UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d)
of the
Securities Exchange Act of 1934
Date of
Report (Date of earliest event reported): July 8, 2009
TEPPCO
PARTNERS, L.P.
(Exact
name of registrant as specified in its charter)
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Delaware
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1-10403
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76-0291058
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(State
or Other Jurisdiction of
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(Commission
File Number)
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(I.R.S.
Employer
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Incorporation
or Organization)
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Identification
No.)
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1100
Louisiana, Suite 1600, Houston, Texas
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77002
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(Address
of Principal Executive Offices)
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(Zip
Code)
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| Registrant’s Telephone Number, including Area Code: (713) 381-3636 |
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
¨ Written communications
pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨ Soliciting material
pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨ Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
¨ Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
Item
8.01. Other Events.
On January 1, 2009, Texas Eastern
Products Pipeline Company, LLC and Subsidiaries (“TEPPCO GP”) adopted Statement
of Financial Accounting Standards No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an Amendment of ARB No. 51 (“SFAS
160”). TEPPCO GP is the general partner of TEPPCO Partners, L.P.
(“TEPPCO”).
Attached as Exhibit 99.1 to this
Current Report on Form 8-K and incorporated herein by reference is a
retrospectively adjusted version of the consolidated balance sheet of TEPPCO GP
as of December 31, 2008, as filed with the Securities and Exchange Commission
(“SEC”) on March 5, 2009, which reflects the adoption of SFAS 160 and the
resulting change in the presentation and disclosure requirements relating to the
consolidated balance sheet presented in accordance with the requirements of SFAS
160. The information in Exhibit 99.1 does not reflect events or
developments that occurred after March 5, 2009. More current
information is contained in the TEPPCO Current Report on Form 8-K filed on May
12, 2009 and other filings with the SEC. The Current Report on Form
8-K filed on May 12, 2009 and other filings contain important information
regarding events or developments that have occurred since the filing of the
Current Report on Form 8-K on March 5, 2009.
Included as Exhibit 23.1 is an
auditors’ consent to the incorporation by reference into previously filed
registration statements of their report relating to the consolidated balance
sheet of TEPPCO GP at December 31, 2008 that is filed as Exhibit 99.1 to this
Current Report on Form 8-K.
Item
9.01 Financial Statements and Exhibits.
(d) Exhibits.
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Exhibit No.
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Description
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23.1
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Consent
of Deloitte & Touche LLP.
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99.1
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Recast
Consolidated Balance Sheet of TEPPCO GP as of December 31,
2008.
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1
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SIGNATURES
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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 hereunto duly
authorized.
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TEPPCO
PARTNERS, L.P.
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|||
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By:
Texas Eastern Products Pipeline Company, LLC,
its
General Partner
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|||
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Date:
July 8, 2009
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By:
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/s/ Tracy E.
Ohmart
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Name:
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Tracy E. Ohmart
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||
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Title:
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Assistant Secretary, Assistant Treasurer,
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| Controller and Acting Chief Financial Officer | |||
2
Exhibit
Index
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Exhibit No.
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Description
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23.1
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Consent
of Deloitte & Touche LLP.
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99.1
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Recast
Consolidated Balance Sheet of TEPPCO GP as of December 31,
2008.
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3
Exhibit
23.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by
reference in Registration Statement Nos. 333-153314, 333-146108 and 33-81976 on
Form S-3, and Registration Statement Nos. 333-143554 and 333-141919 on Form S-8
of our report dated March 2, 2009 (July 6, 2009 as to the effects of the
adoption of SFAS 160 and the related disclosures in Notes 1, 2, 3, 13 and
14), relating to the
consolidated balance sheet of Texas Eastern Products Pipeline Company, LLC and
subsidiaries at December 31, 2008 (which report expresses an unqualified opinion
and includes an explanatory paragraph concerning the retrospective adjustments
related to the adoption of SFAS 160), appearing in this Current Report on Form
8-K of TEPPCO Partners, L.P.
/s/ DELOITTE
& TOUCHE LLP
Houston,
Texas
July 6,
2009
Exhibit
99.1
Texas
Eastern Products Pipeline Company, LLC and Subsidiaries
Consolidated
Balance Sheet as of December 31, 2008
and
Report of Independent Registered Public Accounting Firm
CONSOLIDATED
BALANCE SHEET OF
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
TABLE
OF CONTENTS
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Page No.
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Report
of Independent Registered Public Accounting Firm
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1
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Consolidated
Balance Sheet as of December 31, 2008
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2
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Notes
to Consolidated Balance Sheet
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3
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Note
1. Organization
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3
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Note 2. Summary of
Significant Accounting Policies
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3
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Note 3. Recent
Accounting Developments
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12
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Note 4. Accounting
for Equity Awards
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14
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Note 5. Employee
Benefit Plans
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20
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Note 6. Financial
Instruments
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21
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Note
7. Inventories
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25
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Note 8. Property,
Plant and Equipment
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25
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Note 9. Investments
in Unconsolidated Affiliates
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26
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Note
10. Acquisitions
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29
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Note 11. Intangible
Assets and Goodwill
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32
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Note 12. Debt
Obligations
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34
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Note
13. Noncontrolling Interest
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37
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Note 14. Equity
(Deficit)
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38
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Note 15. Business
Segments
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39
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Note 16. Related
Party Transactions
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40
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Note 17. Commitments
and Contingencies
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43
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Note
18. Concentrations of Credit Risk
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50
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i
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors of
Texas
Eastern Products Pipeline Company, LLC:
We have audited the accompanying
consolidated balance sheet of Texas Eastern Products Pipeline Company, LLC and
subsidiaries (the “Company”) as of December 31, 2008. This financial
statement is the responsibility of the Company’s management. Our
responsibility is to express an opinion on the financial statement based on our
audit.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated
balance sheet presents fairly, in all material respects, the financial position
of Texas Eastern Products Pipeline Company, LLC and subsidiaries as of December
31, 2008 in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Notes 1, 2, 3, 13 and
14 to the consolidated balance sheet, the accompanying consolidated balance
sheet has been retrospectively adjusted for the adoption of FASB Statement No.
160, Noncontrolling Interests
in Consolidated Financial Statements – an Amendment of ARB No. 51 (“SFAS
160”).
/s/ DELOITTE
& TOUCHE LLP
Houston,
Texas
March 2,
2009
(July 6,
2009 as to the effects of the adoption of SFAS 160 and the related disclosures
in Notes 1, 2, 3, 13 and 14)
1
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TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEET
(Dollars
in thousands)
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||||
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December
31,
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||||
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2008
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||||
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ASSETS
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||||
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Current
assets:
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||||
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Cash and cash
equivalents
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$ | 37 | ||
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Accounts receivable, trade (net
of allowance for doubtful accounts of $2,559)
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790,374 | |||
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Accounts receivable, related
parties
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15,758 | |||
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Inventories
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52,906 | |||
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Other
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48,495 | |||
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Total current
assets
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907,570 | |||
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Property, plant and equipment,
at cost (net of accumulated depreciation of
$678,784)
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2,439,910 | |||
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Equity
investments
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1,255,923 | |||
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Intangible assets (net
of accumulated amortization of $158,391)
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207,653 | |||
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Goodwill
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106,611 | |||
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Other
assets
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132,161 | |||
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Total assets
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$ | 5,049,828 | ||
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LIABILITIES
AND EQUITY
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||||
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Current
liabilities:
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||||
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Accounts payable and accrued
liabilities
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$ | 792,469 | ||
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Accounts payable, related
parties
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17,219 | |||
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Accrued interest
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36,401 | |||
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Other accrued
taxes
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23,038 | |||
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Other
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30,869 | |||
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Total current
liabilities
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899,996 | |||
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Long-term
debt:
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||||
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Senior
notes
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1,713,291 | |||
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Junior
subordinated notes
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299,574 | |||
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Other
long-term debt
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516,654 | |||
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Total
long-term debt
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2,529,519 | |||
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Other
liabilities and deferred credits
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28,826 | |||
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Commitments
and contingencies
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||||
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Equity
(deficit):
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||||
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Texas
Eastern Products Pipeline Company, LLC member’s equity
(deficit):
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||||
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Member’s equity
(deficit)
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(110,301 | ) | ||
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Accumulated other comprehensive
loss
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(6,302 | ) | ||
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Total Texas Eastern Products
Pipeline Company, LLC member’s equity (deficit)
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(116,603 | ) | ||
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Noncontrolling
interest
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1,708,090 | |||
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Total equity
(deficit)
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1,591,487 | |||
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Total liabilities and equity
(deficit)
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$ | 5,049,828 | ||
See Notes
to Consolidated Balance Sheet.
2
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET
Except
as noted within the context of each footnote disclosure, the dollar amounts
presented in the tabular data within these footnote disclosures are stated in
thousands.
NOTE
1. ORGANIZATION
Texas
Eastern Products Pipeline Company, LLC (the “Company”), is a Delaware limited
liability company that owns a 2% general partner interest in TEPPCO
Partners, L.P. (“TEPPCO”) and acts as the managing general partner of
TEPPCO. We have no independent operations and no material assets
outside those of TEPPCO. TEPPCO is a publicly traded, diversified
energy logistics company with operations that span much of the continental
United States. Its limited partner units (“Units”) are listed on the
New York Stock Exchange (“NYSE”) under the ticker symbol
“TPP.” TEPPCO was formed in March 1990 as a Delaware limited
partnership. TEPPCO operates principally through TE Products Pipeline
Company, LLC (“TE Products”), TCTM, L.P. (“TCTM”), TEPPCO Midstream Companies,
LLC (“TEPPCO Midstream”) and TEPPCO Marine Services, LLC (“TEPPCO Marine
Services”).
Our
membership interests are owned by Enterprise GP Holdings L.P. (“Enterprise GP
Holdings”), a publicly traded partnership controlled by Dan L.
Duncan. Enterprise GP Holdings is an affiliate of EPCO, Inc.
(“EPCO”), a privately held company also controlled by Dan L.
Duncan. Mr. Duncan and certain of his affiliates, including DFI GP
Holdings L.P. (“DFIGP”), Enterprise GP Holdings and Dan Duncan LLC, a privately
held company controlled by him, control us, TEPPCO and Enterprise Products
Partners L.P. (“Enterprise Products Partners”) and its affiliates, including
Duncan Energy Partners L.P. (“Duncan Energy Partners”). EPCO and its
affiliates and Enterprise GP Holdings are not liable for our obligations nor do
we assume or guarantee the obligations of such affiliates. We do not
receive financial assistance from or own interests in any other EPCO affiliates
other than our general partner interests in TEPPCO. Enterprise GP
Holdings, DFIGP and other entities controlled by Mr. Duncan own 17,073,315 of
TEPPCO’s Units. Our executive officers are employees of EPCO, and
most of the other personnel working on behalf of TEPPCO also are employees of
EPCO. Under an amended and restated administrative services agreement
(“ASA”), EPCO performs management, administrative and operating functions
required for us and our subsidiaries, and we reimburse EPCO for all direct and
indirect expenses that have been incurred in managing us and our
subsidiaries.
