EXHIBIT 99
REPORT OF INDEPENDENT AUDITORS
The Board of Directors of WEG GP LLC
General Partner of Williams Energy Partners L.P.
We have audited the accompanying consolidated balance sheet of WEG GP LLC
as of December 31, 2002. The consolidated balance sheet is the responsibility of
the Company's management. Our responsibility is to express an opinion on the
consolidated balance sheet based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated balance
sheet is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit of the consolidated
balance sheet provides a reasonable basis for our opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the consolidated financial position of WEG GP
LLC at December 31, 2002 in conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
Tulsa, Oklahoma
March 3, 2003
WEG GP LLC
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<Table>
<Caption>
DECEMBER 31,
2002
------------
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 75,738
Accounts receivable (less allowance for doubtful
accounts of $457 and $510 at December 31, 2002
and 2001, respectively) .................................... 18,038
Other accounts receivable .................................... 6,619
Affiliate accounts receivable ................................ 15,608
Inventory .................................................... 5,224
Other current assets ......................................... 5,393
------------
Total current assets ....................................... 126,620
Property, plant and equipment, at cost ......................... 1,334,527
Less: accumulated depreciation ............................... 401,396
------------
Net property, plant and equipment .......................... 933,131
Goodwill (less amortization of $141 and $145 at December
31, 2002 and 2001, respectively) ............................. 22,295
Other intangibles (less amortization of $297 and $310 at
December 31, 2002 and 2001, respectively) .................... 2,432
Long-term affiliate receivables ................................ 11,656
Long-term receivables .......................................... 9,268
Other noncurrent assets ........................................ 12,416
------------
Total assets ............................................... $ 1,117,818
============
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 17,024
Affiliate accounts payable ................................... 28,555
Cash overdrafts .............................................. 1,967
Accrued affiliate payroll and benefits ....................... 7,065
Accrued taxes other than income .............................. 13,698
Accrued interest payable ..................................... 67
Accrued environmental liabilities ............................ 10,359
Deferred revenue ............................................. 11,550
Accrued product purchases .................................... 2,924
Accrued casualty losses ...................................... 655
Other current liabilities .................................... 3,880
------------
Total current liabilities .................................. 97,744
Long-term debt ................................................. 570,000
Long-term affiliate payable .................................... 450
Deferred compensation .......................................... 4,028
Other deferred liabilities ..................................... 488
Environmental liabilities ...................................... 11,927
Minority interest .............................................. 340,023
Commitments and contingencies
Owners' equity ................................................. 94,129
Accumulated other comprehensive loss ........................... (971)
------------
Total liabilities and owners' equity ......................... $ 1,117,818
============
</Table>
See accompanying notes.
2
WEG GP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRESENTATION
Williams Energy Partners L.P. ("the Partnership") is a Delaware limited
partnership that was formed in August 2000 to own, operate and acquire a
diversified portfolio of complementary energy assets. At the time of the
Partnership's initial public offering in February 2001, the Partnership owned:
(a) selected petroleum products terminals previously owned by Williams Energy
Ventures, Inc., and (b) an ammonia pipeline system, Williams Ammonia Pipeline
Inc., previously owned by Williams Natural Gas Liquids, Inc. ("WNGL"). Prior to
the closing of the Partnership's initial public offering in February 2001,
Williams Energy Ventures, Inc. was owned by Williams Energy Services, LLC
("WES"). Both WES and WNGL are wholly owned subsidiaries of The Williams
Companies, Inc ("Williams"). Williams GP LLC, a Delaware limited liability
company, was also formed in August 2000, to serve as general partner for the
Partnership.
During November 2002, Williams created a new general partner, WEG GP LLC
("General Partner"). WEG GP LLC, which is owned by affiliates of Williams, has
all of the rights, privileges and responsibilities relative to the Partnership
previously held by the old general partner, Williams GP LLC. Williams GP LLC
will continue to own the Class B units issued by the Partnership in April 2002
as discussed below.
These financial statements present the consolidated financial position of
WEG GP LLC and the Partnership. Minority interest represents the limited partner
interest held in the Partnership by non-Williams affiliated limited partners.
On February 9, 2001, the Partnership completed its initial public offering
of 4 million common units representing limited partner interests in the
Partnership at a price of $21.50 per unit. The proceeds of $86.0 million were
used to pay underwriting discounts and commissions of $5.6 million and legal,
professional fees and costs associated with the initial public offering of $3.1
million, with the remainder used to reduce affiliate note balances with
Williams.
As part of the initial public offering, the underwriters exercised their
over-allotment option and purchased 600,000 common units, also at a price of
$21.50 per unit. The net proceeds of $12.1 million, after underwriting discounts
and commissions of $0.8 million, from this over-allotment option were used to
redeem 600,000 of the common units held by WES to reimburse it for capital
expenditures related to the Partnership's assets. The Partnership maintained the
historical costs of the net assets in connection with the initial public
offering. Following the exercise of the underwriters' over-allotment option, 40%
of the Partnership was owned by the public and 60%, including the General
Partner's ownership, was owned by affiliates of the Partnership. Generally, the
limited partners' liability in the Partnership is limited to their investment.
On April 11, 2002, the Partnership acquired all of the membership interests
of Williams Pipe Line Company ("Williams Pipe Line") for approximately $1.0
billion (see Note 4 - Acquisitions and Divestitures). Because Williams Pipe Line
was an affiliate of the Partnership at the time of the acquisition, the
transaction was between entities under common control and, as such, has been
accounted for similarly to a pooling of interests. Accordingly, the consolidated
balance sheet and notes of WEG GP LLC have been restated to reflect the combined
historical financial position of WEG GP LLC, the Partnership and Williams Pipe
Line for 2002.
On April 11, 2002, the Partnership issued 7,830,924 Class B units
representing limited partner interests to Williams GP LLC. The securities,
valued at $304.4 million and along with $6.2 million of additional general
partner equity interests were issued as partial payment for the acquisition of
Williams Pipe Line (See Note 4 - Acquisitions and Divestitures). According to
the provisions in the Williams Pipe Line private placement debt agreement dated
November 15, 2002, the Partnership can redeem the Class B units only with
proceeds from an equity offering. When the Class B units are redeemed, the price
will be based on the 20-day average closing price of the common units prior to
the redemption date. If the Class B units are not redeemed by April 11, 2003,
then upon the request of the holders of the Class B units and approval of the
holders of a majority of the common units voting at a meeting of the
unitholders, the Class B units will convert into common units. If the approval
of the conversion by the common unitholders is not obtained within 120 days of
this request, the holder of the Class B units will be entitled to receive
distributions with respect to its Class B units, on a per unit basis, equal to
115% of the amount of distributions paid on a common unit.
In May 2002, the Partnership issued 8,000,000 common units representing
limited partner interests in the Partnership at a price of $37.15 per unit for
total proceeds of $297.2 million. Associated with this offering, Williams
contributed $6.1 million to the Partnership to maintain its 2% general partner
interest. A portion of the total proceeds was used to pay underwriting discounts
and commissions of $12.6 million. Legal, professional fees and costs associated
with this offering were approximately $5.3 million. The remaining cash proceeds
of $289.0 million were used to partially repay the $700.0 million short-term
note assumed by the Partnership to help finance the Williams Pipe Line
acquisition (see Note 10 - Long-Term Debt).
3
During November 2002, amendments were made to the Partnership's agreement of
limited partnership and a limited liability company agreement for WEG GP LLC was
adopted. The first change requires the Partnership and the general partner to
maintain separateness from Williams including formalities on interaction between
the Partnership, the public and Williams. Changes were also made to require the
approval of the Conflicts Committee (consisting of three independent directors)
before the general partner can make bankruptcy-related decisions for the
Partnership. In addition, adjustments were made to the voting rights of units
held by Williams. Williams' Class B units no longer have voting rights except
with respect to matters that would have a material impact on the holders of such
units, its subordinated units generally have one-half vote for every one unit
owned and all common units will be allowed to vote in any subordinated class
vote. Finally, election of the board members of the general partner has been
moved to a vote of the common unitholders, with the first vote to be held in
2003. The voting right changes and board member changes will be voided and
reversed in the event of a foreclosure in a Williams-related bankruptcy
proceeding. In addition, the Partnership eliminated from its agreements the
requirement that the Board of Directors of the Partnership's General Partner
approve any proposed disposition of any membership interest of the General
Partner.
