FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
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.
(Exact name of Registrant as specified in its charter)
DELAWARE 76-0568219
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2727 NORTH LOOP WEST
HOUSTON, TEXAS
77008-1037
(Address of principal executive offices) (Zip code)
(713) 880-6500
(Registrant's telephone number including area code)
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 46,552,915 Common Units outstanding as of August 11, 2000.
ENTERPRISE PRODUCTS PARTNERS L.P. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
No.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ENTERPRISE PRODUCTS PARTNERS L.P. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets, June 30, 2000 and December 31, 1999 1
Statements of Consolidated Operations
for the Three and Six Months ended June 30, 2000 and 1999 2
Statements of Consolidated Cash Flows
for the Six Months ended June 30, 2000 and 1999 3
Notes to Unaudited Consolidated Financial Statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 30
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. 32
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 33
Signature Page
PART 1. FINANCIAL INFORMATION.
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
ENTERPRISE PRODUCTS PARTNERS L.P.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
JUNE 30,
2000 DECEMBER 31,
ASSETS (UNAUDITED) 1999
----------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 87,135 $ 5,230
Accounts receivable - trade, net of allowance for doubtful accounts of
$15,948 at June 30, 2000 and $15,871 at December 31, 1999 192,569 262,348
Accounts receivable - affiliates 59,480 56,075
Inventories 145,068 39,907
Current maturities of participation in notes receivable from
unconsolidated affiliates - 6,519
Prepaid and other current assets 11,849 14,459
----------------------------------
Total current assets 496,101 384,538
PROPERTY, PLANT AND EQUIPMENT, NET 903,832 767,069
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES 287,918 280,606
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $3,055 AT
JUNE 30, 2000 AND $1,345 AT DECEMBER 31, 1999 63,975 61,619
OTHER ASSETS 3,898 1,120
----------------------------------
TOTAL $1,755,724 $ 1,494,952
==================================
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ - $ 129,000
Accounts payable - trade 44,959 69,294
Accounts payable - affiliate 24,552 64,780
Accrued gas payables 396,545 233,360
Accrued expenses 4,812 16,510
Other current liabilities 24,080 18,176
----------------------------------
Total current liabilities 494,948 531,120
LONG-TERM DEBT 404,000 166,000
OTHER LONG-TERM LIABILITIES 6,060 296
MINORITY INTEREST 8,613 8,071
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY
Common Units (45,552,915 Units outstanding at June 30, 2000
and December 31, 1999) 449,787 428,707
Subordinated Units (21,409,870 Units outstanding at June 30, 2000
and December 31, 1999) 141,550 131,688
Special Units (14,500,000 Units outstanding at June 30, 2000
and December 31, 1999) 247,025 225,855
Treasury Units acquired by Trust, at cost (267,200 Units outstanding at
June 30, 2000 and December 31, 1999) (4,727) (4,727)
General Partner 8,468 7,942
----------------------------------
Total Partners' Equity 842,103 789,465
----------------------------------
TOTAL $1,755,724 $ 1,494,952
==================================
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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------------------------- -------------------------------
REVENUES
Revenues from consolidated operations $ 592,913 $ 174,599 $ 1,339,194 $ 321,913
Equity income in unconsolidated affiliates 11,097 2,880 18,540 4,443
------------------------------- -------------------------------
Total 604,010 177,479 1,357,734 326,356
------------------------------- -------------------------------
COST AND EXPENSES
Operating costs and expenses 546,306 153,410 1,219,212 287,219
Selling, general and administrative 7,658 3,000 13,042 6,000
------------------------------- -------------------------------
Total 553,964 156,410 1,232,254 293,219
------------------------------- -------------------------------
OPERATING INCOME 50,046 21,069 125,480 33,137
OTHER INCOME (EXPENSE)
Interest expense (8,070) (2,129) (15,844) (4,392)
Interest income from unconsolidated affiliates 126 292 270 689
Dividend income from unconsolidated affiliates 2,761 - 3,995 -
Interest income - other 1,225 148 2,706 432
Other, net (62) (30) (425) 45
------------------------------- -------------------------------
Other income (expense) (4,020) (1,719) (9,298) (3,226)
------------------------------- -------------------------------
INCOME BEFORE MINORITY INTEREST 46,026 19,350 116,182 29,911
MINORITY INTEREST (466) (196) (1,175) (302)
------------------------------- -------------------------------
NET INCOME $ 45,560 $ 19,154 $ 115,007 $ 29,609
=============================== ===============================
ALLOCATION OF NET INCOME TO:
Limited partners $ 45,104 $ 18,962 $ 113,857 $ 29,313
=============================== ===============================
General partner $ 456 $ 192 $ 1,150 $ 296
=============================== ===============================
BASIC EARNINGS PER COMMON UNIT
Income before minority interest $ 0.68 $ 0.29 $ 1.72 $ 0.44
=============================== ===============================
Net income per common and subordinated unit $ 0.68 $ 0.28 $ 1.71 $ 0.44
=============================== ===============================
DILUTED EARNINGS PER COMMON UNIT
Income before minority interest $ 0.56 $ 0.29 $ 1.42 $ 0.44
=============================== ===============================
Net income per common, subordinated and special unit $ 0.56 $ 0.28 $ 1.40 $ 0.44
=============================== ===============================
See Notes to Unaudited Consolidated Financial Statements
2
ENTERPRISE PRODUCTS PARTNERS L.P
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in Thousands)
SIX MONTHS ENDED
JUNE 30,
-------------------------------------
2000 1999
-------------------------------------
OPERATING ACTIVITIES
Net income $ 115,007 $ 29,609
Adjustments to reconcile net income to cash flows provided by
(used for) operating activities:
Depreciation and amortization 18,347 9,790
Equity in income of unconsolidated affiliates (18,540) (4,443)
Leases paid by EPCO 5,270 5,278
Minority interest 1,175 302
Loss on sale of assets 2,303 124
Net effect of changes in operating accounts 54,062 (26,417)
-------------------------------------
Operating activities cash flows 177,624 14,243
-------------------------------------
INVESTING ACTIVITIES
Capital expenditures (154,246) (2,513)
Proceeds from sale of assets 52 7
Collection of notes receivable from unconsolidated affiliates 6,519 7,369
Unconsolidated affiliates:
Investments in and advances to (3,040) (40,432)
Distributions received 14,268 3,991
-------------------------------------
Investing activities cash flows (136,447) (31,578)
-------------------------------------
FINANCING ACTIVITIES
Long-term debt borrowings 464,000 85,000
Long-term debt repayments (355,000) (30,000)
Cash dividends paid to partners (67,639) (52,718)
Cash dividends paid to minority interest by Operating Partnership (690) (538)
Units acquired by consolidated trust - (4,607)
Cash contributions from EPCO to minority interest 57 54
-------------------------------------
Financing activities cash flows 40,728 (2,809)
-------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 81,905 (20,144)
CASH AND CASH EQUIVALENTS, JANUARY 1 5,230 24,103
-------------------------------------
CASH AND CASH EQUIVALENTS, JUNE 30 $ 87,135 $ 3,959
=====================================
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 June 30, 2000, consolidated
results of operations for the three and six month periods ended June 30, 2000
and 1999 and consolidated cash flows for the six month periods ended June 30,
2000 and 1999. 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 financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K (File No. 1-14323) for the
year ended December 31, 1999.
The results of operations for the three and six month periods ended June 30,
2000 are not necessarily indicative of the results to be expected for the full
year.
Certain reclassifications have been made to prior years' financial statements to
conform to the presentation of the current period financial statements.
Dollar amounts presented in the tabulations within the notes to the consolidated
financial statements are stated in thousands of dollars, unless otherwise
indicated.
2. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
At June 30, 2000, the Company's significant unconsolidated affiliates accounted
for by the equity method included the following:
Belvieu Environmental Fuels ("BEF") - a 33.33% economic interest in a Methyl
Tertiary Butyl Ether ("MTBE") production facility located in southeast Texas.
Baton Rouge Fractionators LLC ("BRF") - an approximate 32.25% economic interest
in a natural gas liquid ("NGL") fractionation facility located in southeastern
Louisiana.
Baton Rouge Propylene Concentrator, LLC ("BRPC") - a 30.0% economic interest in
a propylene concentration unit located in southeastern Louisiana that became
operational in July 2000.
EPIK Terminalling L.P. and EPIK Gas Liquids, LLC (collectively, "EPIK") - a 50%
aggregate economic interest in a refrigerated NGL marine terminal loading
facility located in southeast Texas.
Wilprise Pipeline Company, LLC ("Wilprise") - a 33.33% economic interest in a
NGL pipeline system located in southeastern Louisiana.
Tri-States NGL Pipeline LLC ("Tri-States") - an aggregate 33.33% economic
interest in a NGL pipeline system located in Louisiana, Mississippi, and
Alabama.
Belle Rose NGL Pipeline LLC ("Belle Rose") - a 41.7% economic interest in a NGL
pipeline system located in south Louisiana.
K/D/S Promix LLC ("Promix") - a 33.33% economic interest in a NGL fractionation
facility and related storage facilities located in south Louisiana.
4
The Company's investments in and advances to unconsolidated affiliates also
includes Venice Energy Services Company, LLC ("VESCO") and Dixie Pipeline
Company ("Dixie"). The VESCO investment consists of a 13.1% economic interest in
a LLC owning a natural gas processing plant, fractionation facilities, storage,
and gas gathering pipelines in Louisiana. The Dixie investment consists of an
11.5% interest in a corporation owning a 1,301-mile propane pipeline and the
associated facilities extending from Mont Belvieu, Texas to North Carolina.
These investments are accounted for using the cost method.
During the third quarter of 1999, the Company acquired the remaining interest in
Mont Belvieu Associates, 51%, ("MBA") and Entell NGL Services, LLC, 50%,
("Entell"). Accordingly, after the acquisition of the remaining interests, MBA
terminated and Entell became a wholly owned subsidiary of the Company and is
included as a consolidated entity from that point forward.
The following table shows investments in and advances to unconsolidated
affiliates at:
JUNE 30, DECEMBER 31,
2000 1999
-------------------------------------
Accounted for on equity basis:
BEF $ 67,665 $ 63,004
Promix 50,991 50,496
BRF 30,767 36,789
Tri-States 27,808 28,887
EPIK 16,869 15,258
Belle Rose 11,926 12,064
BRPC 19,707 11,825
Wilprise 9,185 9,283
Accounted for on cost basis:
VESCO 33,000 33,000
Dixie 20,000 20,000
-------------------------------------
Total $ 287,918 $ 280,606
=====================================
The following table shows equity in income (loss) of unconsolidated affiliates
for the three and six month periods ended June 30, 2000 and 1999:
For Three Months Ended For Six Months Ended
June 30, June 30,
----------------------------- -------------------------------
2000 1999 2000 1999
----------------------------- -------------------------------
BEF $ 8,307 $ 1,936 $ 10,812 $ 2,237
MBA - 424 - 1,184
BRF 208 (143) 737 (286)
BRPC (29) - (19) -
EPIK 178 (220) 1,970 177
Wilprise 74 - 162 -
Tri-States 843 - 1,521 -
Promix 1,546 - 3,208 -
Belle Rose (30) - 149 -
Other - 883 - 1,131
----------------------------- --------------------------------
Total $ 11,097 $ 2,880 $ 18,540 $ 4,443
============================= ================================
5
BEF
BEF is a partnership that owns the MTBE production facility located within the
Company's Mont Belvieu complex. The production of MTBE is driven by oxygenated
fuels programs enacted under the federal Clean Air Act Amendments of 1990 and
other legislation. Any changes to these programs that enable localities to elect
not to participate in these programs, lessen the requirements for oxygenates or
favor the use of non-isobutane based oxygenated fuels reduce the demand for MTBE
and could have an adverse effect on the Company's results of operations.
In recent years, MTBE has been detected in water supplies. The major source of
the ground water contamination appears to be leaks from underground storage
tanks. Although these detections have been limited and the great majority of
these detections have been well below levels of public health concern, there
have been actions calling for the phase-out of MTBE in motor gasoline in various
federal and state governmental agencies.
In light of these developments, the Company is formulating a contingency plan
for use of the BEF facility if MTBE were banned or significantly curtailed.
Management is exploring a possible conversion of the BEF facility from MTBE
production to alkylate production. At present the forecast cost of this
conversion would be in the $20 million to $25 million range, with the Company's
share being $6.7 million to $8.3 million.
3. ACQUISITIONS
Effective August 1, 1999, the Company acquired Tejas Natural Gas Liquids, LLC
("TNGL") from a subsidiary of Tejas Energy, LLC, now Coral Energy, LLC, an
affiliate of Shell Oil Company ("Shell") for $166 million in cash and the
issuance of 14.5 million non-distribution bearing, convertible Special Units.
All references hereafter to "Shell", unless the context indicates otherwise,
shall refer collectively to Shell Oil Company, its subsidiaries and affiliates.
TNGL engages in natural gas processing and NGL fractionation, transportation,
storage and marketing in Louisiana and Mississippi. TNGL's assets include a
20-year natural gas processing agreement with Shell ("Shell Processing
Agreement") and varying interests in eleven natural gas processing plants, four
NGL fractionation facilities; four NGL storage facilities and approximately
1,500 miles in pipelines.
In addition to the Special Units, Shell may be granted 6.0 million
non-distribution bearing, convertible Contingency Units provided that certain
performance criteria are met in calendar years 2000 and 2001 (see Note 5). Under
terms of the agreement with Shell, the Company will issue 3.0 million
Contingency Units in 2000 and an additional 3.0 million Contingency Units in
2001 provided the performance tests are successfully completed. On June 28,
2000, Shell met the performance criteria outlined for calendar year 2000 and in
accordance with an agreement with Shell, the Company issued the 3.0 million
Contingency Units (deemed "Special Units" once they are issued) on August 1,
2000.