References
to “we,” “us,” “our,” and the “Company” mean Texas Eastern Products Pipeline
Company, LLC, and where the context requires, include our subsidiaries and their
business and operations. References to the “Parent Company” are
intended to mean and include Texas Eastern Products Pipeline Company, LLC, in
its individual capacity, and not on a consolidated basis as part of a common
control group with EPCO, Enterprise GP Holdings or TEPPCO and its
subsidiaries.
Effective
January 1, 2009, we adopted the provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an Amendment to ARB No.
51. SFAS 160 established accounting and reporting standards
for noncontrolling interests, which were previously identified as minority
interest in our consolidated balance sheet. The presentation and
disclosure requirements of SFAS 160 have been applied retrospectively to the
consolidated balance sheet and notes included in this Current Report on Form
8-K.
NOTE
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
We adhere to the following significant
accounting policies in the preparation of our consolidated balance
sheet.
3
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
Business
Segments
We operate and report in four business
segments:
|
§
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pipeline
transportation, marketing and storage of refined products, liquefied
petroleum gases (“LPGs”) and petrochemicals (“Downstream
Segment”);
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§
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gathering,
pipeline transportation, marketing and storage of crude oil, distribution
of lubrication oils and specialty chemicals and fuel transportation
services (“Upstream
Segment”);
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§
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gathering
of natural gas, fractionation of natural gas liquids (“NGLs”) and pipeline
transportation of NGLs (“Midstream Segment”);
and
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§
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marine
transportation of refined products, crude oil, condensate, asphalt, heavy
fuel oil and other heated oil products via tow boats and tank barges
(“Marine Services Segment”).
|
Our
reportable segments offer different products and services and are managed
separately because each requires different business strategies (see Note
15).
Certain of our interstate pipeline
transportation operations, including rates charged to customers, are subject to
regulations prescribed by the Federal Energy Regulatory Commission
(“FERC”). We refer to refined products, LPGs, petrochemicals, crude
oil, lubrication oils and specialty chemicals, NGLs, natural gas, asphalt, heavy
fuel oil and other heated oil products, collectively, as “petroleum products” or
“products.”
Allowance
for Doubtful Accounts
Our allowance for doubtful accounts
balance is generally determined based on specific identification and estimates
of future uncollectible accounts, as appropriate. Our procedure for
recording an allowance for doubtful accounts is based on (i) our historical
experience, (ii) the financial stability of our customers and (iii) the levels
of credit granted to customers. In addition, we may also increase the
allowance account in response to specific identification of customers involved
in bankruptcy proceedings and those experiencing other financial
difficulties. We routinely review estimates associated with the
allowance for doubtful accounts to assess the sufficiency of the reserves to
cover potential losses. The following table presents the activity of
our allowance for doubtful accounts for the year ended December 31,
2008:
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For
Year Ended December 31,
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||||
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2008
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||||
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Balance at January
1
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$ | 125 | ||
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Charges to expense
(1)
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2,434 | |||
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Balance
at December
31
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$ | 2,559 | ||
_________________
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(1)
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Charges
to expense include the write-off of receivables primarily attributable to
two customer bankruptcies.
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Asset
Retirement Obligations
Asset retirement obligations (“AROs”)
are legal obligations associated with the retirement of tangible long-lived
assets that result from their acquisition, construction, development and/or
normal operation. We record a liability for AROs when incurred and
capitalize an increase in the carrying value of the related long-lived
asset. Over time, the liability is accreted to its present value each
period, and the capitalized cost is depreciated over its useful
life. We will either settle our ARO obligations at the recorded
amount or incur a gain or loss upon settlement. See Note 8 for further
information regarding our AROs.
4
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
The Downstream Segment assets consist
primarily of an interstate trunk pipeline system and a series of storage
facilities that originate along the upper Texas Gulf Coast and extend through
the Midwest and northeastern United States. We transport refined
products, LPGs and petrochemicals through the pipeline system. These
products are primarily received in the south end of the system and stored and/or
transported to various points along the system per customer
nominations. The Upstream Segment’s operations include purchasing
crude oil from producers at the wellhead and providing delivery, storage and
other services to its customers. The principal properties in the
Upstream Segment consist of interstate trunk pipelines, pump stations, trucking
facilities, storage tanks and various gathering systems primarily in Texas and
Oklahoma. The Midstream Segment gathers natural gas from wells owned
by producers and delivers natural gas and NGLs on its pipeline systems,
primarily in Texas, Wyoming, New Mexico and Colorado. The Midstream
Segment also owns and operates two NGL fractionation facilities in Colorado. The
Marine Services Segment’s principal assets consist of tow boats and tank barges
used in the marine transportation of refined products, crude oil, condensate,
asphalt, heavy fuel oil and other heated oil products.
We have determined that we are
obligated by contractual or regulatory requirements to remove certain facilities
or perform other remediation upon retirement of our assets. However,
we are not able to reasonably determine the fair value of the AROs for our
trunk, interstate and gathering pipelines and our surface facilities, since
future dismantlement and removal dates are indeterminate. During
2006, we recorded conditional AROs related to the retirement of the Val Verde
Gas Gathering Company, L.P. (“Val Verde”) natural gas gathering system and to
structural restoration work to be completed on leased office space that is
required upon our anticipated office lease termination.
In order to determine a removal date
for our crude oil gathering lines and related surface assets, reserve
information regarding the production life of the specific field is
required. As a transporter and gatherer of crude oil, we are not a
producer of the field reserves, and we therefore do not have access to adequate
forecasts that predict the timing of expected production for existing reserves
on those fields in which we gather crude oil. In the absence of such
information, we are not able to make a reasonable estimate of when future
dismantlement and removal dates of our crude oil gathering assets will
occur. With regard to our trunk and interstate pipelines and their
related surface assets, it is impossible to predict when demand for
transportation of the related products will cease. Our right-of-way
agreements allow us to maintain the right-of-way rather than remove the
pipe. In addition, we can evaluate our trunk pipelines for
alternative uses, which can be and have been found. We will record
AROs in the period in which sufficient information becomes available for us to
reasonably estimate the settlement dates of the retirement
obligations.
Basis
of Presentation and Principles of Consolidation
We own a
2% general partner interest in TEPPCO, which conducts substantially all of our
business. We have no independent operations and no material assets
outside those of TEPPCO. The number of reconciling items between our
consolidated balance sheet and that of TEPPCO are few. The most
significant difference is that relating to noncontrolling interest ownership in
our net assets by the limited partners of TEPPCO, and the elimination of our
investment in TEPPCO with our underlying partner’s capital account in TEPPCO
(see Note 13 for additional information regarding noncontrolling interest
ownership in our consolidated subsidiaries).
The
balance sheet includes our accounts on a consolidated basis. We have
eliminated all intercompany items in consolidation.
Cash
and Cash Equivalents
Cash and cash equivalents represent
unrestricted cash on hand and liquid investments with maturities of three months
or less when purchased. The carrying value of cash equivalents
approximate fair value because of the short term nature of these
investments.
5
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
Capitalization
of Interest
We capitalize interest on borrowed
funds related to capital projects only for periods that activities are in
progress to bring these projects to their intended use. The weighted average
rates used to capitalize interest on borrowed funds was 6.43% for the year ended
December 31, 2008.
Consolidation
Policy
Our consolidated balance sheet includes
our accounts and those of our majority-owned subsidiaries in which we have a
controlling financial or equity interest, after the elimination of all
significant intercompany accounts and transactions. We evaluate our financial
interests in companies to determine if they represent variable interest entities
where we are the primary beneficiary. If such criteria are met, we consolidate
the financial statements of such businesses with those of our own.
If an investee is organized as a
limited partnership or limited liability company and maintains separate
ownership accounts, we account for our investment using the equity method if our
ownership interest is between 3% and 50% and we exercise significant influence
over the entity’s operating and financial policies. For all other types of
investments, we apply the equity method of accounting if our ownership interest
is between 20% and 50% and we exercise significant influence over the entity’s
operating and financial policies. In consolidation, we eliminate our
proportionate share of profits and losses from transactions with equity method
unconsolidated affiliates to the extent such amounts are material and remain on
our balance sheet (or those of our equity method investments) in inventory or
similar accounts.
Our
investments in Seaway Crude Pipeline Company (“Seaway”) and Centennial Pipeline
LLC (“Centennial”) are accounted for under the equity method of accounting, as
we own 50% ownership interests in these entities and have 50% equal management
with the other joint venture participants. Our investment in Texas Offshore Port
System (a development stage enterprise) is accounted for under the equity method
of accounting, as we own a 33% ownership interest in this entity and have equal
voting rights with the other joint venture participants. Our investment in Jonah
Gas Gathering Company (“Jonah”) is accounted for under the equity method of
accounting, as we have 50% equal management with the other participant, even
though we own an approximate 80% economic interest in the
partnership.
If our ownership interest in an entity
does not provide us with either control or significant influence over the
investee, we account for the investment using the cost method.
Contingencies
Certain conditions may exist as of the
date our financial statements are issued, which may result in a loss to us but
which will only be resolved when one or more future events occur or fail to
occur. Our management with input from legal counsel assesses such
contingent liabilities, and such assessment inherently involves an exercise in
judgment. In assessing loss contingencies related to legal
proceedings that are pending against us or unasserted claims that may result in
proceedings, our management with input from legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well as the
perceived merits of the amount of relief sought or expected to be sought
therein.
If the assessment of a contingency
indicates that it is probable that a material loss has been incurred and the
amount of liability can be estimated, then the estimated liability would be
accrued in our financial statements. If the assessment indicates that
a potentially material loss contingency is not probable but is reasonably
possible, or is probable but cannot be estimated, then the nature of the
contingent liability, together with an estimate of the range of possible loss if
determinable and material, is disclosed.
6
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
Loss contingencies considered remote
are generally not disclosed unless they involve guarantees, in which case the
guarantees would be disclosed.
Current
Assets and Current Liabilities
We present, as individual captions in
our consolidated balance sheet, all components of current assets and current
liabilities that exceed five percent of total current assets and liabilities,
respectively.
