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 September 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 12,000,000 publicly traded common units outstanding
as of September 30, 1998.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Page
ENTERPRISE PRODUCTS PARTNERS L.P. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets, September 30, 1998 and December 31, 1997 1
Statements of Consolidated Operations
for the Three and Nine Months Ended September 30, 1998 and 1997 2
Statement of Consolidated Cash Flows
for the Nine Months Ended September 30, 1998 and 1997 3
Notes to Unaudited Consolidated Financial Statements 4-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8-15
Signature Page 16
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ENTERPRISE PRODUCTS PARTNERS L.P.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
ASSETS September 30,
December 31, 1998
1997 (Unaudited)
-----------------------------------
CURRENT ASSETS
Cash and cash equivalents, including restricted
cash of $4,522 in 1997 $ 23,463 $ 10,992
Accounts receivable-trade 76,533 56,654
Inventories 18,935 60,920
Current maturities of notes receivable from
unconsolidated affiliates 14,737
Prepaid and other current assets 8,103 8,273
-----------------------------------
Total current assets 127,034 151,576
PROPERTY, PLANT AND EQUIPMENT, NET 513,727 502,769
INVESTMENTS IN AND ADVANCES TO
UNCONSOLIDATED AFFILIATES 55,875 81,936
NOTES RECEIVABLE FROM UNCONSOLIDATED AFFILIATES 15,445
OTHER ASSETS 1,077 886
-----------------------------------
TOTAL $697,713 $752,612
===================================
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 14,903
Accounts payable--trade 76,591 $ 49,336
Accrued gas payables 45,668 37,231
Accrued expenses 8,638 4,135
Other current liabilities 21,544 9,065
-----------------------------------
Total current liabilities 167,344 99,767
LONG TERM DEBT 215,334 75,000
MINORITY INTEREST 3,150 3,127
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY
Common Units 188,492 442,526
Subordinated Units 120,274 128,878
General Partner 3,119 3,314
-----------------------------------
Total partners' equity 311,885 574,718
===================================
TOTAL $697,713 $752,612
===================================
See Notes to Unaudited Consolidated Financial Statements
1
ENTERPRISE PRODUCTS PARTNERS L.P.
STATEMENTS OF CONSOLIDATED OPERATIONS
(Unaudited)
(Amounts in thousands,
except per unit amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
---------------------------------------------------------------
REVENUES $268,974 $164,620 $770,006 $562,703
---------------------------------------------------------------
COST AND EXPENSES
Operating costs and expenses 254,039 153,197 710,303 521,428
Selling, general and administrative 5,207 3,751 17,129 15,362
---------------------------------------------------------------
Total 259,246 156,948 727,432 536,790
---------------------------------------------------------------
OPERATING INCOME 9,728 7,672 42,574 25,913
---------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (5,623) (2,500) (17,282) (13,304)
Interest income 263 425 1,035 985
Equity income in unconsolidated affiliates 3,444 4,171 11,303 10,824
Other, net (337) 34 794 464
---------------------------------------------------------------
Total other income (expense) (2,253) 2,130 (4,150) (1,031)
---------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY CHARGE AND
MINORITY INTEREST 7,475 9,802 38,424 24,882
Extraordinary charge on early
extinguishment of debt (27,176) (27,176)
---------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 7,475 (17,374) 38,424 (2,294)
Minority Interest (75) 174 (384) 23
---------------------------------------------------------------
NET INCOME $ 7,400 $(17,200) $ 38,040 $ (2,271)
===============================================================
ALLOCATION OF NET INCOME TO:
Limited partners $ 7,326 $(17,028) $ 37,660 $ (2,248)
===============================================================
General partner $ 74 $ (172) $ 380 $ (23)
===============================================================
NET INCOME PER COMMON UNIT BEFORE
EXTRAORDINARY CHARGE AND MINORITY
INTEREST $ .14 $ .15 $ .70 $ .43
===============================================================