The value of these new Special Units is currently estimated at $55.2 million
using present value techniques. In August 2000, the purchase price and the value
of the natural gas processing agreement will be increased by the estimated $55.2
million value of the Units. If the remainder of the Contingency Units are issued
in 2001 (or at such later date as agreed to by the parties), the purchase price
and value of the natural gas processing agreement will be adjusted accordingly.
Effective July 1, 1999, the Company acquired Kinder Morgan Operating LP "A"'s
25% indirect ownership interest and Enterprise Products Company's ("EPCO") 0.5%
indirect ownership interest in a 210,000 barrel per day NGL fractionation
facility located in Mont Belvieu, Texas for approximately $42 million in cash
and the assumption of approximately $4 million in debt.
Both acquisitions were accounted for using the purchase method of accounting,
and accordingly, the purchase price of each has been allocated to the assets
purchased and liabilities assumed based on their estimated fair value at the
effective date of each transaction.
6
PRO FORMA EFFECT OF ACQUISITIONS
The following table presents unaudited pro forma information for the three and
six month periods ended June 30, 1999 as if the acquisition of TNGL from Shell
and the Mont Belvieu NGL fractionation facility from Kinder Morgan and EPCO had
been made as of January 1, 1999:
Three Six
Months Months
Ended Ended
--------------------------------
June 30, 1999
--------------------------------
Revenues $ 343,990 $ 644,500
================================
Net income $ 26,831 $ 40,112
================================
Allocation of net income to
Limited partners $ 26,562 $ 39,711
================================
General Partner $ 268 $ 401
================================
Units used in earning per Unit calculations
Basic 66,725 66,725
================================
Diluted 81,225 81,225
================================
Income per Unit before minority interest
Basic $ 0.40 $ 0.60
================================
Diluted $ 0.33 $ 0.49
================================
Net income per Unit
Basic $ 0.40 $ 0.60
================================
Diluted $ 0.33 $ 0.49
================================
Diluted earnings per Unit do not include the pro rata effect of the 3.0 million
Contingency Units issued on August 1, 2000.
4. LONG-TERM DEBT
GENERAL. Long-term debt at June 30, 2000 was comprised of $350 million in 5-year
public Senior Notes (the "$350 Million Senior Notes") issued by Enterprise
Products Operating L.P. (the "Operating Partnership") and a 10-year $54 million
loan agreement with the Mississippi Business Finance Corporation ("MBFC" and the
"$54 Million MBFC Loan"). The issuance of the $350 Million Senior Notes
represented a partial takedown of the $800 million universal shelf registration
(the "Registration Statement") that was filed with the Securities and Exchange
Commission in December 1999. The proceeds from the $350 Million Senior Notes and
the $54 Million MBFC Loan were used to extinguish all outstanding balances owed
under the $200 Million Bank Credit Facility and the $350 Million Bank Credit
Facility.
7
The following table summarizes long-term debt at:
JUNE 30, DECEMBER 31,
2000 1999
----------------------------------
Borrowings under:
$200 Million Bank Credit Facility $ 129,000
$350 Million Bank Credit Facility 166,000
$350 Million Senior Notes $ 350,000
$54 Million MBFC Loan 54,000
----------------------------------
Total 404,000 295,000
Less current maturities of long-term debt - 129,000
----------------------------------
Long-term debt $ 404,000 $ 166,000
==================================
At June 30, 2000, the Operating Partnership had a total of $40 million of
standby letters of credit available of which approximately $13.3 million were
outstanding under letter of credit agreements with the banks.
$200 MILLION BANK CREDIT FACILITY. In July 1998, the Operating Partnership
entered into a $200 million bank credit facility that included a $50 million
working capital facility and a $150 million revolving term loan facility. On
March 15, 2000, the Operating Partnership used $169 million of the proceeds from
the issuance of the $350 Million Senior Notes to retire this credit facility in
accordance with its agreement with the banks.
$350 MILLION BANK CREDIT FACILITY. In July 1999, the Operating Partnership
entered into a $350 Million Bank Credit Facility that includes a $50 million
working capital facility and a $300 million revolving term loan facility. The
$300 million revolving term loan facility includes a sublimit of $40 million for
letters of credit. Borrowings under the $350 Million 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 Operating Partnership elects
the basis for the interest rate at the time of each borrowing.
This facility is scheduled to expire in July 2001 and all amounts borrowed
thereunder shall be due and payable at that time. There must be no amount
outstanding under the working capital facility for at least 15 consecutive days
during each fiscal year. In March 2000, the Operating Partnership used $179
million of the proceeds from the issuance of the $350 Million Senior Notes and
$47 million from the $54 Million MBFC Loan to payoff the outstanding balance on
this credit facility. No amount was outstanding on this credit facility at June
30, 2000.
The credit agreement relating to this 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 Operating
Partnership 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 $250.0 million,
(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 3.5 to 1.0 and (iii) maintain a ratio of
Total Indebtedness (as defined in the bank credit facility) to EBITDA of no more
than 3.0 to 1.0. The Operating Partnership was in compliance with the
restrictive covenants at June 30, 2000.
$350 MILLION SENIOR NOTES. On March 13, 2000, the Operating Partnership
completed a public offering of $350 million in principal amount of 8.25%
fixed-rate Senior Notes due March 15, 2005 at a price to the public of 99.948%
per Senior Note. The Operating Partnership received proceeds, net of
underwriting discounts and commissions, of approximately $347.7 million. The
proceeds were used to pay the entire $169 million outstanding principal balance
on the $200 Million Bank Credit Facility and $179 million of the $226 million
outstanding principal balance on the $350 Million Bank Credit Facility.
8
The $350 Million Senior Notes are subject to a make-whole redemption right by
the Operating Partnership. The notes are an unsecured obligation of the
Operating Partnership and rank equally with its existing and future unsecured
and unsubordinated indebtedness and senior to any future subordinated
indebtedness. The notes are guaranteed by the Company through an unsecured and
unsubordinated guarantee and were issued under an indenture containing certain
restrictive covenants. These covenants restrict the ability of the Company and
the Operating Partnership, with certain exceptions, to incur debt secured by
liens and engage in sale and leaseback transactions. The Company and Operating
Partnership were in compliance with the restrictive covenants at June 30, 2000.
Settlement was completed on March 15, 2000. The issuance of the $350 Million
Senior Notes was a takedown under the Company's $800 million Registration
Statement; therefore, the amount of securities available under the Registration
Statement have been reduced to $450 million.
$54 MILLION MBFC LOAN. On March 27, 2000, the Operating Partnership executed a
$54 million loan agreement with the MBFC which was funded with proceeds from the
sale of Taxable Industrial Revenue Bonds ("Bonds") by the MBFC. The Bonds issued
by the MBFC are 10-year bonds with a maturity date of March 1, 2010 and bear a
fixed rate interest coupon of 8.70%. The Operating Partnership received proceeds
from the sale of the Bonds, net of underwriting discounts and commissions, of
approximately $53.6 million. The proceeds were used to pay the remaining $47
million outstanding principal balance on the $350 Million Bank Credit Facility
and for working capital and other general partnership purposes. In general, the
proceeds of the Bonds were used to reimburse the Operating Partnership for costs
incurred in acquiring and constructing the Pascagoula, Mississippi natural gas
processing plant.
The Bonds were issued at par and are subject to a make-whole redemption right by
the Operating Partnership. The Bonds are guaranteed by the Company through an
unsecured and unsubordinated guarantee. The loan agreement contains certain
covenants including maintaining appropriate levels of insurance on the
Pascagoula natural gas processing facility and restrictions regarding mergers.
The Company was in compliance with the restrictive covenants at June 30, 2000.
5. CAPITAL STRUCTURE AND EARNINGS PER UNIT
SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF THE COMPANY. The
Second Amended and Restated Agreement of Limited Partnership of the Company (the
"Partnership Agreement") sets forth the calculation to be used to determine the
amount and priority of cash distributions that the Common Unitholders,
Subordinated Unitholders and the General Partner will receive. The Partnership
Agreement also contains provisions for the allocation of net earnings and losses
to the Unitholders and the General Partner. For purposes of maintaining partner
capital accounts, the Partnership Agreement specifies that items of income and
loss shall be allocated among the partners in accordance with their respective
percentage interests. Normal allocations according to percentage interests are
done only, however, after giving effect to priority earnings allocations in an
amount equal to incentive cash distributions allocated 100% to the General
Partner. As an incentive, the General Partner's percentage interest in quarterly
distributions is increased after certain specified target levels are met. When
quarterly distributions exceed $0.506 per Unit, the General Partner receives a
percentage of the excess between the actual distribution rate and the target
level ranging from approximately 15% to 50% depending on the target level
achieved.
The Partnership Agreement generally authorizes the Company to issue an unlimited
number of additional limited partner interests and other equity securities of
the Company for such consideration and on such terms and conditions as shall be
established by the General Partner in its sole discretion without the approval
of the Unitholders. During the Subordination Period, however, the Company is
limited with regards to the number of equity securities that it may issue that
rank senior to Common Units (except for Common Units upon conversion of
Subordinated Units, pursuant to employee benefit plans, upon conversion of the
general partner interest as a result of the withdrawal of the General Partner or
in connection with acquisitions or capital improvements that are accretive on a
per Unit basis) or an equivalent number of securities ranking on a parity with
the Common Units, without the approval of the holders of at least a Unit
Majority. A Unit Majority is defined as at least a majority of the outstanding
Common Units (during the Subordination Period), excluding Common Units held by
the General Partner and its affiliates, and at least a majority of the
outstanding Common Units (after the Subordination Period).
9
In April 2000, the Company mailed a Proxy Statement to its public Unitholders
asking them to consider and vote for a proposal to amend the Partnership
Agreement to increase the number of additional Common Units that may be issued
during the Subordination Period without the approval of a Unit Majority from
22,775,000 Common Units to 47,775,000 Common Units. The primary purpose of the
requested increase was to improve the future financial flexibility of the
Company since 20,500,000 Common Units of the 22,775,000 Common Units available
to the partnership during the Subordination Period were reserved for issuance in
connection with the TNGL acquisition. At a special meeting of the Unitholders
and General Partner held on June 9, 2000, this proposal was approved by 90.7% of
the public Unitholders. The amendment increases the number of Common Units
available (and unreserved) to the Company for general partnership purposes
during the Subordination Period from 2,275,000 to 27,275,000.
SUBORDINATED UNITS. The Subordinated Units have no voting rights until converted
into Common Units at the end of the Subordination Period (as defined below). The
Subordination Period for the Subordinated Units will generally extend until the
first day of any quarter beginning after June 30, 2003 when the Conversion Test
has been satisfied. Generally, the Conversion Test will have been satisfied when
the Company has paid from Operating Surplus and generated from Adjusted
Operating Surplus the minimum quarterly distribution on all Units for each of
the three preceding four-quarter periods. Upon expiration of the Subordination
Period, all remaining Subordinated Units will convert into Common Units on a
one-for-one basis and will thereafter participate pro rata with the other Common
Units in distributions of Available Cash.
If the Conversion Test has been met for any quarter ending on or after June 30,
2001, 25% of the Subordinated Units will convert into Common Units. If the
Conversion Test has been met for any quarter ending on or after June 30, 2002,
an additional 25% of the Subordinated Units will convert into Common Units. The
early conversion of the second 25% of Subordinated Units may not occur until at
least one year following the early conversion of the first 25% of Subordinated
Units.
SPECIAL UNITS. The 14.5 million Special Units issued do not accrue distributions
and are not entitled to cash distributions until their conversion into Common
Units, which occurs automatically with respect to 1.0 million Units on August 1,
2000, 5.0 million Units on August 1, 2001 and 8.5 million Units on August 1,
2002.
On June 28, 2000, Shell met certain year 2000 performance criteria for the
issuance of 3.0 million non-distribution bearing, convertible Contingency Units
(hereafter referred to as Special Units once they are issued). Per an agreement
with Shell, the Company issued these Special Units on August 1, 2000. Shell has
the opportunity to earn an additional 3.0 million non-distribution bearing,
convertible Contingency Units based on certain performance criteria for calendar
year 2001. Specifically, Shell will earn another 3.0 million convertible
Contingency Units if at any point during calendar year 2001 (or extensions
thereto due to force majeure events) gas production by Shell from its offshore
Gulf of Mexico producing properties and leases is 900 million cubic feet per day
for 180 not-necessarily-consecutive days or 350 billion cubic feet on a
cumulative basis. If the year 2001 performance test is not met but Shell's
offshore Gulf of Mexico gas production reaches 725 billion cubic feet on a
cumulative basis in calendar years 2000 and 2001 (or extensions thereto due to
force majeure events), Shell would still earn an additional 3.0 million
non-distribution bearing, convertible Contingency Units. If all of the
Contingency Units are earned, 1.0 million Contingency Units would convert into
Common Units on August 1, 2002 and 5.0 million Contingency Units would convert
into Common Units on August 1, 2003. The Contingency Units do not accrue
distributions and are not entitled to cash distributions until conversion into
Common Units.
Under the rules of the New York Stock Exchange, conversion of the Special Units
into Common Units requires approval of the Company's Unitholders. EPC Partners
II, Inc. ("EPC II"), which owns in excess of 81% of the outstanding Common
Units, has voted its Units in favor of conversion, which will provide the
necessary votes for approval.
UNITS ACQUIRED BY TRUST. During the first quarter of 1999, the Company
established a revocable grantor trust (the "Trust") to fund future liabilities
of a long-term incentive plan. At June 30, 2000, the Trust had purchased a total
of 267,200 Common Units (the "Trust Units") which are accounted for in a manner
similar to treasury stock under the cost method of accounting. The Trust Units
are considered outstanding and will receive distributions; however, they are
excluded from the calculation of net income per Unit.
10
On May 12, 2000, the Company filed a Registration Statement with the Securities
and Exchange Commission for the transfer of up to (i) 1,000,000 Common Units to
fund a long-term incentive plan established by the General Partner and (ii)
1,000,000 Common Units to fund a long-term incentive plan established by
Enterprise Products Company.
