SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1998
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _______________
Commission file number: 1-14323
ENTERPRISE PRODUCTS PARTNERS L.P.
Delaware 76-0568219
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization
2727 North Loop West, Houston, Texas 77008-1037
(713) 880-6500
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
The registrant had no publicly traded common units outstanding as of
June 30, 1998.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Page
ENTERPRISE PRODUCTS PARTNERS L.P. UNAUDITED COMBINED FINANCIAL STATEMENTS:
Combined Balance Sheets, June 30, 1998 and December 31, 1997............................................ 1
Statements of Combined Operations
for the Three and Six Months Ended June 30, 1998 and 1997.............................................. 2
Statements of Combined Cash Flows
for the Six Months Ended June 30, 1998 and 1997........................................................ 3
Statements of Combined Equity
for the Six Months Ended, June 30, 1998 and 1997....................................................... 4
Notes to Unaudited Combined Financial Statements........................................................ 5-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............9-16
Signature Page................................................................................... 17
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENTERPRISE PRODUCTS PARTNERS L.P.
COMBINED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
ASSETS December 31, June 30,
1997 1998
------------------------
CURRENT ASSETS
Cash and cash equivalents, including restricted cash
of $4,522 in 1997 and $5,734 in 1998 $ 23,463 $ 14,910
Accounts receivable-trade 76,533 71,728
Inventories 18,935 37,950
Prepaid and other current assets 8,103 7,678
------------------------
Total current assets 127,034 132,266
PROPERTY, PLANT AND EQUIPMENT, NET 513,727 508,260
INVESTMENTS IN AND ADVANCES TO
UNCONSOLIDATED AFFILIATES 55,875 72,108
OTHER ASSETS 1,077 1,983
------------------------
TOTAL $697,713 $714,617
========================
LIABILITIES AND COMBINED EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 14,903 $ 23,474
Accounts payable--trade 76,591 42,388
Accrued gas payables 45,668 69,367
Accrued expenses 8,638 3,789
Other current liabilities 21,544 14,921
------------------------
Total current liabilities 167,344 153,939
LONG TERM DEBT 215,334 194,589
MINORITY INTEREST 3,150 3,301
COMMITMENTS AND CONTINGENCIES
COMBINED EQUITY 311,885 362,788
------------------------
TOTAL $697,713 $714,617
========================
See Notes to Unaudited Combined Financial Statements
1
ENTERPRISE PRODUCTS PARTNERS L.P.
STATEMENTS OF COMBINED OPERATIONS
(Unaudited)
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
---------------------------------------------------
REVENUES $245,380 $207,566 $501,032 $398,083
---------------------------------------------------
COST AND EXPENSES
Operating costs and expenses 227,128 186,784 456,264 368,231
Selling, general and administrative 5,286 5,857 11,922 11,611
---------------------------------------------------
Total 232,414 192,641 468,186 379,842
---------------------------------------------------
OPERATING INCOME 12,966 14,925 32,846 18,241
---------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (5,692) (4,070) (11,659) (10,804)
Interest income 185 285 772 560
Equity income in unconsolidated affiliates 4,839 3,831 7,859 6,653
Other, net 66 428 1,131 430
---------------------------------------------------
Total other income (expense) (602) 474 (1,897) (3,161)
---------------------------------------------------
INCOME BEFORE MINORITY INTEREST 12,364 15,399 30,949 15,080
MINORITY INTEREST (123) (154) (309) (151)
---------------------------------------------------
NET INCOME $ 12,241 $ 15,245 $ 30,640 $ 14,929
===================================================
ALLOCATION OF NET INCOME TO:
Limited partner $ 12,119 $ 15,093 $ 30,334 $ 14,780
===================================================
General partner $ 122 $ 152 $ 306 $ 149
===================================================
NET INCOME PER COMMON UNIT (based upon 54,963 common
units to be issued to Enterprise Products Company
("EPCO")) $.22 $.27 $.55 $.27
===================================================
See Notes to Unaudited Combined Financial Statements
2
ENTERPRISE PRODUCTS PARTNERS L.P.
STATEMENTS OF COMBINED CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Six Months Ended
June 30,
1997 1998
-------------------------------------
OPERATING ACTIVITIES
Net income $ 30,640 $ 14,929
Adjustments to reconcile net income to cash flows used for operating
activities:
Minority Interest 309 151
Depreciation and amortization 8,756 9,403
Equity in income of unconsolidated affiliates (7,859) (6,653)
Gain on sale of assets (252)
Net effect of changes in operating accounts (65,317) (36,667)
-------------------------------------
Operating activities cash flows (33,471) (19,089)
-------------------------------------
INVESTING ACTIVITIES
Capital expenditures (20,658) (7,388)
Proceeds from sale of assets 3,704
Unconsolidated affiliates:
Investments in and advances to 687 (14,471)
Distributions received 3,120 4,891
-------------------------------------
Investing activities cash flows (16,851) (13,264)
-------------------------------------
FINANCING ACTIVITIES
Long-term debt repayments (14,009) (12,174)
Net increase in restricted cash (563) (1,212)
-------------------------------------
Financing activities cash flows (14,572) (13,386)
-------------------------------------
CASH CONTRIBUTIONS FROM PARENT 47,062 35,974
NET CHANGE IN CASH AND CASH EQUIVALENTS (17,832) (9,765)
CASH AND CASH EQUIVALENTS, JANUARY 1 24,978 18,941
-------------------------------------
CASH AND CASH EQUIVALENTS, JUNE 30,
(Excluding restricted cash of $3,914 in 1997 and $5,734 in 1998) $ 7,146 $ 9,176
=====================================
See Notes to Unaudited Combined Financial Statements
3
ENTERPRISE PRODUCTS PARTNERS L.P.