Environmental
Expenditures
We accrue for environmental costs that
relate to existing conditions caused by past operations, including conditions
with assets we have acquired. Environmental costs include initial site surveys
and environmental studies of potentially contaminated sites, costs for
remediation and restoration of sites determined to be contaminated and ongoing
monitoring costs, as well as damages and other costs, when estimable. We monitor
the balance of accrued undiscounted environmental liabilities on a regular
basis. We record liabilities for environmental costs at a specific site when our
liability for such costs is probable and a reasonable estimate of the associated
costs can be made. Adjustments to initial estimates are recorded, from time to
time, to reflect changing circumstances and estimates based upon additional
information developed in subsequent periods. Estimates of our ultimate
liabilities associated with environmental costs are particularly difficult to
make with certainty due to the number of variables involved, including the early
stage of investigation at certain sites, the lengthy time frames required to
complete remediation alternatives available and the evolving nature of
environmental laws and regulations. None of our estimated environmental
remediation liabilities are discounted to present value since the ultimate
amount and timing of cash payments for such liabilities are not readily
determinable. Expenditures to mitigate or prevent future environmental
contamination are capitalized.
At December 31, 2008, our accrued
liabilities for environmental remediation projects totaled $6.9 million. These
amounts were derived from a range of reasonable estimates based upon studies and
site surveys. Unanticipated changes in circumstances and/or legal requirements
could result in expenses being incurred in future periods in addition to an
increase in actual cash required to remediate contamination for which we are
responsible.
The following table presents the
activity of our environmental reserve for the year ended December 31,
2008:
|
For
Year Ended December 31,
|
||||
|
2008
|
||||
|
Balance at January
1
|
$ | 4,002 | ||
|
Charges to
expense
|
4,981 | |||
|
Deductions and
other
|
(2,047 | ) | ||
|
Balance
at December 31
|
$ | 6,936 | ||
Estimates
The preparation of financial statements
in conformity with U.S. generally accepted accounting principals (“GAAP”)
requires our management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Although we believe these
estimates are reasonable, actual results could differ from those
estimates.
7
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
Fair Value of Current
Assets and Current Liabilities
The carrying amount of cash and cash
equivalents, accounts receivable, inventories, other current assets, accounts
payable and accrued liabilities, other current liabilities and financial
instruments approximates their fair value due to their short-term
nature. The fair values of these financial instruments are
represented in our consolidated balance sheet.
Financial
Instruments
We account for financial instruments in
accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133. These statements establish accounting and reporting
standards requiring that financial instruments (including certain financial
instruments embedded in other contracts) be recorded on the balance sheet at
fair value as either assets or liabilities. The accounting for
changes in the fair value of a financial instrument depends on the intended use
of the financial instrument and the resulting designation, which is established
at the inception of a financial instrument.
Our financial instruments consist
primarily of contracts for the purchase and sale of petroleum products in
connection with our crude oil marketing activities. Substantially all
financial instruments related to our crude oil marketing activities meet the
normal purchases and sales criteria of SFAS 133, as amended, and as such,
changes in the fair value of petroleum product purchase and sales agreements are
reported on the accrual basis of accounting. SFAS 133 describes
normal purchases and sales as contracts that provide for the purchase or sale of
something other than a financial instrument that will be delivered in quantities
expected to be used or sold by the reporting entity over a reasonable period in
the normal course of business.
For all hedging relationships, we
formally document at inception the hedging relationship and its risk-management
objective and strategy for undertaking the hedge, the hedging instrument, the
item, the nature of the risk being hedged, how the hedging instrument’s
effectiveness in offsetting the hedged risk will be assessed and a description
of the method of measuring ineffectiveness. This process includes
linking all financial instruments that are designated as fair value or cash flow
to specific assets and liabilities on the balance sheet or to specific firm
commitments or forecasted transactions. We also formally assess, both
at the hedge’s inception and on an ongoing basis, whether the financial
instruments that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items. If
it is determined that a financial instrument is not highly effective as a hedge
or that it has ceased to be a highly effective hedge, we discontinue hedge
accounting prospectively.
For financial instruments designated as
fair value hedges, changes in the fair value of a financial instrument that is
highly effective and that is designated and qualifies as a fair value hedge,
along with the loss or gain on the hedged asset or liability or unrecognized
firm commitment of the hedged item that is attributable to the hedged risk, are
recorded in earnings with the change in fair value of the financial instrument
and hedged asset or liability reflected on the balance sheet. Changes
in the fair value of a financial instrument that is highly effective and that is
designated and qualifies as a cash flow hedge are recorded in other
comprehensive income to the extent that the financial instrument is effective as
a hedge, until earnings are affected by the variability in cash flows of the
designated hedged item. Hedge effectiveness is measured at least quarterly based
on the relative cumulative changes in fair value between the financial
instrument contract and the hedged item over time. The ineffective
portion of the change in fair value of a financial instrument that qualifies as
either a fair value hedge or a cash flow hedge is reported immediately in
earnings.
According to SFAS 133, as amended, we
are required to discontinue hedge accounting prospectively when it is determined
that the financial instrument is no longer effective in offsetting changes in
the fair value or cash flows of the hedged item, or the financial instrument
expires or is sold, terminated, or exercised, or the financial
8
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
instrument
is de-designated as a hedging instrument, because it is unlikely that a
forecasted transaction will occur, a hedged firm commitment no longer meets the
definition of a firm commitment, or management determines that designation of
the financial instrument as a hedging instrument is no longer
appropriate.
When hedge accounting is discontinued
because it is determined that the financial instrument no longer qualifies as an
effective fair value hedge, we continue to carry the financial instrument on the
balance sheet at its fair value and no longer adjust the hedged asset or
liability for changes in fair value. The adjustment of the carrying
amount of the hedged asset or liability is accounted for in the same manner as
other components of the carrying amount of that asset or
liability. When hedge accounting is discontinued because the hedged
item no longer meets the definition of a firm commitment, we continue to carry
the financial instrument on the balance sheet at its fair value, remove any
asset or liability that was recorded pursuant to recognition of the firm
commitment from the balance sheet, and recognize any gain or loss in
earnings. When hedge accounting is discontinued because it is
probable that a forecasted transaction will not occur, we continue to carry the
financial instrument on the balance sheet at its fair value with subsequent
changes in fair value included in earnings, and gains and losses that were
accumulated in other comprehensive income are recognized immediately in
earnings. In all other situations in which hedge accounting is
discontinued, we continue to carry the financial instrument at its fair value on
the balance sheet and recognize any subsequent changes in its fair value in
earnings.
Goodwill
Goodwill represents the excess of
purchase price over fair value of net assets acquired. Our goodwill amounts are
assessed for impairment (i) on an annual basis during the fourth quarter of each
year or (ii) on an interim basis when impairment indicators are
present. If such indicators are present (e.g., loss of a significant
customer, economic obsolescence of plant assets, etc.), the fair value of the
reporting unit to which the goodwill is assigned will be calculated and compared
to its book value.
If the fair value of the reporting unit
exceeds its book value, the goodwill amount is not considered to be impaired and
no impairment charge is required. If the fair value of the reporting
unit is less than its book value, a charge to earnings is recorded to adjust the
carrying value of the goodwill to its implied fair value. We have not
recognized any impairment losses related to our goodwill for any of the periods
presented (see Note 11 for a further discussion of our goodwill).
Income
Taxes
Our limited liability company is not
directly subject to federal income taxes. As a result, our earnings or losses
for federal income tax purposes are included in the tax returns of our
member. We are organized as a pass through entity for federal income
tax purposes. As a result, our member is individually responsible for
the federal income taxes on its share of our taxable income.
Revised
Texas Franchise Tax
In general, legal entities that conduct
business in Texas are subject to the Revised Texas Franchise Tax. In May
2006, the State of Texas expanded its pre-existing franchise tax to include
limited partnerships, limited liability companies, corporations and limited
liability partnerships. As a result of the change in tax law, our tax
status in the State of Texas has changed from non-taxable to taxable. TE
Products (formerly TE Products Pipeline Company, Limited Partnership) and TEPPCO
Midstream (formerly TEPPCO Midstream Companies, L.P.) each converted into a
Texas limited partnership and immediately thereafter each merged into a separate
newly-formed Texas limited liability company on June 30, 2007. The
pre-June 30, 2007 revenue of each of these former partnerships was not subject
to the Revised Texas Franchise Tax because the former partnerships did not
conduct business in Texas after June 30, 2007.
9
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
For the
year ended December 31, 2008, our current and deferred tax liabilities are
applicable to our state tax obligations under the Revised Texas Franchise
Tax. At December 31, 2008, we had a current tax liability of $3.9
million and a deferred tax liability of less than $0.1
million. During the year ended December 31, 2008, we recorded an
increase in current income tax liability of $4.5 million and a less than $0.1
million increase to deferred tax liability.
Accounting
for Uncertainty in Income Taxes
In accordance with Financial Accounting
Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, we must recognize the tax effects of any uncertain tax positions
we may adopt, if the position taken by us is more likely than not
sustainable. If a tax position meets such criteria, the tax effect to
be recognized by us would be the largest amount of benefit with more than a 50%
chance of being realized upon ultimate settlement with a taxing authority with
full knowledge of all relevant information.
Intangible
Assets and Excess Investments
Intangible assets on the consolidated
balance sheet consist primarily of gathering contracts assumed in the
acquisition of Val Verde on June 30, 2002, a fractionation agreement, customer
contracts related to the acquisition of crude oil supply and transportation
assets, customer relationships and non-compete agreements related to the
acquisition of the marine assets and other intangible assets (see Note
11). Included in equity investments on the consolidated balance sheet
are excess investments in Centennial, Seaway and Jonah.
In connection with the acquisition of
Val Verde, we assumed fixed-term contracts with customers that gather coal bed
methane from the San Juan Basin in New Mexico and Colorado. The value
assigned to these intangible assets relates to contracts with customers that are
for a fixed term. These intangible assets are amortized on a
unit-of-production basis, based upon the actual throughput of the system over
the expected total throughput for the lives of the
contracts. Revisions to the unit-of-production estimates may occur as
additional production information is made available to us (see Note
11).
In connection with the formation of
Centennial, we recorded excess investment, the majority of which is amortized on
a unit-of-production basis over a period of 10 years. In connection
with the acquisition of our interest in Seaway, we recorded excess investment,
which is amortized on a straight-line basis over a period of 39
years. In connection with the formation of our Jonah joint venture
and the construction of its expansion, we recorded excess investment, which is
amortized on a straight-line basis over the life of the assets constructed (see
Note 11).