NET INCOME PER COMMON UNIT $ .13 $ (.27) $ .69 $ (.04)
===============================================================
WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING 54,963 63,441 54,963 57,830
===============================================================
See Notes to Unaudited Consolidated Financial Statements
2
ENTERPRISE PRODUCTS PARTNERS L.P.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Nine Months Ended
September 30,
1997 1998
------------------------------------
OPERATING ACTIVITIES
Net income $ 38,040 ($ 2,271)
Adjustments to reconcile net income to cash flows provided by
(used for) operating activities:
Extraordinary charge on early extinguishment of debt 27,176
Leases paid by EPCO 3,327
Minority Interest 312 (23)
Depreciation and amortization 13,128 14,796
Equity in income of unconsolidated affiliates (11,303) (10,824)
Gain on sale of assets (274)
Net effect of changes in operating accounts (38,015) (75,824)
-------------------------------------
Operating activities cash flows 2,162 (43,917)
-------------------------------------
INVESTING ACTIVITIES
Capital expenditures (27,455) (7,159)
Proceeds from sale of assets 1,890
Notes receivable from unconsolidated affiliates:
Purchase of notes receivable (33,724)
Collection of notes receivable 3,542
Unconsolidated affiliates:
Investments in and advances to (347) (19,988)
Distributions received 4,890 6,601
-------------------------------------
Investing activities cash flows (22,912) (48,838)
-------------------------------------
FINANCING ACTIVITIES
Net proceeds from sale of common units 243,309
Long-term debt borrowings 75,000
Long-term debt repayments (including $26.3 million make whole
payments in 1998) (14,009) (256,493)
Net increase (decrease) in restricted cash (7,709) 4,522
-------------------------------------
Financing activities cash flows (21,718) 66,338
-------------------------------------
CASH CONTRIBUTIONS FROM EPCO 35,264 18,468
NET CHANGE IN CASH AND CASH EQUIVALENTS (7,204) (7,949)
CASH AND CASH EQUIVALENTS, JANUARY 1 24,978 18,941
-------------------------------------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30,
(Excluding restricted cash of $11,060 in 1997) $ 17,774 $ 10,992
=====================================
See Notes to Unaudited Consolidated Financial Statements
3
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
In the opinion of Enterprise Products Partners L.P. (the "Company"), the
accompanying unaudited consolidated financial statements include all
adjustments consisting of normal recurring accruals necessary for a fair
presentation of the Company's consolidated financial position as of September
30, 1998 and its consolidated results of operations and cash flows for the nine
months periods ending September 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 consolidated financial statements should be read
in conjunction with the 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 nine months ended September 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
consolidated financial statements are stated in thousands of dollars, unless
otherwise indicated.
2. INVESTMENT IN UNCONSOLIDATED AFFILIATES
At September 30, 1998, the Company's unconsolidated affiliates accounted for by
the equity method included the following:
Belvieu Environmental Fuels ("BEF") - a 33 1/3% economic interest in an
MTBE production facility.
Mont Belvieu Associates ("MBA") - a 49% economic interest in an entity
which owns a 50% interest in an NGL fractionation facility.
Baton Rouge Fractionators, LLC ("BRF") - a 27% economic interest in an NGL
fractionation facility which is under construction and is scheduled to
begin production during the first quarter of 1999.
EPIK Terminalling L.P. ("EPIK") - a 50% economic interest in a refrigerated
LPG loading/unloading facility which is under construction and is partially
operational as of September 30, 1998.
Wilprise Pipeline Company, L.L.C. ("Wilprise") - a 33.3% economic interest
in a pipeline gathering system which is under construction and is scheduled
to begin production during the first quarter of 1999.
Tri-States NGL Pipeline, L.L.C. ("Tri-States") - a 16.7% economic interest
in a pipeline gathering system which is under construction and is scheduled
to begin production during the first quarter of 1999.
