Transfer Equity receives from ETP based on our ownership interest in the incentive distribution rights in ETP as compared to cash distributions Energy Transfer Equity receives from ETP on its 2% General Partner interest in ETP and its ETP common units. Any such reduction would reduce the amounts that Energy Transfer Equity could distribute to us directly and indirectly through our equity interests in its general partner.
ETP is under investigation by the FERC and CFTC relating to certain trading and transportation activities.
ETP is under investigation by the FERC and Commodity Futures Trading Commission (“CFTC”) with respect to whether ETP engaged in manipulation or improper trading activities in the Houston Ship Channel market around the times of the hurricanes in the fall of 2005 and other prior periods in order to benefit financially from its commodities derivative positions and from certain of our index-priced physical gas purchases in the Houston Ship Channel market. The FERC is also investigating certain of ETP’s intrastate transportation activities. Management of Energy Transfer Equity believes that these agencies will require a payment in order to conclude these investigations on a negotiated settlement basis. It is also possible that third parties will assert claims for damages related to these matters.
On July 26, 2007, the FERC announced that it was taking preliminary action against ETP and proposed civil penalties of $97.5 million and disgorgement of profits of $70.1 million, and, in its lawsuit, the CFTC is seeking civil penalties of $130,000 per violation or three times the profit gained from each violation and other specified relief. At this time, ETP is unable to predict the outcome of these matters; however, it is possible that the amount it becomes obligated to pay as a result of the final resolution of these matters, whether on a negotiated settlement basis or otherwise, will exceed the amount of existing accrual related to these matters.
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As of May 31, 2007, ETP’s accrued amounts for all of its contingencies and current litigation matters (excluding environmental matters) was $30.3 million. Since ETP’s accrual amounts are non-cash, any cash payment of an amount in resolution of these matters would likely be made from cash from operations or borrowings, which payments would reduce its cash available for distributions either directly or as a result of increased principal and interest payments necessary to service any borrowings incurred to finance such payments. If these payments are substantial, ETP and, ultimately, our investee, Energy Transfer Equity, may experience a material adverse impact on results of operations, cash available for distribution and liquidity.
Tax Risks to Our Unitholders
Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as our not being subject to a material amount of entity-level taxation by individual states. If the IRS were to treat us as a corporation or if we were to become subject to a material amount of entity-level taxation for state tax purposes, then our cash available for distribution to our unitholders would be substantially reduced.
The anticipated after-tax benefit of an investment in our units depends largely on our being treated as a partnership for federal income tax purposes. We have not requested, and do not plan to request, a ruling from the IRS (“Internal Revenue Service”) on this matter. The value of our investment in the MLP Entities depends largely on each of the MLP Entities being treated as a partnership for federal income tax purposes.
If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%. Distributions to our unitholders would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to our unitholders. Because a tax would be imposed upon us as a corporation, our cash available for distribution to our unitholders would be substantially reduced. This treatment of us as a corporation would result in a material reduction in our anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our units.
If any of the MLP Entities were treated as a corporation for federal income tax purposes, it would pay federal income tax on its taxable income at the corporate tax rate. Distributions to us would generally be taxed again as corporate distributions, and no income, gains, losses, deduction or credits would flow through to us. As a result, there would be a material reduction in our anticipated cash flow, likely causing a substantial reduction in the value of our units.
Current law may change, causing us or any of the MLP Entities to be treated as a corporation for federal income tax purposes or otherwise subjecting us or any of the MLP Entities to a material amount of entity level taxation. In addition, because of widespread state budget deficits and other reasons, several states (including Texas) are evaluating ways enhance state-tax collections. For example, our operating subsidiaries will be subject to a newly revised Texas franchise tax (the “Texas Margin Tax”) on the portion of their revenue that is generated in Texas beginning for tax reports due on or after January 1, 2008. Specifically, the Texas Margin Tax will be imposed at a maximum effective rate of 0.7% of the operating subsidiaries’ gross revenue that is apportioned to Texas. If any additional state were to impose a entity-level tax upon us or the MLP Entities as an entity, the cash available for distribution to our unitholders would be reduced.