EARNINGS PER UNIT. The Company has no dilutive securities that would require
adjustment to net income for the computation of diluted earnings per Unit. The
following is a reconciliation of the number of units used in the computation of
basic and diluted earnings per Unit for all periods presented.
For Three Months Ended For Six Months Ended
At June 30, At June 30,
2000 1999 2000 1999
---------------------------------- ----------------------------------
Weighted average number of Common
and Subordinated Units outstanding 66,696 66,696 66,696 66,725
Weighted average number of Special
Units to be converted to Common Units 14,500 14,500
---------------------------------- ----------------------------------
Units used to compute diluted
earnings per Unit 81,196 66,696 81,196 66,725
================================== ==================================
The Contingency Units (described above) to be issued upon achieving certain
performance criteria have been excluded from diluted earnings per Unit because
such tests have either not been met at June 30, 2000 or have not been issued per
agreement with Shell.
6. DISTRIBUTIONS
The Company intends, to the extent there is sufficient available cash from
Operating Surplus, as defined by the Partnership Agreement, to distribute to
each holder of Common Units at least a minimum quarterly distribution of $0.45
per Common Unit. The minimum quarterly distribution is not guaranteed and is
subject to adjustment as set forth in the Partnership Agreement. With respect to
each quarter during the subordination period, which will generally not end
before June 30, 2003, the Common Unitholders will generally have the right to
receive the minimum quarterly distribution, plus any arrearages thereon, and the
General Partner will have the right to receive the related distribution on its
interest before any distributions of available cash from Operating Surplus are
made to the Subordinated Unitholders. As an incentive, the General Partner's
interest in quarterly distributions is increased after certain specified target
levels are met (see Note 5 discussion regarding incentive distributions under
the section titled Second Amended and Restated Agreement of Limited Partnership
of the Company.) The Company made its first incentive cash distribution to the
General Partner on August 10, 2000 in the amount of $0.2 million.
On January 17, 2000, the Company declared an increase in its quarterly cash
distribution to $0.50 per Unit. This amount was raised to $0.525 per Unit on
July 17, 2000.
11
The following is a summary of cash distributions to partnership interests since
the first quarter of 1999:
CASH DISTRIBUTIONS
--------------------------------------------------------------------------
PER COMMON PER SUBORDINATED RECORD PAYMENT
UNIT UNIT DATE DATE
--------------------------------------------------------------------------
1999
- ----
First Quarter $ 0.450 $ 0.450 January 29, 1999 February 11, 1999
Second Quarter $ 0.450 $ 0.070 April 30, 1999 May 12, 1999
Third Quarter $ 0.450 $ 0.370 July 30, 1999 August 11, 1999
Fourth Quarter $ 0.450 $ 0.450 October 29, 1999 November 10, 1999
2000
- ----
First Quarter $ 0.500 $ 0.500 January 31, 2000 February 10, 2000
Second Quarter $ 0.500 $ 0.500 April 28, 2000 May 10, 2000
Third Quarter $ 0.525 $ 0.525 July 31, 2000 August 10, 2000
(through August 11, 2000)
7. SUPPLEMENTAL CASH FLOW DISCLOSURE
The net effect of changes in operating assets and liabilities is as follows:
SIX MONTHS ENDED
MARCH 31,
--------------------------------
2000 1999
--------------------------------
(Increase) decrease in:
Accounts receivable $ 66,374 $ (6,574)
Inventories (105,161) (37,952)
Prepaid and other current assets 2,610 970
Other assets (4,287) -
Increase (decrease) in:
Accounts payable (64,563) (164)
Accrued gas payable 163,185 22,864
Accrued expenses (11,698) (1,949)
Other current liabilities 5,904 (3,612)
Other liabilities 1,698 -
--------------------------------
Net effect of changes in operating accounts $ 54,062 $ (26,417)
================================
Capital expenditures for the first six months of 2000 were $154.2 million
compared to $2.5 million for the same period in 1999. Capital expenditures in
2000 included $99.6 million for the purchase of the Lou-Tex Propylene Pipeline
and related assets, $39.2 million in construction costs for the Lou-Tex NGL
Pipeline and $4.4 million in construction costs for the Neptune gas processing
facility.
The purchase of the Lou-Tex Propylene Pipeline and related assets from Concha
Chemical Pipeline Company, an affiliate of Shell, was completed on February 25,
2000. The effective date of the transaction was March 1, 2000. The Lou-Tex
Propylene Pipeline is a 263-mile, 10" pipeline that transports chemical grade
propylene from Sorrento, Louisiana to Mont Belvieu, Texas. Also acquired in this
transaction was 27.5 miles of 6" ethane pipeline between Sorrento and Norco,
Louisiana, and a 0.5 million barrel storage cavern at Sorrento, Louisiana.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
12
Statement No. 133-an amendment of FASB Statement No. 133" which effectively
delays the application of SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities" for one year, to fiscal years beginning after June 15,
2000. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment of FASB
Statement No. 133" which amends and supercedes various sections of SFAS No. 133.
Management is currently studying SFAS No. 133 and its amendments for their
possible impact on the consolidated financial statements when they are adopted
in January 2001.
9. FINANCIAL INSTRUMENTS
The Company enters into swaps and other contracts to hedge the price risks
associated with inventories, commitments and certain anticipated transactions.
The Company does not currently hold or issue financial instruments for trading
purposes. The swaps and other contracts are with established energy companies
and major financial institutions. The Company believes its credit risk is
minimal on these transactions, as the counterparties are required to meet
stringent credit standards. There is continuous day-to-day involvement by senior
management in the hedging decisions, operating under resolutions adopted by the
board of directors.
INTEREST RATE SWAPS. The Company's interest rate exposure results from variable
rate borrowings from commercial banks and fixed rate borrowings pursuant to the
$350 Million Senior Notes and the $54 Million MBFC Loan. The company manages its
exposure to changes in interest rates in its consolidated debt portfolio by
utilizing interest rate swaps. An interest rate swap, in general, requires one
party to pay a fixed rate on the notional amount while the other party pays a
floating rate based on the notional amount.
In March 2000, after the issuance of the $350 Million Senior Notes and the
execution of the $54 Million MBFC Loan, 100% of the Operating Partnership's
consolidated debt were fixed rate obligations. To maintain a balance between
variable rate and fixed rate exposure, the Operating Partnership entered into
interest rate swap agreements with a notional amount of $154 million by which
the Operating Partnership receives payments based on a fixed rate and pays an
amount based on a floating rate. The Operating Partnership's consolidated debt
portfolio interest rate exposure was 62 percent fixed and 38 percent floating,
after considering the effect of the interest rate swap agreements. The notional
amount does not represent exposure to credit loss. The Operating Partnership
monitors its positions and the credit ratings of its counterparties. Management
believes the risk of incurring a credit related loss is remote, and that if
incurred, such losses would be immaterial.
The effect of these swaps (none of which are leveraged) was to decrease the
Company's interest expense by $3.2 million for the three months ended June 30,
2000 and $3.5 million for the six months ended June 30, 2000. Following is
selected information on the Company's portfolio of interest rate swaps at June
30, 2000:
INTEREST RATE SWAP PORTFOLIO AT JUNE 30, 2000 (1) :
(Dollars in millions)
Early Fixed /
Notional Termination Floating
Amount Period Covered Date (2) Rate (3)
- --------------------------------------------------------------------------------
$ 50.0 March 2000 - March 2005 March 2001 8.25% / 6.9500%
$ 50.0 March 2000 - March 2005 March 2001 8.25% / 6.9550%
$ 54.0 March 2000 - March 2010 March 2003 8.70% / 7.2575%
Notes:
(1) All swaps outstanding at June 30, 2000 were entered into for the purpose of
managing the Operating Partnership's exposure to fluctuations in market
interest rates.
(2) In each case, the counterparty has the option to terminate the interest
rate swap on the Early Termination Date.
(3) In each case, the Operating Partnership is the floating-price payor. The
floating rate was the rate in effect as of June 30, 2000.
13
10. SEGMENT INFORMATION
The Company has five reportable operating segments: Fractionation, Pipeline,
Processing, Octane Enhancement and Other. Fractionation includes NGL
fractionation, polymer grade propylene fractionation and butane isomerization
(converting normal butane into high purity isobutane) services. Pipeline
consists of pipeline, storage and import/export terminal services. Processing
includes the natural gas processing business and its related NGL merchant
activities. Octane Enhancement represents the Company's 33.33% ownership
interest in a facility that produces motor gasoline additives to enhance octane
(currently producing MTBE). The Other operating segment consists of fee-based
marketing services and other plant support functions.
Operating segments are components of a business about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
The management of the Company evaluates segment performance on the basis of
gross operating margin. Gross operating margin reported for each segment
represents earnings before depreciation and amortization, lease expense
obligations retained by EPCO, gains and losses on the sale of assets and general
and administrative expenses. In addition, segment gross operating margin is
exclusive of interest expense, interest income (from unconsolidated affiliates
or others), dividend income from unconsolidated affiliates, minority interest,
extraordinary charges and other income and expense transactions. The Company's
equity earnings from unconsolidated affiliates are included in segment gross
operating margin.
Segment assets consists of property, plant and equipment and the amount of
investments in and advances to unconsolidated affiliates. The principal
reconciling item between consolidated property, plant and equipment and segment
assets is construction-in-progress. Segment assets are defined as those
facilities and projects that generate segment gross margin amounts. Since assets
under construction do not generally contribute to segment earnings, these assets
are not included in the segment totals until they are deemed operational.
Segment gross operating margin is inclusive of intersegment revenues. These
revenues have been eliminated from the consolidated totals.
14
Information by operating segment, together with reconciliations to the
consolidated totals, is presented in the following table:
Operating Segments Adjustments
------------------------------------------------------------------
Octane and Consolidated
Fractionation Pipelines Processing Enhancement Other Eliminations Totals
-----------------------------------------------------------------------------------------
Revenues from external customers
Three months ended June 30, 2000 $103,741 $ 18,048 $478,244 $ 8,307 $ 751 $(5,081) $604,010
Three months ended June 30, 1999 64,453 4,360 120,638 1,936 - (13,908) 177,479
Six months ended June 30, 2000 202,566 27,862 1,125,101 10,812 1,266 (9,873) 1,357,734
Six months ended June 30, 1999 118,149 8,101 223,511 2,237 - (25,642) 326,356
Intersegment revenues
Three months ended June 30, 2000 42,537 14,760 139,655 - 95 (197,047) -
Three months ended June 30, 1999 25,137 9,279 16 - 108 (34,540) -
Six months ended June 30, 2000 82,728 28,025 281,885 - 189 (392,827) -
Six months ended June 30, 1999 37,360 17,310 38 - 204 (54,912) -
Total revenues
Three months ended June 30, 2000 146,278 32,808 617,899 8,307 846 (202,128) 604,010
Three months ended June 30, 1999 89,590 13,639 120,654 1,936 108 (48,448) 177,479
Six months ended June 30, 2000 285,294 55,887 1,406,986 10,812 1,455 (402,700) 1,357,734
Six months ended June 30, 1999 155,509 25,411 223,549 2,237 204 (80,554) 326,356
Gross operating margin by segment
Three months ended June 30, 2000 29,591 14,192 18,486 8,307 872 - 71,448
Three months ended June 30, 1999 26,491 4,350 (1,524) 1,936 277 - 31,530
Six months ended June 30, 2000 63,922 28,827 58,040 10,812 1,426 - 163,027
Six months ended June 30, 1999 42,813 8,851 (433 2,237 481 - 53,949
Segment assets
At June 30, 2000 360,410 357,107 125,642 - 111 60,562 903,832
At December 31, 1999 362,198 249,453 122,495 - 13 32,810 767,069
Investments in and advances
to unconsolidated affiliates
At June 30, 2000 101,465 85,788 33,000 67,665 - - 287,918
At December 31, 1999 99,110 85,492 33,000 63,004 - - 280,606
15
A reconciliation of segment gross operating margin to consolidated income before
minority interest follows:
For Three Months Ended For Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
----------------------------- -----------------------------
Total segment gross operating margin $ 71,448 $ 31,530 $163,027 $ 53,949
Depreciation and amortization (8,754) (4,668) (16,878) (9,356)
Retained lease expense, net (2,687) (2,666) (5,324) (5,332)
Loss on sale of assets (2,303) (127) (2,303) (124)
Selling, general and administrative (7,658) (3,000) (13,042) (6,000)
----------------------------- -----------------------------
Consolidated operating income 50,046 21,069 125,480 33,137
Interest expense (8,070) (2,129) (15,844) (4,392)
Interest income from unconsolidated affiliates 126 292 270 689
Dividend income from unconsolidated affiliates 2,761 - 3,995 -
Interest income - other 1,225 148 2,706 432
Other, net (62) (30) (425) 45
----------------------------- -----------------------------
Consolidated income before minority interest $ 46,026 $ 19,350 $116,182 $ 29,911
============================= =============================
11. SUBSEQUENT EVENTS
On July 27, 2000, the Company announced that the Board of Directors of the
General Partner had authorized the Company to purchase up to 1.0 million of the
outstanding Common Units over the next two years. The Units may be purchased
from time to time in the open market or in privately negotiated transactions as
conditions warrant. The timing of any such purchases will be based on the Unit
price and other market factors.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FOR THE INTERIM PERIODS ENDED JUNE 30, 2000 AND 1999
The following discussion and analysis should be read in conjunction
with the unaudited consolidated financial statements and notes thereto of
Enterprise Products Partners L.P. ("Enterprise" or the "Company") included
elsewhere herein.
