Tejas Natural Gas Liquids, LLC and Subsidiaries Statement of Assets
Acquired and Liabilities Assumed As of December 31, 1998 and Statements of
Revenues and Direct Operating Expenses for the Years Ended December 31,
1998, 1997 and 1996 and Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
Tejas Natural Gas Liquids, LLC and Subsidiaries:
We have audited the accompanying statement of assets acquired and liabilities
assumed of Tejas Natural Gas Liquids, LLC and subsidiaries (the "Company"), a
wholly owned subsidiary of Tejas Midstream Enterprises, LLC, as of December 31,
1998, pursuant to the Contribution Agreement by and among Tejas Midstream
Enterprises, LLC, Tejas Energy, LLC, Enterprise Products Partners L.P.,
Enterprise Products Operating L.P., Enterprise Products GP, LLC, EPC Partners
II, Inc. and Enterprise Products Company, dated September 17, 1999 (the
"Agreement"), and the related statements of revenues and direct operating
expenses for the years ended December 31, 1998, 1997 and 1996. These statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statements. We believe that
our audits provide a reasonable basis for our opinion.
The statements referred to above were prepared to present the net assets and
operations of Tejas Natural Gas Liquids, LLC and subsidiaries to be acquired
pursuant to the Agreement described in Note 1 and are not intended to be a
complete presentation of the net assets or operations of Tejas Natural Gas
Liquids, LLC and subsidiaries.
In our opinion, such statements present fairly, in all material respects, the
assets acquired and liabilities assumed as of December 31, 1998, and the
revenues and direct operating expenses for the years ended December 31, 1998,
1997 and 1996 of Tejas Natural Gas Liquids, LLC and subsidiaries, pursuant to
the Agreement referred to above, in conformity with generally accepted
accounting principles.
Houston, Texas
September 17, 1999
TEJAS NATURAL GAS LIQUIDS, LLC AND SUBSIDIARIES
STATEMENT OF ASSETS ACQUIRED AND LIABILITIES ASSUMED (Note 1)
DECEMBER 31, 1998 (In Thousands)
- --------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE - Trade, net of allowance for doubtful $ 55,536
accounts of $1,789
INVENTORIES 18,494
PROPERTY, PLANT AND EQUIPMENT, Net 99,605
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED 96,789
AFFILIATES
ACCOUNTS PAYABLE:
Trade (49,126)
Affiliate (8,739)
ACCRUED EXPENSES (4,135)
ADVANCES PAYABLE TO UNCONSOLIDATED AFFILIATES (31,195)
ASSETS ACQUIRED AND LIABILITIES ASSUMED, Net $177,229
See notes to statements.
TEJAS NATURAL GAS LIQUIDS, LLC AND SUBSIDIARIES
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES (Note 1)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (In Thousands)
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
REVENUES:
Sales $589,528 $819,523 $857,499
Dividend income 4,461 903 1,081
Equity earnings from unconsolidated affiliates 1,592 3,100
----- ----- -----
Total 595,581 823,526 858,580
DIRECT OPERATING EXPENSES:
Cost of goods sold and operating expenses 573,266 765,078 786,405
Depreciation 4,911 4,344 3,258
----- ----- -----
Total 578,177 769,422 789,663
------- ------- -------
EXCESS OF REVENUES OVER DIRECT
OPERATING EXPENSES $ 17,404 $ 54,104 $ 68,917
======== ======== ========
See notes to statements.
TEJAS NATURAL GAS LIQUIDS, LLC
NOTES TO STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
TejasNatural Gas Liquids, LLC ("TNGL" or the "Company") is a wholly owned
subsidiary of Tejas Midstream Enterprises, LLC ("TME"), which is an
affiliate of Shell Oil Company ("Shell"). The Company was formed on
January 7, 1998 in connection with Shell's contribution of certain of its
interests in natural gas processing plants, natural gas liquids ("NGLs"),
fractionation facilities and pipelines, and NGL marketing activities which
were previously part of approximately eight separate Shell divisions. The
various assets owned and operated by TNGL are located in Louisiana and
Mississippi.