Recent Developments
During 2002, Williams began to experience significant financial and
liquidity difficulties and no longer maintains an investment grade credit
rating. In the event that Williams' financial condition does not improve, or
becomes worse, it may have to consider other options including the possibility
of filing for bankruptcy under the United States Bankruptcy Code. Management has
reviewed the situation with outside counsel and believes that should Williams
and its affiliates file for bankruptcy protection that the Partnership would not
necessarily become a party to such bankruptcy filings. However, we cannot assure
you that Williams and its affiliates, or the creditors of Williams and its
affiliates, would not attempt to utilize various remedies available in a
bankruptcy (including substantive consolidation), in an effort to make the
assets of the Partnership available to the creditors of Williams and its
affiliates, or how a bankruptcy court would resolve such issues. Likewise, there
can be no assurances as to the ultimate impact a bankruptcy by Williams and its
affiliates would have on Williams' and its affiliates' ability to perform
obligations owed to the Partnership and its affiliates, including WEG GP LLC.
Provisions of the General Partner's limited liability company agreement
specifically provide that decisions regarding a voluntary bankruptcy filing of
WEG GP LLC or the Partnership must be approved by the Conflicts Committee, which
is comprised of the independent board members of WEG GP LLC.
If WEG GP LLC were to file for bankruptcy relief under Chapter 7 of the
United States Bankruptcy Code, the filing would be an "Event of Withdrawal"
under the Partnership's Partnership Agreement and WEG GP LLC will be deemed to
have withdrawn. A Chapter 11 filing would not be considered an "Event of
Withdrawal" and the Partnership would continue to operate under its existing
agreements. Upon the occurrence of an Event of Withdrawal, WEG GP LLC is
required to give notice to the Partnership's limited partners within 30 days
after such occurrence. An Event of Withdrawal triggers dissolution and winding
up of the affairs of the Partnership unless: (i) a successor general partner is
elected and admitted to the Partnership within 90 days of receiving the General
Partner's withdrawal notice, (ii) a written opinion of counsel is issued that
such withdrawal would not result in the loss of the limited liability of any
limited partner or of the limited partner of any of the Partnership's operating
limited partnerships or cause the Partnership or any of the Partnership's
operating limited partnerships to be treated as an association taxable as a
corporation or otherwise to be taxed as an entity for federal income tax
purposes, and (iii) the new general partner executes a new partnership agreement
and executes and files a new certificate of limited partnership. Election of a
successor general partner requires a vote of a majority of the outstanding units
to reconstitute the Partnership and approve the successor general partner.
2. DESCRIPTION OF BUSINESSES
WEG GP LLC serves as managing general partner for the Partnership. The
Partnership owns and operates a petroleum products pipeline system, petroleum
products terminals and an ammonia pipeline system.
WILLIAMS PIPE LINE SYSTEM
Williams Pipe Line is a petroleum products pipeline system that covers an
11-state area extending from Oklahoma through the Midwest to North Dakota,
Minnesota and Illinois. The system includes a 6,700-mile pipeline and 39
terminals that provide transportation, storage and distribution services. The
products transported on the Williams Pipe Line system are largely petroleum
products, including gasoline, diesel fuels, LPGs and aviation fuels. Product
originates on the system from direct connections to refineries and interconnects
with other interstate pipelines for transportation and ultimate distribution to
retail gasoline stations, truck stops, railroads, airlines and other end-users.
4
PETROLEUM PRODUCTS TERMINALS
Most of the Partnership's 28 petroleum products terminals are strategically
located along or near third party pipelines or petroleum refineries. The
petroleum products terminals provide a variety of services such as distribution,
storage, blending, inventory management and additive injection to a diverse
customer group including governmental customers and end-users in the downstream
refining, retail, commercial trading, industrial and petrochemical industries.
Products stored in and distributed through the petroleum products terminal
network include refined petroleum products, blendstocks and heavy oils and
feedstocks. The terminal network consists of marine terminal facilities and
inland terminals. Four marine terminal facilities are located along the Gulf
Coast and one marine terminal facility is located in Connecticut near the New
York harbor. The inland terminals are located primarily in the southeastern
United States.
AMMONIA PIPELINE SYSTEM
The ammonia pipeline system consists of an ammonia pipeline and six
company-owned terminals. Shipments on the pipeline primarily originate from
ammonia production plants located in Borger, Texas and Enid and Verdigris,
Oklahoma for transport to terminals throughout the Midwest for ultimate
distribution to end-users in Iowa, Kansas, Minnesota, Missouri, Nebraska,
Oklahoma, South Dakota and Texas. The ammonia transported through the system is
used primarily as nitrogen fertilizer.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
WEG GP LLC has an effective ownership in the Partnership of 54.5%. This
effective ownership is derived through its 2.0% general partner ownership, which
gives it control of the Partnership, and its affiliates, who own 52.5% of the
limited partnership interests. The Partnership is fully consolidated in WEG GP
LLC's balance sheet.
The consolidated balance sheet includes Williams Pipe Line, the petroleum
products terminals and the ammonia pipeline system. For 11 of these petroleum
products terminals, the Partnership owns varying undivided ownership interests.
From inception, ownership of these assets has been structured as an ownership of
an undivided interest in assets, not as an ownership interest in a partnership,
limited liability company, joint venture or other form of entity. Marketing and
invoicing are controlled separately by each owner, and each owner is responsible
for any loss, damage or injury that may occur to their own customers. As a
result, the Partnership applies proportionate consolidation for its interests in
these assets.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
REGULATORY REPORTING
Williams Pipe Line is regulated by the Federal Energy Regulatory
Commission ("FERC"), which prescribes certain accounting principles and
practices for the annual Form 6 Report filed with the FERC that differ from
those used in these financial statements. Such differences relate primarily to
capitalization of interest, accounting for equity investments and other
adjustments and are not significant to the financial statements.
CASH EQUIVALENTS
Cash and cash equivalents include demand and time deposits and other
marketable securities with maturities of three months or less when acquired. The
carrying amount of cash and cash equivalents approximates fair value of those
instruments due to their short maturity.
INVENTORY VALUATION
Inventory is comprised primarily of refined products and materials and
supplies. Refined products and natural gas liquids inventories are stated at the
lower of average cost or market. The average cost method is used for materials
and supplies.
5
TRADE RECEIVABLES
Trade receivables are recognized when products are sold or services are
rendered. An allowance for doubtful accounts is established for all amounts
deemed uncollectable and reserves are evaluated no less than quarterly to
determine their adequacy.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Expenditures for
maintenance and repairs are charged to operations in the period incurred.
Depreciation of property, plant and equipment is provided on the straight-line
basis. For petroleum products terminal and ammonia pipeline system assets, the
costs of property, plant and equipment sold or retired and the related
accumulated depreciation is removed from the accounts, and any associated gains
or losses are recorded in the income statement, in the period of sale or
disposition. For Williams Pipe Line, gains or losses from the ordinary sale or
retirement of property, plant and equipment are credited or charged to
accumulated depreciation under FERC accounting guidelines.
GOODWILL AND OTHER INTANGIBLE ASSETS
In January 2002, WEG GP LLC adopted Statement of Financial Accounting
Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets." In accordance
with this Statement, beginning on January 1, 2002, goodwill, which represents
the excess of cost over fair value of assets of businesses acquired, is no
longer amortized but must be evaluated periodically for impairment. The
determination of whether goodwill is impaired is based on management's estimate
of the fair value of the Partnership's operating segments as compared to their
carrying values. If an impairment has occurred, the amount of the impairment
recognized is determined by subtracting the implied fair value of the reporting
unit goodwill from the carrying amount of the goodwill. Other intangible assets
are amortized on a straight-line basis over a period of up to 25 years.