STATEMENTS OF COMBINED EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(Unaudited)
(Dollars in Thousands)
LIMITED GENERAL
PARTNER PARTNER TOTAL
-------------------------------------------------------------
Combined Equity, December 31, 1996 $263,361 $2,660 $266,021
Net Income 30,334 306 30,640
Cash contribution from parent 46,588 471 47,059
-------------------------------------------------------------
Combined Equity, June 30, 1997 $340,283 $3,437 $343,720
=============================================================
Combined Equity, December 31, 1997 $308,766 $3,119 $311,885
Net Income 14,780 149 14,929
Cash contribution from parent 35,614 360 35,974
-------------------------------------------------------------
Combined Equity, June 30, 1998 $359,160 $3,628 $362,788
=============================================================
See Notes to Unaudited Combined Financial Statements
4
ENTERPRISE PRODUCTS PARTNERS L.P.
Notes to Combined Financial Statements
(Unaudited)
1. GENERAL
In the opinion of Enterprise Products Partners L.P. (the "Company"), the
accompanying unaudited combined financial statements include all adjustments
consisting of normal recurring accruals necessary for a fair presentation of the
Company's combined financial position as of June 30, 1998 and its combined
results of operations and cash flows for the six months periods ending June 30,
1998 and 1997. Although the Company believes the disclosures in these financial
statements are adequate to make the information presented not misleading,
certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. These unaudited combined financial
statements should be read in conjunction with the combined financial statements
and the notes thereto included in the Company's Registration Statement No.
333-52537 under the Securities Act of 1933 (as amended) on Form S-1 ("Form S-1")
dated July 21, 1998.
The results of operations for the six months ended June 30, 1998 are not
necessarily indicative of the results to be expected for the full year.
Dollar amounts presented in the tabulations within the notes to the combined
financial statements are stated in thousands of dollars, unless otherwise
indicated.
2. INVESTMENT IN UNCONSOLIDATED AFFILIATES
At June 30, 1998, the Company's unconsolidated affiliates accounted for by the
equity method included a 33 1/3% economic interest in Belvieu Environmental
Fuels ("BEF") which owns an MTBE production facility and a 49% economic interest
in Mont Belvieu Associates which owns a 50% interest in an NGL fractionation
facility. Also included in investments are construction costs related to an
approximately 27% economic interest in Baton Rouge Fractionators, LLC which is
building an NGL fractionation facility scheduled to begin production during the
first quarter of 1999.
Following is a summary of the Company's investments in and advances to and
equity in income of unconsolidated affiliates:
AT DECEMBER AT JUNE
31, 1997 30, 1998
----------------------------------
Investments in and advances to unconsolidated affiliates:
BEF................................................................ $ 41,278 $ 46,754
Mont Belvieu Associates............................................ 11,963 11,035
Baton Rouge Fractionators, LLC..................................... 2,634 10,686
Other.............................................................. ---- 3,633
----------------------------------
Total.............................................. $ 55,875 $ 72,108
==================================
5
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
1997 1998 1997 1998
--------- --------- -------- --------
Equity in income of unconsolidated affiliates:
BEF............................................. $3,139 $2,381 $4,805 $3,254
Mont Belvieu Associates......................... 1,700 1,494 3,054 3,443
Other........................................... --- (44) --- (44)
------ ------ ------ ------
Total................................... $4,839 $3,831 $7,859 $6,653
====== ====== ====== ======
3. SUPPLEMENTAL CASH FLOW DISCLOSURE
The net effect of changes in operating assets and liabilities is as
follows:
SIX MONTHS ENDED
JUNE 30,
1997 1998
------------------------------------
(Increase) decrease in:
Accounts and notes receivable--trade $ 8,360 $ 4,805
Inventories (12,381) (19,015)
Prepaid expenses and other current assets 1,528 425
Other assets 708 (906)
Increase (decrease) in:
Accounts payable--trade (29,076) (34,203)
Accrued gas payable (30,753) 23,699
Accrued expenses (7,788) (4,849)
Other current liabilities 4,085 (6,623)
------------------------------------
Net effect of changes in operating accounts $(65,317) $(36,667)
====================================
4. RECENTLY ISSUED ACCOUNTING STANDARDS
Recent Statements of Financials Standards ("SFAS") include the following:
(effective for fiscal years beginning after December 15, 1997) SFAS 130,
Reporting of Comprehensive Income, SFAS 131, Disclosure about Segments of an
Enterprise and Related Information and SFAS 132, Employers' Disclosure about
Pensions and Other Postretirement Benefits and (effective for all fiscal
quarters of fiscal years beginning after Jun 15, 1999) SFAS 133, Accounting for