If the IRS contests the federal income tax positions we take, the market for our units may be adversely impacted, and the costs of any contest will be borne by our unitholders and EPE Holdings.
The IRS may adopt positions that differ from the position we take, even positions taken with advice of counsel. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s conclusions or the positions we take. A court may not agree with some or all of our counsel’s conclusions or the positions we take. Any contest with the IRS may materially and adversely
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impact the market for our units and the price at which they trade. In addition, the costs of any contest with the IRS will result in a reduction in cash available for distribution to our unitholders and our general partner and thus will be borne indirectly by our unitholders and our general partner.
A successful IRS contest of the federal income tax positions taken by any of the MLP Entities may adversely impact the market for its common units, and the costs of any contest will be borne by such MLP Entity, and therefore indirectly by us and the other unitholders of the MLP Entities.
The IRS may adopt positions that differ from the positions each of the MLP Entities takes, even positions taken with the advice of counsel. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions such MLP Entity takes. A court may not agree with all of the positions such MLP Entity takes. Any contest with the IRS may materially and adversely impact the market for the MLP Entities’ common units and the prices at which the common units trade. In addition, the costs of any contest with the IRS will be borne by the MLP Entities and therefore indirectly by us, as a unitholder and as the owner of the general partner of such Controlled Entity, and by the other unitholders of the Controlled Entities.
Even if our unitholders do not receive any cash distributions from us, they will be required to pay taxes on their share of our taxable income.
Our unitholders will be required to pay federal income taxes and, in some cases, state and local income taxes on their share of our taxable income, whether or not they receive cash distributions from us. Our unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from their share of our taxable income.
Tax gain or loss on the disposition of our units could be different than expected.
If our unitholders sell their units, they will recognize gain or loss equal to the difference between the amount realized and their tax basis in those units. Prior distributions in excess of the total net taxable income allocated to a unitholder for a unit, which decreased his tax basis in that unit, will, in effect, become taxable income if the unit is sold at a price greater than such unitholder’s tax basis in that unit, even if the price received is less than such unitholder’s original cost. A substantial portion of the amount realized, whether or not representing gain, may be ordinary income to our unitholders.
Tax-exempt entities and foreign persons face unique tax issues from owning units that may result in adverse tax consequences to them.
Investment in units by tax-exempt entities, such as individual retirement accounts (known as IRAs), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations exempt from federal income tax, including individual retirement accounts and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file United States federal income tax returns and pay tax on their share of our taxable income.
We will treat each purchaser of our units as having the same tax benefits without regard to the units purchased. The IRS may challenge this treatment, which could adversely affect the value of our units.
Because we cannot match transferors and transferees of units, we will adopt depreciation and amortization positions that may not conform with all aspects of existing Treasury regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. It also could affect the timing of these tax benefits or the amount of gain from your sale of units and could have a negative impact on the value of our units or result in audit adjustments to our unitholders’ tax returns.
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Our unitholders will likely be subject to state and local taxes and return filing requirements as a result of investing in our units.
In addition to federal income taxes, our unitholders will likely be subject to other taxes, such as state and local income taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we or each of the MLP Entities do business or own property. Our unitholders will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, our unitholders may be subject to penalties for failure to comply with those requirements. We or the MLP Entities may own property or conduct business in other states or foreign countries in the future. It is our unitholders’ responsibility to file all federal, state and local tax returns.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
As reported on Item 3.02 of our Current Report on Form 8-K dated May 10, 2007, we issued 14,173,304 Class B units and 16,000,000 Class C units to private company affiliates of EPCO in exchange for all of the membership interests of TEPPCO GP (including related incentive distribution rights) and 4,400,000 common units of TEPPCO.
We did not repurchase any of our units during the three and six months ended June 30, 2007.
Item 3.Defaults Upon Senior Securities.
None.
Item 4.Submission of Matters to a Vote of Security Holders.
None.
Item 5.Other Information.
None.