Judgments and assumptions are inherent in management's estimates used to
determine the fair value of its operating segments. The use of alternate
judgments and/or assumptions could result in the recognition of different levels
of impairment charges in the financial statements.
Previously, goodwill was amortized on a straight-line basis over a period
of 20 years for those assets acquired prior to July 1, 2001. Based on the amount
of goodwill recorded as of December 31, 2001, application of the
non-amortization provision of SFAS No. 142 resulted in a decrease to
amortization expense in 2002 of approximately $0.8 million.
IMPAIRMENT OF LONG-LIVED ASSETS
In January 2002, WEG GP LLC adopted SFAS No.144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." There was no initial impact to WEG
GP LLC's financial position upon adoption of this standard.
In accordance with this Statement, WEG GP LLC evaluates its long-lived
assets of identifiable business activities for impairment when events or changes
in circumstances indicate, in management's judgment, that the carrying value of
such assets may not be recoverable. The determination of whether an impairment
has occurred is based on management's estimate of undiscounted future cash flows
attributable to the assets as compared to the carrying value of the assets. If
an impairment has occurred, the amount of the impairment recognized is
determined by estimating the fair value for the assets and recording a provision
for loss if the carrying value is greater than fair value.
For assets identified to be disposed of in the future, the carrying value
of these assets is compared to the estimated fair value less the cost to sell to
determine if an impairment is required. Until the assets are disposed of, an
estimate of the fair value is redetermined when related events or circumstances
change.
Judgments and assumptions are inherent in management's estimate of
undiscounted future cash flows used to determine recoverability of an asset and
the estimate of an asset's fair value used to calculate the amount of impairment
to recognize. The use of alternate judgments and/or assumptions could result in
the recognition of different levels of impairment charges in the financial
statements.
INCOME TAXES
WEG GP LLC is a partnership for income tax purposes and therefore is not
subject to federal or state income taxes. Income taxes for WEG GP LLC are the
responsibility of the owners of this partnership, which are affiliates of WEG GP
LLC.
6
EMPLOYEE STOCK-BASED AWARDS
Williams' employee stock-based awards are accounted for under provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Williams' fixed plan common stock
options do not result in compensation expense because the exercise price of the
stock options equals the market price of the underlying stock on the date of
grant.
WEG GP LLC has issued incentive awards of phantom units to Williams
employees assigned to the Partnership. These awards are also accounted for under
provisions of Accounting Principles Board Opinion No. 25. Since the exercise
price of the unit awards is less than the market price of the underlying units
on the date of grant, compensation expense is recognized by the General Partner
and directly allocated to the Partnership.
ENVIRONMENTAL
Environmental expenditures that relate to current or future revenues are
expensed or capitalized based upon the nature of the expenditures. Expenditures
that relate to an existing condition caused by past operations that do not
contribute to current or future revenue generation are expensed. Environmental
liabilities are recorded independently of any potential claim for recovery.
Receivables are recognized in cases where the realization of reimbursements of
remediation costs are considered probable. Accruals related to environmental
matters are generally determined based on site-specific plans for remediation,
taking into account prior remediation experience of the Partnership and
Williams.
RECENT ACCOUNTING STANDARDS
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure
- -- an amendment of FASB Statement No. 123". This Statement amends FASB Statement
No. 123, "Accounting for Stock-Based Compensation", to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. This Statement improves the prominence and clarity of
the pro forma disclosures required by Statement 123 by prescribing a specific
tabular format and by requiring disclosure in the "Summary of Significant
Accounting Policies" or its equivalent. The standard is effective for fiscal
periods ending after December 15, 2002. The Partnership accounts for stock-based
compensation for Williams employees assigned to the Partnership under provisions
of Accounting Principles Board Opinion No. 25, hence, adoption of this standard
will have no impact on WEG GP LLC's financial position. WEG GP LLC adopted the
additional disclosure requirements of this standard in 2002.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. WEG GP LLC
adopted this standard in January 2003 and it did not have a material impact on
its financial position.
In the second quarter of 2002, the FASB issued SFAS No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement 13 and Technical
Corrections". The rescission of SFAS No. 4 "Reporting Gains and Losses from
Extinguishment of Debt," and SFAS No. 64, "Extinguishment of Debt Made to
Satisfy Sinking-Fund Requirements," requires that gains or losses from
extinguishment of debt only be classified as extraordinary items in the event
they meet the criteria in Accounting Principle Board Opinion ("APB") No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". SFAS No. 44, "Accounting for Intangible Assets of
Motor Carriers," established accounting requirements for the effects of
transition to the Motor Carriers Act of 1980 and is no longer required now that
the transitions have been completed. Finally, the amendments to SFAS No. 13
"Accounting for Leases" are effective for transactions occurring after May 15,
2002. All other provisions of this Statement will be effective for financial
statements issued on or after May 15, 2002. WEG GP LLC adopted this standard in
January 2003, and it did not have a material impact on its financial position.
However, in subsequent reporting periods, any gains and losses from debt
extinguishments will not be accounted for as extraordinary items.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" and amends APB No. 30. The Statement retains the basic
framework of SFAS No. 121, resolves certain implementation issues of SFAS No.
121, extends applicability to discontinued operations and broadens the
presentation of discontinued operations to include a component of an entity. The
Statement was to be applied prospectively and was effective for financial
statements issued for fiscal years beginning after December 15, 2001. There was
no initial impact on WEG GP LLC's financial position upon adoption of this
standard.
7
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which is effective for fiscal years beginning after
June 15, 2002. The Statement requires legal obligations associated with the
retirement of long-lived assets to be recognized at their fair value at the time
that the obligations are incurred. Upon initial recognition of a liability, that
cost should be capitalized as a part of the related long-lived asset and
allocated to expense over the useful life of the asset. WEG GP LLC adopted the
new rules on asset retirement obligations on January 1, 2003. Application of the
new rules did not have a material impact on WEG GP LLC's financial position as
retirement obligations were not recorded for assets for which the remaining life
is not currently determinable, including pipeline transmission and terminal
assets.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 establishes
accounting and reporting standards for business combinations and requires all
business combinations to be accounted for by the purchase method. The Statement
is effective for all business combinations for which the date of acquisition is
July 1, 2001 or later. SFAS No. 142 addresses accounting and reporting standards
for goodwill and other intangible assets. Under this Statement, goodwill and
intangible assets with indefinite useful lives will no longer be amortized but
will be tested annually for impairment. The Statement became effective for all
fiscal years beginning after December 15, 2001. WEG GP LLC applied the new rules
on accounting for goodwill and other intangible assets beginning January 1,
2002. Based on the amount of goodwill recorded as of December 31, 2001,
application of the non-amortization provision of the Statement resulted in a
decrease to amortization expense in 2002 of approximately $0.8 million.
4. ACQUISITIONS AND DIVESTITURES
WILLIAMS PIPE LINE
On April 11, 2002, the Partnership acquired all of the membership interests
of Williams Pipe Line from WES for approximately $1.0 billion. The Partnership
remitted to WES consideration in the amount of $674.4 million and WES retained
$15.0 million of Williams Pipe Line's receivables. The $310.6 million balance of
the consideration consisted of $304.4 million of Class B units representing
limited partner interests in the Partnership issued to Williams GP LLC and
affiliates of WES and Williams' contribution to the Partnership of $6.2 million
to maintain its 2% general partner interest. The Partnership borrowed $700.0
million from a group of financial institutions, paid WES $674.4 million and used
$10.6 million of the funds to pay debt fees and other transaction costs (see
Note 10 - Long-Term Debt). The Partnership retained $15.0 million of the funds
to meet working capital needs.
Williams Pipe Line primarily provides petroleum products transportation,
storage and distribution services and is reported as a separate business segment
of the Partnership. Because of the Partnership's affiliate relationship with
Williams Pipe Line, the transaction was between entities under common control
and, as such, has been accounted for similarly to a pooling of interest.
Accordingly, the consolidated balance sheet and notes of WEG GP LLC have been
restated to reflect the historical results as if the companies had been combined
throughout 2002.