As of July 31, 1999, TNGL distributed to its parent all of its interests in
Tejas Biogas, LLC, Tejas C Gas Plants LP, LLC, Texas Gas Plants GP, LLC,
and Tejas Sheridan Pipeline, LLC, and its subsidiary, Texas Gas Plants,
L.P. The Company also transferred certain other assets and liabilities to
its parent. In addition, pursuant to a Contribution Agreement (dated
September 17, 1999) by and among TME, Tejas Energy, LLC, Enterprise
Products Partners L.P. ("EPD"), Enterprise Products Operating L.P.,
Enterprise Products Company, Enterprise Products GP, LLC and EPC Partners
II, Inc., effective August 1, 1999, TME contributed the limited liability
company interest of TNGL and its subsidiaries to EPD for cash and certain
of EPD's general and limited partnership units as defined in the
Contribution Agreement. The sale closed on September 20, 1999. The assets
acquired under the Contribution Agreement included the TNGL assets and
liabilities (the "TNGL Assets'), located in Louisiana and Mississippi,
which includes: (a) interest in a number of gas processing and
fractionation facilities and related assets; (b) NGL pipelines and
(c) additional assets including transportation and terminalling assets
required to support the NGL marketing operations and certain related
contracts and working capital.
The accompanying statement of assets acquired and liabilities assumed
represents the assets and liabilities of the TNGL Assets at their
historical cost. The statements of revenues and direct operating expenses
include only those amounts related to the operations of the TNGL Assets and
do not include selling, general and administrative allocations from the
parent company. Historically, the Company has provided service and support
functions for Shell's integrated operations. In this role, the strategic
direction and economic development of the Company has been for the sole
benefit of Shell. Consequently, certain business decisions made in periods
of volatile market conditions were influenced by Shell's integrated
operations and strategic direction and, as such, were not necessarily made
autonomously for the profit of the individual assets. As a result, these
statements are not necessarily indicative of the financial condition or
results of operations that would have resulted had the TNGL Assets been
operated as a stand-alone entity. Additionally, the distinct and separate
accounts necessary to present an individual balance sheet as of December
31, 1998 and the related statements of income and of cash flows for the
years ended December 31, 1998, 1997 and 1996 in accordance with generally
accepted accounting principles have not been maintained and, therefore, are
not presented.
2. SIGNIFICANT ACCOUNTING POLICIES
Investments in Unconsolidated Affiliates - The accompanying statements
include the accounts of the TNGL Assets and those of 50% or more owned
subsidiaries controlled by the Company and also part of the TNGL Assets.
The equity method is used to account for investments in unconsolidated
entities in which the Company owns more than 20% of the voting interest but
by definition does not have control. The cost method is used to account for
investments in unconsolidated affiliates in which the Company owns less
than 20% of the voting interest and by definition does not execute control.
Inventories - Inventories consisting of NGLs and NGL products are carried
at the lower of cost, on a last-in first-out (LIFO) basis, or market, and
include certain costs directly related to the production process. The
replacement cost of the inventory at December 31, 1998 was approximately
$18.0 million.
Property, Plant and Equipment - Property, plant and equipment is recorded
at cost and is generally depreciated using the straight-line method over
the assets' estimated useful lives. Some processing facilities are
depreciated on a units-of-production basis to the extent that the
processing facilities' sole operations are directly related to specific
gas-producing properties. The unit-of-production rate is based on total
proven reserves related to the dedicated gas producing properties.
Maintenance and repair costs are expensed as incurred; additions,
improvements and replacements are capitalized.
Variable Ownership Percentage Adjustments - The ownership percentage of
certain natural gas processing plants varies according to the plants' gas
throughput associated with the Company. These plants are jointly owned with
other entities which pay or are reimbursed by the Company to adjust the
ownership percentage on an annual basis.
Long-Lived Assets - The Company records impairment losses on long-lived
assets if the carrying amount of such assets, grouped at the lowest level
for which there are identifiable cash flows that are largely independent of
the cash flows from other assets, exceeds the estimated undiscounted future
cash flows of such assets. Measurement of any impairment loss is based on
the fair value of the asset. For the years ended December 31, 1998, 1997
and 1996, there were no charges for impairments included in the statements
of revenues and direct operating expenses.
Excess Cost Over Underlying Equity in Net Assets - The excess of the
Company's cost over the underlying equity in net assets of K/D/S Promix,
LLC, is being amortized using the straight-line method over the estimated
remaining life of the assets over a period not to exceed 20 years. Such
amortization is reflected in the equity earnings from unconsolidated
affiliates. The unamortized excess was approximately $20.3 million at
December 31, 1998.
Revenue Recognition - Revenue from processing and fractionation services is
recognized when the services are provided. Revenue from the sale of natural
gas liquids is generally recognized upon the passage of title. Revenue from
pipeline transportation of natural gas liquids is recognized upon receipt
of the natural gas liquids into the pipeline systems.
Federal Income Taxes - The Company is a limited liability company and is,
therefore, not taxable for federal tax purposes; as a result, income taxes
have been excluded from the statements.
Use of Estimates - The preparation of statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of certain
assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the statements, and the related reported amounts of revenue
and expenses during the reporting period. Actual results could differ from
these estimates.