THE COMPANY
ENTERPRISE PRODUCTS PARTNERS L.P. (the "Company") is a leading
integrated North American provider of processing and transportation services to
domestic and foreign producers of natural gas liquids ("NGL" or "NGLs") and
other liquid hydrocarbons and domestic and foreign consumers of NGLs and liquid
hydrocarbon products. The Company manages a fully integrated and diversified
portfolio of midstream energy assets and is engaged in NGL processing and
transportation through direct and indirect ownership and operation of NGL
fractionators. It also operates and or manages NGL processing facilities,
storage facilities, pipelines, rail transportation facilities, a methyl tertiary
butyl ether ("MTBE") facility, a propylene production complex and other
transportation facilities in which it has a direct and indirect ownership. As a
result of acquisitions completed in 1999, the Company is also engaged in natural
gas processing.
The Company is a publicly traded master limited partnership (NYSE,
symbol "EPD") that conducts substantially all of its business through ENTERPRISE
PRODUCTS OPERATING L.P. (the "Operating Partnership"), the Operating
Partnership's subsidiaries, and a number of joint ventures with industry
partners. The Company was formed in April 1998 to acquire, own, and operate all
of the NGL processing and distribution assets of Enterprise Products Company
("EPCO"). The general partner of the Company, Enterprise Products GP, LLC (the
"General Partner"), a majority-owned subsidiary of EPCO, holds a 1.0% general
partner interest in the Company and a 1.0101% general partner interest in the
Operating Partnership.
The principal executive office of the Company is located at 2727 North
Loop West, Houston, Texas, 77008-1038, and the telephone number of that office
is 713-880-6500. References to, or descriptions of, assets and operations of the
Company in this Quarterly Report include the assets and operations of the
Operating Partnership and its subsidiaries as well as the predecessors of the
Company.
GENERAL
The Company (i) processes natural gas; (ii) fractionates for a
processing fee mixed NGLs produced as by-products of oil and natural gas
production into their component products: ethane, propane, isobutane, normal
butane and natural gasoline; (iii) converts normal butane to isobutane through
the process of isomerization; (iv) produces MTBE from isobutane and methanol;
and (v) 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 NGL operations are concentrated in the Texas, Louisiana,
and Mississippi Gulf Coast area. A large portion is concentrated in Mont
Belvieu, Texas, which is the hub of the domestic NGL industry and is adjacent to
the largest concentration of refineries and petrochemical plants in the United
States. The facilities the Company operates at Mont Belvieu include: (i) one of
the largest NGL fractionation facilities in the United States with an average
production capacity of 210,000 barrels per day ("BPD"); (ii) the largest butane
isomerization complex in the United States with an average isobutane production
capacity of 80,000 BPD; (iii) one of the largest MTBE production facilities in
the United States with an average production capacity of 14,800 BPD; and (iv)
two propylene fractionation units with an average combined production capacity
of 31,000 BPD. The Company owns all of the assets at its Mont Belvieu facility
except for the NGL fractionation facility, in which it owns an effective 62.5%
economic interest; one of the propylene fractionation units, in which it owns a
54.6% interest and controls the remaining interest through a long-term lease;
the MTBE production facility, in which it owns a 33.33% interest; and one of its
17
three isomerization units and one deisobutanizer which are held under long-term
leases with purchase options. The Company's operations in Louisiana and
Mississippi include varying interests in eleven natural gas processing plants
with a combined capacity of 11.0 billion cubic feet per day ("Bcfd") and net
capacity of 3.1 Bcfd and four NGL fractionation facilities with a combined gross
capacity of 281,000 BPD and net capacity of 131,500 BPD. In addition, the
Company owns and operates a NGL fractionation facility in Petal, Mississippi
with an average production capacity of 7,000 BPD.
The Company owns and operates approximately 28 million barrels of
storage capacity at Mont Belvieu and 7 million barrels of storage capacity in
Petal, Mississippi that are an integral part of its processing operations. The
Company has interests in four NGL storage facilities in Louisiana and
Mississippi with approximately 28.8 million barrels of gross capacity and 8.8
million barrels of net capacity. The Company also leases and operates one of
only two commercial NGL import/export terminals on the Gulf Coast.
Lastly, the Company has operating and non-operating ownership interests
in over 2,400 miles of NGL pipelines along the Gulf Coast (including an 11.5%
interest in the 1,301 mile Dixie Pipeline).
Industry Environment
Because certain NGL products compete with other refined petroleum
products in the fuel and petrochemical feedstock markets, NGL product prices are
set by or in competition with refined petroleum products. Increased production
and importation of NGLs and NGL products in the United States may decrease NGL
product prices in relation to refined petroleum alternatives and thereby
increase consumption of NGL products as NGL products are substituted for other
more expensive refined petroleum products. Conversely, a decrease in the
production and importation of NGLs and NGL products could increase NGL product
prices in relation to refined petroleum product prices and thereby decrease
consumption of NGLs. However, because of the relationship of crude oil and
natural gas production to NGL production, the Company believes any imbalance in
the prices of NGLs and NGL products and alternative products would be temporary.
Due to higher crude oil prices in the first six months of 2000 versus
the same period in 1999, the demand for NGLs in petrochemical manufacturing was
strong. The increased use of NGLs in petrochemical manufacturing resulted in the
increasing of both production and pricing of NGLs. In the NGL industry, revenues
and cost of goods sold can fluctuate significantly up or down based on current
NGL prices. However, operating margins will generally remain constant except for
the effect of inventory price adjustments or increased operating expenses.
RESULTS OF OPERATION OF THE COMPANY
The Company has five reportable operating segments: Fractionation,
Pipeline, Processing, Octane Enhancement and Other. Fractionation includes NGL
fractionation, polymer grade propylene fractionation and butane isomerization
(converting normal butane into high purity isobutane) services. Pipeline
consists of pipeline, storage and import/export terminal services. Processing
includes the natural gas processing business and its related NGL merchant
activities. Octane Enhancement represents the Company's 33.33% ownership
interest in a facility that produces motor gasoline additives to enhance octane
(currently producing MTBE). The Other operating segment consists of fee-based
marketing services and other plant support functions.
The management of the Company evaluates segment performance on the
basis of gross operating margin. Gross operating margin reported for each
segment represents earnings before depreciation and amortization, lease expense
obligations retained by EPCO, gains and losses on the sale of assets and general
and administrative expenses. In addition, segment gross operating margin is
exclusive of interest expense, interest income (from unconsolidated affiliates
or others), dividend income from unconsolidated affiliates, minority interest,
extraordinary charges and other income and expense transactions. The Company's
equity earnings from unconsolidated affiliates are included in segment gross
operating margin.
18
The Company's gross operating margin by segment (in thousands of
dollars) along with a reconciliation to consolidated operating income for the
three and six month periods ended June 30, 2000 and 1999 were as follows:
For Three Months Ended For Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
----------------------------- -----------------------------
Gross Operating Margin by segment:
Fractionation $ 29,591 $ 26,491 $ 63,922 $ 42,813
Pipeline 14,192 4,350 28,827 8,851
Processing 18,486 (1,524) 58,040 (433)
Octane enhancement 8,307 1,936 10,812 2,237
Other 872 277 1,426 481
----------------------------- -----------------------------
Gross Operating margin total 71,448 31,530 163,027 53,949
Depreciation and amortization 8,754 4,668 16,878 9,356
Retained lease expense, net 2,687 2,666 5,324 5,332
Loss (gain) on sale of assets 2,303 127 2,303 124
Selling, general and administrative expenses 7,658 3,000 13,042 6,000
----------------------------- -----------------------------
Consolidated operating income $ 50,046 $ 21,069 $125,480 $ 33,137
============================= =============================
The Company's significant plant production and other volumetric data
(in thousands of barrels per day on an equity basis) for the three and six month
periods ended June 30, 2000 and 1999 were as follows:
For Three Months Ended For Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
----------------------------- -----------------------------
Plant production data:
NGL Production 71 N/A 71 N/A
NGL Fractionation 215 61 215 58
Isomerization 81 74 74 71
Propylene Fractionation 30 31 30 27
MTBE 5 5 4 4
Major Pipelines 331 186 338 173
1999 Acquisitions
The Company completed two significant acquisitions during the third
quarter of 1999. Effective August 1, 1999, the Company acquired Tejas Natural
Gas Liquids, LLC ("TNGL") from Tejas Energy, LLC, now Coral Energy, LLC, an
affiliate of Shell Oil Company ("Shell", including subsidiaries and affiliates),
in exchange for 14.5 million non-distribution bearing, convertible special
partnership Units of the Company and $166 million in cash. The Company also
agreed to issue up to 6.0 million additional non-distribution bearing special
partnership Units to Shell in the future if the volumes of natural gas that the
Company processes for Shell reach agreed upon levels in 2000 and 2001. The first
3.0 million of these additional special partnership Units were issued on August
1, 2000.
The businesses acquired from Shell include natural gas processing and
NGL fractionation, transportation and storage in Louisiana and Mississippi and
its NGL supply and merchant business. The assets acquired include varying
interests in eleven natural gas processing plants, four NGL fractionation
facilities, four NGL storage facilities, operator and non-operator ownership
interests in approximately 1,500 miles of NGL pipelines, and a 20-year natural
gas processing agreement with Shell. The Company accounted for this acquisition
using the purchase method.
19
Effective July 1, 1999, a subsidiary of the Operating Partnership
acquired an additional 25% interest in the Mont Belvieu NGL fractionation
facility from Kinder Morgan Operating LP "A" ("Kinder Morgan") for a purchase
price of approximately $41.2 million in cash and the assumption of $4 million in
debt. An additional 0.5% interest in the same facility was purchased from EPCO
for a cash purchase price of $0.9 million. This acquisition (referred to as the
"MBA acquisition") increased the Company's effective economic interest in the
Mont Belvieu NGL fractionation facility from 37.0% to 62.5%. As a result of this
acquisition, the results of operations after July 1, 1999 were consolidated
rather than included in equity in earnings of unconsolidated affiliates.
The results of operations for the three and six month periods ended
June 30, 1999 do not include the impact of the assets acquired from TNGL and
MBA. See the section below labeled "Pro Forma impact of Acquisitions" for
selected financial data reflecting these transactions as if they had occurred on
January 1, 1999.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1999
Revenues, Costs and Expenses and Operating Income. The Company's
revenues increased by 240.3% to $604.0 million in 2000 compared to $177.5
million in 1999. The Company's costs and expenses increased by 256.1% to $546.3
million in 2000 versus $153.4 million in 1999. Operating income before selling,
general and administrative expenses ("SG&A") increased to $57.7 million in 2000
from $24.1 million in 1999. The principal factors behind the $33.6 million
increase in operating income before SG&A were the additional earnings associated
with the assets acquired in the TNGL acquisition and the overall improvement in
NGL product prices in 2000 over 1999.
Fractionation. The Company's gross operating margin for the
Fractionation segment increased to $29.6 million in 2000 from $26.5 million in
1999 due to higher overall volumes and NGL pricing plus the addition of margins
from the assets acquired from TNGL. NGL Fractionation gross operating margin
increased to $12.6 million in 2000 from $1.2 million in 1999 primarily the
result of substantially higher volumes. Net NGL fractionation volumes were 215
thousand barrels per day ("MBPD") in 2000 compared to 61 MBPD in 1999. The
increase is attributable to the four NGL fractionators acquired in August 1999
as a result of the TNGL acquisition and the completion of the BRF NGL
fractionation facility in July 1999. Of the $11.4 million increase in NGL
fractionation gross margin, $10.8 million is derived from the NGL fractionators
acquired in the TNGL acquisition (including equity earnings of $1.5 million from
Promix) with $0.4 million arising from higher equity earnings from BRF. The Mont
Belvieu NGL fractionation facility contributed the remaining $0.2 million rise
in earnings. Margins from the Mont Belvieu facility increased due to higher
volumes and the additional ownership interest acquired in July 1999 as a result
of the MBA acquisition.
Gross operating margin from the isomerization business decreased to
$11.4 million in 2000 from $17.2 million in 1999. The decrease in isomerization
margins is primarily due to expenses associated with the restart of one of the
Mont Belvieu isomerization units in May 2000 and higher operating expenses
stemming from an increase in fuel costs. Isomerization production rates
increased to 81 MBPD in 2000 compared to 74 MBPD in 1999 as a result of the
restart of the isomerization unit. The Company's gross operating margin on its
propylene fractionation facilities decreased to $5.4 million in 2000 versus $7.0
million in 1999. The decrease stems from the impact of propylene storage well
charges and higher fuel costs. Propylene production decreased to 30 MBPD in 2000
from 31 MBPD in 1999.
Pipeline. The Company's gross operating margin for the Pipeline segment
was $14.2 million in the second quarter of 2000 compared to $4.4 million during
the same period in 1999. The Louisiana Pipeline Distribution System gross margin
for 2000 was $6.7 million versus $1.4 million in 1999 primarily due to a 135%
increase in throughput volumes stemming from pipeline assets acquired in the
TNGL acquisition. The gross operating margin of the Houston Ship Channel
Distribution system increased to $2.9 million in 2000 from $2.1 million in 1999
on the strength of increased export volumes at the EPIK loading facility.
Earnings from the newly acquired Lou-Tex Propylene Pipeline were $2.3 million.
Equity earnings from unconsolidated affiliates in the Pipeline segment
increased from a loss of $0.2 million in 1999 to a $1.1 million profit in 2000.
A portion of the improvement in equity earnings is attributable to EPIK which
posted an increase of $0.4 million from a $0.2 million loss in 1999 to a $0.2
million profit in 2000. EPIK's higher earnings are attributable to a 344%
increase in export volumes due to the new chiller unit that began operations in
20
the fourth quarter of 1999. The remaining $0.9 million increase stems from the
Wilprise, Tri-States and Belle Rose pipeline systems in which an equity interest
was acquired by the Company as a result of the TNGL acquisition.
Processing. The Company's gross operating margin for Processing was
$18.5 million in 2000 compared to a loss of $1.5 million in 1999. The increase
is attributable to the gas processing operations acquired in the TNGL
acquisition. The gas processing operations benefited from a favorable NGL
pricing environment and 71 MBPD of equity NGL production during the quarter.