OTHER ACQUISITIONS
The assets identified below were acquired for cash during the periods
presented and are described below. All acquisitions, except the Aux Sable
transaction, were accounted for as purchases of businesses and the results of
operations of the acquired petroleum products terminals are included with the
combined results of operations from their acquisition dates.
On December 31, 2001, the Partnership purchased an 8.5-mile, 8-inch natural
gas liquids pipeline in northeastern Illinois from Aux Sable Liquid Products
L.P. ("Aux Sable") for $8.9 million. The Partnership then entered into a
long-term lease arrangement under which Aux Sable is the sole lessee of these
assets. The Partnership has accounted for this transaction as a direct financing
lease. The lease expires in December 2016 and has a purchase option after the
first year. The minimum lease payments to be made by Aux Sable are $18.1 million
in total over the remaining life of the lease and $1.3 million per year over
each of the next five years. Aux Sable has the right to re-acquire the pipeline
at the end of the lease for a de minimis amount.
In October 2001, the Partnership acquired the crude oil storage and
distribution assets of Geonet Gathering, Inc. ("Geonet") located in Gibson,
Louisiana. The Partnership acquired these assets with the intent to use the
facility as a crude storage and distribution facility with an affiliate company
as its primary customer. The purchase price and allocation to assets acquired
and liabilities assumed was as follows (in thousands):
<Table>
Purchase price:
Cash paid, including transaction costs ................. $20,261
Liabilities assumed .................................... 856
-------
Total purchase price ................................... $21,117
=======
</Table>
8
Allocation of purchase price:
<Table>
Current assets ....................... $ 62
Property, plant and equipment ........ 4,607
Goodwill ............................. 13,719
Intangible assets .................... 2,729
--------
Total allocation ..................... $ 21,117
========
</Table>
Factors contributing to the recognition of goodwill are the market in which
the facility is located and the opportunity to enter into a long-term throughput
agreement with an affiliate company. Of the amount allocated to intangible
assets, $2.0 million represents the value of the leases associated with this
facility, which have amortization periods of up to 25 years. The remaining $0.7
million allocated to intangible assets represents covenants not-to-compete and
has an amortization period of five years. The total weighted average
amortization period of intangible assets was approximately 16 years at the time
of the acquisition. Of the consideration paid for the facility, $0.2 million is
held in escrow at December 31, 2002, pending final evaluation of reimbursable
repairs by the Partnership.
In June 2001, the Partnership purchased two petroleum products terminals
located in Little Rock, Arkansas from TransMontaigne, Inc. ("TransMontaigne") at
a cost of $28.9 million, of which $20.2 million was allocated to property, plant
and equipment and $8.7 million to goodwill and other intangibles.
In April 2001, the Partnership purchased a 6-mile pipeline for $0.3 million
from Equilon Pipeline Company LLC, enabling connection of the Partnership's
existing Dallas, Texas area petroleum storage and distribution facility to
Dallas Love Field. The acquisition was made in conjunction with an agreement for
the Partnership to provide jet fuel delivery services into Dallas Love Field for
Southwest Airlines. In December 2001, the Partnership completed construction of
additional jet fuel storage tanks at its distribution facility in Dallas to
support delivery of jet fuel to the airport. Total cost of the pipeline and
construction of the additional jet fuel storage tanks totaled $5.5 million.
DIVESTITURES
During the fourth quarter of 2002, the Partnership sold its Mobile, Alabama
and Jacksonville, Florida inland terminals. Total cash proceeds of approximately
$1.3 million were received, with a gain of approximately $1.1 million
recognized.
During the fourth quarter of 2001, the Partnership sold its Meridian,
Mississippi inland terminal. Cash proceeds of approximately $1.7 million were
received, with a gain of approximately $1.1 million recognized.
5. INVENTORIES
Inventories at December 31, 2002 were as follows (in thousands):
<Table>
<Caption>
2002
--------
Refined petroleum products .............. $ 3,863
Additives ............................... 897
Other ................................... 464
--------
Total inventories .................. $ 5,224
========
</Table>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2002 consisted of the
following (in thousands):
<Table>
<Caption>
ESTIMATED
DEPRECIABLE
2002 LIVES
---------- ---------------
Construction work-in-progress $ 4,909
Land and right-of-way 30,199
Carrier property 898,829 6 - 59 years
Buildings 8,281 30 years
Storage tanks 172,865 30 years
Pipeline and station equipment 57,551 30 - 67 years
Processing equipment 138,180 30 years
Other 23,713 10 - 30 years
----------
Total $1,334,527
==========
</Table>
9
Carrier property is defined as pipeline assets regulated by the FERC. Other
includes $18.6 million of capitalized interest at December 31, 2002.
7. CONCENTRATION OF RISK
Any issues impacting the petroleum refining and marketing and anhydrous
ammonia industries could impact WEG GP LLC's overall exposure to credit risk.
Williams Pipe Line transports refined petroleum products for refiners and
marketers in the petroleum industry. The major concentration of Williams Pipe
Line's revenues is derived from activities conducted in the central United
States. The size and quality of the companies with which the Partnership
conducts its businesses hold its credit losses to a minimum. Sales to customers
are generally unsecured and the financial condition and creditworthiness of
customers are routinely evaluated. The Partnership has the ability with many of
its terminals contracts to sell stored customer products to recover unpaid
receivable balances, if necessary. The concentration of ammonia revenues is
derived from customers with plants in Oklahoma and Texas and sales are generally
unsecured. Any issues impacting the petroleum refining and marketing and
anhydrous ammonia industries could impact the Partnership's overall exposure to
credit risk.
The accounts receivable balance of Williams Energy Marketing & Trading
accounted for 7% of total accounts and affiliate receivables at December 31,
2002.
Williams Pipe Line's labor force of 538 employees is concentrated in the
central United States. At December 31, 2002, 41% of the employees were
represented by a union and covered by collective bargaining agreements that
expire in February 2006. The petroleum products terminals operation's labor
force of 192 people is concentrated in the southeastern and Gulf Coast regions
of the United States. Other than at Galena Park, Texas marine terminal facility,
none of the terminal operations employees are represented by labor unions. The
employees at the Partnership's Galena Park marine terminal facility are
currently represented by a union, but indicated in 2000 their unanimous desire
to terminate their union affiliation. Nevertheless, the National Labor Relations
Board ("NLRB") ordered the Partnership to bargain with the union as the
exclusive collective bargaining representative of the employees at the facility.
The Partnership appealed this decision to the Fifth Circuit Court of Appeals.
Subsequently, the NLRB indicated the possibility that it would overturn its
decision and requested that the Court of Appeals return the Partnership's and
other matters to the NLRB for further review and decision. A final decision by
the NLRB had not been issued. Our General Partner considers its employee
relations to be good.
8. EMPLOYEE BENEFIT PLANS
The historical results for Williams Pipe Line included certain assets and
liabilities that were conveyed to and assumed by an affiliate of Williams Pipe
Line prior to its acquisition by the Partnership. The pension assets and
obligations associated with the non-contributory defined-benefit pension plan
which covered union employees assigned to Williams Pipe Line's operations were
part of the assets and liabilities that were conveyed to and assumed by an
affiliate of the Partnership.