Inventories
Inventories consist primarily of
petroleum products, which are valued at the lower of cost (weighted average cost
method) or market. Our Downstream Segment acquires and disposes of
various products under purchase, sale and exchange
agreements. Receivables and payables arising from exchange
transactions are usually satisfied with products rather than
cash. The net balances of exchange receivables and payables are
valued at weighted average cost and included in inventories. Our
Upstream Segment also acquires and disposes of crude oil under purchase, sale,
buy/sale and exchange agreements. Additionally, our Upstream Segment acquires
crude oil inventory through a pipeline loss allowance (“PLA”) in certain of our
pipeline tariffs, whereby the shipper conveys physical crude oil to us, in
addition to a cash tariff payment for transportation services, in exchange for
our bearing the risk of pipeline volumetric losses. These PLA barrels are
recorded to inventory based on the current market value at the time the barrels
are transported and later sold. Inventories of materials and
supplies, used for ongoing replacements and expansions, are carried at
cost.
10
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
Natural
Gas Imbalances
Gas imbalances occur when gas producers
(customers) deliver more or less actual natural gas gathering volumes to our
gathering systems than they originally nominated. Actual deliveries
are different from nominated volumes due to fluctuations in gas production at
the wellhead. To the extent that these shipper imbalances are not
cashed out, Val Verde records a payable to shippers who supply more natural gas
gathering volumes than nominated, and a receivable from the shippers who
nominate more natural gas gathering volumes than supplied. To the
extent pipeline imbalances are not cashed out, Val Verde records a receivable
from connecting pipeline transporters when total volumes delivered exceed the
total of shipper’s nominations and records a payable to connecting pipeline
transporters when the total shippers’ nominations exceed volumes
delivered. We record natural gas imbalances using average market
prices, which is representative of the estimated value of the imbalances upon
final settlement.
Noncontrolling
Interest
As
presented in our Consolidated Balance Sheet, noncontrolling interest represents
third-party ownership interests, including those of TEPPCO’s public unitholders,
in the net assets of TEPPCO, through TEPPCO’s publicly traded
Units. For financial reporting purposes, the assets and liabilities
of TEPPCO are consolidated with those of the Parent Company, with any
third-party ownership in such amounts presented as noncontrolling
interest. See Note 13 for information regarding noncontrolling
interest.
Property,
Plant and Equipment
Property, plant and equipment is
recorded at its acquisition cost. Additions to property, plant and
equipment, including major replacements or betterments, are recorded at
cost. We charge replacements and renewals of minor items of property
that do not materially increase values or extend useful lives to maintenance
expense. Depreciation expense is computed on the straight-line method
using rates based upon expected useful lives of various classes of assets
(ranging from 2% to 20% per annum).
We evaluate impairment of long-lived
assets in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Long-lived assets are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
the carrying amount of assets to be held and used is measured by a comparison of
the carrying amount of the asset to estimated future net cash flows expected to
be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount or estimated fair value less costs to sell.
Equity
Awards
We account for equity awards in
accordance with SFAS No. 123(R), Share-Based
Payment. SFAS 123(R) requires us to recognize compensation
expense related to equity awards based on the fair value of the award at grant
date. The fair value of restricted unit awards is based on the market
price of the underlying Units on the date of grant. The fair value of
other equity awards is estimated using the Black-Scholes option pricing model.
Under SFAS 123(R), the fair value of an equity award is amortized to earnings on
a straight-line basis over the requisite service or vesting period of the equity
awards. As used in the context of the compensation plans, the term
“restricted unit” represents a time-vested unit under SFAS
123(R). Such awards are non-vested until the required service period
expires. Compensation for liability awards is recognized over the
requisite service or vesting period of an award based on the fair value of the
award remeasured at each reporting period. Liability awards will be
settled in cash upon vesting. We accrue compensation expense based
upon the terms of each plan (see Note 4).
11
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
NOTE
3. RECENT ACCOUNTING DEVELOPMENTS
The
accounting standard setting bodies have recently issued the following accounting
guidance that may affect our future financial statements: SFAS
141(R), Business
Combinations; FASB Staff Position (“FSP”) SFAS 142-3,
Determination of the Useful
Life of Intangible Assets; SFAS No. 157, Fair Value
Measurements; SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities – An Amendment of FASB Statement No. 133; EITF 08-6,
Equity Method Investment
Accounting Considerations; and SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No.
51.
SFAS No. 141(R),
Business
Combinations. SFAS 141(R)
replaces SFAS No. 141, Business Combinations and was
effective January 1, 2009. SFAS 141(R) retains the fundamental requirements
of SFAS 141 in that the acquisition method of accounting (previously termed the
“purchase method”) is used for all business combinations and for
the “acquirer” to be identified for each business
combination. SFAS 141(R) defines the acquirer as the entity that
obtains control of one or more businesses in a business combination and
establishes the acquisition date as the date that the acquirer achieves
control. This new guidance also retains guidance in SFAS 141 for
identifying and recognizing intangible assets separately from
goodwill. SFAS 141(R) will have an impact on the way in which we
evaluate acquisitions.
The
objective of SFAS 141(R) is to improve the relevance, representational
faithfulness, and comparability of the information a reporting entity provides
in its financial reports about business combinations and their
effects. To accomplish this, SFAS 141(R) establishes principles and
requirements for how the acquirer:
|
§
|
recognizes
and measures in its financial statements the identifiable assets acquired,
the liabilities assumed, and any noncontrolling interests in the
acquiree.
|
|
§
|
recognizes
and measures the goodwill acquired in the business combination or a gain
resulting from a bargain purchase. SFAS 141(R) defines a
bargain purchase as a business combination in which the total
acquisition-date fair value of the identifiable net assets acquired
exceeds the fair value of the consideration transferred plus any
noncontrolling interest in the acquiree, and requires the acquirer to
recognize that excess in net income as a gain attributable to the
acquirer.
|
|
§
|
determines
what information to disclose to enable users of the financial statements
to evaluate the nature and financial effects of the business
combination.
|
SFAS
141(R) also requires that direct costs of an acquisition (e.g. finder’s fees,
outside consultants, etc.) be expensed as incurred and not capitalized as part
of the purchase price.
FSP
No. FAS 142-3, Determination of the Useful Life of Intangible
Assets. In
April 2008, the FASB issued FSP No. 142-3, which revised the factors that should
be considered in developing renewal or extension assumptions used in determining
the useful lives of recognized intangible assets under SFAS No. 142, Goodwill and Other Intangible
Assets. These revisions are intended to improve consistency between the
useful life of a recognized intangible asset under SFAS 142 and the period
of expected cash flows used to measure the fair value of such assets under
SFAS 141(R) and other accounting guidance. The measurement and disclosure
requirements of this new guidance will be applied to intangible assets acquired
after January 1, 2009. Our adoption of this guidance is not expected
to have a material impact on our consolidated financial statement.
SFAS No.
157, Fair Value Measurements. SFAS 157 defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. Although certain provisions of SFAS 157
were effective January 1, 2008, the remaining guidance of this new standard
applicable to nonfinancial assets and liabilities was effective January 1,
2009. See Note 6 for information regarding fair value-related
disclosures required for 2008 in connection with SFAS 157.
12
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
SFAS 157
applies to fair-value measurements that are already required (or permitted) by
other accounting standards and is expected to increase the consistency of those
measurements. SFAS 157 emphasizes that fair value is a
market-based measurement that should be determined based on the assumptions that
market participants would use in pricing an asset or liability. Companies are
required to disclose the extent to which fair value is used to measure assets
and liabilities, the inputs used to develop such measurements, and the effect of
certain of the measurements on earnings (or changes in net assets) during a
period. Our adoption of this guidance is not expected to have a
material impact on our consolidated financial statement. SFAS 157
will impact the valuation of assets and liabilities (and related disclosures) in
connection with future business combinations and impairment
testing.
SFAS No.
161, Disclosures about Derivative Instruments and Hedging Activities - An
Amendment of FASB Statement No. 133. SFAS 161 revised
the disclosure requirements for financial instruments and related hedging
activities to provide users of financial statements with an enhanced
understanding of (i) why and how an entity uses financial instruments, (ii) how
an entity accounts for financial instruments and related hedged items under SFAS
133, Accounting for Derivative
Instruments and Hedging Activities, and its related interpretations and
(iii) how financial instruments and related hedged items affect an entity’s
financial position, financial performance and cash flows.
SFAS 161
requires qualitative disclosures about objectives and strategies for using
financial instruments, quantitative disclosures about fair value amounts of and
gains and losses on financial instruments and disclosures about credit
risk-related contingent features in financial instrument agreements. SFAS 161
was effective January 1, 2009, and we will apply its requirements beginning with
the first quarter of 2009.
EITF
08-6, Equity Method Investment Accounting Considerations. EITF
08-6 clarifies the accounting for certain transactions and impairment
considerations involving equity method investments under SFAS 141(R) and SFAS
160. EITF 08-6 generally requires that (i) transaction costs should
be included in the initial carrying value of an equity method investment; (ii)
an equity method investor shall not test separately an investee’s underlying
assets for impairment, rather such testing should be performed in accordance
with Accounting Principles Board Opinion No. 18 (i.e., on the equity method
investment itself); (iii) an equity method investor shall account for a share
issuance by an investee as if the investor had sold a proportionate share of its
investment (any gain or loss to the investor resulting from the investee’s share
issuance shall be recognized in earnings); and (iv) a gain or loss
should not be recognized when changing the method of accounting for an
investment from the equity method to the cost method. EITF 08-6 was
effective January 1, 2009.
SFAS
160, Noncontrolling Interests in Consolidated Financial Statements – an
amendment of ARB No. 51. SFAS 160
established accounting and reporting standards for noncontrolling interests,
which have been referred to as minority interests in prior accounting
literature. SFAS 160 was effective January 1, 2009. A
noncontrolling interest is that portion of equity in a consolidated subsidiary
not attributable, directly or indirectly, to a reporting entity. This
new standard requires, among other things, that (i) ownership interests of
noncontrolling interests be presented as a component of equity, including
accumulated other comprehensive income, on the balance sheet (i.e., elimination
of the “mezzanine” presentation); (ii) elimination of minority interest expense
as a line item on the statement of income and, as a result, that net income and
other comprehensive income be allocated between the reporting entity and
noncontrolling interests on the face of the statement of income; and (iii)
enhanced disclosures regarding noncontrolling interests.
Effective
January 1, 2009, we adopted the provisions of SFAS 160. The
presentation and disclosure requirements of SFAS 160 have been applied
retrospectively to the consolidated balance sheet and notes included in this
Current Report on Form 8-K.