Octane Enhancement. The Company's gross operating margin for Octane
Enhancement increased to $8.3 million in 2000 from $1.9 million in 1999. This
segment consists entirely of the Company's equity earnings and 33.33% investment
in BEF, a joint venture facility that currently produces MTBE. The earnings
improvement stems from higher MTBE prices and lower debt service costs. BEF made
its final note payment on May 31, 2000 and now owns a debt-free facility. MTBE
production, on an equity basis, was steady at 5 MBPD during both the 2000 and
1999 periods.
Other. The Company's gross operating margin for the Other segment was
$0.9 million in 2000 compared to $0.3 million in 1999. Beginning in the fourth
quarter of 1999, this segment includes fee-based marketing services. The Company
acquired its fee-based marketing services business as part of the TNGL
acquisition. For the second quarter of 2000, this business earned $0.7 million.
Apart from this portion of the segment's operations, the gross margin
contribution of the other aspects of this segment were insignificant in both
2000 and 1999.
Selling, general and administrative expenses. SG&A expenses increased
to $7.7 million in the second quarter of 2000 from $3.0 million during the same
period in 1999. The higher costs stem from an increase in the administrative
services fee charged by EPCO to $1.6 million per month beginning in January 2000
versus the $1.0 million per month charged in the second quarter of 1999. The
remainder of the increase is attributable to additional general and
administrative expenses related to the TNGL acquisition.
Interest expense. The Company's interest expense increased to $8.1
million in the second quarter of 2000 from $2.1 million in the second quarter of
1999. The increase is primarily attributable to a rise in average debt levels to
$404 million in the second quarter of 2000 from $132 million in the second
quarter of 1999. Debt levels have increased over the last year due to
acquisitions and capital expenditures. Specifically, $215 million was borrowed
to complete the TNGL and MBA acquisitions in the third quarter of 1999 and
approximately $60 million was borrowed to fund a portion of the purchase of the
Lou-Tex Propylene Pipeline in the first quarter of 2000.
Dividend income from unconsolidated affiliates. The Company's
investment in Dixie and VESCO are recorded using the cost method as prescribed
by generally accepted accounting principles. In accordance with these
guidelines, the Company records as dividend income the cash distributions from
these investments as opposed to recording equity earnings. Both the Dixie and
VESCO investments were acquired as part of the TNGL acquisition. For the second
quarter of 2000, the Company recorded dividend income totaling $2.8 from VESCO.
Loss on sale of assets. During the second quarter of 2000, the Company
recognized a one-time $2.3 million non-cash charge on the sale of its Longview
Terminal to Huntsman Corporation. The Longview Terminal was part of the
Pipelines segment and was used to unload polymer grade propylene from NGL tank
trucks.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999
Revenues, Costs and Expenses and Operating Income. The Company's
revenues increased by 316.0% to $1,357.7 million in 2000 compared to $326.4
million in 1999. The Company's costs and expenses increased by 324.5% to
$1,219.2 million in 2000 versus $287.2 million in 1999. Operating income before
SG&A increased to $138.5 million in 2000 from $39.2 million in 1999. The
principal factors behind the $99.4 million increase in operating income before
SG&A were the additional earnings associated with the assets acquired in the
TNGL acquisition and the overall improvement in NGL product prices in 2000 over
1999.
Fractionation. The Company's gross operating margin for the
Fractionation segment increased to $63.9 million in 2000 from $42.8 million in
1999 due to higher overall volumes and NGL pricing plus the addition of margins
21
from the assets acquired from TNGL. NGL Fractionation gross operating margin
increased to $29.0 million in 2000 from $2.9 million in 1999 primarily the
result of substantially higher volumes. Net NGL fractionation volumes were 215
MBPD in 2000 compared to 58 MBPD in 1999. The increase is attributable to the
four NGL fractionators acquired in August 1999 as a result of the TNGL
acquisition and the completion of the BRF NGL fractionation facility in July
1999. Of the $26.1 million increase in NGL fractionation gross margin, $24.6
million is derived from the NGL fractionators acquired in the TNGL acquisition
(including equity earnings of $3.2 million from Promix) with $1.0 million
arising from higher equity earnings from BRF. The Mont Belvieu NGL fractionation
facility contributed the remaining $0.5 million rise in earnings. Margins from
the Mont Belvieu facility increased due to higher volumes and the additional
ownership interest acquired in July 1999 as a result of the MBA acquisition.
Gross operating margin from the isomerization business decreased to
$21.0 million in 2000 from $24.7 million in 1999. The decrease in isomerization
margins is primarily due to expenses associated with the restart of one of the
Mont Belvieu isomerization units in May 2000 and higher operating expenses
stemming from an increase in fuel costs. Isomerization production rates
increased to 74 MBPD in 2000 compared to 71 MBPD in 1999. The Company's gross
operating margin on its propylene production facilities was $12.7 million in
2000 and 1999. The margin for 2000 includes $0.7 million in propylene storage
well charges along with $0.6 million in higher fuel expenses associated with the
increased cost of natural gas. Propylene production volumes increased to 30 MBPD
in 2000 versus 27 MBPD in 1999.
Pipeline. The Company's gross operating margin for the Pipeline segment
was $28.9 million in 2000 compared to $8.9 million in 1999. The Louisiana
Pipeline Distribution System gross margin for 2000 was $14.5 million versus $3.0
million in 1999 primarily due to a 164% increase in throughput volumes stemming
from pipeline assets acquired in the TNGL acquisition. The gross operating
margin of the Houston Ship Channel Distribution system increased to $5.9 million
in 2000 from $4.1 million in 1999 on the strength of increased export volumes at
the EPIK loading facility.
On February 25, 2000, the purchase of the Lou-Tex Propylene Pipeline
and related assets from Concha Chemical Pipeline Company, an affiliate of Shell,
was completed at a cost of approximately $100 million. The effective date of the
transaction was March 1, 2000. The Lou-Tex Propylene Pipeline is a 263-mile, 10"
pipeline that transports chemical grade propylene from Sorrento, Louisiana to
Mont Belvieu, Texas. Also acquired in this transaction was a 27.5-mile 6" ethane
pipeline between Sorrento and Norco, Louisiana and a 0.5 million barrel storage
cavern at Sorrento, Louisiana. For the four months ended June 30, 2000, the
Lou-Tex Propylene Pipeline gross operating margin was $3.1 million on volumes of
21 MBPD. Due to customer demand, a project is currently underway and should be
completed in the third quarter of 2000 to increase the capacity of this pipeline
to 50,000 BPD .
Equity earnings from unconsolidated affiliates in the Pipeline segment
increased from $0.2 million in 1999 to $3.8 million in 2000. The greatest
improvement in equity earnings was from EPIK which posted a $1.8 million
increase to $2.0 million in 2000 from $0.2 million in 1999. EPIK's higher
earnings are attributable to a 211% increase in export volumes due to the new
chiller unit that began operations in the fourth quarter of 1999. The Company
recorded a combined $1.8 million in equity income from the Wilprise, Tri-States,
and Belle Rose Systems. Individually, equity earnings from Wilprise, Tri-States,
and Belle Rose were $0.2 million, $1.5 million and $0.1 million, respectively.
Processing. The Company's gross operating margin for Processing was
$58.0 million in 2000 compared to a loss of $0.4 million in 1999. The increase
is attributable to the gas processing operations acquired in the TNGL
acquisition. The gas processing operations benefited from a favorable NGL
pricing environment and 71 MBPD of equity NGL production during the first six
months of 2000.
Octane Enhancement. The Company's gross operating margin for Octane
Enhancement increased to $10.8 million in 2000 from $2.2 million in 1999. This
segment consists entirely of the Company's equity earnings and 33.33% investment
in BEF, a joint venture facility that currently produces MTBE. The 1999 results
included the impact of a $4.5 million non-cash write-off of the unamortized
balance of deferred start-up costs. The Company's share of this non-cash charge
was $1.5 million. The 2000 results reflect the impact of higher than normal MTBE
market prices during the second quarter and lower debt service costs. BEF made
22
its final note payment in May 2000 and now owns the MTBE facility debt-free.
MTBE production, on an equity basis, was 4 MBPD in 2000 and 1999.
Other. The Company's gross operating margin for the Other segment was
$1.4 million in 2000 compared to $0.5 million in 1999. Beginning in the fourth
quarter of 1999, this segment includes fee-based marketing services. The Company
acquired its fee-based marketing services business as part of the TNGL
acquisition. For the first six months of 2000, this business earned $1.2
million. Apart from this portion of the segment's operations, the gross margin
contribution of the other aspects of this segment were insignificant in both
2000 and 1999.
Selling, general and administrative expenses. SG&A expenses increased
to $13.0 million in the first six months of 2000 from $6.0 million during the
same period in 1999. The primary reason for the higher costs was an increase in
the administrative services fee charged by EPCO to $1.6 million per month
beginning in January 2000 versus the $1.0 million per month charged in the first
quarter of 1999. The remainder of the increase is attributable to additional
general and administrative costs related to the TNGL acquisition.
Interest expense. The Company's interest expense increased to $15.8
million in the first six months of 2000 from $4.4 million during the same period
for 1999. The increase is primarily attributable to a rise in debt levels to
$374 million in 2000 from $128 million in 1999. Debt levels have increased over
the last year due to acquisitions and capital expenditures. Specifically, $215
million was borrowed to complete the TNGL and MBA acquisitions in the third
quarter of 1999 and $60 million was borrowed to fund a portion of the purchase
of the Lou-Tex Propylene Pipeline in the first quarter of 2000.
Dividend income from unconsolidated affiliates. The Company's
investment in Dixie and VESCO are recorded using the cost method as prescribed
by generally accepted accounting principles. In accordance with these
guidelines, the Company records as dividend income the cash distributions from
these investments as opposed to recording equity earnings. Both the Dixie and
VESCO investments were acquired as part of the TNGL acquisition. For the first
six months of 2000, the Company recorded dividend income totaling $3.4 million
from VESCO and $0.6 million from Dixie.
Loss on sale of assets. During the second quarter of 2000, the Company
recognized a one-time $2.3 million non-cash charge on the sale of its Longview
Terminal to Huntsman Corporation. The Longview Terminal was part of the
Pipelines segment and was used to unload polymer grade propylene from NGL tank
trucks.
PRO FORMA IMPACT OF ACQUISITIONS
As noted above under 1999 Acquisitions, the Company acquired TNGL and
MBA in the third quarter of 1999. As a result of these acquisitions, revenues,
operating costs and expenses, interest expense, and other amounts shown on the
Statements of Consolidated Operations for the three and six months ended June
30, 2000 have increased significantly over the amounts shown for the three and
six months ended June 30, 1999. The following table presents certain unaudited
pro forma information as if the acquisition of TNGL from Shell and the Mont
Belvieu fractionator facility from Kinder Morgan and EPCO had been made as of
January 1, 1999:
23
Three Six
Months Months
Ended Ended
--------------------------------
June 30, 1999
--------------------------------
Revenues $ 343,990 $ 644,500
================================
Net income $ 26,831 $ 40,112
================================
Allocation of net income to
Limited partners $ 26,562 $ 39,710
================================
General Partner $ 268 $ 401
================================
Units used in earning per Unit calculations
Basic 66,725 66,725
================================
Diluted 81,225 81,225
================================
Income per Unit before minority interest
Basic $ 0.40 $ 0.60
================================
Diluted $ 0.33 $ 0.49
================================
Net income per Unit
Basic $ 0.40 $ 0.60
================================
Diluted $ 0.33 $ 0.49
================================
LIQUIDITY AND CAPITAL RESOURCES
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 the partners. The
Company expects to fund future cash distributions and maintenance capital
expenditures with cash flows from operating activities. Capital expenditures for
future expansion activities and asset acquisitions are expected to be funded
with cash flows from operating activities and borrowings under the revolving
bank credit facility or issuance of additional Common Units.
Cash flows from operating activities were a $177.6 million inflow for
the first six months of 2000 compared to a $14.2 million inflow for the
comparable period of 1999. Cash flows from operating activities primarily
reflect the effects of net income, depreciation and amortization, extraordinary
items, equity income of unconsolidated affiliates and changes in working
capital. Net income increased significantly as a result of improved overall
margins and the TNGL acquisition. Depreciation and amortization increased a
combined $8.6 million in the first six months of 2000 over comparable 1999
levels as a result of additional capital expenditures and the TNGL and MBA
acquisitions in the third quarter of 1999. Amortization expense increased by
$2.8 million due to amortization of the intangible asset associated with the
Shell Processing Agreement ($1.5 million), the write-off of prepaid loan costs
associated with the payoff of the $200 Million Bank Credit Facility in March
2000 ($0.3 million) and the continued amortization of excess costs and other
prepaid loan and bond issue costs ($1.0 million). The net effect of changes in
operating accounts from year to year is generally the result of timing of NGL
sales and purchases near the end of the period.
Cash outflows used in investing activities were $136.4 million in the
first six months of 2000 and $31.6 million for the comparable period of 1999.
Cash outflows included capital expenditures of $154.2 million for the first six
months of 2000 versus $2.5 million for the same period in 1999. Capital
expenditures for the first six months of 2000 included $99.6 million for the
purchase of the Lou-Tex Propylene Pipeline and related assets, $39.2 million in
24
construction costs for the Lou-Tex NGL Pipeline, and $4.4 million in
construction costs for the Neptune gas processing facility. Included in capital
expenditures for the first six months of 2000 are maintenance capital
expenditures of $0.5 million versus $0.7 million for the same period in 1999.
Investing cash outflows in 2000 include $3.0 million in advances to and
investments in unconsolidated affiliates versus $40.4 million for 1999. The
$37.4 million decrease stems primarily from the completion of the BRF facility
and the Tri-States and Wilprise pipeline systems in 1999. The first six months
of 1999 included $27.9 million in investments in and advances to these projects.