Item 6.Exhibits.
| | | |
| Exhibit | | |
| Number | | Exhibit* |
| 3.1 | | First Amended and Restated Agreement of Limited Partnership of Enterprise GP Holdings L.P., dated as of August 29, 2005 (incorporated by reference to Exhibit 3.1 to Enterprise GP Holdings’ Form 10-Q filed November 4, 2005). |
| | | |
| 3.2 | | Amendment No. 1 to First Amended and Restated Agreement of Limited Partnership of Enterprise GP Holdings L.P., dated as of May 7, 2007 (incorporated by reference to Exhibit 3.1 to Enterprise GP Holdings’ Form 8-K filed on May 10, 2007). |
| | | |
| 3.3 | | Second Amended and Restated Limited Liability Company Agreement of EPE Holdings, LLC, dated as of February 13, 2006 (incorporated by reference to Exhibit 3.1 to Enterprise GP Holdings’ Form 8-K filed February 16, 2006). |
| | | |
| 3.4 | | Certificate of Limited Partnership of Enterprise GP Holdings L.P. (incorporated by reference to Exhibit 3.1 to Amendment No. 2 to Enterprise GP Holdings’ Form S-1 Registration Statement, Reg. No. 333-124320, filed July 21, 2005). |
| | | |
| 3.5 | | Certificate of Formation of EPE Holdings, LLC (incorporated by reference to Exhibit 3.2 to Amendment No. 2 to Enterprise GP Holdings’ Form S-1 Registration Statement, Reg. No. 333-124320, filed July 21, 2005). |
| | | |
| 3.6 | | Fifth Amended and Restated Agreement of Limited Partnership of Enterprise Products Partners L.P., dated effective as of August 8, 2005 (incorporated by reference to Exhibit 3.1 to Enterprise Products Partners’ Form 8-K filed August 10, 2005). |
109
| | | |
| Exhibit | | |
| Number | | Exhibit* |
| 3.7 | | Fourth Amended and Restated Limited Liability Company Agreement of Enterprise Products GP, LLC, dated as of February 13, 2006 (incorporated by reference to Exhibit 3.1 to Enterprise Products Partners’ Form 8-K filed February 16, 2006). |
| | | |
| 3.8 | | Amended and Restated Limited Liability Company Agreement of Texas Eastern Products Pipeline Company, LLC dated May 7, 2007 (incorporated by reference to Exhibit 3 to the Current Report on Form 8-K of TEPPCO Partners, L.P. (commission File No. 1-10403) filed on May 10, 2007). |
| | | |
| 3.9 | | Fourth Amended and Restated Agreement of Limited Partnership of TEPPCO Partners, L.P., dated December 8, 2006 (Filed as Exhibit 3 to the Current Report on Form 8-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) filed on December 13, 2006). |
| | | |
| 4.1 | | Specimen Unit certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 3 to Enterprise GP Holdings’ Form S-1 Registration Statement, Reg. No. 333-124320, filed August 11, 2005). |
| | | |
| 4.2 | | Registration Rights Agreement dated as of July 17, 2007 by and among Enterprise GP Holdings L.P. and the Purchasers named therein (incorporated by reference to Exhibit 10.2 to Enterprise GP Holdings’ Form 8-K filed on July 12, 2007). |
| | | |
| 10.1 | | Securities Purchase Agreement, dated as of May 7, 2007, by and among Enterprise GP Holdings L.P., Natural Gas Partners VI, L.P., Ray C. Davis, Avatar Holdings, LLC, Avatar Investments, LP, Lon Kile, MHT Properties, Ltd., P. Brian Smith Holdings, LP., and LE GP, LLC (incorporated by reference to Exhibit 10.1 to Enterprise GP Holdings’ Form 8-K filed on May 10, 2007). |
| | | |
| 10.2 | | Amended and Restated Limited Liability Company Agreement of LE GP, LLC, dated as of May 7, 2007 (incorporated by reference to Exhibit 10.2 to Enterprise GP Holdings’ Form 8-K filed on May 10, 2007). |
| | | |