13
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
NOTE
4. ACCOUNTING FOR EQUITY AWARDS
1999
Plan
The Texas Eastern Products Pipeline
Company, LLC 1999 Phantom Unit Retention Plan (“1999 Plan”) provides for the
issuance of phantom unit awards as incentives to key employees. These
liability awards are settled for cash based on the fair market value of the
vested portion of the phantom units at redemption dates in each
award. The fair market value of each phantom unit award is equal to
the closing price of a TEPPCO Unit on the NYSE on the redemption
date. Each participant is required to redeem their phantom units as
they vest. Each participant is also entitled to cash distributions
equal to the product of the number of phantom units granted to the participant
and the per Unit cash distribution that TEPPCO paid to its
unitholders. Grants under the 1999 Plan are subject to forfeiture if
the participant’s employment with EPCO is terminated.
A total of 18,600 phantom units were
outstanding under the 1999 Plan at December 31, 2008. In April 2008,
13,000 phantom units vested and $0.4 million was paid out to one participant in
the second quarter of 2008. The remaining awards outstanding at December 31,
2008 cliff vest as follows: 13,000 in April 2009 and 5,600 in January
2010. At December 31, 2008, we had an accrued liability balance of
$0.4 million for compensation related to the 1999 Plan. For the
year ended December 31, 2008, participants received $62 thousand in cash
distributions.
2000
LTIP
The Texas Eastern Products Pipeline
Company, LLC 2000 Long Term Incentive Plan (“2000 LTIP”) provides key employees
incentives to achieve improvements in TEPPCO’s financial
performance. Generally, upon the close of a three-year performance
period, the participant will receive a cash payment equal to (i) the applicable
“performance percentage” as specified in the award multiplied by (ii) the number
of phantom units granted under the award multiplied by (iii) the average of the
closing prices of a TEPPCO Unit over the ten consecutive trading days
immediately preceding the last day of the performance period. In
addition, during the performance period, each participant is entitled to cash
distributions equal to the product of the number of phantom units granted to the
participant and the per Unit cash distribution that TEPPCO paid to its
unitholders. Grants under the 2000 LTIP are accounted for as
liability awards and subject to forfeiture if the participant’s employment with
EPCO is terminated, with customary exceptions for death, disability or
retirement.
A participant’s “performance
percentage” is based upon an improvement in Economic Value Added during a given
three-year performance period over the Economic Value Added for the three-year
period immediately preceding the performance period. The term
“Economic Value Added” means TEPPCO’s average annual EBITDA for the performance
period minus the product of its average asset base and its cost of capital for
the performance period. In this context, EBITDA means earnings before
net interest expense, other income, depreciation and amortization and TEPPCO’s
proportional interest in the EBITDA of its joint ventures, except that our chief
executive officer may exclude gains or losses from extraordinary, unusual or
non-recurring items. Average asset base means the quarterly average, during the
performance period, of TEPPCO’s gross carrying value of property, plant and
equipment, plus long-term inventory, and the gross carrying value of intangible
assets and equity investments. The cost of capital is determined at
the date each award is granted.
At December 31, 2008, a total of 11,300
phantom units vested and will be paid out to participants in the first quarter
of 2009. At December 31, 2008, we had an accrued liability balance of
$0.2 million for compensation related to the 2000 LTIP. After payout
in the first quarter of 2009 on awards which vested on December 31, 2008, there
will be no remaining phantom units outstanding under the 2000
LTIP. For the year ended December 31, 2008, participants received $38
thousand in cash distributions.
14
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
2005 Phantom Unit
Plan
The Texas Eastern Products Pipeline
Company, LLC 2005 Phantom Unit Plan (“2005 Phantom Unit Plan”) provides key
employees incentives to achieve improvements in TEPPCO’s financial
performance. Generally, upon the close of a three-year performance
period, the participant will receive a cash payment equal to (i) the applicable
“performance percentage” as specified in the award multiplied by (ii) the number
of phantom units granted under the award multiplied by (iii) the average of the
closing prices of a TEPPCO Unit over the ten consecutive trading days
immediately preceding the last day of the performance period. In
addition, during the performance period, each participant is entitled to cash
distributions equal to the product of the number of phantom units granted to the
participant and the per Unit cash distribution that TEPPCO paid to its
unitholders. Grants under the 2005 Phantom Unit Plan are accounted
for as liability awards and subject to forfeiture if the participant’s
employment with EPCO is terminated, with customary exceptions for death,
disability or retirement.
Generally, a participant’s performance
percentage is based upon the achievement of a cumulative EBITDA for the
performance period of an amount equal to the sum of the EBITDA targets
established for each of the three years of the performance period. In
this context, EBITDA means earnings before net interest expense, other income,
depreciation and amortization and TEPPCO’s proportional interest in the EBITDA
of its joint ventures, except that our chief executive officer may exclude gains
or losses from extraordinary, unusual or non-recurring items.
At December 31, 2008, a total of 36,600
phantom units vested and will be paid out to participants in the first quarter
of 2009. At December 31, 2008, we had an accrued liability balance of
$0.6 million for compensation related to the 2005 Phantom Unit
Plan. After the payout in the first quarter of 2009 on awards which
vested on December 31, 2008, there will be no remaining phantom units
outstanding under the 2005 Phantom Unit Plan. For the year ended
December 31, 2008, participants received $0.1 million in cash
distributions.
2006
LTIP
The EPCO, Inc. 2006 TPP Long-Term
Incentive Plan (“2006 LTIP”) provides for awards of TEPPCO Units and other
rights to our non-employee directors and to certain employees of EPCO and its
affiliates providing services to us. Awards granted under the 2006
LTIP may be in the form of restricted units, phantom units, unit options, UARs
and distribution equivalent rights. The exercise price of unit
options or UARs awarded to participants is determined by the Audit, Conflicts
and Governance Committee of our Board of Directors (“ACG Committee”) (at its
discretion) at the date of grant and may be no less than the fair market value
of the option award as of the date of grant. The 2006 LTIP is
administered by the ACG Committee. Subject to adjustment as provided
in the 2006 LTIP, awards with respect to up to an aggregate of 5,000,000 of
TEPPCO’s Units may be granted under the 2006 LTIP. We reimburse EPCO
for the costs allocable to 2006 LTIP awards made to employees who work in our
business. The 2006 LTIP is effective until the earlier of (i)
December 8, 2016, (ii) the time by which all available TEPPCO Units under the
2006 LTIP have been delivered to participants, or (iii) the time of termination
of the 2006 LTIP by EPCO or the ACG Committee. The 2006 LTIP may be
amended or terminated at any time by the board of directors of EPCO, which is an
affiliate of the Company, or the ACG Committee; however, any material amendment,
such as a material increase in the number of TEPPCO Units available under the
plan or a change in the types of awards available under the plan, would require
the approval of at least 50% of our unitholders. The ACG Committee is
also authorized to make adjustments in the terms and conditions of, and the
criteria included in awards under the 2006 LTIP in specified
circumstances. After giving effect to outstanding unit options and
restricted units at December 31, 2008, and the forfeiture of restricted units
through December 31, 2008, a total of 4,487,084 additional TEPPCO Units could be
issued under the 2006 LTIP in the future.
15
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
Unit
Options
The information in the following table
presents unit option activity under the 2006 LTIP for the periods
indicated:
|
Weighted-
|
||||||||||||
|
Weighted-
|
Average
|
|||||||||||
|
Average
|
Remaining
|
|||||||||||
|
Number
|
Strike
Price
|
Contractual
|
||||||||||
|
of Units
|
(dollars/Unit)
|
Term
(in years)
|
||||||||||
|
Unit
Options:
|
||||||||||||
|
Outstanding
at December 31, 2007 (1)
|
155,000 | $ | 45.35 | |||||||||
|
Granted
(2)
|
200,000 | 35.86 | ||||||||||
|
Outstanding
at December 31, 2008
|
355,000 | 40.00 | 4.57 | |||||||||
|
Options
exercisable at:
|
||||||||||||
|
December
31, 2008
|
-- | $ | -- | -- | ||||||||
|
(1)
|
During
2008, these unit option grants were amended. The expiration
dates of these awards granted on May 22, 2007 were modified from May 22,
2017 to December 31, 2012.
|
|
(2)
|
The
total grant date fair value of these awards granted on May 19, 2008 was
$0.3 million based upon the following assumptions: (i) expected
life of the option of 4.7 years; (ii) risk-free interest rate of 3.3%;
(iii) expected distribution yield on TEPPCO Units of 7.9%; (iv) estimated
forfeiture rate of 17%; and (v) expected Unit price volatility on TEPPCO
Units of 18.7%.
|
At
December 31, 2008, total unrecognized compensation cost related to nonvested
unit options granted under the 2006 LTIP was an estimated $0.6
million. We expect to recognize this cost over a weighted-average
period of 2.95 years.
Restricted
Units
The
following table presents restricted unit activity for the periods
indicated:
|
Weighted-
|
||||||||
|
Average
Grant
|
||||||||
|
Number
|
Date
Fair Value
|
|||||||
|
of
Units
|
per
Unit (1)
|
|||||||
|
Restricted Units at December 31,
2007
|
62,400 | |||||||
|
Granted
(2)
|
96,900 | $ | 29.54 | |||||
|
Vested
|
(1,000 | ) | $ | 40.61 | ||||
|
Forfeited
|
(1,000 | ) | $ | 35.86 | ||||
|
Restricted Units at December 31,
2008
|
157,300 | |||||||
___________________________
|
(1)
|
Determined
by dividing the aggregate grant date fair value of awards (including an
allowance for forfeitures) by the number of awards
issued.
|
|
(2)
|
Aggregate
grant date fair value of restricted unit awards issued during 2008 was
$2.8 million based on grant date market prices ranging from $34.63 to
$35.86 per TEPPCO Unit and an estimated forfeiture rate of
17%.
|
The total
fair value of our restricted unit awards that vested during the year ended
December 31, 2008 was $24 thousand. At December 31, 2008, total
unrecognized compensation cost related to restricted units was $3.7 million, and
these costs are expected to be recognized over a weighted-average period of 2.8
years.
16
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
Phantom
Units
At December 31, 2008, a total of 1,647
phantom units were outstanding, which have been awarded under the 2006 LTIP to
three of the non-executive members of our board of directors. Each phantom unit
will pay out in cash on April 30, 2011 or, if earlier, the date the director is
no longer serving on the board of directors, whether by voluntarily resignation
or otherwise. Each participant is also entitled to cash distributions equal to
the product of the number of phantom units granted to the participant and the
per TEPPCO Unit cash distribution that TEPPCO paid to its unitholders. Phantom
unit awards to non-executive directors are accounted for in a manner similar to
SFAS 123(R) liability awards.
UARs
At December 31, 2008, a total of
431,377 UARs were outstanding, which have been awarded under the 2006 LTIP to
non-executive members of our board of directors and to certain employees
providing services directly to us.