Derivative Instruments and Hedging Activities. Management is currently studying
these SFAS items for possible impact on the combined financial statements;
however, based upon its preliminary assessment of the SFASs, management believes
that they will not have a significant impact on the Company's financial
statements. On April 3, 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5, Reporting on the Costs of Start-
Up Activities ("SOP 98-5"). For years beginning after December 15, 1998, SOP
98-5 generally requires that all start-up costs of a business activity be
charged to expense as incurred and any start-up costs previously deferred should
be written-off as a cumulative
6
effect of a change in accounting principle. Management is currently studying SOP
98-5 for its possible impact on the combined financial statements. Based upon
its preliminary assessment of SOP 98-5, management believes that SOP 98-5 will
not have a material impact on the combined financial statements except for a
$4.5 million non-cash write-off at January 1, 1999 of the unamortized balances
of deferred start-up costs of BEF, in which the Company owns a 33 1/3% economic
interest. Such a write-off would cause a $1.5 million reduction in the equity in
income of unconsolidated affiliates for 1999 and a corresponding reduction in
the Company's investment in unconsolidated affiliates.
5. SUBSEQUENT EVENTS
CAPITAL STRUCTURE
Pursuant to the filing of Form S-1 mentioned in Note 1 above, effective on July
27, 1998, the Company sold to the public 12,000,000 Common Units at $22 per unit
receiving $247,200,000 after underwriting commissions of $16,800,000. Units
outstanding after the sale were 45,552,915 Common Units and 21,409,870
Subordinated Units representing an aggregate 66.7% and 31.3% limited partner
interest in the Company, respectively. The remaining 2% partner interest is held
by Enterprise Products GP, LLC, the general partner. Public holders own in the
aggregate a 17.6% limited partner interest in the Company.
The Company intends, to the extent there is sufficient Available Cash from
Operations to distribute to each holder of Common Units at least the Minimum
Quarterly Distribution ("MQD") of $.45 per Common Unit per quarter. On a pro
rata basis, the first MQD will be $.32 per Common Unit to be paid within 45 days
after the quarter ending September 30, 1998. The MQD is not guaranteed and is
subject to adjustment as described in the registration statement.
Distributions on Subordinated Units are regulated by various provisions of the
Partnership Agreement which, among other conditions and providing that certain
tests are met, permit the early conversion of 25%, 25% and 50% of the
Subordinated Units to Common Units on any quarter ending on or after June 30,
2001, 2002 and 2003 respectively.
LONG TERM DEBT
On July 31, 1998, the Company entered into a $200 million revolving credit
agreement (the "Revolver") with a bank syndicate. The Revolver is due on July
31, 2000 and bears interest at various rates based upon the bank's prime rate,
three months certificate of deposit rate, as defined, federal funds effective
rate or a Eurodollar rate. The Company elects the basis for the interest rate
at the time of each borrowing. As of July 31, 1998, the Company had outstanding
$50 million under the Revolver.
REPAYMENT OF LONG TERM DEBT
On July 31, 1998, certain proceeds from the sale of Common Units and funds from
the Revolver mentioned above, were used to retire all of the existing long term
debt. As a result of this early extinguishment of debt, the Company incurred
$27.1 million in "make whole payments" which will be presented as an
extraordinary item in the financial statements for the nine months ending
September 30, 1998.
PRO FORMA INFORMATION
The following pro forma information gives effect (as of January 1, 1997) to the
above described public offering and the related use of proceeds from the
offering and other borrowings that were described in the offering document. The
principal transactions include: (a) elimination of interest expense due to the
repayment of the debt assumed from EPCO; (b) accrual of interest income due to
the purchase of a participation interest in bank notes of its unconsolidated
affiliates; (c) accrual of interest expense for the $50 million of borrowings
7
under the Revolver; and (d) the reduction of general and administrative expenses
as a result of the EPCO Agreement to provide such services at a fixed rate
(amounts in thousands, except for per unit amounts):
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
1997 1998 1997 1998
--------- --------- -------- --------
Income from Continuing Operations $20,975 $22,456 $49,521 $31,829
Allocation of income from
continuing operations to:
Limited Partners $20,765 $22,231 $49,026 $31,511
General Partners $ 210 $ 225 $ 495 $ 318
Net income per common unit (based
upon 66,963 units outstanding after the offering) $ .31 $ .33 $ .73 $ .47
The above pro forma income from continuing operations (and related allocation to
partners and per unit amounts) for all periods presented do not include a pro
forma adjustment for the $27.1 million ($0.40 per unit) loss recognized as of
July 31, 1998 for the early extinguishment of debt that was assumed from EPCO.
