|ENTERPRISE PRODUCTS PARTNERS L P filed this Form 10-K on 02/28/2018|
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Long-Term Liabilities
The following table summarizes the components of “Other long-term liabilities” as presented on our Consolidated Balance Sheets at the dates indicated:
Liquidity Option Agreement
We entered into a put option agreement (the “Liquidity Option Agreement” or “Liquidity Option”) with OTA and Marquard & Bahls AG, a German corporation and the ultimate parent company of OTA (“M&B”), in connection with the Oiltanking acquisition (see Note 12). Under the Liquidity Option Agreement, we granted M&B the option to sell to us 100% of the issued and outstanding capital stock of OTA at any time within a 90-day period commencing on February 1, 2020. If the Liquidity Option is exercised, we would indirectly acquire any Enterprise common units then owned by OTA and assume all future income tax obligations of OTA associated with (i) owning common units encumbered by the entity-level taxes of a U.S. corporation and (ii) OTA’s deferred tax liabilities. To the extent that the sum of OTA’s deferred tax liabilities exceeds the then current book value of the Liquidity Option liability at the exercise date, we will recognize expense for the difference.
The aggregate consideration to be paid by us for OTA’s capital stock would equal 100% of the then-current fair market value of the Enterprise common units owned by OTA at the exercise date. The consideration paid may be in the form of newly issued Enterprise common units, cash or any mix thereof, as determined solely by us. We have the ability to issue the requisite number of common units needed to satisfy any potential obligation under the Liquidity Option.
The Liquidity Option may be exercised prior to February 2020 if a Trigger Event (as defined in the underlying agreements) occurs. The exercise period for a Trigger Event is 135 days following the notice of such event. Trigger Events include, among other scenarios, any Enterprise Tax Event (as defined in the underlying agreements), which includes certain events in which OTA would recognize a taxable gain on the Enterprise common units that it owns.
The carrying value of the Liquidity Option Agreement, which is a component of “Other long-term liabilities” on our Consolidated Balance Sheet, was $333.9 million and $269.6 million at December 31, 2017 and 2016, respectively. The fair value of the Liquidity Option, at any measurement date, represents the present value of estimated federal and state income tax payments that we believe a market participant would incur on the future taxable income of OTA. We expect that OTA’s taxable income would, in turn, be based on an allocation of our partnership’s taxable income to the common units held by OTA and reflect certain tax planning strategies we believe could be employed.
Changes in the fair value of the Liquidity Option are recognized in earnings as a component of other income (expense) on our Statements of Consolidated Operations. Results for the years ended December 31, 2017, 2016 and 2015 include $64.3 million, $24.5 million and $25.4 million, respectively, of aggregate non-cash expense attributable to accretion and changes in management estimates regarding inputs to the valuation model.
The fair value of the Liquidity Option at December 31, 2017 reflects the estimated impact of the Tax Cuts and Jobs Act (the “TCJA”) enacted by the U.S. Congress in late December 2017. The TCJA makes broad and complex changes to the U.S. tax code that will affect the carrying value of the Liquidity Option Agreement, including, but not limited to, (i) reducing the federal corporate tax rate payable by OTA from 35% to 21%, (ii) creating a new limitation on deductible interest expense, (iii) bonus depreciation that will allow for full expensing of qualified properties for certain tax years, and (iv) changing rules related to uses and limitations of OTA’s net operating loss carryforwards created in tax years beginning after December 31, 2017. In connection with our initial analysis of the impact of the TCJA for the Liquidity Option, we have recorded an estimate resulting in the recognition of $21.2 million of non-cash expense, which is a component of the overall $64.3 million of non-cash expense we recognized for the Liquidity Option during the year ended December 31, 2017.