Non-Executive
Members of our Board of Directors. At December 31, 2008, a
total of 95,654 UARs, awarded to non-executive members of our board of directors
under the 2006 LTIP, were outstanding at a weighted average exercise price of
$41.82 per TEPPCO Unit (66,225 UARs issued in 2007 at an exercise price of
$45.30 per TEPPCO Unit to the then three non-executive members of our board of
directors and 29,429 UARs issued in 2008 at an exercise price of $33.98 per
TEPPCO Unit to a non-executive member of our board of directors in connection
with his election to the board). The UARs are subject to five year
cliff vesting and will vest earlier if the director dies or is removed from, or
not re-elected or appointed to, the board of directors for reasons other than
his voluntary resignation or unwillingness to serve. When the UARs become
payable, the director will receive a payment in cash equal to the fair market
value of the TEPPCO Units subject to the UARs on the payment date over the fair
market value of the TEPPCO Units subject to the UARs on the date of grant. UARs
awarded to non-executive directors are accounted for similar to SFAS 123(R)
liability awards.
Employees.
At December 31, 2008, a total of 335,723 UARs, awarded under the 2006 LTIP to
certain employees providing services directly to us, were outstanding at an
exercise price of $45.35 per TEPPCO Unit. The UARs are subject to five year
cliff vesting and are subject to forfeiture. When the UARs become payable, the
awards will be redeemed in cash (or, in the sole discretion of the ACG
Committee, TEPPCO Units or a combination of cash and TEPPCO Units) equal to the
fair market value of the TEPPCO Units subject to the UARs on the payment date
over the fair market value of the TEPPCO Units subject to the UARs on the date
of grant. In addition, for each calendar quarter from the grant date until the
UARs become payable, each holder will receive a cash payment equal to the
product of (i) the per TEPPCO Unit cash distribution paid to our unitholders
during such calendar quarter less the quarterly distribution amount in effect at
the time of grant multiplied by (ii) the number of TEPPCO Units subject to the
UAR. UARs awarded to employees are accounted for as liability awards under SFAS
123(R) since the current intent is to settle the awards in cash.
Employee
Partnerships
EPCO formed TEPPCO Unit L.P. (“TEPPCO
Unit I”) and TEPPCO Unit II L.P. (“TEPPCO Unit II”) (collectively, “Employee
Partnerships”) to serve as an incentive arrangement for key employees of EPCO by
providing them with a “profits interest” in the Employee
Partnerships. Certain EPCO employees who perform services for us,
including our chief executive officer and other executive officers, were issued
Class B limited partner interests and admitted as Class B limited partners
without any capital contribution. The profits interest awards (i.e.,
the Class B limited partner interests) in the Employee Partnerships entitles
each holder to participate in the appreciation in value of TEPPCO
Units. The Class B limited partner interests are subject to
forfeiture if the participating employee’s employment with EPCO is terminated
prior to vesting of the profit interest, with customary
17
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
exceptions
for death, disability and certain retirements. The risk of forfeiture
associated with the Class B limited partner interests in the Employee
Partnerships will also lapse upon certain change in control events.
The following is a discussion of the
significant terms of the Employee Partnerships.
TEPPCO Unit
I. On September 4, 2008, EPCO formed a Delaware limited
partnership, TEPPCO Unit I, for which it serves as the general partner, to serve
as an incentive arrangement for certain employees of EPCO, including our
executive officers. EPCO Holdings, Inc. (“EPCO Holdings”), an
affiliate of EPCO, contributed approximately $7.0 million to TEPPCO Unit I as a
capital contribution with respect to its interest and was admitted as the Class
A limited partner of TEPPCO Unit I. TEPPCO Unit I purchased 241,380
Units directly from TEPPCO in an unregistered transaction at the public offering
price concurrently with the closing of TEPPCO’s September 2008 equity
offering. Certain EPCO employees who perform services for us,
including executive officers, were issued Class B limited partner interests and
admitted as Class B limited partners of TEPPCO Unit I without any capital
contribution. The Class B limited partner interests, which entitle
the holder to participate in the appreciation in value of TEPPCO’s Units, are
equity-based compensatory awards designed to incentivize officers and employees
of EPCO who perform services for us to enhance the long-term value of TEPPCO’s
Units.
Compensation
expense attributable to these awards is based on the estimated grant date fair
value of each award. A portion of the fair value of these
equity-based awards is allocated to us under the ASA as a non-cash
expense. We are not responsible for reimbursing EPCO for any expenses
of TEPPCO Unit I, including the value of any contributions of cash or TEPPCO’s
Units made by private company affiliates of EPCO at the formation of TEPPCO Unit
I.
Unless otherwise agreed to by EPCO,
EPCO Holdings and a majority in interest of the Class B limited partners or
unless other specified dissolution events occur, TEPPCO Unit I will terminate at
the earlier of (i) thirty days following September 4, 2013 (five years from the
date of TEPPCO Unit I’s agreement of limited partnership) or (ii) a change in
control of EPCO, Enterprise GP Holdings, TEPPCO or us. Summarized
below are certain material terms regarding distributions by TEPPCO Unit I to its
partners:
|
§
|
Distributions
of Cash Flow –
Each quarter, 100% of the cash distributions received by the TEPPCO
Unit I from TEPPCO in that quarter will be distributed to the Class A
limited partner until the Class A limited partner has received an amount
equal to the Class A preferred return (as defined below), and any
excess distributions received by TEPPCO Unit I in that quarter will be
distributed to the Class B limited partners. The
Class A preferred return equals the Class A capital base (as defined
below) multiplied by a floating rate determined by EPCO, in its sole
discretion, that will be no less than 4.5% and no greater than 5.725% per
annum. The Class A limited partner’s capital base equals
the amount of any contributions of cash or cash equivalents made by the
Class A limited partner to TEPPCO Unit I, plus any unpaid Class A
preferred return from prior periods, less any distributions of cash or
Units previously made to the Class A limited partner by TEPPCO Unit
I.
|
|
§
|
Liquidating
Distributions –
Upon liquidation of TEPPCO Unit I (after satisfaction of any debt
or other obligations of TEPPCO Unit I), Units having a fair market value
equal to the Class A capital base will be distributed to EPCO
Holdings, plus any accrued Class A preferred return for the quarter
in which liquidation occurs. Any remaining Units will be
distributed to the Class B limited
partners.
|
|
§
|
Sale
Proceeds – If
TEPPCO Unit I sells any Units that it owns, the sale proceeds will be
distributed to the Class A limited partner and the Class B
limited partners in the same manner as liquidating distributions described
above.
|
The grant date fair value of the Class
B limited partner interests in TEPPCO Unit I was $2.1 million. This
fair value was estimated using the Black-Scholes option pricing model, which
incorporates various assumptions
18
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
including
(i) an expected life of the awards of five years, (ii) risk-free interest rate
of 2.87%, (iii) an expected distribution yield on TEPPCO’s Units of 7.28%, and
(iv) an expected Unit price volatility for TEPPCO’s Units of
16.42%. At December 31, 2008, there was an estimated $1.7 million of
unrecognized compensation cost related to TEPPCO Unit I. We will
recognize our share of these costs in accordance with the ASA over a weighted
average period of 4.68 years.
TEPPCO Unit
II. On November 13, 2008, EPCO formed a Delaware limited
partnership, TEPPCO Unit II, for which it serves as the general partner, to
serve as an incentive arrangement for Mr. Thompson, our chief executive officer
and an employee of EPCO. On the same date, Duncan Family Interests,
Inc. (“DFI”), an affiliate of EPCO, contributed to TEPPCO Unit II 123,185 Units
(with a value of approximately $3.1 million, based on the closing price of
TEPPCO’s Units on the NYSE on November 12, 2008) and was admitted as the Class A
limited partner of TEPPCO Unit II. Mr. Thompson was issued 100% of
the Class B limited partner interests and admitted as Class B limited
partner of TEPPCO Unit II without any capital contribution. The
Class B limited partner interest, which entitles Mr. Thompson to
participate in the appreciation in value of TEPPCO’s Units, is an equity-based
compensatory award designed to incentivize him to enhance the long-term value of
TEPPCO’s Units.
Compensation
expense attributable to this award is based on the estimated grant date fair
value of the award and the fair value is allocated to us under the
ASA. We are responsible for reimbursing EPCO for the amount of
distributions of cash or securities, if any, made by TEPPCO Unit II to Mr.
Thompson.
Unless otherwise agreed to by EPCO, DFI
and the Class B limited partner or unless other specified dissolution
events occur, TEPPCO Unit II will terminate at the earlier of (i) thirty days
following November 13, 2013 (five years from the date of TEPPCO Unit II’s
agreement of limited partnership) or (ii) a change in control of us, TEPPCO or
EPCO. Summarized below are certain material terms regarding
distributions by TEPPCO Unit II to its partners:
|
§
|
Distributions
of Cash Flow –
Each quarter, 100% of the cash distributions received by TEPPCO
Unit II from TEPPCO in that quarter will be distributed to the
Class A limited partner until the Class A limited partner has
received an amount equal to the Class A preferred return (as defined
below), and any remaining excess distributions received by TEPPCO Unit II
in that quarter will be distributed to the Class B limited
partner. The Class A preferred return equals the Class A
capital base (as defined below) multiplied by a rate of 6.31% per
annum. The Class A limited partner’s capital base equals
the amount of any contributions of cash or cash equivalents made by the
Class A limited partner to TEPPCO Unit II, plus any unpaid Class A
preferred return from prior periods, less any distributions of cash or
Units previously made to the Class A limited partner by TEPPCO Unit II (as
described below).
|
|
§
|
Liquidating
Distributions –
Upon liquidation of TEPPCO Unit II (after satisfaction of any debt
or other obligations of TEPPCO Unit II), Units having a fair market value
equal to the Class A capital base will be distributed to DFI, plus
any accrued Class A preferred return for the quarter in which
liquidation occurs. Any remaining Units will be distributed to
the Class B limited partner.
|
|
§
|
Sale
Proceeds – If
TEPPCO Unit II sells any Units that it owns, the sale proceeds will be
distributed to the Class A limited partner and the Class B
limited partner in the same manner as liquidating distributions described
above.
|
The grant date fair value of the Class
B limited partner interest in TEPPCO Unit II was $1.4 million. This
fair value was estimated using the Black-Scholes option pricing model, which
incorporates various assumptions including (i) an expected life of the awards of
five years, (ii) a risk-free interest rate of 2.37%, (iii) an expected
distribution yield on TEPPCO’s Units of 13.87%, and (iv) an expected Unit price
volatility for TEPPCO’s Units of 66.38%. At December 31, 2008, there
was an estimated $1.3 million of unrecognized compensation cost related
to
19
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
TEPPCO
Unit II. We will recognize our share of these costs in accordance
with the ASA over a weighted average period of 4.87 years.