Such loss, in accordance with generally accepted accounting principles, will be
reported as an extraordinary loss.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED JUNE 30, 1998 AND 1997
The following discussion and analysis should be read in conjunction with the
unaudited combined financial statements and notes thereto of Enterprise Products
Partners L.P. included elsewhere herein.
GENERAL
The Company is a leading integrated provider of processing and transportation
services to producers of natural gas liquids ("NGLs") and consumers of NGL
products. The Company (i) fractionates mixed NGLs produced as by-products of
oil and natural gas production into their component products: ethane, propane,
isobutane, normal butane and natural gasoline; (ii) converts normal butane to
isobutane through the process of isomerization; (iii) produces MTBE from
isobutane and methanol; and (iv) transports NGL products to end users by
pipeline and railcar. The Company also separates high purity propylene from
refinery-sourced propane/propylene mix and transports high purity propylene to
plastics manufacturers by pipeline. Products processed by the Company generally
are used as feedstocks in petrochemical manufacturing, in the production of
motor gasoline and as fuel for residential and commercial heating.
The Company's processing operations are concentrated at Mont Belvieu, Texas.
The facilities operated by the Company include (i) one of the largest NGL
fractionation facilities in the United States with an average production
capacity of 210,000 barrels per day; (ii) the largest butane isomerization
complex in the United States with an average production capacity of 116,000
barrels per day; (iii) one of the largest MTBE production facilities in the
United States with an average production capacity of 14,800 barrels per day; and
(iv) two propylene fractionation units with an average combined production
capacity of 30,000 barrels per day. The Company owns all of the assets at its
Mont Belvieu facility except for the fractionation facility, in which it owns a
37.0% economic interest; one of the propylene fractionation units, in which it
owns a 54.6% interest and leases the remaining interest; the MTBE plant, in
which it owns a 33 1/3% economic interest; and one of its three isomerization
units and one deisobutanizer tower which are held under long-term leases with
purchase options. The Company owns and operates a network of approximately 500
miles of pipelines along the Gulf Coast and a fractionation facility in Petal,
Mississippi with a capacity of 7,000 barrels per day. The Company also leases
and operates one of only two commercial NGL import/export terminals on the Gulf
Coast. As an integral part of providing processing and transportation services,
the Company also owns and operates NGL storage wells with approximately 35
million barrels of capacity.
NGL Fractionation
The profitability of this business unit depends on the volume of mixed NGLs
that the Company processes for its toll customers and the level of toll
processing fees charged to its customers. The most significant variable cost of
fractionation is the cost of energy required to operate the units and to heat
the mixed NGLs to effect separation of the NGL products. The Company is able to
reduce its energy costs by capturing excess heat and re-using it in its
operations. Additionally, the Company's NGL fractionation processing contracts
typically contain escalation provisions for cost increases resulting from
increased variable costs, including energy costs. The Company's interest in the
operations of its NGL fractionation facilities at Mont Belvieu consists of a
directly-owned 12.5% undivided interest and a 49.0% economic interest in Mont
Belvieu Associates, which in turn owns a 50.0% undivided interest in such
facilities. The Company's 12.5% interest is recorded as part of revenues and
expenses, and its effective 24.5% economic interest is recorded as an equity
investment in an unconsolidated subsidiary.
Isomerization
The profitability of this business unit depends on the volume of normal
butane that the Company isomerizes into isobutane for its toll processing
customers, the level of toll processing fees charged to its customers and the
margins generated from selling isobutane to merchant customers.
9
The Company's toll processing customers pay the Company a fee for isomerizing
their normal butane into isobutane. In addition, the Company sells isobutane
which it obtains by isomerizing normal butane into isobutane, fractionating
mixed butane into isobutane and normal butane or purchasing isobutane in the
spot market. The Company determines the optimal sources for isobutane to meet
sales obligations based on current and expected market prices for isobutane and
normal butane, volumes of mixed butane held in inventory and estimated costs of
isomerization and mixed butane fractionation.
The Company purchases most of its imported mixed butane between the months of
February and October. During these months, the Company is able to purchase
imported mixed butanes at prices that are often at a discount to posted market
prices. Because of its storage capacity, the Company is able to store these
imports until the summer months when the spread between isobutane and normal
butane typically widens or until winter months when the prices of isobutane and
normal butane typically rise. Should this spread not materialize, or in the
event absolute prices decline, margins generated from selling isobutane to
merchant customers may be negatively affected.
Propylene Fractionation
The profitability of this business unit depends on the volumes of refinery-
sourced propane/propylene mix that the Company processes for its toll customers,
the level of toll processing fees charged to its customers and the margins
associated with buying refinery-sourced propane/propylene mix and selling high
purity propylene to meet sales contracts with non-tolling customers.