Significant Risks - The Company is subject to a number of risks inherent in
the industry in which it operates, primarily fluctuating gas and liquids
prices and gas supply. The Company's financial condition and results of
operations will depend significantly on the prices received for NGLs and
the price paid for gas consumed in the NGL extraction process. These prices
are subject to fluctuations in response to changes in supply, market
uncertainty and a variety of additional factors that are beyond the control
of the Company. In addition, the Company must continually connect new wells
through third-party gathering systems which serve the plants in order to
maintain or increase throughput levels to offset natural declines in
dedicated volumes. The number of wells drilled by third parties will depend
on, among other factors, the price of gas and oil, the energy policy of the
federal government, and the availability of foreign oil and gas, none of
which is within the Company's control.
Recently Issued Accounting Standards - On June 6, 1999, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133 - an amendment of FASB Statement No. 133," which
effectively delays and amends the application of SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," for one year, to fiscal
years beginning after June 15, 2000. Management is currently studying this
item to determine the financial statement impact of adopting SFAS No. 133.
Dollar Amounts - Amounts presented in the tabulations within the notes to
the statements are stated in thousands of dollars, unless otherwise
indicated.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment and accumulated depreciation at December 31,
1998 were as follows:
Estimated
Useful Life
Description (in Years)
Plants 15 - 20 $ 99,673
Pipelines 10 - 20 21,497
Transportation equipment 22 3,313
Land 175
Construction-in-progress 54,186
------
Total property 178,844
Accumulated depreciation (79,239)
Property, net $ 99,605
========
4. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
At December 31, 1998, the Company's significant unconsolidated affiliates
included the following:
K/D/S Promix, LLC ("Promix") - A 33.33% economic interest in a Limited
Liability Company ("LLC") owning a fractionation plant and related pipeline
and storage facilities near Napoleonville, Louisiana. The economic interest
was acquired during 1997. The LLC is owned by three entities and operated
by Koch Hydrocarbon Southeast, Inc. At December 31, 1998, the Company had a
payable to Promix for capital expansions.
Dixie Pipeline Company ("Dixie") - An 11.5% economic interest in a
corporation owning a 1,300-mile propane pipeline and the associated
facilities extending from Mt. Belvieu, Texas, to North Carolina. Dixie has
seven owners, and Phillips Pipeline Company is the operator of the assets.
Venice Energy Services Company, LLC ("Vesco") - A 13.1% economic interest
in an LLC owning a natural gas processing plant with processing capacity of
1,300 MMCF/day, fractionation facilities, storage, and gas gathering
pipelines in Louisiana. Vesco is jointly owned by five entities including
TNGL. Dynegy Midstream Services L.P. is the operator of the assets.
Tri-States NGL Pipeline, LLC ("Tri-States") - A 16.7% economic interest in
an LLC owning a 161-mile NGL pipeline which stretches from Mobile Bay,
Alabama, to Kenner, Louisiana. The pipeline construction started in the
latter part of 1997 and was completed in January 1999. Tri-States is owned
by six entities, including TNGL, and WSF-NGL Pipeline Company, Inc.
("Williams") is the operator of the assets. Because the Tri-States LLC
agreement was not signed until January 1999, payment for a portion of its
capital contribution by TNGL was recorded as an advance payable to
unconsolidated affiliates as of December 31, 1998.
Belle Rose NGL Pipeline, LLC ("Belle Rose") - A 41.7% economic interest in
an LLC owning a 48-mile NGL pipeline extending from Kenner, Louisiana to
Belle Rose, Louisiana. The pipeline construction began during the latter
part of 1997 and began operations during March 1999. At December 31, 1998,
the LLC agreement was not finalized. As a result, payment by TNGL has not
been made for the investment in Belle Rose. Consequently, a payable was
recorded as advances payable to unconsolidated affiliates as of
December 31, 1998. Belle Rose will be owned by three entities, including
TNGL, with TNGL being the operator of the assets.