NOTE
5. EMPLOYEE
BENEFIT PLANS
Retirement
Plan
The TEPPCO Retirement Cash Balance Plan
(“TEPPCO RCBP”) was a non-contributory, trustee-administered pension
plan. The benefit formula for all eligible employees was a cash
balance formula. Under a cash balance formula, a plan participant
accumulated a retirement benefit based upon pay credits and current interest
credits. The pay credits were based on a participant’s salary, age
and service. We used a December 31 measurement date for this
plan.
Effective May 31, 2005, participation
in the TEPPCO RCBP was frozen, and no new participants were eligible to be
covered by the plan after that date. Effective June 1, 2005, EPCO
adopted the TEPPCO RCBP for the benefit of its employees providing services to
us. Effective December 31, 2005, all plan benefits accrued were
frozen, participants received no additional pay credits after that date, and all
plan participants were 100% vested regardless of their years of
service. The TEPPCO RCBP plan was terminated effective December 31,
2005, and plan participants had the option to receive their benefits either
through a lump sum payment or through an annuity. In April 2006, we
received a determination letter from the Internal Revenue Service (“IRS”)
providing IRS approval of the plan termination. For those plan
participants who elected to receive an annuity, we purchased an annuity contract
from an insurance company in which the plan participants own the annuity,
absolving us of any future obligation to the participants.
As of December 31, 2008, all benefit
obligations to TEPPCO RCBP plan participants have been
settled. During the first quarter of 2008, the remaining balance of
the TEPPCO RCBP was transferred to an EPCO benefit plan.
Other
Plans
EPCO maintains defined contribution
plans for the benefit of employees providing services to us, and we reimburse
EPCO for the cost of maintaining these plans in accordance with the ASA (see
Note 16 for additional information related to the costs and expenses allocated
to us for employee benefits).
20
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
NOTE
6. FINANCIAL
INSTRUMENTS
The following table presents the
estimated fair values of our financial instruments at December 31,
2008:
|
Carrying
|
Fair
|
|||||||
|
Financial
Instruments
|
Value
|
Value
|
||||||
|
Financial
assets:
|
||||||||
|
Cash
and cash equivalents (1)
|
$ | 37 | $ | 37 | ||||
|
Accounts receivable
(1)
|
790,374 | 790,374 | ||||||
|
Commodity financial instruments
(2) (3)
|
15,711 | 15,711 | ||||||
|
Financial
liabilities:
|
||||||||
|
Accounts payable and accrued
liabilities (1)
|
792,469 | 792,469 | ||||||
|
Fixed-rate debt (principal
amount) (4)
|
2,000,000 | 1,553,218 | ||||||
|
Variable-rate debt
(5)
|
516,654 | 516,654 | ||||||
|
Commodity financial instruments
(2) (3)
|
15,708 | 15,708 | ||||||
______________
|
(1)
|
Cash
and cash equivalents, accounts receivable and accounts payable and accrued
liabilities are carried at amounts which reasonably approximate their fair
values due to their short-term
nature.
|
|
(2)
|
Represents
commodity financial instrument transactions that either have not settled
or have settled and not been invoiced. Settled and invoiced
transactions are reflected in either accounts receivable or accounts
payable depending on the outcome of the
transaction.
|
|
(3)
|
The
fair values associated with our interest rate and commodity hedging
portfolios were developed using available market information and
appropriate valuation techniques.
|
|
(4)
|
The
estimated fair values of TEPPCO’s fixed rate debt are based on quoted
market prices for such debt or debt of similar terms and maturities (see
Note 12).
|
|
(5)
|
The
carrying amount of TEPPCO’s variable-rate debt obligation reasonably
approximates its fair value due to its variable interest
rate.
|
Fair value is generally defined as the
amount at which a financial instrument could be exchanged in a current
transaction between willing parties, not in a forced or liquidation
sale. The estimated fair values of our financial instruments have
been determined using available market information and appropriate valuation
techniques. We must use considerable judgment, however, in
interpreting market data and developing these estimates. Accordingly,
our fair value estimates are not necessarily indicative of the amounts that we
could realize upon disposition of these instruments. The use of
different market assumptions and/or estimation techniques could have a material
effect on our estimates of fair value.
We are exposed to financial market
risks, including changes in commodity prices and interest rates. We
do not have foreign exchange risks. We may use financial instruments
(i.e., futures, forwards, swaps, options and other financial instruments with
similar characteristics) to mitigate the risks of certain identifiable and
anticipated transactions. In general, the type of risks we attempt to
hedge are those related to fair values of certain debt instruments and cash
flows resulting from changes in applicable interest rates or commodity
prices.
We routinely review our outstanding
financial instruments in light of current market conditions. If
market conditions warrant, some financial instruments may be closed out in
advance of their contractual settlement dates, resulting in the realization of
income or loss depending on the specific hedging criteria. When this
occurs, we may enter into a new financial instrument to reestablish the hedge to
which the closed instrument relates.
21
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
Interest
Rate Risk Hedging Program
Our interest rate exposure results from
variable and fixed interest rate borrowings under various debt
agreements. From time to time we utilize interest rate swaps and
similar arrangements to manage a portion of our interest rate exposure, which
allow us to convert a portion of fixed rate debt into variable rate debt or a
portion of variable rate debt into fixed rate debt. At December 31,
2008, there were no interest related financial instruments
outstanding.
Fair
Value Hedges – Interest Rate Swaps
In January 2006, TEPPCO entered into
interest rate swap agreements with a total notional value of $200.0 million to
hedge its exposure to increases in the benchmark interest rate underlying its
variable rate revolving credit facility. Under the swap agreements,
TEPPCO paid a fixed rate of interest ranging from 4.67% to 4.695% and received a
floating rate based on the three-month U.S. Dollar LIBOR rate. At
December 31, 2007, the fair value of these interest rate swaps was an asset of
$0.3 million. These interest rate swaps expired in January
2008.
In October 2001, TE Products entered
into an interest rate swap agreement to hedge its exposure to changes in the
fair value of its fixed rate 7.51% Senior Notes due 2028. This swap agreement,
designated as a fair value hedge, had a notional value of $210.0 million and was
set to mature in January 2028 to match the principal and maturity of the TE
Products Senior Notes. In September 2007, TEPPCO terminated this swap
agreement, resulting in a loss of $1.2 million. This loss was
deferred as an adjustment to the carrying value of the 7.51% Senior Notes, and
approximately $0.2 million of the loss was amortized to interest expense in
2007, with the remaining $1.0 million recognized in interest expense in January
2008 at the time the 7.51% Senior Notes were redeemed (see Note
12).
During
2002, TEPPCO entered into interest rate swap agreements, designated as fair
value hedges, to hedge its exposure to changes in the fair value of its fixed
rate 7.625% Senior Notes due 2012. The swap agreements had a combined notional
value of $500.0 million and were set to mature in 2012 to match the principal
and maturity of the underlying debt. These swap agreements were terminated in
2002 resulting in deferred gains of $44.9 million, which are being amortized
using the effective interest method as reductions to future interest expense
over the remaining term of the 7.625% Senior Notes. At December 31, 2008, the
unamortized balance of the deferred gains was $18.1 million. In the event of
early extinguishment of the 7.625% Senior Notes, any remaining unamortized gains
would be recognized in the statement of consolidated income at the time of
extinguishment.
Cash
Flow Hedges – Treasury Locks
At times, we may use treasury lock
financial instruments to hedge the underlying U.S. treasury rates related to
anticipated debt incurrence. Gains or losses on the termination of
such instruments are amortized to earnings using the effective interest method
over the estimated term of the underlying fixed-rate debt. Each of
TEPPCO’s treasury lock transactions was designated as a cash flow hedge under
SFAS 133.
In October 2006 and February 2007,
TEPPCO entered into treasury lock agreements, accounted for as cash flow hedges,
which extended through June 2007 for a notional value totaling $300.0 million.
In May 2007, these treasury locks were terminated concurrent with the issuance
of junior subordinated notes (see Note 12). The termination of the treasury
locks resulted in gains of $1.4 million, and these gains were recorded in
accumulated other comprehensive income. These gains are being amortized using
the effective interest method as reductions to future interest expense over the
term of the forecasted fixed rate interest payments, which is ten
years. Over the next twelve months, TEPPCO expects to reclassify $0.1
million of accumulated other comprehensive income that was generated by these
treasury locks as a reduction to interest expense. In the event of early
extinguishment of the junior subordinated notes, any remaining unamortized gains
would be recognized in the statement of consolidated income at the time of
extinguishment.
22
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
In 2007, TEPPCO entered into treasury
locks, accounted for as cash flow hedges, which extended through January 31,
2008 for a notional value totaling $600.0 million. At December 31, 2007, the
fair value of the treasury locks was a liability of $25.3 million. In January
2008, these treasury locks were extended through April 30, 2008. In March 2008,
these treasury locks were settled concurrently with the issuance of senior notes
(see Note 12). The settlement of the treasury locks resulted in losses of $52.1
million, and these losses were recorded in accumulated other comprehensive
income. TEPPCO recognized approximately $3.6 million of this loss in interest
expense as a result of interest payments hedged under the treasury locks not
occurring as forecasted. The remaining losses are being amortized using the
effective interest method as increases to future interest expense over the terms
of the forecasted interest payments, which range from five to ten years. Over
the next twelve months, TEPPCO expects to reclassify $5.8 million of accumulated
other comprehensive loss that was generated by these treasury locks as an
increase to interest expense. In the event of early extinguishment of these
senior notes, any remaining unamortized losses would be recognized in the
statement of consolidated income at the time of extinguishment.
Commodity
Risk Hedging Program
We seek to maintain a position that is
substantially balanced between crude oil purchases and related sales and future
delivery obligations. As part of our crude oil marketing business, we
enter into financial instruments such as swaps and other hedging
instruments. The purpose of such hedging activity is to either
balance our inventory position or to lock in a profit margin.
At December 31, 2008, TEPPCO had no
commodity financial instruments that were accounted for as cash flow
hedges. Gains and losses on financial instruments used in cash flow
hedges are offset against corresponding gains or losses of the hedged item and
are deferred through other comprehensive income, thus minimizing exposure to
cash flow risk. No ineffectiveness was recognized as of December 31,
2008. In addition, TEPPCO had some commodity financial instruments
that did not qualify for hedge accounting. These financial
instruments had a minimal impact on our earnings. The fair value of
the open positions at December 31, 2008 was an asset of $3
thousand.