Pipelines
The Company operates both interstate and intrastate NGL product and propylene
pipelines. The Company's interstate pipelines are common carriers and must
provide service to any shipper who requests transportation services at rates
regulated by the Federal Energy Regulatory Commission ("FERC"). One of the
Company's intrastate pipelines is a common carrier regulated by the State of
Louisiana. The profitability of this business unit is primarily dependent on
pipeline throughput volumes.
Belvieu Environmental Fuels
The Company owns a 33 1/3% economic interest in BEF, which owns the MTBE
production facility that is operated by the Company and located at its Mont
Belvieu complex. The Company's interest in BEF is accounted for using the equity
method. Sun and Mitchell Energy each own a 33 1/3% interest in BEF, and Sun has
entered into a contract with BEF under which Sun is required to take all of
BEF's production of MTBE through May 2005. Under the terms of its agreement with
BEF, through May 2000, Sun will pay the higher of a floor price (approximately
$0.83 per gallon at June 30, 1998) or a market-based price for the first
193,450,000 gallons per contract year of production (equivalent to approximately
12,600 barrels per day) from the BEF facility, subject to quarterly adjustments
on certain excess volumes. Sun will pay a market-based price for volumes
produced in excess of 193,450,000 gallons per contract year. Since the contract
year begins on June 1, if the facility produces at full capacity during the
year, it will reach 193,450,000 gallons of production near the end of March, and
sales thereafter through the end of May will be at market-based prices.
Generally, the price charged by BEF to Sun for the MTBE has been above the spot
market price for MTBE. During the six month period ended June 30, 1998, and the
second quarter of 1998, the average Gulf Coast spot market price for MTBE was
$0.67 and $0.66 per gallon, respectively.
Beginning in June 2000, pricing on all volumes will convert to market-based
rates. The price of MTBE is affected by the demand for MTBE as an oxygenation
additive for gasoline and the cost of its principal feedstocks (isobutane and
methanol).
Prepayment Penalties on Extinguishment of Debt
The Company will incur a $27.1 million extraordinary loss during the third
quarter of 1998 in connection with the early extinguishment of debt assumed from
EPCO in connection with the Company's initial public offering of Common Units.
The extraordinary loss is equal to
10
remaining unamortized debt origination costs associated with such debt and make-
whole premiums payable in connection with the repayment of such debt. The actual
prepayment penalties on the early extinguishment of debt that the Company
incurred was approximately $6.0 million greater than originally estimated by the
Company. Under terms of the debt agreements, the make-whole payments were based
upon the current effective interest rate for US Treasury notes with similar
maturity as the debt obligation being repaid. The difference between the
original amount estimated by the Company and the actual prepayment penalties
paid is primarily due to the rapid decrease in the interest rate for US Treasury
notes from the period that the Company originally estimated the penalties to the
date that the debt was actually repaid.
RESULTS OF OPERATIONS
The Company's operating margins by business unit for the three month periods
ended June 30, 1997 and June 30, 1998, and six month periods ended June 30, 1997
and June 30, 1998, were as follows:
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998
------------ -------------- -------------- -------------
(IN THOUSANDS)
Operating Margin:
NGL Fractionation $ 757 $ 697 $ 1,304 $ 1,538
Isomerization 7,261 10,808 24,069 13,462
Propylene Fractionation 5,873 2,454 9,922 4,466
Pipeline 2,367 3,772 5,475 7,047
Storage and Other Plants 1,994 3,051 3,998 3,339
------- ------- ------- -------
Total $18,252 $20,782 $44,768 $29,852
======= ======= ======= =======
THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1997
Revenues; Costs and Expenses
The Company's revenues decreased by 15.4% to $207.6 million in the second
quarter of 1998 from $245.4 million in the second quarter of 1997. The
Company's costs and operating expenses decreased by 17.7% to $186.8 million in
the second quarter of 1998 from $227.1 million for the same period of 1997.
Operating margin increased by 13.7% to $20.8 million from $18.3 million from
period to period, primarily reflecting increased operating margins in
isomerization.
NGL Fractionation. The Company's operating margin for NGL fractionation
decreased by 12.5% to $0.7 million in the second quarter of 1998 from $0.8
million in the second quarter of 1997. The decrease in NGL fractionation margin
was due to increased operating expenses during the second quarter of 1998,
partially offset by increased processing fees as a result of increased volumes.
Average daily fractionation volumes increased from 195,171 barrels per day to
205,404 barrels per day from quarter to quarter, primarily as a result of
increased volumes from a joint owner's new gas processing plant which began
operations in February, 1998.
Isomerization. The Company's operating margin for isomerization increased by
47.9% to $10.8 million in the second quarter of 1998 from $7.3 million in the
second quarter of 1997. The increase in isomerization operating margins was
mainly due to increased processing fees from increased utilization of the
deisobutanizer units as a result of an increase in the volume of imported mixed
butanes.