The following table presents the changes in benefit obligations and plan
assets for pension benefits for the union plan for the year indicated. These
assets and liabilities are not included in WEG GP LLC's consolidated balance
sheet for the period presented but are included in the balance sheet of our
affiliate (in thousands):
<Table>
<Caption>
2002
--------
Change in benefit obligation:
Benefit obligation at beginning of year ................ $ 21,597
Service cost ........................................... 939
Interest cost .......................................... 1,531
Actuarial loss ......................................... 905
Benefits paid .......................................... (1,041)
--------
Benefit obligation at end of year ...................... 23,931
Change in plan assets:
Fair value of plan assets at beginning of year ......... 18,700
Employer contribution .................................. 1,000
Loss on plan assets .................................... (2,267)
Benefits paid .......................................... (1,041)
--------
Fair value of plan assets at end of year ............... 16,392
--------
Funded status ............................................ (7,539
Unrecognized net actuarial loss .......................... 10,236
Unrecognized prior service cost .......................... 368
Unrecognized transition asset ............................ --
--------
Prepaid benefit cost ..................................... $ 3,065
========
</Table>
10
Net pension benefit cost for the union plan consists of the following (in
thousands):
<Table>
<Caption>
2002
--------
Components of net periodic pension expense:
Service cost ....................................... $ 939
Interest cost ...................................... 1,531
Expected return on plan assets ..................... (1,715)
Amortization of transition asset ................... --
Amortization of prior service cost ................. 53
Recognized net actuarial loss ...................... 50
--------
Net periodic pension expense (income) .............. $ 858
========
</Table>
<Table>
<Caption>
2002
--------
Discount rate......................................... 7.5%
Expected return on plan assets........................ 8.5%
Rate of compensation increase......................... 5.0%
</Table>
9. RELATED PARTY TRANSACTIONS
Current and long-term affiliate accounts receivable are primarily associated
with environmental liabilities, which have been indemnified by Williams and its
affiliates. Affiliate accounts payable primarily represent amounts owed to
affiliates for operational and general and administrative services provided on
behalf of WEG GP LLC and the Partnership. Accrued affiliate payroll and benefits
are amounts due to affiliate companies for salary and wages and associated
charges for employees directly assigned to the Partnership. Long-term affiliate
payables represent amounts associated with non-compete agreements and for
amounts associated with long-term incentive compensation.
The Partnership has entered into agreements with various Williams
affiliates. The Partnership has several agreements with Williams Energy
Marketing & Trading, which provide for: (i) approximately 2.5 million barrels of
storage and other ancillary services at the Partnership's marine terminal
facilities, (ii) capacity utilization rights to substantially all of the
capacity of the Gibson, Louisiana marine terminal facility, (iii) the lease of
the Carthage, Missouri propane storage cavern and (iv) throughput and deficiency
agreements for product movements through a third-party capacity lease. Williams
Pipe Line has entered into agreements with Mid-America Pipeline Company ("MAPL")
and Williams Bio Energy to provide tank storage and pipeline system storage,
respectively. Williams Bio Energy is an affiliate entity and MAPL was an
affiliate entity until August 1, 2002, when it was sold to Enterprise Products
Partners L.P. ("Enterprise").
Historically, Williams Pipe Line also has been a party to an agreement with
Williams Energy Marketing & Trading for sales of blended gasoline. Also, both
Williams Energy Marketing & Trading and Williams Refining & Marketing have
agreements for the access and utilization of storage on Williams Pipe Line
system and for the access and utilization of the inland terminals. The
Partnership also has agreements with Williams Energy Marketing & Trading,
Williams Refining & Marketing and Williams Bio Energy for the non-exclusive and
non-transferable sub-license to use the ATLAS 2000 software system. Payment
terms for affiliate entities are generally the same as for third-party
companies. Generally, at each month-end, the Partnership is in a net payable
position with Williams. The Partnership deducts any amounts owed to it by
Williams before remitting the monthly cash amounts owed to Williams. The
following table provides the percentage of total revenues that the Partnership
derived from various Williams' subsidiaries during 2002:
<Table>
<Caption>
2002
------
Williams 100%-Owned Affiliates:
Williams Energy Marketing & Trading ..................... 9.2%
Williams Refining & Marketing ........................... 1.9%
Williams Bio Energy ..................................... 1.1%
Williams Energy Services ................................ 0.6%
Midstream Marketing & Risk Management ................... 0.4%
Mid-America Pipeline .................................... 0.1%
Other ................................................... 0.1%
Williams Partially-Owned Affiliates:
Longhorn Pipeline Partners .............................. 0.1%
------
Total ................................................... 13.5%
======
</Table>
11
Williams allocates both direct and indirect general and administrative
expenses to its affiliates. Direct expenses allocated by Williams are primarily
salaries and benefits of employees and officers associated with the business
activities of the affiliate. Indirect expenses include legal, accounting,
treasury, engineering, information technology and other corporate services. The
Partnership reimburses the General Partner and its affiliates for expenses
charged to the Partnership by the General Partner on a monthly basis based on
the expense limitations provided in the Omnibus Agreement. Generally, at each
month-end, the Partnership is in a net payable position with Williams. The
Partnership deducts any amounts owed to it by Williams before issuing its
monthly cash remittance for amounts owed to Williams.
10. LONG-TERM DEBT
Long-term debt for WEG GP LLC at December 31, 2002 was as follows (in
thousands):
<Table>
OLP term loan and revolving credit facility ........ $ 90,000
Williams Pipe Line Senior Secured Notes ............ 480,000
-------
Total long-term debt ............................. $ 570,000
=======
</Table>
WILLIAMS OLP L.P. TERM LOAN AND REVOLVING CREDIT FACILITY - At December 31,
2002, Williams OLP L.P. ("OLP"), an operating subsidiary of the Partnership
which operates the petroleum products terminals and ammonia pipeline system
segments, had a $175.0 million bank credit facility, led by Bank of America.
Long-term debt and available borrowing capacity under this facility at December
31, 2002, were $90.0 million and $85.0 million, respectively. The credit
facility is comprised of a $90.0 million term loan facility and an $85.0 million
revolving credit facility, which includes a $73.0 million acquisition
sub-facility and a $12.0 million working capital sub-facility. On February 9,
2001, the OLP borrowed $90.0 million under the term loan facility, which
remained outstanding at December 31, 2002. All amounts previously borrowed under
the acquisition and working capital facility were repaid in full during the
fourth quarter of 2002. The credit facility's term extends through February 5,
2004, with all amounts due at that time. Borrowings under the credit facility
carry an interest rate equal to the Eurodollar rate plus a spread from 1.0% to
1.5%, depending on the OLP's leverage ratio. Interest is also assessed on the
unused portion of the credit facility at a rate from 0.2% to 0.4%, depending on
the OLP's leverage ratio. The OLP's leverage ratio is defined as the ratio of
consolidated total debt to consolidated earnings before interest, income taxes,
depreciation and amortization for the period of the four fiscal quarters ending
on such date. Closing fees associated with the initiation of the credit facility
were $0.9 million, which are being amortized over the life of the facility.
Weighted average interest rates were 3.3% for the twelve months ended December
31, 2002 and 5.0% for the period February 10, 2001 through December 31, 2001.
The interest rates for amounts borrowed against this facility on December 31,
2002 and 2001 were 2.8% and 3.2%, respectively. At December 31, 2002, the fair
value of this debt approximates its carrying value because of the floating
interest rate applied to the debt facility.
Under terms of this facility, a change of control whereby Williams and its
affiliates no longer own 100% of the General Partner's equity would result in an
event of default, in which case the maturity date of the outstanding amounts
under this facility may be accelerated by the lenders in the facility.
WILLIAMS PIPE LINE SENIOR SECURED NOTES - In April 2002, the Partnership
borrowed $700.0 million from a group of financial institutions. This short-term
loan was used to help finance the Partnership's acquisition of Williams Pipe
Line. During the second quarter of 2002 the Partnership repaid $289.0 million of
the short-term loan with net proceeds from an equity offering. The weighted
average interest rate on this note was 5.1% for the period April 11, 2002
through November 15, 2002. Debt placement fees associated with the note were
$7.1 million and were amortized over the life of the note. In October 2002, the
Partnership negotiated an extension to the maturity of this note from October 8,
2002, to November 27, 2002. The Partnership paid additional fees of
approximately $2.1 million associated with this maturity date extension.
During September 2002, in anticipation of a new debt placement to replace
the short-term debt assumed to acquire Williams Pipe Line, the Partnership
entered into an interest rate hedge. The effect of this interest rate hedge was
to set the coupon rate on a portion of the fixed-rate debt at 7.75% prior to
actual execution of the debt agreement. The loss on the hedge, approximately
$1.0 million, was recorded in accumulated other comprehensive loss and is being
amortized over the five-year life of the fixed-rate debt secured during October
2002.
During October 2002, Williams Pipe Line entered into a private placement
debt agreement with a group of financial institutions for up to $200.0 million
aggregate principal amount of Floating Rate Series A-1 and Series A-2 Senior
Secured Notes and up to $340.0 million aggregate principal amount of Fixed Rate
Series B-1 and Series B-2 Senior Secured Notes. Both notes are secured with the
Partnership's membership interest in and assets of Williams Pipe Line Company.