4
Investments in and advances to unconsolidated affiliates at:
December 31, September
1997 30, 1998
-----------------------------------------
BEF........................................................... $41,278 $ 46,913
MBA........................................................... 11,963 10,090
BRF........................................................... 2,634 17,944
EPIK.......................................................... 4,734
Wilprise...................................................... 2,208
Tri-States.................................................... 47
-----------------------------------------
Total................................................... $55,875 $ 81,936
=========================================
Equity in income of unconsolidated affiliates for the:
Three Months Nine Months
Ended September 30 Ended September 30
-------------------------- -------------------------
1997 1998 1997 1998
--------- --------- -------- --------
BEF......................................... $1,716 $3,355 $ 6,521 $ 6,609
MBA......................................... 1,728 862 4,782 4,305
EPIK........................................ (46) (90)
-------------------------------------------------------------
Total................................. $3,444 $4,171 $11,303 $10,824
=============================================================
3. SUPPLEMENTAL CASH FLOW DISCLOSURE
The net effect of changes in operating assets and liabilities is as follows:
Nine Months Ended
September 30,
--------------------------------------
1997 1998
--------------------------------------
(Increase) decrease in:
Accounts receivable--trade $ 24,385 $ 19,879
Inventories (34,420) (41,985)
Prepaid and other current assets 3,061 (550)
Other assets 724 (494)
Increase (decrease) in:
Accounts payable--trade (19,681) (27,255)
Accrued gas payable (3,507) (8,437)
Accrued expenses (9,819) (4,503)
Other current liabilities 1,242 (12,479)
--------------------------------------
Net effect of changes in operating accounts $(38,015) $(75,824)
======================================
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Nine months ended
September 30, 1998
--------------------
Write-off of prepaid loan costs related to early extinguishment of long-term debt $ 920
===================
Contribution of plant equipment to investment in unconsolidated affiliate $1,850
===================
5
4. RECENTLY ISSUED ACCOUNTING STANDARDS
Recent Statements of Financials Standards ("SFAS") include (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 this SFAS item for possible impact on the consolidated
financial statements; however, based upon its preliminary assessment of the
SFASs, management believes that it 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 effect of a change in
accounting principle. Management is currently studying SOP 98-5 for its
possible impact on the consolidated 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 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. 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 approximately $243.3 million after underwriting commissions of
$16.8 million and expenses of approximately $3.9 million. Units outstanding
after the sale were 45,552,915 Common Units and 21,409,870 Subordinated Units
representing an aggregate 67.3% and 31.7% limited partner interest in the
Company, respectively. The remaining 1% partner interest is held by Enterprise
Products GP, LLC, the general partner. Public holders own in the aggregate a
17.7% 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. The first
distribution will be paid on a pro rata basis from the day of the sale of the
common units to the public as described on Note 6.
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.
6. DISTRIBUTIONS
On October 5, 1998, the Company declared a quarterly distribution of $.32 per
unit, which is based on 65 days for the third quarter, to be paid on November
12, 1998 to all unitholders of record as of October 30, 1998.
7. 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 September 30, 1998, the Company had
outstanding $75 million under the revolving credit agreement.
6
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 has been presented as an
extraordinary charge in the financial statements for the nine months ending
September 30, 1998.
8. NOTES RECEIVABLE FROM UNCONSOLIDATED AFFILIATES
On July 31, 1998, the Company purchased a participation interest in bank loans
of MBA and BEF. Interest from the MBA note receivable totaled approximately
$7.7 million at the time of the purchase. The MBA note receivable bears
interest at a floating rate per annum at 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 MBA during
the term of the loan with an additional $1.8 million lump sump payment upon
maturity.
Interest from the BEF note receivable totaled approximately $26.1 million at
the time of purchase. The BEF note receivable bears interest at a floating rate
per annum at LIBOR plus .0875% and matures of 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.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 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% 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. 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.
8
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. As a result, inventory investment
is generally at its highest level at the end of the third quarter of the year.
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
$0.82 per gallon at September 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 nine month period ended September 30, 1998,
and the third quarter of 1998, the average Gulf Coast spot market price for MTBE
was $0.66 and $0.64 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 incurred a $27.2 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 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 $6.1 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.
9
RESULTS OF OPERATIONS
The Company's operating margins by business unit for the three month
periods ended September 30, 1997 and September 30, 1998, and nine month periods
ended September 30, 1997 and September 30, 1998, were as follows:
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
-------------- -------------- --------------- -------------
(in thousands)
Operating Margin:
NGL Fractionation $ 754 $ 1,274 $ 2,058 $ 2,812
Isomerization 6,118 2,267 30,187 15,729
Propylene Fractionation 5,318 3,538 15,240 8,004
Pipeline 3,571 3,221 9,046 10,268
Storage and Other Plants (826) 1,123 3,172 4,462
------ ------ ------ ------
Total $14,935 $11,423 $59,703 $41,275
====== ====== ====== ======
The Company's major plant operating data for the three month periods
ended September 30, 1997 and September 30, 1998, and nine month periods ended
September 30, 1997 and September 30, 1998, were as follows:
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
-------------- -------------- --------------- -------------
Plant Operating Data:
Fractionation
Production (Avg BPD) 197,891 179,671 187,704 197,399
Isomerization
Production (Avg BPD) 67,304 64,976 64,727 64,678
MTBE
Production (Avg BPD) 13,057 14,020 15,964 13,214
Propylene Fractionation
Production (Avg BPD) 30,627 26,296 26,063 25,894
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1997
Revenues; Costs and Expenses
The Company's revenues decreased by 38.8% to $164.6 million in the third
quarter of 1998 from $269.0 million in the third quarter of 1997. The Company's
costs and operating expenses decreased by 39.7% to $153.2 million in the third
quarter of 1998 from $254.0 million for the same period of 1997. Operating
margin decreased by 23.5% to $11.4 million from $14.9 million from period to
period, primarily reflecting decreased operating margins in isomerization and
propylene fractionation.