Propylene Fractionation. The Company's operating margin for propylene
fractionation decreased by 57.6% to $2.5 million in the second quarter of 1998
from $5.9 million in the second
11
quarter of 1997. The decrease in propylene margins resulted from lower prices
for high purity propylene during the second quarter of 1998 which in turn
reflected lower polypropylene prices. The decrease in margins also reflected
losses taken on the sale of excess quantities of refinery grade
propane/propylene mix during the second quarter of 1998.
Pipeline. The Company's operating margin for pipeline operations increased
by 58.3% to $3.8 million from $2.4 million from quarter to quarter, reflecting a
35.7% increase in throughput volume.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses increased by 11.3% to $5.9
million in the second quarter of 1998 from $5.3 million in the second quarter of
1997.
Interest Expense
Interest expense was $4.1 million in the second quarter of 1998 and $5.7
million in the second quarter of 1997, primarily due to reductions in
outstanding term debt.
Equity Income of Unconsolidated Affiliates
Equity income of unconsolidated affiliates decreased by 20.8% to $3.8 million
in the second quarter of 1998 from $4.8 million in the second quarter of 1997.
Equity income of unconsolidated affiliates includes the Company's interests in
BEF and Mont Belvieu Associates. Equity income in BEF declined by 22.6% to $2.4
million from $3.1 million quarter to quarter due to lower MTBE sales prices at
the end of the contract year. Equity income of Mont Belvieu Associates
decreased by 11.8% to $1.5 million in the second quarter of 1998 from $1.7
million in the second quarter of 1997 because of the decrease in NGL
fractionation margins as described above.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues; Costs and Expenses
The Company's revenues decreased by 20.5% to $398.1 million in 1998 compared
to $501.0 million in 1997. The Company's costs and operating expenses decreased
by 19.3% to $368.2 million in 1998 compared to $456.3 million in 1997.
Operating margin decreased by 33.1% to $29.9 million in 1998 from $44.7 million
in 1997.
NGL Fractionation. The Company's operating margin for NGL fractionation
increased by 15.4% to $1.5 million in 1998 from $1.3 million in 1997. Average
daily fractionation volumes increased from 182,527 barrels per day to 206,410
barrels per day from period to period, primarily as a result of increased
volumes from joint owner's new gas processing plant which began operations
during February 1998.
Isomerization. The Company's operating margin for isomerization decreased by
44.0% to $13.5 million in 1998 from $24.1 million in 1997. The Company's
margins were negatively impacted as a result of lower isobutane prices from
period to period and a lower average spread between isobutane and normal butane
prices. Isobutane prices were unusually high in the first half of 1997. In
addition, demand for isobutane declined by approximately 15,000 barrels per day
for approximately one month during the first half of 1998 due to a turnaround at
the BEF MTBE facility. The BEF facility is scheduled for a turnaround
approximately every 12 to 15 months. The decrease in isomerization operating
margins was partially offset by increased processing fees from increased
utilization of the deisobutanizer units as a result of an increase in the volume
of imported mixed butanes.
Propylene Fractionation. The Company's operating margin for propylene
fractionation decreased by 54.5% to $4.5 million in 1998 from $9.9 million in
1997. Propylene fractionation operating margins were positively affected by an
increase in volumes due to the start up of the Company's second propylene
fractionation unit in April 1997. However, this increase in volume was offset
by price decreases for high purity propylene in the first half of 1998, which
reflected weaker
12
prices for polypropylene, compared to slight price increases for high purity
propylene in the first half of 1997.
Pipeline. The Company's operating margin for pipeline operations increased
by 27.3% to $7.0 million in 1998 from $5.5 million in 1997, reflecting a 23.4%
increase in throughput volume.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $0.3 million to
$11.6 million in 1998 from $11.9 million in 1997. This decrease was primarily
due to the reduction of employee stock appreciation rights outstanding from
period to period.
Interest Expense
Interest expense was $10.8 million in 1998 and $11.7 million in 1997. The
$0.9 million decrease was due to a decrease in the average debt outstanding to
$224.2 million in the first half of 1998 from $248.6 million in the first half
of 1997.
Equity Income of Unconsolidated Affiliates
Equity income of unconsolidated affiliates decreased by 15.2% to $6.7 million
in the first half of 1998 from $7.9 million in the first half of 1997. Equity
income of unconsolidated affiliates includes the Company's interest in BEF and
Mont Belvieu Associates. Equity income in BEF declined by 31.3% to $3.3 million
from $4.8 million period to period as a result of the turnaround of the BEF
facility and decreased MTBE contractual sales pricings described above. Equity
income of Mont Belvieu Associates increased by 9.7% to $3.4 million in the first
half of 1998 from $3.1 million in the first half of 1997 because of the increase
in NGL fractionation volume described above.