| 10.3 | | Unitholder Rights and Restrictions Agreement, dated as of May 7, 2007, by and among Energy Transfer Equity, L.P., Enterprise GP Holdings L.P., Natural Gas Partners VI, L.P. and Ray C. Davis (incorporated by reference to Exhibit 10.3 to Enterprise GP Holdings’ Form 8-K filed on May 10, 2007). |
| | | |
| 10.4 | | Securities Purchase Agreement, dated as of May 7, 2007, by and among Enterprise GP Holdings L.P., DFI GP Holdings L.P. and Duncan Family Interests, Inc. (incorporated by reference to Exhibit 10.4 to Enterprise GP Holdings’ Form 8-K filed on May 10, 2007). |
| | | |
| 10.5 | | Second Amended and Restated Credit Agreement, dated as of May 1, 2007, by and among Enterprise GP Holdings L.P., as Borrower, the Lenders named therein, Citicorp North America, Inc., as Administrative Agent, Lehman Commercial Paper Inc., as Syndication Agent, Citibank, N.A., as Issuing Bank, and The Bank of Nova Scotia, Sun Trust Bank and Mizuho Corporate Bank, Ltd., as Co-Documentation Agent (incorporated by reference to Exhibit 10.5 to Enterprise GP Holdings’ Form 8-K filed on May 10, 2007). |
| | | |
| 10.6** | | First Amendment to EPE Unit L.P. Agreement of limited partnership dated August 7, 2007 (incorporated by reference to Exhibit 10.3 to Form 10-Q filed by Duncan Energy Partners L.P. on August 8, 2007). |
| | | |
| 10.7** | | First Amendment to EPE Unit II, L.P. Agreement of limited partnership dated August 7, 2007 (incorporated by reference to Exhibit 10.4 to Form 10-Q filed by Duncan Energy Partners L.P. on August 8, 2007). |
| | | |
| 10.8** | | First Amendment to EPE Unit III, L.P. Agreement of limited partnership dated August 7, 2007 (incorporated by reference to Exhibit 10.5 to Form 10-Q filed by Duncan Energy Partners L.P. on August 8, 2007). |
| | | |
| 10.9 | | Second Amendment to Fourth Amended and Restated Administrative Services Agreement dated August 7, 2007, but effective as of May 7, 2007 (incorporated by reference to Exhibit 10.1 to Form 10-Q filed by Duncan Energy Partners L.P. on August 8, 2007). |
| | | |
| 10.10** | | EPE Unit II, L.P. Agreement of Limited Partnership dated December 5, 2006 (incorporated by reference to Exhibit 10.13 to Enterprise Products Partners’ annual report on Form 10-K for the year ended December 31, 2006 filed on February 28, 2007). |
| | | |
| 10.11** | | EPE Unit III, L.P. Agreement of Limited Partnership dated May 7, 2007 (incorporated by reference to Exhibit 10.6 to Enterprise GP Holdings’ Form 8-K filed on May 10, 2007). |
| | | |
| 31.1# | | Sarbanes-Oxley Section 302 certification of Dr. Ralph S. Cunningham for Enterprise GP Holdings L.P. with respect to the June 30, 2007 Quarterly Report on Form 10-Q. |
| | | |
| 31.2# | | Sarbanes-Oxley Section 302 certification of W. Randall Fowler for Enterprise GP Holdings L.P. with respect to the June 30, 2007 Quarterly Report on Form 10-Q. |
| | | |
| 32.1# | | Section 1350 certification of Dr. Ralph S. Cunningham for the June 30, 2007 Quarterly Report on Form 10-Q. |
| | | |
| 32.2# | | Section 1350 certification of W. Randall Fowler for the June 30, 2007 Quarterly Report on Form 10-Q. |
110
| | |
| * | | With respect to any exhibits incorporated by reference to any Exchange Act filings, the Commission file numbers for Enterprise Products Partners, Duncan Energy Partners and TEPPCO are 1-14323, 1-33266 and 1-10403, respectively. |
| |
| ** | | Identifies management contract and compensatory plan arrangements. |
| |
| # | | Filed with this report. |
111
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Houston, State of Texas on August 9, 2007.
| | | | | | | |
| | | ENTERPRISE GP HOLDINGS L.P.