The maturity date of both notes is October 7, 2007;
12
however, the Partnership will be required on each of October 7, 2005 and October
7, 2006, to repay 5% of the then outstanding principal amount of the Senior
Secured Notes.
Two borrowings have occurred in relation to these notes. The first
borrowing was completed in November 2002 and was for $420.0 million, of which
$156.0 million was borrowed under the Series A-1 notes and $264.0 million under
the Series B-1 notes. The proceeds from this initial borrowing were used to
repay Williams Pipe Line's $411.0 million short-term loan and pay related debt
placement fees. The second borrowing was completed in December 2002 for $60.0
million, of which $22.0 million was borrowed under the Series A-2 notes and
$38.0 million under the Series B-2 notes. $58.0 million of the proceeds from
this second borrowing were used to repay the acquisition sub-facility of the OLP
and $2.0 million were used for general corporate purposes. The Series A-1 and
Series A-2 notes bear interest at a rate equal to the six month Eurodollar Rate
plus 4.25%. The rate on the Series A-1 and Series A-2 notes is currently 5.7%
and will be reset on April 7, 2003. The Series B-1 notes bear interest at a
fixed rate of 7.7%, while the Series B-2 notes bear interest at a fixed rate of
7.9%. The weighted-average rate for the Williams Pipe Line Senior Secured Notes
at December 31, 2002 was 7.0%. Debt placement fees associated with these notes
were $10.5 million, and are being amortized over the life of the notes. Payment
of interest and repayment of the principal is guaranteed by the Partnership. The
fair value of the long-term debt at December 31, 2002, approximated its carrying
value, because of the floating interest rate applied to the Series A-1 and
Series A-2 notes and because the rates on the Series B-1 and B-2 notes were near
market rates at December 31, 2002.
The new debt agreement imposes certain restrictions on Williams Pipe Line
and the Partnership. Generally, the agreement restricts the amount of additional
indebtedness Williams Pipe Line can incur, prohibits Williams Pipe Line from
creating or incurring any liens on its property, and restricts Williams Pipe
Line from disposing of its property, making any debt or equity investments, or
making any loans or advances of any kind. The agreement also requires
transactions between Williams Pipe Line and any of its affiliates to be on terms
no less favorable than those Williams Pipe Line would receive in an arms-length
transaction. In addition, the agreement prohibits WEG GP LLC from assuming any
indebtedness of any kind. Also as part of this agreement, the Partnership agreed
that it will not redeem or retire the Partnership's Class B units except with
proceeds from equity issued by the Partnership (see Note 1 - Organization and
Presentation). In the event of a change in control of WEG GP LLC, each holder of
the notes would have thirty days within which they could exercise a right to put
their notes to Williams Pipe Line unless the new owner of the General Partner
has (i) a net worth of at least $500.0 million and (ii) long-term unsecured debt
rated as investment grade by both Moody's Investor Service Inc. and Standard &
Poor's Rating Service. If this put right were exercised, Williams Pipe Line
would be obligated to repurchase any such notes and repay any accrued interest
within sixty days.
11. LEASES
LEASES - LESSEE
The Partnership leases land, office buildings, tanks and terminal equipment
at various locations to conduct its on-going business operations. Future minimum
annual rental under noncancelable operating leases as of December 31, 2002, are
as follows (in thousands):
<Table>
2003............................................. $ 478
2004............................................. 480
2005............................................. 482
2006............................................. 236
2007............................................. 158
Thereafter....................................... -
--------
Total $ 1,834
========
</Table>
Lease payments associated with the Partnership's lease of land, tanks and
related terminal equipment at its Gibson, Louisiana facility can be canceled at
the Partnership's option after 2006 and include provisions for renewal of the
lease at five-year increments which can extend the lease for a total of 25 years
from their inception in 2001. The lease terms require the Partnership to return
the Gibson terminal facility property to substantially its same condition at the
time the lease was executed.
LEASES - LESSOR
On December 31, 2001, the Partnership purchased an 8.5-mile, 8-inch natural
gas liquids pipeline in northeastern Illinois from Aux Sable for $8.9 million.
The Partnership then entered into a long-term lease arrangement under which Aux
Sable is the sole lessee of these assets. The Partnership has accounted for this
transaction as a direct financing lease. The lease expires in December 2016 and
has a purchase option after the first year. Aux Sable has the right to
re-acquire the pipeline at the end of the lease for a de minimis amount. The
Partnership also has two five-year pipeline capacity leases with Farmland. The
first agreement, which is accounted for as a direct financing lease, will expire
on November 30, 2005 and the second agreement, which is accounted for as an
operating lease,
13
will expire on April 30, 2007. Both leases contain options to extend the
agreement for another five years. In addition, the Partnership has eight other
capacity operating leases with terms of four to fifteen years. All of the
agreements provide for negotiated extensions.
Future minimum lease payments receivable under operating-type leasing
arrangements as of December 31, 2002, are as follows (in thousands):
<Table>
2003............................................. $ 8,925
2004............................................. 8,395
2005............................................. 6,377
2006............................................. 3,333
2007............................................. 3,023
Thereafter....................................... 17,138
--------
Total............................................ $ 47,191
========
</Table>
The net investment under direct financing leasing arrangements as of
December 31, 2002, is as follows (in thousands):
<Table>
Total minimum lease payments receivable.......... $ 20,154
Less: Unearned income............................ 9,923
--------
Recorded net investment in direct financing
leases........................................... $ 10,231
========
</Table>
As of December 31, 2002, the net investment in direct financing leases is
classified in the Consolidated Balance Sheet as $1.0 million current
accounts receivable and $9.2 million noncurrent accounts receivable.
12. LONG-TERM INCENTIVE PLAN
In February 2001, the General Partner adopted the Williams Energy Partners'
Long-Term Incentive Plan for Williams' employees who perform services for the
Partnership and directors of the General Partner. The General Partner
subsequently amended and restated the Long-Term Incentive Plan in 2003. The
Long-Term Incentive Plan permits the granting of various types of awards,
including units, options, phantom units and bonus units but to-date only phantom
units have been granted. The Long-Term Incentive Plan allows the grant of awards
up to an aggregate of 700,000 common units. The Long-Term Incentive Plan is
administered by the Compensation Committee of WEG GP LLC's Board of Directors.
In addition to units, members of the WEG GP LLC's Board of Directors may receive
phantom units as compensation for their director fees. Members of the WEG GP
LLC's Board of Directors received 3,344 units and 1,489 phantom units during
2002 as partial compensation for their services as board members.
In April 2001, the General Partner issued grants of 92,500 phantom units to
certain key employees associated with the Partnership's initial public offering
in February 2001. These awards allowed for early vesting if established
performance measures were met prior to February 9, 2004. The Partnership met all
of these performance measures and all of the awards vested during 2002. The
Partnership recognized compensation expense of $2.1 million and $0.7 million
associated with these awards in 2002 and 2001, respectively.
In April 2001, the General Partner issued grants of 64,200 phantom units
associated with the long-term incentive compensation program. The actual number
of units that will be awarded under this grant will be determined by the
Partnership in early 2004. At that time, the Partnership will assess whether
certain performance criteria have been met as of the end of 2003 and determine
the number of units that will be awarded, which could range from zero units up
to a total of 128,400 units. These units are subject to forfeiture if employment
is terminated prior to vesting. These awards do not have an early vesting
feature, except for a change in control of WEG GP LLC or for specific
participants in the event of their death or disability. In the event of a change
of control of WEG GP LLC, these awards will vest and payout immediately at the
number of units associated with achieving the highest performance level under
the plan. The Partnership is expensing compensation costs associated with these
awards assuming the highest level of performance will be achieved; accordingly,
the Partnership recognized $1.5 million and $1.3 million of compensation expense
in 2002 and 2001, respectively. The fair market value of the phantom units
associated with this grant was $4.2 million and $5.4 million on December 31,
2002 and 2001, respectively.