FINANCIAL CONDITION AND LIQUIDITY
General
The Company's primary cash requirements, in addition to normal operating
expenses, are debt service, maintenance capital expenditures, expansion capital
expenditures, and quarterly distributions to partnership unitholders. The
Company expects to fund future cash distributions and maintenance capital
expenditures with cash flows from operating activities. Expansion capital
expenditures for current projects are expected to be funded with cash proceeds
from the Company's initial public offering and borrowings under the revolving
bank credit facility described below while capital expenditures for future
expansion activities are expected to be funded with cash flows from operating
activities and borrowings under the revolving bank credit facility.
Cash flows from operating activities were a $19.1 million outflow for the
first six months of 1998 as compared to a $33.5 million outflow for the
comparable period of 1997. Cash flows from operating activities are affected
primarily by net income, depreciation and amortization, equity income of
unconsolidated affiliates and changes in working capital. Depreciation and
amortization increased by $0.6 million for the first six months of 1998 as a
result of capital expenditures in 1997. The net effect of changes in operating
accounts from period to period is generally the result of timing of NGL sales
and purchases near the end of the period.
Cash flows from financing activities were a $13.4 million outflow for the
first six months of 1998 and a $14.6 million outflow for the comparable period
of 1997. Cash flows from financing activities were affected primarily by
repayments of long-term debt.
Cash outflows from investing activities were $13.3 million for the first six
months of 1998 and $16.9 million for the comparable period of 1997. Cash
outflows were primarily capital expenditures which aggregated $7.4 million
(including approximately $3.5 million of maintenance capital expenditures) for
this period in 1998 and $20.7 million for this period in 1997. Investing cash
outflows also included $7.7 million in advances to unconsolidated affiliates
resulting from normal operating timing
13
differences and $6.7 million in contributions primarily used for construction
projects of the unconsolidated affiliates during the first six months of 1998.
Future Capital Expenditures
The Company currently estimates that its share of remaining expenditures for
current capital projects will be approximately $36.9 million. The major portion
of these expenditures will be for construction of new joint venture projects
in Louisiana which will be recorded as additional investments in unconsolidated
subsidiaries. The Company expects to finance these expenditures out of operating
cash flows, the proceeds from its initial public offering and borrowings under
its bank credit facility.
Distributions from Unconsolidated Affiliates; Loan Participations
Distributions to the Company from Mont Belvieu Associates were $3.5 million
for the first six months of 1998 and $3.1 million for the comparable period of
1997. Distributions from BEF for the first six months of 1998 were $1.4
million. Prior to the first quarter of 1998, BEF was prohibited under the terms
of its bank indebtedness from making distributions to its owners. These
restrictions lapsed during the first quarter of 1998 as a result of BEF having
repaid 50% of the principal on such indebtedness, and the Company received its
first distribution from BEF in April 1998.
In connection with its initial public offering, the Company purchased
participation interests in a bank loan to Mont Belvieu Associates and a bank
loan to BEF. The Company acquired an approximate $7.7 million participation
interest in the bank debt of Mont Belvieu Associates, which bears interest at a
floating rate per annum of LIBOR plus 0.75% and matures on December 31, 2001.
The Company will receive monthly principal payments, aggregating approximately
$1.7 million per year, plus interest from Mont Belvieu Associates during the
term of the loan. The Company will receive a final payment of principal of $1.8
million upon maturity. The Company acquired an approximate $26.1 million
participation interest in a bank loan to BEF, which bears interest at a floating
rate per annum of LIBOR plus 0.875% and matures on May 31, 2000. The Company
will receive quarterly principal payments of approximately $3.3 million plus
interest from BEF during the term of the loan.
Bank Credit Facility
In connection with its initial public offering, the Company entered into a
$200.0 million bank credit facility that includes a $50.0 million working
capital facility and a $150.0 million revolving term loan facility. The $150.0
million revolving term loan facility includes a sublimit of $30.0 million for
letters of credit. In connection with the closing of this offering, the Company
borrowed $50.0 million under the revolving term loan facility.
The Company's obligations under the bank credit facility are unsecured
general obligations and are non-recourse to the General Partner. Borrowings
under the bank credit facility will bear interest at either the bank's prime
rate or the Eurodollar rate plus the applicable margin as defined in the
facility. The bank credit facility will expire after two years and all amounts
borrowed thereunder shall be due and payable on such date. There must be no
amount outstanding under the working capital facility for at least 15
consecutive days during each fiscal year.