NGL Fractionation. The Company's operating margin for NGL fractionation
increased by 62.5% to $1.3 million in the third quarter of 1998 from $0.8
million in the third quarter of 1997. Excluding the positive effect of $0.8
million in overhead expense and support facility cost reimbursements from joint
venture partners in the third quarter of 1998, the company's NGL fractionation
operating margin decreased by 37.5% to $0.5 million from quarter to quarter.
The decrease in NGL fractionation margin was mainly due to decreased average
daily fractionation volumes from 197,891 barrels per day to 179,671 barrels per
day from quarter to quarter, primarily as a result of reduced raw mix NGL
inventories. During the third quarter of 1998,
10
as natural gas prices rose above the BTU value of ethane, natural gas processing
plants curtailed ethane extraction causing a reduction in NGL raw mix available
for fractionation.
Isomerization. The Company's operating margin for isomerization
decreased by 62.3% to $2.3 million in the third quarter of 1998 from $6.1
million in the third quarter of 1997. The decrease in isomerization operating
margins was mainly due to a decline in marketing margins from lower isobutane
prices and lower average differentials between isobutane and normal butane
prices from quarter to quarter. In addition, operating margins during the third
quarter of 1998, were reduced due to the impact of market price declines on
imported commercial butane inventories purchased during the second quarter of
1998.
Propylene Fractionation. The Company's operating margin for propylene
fractionation decreased by 34.0% to $3.5 million in the third quarter of 1998
from $5.3 million in the third quarter of 1997. The decrease in propylene
margins resulted from lower prices for high purity propylene during the third
quarter of 1998 which in turn reflected lower polypropylene prices. The decrease
in margins also reflected a reduction in propylene fractionation volumes of
14.1% from 30,627 barrels per day during the third quarter of 1997 to 26,296
barrels per day during the third quarter of 1998, due to lower propylene spot
market prices during the third quarter of 1998.
Pipeline. The Company's operating margin for pipeline operations
decreased by 11.1% to $3.2 million from $3.6 million from quarter to quarter,
reflecting an increase in operating expenses from quarter to quarter.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses decreased by 26.9% to $3.8
million in the third quarter of 1998 from $5.2 million in the third quarter of
1997 due to the EPCO Agreement providing for administrative services at a fixed
rate beginning on July 27, 1998 in conjunction with the company's IPO.
Interest Expense
Interest expense decreased to $2.5 million in the third quarter of 1998
from $5.6 million in the third quarter of 1997, primarily due to reductions in
outstanding term debt as a result of the company's IPO and subsequent debt
prepayment during the third quarter of 1998.
Equity Income of Unconsolidated Affiliates
Equity income of unconsolidated affiliates increased by 23.5% to $4.2
million in the third quarter of 1998 from $3.4 million in the third quarter of
1997. Equity income of unconsolidated affiliates mainly includes the Company's
interests in BEF and Mont Belvieu Associates. Equity income in BEF doubled to
$3.4 million from $1.7 million quarter to quarter due to lower MTBE plant
operating expenses and decreased interest expense on lower debt levels. Equity
income of Mont Belvieu Associates decreased by 47.1% to $0.9 million in the
third quarter of 1998 from $1.7 million in the third quarter of 1997 because of
the decrease in NGL fractionation margins as described above.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Revenues; Costs and Expenses
The Company's revenues decreased by 26.9% to $562.7 million in 1998
compared to $770.0 million in 1997. The Company's costs and operating expenses
decreased by 26.6% to $521.4 million in 1998 compared to $710.3 million in 1997.