On March 8, 2000, the Company's offer of February 23, 2000 to buy the
remaining 88.5% ownership interests in Dixie Pipeline Company ("Dixie") from the
other seven owners expired, with no interest being purchased. In July 2000, the
Company entered into a letter of intent with a stockholder of Dixie to purchase
all or a portion of that stockholder's interest in Dixie (currently 8.38%) for a
purchase price of up to $19.4 million. The purchase of this stockholder's
interest is subject to a right of first refusal held by the other stockholders
of Dixie.
During the first six months of 2000, the Company received $6.5 million
in payments from its participation in the BEF note that was purchased during
1998 with the proceeds from the Company's IPO. BEF made its final note payment
in May 2000. With BEF's final payment, the Company's receivable relating to its
participation in the BEF note was extinguished.
Cash flows from financing activities were a $40.7 million inflow in the
first six months of 2000 versus a $2.8 million outflow for the same period in
1999. Cash flows from financing activities are primarily affected by repayments
of long-term debt, borrowings under the long-term debt agreements and
distributions to the partners. The first six months of 2000 include proceeds
from the $350 Million Senior Notes and the $54 Million MBFC Loan. Also included
are the March 2000 payments made to retire the outstanding balances on the $200
Million and $350 Million Bank Credit Facilities using the proceeds of the $350
Million Senior Notes and $54 Million MBFC Loan. For a complete discussion of the
$350 Million Senior Notes and $54 Million MBFC Loan, see the sections below
entitled "Long-term Debt" and "Senior Notes and MBFC Loan." Cash flows from
financing activities for 1999 reflected the purchase of $4.6 million of Common
Units by a consolidated trust. The Company used $36.1 million of the $87.1
million in cash and cash equivalents at June 30, 2000 to fund the quarterly cash
distribution to Unitholders and the General Partner paid on August 10, 2000.
On July 27, 2000, the Company announced that the Board of Directors of
the General Partner had authorized the Company to purchase up to 1.0 million of
the outstanding Common Units over the next two years. The Units may be purchased
from time to time in the open market or in privately negotiated transactions as
conditions warrant. The timing of any such purchases will be based on the Unit
price and other market factors. The Company may use the repurchased Common Units
as currency in connection with significant and accretive acquisitions to
maintain an appropriate capital structure and increase Unitholder value.
Future Capital Expenditures. The Company estimates that its share of
remaining capital expenditures for 2000 in the projects of its unconsolidated
affiliates will be approximately $5.0 million (including $3.2 million for the
BRPC propylene fractionator). In addition, the Company forecasts that $95.0
million will be spent during the last six months of 2000 on capital projects
that will be recorded as property, plant, and equipment. Of this amount, the
most significant projects and their remaining expenditures for 2000 are as
follows:
- $40.5 million for the Lou-Tex NGL Pipeline;
- $16.1 million for the Garyville, Louisiana to Norco, Louisiana
butane pipelines;
- $ 9.9 million for the Venice, Louisiana to Grand Isle, Louisiana
pipeline; and
- $ 3.6 million for the Norco fractionator ethane liquefaction
facility.
The Company expects to fund these expenditures with operating cash flows,
borrowings under its bank credit facility, and offerings of debt and/or equity
securities. As of June 30, 2000, the Company had $15.8 million in outstanding
purchase commitments attributable to its capital projects. Of this amount, $7.5
million is related to the construction of the Lou-Tex NGL Pipeline and $1.3
million is associated with capital projects which will be recorded as additional
investments in unconsolidated affiliates.
25
DISTRIBUTIONS AND DIVIDENDS FROM UNCONSOLIDATED AFFILIATES
Distributions from unconsolidated affiliates. The Company received
$14.3 million in distributions from its equity method investments in the first
six months of 2000 compared to $4.0 million for the same period in 1999. Of the
$10.3 million increase in distributions, $4.7 million was from EPIK. As noted
before, EPIK's earnings increased in the first six months of 2000 due to higher
export activity. In addition, the first six months of 2000 included $3.3 million
in cash receipts from Promix which was acquired as a result of the TNGL
acquisition in August 1999.
Dividends received from unconsolidated affiliates. The Company received
$4.0 million in cash dividend payments from its cost method investments in Dixie
and VESCO. Specifically, dividends paid by Dixie and VESCO were $0.6 million and
$3.4 million, respectively. Distributions received from these investments are
recorded by the Company as "Dividend income from unconsolidated affiliates" in
the Statements of Consolidated Operations. Both Dixie and VESCO were acquired in
August 1999 as part of the TNGL acquisition.
LONG-TERM DEBT
Long-term debt at June 30, 2000 was comprised of $350 million in 5-year
public Senior Notes (the "$350 Million Senior Notes") and a 10-year $54 million
loan agreement with the Mississippi Business Finance Corporation ("MBFC" and the
"$54 Million MBFC Loan"). The issuance of the $350 Million Senior Notes
represented a partial takedown of the $800 million universal shelf registration
(the "Registration Statement") that was filed with the Securities and Exchange
Commission in December 1999. The proceeds from the $350 Million Senior Notes and
the $54 Million MBFC Loan were used to extinguish all outstanding balances owed
under the $200 Million Bank Credit Facility and the $350 Million Bank Credit
Facility.
The following table summarizes long-term debt at:
JUNE 30, DECEMBER 31,
2000 1999
--------------------------------
Borrowings under:
$200 Million Bank Credit Facility $ 129,000
$350 Million Bank Credit Facility 166,000
$350 Million Senior Notes $ 350,000
$54 Million MBFC Loan 54,000
--------------------------------
Total 404,000 295,000
Less current maturities of long-term debt - 129,000
--------------------------------
Long-term debt $ 404,000 $ 166,000
================================
At June 30, 2000, the Company had a total of $40 million of standby
letters of credit available of which approximately $13.3 million were
outstanding under letter of credit agreements with the banks.
Bank Credit Facilities
$200 Million Bank Credit Facility. In July 1998, the Enterprise
Products Operating L.P. (the "Operating Partnership") entered into a $200
Million Bank Credit Facility that included a $50 million working capital
facility and a $150 million revolving term loan facility. On March 15, 2000, the
Company used $169 million of the proceeds from the issuance of the $350 Million
Senior Notes to retire this credit facility in accordance with its agreement
with the banks.
$350 Million Bank Credit Facility. In July 1999, the Operating
Partnership entered into a $350 Million Bank Credit Facility that includes a $50
million working capital facility and a $300 million revolving term loan
facility. The $300 million revolving term loan facility includes a sublimit of
$40 million for letters of credit. Borrowings under the $350 Million Bank Credit
Facility will bear interest at either the bank's prime rate or the Eurodollar
26
rate plus the applicable margin as defined in the facility. The Company elects
the basis for the interest rate at the time of each borrowing.
This facility is scheduled to expire in July 2001 and all amounts
borrowed thereunder shall be due and payable at that time. There must be no
amount outstanding under the working capital facility for at least 15
consecutive days during each fiscal year. In March 2000, the Company used $179
million of the proceeds from the issuance of the $350 Million Senior Notes and
$47 million from the $54 Million MBFC Loan to payoff the outstanding balance on
this credit facility. No amount was outstanding on this credit facility at June
30, 2000.
The credit agreement relating to this 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 $250.0 million, (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 3.5 to 1.0 and (iii) maintain a ratio of Total Indebtedness
(as defined in the bank credit facility) to EBITDA of no more than 3.0 to 1.0.
The Company was in compliance with the restrictive covenants at June 30, 2000.
Senior Notes and MBFC Loan
$350 Million Senior Notes. On March 13, 2000, the Operating Partnership
completed a public offering of $350 million in principal amount of 8.25%
fixed-rate Senior Notes due March 15, 2005 at a price to the public of 99.948%
per Senior Note. In the offering, the Operating Partnership received proceeds,
net of underwriting discounts and commissions, of approximately $347.7 million.
The proceeds were used to pay the entire $169 million outstanding principal
balance on the $200 Million Bank Credit Facility and $179 million of the $226
million outstanding principal balance on the $350 Million Bank Credit Facility.
The notes are subject to a make-whole redemption right by the Operating
Partnership. They are an unsecured obligation of the Operating Partnership and
rank equally with its existing and future unsecured and unsubordinated
indebtedness and senior to any future subordinated indebtedness. The notes are
guaranteed by the Company through an unsecured and unsubordinated guarantee and
were issued under an indenture containing certain restrictive covenants. These
covenants restrict the ability of the Company and the Operating Partnership,
with certain exceptions, to incur debt secured by liens and engage in sale and
leaseback transactions. The Company and Operating Partnership were in compliance
with these restrictive covenants at June 30, 2000.
Settlement was completed on March 15, 2000. The offering of the $350
Million Senior Notes was a takedown under the Company's $800 million
Registration Statement; therefore, the amount of securities available under the
Registration Statement is reduced to $450 million.
$54 Million MBFC Loan. On March 27, 2000, the Operating Partnership
executed a $54 million loan agreement with the MBFC which was funded by the
proceeds from the sale of Revenue Bonds by the MBFC. The Revenue Bonds issued by
the MBFC are 10-year bonds with a maturity date of March 1, 2010 and bear a
fixed rate interest coupon of 8.70 percent. The Operating Partnership received
proceeds from the sale of the Revenue Bonds, net of underwriting discounts and
commissions, of approximately $53.6 million. The proceeds were used to pay the
remaining $47 million outstanding principal balance on the $350 Million Bank
Credit Facility and for working capital and other general partnership purposes.
In general, the proceeds of the Revenue Bonds were used to reimburse the
Operating Partnership for costs it incurred in acquiring and constructing the
Pascagoula, Mississippi natural gas processing plant.
The Revenue Bonds were issued at par and are subject to a make-whole
redemption right by the Operating Partnership. The Revenue Bonds are guaranteed
by the Company through an unsecured and unsubordinated guarantee. The loan
agreement contains certain covenants including maintaining appropriate levels of
27
insurance on the Pascagoula natural gas processing facility and restrictions
regarding mergers. The Company was in compliance with these restrictive
covenants at June 30, 2000.
Interest Rate Swaps. The Company's interest rate exposure results from
variable rate borrowings from commercial banks and fixed rate borrowings
pursuant to the $350 Million Senior Notes and the $54 Million MBFC Loan. The
company manages its exposure to changes in interest rates in its consolidated
debt portfolio by utilizing interest rate swaps. An interest rate swap, in
general, requires one party to pay a fixed rate on the notional amount while the
other party pays a floating rate based on the notional amount.
In March 2000, after the issuance of the $350 Million Senior Notes and
the execution of the $54 Million MBFC Loan, 100% of the Operating Partnership's
consolidated debt were fixed rate obligations. To maintain a balance between
variable rate and fixed rate exposure, the Operating Partnership entered into
interest rate swap agreements with a notional amount of $154 million by which
the Operating Partnership receives payments based on a fixed rate and pays an
amount based on a floating rate. The Operating Partnership's consolidated debt
portfolio interest rate exposure was 62 percent fixed and 38 percent floating,
after considering the effect of the interest rate swap agreements. The notional
amount does not represent exposure to credit loss. The Operating Partnership
monitors its positions and the credit ratings of its counterparties. Management
believes the risk of incurring a credit related loss is remote, and that if
incurred, such losses would be immaterial.
The effect of these swaps (none of which are leveraged) was to decrease the
Company's interest expense by $3.2 million for the three months ended June 30,
2000 and $3.5 million for the six months ended June 30, 2000. For further
information regarding the interest rate swaps, see Note 9 of the unaudited Notes
to the Consolidated Financial Statements.
AMENDMENT TO PARTNERSHIP AGREEMENT
The Partnership Agreement generally authorizes the Company to issue an
unlimited number of additional limited partner interests and other equity
securities of the Company for such consideration and on such terms and
conditions as shall be established by the General Partner in its sole discretion
without the approval of the Unitholders. During the Subordination Period,
however, the Company is limited with regards to the number of equity securities
that it may issue that rank senior to Common Units (except for Common Units upon
conversion of Subordinated Units, pursuant to employee benefit plans, upon
conversion of the general partner interest as a result of the withdrawal of the
General Partner or in connection with acquisitions or capital improvements that
are accretive on a per Unit basis) or an equivalent number of securities ranking
on a parity with the Common Units, without the approval of the holders of at
least a Unit Majority. A Unit Majority is defined as at least a majority of the
outstanding Common Units (during the Subordination Period), excluding Common
Units held by the General Partner and its affiliates, and at least a majority of
the outstanding Common Units (after the Subordination Period).
In April 2000, the Company mailed a Proxy Statement to its public
Unitholders asking them to consider and vote for a proposal to amend the
Partnership Agreement to increase the number of additional Common Units that may
be issued during the Subordination Period without the approval of a Unit
Majority from 22,775,000 Common Units to 47,775,000 Common Units. The primary
purpose of the requested increase was to improve the future financial
flexibility of the Company since 20,500,000 Common Units of the 22,775,000
Common Units available to the partnership during the Subordination Period were
reserved for issuance in connection with the TNGL acquisition. At a special
meeting of the Unitholders and General Partner held on June 9, 2000, this
proposal was approved by 90.7% of the public Unitholders. The amendment
increases the number of Common Units available (and unreserved) to the Company
for general partnership purposes during the Subordination Period from 2,275,000
to 27,275,000.
MTBE FACILITY
The Company owns a 33.33% economic interest in the BEF partnership that
owns the MTBE production facility located within the Company's Mont Belvieu
complex. The production of MTBE is driven by oxygenated fuels programs enacted
under the federal Clean Air Act Amendments of 1990 and other legislation. Any
changes to these programs that enable localities to opt out of these programs,
lessen the requirements for oxygenates or favor the use of non-isobutane based
28
oxygenated fuels reduce the demand for MTBE and could have an adverse effect on
the Company's results of operations.
In recent years, MTBE has been detected in water supplies. The major
source of the ground water contamination appears to be leaks from underground
storage tanks. Although these detections have been limited and the great
majority of these detections have been well below levels of public health
concern, there have been actions calling for the phase-out of MTBE in motor
gasoline in various federal and state governmental agencies.