Following is a summary of the Company's investments in and advances to
unconsolidated affiliates at December 31, 1998:
Unconsolidated Affiliates
--------------------------------------------
--------------------------------------------
Investments in Advances
and Advances To Payable To
Promix $60,610 $ 7,000
Dixie 10,639
Vesco 1,345
Tri-States 13,058 13,058
Belle Rose 11,137 11,137
------ ------
Total $96,789 $31,195
======= =======
Equity earnings from unconsolidated affiliates for the years ended
December 31, 1998, 1997 and 1996 are as follows:
Unconsolidated Affiliates
----------------------------------------------------------------
1998 1997 1996
------------------------------ ---------------------------- ------------------
Dividend Equity in Dividend Equity in Dividend
Income Earnings Income Earnings Income
-------------- ------------- ----------- ------------- ------------------
Promix $1,592 $3,100
Dixie $1,373 $903 $1,081
Vesco 3,088
Tri-States
Belle Rose -------- -------- -------- -------- --------
Total $4,461 $1,592 $903 $3,100 $1,081
====== ====== ==== ====== ======
Following is selected financial data for Promix, the most significant
investment of the Company:
BALANCE SHEET DATA 1998
Current assets $ 12,801
Property, plant and equipment, net 114,945
-------
Total assets $127,746
========
Current liabilities $ 30,533
Members' equity 97,213
------
Total liabilities and members' equity $127,746
========
INCOME STATEMENT DATA 1997 1998
Revenues $24,563 $ 23,994
Expenses 12,639 16,009
------ ------
Net income $11,924 $ 7,985
======= ========
5. RELATED-PARTY TRANSACTIONS
Sales to Affiliates - The Company has transactions in the normal course of
business with the unconsolidated affiliates and other subsidiaries and
divisions of Shell. Such transactions include the buying, selling and
transportation of NGL products.
Products sold to related parties during 1998, 1997 and 1996 amounted to
$168.8 million, $250.5 million and $312.6 million, respectively.
Purchase of Raw Materials and Products - A contract exists between the
Company and other Shell affiliates to allow processing of natural gas owned
by Shell in the Company's operated and outside operated plants. Under this
agreement, the Shell affiliates are paid for the gas volumes lost in
processing at market prices. In addition, affiliates are reimbursed for any
additional royalty expense as a result of processing the gas. In return,
the Company receives 100% of the liquids extracted in these plants. Also,
the Company purchases NGL products from unconsolidated affiliates and other
subsidiaries and divisions of Shell. During 1998, 1997 and 1996, the
Company paid Shell and its affiliates $377.1 million, $492.3 million and
$466.3 million, respectively, representing raw material and product
purchases.
Cost Allocations - The Company has no employees. All individuals who
perform the day-to-day operational functions are employed by affiliates of
Shell. However, all direct operational salary costs are directly passed
through to the Company and, therefore, do not represent partial
allocations.
6. COMMITMENTS AND CONTINGENCIES
Capital Expenditures Commitments - As of December 31, 1998, the Company had
capital expenditures commitments totaling approximately $ 38.3 million, the
majority of which relates to the construction of projects of unconsolidated
affiliates.
Litigation - The Company is sometimes named as a defendant in litigation
relating to its normal business operations. Although the Company insures
itself against various business risks, to the extent management believes it
is prudent, there is no assurance that the nature and amount of such
insurance will be adequate, in every case, to indemnify the Company against
liabilities arising from future legal proceedings as a result of its
ordinary business activity. Except for the note below, management is aware
of no significant litigation or audit claims, pending or threatened, that
would have a materially adverse effect on the Company's financial position
or results of operations.
The State of Louisiana has conducted an audit of fuel gas consumed in plant
operations. Consumption of this fuel gas was exempt from taxation prior to
1987. However, in 1987 the state rescinded the fuel tax exemption, thus
making the gas subject to tax at 3% of its value. The audit period reviewed
by the state was January 1991 through December 1994 and included TNGL
operated plants (Toca, Calumet and North Terrebone). The state claims TNGL
Assets owes approximately $4.6 million in tax, interest and penalties based
on total fuel gas usage at those plants for this period. However, it is
expected that TNGL's tax liability will only be equivalent to its ownership
in these plants. It also appears TNGL will be liable for tax on its share
of the fuel at outside-operated plants located in Louisiana in which TNGL
owns an interest. Although the ultimate liability is difficult to
determine, the Company has $4.0 million included in accrued expenses as of
December 31, 1998 which represents the Company's share of tax on fuel
consumed at the operated as well as the outside-operated properties for the
period from 1991 through 1998, including interest.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The disclosure of the estimated fair value of accounts receivable and
accounts payable was determined by the Company using available market
information and appropriate valuation methodologies. Considerable judgment,
however, is necessary to interpret market data and develop the related
estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts that the Company could realize
upon disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies could have a material effect on
the estimated fair value amounts. Accounts receivable and accounts payable
are carried at amounts that approximate their fair value.
8. CONCENTRATION OF CREDIT RISK
Substantial portions of the Company's revenues are derived from the
fractionation, processing, marketing and transportation of NGLs to various
companies in the NGL industry located in the United States. Although this
concentration could affect the Company's overall exposure to credit risk,
since its customers might be influenced by similar economic or other
conditions, management believes that the Company is exposed to minimal
credit risk, because the majority of its business is conducted with major
companies within the industry and much of the business is conducted with
companies with whom the Company has joint operations. The Company generally
does not require collateral for its accounts receivable.
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