The credit agreement relating to the facility contains a prohibition on
distributions on, or purchases or redemptions of, Units if any event of default
is continuing. In addition, the bank credit facility contains various
affirmative and negative covenants applicable to the ability of the Company to,
among other things, (i) incur certain additional indebtedness, (ii) grant
certain liens, (iii) sell assets in excess of certain limitations, (iv) make
investments, (v) engage in transactions with affiliates and (vi) enter into a
merger, consolidation or sale of assets. The bank credit facility requires that
the Operating Partnership satisfy the following financial covenants at the end
of each fiscal quarter: (i) maintain Consolidated Tangible Net Worth (as
defined in the bank credit facility) of at least $257,000,000 plus 75% of the
net cash proceeds from the sale of equity securities of the Company that are
contributed to the Operating Partnership, (ii) maintain a ratio of EBITDA (as
defined in the bank credit facility) to
14
Consolidated Interest Expense (as defined in the bank credit facility) for the
previous 12-month period of at least 3.50 to 1.0 and (iii) maintain a ratio of
Total Indebtedness (as defined in the bank credit facility) to EBITDA of no more
than 2.25 to 1.0.
A "Change of Control" constitutes an Event of Default under the bank credit
facility. A Change of Control includes any of the following events: (i) Dan
Duncan (and certain affiliates) cease to own (a) at least 51% (on a fully
converted, fully diluted basis) of the economic interest in the capital stock of
EPCO or (b) an aggregate number of shares of capital stock of EPCO sufficient to
elect a majority of the board of directors of EPCO; (ii) EPCO ceases to own,
through a wholly owned subsidiary, at least 95% of the outstanding membership
interest in the General Partner and at least 51% of the outstanding Common
Units; (iii) any person or group beneficially owns more than 20% of the
outstanding Common Units; (iv) the General Partner ceases to be the general
partner of the Company or the Operating Partnership; or (v) the Company ceases
to be the sole limited partner of the Operating Partnership.
YEAR 2000 ISSUES
The year 2000 issues are related to data processing programs that have date-
sensitive information and that use two digits (rather than four) to define the
applicable year. Any program and hardware that have time-sensitive coding may
recognize a date using "00" as the year 1900 rather than the year 2000. This
error could result in miscalculations or system failure.
Management believes that it has identified all significant areas in which
year 2000 issues may arise within its data processing and other systems and has
developed a comprehensive plan to test these areas and address such issues.
Management expects that most of the coding corrections for the year 2000
problems will be completed during 1998 and that most of the critical systems
will be corrected by January 1, 1999. Although management is reasonably
satisfied that it will be able to resolve its internal year 2000 issues, it
cannot be assured that its customers and vendors will adequately address their
year 2000 issues. Management is currently assessing what impact year 2000
issues might have on its significant customers and vendors. Total costs to
correct year 2000 issues are not expected to be significant.
If the Company, its customers or vendors are unable to resolve such
processing issues, it could result in a material financial risk. Accordingly,
management will continue to devote the necessary resources to resolve all
significant year 2000 issues in a timely manner.
ACCOUNTING STANDARDS
Recent Statements of Financial Account Standards ("SFAS") include the
following: (effective for fiscal years beginning after December 15, 1997) SFAS
130, Reporting of Comprehensive Income, SFAS 131, Disclosure about Segments of
an Enterprise and Related Information, and SFAS 132, Employers' Disclosure about
Pensions and Other Postretirement Benefits and (effective for all fiscal
quarters of fiscal years beginning after June 15, 1999) SFAS 133, Accounting for
Derivative Instruments and Hedging Activities. Management is currently studying
these SFAS items for possible impact on the combined financial statements;
however, based upon its preliminary assessment of the SFAS, management believes
that they will not have a significant impact on the Company's financial
statements. On April 3, 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5, Reporting on the Costs of Start-
Up Activities ("SOP 98-5"). For years beginning after December 15, 1998, SOP
98-5 generally requires that all start-up costs of a business activity be
charged to expense as incurred and any start-up cost previously deferred should
be written-off as a cumulative effect of a change in accounting principle.
Management is currently studying SOP 98-5 for its possible impact on the
combined financial statements. Based upon its preliminary assessment of SOP
98-5, management believes that SOP-5 will not have a material impact on the
combined financial statements except for a $4.5 million non-cash write off at
January 1, 1999 of the unamortized balance of deferred start-up costs of BEF, an
unconsolidated affiliate, in which the Company owns a 33 1/3% economic interest.
Such a write-off would cause a $1.5 million reduction in the equity in income of
unconsolidated affiliates for 1999 and a corresponding reduction in the
Company's investment in unconsolidated affiliates.
15
QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
The Company is exposed to certain market risks which are inherent in
financial instruments it issues in the normal course of business. The Company
may, but generally does not, enter into derivative financial instrument
transactions in order to manage or reduce market risk. The Company does not
enter into derivative financial instruments for speculative purposes. At
December 31, 1997 and June 30, 1998, the Company had no derivative instruments
in place to cover any potential interest rate, foreign currency or other
financial instrument risk.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENTERPRISE PRODUCTS PARTNERS L.P.
(A Delaware Limited Partnership)
By: Enterprise Products GP, LLC
as General Partner
Date: September 8, 1998 By: /s/ Gary L. Miller
--------------------------------
Gary L. Miller
Executive Vice President
Chief Financial Officer and Treasurer
17