In light of these developments, the Company is formulating a
contingency plan for use of the BEF facility if MTBE were banned or
significantly curtailed. Management is exploring a possible conversion of the
BEF facility from MTBE production to alkylate production. At present the
forecast cost of this conversion would be in the $20 million to $25 million
range, with the Company's share being $6.7 million to $8.3 million. Management
anticipates that if MTBE is banned alkylate demand will rise as producers use it
to replace MTBE as an octane enhancer. Alkylate production would be expected to
generate spot market margins comparable to those of MTBE. Greater alkylate
production would be expected to increase isobutane consumption nationwide and
result in improved isomerization margins for the Company.
Sun, the MTBE facility's major customer and one of the partners of BEF,
has entered into a contract with BEF to take all of the MTBE production through
September 2004.
YEAR 2000 READINESS DISCLOSURE
The Company's efforts at preparing its computer systems for the Year
2000 were successful and no significant problems were encountered. The Year 2000
Readiness team reported that all systems functioned properly as the date changed
from December 31, 1999 to January 1, 2000. The Company is also pleased to note
that no problems were reported to it by its customers or vendors as a result of
the Year 2000 issue. The Company continues to be vigilant in monitoring its
systems for any potential Year 2000 problems that may arise in the short-term.
There is no assurance that residual Year 2000 issues will not arise in the
future which could have a material adverse effect on the operations of the
Company.
ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133-an amendment of FASB Statement No. 133" which effectively
delays the application of SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities" for one year, to fiscal years beginning after June 15,
2000. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment of FASB
Statement No. 133" which amends and supercedes various sections of SFAS No. 133.
Management is currently studying SFAS No. 133 and its amendments for their
possible impact on the consolidated financial statements when they are adopted
in January 2001.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION
This quarterly report contains various forward-looking statements and
information that are based on the belief of the Company and the General Partner,
as well as assumptions made by and information currently available to the
Company and the General Partner. When used in this document, words such as
"anticipate," "estimate," "project," "expect," "plan," "forecast," "intend,"
"could," and "may," and similar expressions and statements regarding the plans
and objectives of the Company for future operations, are intended to identify
forward-looking statements. Although the Company and the General Partner believe
that the expectations reflected in such forward-looking statements are
reasonable, they can give no assurance that such expectations will prove to be
correct. Such statements are subject to certain risks, uncertainties, and
assumptions. If one or more of these risks or uncertainties materialize, or if
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated, projected, or expected. Among the key risk factors
that may have a direct bearing on the Company's results of operations and
financial condition are: (a) competitive practices in the industries in which
the Company competes, (b) fluctuations in oil, natural gas, and NGL product
prices and production, (c) operational and systems risks, (d) environmental
29
liabilities that are not covered by indemnity or insurance, (e) the impact of
current and future laws and governmental regulations (including environmental
regulations) affecting the NGL industry in general, and the Company's operations
in particular, (f) loss of a significant customer, and (g) failure to complete
one or more new projects on time or within budget.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to financial market risks, including changes in
interest rates with respect to a portion of its debt obligations and changes in
commodity prices. The Company may use derivative financial instruments (i.e.,
futures, forwards, swaps, options, and other financial instruments with similar
characteristics) to mitigate these risks. The Company does not use derivative
financial instruments for speculative (or trading) purposes.
Beginning with the fourth quarter of 1999, the Company adopted a
commercial policy to manage exposures to the risks generated by the NGL
businesses acquired in the TNGL acquisition. The objective of the policy is to
assist the Company in achieving its profitability goals while maintaining a
portfolio of conservative risk, defined as remaining with the position limits
established by the Board of Directors of the General Partner. The Company will
enter into risk management transactions to manage price risk, basis risk,
physical risk or other risks related to energy commodities on both a short-term
(less than 30 days) and long-term basis, not to exceed 18 months. The General
Partner has established a Risk Committee (the "Committee") that will oversee
overall strategies associated with physical and financial risks. The Committee
will approve specific commercial policies of the Company subject to this policy,
including authorized products, instruments and markets. The Committee is also
charged with establishing specific guidelines and procedures for implementing
the policy and ensuring compliance with the policy.
INTEREST RATE RISK
Variable rate Debt. At June 30, 2000 and December 31, 1999, the Company
had no derivative instruments in place to cover any potential interest rate risk
on its variable-rate debt obligations. Variable interest rate debt obligations
do expose the Company to possible increases in interest expense and decreases in
earnings if interest rates were to rise. The Company's long-term debt associated
with the $350 Million Bank Credit Facility is at variable interest rates. No
amount was outstanding under this facility during the second quarter of 2000.
If the weighted average base interest rates selected on the
variable-rate long-term debt at December 31, 1999 were to have been 10% higher
than the weighted average of the actual base interest rates selected, assuming
no changes in weighted average variable debt levels, interest expense would have
increased by approximately $1.4 million with a corresponding decrease in
earnings before minority interest. No calculation has been made on the
variable-rate debt for June 30, 2000 since no amount was outstanding under the
$350 Million Bank Credit Facility.
Fixed rate Debt. In March 2000, the Operating Partnership entered into
interest rate swaps whereby the fixed rate of interest on a portion of the $350
Million Senior Notes and the $54 Million MBFC Loan was effectively swapped for
floating rates tied to the six month London Interbank Offering Rate ("LIBOR").
Interest rate swaps are used to manage the Company's exposure to changes in
interest rates and to lower overall costs of financing. An interest rate swap,
in general, requires one party to pay a fixed rate on the notional amount while
the other party pays a floating rate based on the notional amount.
After the issuance of the $350 Million Senior Notes and the execution
of the $54 Million MBFC Loan, 100% of the Operating Partnership's consolidated
debt were fixed rate obligations. To maintain a balance between variable rate
and fixed rate exposure, the Operating Partnership entered into interest rate
swap agreements with a notional amount of $154 million by which the Operating
Partnership receives payments based on a fixed rate and pays an amount based on
a floating rate. The Operating Partnership's consolidated debt portfolio
interest rate exposure was 62 percent fixed and 38 percent floating, after
considering the effect of the interest rate swap agreements. The notional amount
does not represent exposure to credit loss. The Operating Partnership monitors
its positions and the credit ratings of its counterparties. Management believes
the risk of incurring a credit related loss is remote, and that if incurred,
such losses would be immaterial.
30
The effect of these swaps (none of which are leveraged) was to decrease
the Company's interest expense by $3.2 million for the three months ended June
30, 2000 and $3.5 million for the six months ended June 30, 2000. Following is
selected information on the Company's portfolio of interest rate swaps at June
30, 2000:
INTEREST RATE SWAP PORTFOLIO AT JUNE 30, 2000 (1) :
(Dollars in millions)
Early Fixed /
Notional Termination Floating
Amount Period Covered Date (2) Rate (3)
- --------------------------------------------------------------------------------
$ 50.0 March 2000 - March 2005 March 2001 8.25% / 6.9500%
$ 50.0 March 2000 - March 2005 March 2001 8.25% / 6.9550%
$ 54.0 March 2000 - March 2010 March 2003 8.70% / 7.2575%
Notes:
(1) All swaps outstanding at June 30, 2000 were entered into for the purpose of
managing the Operating Partnership's exposure to fluctuations in market
interest rates.
(2) In each case, the counterparty has the option to terminate the interest
rate swap on the Early Termination Date.
(3) In each case, the Operating Partnership is the floating-price payor. The
floating rate was the rate in effect as of June 30, 2000.
If the six month LIBOR rates on the notional amounts of fixed-rate
long-term debt at June 30, 2000 were to have been 10% higher than the six month
LIBOR rates actually used in the swap agreements, assuming no changes in
weighted average fixed-rate debt levels, interest expense for the three and six
months ended June 30, 2000 would have increased by approximately $0.3 million
with a corresponding decrease in earnings before minority interest.
Other. At June 30, 2000 and December 31, 1999, the Company had $87.1
million and $5.2 million invested in cash and cash equivalents, respectively.
All cash equivalent investments other than cash are highly liquid, have original
maturities of less than three months, and are considered to have insignificant
interest rate risk.
COMMODITY PRICE RISK
The Company is exposed to commodity price risk through its NGL
businesses acquired in the TNGL acquisition. In order to effectively manage this
risk, the Company may enter into swaps, forwards, commodity futures, options and
other derivative commodity instruments with similar characteristics that are
permitted by contract or business custom to be settled in cash or with another
financial instrument. The purpose of these risk management activities is to
hedge exposure to price risks associated with natural gas, NGL inventories,
commitments and certain anticipated transactions. The table below presents the
hypothetical changes in fair values arising from immediate selected potential
changes in the quoted market prices of derivative commodity instruments
outstanding at December 31, 1999 and June 30, 2000. Gain or loss on these
derivative commodity instruments would be offset by a corresponding gain or loss
on the hedged commodity positions, which are not included in the table. The fair
value of the commodity futures at December 31, 1999 and June 30, 2000 was
estimated at $0.5 million payable and $7.7 million receivable, respectively,
based on quoted market prices of comparable contracts and approximate the gain
or loss that would have been realized if the contracts had been settled at the
balance sheet date. The change in fair value of the commodity futures since
December 31, 1999 is primarily due to an increase in volumes hedged, change in
composition of commodities hedged and higher natural gas prices. The change in
fair value between June 30, 2000 and August 1, 2000 is due to the settlement of
the July 2000 contract volumes and changes in natural gas prices.
31
(MILLIONS OF DOLLARS) NO CHANGE 10% INCREASE 10% DECREASE
--------- ------------ ------------
IMPACT OF CHANGES IN QUOTED FAIR FAIR INCREASE FAIR INCREASE
MARKET PRICES ON: VALUE VALUE (DECREASE) VALUE (DECREASE)
- ------------------------------------------------------------------------------------------------------------------
Commodity futures
At December 31, 1999 $ (0.5) $ 1.2 $ 1.7 $ (2.2) $ (1.7)
At June 30, 2000 $ 7.7 $ 12.1 $ 4.4 $ 3.2 $ (4.5)
At August 1, 2000 $ 0.7 $ 5.6 $ 4.9 $ (4.2) $ (4.9)
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The following table shows the Use of Proceeds from the $350 Million
Senior Notes offering completed on March 15, 2000. The $350 Million Senior Notes
represented a partial takedown of the Company's and the Operating Partnership's
$800 million Registration Statement filed with the Securities and Exchange
Commission in December 1999 (File Nos. 333-93239 and 333-93239-01, effective
January 14, 2000); therefore, the amount of securities available under the
Registration Statement was reduced to $450 million.
The title of the registered debt securities was "8.25% Senior Notes Due
2005." The underwriters of the offering were Chase Securities, Inc., Lehman
Brothers Inc., Banc One Capital Markets, Inc., FleetBoston Robertson Stephens
Inc., First Union Securities, Inc., Scotia Capital (USA) Inc. and SG Cowen
Securities Corp.. The 5-year Senior Notes have a maturity date of March 15, 2005
and bear a fixed-rate interest coupon of 8.25%.
Amounts
(in millions)
--------------
Proceeds:
Sale of $350 Million Senior Notes to public at 99.948% per Note $ 350
Less underwriting discount of 0.600% per Note (2)
--------------
Total Proceeds to Company and Operating Partnership $ 348
==============
Use of Proceeds:
Retire balance on $200 Million Bank Credit Facility $ (169)
Partial retirement of balance on $350 Million Bank Credit Facility (179)
--------------
Total uses of funds $ (348)
==============
See Note 4 of the Notes to Consolidated Financial Statements for a
description of the $350 Million Senior Notes.
32
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
In April 2000, the Company mailed a Proxy Statement to its public
Unitholders asking them to consider and vote for a proposal to amend the
Partnership Agreement to increase the number of additional Common Units that may
be issued during the Subordination Period without the approval of a Unit
Majority from 22,775,000 Common Units to 47,775,000 Common Units. The primary
purpose of the requested increase was to improve the future financial
flexibility of the Company since 20,500,000 Common Units of the 22,775,000
Common Units available to the partnership during the Subordination Period were
reserved for issuance in connection with the TNGL acquisition. At a special
meeting of the public Unitholders held on June 9, 2000 in Houston, Texas, this
proposal was approved by 90.7% of the public Unitholders. The amendment
increases the number of Common Units available (and unreserved) to the Company
for general partnership purposes during the Subordination Period from 2,275,000
to 27,275,000.
The voting results were as follows:
Number of votes cast approving the amendment 9,533,215
Number of votes cast against the amendment 381,608
Number of votes withheld 489,637
Number of abstentions 104,406
Total number of public Unitholders 10,508,866
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
*1.1 Underwriting Agreement dated March 10, 2000, among Enterprise Products
Partners L.P., Enterprise Products Operating L.P., Chase Securities
Inc., Lehman Brothers Inc., Banc One Capital Markets, Inc., FleetBoston
Robertson Stephens Inc., First Union Securities, Inc., Scotia Capital
(USA) Inc. and SG Cowen Securities Corp. (Exhibit 1.1 on Form 8-K filed
March 10, 2000).
*3.1 Form of Amended and Restated Agreement of Limited Partnership of
Enterprise Products Partners L.P. (Exhibit 3.1 to Registration
Statement on Form S-1, File No. 333-52537, filed on May 13, 1998).
*3.2 Form of Amended and Restated Agreement of Limited Partnership of
Enterprise Products Operating L.P. (Exhibit 3.2 to Registration
Statement on Form S-1/A, File No. 333-52537, filed on July 21, 1998).
*3.3 LLC Agreement of Enterprise Products GP (Exhibit 3.3 to Registration
Statement on Form S-1/A, File No. 333-52537, filed on July 21, 1998).