Operating margin decreased by 30.8% to $41.3 million in 1998 from $59.7 million
in 1997.
NGL Fractionation. The Company's operating margin for NGL fractionation
increased by 33.3% to $2.8 million in 1998 from $2.1 million in 1997. NGL
fractionation margins increased due to $0.8 million in overhead expense and
support facility cost reimbursements from joint venture partners during the
third quarter of 1998. Average daily fractionation volumes increased from
187,704 barrels per day to 197,399 barrels per day from period to period,
primarily as a result of increased volumes from joint owners' new gas processing
plants which began operations during 1998.
11
Isomerization. The Company's operating margin for isomerization
decreased by 48.0% to $15.7 million in 1998 from $30.2 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 nine months 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. In addition, operating margins
during the third quarter of 1998, were reduced due to the impact of market price
declines on imported commercial butane inventories purchased during the second
quarter of 1998.
Propylene Fractionation. The Company's operating margin for propylene
fractionation decreased by 47.4% to $8.0 million in 1998 from $15.2 million in
1997. The company's margins were negatively impacted by price decreases for high
purity propylene in the first nine months of 1998, which reflected weaker prices
for polypropylene, compared to overall price increases for high purity propylene
in the first nine months of 1997.
Pipeline. The Company's operating margin for pipeline operations
increased by 14.4% to $10.3 million in 1998 from $9.0 million in 1997,
reflecting a 17.5% increase in throughput volume.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $1.7 million
to $15.4 million in 1998 from $17.1 million in 1997. This decrease was
primarily due to the reduction of employee stock appreciation rights outstanding
during the first seven months of 1998 as compared to the same period of 1997,
and the effect of the EPCO Agreement beginning in July, 1998 in conjunction with
the Company's IPO.
Interest Expense
Interest expense was $13.3 million in 1998 and $17.3 million in 1997.
The $4.0 million decrease was due to a decrease in the average debt outstanding
during the first seven months of 1998 as compared to the same period of 1997,
and the prepayment of debt in conjunction with the Company's IPO in July, 1998.
Equity Income of Unconsolidated Affiliates
Equity income of unconsolidated affiliates decreased by 4.4% to $10.8
million in the first nine months of 1998 from $11.3 million in the first nine
months of 1997. Equity income of unconsolidated affiliates mainly includes the
Company's interest in BEF and Mont Belvieu Associates. Equity income in BEF
increased by 1.5% to $6.6 million from $6.5 million period to period. Equity
income of Mont Belvieu Associates decreased by 10.4% to $4.3 million in the
first nine months of 1998 from $4.8 million in the first nine months of 1997 due
to lower average NGL fractionation processing fees from period to period.
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 $43.9 million outflow for
the first nine months of 1998 as compared to $2.2 million inflow for the
comparable period of 1997. Cash flows from operating activities are affected
primarily by net income, depreciation and amortization, extraordinary charges,
equity income of unconsolidated affiliates and changes in working capital.
Depreciation and amortization increased by $1.7 million for the first nine
months of 1998 as a result of additional capital expenditures. The net effect
of
12
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 $66.3 million inflow for the
first nine months of 1998 and a $21.7 million outflow for the comparable period
of 1997. Cash flows from financing activities during the first nine months of
1998 were affected primarily by repayments of long-term debt, borrowings under
long term debt agreements, costs for early extinguishment of debt, and net
proceeds from the sale of partnership units in connection with the Company's
IPO.
Cash outflows from investing activities were $48.8 million for the first
nine months of 1998 and $22.9 million for the comparable period of 1997. Cash
outflows included capital expenditures which aggregated $7.2 million (including
approximately $5.7 million of maintenance capital expenditures) for this period
in 1998 and $27.5 million for this period in 1997. Investing cash outflows also
included $13.4 million in advances to unconsolidated affiliates resulting from
normal operating timing differences and $6.6 million in contributions primarily
used for construction projects of the unconsolidated affiliates during the first
nine months of 1998. The Company purchased $33.7 million in notes receivable
from BEF and Mont Belvieu Associates which is included as a cash outflow from
investing activities and received $3.5 million in payments on these notes
included as a cash inflow from investing activities during the third quarter of
1998.
Future Capital Expenditures
The Company currently estimates that its share of remaining expenditures
for current capital projects will be approximately $32.0 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 $4.7
million for the first nine months of 1998 and $4.9 million for the comparable
period of 1997. Distributions from BEF for the first nine months of 1998 were
$1.9 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. As of September 30, 1998, the Company has borrowed $75.0
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.