(A Delaware Limited Partnership) | | |
| | | | | | | |
| | | By: | | EPE Holdings, LLC, | | |
| | | | | as General Partner | | |
| | | | | | | |
| | | By:
Name: | | /s/ Michael J. Knesek Michael J. Knesek | | |
| | | Title: | | Senior Vice President, Controller | | |
| | | | | and Principal Accounting Officer | | |
| | | | | of the General Partner | | |
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Exhibit Index
| | | |
| Exhibit | | |
| Number | | Exhibit* |
| | | |
| 3.1 | | First Amended and Restated Agreement of Limited Partnership of Enterprise GP Holdings L.P., dated as of August 29, 2005 (incorporated by reference to Exhibit 3.1 to Enterprise GP Holdings’ Form 10-Q filed November 4, 2005). |
| | | |
| 3.2 | | Amendment No. 1 to First Amended and Restated Agreement of Limited Partnership of Enterprise GP Holdings L.P., dated as of May 7, 2007 (incorporated by reference to Exhibit 3.1 to Enterprise GP Holdings’ Form 8-K filed on May 10, 2007). |
| | | |
| 3.3 | | Second Amended and Restated Limited Liability Company Agreement of EPE Holdings, LLC, dated as of February 13, 2006 (incorporated by reference to Exhibit 3.1 to Enterprise GP Holdings’ Form 8-K filed February 16, 2006). |
| | | |
| 3.4 | | Certificate of Limited Partnership of Enterprise GP Holdings L.P. (incorporated by reference to Exhibit 3.1 to Amendment No. 2 to Enterprise GP Holdings’ Form S-1 Registration Statement, Reg. No. 333-124320, filed July 21, 2005). |
| | | |
| 3.5 | | Certificate of Formation of EPE Holdings, LLC (incorporated by reference to Exhibit 3.2 to Amendment No. 2 to Enterprise GP Holdings’ Form S-1 Registration Statement, Reg. No. 333-124320, filed July 21, 2005). |
| | | |
| 3.6 | | Fifth Amended and Restated Agreement of Limited Partnership of Enterprise Products Partners L.P., dated effective as of August 8, 2005 (incorporated by reference to Exhibit 3.1 to Enterprise Products Partners’ Form 8-K filed August 10, 2005). |
| | | |
| 3.7 | | Fourth Amended and Restated Limited Liability Company Agreement of Enterprise Products GP, LLC, dated as of February 13, 2006 (incorporated by reference to Exhibit 3.1 to Enterprise Products Partners’ Form 8-K filed February 16, 2006). |
| | | |
| 3.8 | | Amended and Restated Limited Liability Company Agreement of Texas Eastern Products Pipeline Company, LLC dated May 7, 2007 (incorporated by reference to Exhibit 3 to the Current Report on Form 8-K of TEPPCO Partners, L.P. (commission File No. 1-10403) filed on May 10, 2007). |
| | | |
| 3.9 | | Fourth Amended and Restated Agreement of Limited Partnership of TEPPCO Partners, L.P., dated December 8, 2006 (Filed as Exhibit 3 to the Current Report on Form 8-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) filed on December 13, 2006). |
| | | |
| 4.1 | | Specimen Unit certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 3 to Enterprise GP Holdings’ Form S-1 Registration Statement, Reg. No. 333-124320, filed August 11, 2005). |
| | | |
| 4.2 | | Registration Rights Agreement dated as of July 17, 2007 by and among Enterprise GP Holdings L.P. and the Purchasers named therein (incorporated by reference to Exhibit 10.2 to Enterprise GP Holdings’ Form 8-K filed on July 12, 2007). |
| | | |
| 10.1 | | Securities Purchase Agreement, dated as of May 7, 2007, by and among Enterprise GP Holdings L.P., Natural Gas Partners VI, L.P., Ray C. Davis, Avatar Holdings, LLC, Avatar Investments, LP, Lon Kile, MHT Properties, Ltd., P. Brian Smith Holdings, LP., and LE GP, LLC (incorporated by reference to Exhibit 10.1 to Enterprise GP Holdings’ Form 8-K filed on May 10, 2007). |
| | | |