*3.4 Second Amended and Restated Agreement of Limited Partnership of
Enterprise Products Partners L.P. dated September 17, 1999. (The
Company incorporates by reference the above document included in the
Schedule 13D filed September 27, 1999 by Tejas Energy LLC ; filed as
Exhibit 99.7 on Form 8-K dated October 4, 1999).
*3.5 First Amended and Restated Limited Liability Company Agreement of
Enterprise Products GP, LLC dated September 17, 1999. (Exhibit 99.8 on
Form 8-K/A-1 filed October 27, 1999).
3.6 Amendment No. 1 to Second Amended and Restated Agreement of Limited
Partnership of Enterprise Products Partners L.P. dated June 9, 2000.
*4.1 Form of Common Unit certificate (Exhibit 4.1 to Registration Statement
on Form S-1/A, File No. 333-52537, filed on July 21, 1998).
33
*4.2 $200 million Credit Agreement among Enterprise Products Operating L.P.,
the Several Banks from Time to Time Parties Hereto, Den Norske Bank
ASA, and Bank of Tokyo-Mitsubishi, Ltd., Houston Agency as
Co-Arrangers, The Bank of Nova Scotia, as Co-Arranger and as
Documentation Agent and The Chase Manhattan Bank as Co-Arranger and as
Agent dated as of July 27, 1998 as Amended and Restated as of September
30, 1998. (Exhibit 4.2 on Form 10-K for year ended December 31, 1998,
filed March 17, 1999).
*4.3 First Amendment to $200 million Credit Agreement dated July 28, 1999
among Enterprise Products Operating L.P. and the several banks thereto.
(Exhibit 99.9 on Form 8-K/A-1 filed October 27, 1999).
*4.4 $350 million Credit Agreement among Enterprise Products Operating L.P.,
BankBoston, N.A., Societe Generale, Southwest Agency and First Union
National Bank, as Co-Arrangers, The Chase Manhattan Bank, as
Co-Arranger and as Administrative Agent, The First National Bank of
Chicago, as Co-Arranger and as Documentation Agent, The Bank of Nova
Scotia, as Co-Arranger and Syndication Agent, and the Several Banks
from Time to Time parties hereto with First Union Capital Markets
acting as Managing Agent and Chase Securities Inc. acting as Lead
Arranger and Book Manager dated July 28, 1999 (Exhibit 99.10 on Form
8-K/A-1 filed October 27, 1999).
*4.5 Unitholder Rights Agreement among Tejas Energy LLC, Tejas Midstream
Enterprises, LLC, Enterprise Products Partners L.P., Enterprise
Products Operating L.P., Enterprise Products Company, Enterprise
Products GP, LLC and EPC Partners II, Inc. dated September 17, 1999.
(The Company incorporates by reference the above document included in
the Schedule 13D filed September 27, 1999 by Tejas Energy LLC; filed as
Exhibit 99.5 on Form 8-K dated October 4, 1999).
*4.6 Form of Indenture dated as of March 15, 2000, among Enterprise Products
Operating L.P., as Issuer, Enterprise Products Partners L.P., as
Guarantor, and First Union National Bank, as Trustee. (Exhibit 4.1 on
Form 8-K filed March 10, 2000).
*4.7 Form of Global Note representing all 8.25% Senior Notes Due 2005.
(Exhibit 4.2 on Form 8-K filed March 10, 2000).
*4.8 Second Amendment, dated as of January 24, 2000, to $200 Million Credit
Agreement dated as of July 27, 1998, as Amended and Restated as of
September 30, 1998, among Enterprise Products Operating L.P. and the
several banks thereto. (Exhibit 4.3 on Form 8-K filed March 10, 2000).
*4.9 First Amendment, dated as of January 24, 2000, to $350 Million Credit
Agreement among Enterprise Products Operating L.P., BankBoston, N.A.,
Societe Generale, Southwest Agency and First Union National Bank, as
Co-Arrangers, The Chase Manhattan Bank, as Co-Arranger and as
Administrative Agent, BankOne N.A., as Co- Arranger and as
Documentation Agent, The Bank of Nova Scotia, as Co-Arranger and as
Syndication Agent, and the several Banks from time to time parties
thereto, with First Union Capital Markets acting as Managing Agent and
Chase Securities Inc. acting as Lead Arranger and Manager dated as of
July 28, 1999. (Exhibit 4.4 on Form 8-K filed March 10, 2000).
*4.10 Second Amendment, dated as of March 7, 2000, to $350 Million Credit
Agreement among Enterprise Products Operating L.P., BankBoston, N.A.,
Societe Generale, Southwest Agency and First Union National Bank, as
Co-Arrangers, The Chase Manhattan Bank, as Co-Arranger and as
Administrative Agent, BankOne N.A., as Co- Arranger and as
Documentation Agent, The Bank of Nova Scotia, as Co-Arranger and as
Syndication Agent, and the several Banks from time to time parties
thereto, with First Union Capital Markets acting as Managing Agent and
Chase Securities Inc. acting as Lead Arranger and Manager dated as of
July 28, 1999. (Exhibit 4.5 on Form 8-K filed March 10, 2000).
*4.11 Guaranty Agreement, dated as of March 7, 2000, by Enterprise Products
Partners L.P. in favor of The Chase Manhattan Bank, as Administrative
Agent, with respect to the $350 Million Credit Agreement referred to in
Exhibits 4.4 and 4.5. (Exhibit 4.6 on Form 8-K filed March 10, 2000).
*10.1 Articles of Merger of Enterprise Products Company, HSC Pipeline
Partnership, L.P., Chunchula Pipeline Company, LLC, Propylene Pipeline
Partnership, L.P., Cajun Pipeline Company, LLC and Enterprise Products
Texas Operating L.P. dated June 1, 1998 (Exhibit 10.1 to Registration
Statement on Form S-1/A, File No: 333-52537, filed on July 8, 1998).
34
*10.2 Form of EPCO Agreement between Enterprise Products Partners L.P.,
Enterprise Products Operating L.P., Enterprise Products GP, LLC and
Enterprise Products Company (Exhibit 10.2 to Registration Statement on
Form S-1/A, File No. 333-52537, filed on July 21, 1998).
*10.3 Transportation Contract between Enterprise Products Operating L.P. and
Enterprise Transportation Company dated June 1, 1998 (Exhibit 10.3 to
Registration Statement on Form S-1/A, File No. 333-52537, filed on July
8, 1998).
*10.4 Venture Participation Agreement between Sun Company, Inc. (R&M), Liquid
Energy Corporation and Enterprise Products Company dated May 1, 1992
(Exhibit 10.4 to Registration Statement on Form S-1, File No.
333-52537, filed on May 13, 1998).
*10.5 Partnership Agreement between Sun BEF, Inc., Liquid Energy Fuels
Corporation and Enterprise Products Company dated May 1, 1992 (Exhibit
10.5 to Registration Statement on Form S-1, File No. 333-52537, filed
on May 13, 1998).
*10.6 Amended and Restated MTBE Off-Take Agreement between Belvieu
Environmental Fuels and Sun Company, Inc. (R&M) dated August 16, 1995
(Exhibit 10.6 to Registration Statement on Form S-1, File No.
333-52537, filed on May 13, 1998).
*10.7 Articles of Partnership of Mont Belvieu Associates dated July 17, 1985
(Exhibit 10.7 to Registration Statement on Form S-1, File No.
333-52537, filed on May 13, 1998).
*10.8 First Amendment to Articles of Partnership of Mont Belvieu Associates
dated July 15, 1996 (Exhibit 10.8 to Registration Statement on Form
S-1, File No. 333-52537, filed on May 13, 1998).
*10.9 Propylene Facility and Pipeline Agreement between Enterprise
Petrochemical Company and Hercules Incorporated dated December 13, 1978
(Exhibit 10.9 to Registration Statement on Form S-1, File No.
333-52537, dated May 13, 1998).
*10.10 Restated Operating Agreement for the Mont Belvieu Fractionation
Facilities Chambers County, Texas between Enterprise Products Company,
Texaco Producing Inc., El Paso Hydrocarbons Company and Champlin
Petroleum Company dated July 17, 1985 (Exhibit 10.10 to Registration
Statement on Form S-1/A, File No. 333-52537, filed on July 8, 1998).
*10.11 Ratification and Joinder Agreement relating to Mont Belvieu Associates
Facilities between Enterprise Products Company, Texaco Producing Inc.,
El Paso Hydrocarbons Company, Champlin Petroleum Company and Mont
Belvieu Associates dated July 17, 1985 (Exhibit 10.11 to Registration
Statement on Form S-1/A, File No. 333-52537, filed on July 8, 1998).
*10.12 Amendment to Propylene Facility and Pipeline Sales Agreement between
HIMONT U.S.A., Inc. and Enterprise Products Company dated January 1,
1993 (Exhibit 10.12 to Registration Statement on Form S-1/A, File No.
333-52537, filed on July 8, 1998).
*10.13 Amendment to Propylene Facility and Pipeline Agreement between HIMONT
U.S.A., Inc. and Enterprise Products Company dated January 1, 1995
(Exhibit 10.13 to Registration Statement on Form S-1/A, File No.
333-52537, filed on July 8, 1998).
*10.14 Fourth Amendment to Conveyance of Gas Processing Rights between Tejas
Natural Gas Liquids, LLC and Shell Oil Company, Shell Exploration &
Production Company, Shell Offshore Inc., Shell Deepwater Development
Inc., Shell Land & Energy Company and Shell Frontier Oil & Gas Inc.
dated August 1, 1999. (Exhibit 10.14 to Form 10-Q filed on November 15,
1999).
35
*12.1 Computation of ratio of earnings to fixed charges for the year ended
December 31, 1999. (Exhibit 12.1 on Form 8-K filed March 10, 2000).
*25.1 Statement of Eligibility and Qualification under the Trust Indenture
Act of 1939 on Form T-1 of First Union National Bank. (Exhibit 25.1 on
Form 8-K filed March 10, 2000).
*99.1 Contribution Agreement between Tejas Energy LLC, Tejas Midstream
Enterprises, LLC, Enterprise Products Partners L.P., Enterprise
Products Operating L.P., Enterprise Products Company, Enterprise
Products GP, LLC and EPC Partners II, Inc. dated September 17, 1999.
(The Company incorporates by reference the above document included in
the Schedule 13D filed September 27, 1999 by Tejas Energy LLC; filed as
Exhibit 99.4 on Form 8-K dated October 4, 1999).
*99.2 Registration Rights Agreement between Tejas Energy LLC and Enterprise
Products Partners L.P. dated September 17, 1999. (The Company
incorporates by reference the above document included in the Schedule
13D filed September 27, 1999 by Tejas Energy LLC ; filed as Exhibit
99.6 on Form 8-K dated October 4, 1999).
27.1 Financial Data Schedule
* Asterisk indicates exhibits incorporated by reference as indicated; all
other exhibits are filed herewith
(B) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the quarter.
36
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
/s/ Michael J. Knesek
------------------------------
Date: August 11, 2000 Vice President, Controller and
Principal Accounting Officer
EXHIBIT 3.6
-----------
AMENDMENT NO. 1
TO
SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
ENTERPRISE PRODUCTS PARTNERS L.P.
This Amendment No. 1, dated as of June 9, 2000 (this "Amendment"), to the
Second Amended and Restated Agreement of Limited Partnership of Enterprise
Products Partners L.P. dated as of September 17, 1999 (the "Partnership
Agreement"), is entered into by and among Enterprise Products GP, LLC, a
Delaware limited liability company, as the General Partner, and the Limited
Partners as provided herein. Each capitalized term used but not otherwise
defined herein shall have the meaning assigned to such term in the Partnership
Agreement.
W I T N E S S E T H:
WHEREAS, the first sentence of Section 5.7(a) of the Partnership Agreement
limits the unrestricted number of additional Parity Units that the Partnership
may issue during the Subordination Period without prior approval of the holders
of a Unit Majority to 22,775,000 Parity Units;
WHEREAS, the General Partner deems it advisable to increase such number of
additional Parity Units to 47,775,000 to give the Partnership more flexibility
in connection with acquisitions and capital raising transactions;
WHEREAS, on March 28, 2000, the Board of Directors of the General Partner
approved this Amendment and directed that it be presented to the holders of the
Outstanding Common Units excluding any Common Units held by the General Partner
and its Affiliates (the "Public Unitholders"), for their approval;
WHEREAS, in accordance with the provisions of Article XIII of the
Partnership Agreement, the General Partner presented the Amendment to the Public
Unitholders for their approval at a special meeting held on June 9, 2000 and the
approval of the Amendment was received at that meeting by the holders of a Unit
Majority, as required by Section 13.2 of the Partnership Agreement;
NOW, THEREFORE, in consideration of the premises, the parties hereto agree
as follows:
1. The first sentence of Section 5.7(a) of the Partnership Agreement is
hereby amended to read in its entirety as follows:
"During the Subordination Period, the Partnership shall not issue (and
shall not issue any options, rights, warrants or appreciation rights
relating to) an aggregate of more than 47,775,000 additional Parity
Units without the prior approval of the holders of a Unit Majority."
2. As amended hereby, the Partnership Agreement is in all respects
ratified, confirmed and approved and shall remain in full force and
effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
GENERAL PARTNER:
ENTERPRISE PRODUCTS GP, LLC
By: /s/ O.S. Andras
-----------------------
O. S. Andras
President and Chief Executive Officer
LIMITED PARTNERS:
All Limited Partners now and hereafter admitted as Limited
Partners of the Partnership, pursuant to Powers of Attorney
now and hereafter executed in favor of, and granted and
delivered to the General Partner.
By: Enterprise Products GP, LLC
General Partner, as attorney-in-fact for the Limited
Partners pursuant to the Powers of Attorney granted
pursuant to Section 2.6.
By: /s/ O.S. Andras
----------------------
O. S. Andras
President and Chief Executive Officer
5
0001061219
Enterprise Prod. Partners L.P.
1000
6-MOS
DEC-31-2000
JAN-01-2000
JUN-30-2000
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