During 2002, the Compensation Committee of the Board of Directors of WEG GP
LLC approved 22,650 phantom units associated with the 2002 long-term incentive
compensation program. The actual number of units that will be awarded under this
grant will be determined by the Partnership in early 2005. At that time, the
Partnership will assess whether certain performance criteria have been met and
determine the number of units that will be awarded, which could range from zero
units up to a total of 45,300 units. These units are also subject to forfeiture
if employment is terminated prior to the vesting date. These awards do not have
an early vesting feature, except in the event of a change in control of WEG GP
LLC or for specific participants in the event of their death or disability. In
the event of a change of control of WEG GP LLC, these awards will vest and
payout immediately at the number of units
14
associated with achieving the highest performance level under the plan. The
Partnership is expensing compensation costs associated with these awards
assuming 22,650 units will vest; accordingly, the Partnership recorded incentive
compensation expense of $0.2 million during 2002. Based on the closing price of
$32.45 per unit at December 31, 2002, these units were valued at $0.7 million.
In February 2003, the Compensation Committee of the Board of Directors of
WEG GP LLC approved 52,825 phantom units associated with the 2003 long-term
incentive compensation program. The actual number of units that will be awarded
under this grant will be determined by the Partnership in early 2006. At that
time, the Partnership will assess whether certain performance criteria have been
met and determine the number of units that will be awarded, which could range
from zero units up to a total of 105,650 units. These units are also subject to
forfeiture if employment is terminated prior to the vesting date. These awards
do not have an early vesting feature, except for (i) specific participants in
the event of their death or disability or (ii) in the event a change in control
of the Partnership's General Partner and the participant is terminated for
reasons other than cause within the two years following a change in control of
the General Partner, in which case the awards will vest and payout immediately
at the highest performance level under the plan. The value of these units on the
date of grant was $1.9 million.
Certain employees of Williams dedicated to or otherwise supporting the
Partnership also receive stock-based compensation awards from Williams. Williams
has several programs providing for common-stock-based awards to employees and to
non-employee directors. The programs permit the granting of various types of
awards including, but not limited to, stock options, stock-appreciation rights,
restricted stock and deferred stock. The purchase price per share for stock
options and the grant price for stock-appreciation rights may not be less than
the market price of the underlying stock on the date of grant. Depending upon
terms of the respective plans, stock options generally become exercisable in
one-third increments each year from the date of the grant or after three or five
years, subject to accelerated vesting if certain future Williams' stock prices
or specific Williams' financial performance targets are achieved. Stock options
expire 10 years after grant.
The following summary reflects Williams' stock option activity for 2002 for
those employees principally supporting the Partnership's operations:
<Table>
<Caption>
2002
----------------------
WEIGHTED-
AVERAGE
EXERCISE
OPTIONS PRICE
--------- --------
Outstanding - beginning of year ..... 501,825 $ 33.04
Granted ............................. 191,120 10.53
Forfeited ........................... -- --
Exercised ........................... -- --
---------
Outstanding - ending of year ........ 692,945 26.83
=========
Exercisable at end of year .......... 435,206 35.89
=========
</Table>
The following summary provides information about outstanding and
exercisable Williams' stock options, held by employees principally supporting
Williams Energy Partners L.P. operations, at December 31, 2002:
<Table>
<Caption>
WEIGHTED-
WEIGHTED- AVERAGE
AVERAGE REMAINING
EXERCISE CONTRACTUAL
RANGE OF EXERCISE PRICES OPTIONS PRICE LIFE
- ------------------------ --------- --------- -----------
$2.27 to $2.57 ............................. 76,600 $ 2.57 9.9 years
$12.22 to $17.31 ........................... 153,119 15.69 7.7 years
$20.83 to $30.00 ........................... 110,328 25.35 5.1 years
$31.56 to $46.06 ........................... 352,898 37.40 7.1 years
---------
Total ...................................... 692,945 26.83 7.2 years
=========
</Table>
The estimated fair value at the date of grant of options for Williams'
common stock granted in 2002 using the Black-Scholes option pricing model, is as
follows:
<Table>
<Caption>
2002
------
Weighted-average grant date fair value of options for
Williams' common stock granted during the year .................. $ 2.77
Assumptions:
Dividend yield .................................................. 1.0%
Volatility ...................................................... 56.3%
Risk-free interest rate ......................................... 3.6%
Expected life (years) ........................................... 5.0
</Table>
15
13. COMMITMENTS AND CONTINGENCIES
WES has agreed to indemnify the Partnership against any covered
environmental losses, up to $15.0 million, relating to assets it contributed to
the Partnership at the time of the initial public offering that arose prior to
February 9, 2001, that become known within three years after February 9, 2001,
and that exceed all amounts recovered or recoverable by the Partnership under
contractual indemnities from third parties or under any applicable insurance
policies. Covered environmental losses are those non-contingent terminal and
ammonia system environmental losses, costs, damages and expenses suffered or
incurred by the Partnership arising from correction of violations of, or
performance of remediation required by, environmental laws in effect at February
9, 2001, due to events and conditions associated with the operation of the
assets and occurring before February 9, 2001. Reimbursements from Williams
relative to their environmental indemnities are received as remediation is
performed. See Note 1 - Organization and Presentation - Recent Developments
relative to Williams. Changes in Williams' ability to perform on their
indemnities could result in the Partnership materially increasing its related
affiliate receivable reserves.
In connection with the acquisition of Williams Pipe Line, WES agreed to
indemnify the Partnership for any breach of a representation or warranty that
results in losses and damages of up to $110.0 million after the payment of a
$2.0 million deductible. With respect to any amount exceeding $110.0 million,
WES will be responsible for one-half of that amount up to $140.0 million. In no
event will WES' liability under these indemnities exceed $125.0 million. These
indemnification obligations will survive for one year, except that those
relating to employees and employee benefits will survive for the applicable
statute of limitations and those relating to real property, including title to
WES' assets, will survive for ten years. This indemnity also provides that the
Partnership will be indemnified for an unlimited amount of losses and damages
related to tax liabilities. In addition, any losses and damages related to
environmental liabilities that arose prior to the acquisition will be subject
only to a $2.0 million deductible, which was met during 2002, for claims made
within six years of our acquisition of Williams Pipe Line in April 2002.
Williams has provided a performance guarantee for the remaining amount of these
environmental indemnities.
Estimated liabilities for environmental costs were $22.3 million at
December 31, 2002. These estimates, provided on an undiscounted basis, were
determined based primarily on data provided by a third-party environmental
evaluation service and Williams' internal environmental engineers. These
liabilities have been classified as current or non-current based on management's
estimates regarding the timing of actual payments. Management estimates that
expenditures associated with these environmental remediation liabilities will be
paid over the next five years. Receivables from Williams or its affiliates
associated of $22.9 million at December 31, 2002 associated with indemnified
environmental costs have been recognized as affiliate accounts receivable in the
Consolidated Balance Sheet.
In conjunction with the 1999 acquisition of the Gulf Coast marine terminals
from Amerada Hess Corporation ("Hess"), Hess has disclosed to the Partnership
all suits, actions, claims, arbitrations, administrative, governmental
investigation or other legal proceedings pending or threatened, against or
related to the assets acquired by the Partnership, which arise under
environmental law. In the event that any pre-acquisition releases of hazardous
substances at the Partnership's Corpus Christi and Galena Park, Texas and
Marrero, Louisiana marine terminal facilities were unknown at closing but
subsequently identified by the Partnership prior to July 30, 2004, the
Partnership will be liable for the first $2.5 million of environmental
liabilities, Hess will be liable for the next $12.5 million of losses and the
Partnership will assume responsibility for any losses in excess of $15.0
million. Also, Hess agreed to indemnify the Partnership through July 30, 2014,
against all known and required environmental remediation costs at the Corpus
Christi and Galena Park, Texas marine terminal facilities from any matters
related to pre-acquisition actions. Hess has indemnified the Partnership for a
variety of pre-acquisition fines and claims that may be imposed or asserted
against the Partnership under certain environmental laws. At December 31, 2002
the Partnership had accrued $0.6 million for costs that may not be recoverable
under Hess' indemnification.