| 10.2 | | Amended and Restated Limited Liability Company Agreement of LE GP, LLC, dated as of May 7, 2007 (incorporated by reference to Exhibit 10.2 to Enterprise GP Holdings’ Form 8-K filed on May 10, 2007). |
| | | |
| 10.3 | | Unitholder Rights and Restrictions Agreement, dated as of May 7, 2007, by and among Energy Transfer Equity, L.P., Enterprise GP Holdings L.P., Natural Gas Partners VI, L.P. and Ray C. Davis (incorporated by reference to Exhibit 10.3 to Enterprise GP Holdings’ Form 8-K filed on May 10, 2007). |
| | | |
| 10.4 | | Securities Purchase Agreement, dated as of May 7, 2007, by and among Enterprise GP Holdings L.P., DFI GP Holdings L.P. and Duncan Family Interests, Inc. (incorporated by reference to Exhibit 10.4 to Enterprise GP Holdings’ Form 8-K filed on May 10, 2007). |
| | | |
| Exhibit | | |
| Number | | Exhibit* |
| | | |
| 10.5 | | Second Amended and Restated Credit Agreement, dated as of May 1, 2007, by and among Enterprise GP Holdings L.P., as Borrower, the Lenders named therein, Citicorp North America, Inc., as Administrative Agent, Lehman Commercial Paper Inc., as Syndication Agent, Citibank, N.A., as Issuing Bank, and The Bank of Nova Scotia, Sun Trust Bank and Mizuho Corporate Bank, Ltd., as Co-Documentation Agent (incorporated by reference to Exhibit 10.5 to Enterprise GP Holdings’ Form 8-K filed on May 10, 2007). |
| | | |
| 10.6** | | First Amendment to EPE Unit L.P. Agreement of limited partnership dated August 7, 2007 (incorporated by reference to Exhibit 10.3 to Form 10-Q filed by Duncan Energy Partners L.P. on August 8, 2007). |
| | | |
| 10.7** | | First Amendment to EPE Unit II, L.P. Agreement of limited partnership dated August 7, 2007 (incorporated by reference to Exhibit 10.4 to Form 10-Q filed by Duncan Energy Partners L.P. on August 8, 2007). |
| | | |
| 10.8** | | First Amendment to EPE Unit III, L.P. Agreement of limited partnership dated August 7, 2007 (incorporated by reference to Exhibit 10.5 to Form 10-Q filed by Duncan Energy Partners L.P. on August 8, 2007). |
| | | |
| 10.9 | | Second Amendment to Fourth Amended and Restated Administrative Services Agreement dated August 7, 2007, but effective as of May 7, 2007 (incorporated by reference to Exhibit 10.1 to Form 10-Q filed by Duncan Energy Partners L.P. on August 8, 2007). |
| | | |
| 10.10** | | EPE Unit II, L.P. Agreement of Limited Partnership dated December 5, 2006 (incorporated by reference to Exhibit 10.13 to Enterprise Products Partners’ annual report on Form 10-K for the year ended December 31, 2006 filed on February 28, 2007). |
| | | |
| 10.11** | | EPE Unit III, L.P. Agreement of Limited Partnership dated May 7, 2007 (incorporated by reference to Exhibit 10.6 to Enterprise GP Holdings’ Form 8-K filed on May 10, 2007). |
| | | |
| 31.1# | | Sarbanes-Oxley Section 302 certification of Dr. Ralph S. Cunningham for Enterprise GP Holdings L.P. with respect to the June 30, 2007 Quarterly Report on Form 10-Q. |
| | | |
| 31.2# | | Sarbanes-Oxley Section 302 certification of W. Randall Fowler for Enterprise GP Holdings L.P. with respect to the June 30, 2007 Quarterly Report on Form 10-Q. |
| | | |
| 32.1# | | Section 1350 certification of Dr. Ralph S. Cunningham for the June 30, 2007 Quarterly Report on Form 10-Q. |
| | | |
| 32.2# | | Section 1350 certification of W. Randall Fowler for the June 30, 2007 Quarterly Report on Form 10-Q. |
| | |
| * | | With respect to any exhibits incorporated by reference to any Exchange Act filings, the Commission file numbers for Enterprise Products Partners, Duncan Energy Partners and TEPPCO are 1-14323, 1-33266 and 1-10403, respectively. |
| |
| ** | | Identifies management contract and compensatory plan arrangements. |
| |
| # | | Filed with this report. |