13
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 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 COMPLIANCE
Pursuant to the EPCO Agreement, any selling, general and administrative
expenses related to Year 2000 issues are covered by the annual administrative
services fee paid by the Company to EPCO. Consequently, only those costs
incurred in connection with the Year 2000 compliance project which relate to
operational information systems and hardware will be paid directly by the
Company.
Since 1997, the Company has been assessing the impact of Year 2000
issues on the software and hardware used by the Company. A team is in the
process of reviewing and documenting the status of the Company's systems for
Year 2000 compliance. The key information systems under review include
financial systems, plant, pipeline and storage operating systems, and the
Company's SCADA (Supervisory Control and Data Acquisition) system. In
connection with each of these areas, consideration is being given to hardware,
operating systems, applications, data base management, system interfaces,
electronic transmission, and outside vendors.
The Company relies on third-party suppliers for certain systems,
products and services, including telecommunications. There can be no assurance
that the systems of other companies on which the Company's systems rely, also
will be timely converted or that any such failure to convert by another company
would not have an adverse effect on the Company's systems. The Company has
received some preliminary information concerning Year 2000 status from a group
of critical suppliers and vendors, and anticipates receiving additional
information in the near future. This will assist the Company in determining the
extent to which it may be vulnerable to those third parties' failure to address
their Year 2000 issues.
Prior to the Company's IPO in July, 1998, EPCO had spent approximately
$9,000 in connection with the Year 2000 project and has estimated future costs
to approximate $250,000. This cost estimate does not include internal costs of
EPCO's previously existing resources and personnel that might be partially used
for the Year 2000 compliance project or cost of normal system upgrades which
also included various Year 2000 Compliance features or fixes. Such internal
costs have been determined to be materially insignificant to the total estimated
cost of the Year 2000 compliance project.
At this time, the Company believes that its total cost for known or
anticipated remediation of its information systems to make them Year 2000
compliant will not be material to its financial position or its ability to
sustain operations. Since its IPO date, the Company has incurred substantially
no expenditures in connection with the Year 2000 Compliance project. However,
the Company expects future spending to approximate $525,000 to complete the
project and become fully compliant with all Year 2000 issues. This estimated
cost does not include the Company's internal costs related to previously
existing resources and personnel that might be partially used for remediation of
Year 2000 compliance issues. Such internal costs have been determined to be
materially insignificant to the total estimated cost of the Year 2000 compliance
14
project. These amounts are current cost estimates and actual future costs could
potentially be higher or lower than the estimates.
Management believes it has a program to address the Year 2000 issue in a
timely manner. Completion of the plan and testing of replacement or modified
systems is anticipated for the second quarter of 1999. Nevertheless, since it
is not possible to anticipate all possible future outcomes, especially when
third parties are involved, there could be circumstances in which the Company
would be unable to invoice customers or collect payments. The failure to
correct a material Year 2000 problem could result in an interruption in or
failure of certain normal business activities or operations of the Company.
Such failures could have a material adverse effect on the Company. The amount
of potential liability and lost revenue has not been estimated.
The Company is working on contingency plans to address unavoided or
unavoidable risks associated with Year 2000 issues.
ACCOUNTING STANDARDS
Recent Statements of Financials Standards ("SFAS") include (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 this SFAS item for possible impact on the consolidated
financial statements; however, based upon its preliminary assessment of the
SFASs, management believes that it 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 effect of a change in accounting
principle. Management is currently studying SOP 98-5 for its possible impact on
the consolidated 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 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.
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 September 30, 1998, the Company had no derivative
instruments in place to cover any potential interest rate, foreign currency or
other financial instrument risk.
15
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: November 11, 1998 By: /S/ Gary L. Miller
----------------------------------
Gary L. Miller
Executive Vice President
Chief Financial Officer and Treasurer
16
5
1,000
9-MOS
DEC-31-1998
JAN-01-1998
SEP-30-1998
10,992
0
56,654
0
60,920
151,576
717,126
214,357
752,612
99,767
0
0
0
0
574,718
752,612
562,703
562,703
536,790
536,790
(12,296)
0
13,304
24,905
0
24,905
0
(27,176)
0
(2,271)
(0.04)
(0.04)