During 2001, the Partnership recorded an environmental liability of $2.3
million at its New Haven, Connecticut facility, which was acquired in September
2000. This liability was based on third-party environmental engineering
estimates completed as part of a Phase II environmental assessment, routinely
required by the State of Connecticut to be conducted by the purchaser following
the acquisition of a petroleum storage facility. The Partnership completed a
Phase III environmental assessment at this facility during 2002 and the results
of that assessment are being evaluated. The environmental liabilities at the New
Haven facility are not expected to change materially once the evaluation of the
assessment is completed, which should be by the end of the first quarter of
2003. The seller of these assets agreed to indemnify the Partnership for certain
of these environmental liabilities. In addition, the Partnership purchased
insurance for up to $25.0 million of environmental liabilities associated with
these assets, which carries a deductible of $0.3 million. Any environmental
liabilities at this location not covered by the seller's indemnity and not
covered by insurance are covered by the WES environmental indemnifications to
the Partnership, subject to the $15.0 million limitation.
During 2001, the Environmental Protection Agency ("EPA"), pursuant to
Section 308 of the Clean Water Act, preliminarily determined that Williams may
have systemic problems with petroleum discharges from pipeline operations. The
inquiry primarily
16
focused on Williams Pipe Line, which was subsequently acquired by the
Partnership. The response to the EPA's information request was submitted during
November 2001. Any claims the EPA may assert relative to this inquiry would be
covered by the Partnership's environmental indemnifications from Williams.
WNGL will indemnify the Partnership for right-of-way defects or failures in
the ammonia pipeline easements for 15 years after the initial public offering
closing date. WES has also indemnified the Partnership for right-of-way defects
or failures associated with the marine terminal facilities at Galena Park and
Corpus Christi, Texas and Marrero, Louisiana for 15 years after the initial
public offering closing date.
On May 31, 2002, Farmland and several of its subsidiaries filed for Chapter
11 bankruptcy protection. Farmland, the largest customer on the ammonia pipeline
system, is also a customer of Williams Pipe Line. The Partnership received
approximately $2.3 million in payments from Farmland during the preference
period prior to Farmland's filing for bankruptcy. Management believes that the
Partnership will not be required to reimburse these funds to the bankruptcy
trustee because they were received in the ordinary course of business with
Farmland. The Partnership's receivable balance from Farmland at December 31,
2002, was $30 thousand. The Partnership also has two five-year petroleum
pipeline lease capacity agreements with Farmland. The first of these agreements,
which expires on November 30, 2005, requires an annual payment by Farmland of
$1.2 million on each November 30th during the contract period. The second
agreement, which expires on April 30, 2007, is for $0.5 million annually and is
invoiced to Farmland on a monthly basis. Farmland has remained current on both
of these lease capacity agreements.
The Partnership is party to various other claims, legal actions and
complaints arising in the ordinary course of business. In the opinion of
management, the ultimate resolution of all claims, legal actions and complaints
after consideration of amounts accrued, insurance coverage or other
indemnification arrangements will not have a material adverse effect upon the
Partnership's future financial position, results of operations or cash flows.
14. DISTRIBUTIONS
Distributions paid by the Partnership during 2002 are as follows (in
thousands):
<Table>
<Caption>
DATE
CASH PER UNIT CASH TOTAL
DISTRIBUTION DISTRIBUTION CASH
PAID AMOUNT DISTRIBUTION
------------------- ------------- ------------
02/14/02 $0.5900 $ 6,861
05/15/02 0.6125 7,162
08/14/02 0.6750 19,222
11/14/02 0.7000 20,128
---------------- -------
Total cash distributions $2.5775 $53,373
================ =======
</Table>
On February 14, 2003, the Partnership paid cash distributions of $0.725 per
unit on its outstanding common, subordinated and Class B units to unitholders of
record at the close of business on January 31, 2003. The total distribution,
including distributions paid to WEG GP LLC on its equivalent units, was $21.0
million.
15. OWNERS' EQUITY
Owners' equity is comprised of the following interests in the Partnership
(in thousands):
<Table>
General Partner interest held by WEG GP LLC .................. $(410,530)
Common units held by affiliates .............................. 59,814
Subordinated units held by affiliates ........................ 131,194
Class B units held by affiliates ............................. 313,651
---------
Balance - December 31, 2002 .................................. $ 94,129
=========
</Table>
Of the Partnership's 13,679,694 common units outstanding at December 31,
2002, 12,600,000 were held by the public, with the remaining 1,079,694 held by
affiliates of WEG GP LLC. All of the Partnership's 5,679,694 subordinated units
and 7,830,924 Class B units are held by affiliates of WEG GP LLC.
17
During the subordination period, the Partnership can issue up to 2,839,847
additional common units without obtaining unitholder approval. In addition, the
General Partner can issue an unlimited number of common units as follows:
o upon exercise of the underwriters' over-allotment option;
o upon conversion of the subordinated units;
o under employee benefit plans;
o upon conversion of the general partner interest and incentive
distribution rights as a result of a withdrawal of the General
Partner;
o in the event of a combination or subdivision of common units;
o in connection with an acquisition or a capital improvement that
increases cash flow from operations per unit on a pro forma basis;
or
o if the proceeds of the issuance are used exclusively to repay up to
$40.0 million of our indebtedness.
The subordination period will end when the Partnership meets certain
financial tests provided for in the Partnership agreement but it generally
cannot end before December 31, 2005.
The limited partners holding common units of the Partnership have the
following rights, among others:
o right to receive distributions of the Partnership's available cash
within 45 days after the end of each quarter;
o right to elect the board members of the Partnership's General
Partner;
o right to remove Williams as the General Partner upon a 66.7%
majority vote of outstanding unitholders;
o right to transfer common unit ownership to substitute limited
partners;
o right to receive an annual report, containing audited financial
statements and a report on those financial statements by our
independent public accountants within 120 days after the close of
the fiscal year end;
o right to receive information reasonably required for tax reporting
purposes within 90 days after the close of the calendar year;
o right to vote according to the limited partners' percentage interest
in the Partnership on any meeting that may be called by the General
Partner; and
o right to inspect our books and records at the unitholders' own
expense.
The voting rights associated with the election of the board members of the
Partnership's General Partner and the right to remove Williams as the General
Partner will be voided in the event of a foreclosure in a Williams-related
bankruptcy proceeding.
Net income is allocated to the General Partner and limited partners based
on their proportionate share of cash distributions for the period. Cash
distributions to the General Partner and limited partners are made based on the
following table:
<Table>
<Caption>
PERCENTAGE OF DISTRIBUTIONS
-------------------------------
QUARTERLY DISTRIBUTION LIMITED GENERAL
AMOUNT (PER UNIT) PARTNERS PARTNER
-------------------------------- ------------ ---------------
Up to $0.578 .................. 98 2
Above $0.578 up to $0.656...... 85 15
Above $0.656 up to $0.788...... 75 25
Above $0.788 .................. 50 50
</Table>
In the event of a liquidation, all property and cash in excess of that
required to discharge all liabilities will be distributed to the partners in
proportion to the positive balances in their respective tax-basis capital
accounts.
16. OTHER EVENTS
On February 14, 2003, the Partnership paid cash distributions of $0.725
per unit on its outstanding common, subordinated and Class B units to
unitholders of record at the close of business on January 31, 2003. The total
distribution, including distributions paid to the General Partner on its
equivalent units, was $21.0 million.
On February 20, 2003, Williams announced its intention to divest its
interest in our General Partner and all of its limited partnership interests. It
is uncertain what form this potential transaction may take and management cannot
currently determine what impact this sale may have on the on-going operations of
the Partnership.
In March 2003, the Partnership reached an agreement with Williams Energy
Marketing & Trading to terminate their storage capacity contract, which extended
through September 30, 2004, at the Galena Park, Texas marine terminal facility.
The Partnership
18
will receive $3.0 million from Williams Energy Marketing & Trading, which will
be under no further obligation under this long-term agreement to pay for tank
storage or any other ancillary services at the Galena Park, Texas facility.
19