Adoption
of SFAS 157 – Fair Value Measurements
On January 1, 2008, we adopted the
provisions of SFAS No. 157 that apply to financial
assets and liabilities. We adopted the provisions of SFAS 157 that
apply to nonfinancial assets and liabilities on January 1, 2009. SFAS
157 defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
Our fair value estimates are based on
either (i) actual market data or (ii) assumptions that other market participants
would use in pricing an asset or liability. These assumptions include
estimates of risk. Recognized valuation techniques employ inputs such
as product prices, operating costs, discount factors and business growth
rates. These inputs may be either readily observable,
corroborated by market data, or generally unobservable. In developing
our estimates of fair value, we endeavor to utilize the best information
available and apply market-based data to the extent
possible. Accordingly, we utilize valuation techniques (such as the
market approach) that maximize the use of observable inputs and minimize the use
of unobservable inputs.
SFAS 157 established a three-tier
hierarchy that classifies fair value amounts recognized or disclosed in the
financial statements based on the observability of inputs used to estimate such
fair values. The hierarchy considers fair value amounts based on
observable inputs (Levels 1 and 2) to be more reliable and predictable than
those based primarily on unobservable inputs (Level 3). At each
balance sheet reporting date, we categorize our financial assets and liabilities
using this hierarchy. The characteristics of fair value amounts
classified within each level of the SFAS 157 hierarchy are described as
follows:
23
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
|
§
|
Level 1 fair
values are based on quoted prices, which are available in active markets
for identical assets or liabilities as of the measurement
date. Active markets are defined as those in which transactions
for identical assets or liabilities occur in sufficient frequency so as to
provide pricing information on an ongoing basis (e.g., the NYSE or New
York Mercantile Exchange). Level 1 primarily consists of
financial assets and liabilities such as exchange-traded financial
instruments, publicly-traded equity securities and U.S. government
treasury securities.
|
|
§
|
Level
2 fair values are based on pricing inputs other than quoted prices in
active markets (as reflected in Level 1 fair values) and are either
directly or indirectly observable as of the measurement
date. Level 2 fair values include instruments that are valued
using financial models or other appropriate valuation
methodologies. Such financial models are primarily
industry-standard models that consider various assumptions, including
quoted forward prices for commodities, time value of money, volatility
factors for stocks, and current market and contractual prices for the
underlying instruments, as well as other relevant economic
measures. Substantially all of these assumptions are observable
in the marketplace throughout the full term of the instrument, can be
derived from observable data, or are validated by inputs other than quoted
prices (e.g., interest rates and yield curves at commonly quoted
intervals). Level 2 includes non-exchange-traded instruments
such as over-the-counter forward contracts, options, and repurchase
agreements.
|
|
§
|
Level
3 fair values are based on unobservable inputs. Unobservable
inputs are used to measure fair value to the extent that observable inputs
are not available, thereby allowing for situations in which there is
little, if any, market activity for the asset or liability at the
measurement date. Unobservable inputs reflect the reporting
entity’s own ideas about the assumptions that market participants would
use in pricing an asset or liability (including assumptions about
risk). Unobservable inputs are based on the best information
available in the circumstances, which might include the reporting entity’s
internally-developed data. The reporting entity must not ignore
information about market participant assumptions that is reasonably
available without undue cost and effort. Level 3 inputs are
typically used in connection with internally developed valuation
methodologies where management makes its best estimate of an instrument’s
fair value. Level 3 generally includes specialized or unique
financial instruments that are tailored to meet a customer’s specific
needs.
|
The following table sets forth by level
within the fair value hierarchy our financial assets and liabilities measured on
a recurring basis at December 31, 2008. These financial assets and
liabilities are classified in their entirety based on the lowest level of input
that is significant to the fair value measurement. Our assessment of
the significance of a particular input to the fair value measurement requires
judgment, and may affect the valuation of the fair value assets and liabilities
and their placement within the fair value hierarchy levels. At
December 31, 2008, we had no Level 1 financial assets and
liabilities.
|
Level
2
|
Level
3
|
Total
|
||||||||||
|
Financial
assets:
|
||||||||||||
|
Commodity financial
instruments
|
$ | 15,488 | $ | 223 | $ | 15,711 | ||||||
|
Total
|
$ | 15,488 | $ | 223 | $ | 15,711 | ||||||
|
Financial
liabilities:
|
||||||||||||
|
Commodity financial
instruments
|
$ | 15,338 | $ | 370 | $ | 15,708 | ||||||
|
Total
|
$ | 15,338 | $ | 370 | $ | 15,708 | ||||||
|
Net
financial liabilities, Level
3
|
$ | (147 | ) | |||||||||
The determination of fair values above
associated with our commodity financial instrument portfolios are developed
using available market information and appropriate valuation techniques in
accordance with SFAS 157.
24
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
The following table sets forth a
reconciliation of changes in the fair value of our net financial assets and
liabilities classified as Level 3 in the fair value hierarchy:
|
Net
|
||||
|
Commodity
|
||||
|
Financial
|
||||
|
Instruments
|
||||
|
Balance,
January 1, 2008
|
$ | (394 | ) | |
|
Total gains included in net
income
|
247 | |||
|
Balance,
December 31, 2008
|
$ | (147 | ) | |
NOTE
7. INVENTORIES
Inventories are valued at the lower of
cost (based on weighted average cost method) or market. The major
components of inventories were as follows:
|
December
31,
|
||||
|
2008
|
||||
|
Crude
oil (1)
|
$ | 32,792 | ||
|
Refined
products and LPGs (2)
|
406 | |||
|
Lubrication
oils and specialty chemicals
|
11,127 | |||
|
Materials
and supplies
|
8,581 | |||
|
Total
|
$ | 52,906 | ||
_____________________
|
(1)
|
$30.7
million of our crude oil inventory was subject to forward sales
contracts.
|
|
(2)
|
Refined
products and LPGs inventory is managed on a combined
basis.
|
NOTE
8. PROPERTY,
PLANT AND EQUIPMENT
Major categories of property, plant and
equipment at December 31, 2008, were as follows:
|
Estimated
|
|||||||||
|
Useful
Life
|
December
31,
|
||||||||
|
In
Years
|
2008
|
||||||||
|
Plants
and pipelines (1)
|
5-40
(4)
|
$ | 1,919,646 | ||||||
|
Underground
and other storage facilities (2)
|
|
5-40
(5)
|
|
296,806 | |||||
|
Transportation
equipment (3)
|
5-10
|
|
|
11,303 | |||||
|
Marine
vessels
|
20-30
|
453,041 | |||||||
|
Land
and right of way
|
143,823 | ||||||||
|
Construction
work in progress
|
294,075 | ||||||||
|
Total property, plant and
equipment
|
3,118,694 | ||||||||
|
Less accumulated
depreciation
|
678,784 | ||||||||
|
Property, plant and equipment,
net
|
$ | 2,439,910 | |||||||
_____________________
|
(1)
|
Plants
and pipelines include refined products, LPGs, NGL, petrochemical, crude
oil and natural gas pipelines; terminal loading and unloading facilities;
office furniture and equipment; buildings, laboratory and shop equipment;
and related assets.
|
|
(2)
|
Underground
and other storage facilities include underground product storage caverns,
storage tanks and other related
assets.
|
25
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
|
(3)
|
Transportation
equipment includes vehicles and similar assets used in our
operations.
|
|
(4)
|
The
estimated useful lives of major components of this category are as
follows: pipelines, 20-40 years (with some equipment at 5
years); terminal facilities, 10-40 years; office furniture and equipment,
5-10 years; buildings 20-40 years; and laboratory and shop equipment, 5-40
years.
|
|
(5)
|
The
estimated useful lives of major components of this category are as
follows: underground storage facilities, 20-40 years (with some
components at 5 years) and storage tanks, 20-30
years.
|
Asset
Retirement Obligations
We have conditional AROs related to the
retirement of the Val Verde natural gas gathering system and to structural
restoration work to be completed on leased office space that is required upon
our anticipated office lease termination.
The following table presents
information regarding our AROs:
|
ARO
liability balance, December 31, 2007
|
$ | 1,346 | ||
|
Accretion
expense
|
128 | |||
|
ARO
liability balance, December 31, 2008
|
$ | 1,474 |
Property, plant and equipment at
December 31, 2008, includes $0.5 million of asset retirement costs capitalized
as an increase in the associated long-lived asset.
NOTE
9. INVESTMENTS
IN UNCONSOLIDATED AFFILIATES
We own interests in related businesses
that are accounted for using the equity method of accounting. These
investments are identified below by reporting business segment (see Note 15 for
a general discussion of our business segments). The following table
presents our investments in unconsolidated affiliates as of December 31,
2008:
|
Ownership
Percentage at
|
||||||||
|
December
31,
|
December
31,
|
|||||||
|
2008
|
2008
|
|||||||
|
Downstream
Segment:
|
||||||||
|
Centennial
|
50.0%
|
$ | 71,841 | |||||
|
Other
|
25.0%
|
332 | ||||||
|
Upstream
Segment:
|
||||||||
|
Seaway
|
50.0%
|
190,129 | ||||||
|
Texas Offshore Port
System
|
33.3%
|
35,915 | ||||||
|
Midstream
Segment:
|
||||||||
|
Jonah
|
80.64%
|
957,706 | ||||||
|
Total
|
$ | 1,255,923 | ||||||
On a quarterly basis, we monitor the
underlying business fundamentals of our investments in unconsolidated affiliates
and test such investments for impairment when impairment indicators are
present. As a result of our reviews for the year ended December 31,
2008, no impairment charges were required. We have the intent and
ability to hold these investments, which are integral to our
operations.
26
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
Centennial
TE Products owns a 50% ownership
interest in Centennial, and Marathon Petroleum Company LLC (“Marathon”) owns the
remaining 50% interest. Centennial owns an interstate refined petroleum products
pipeline extending from the upper Texas Gulf Coast to central
Illinois. Marathon operates the mainline Centennial pipeline, and TE
Products operates the Beaumont origination point and the Creal Springs terminal.
During the year ended December 31, 2008, we did not invest any funds in
Centennial. TE Products has received no cash distributions from
Centennial since its formation.
Seaway
Through one of our indirect wholly
owned subsidiaries, we own a 50% ownership interest in Seaway. The
remaining 50% interest is owned by ConocoPhillips. We operate and
commercially manage the Seaway assets. Seaway owns pipelines and
terminals that carry imported, offshore and domestic onshore crude oil from a
marine terminal at Freeport, Texas, to Cushing, Oklahoma, and from a marine
terminal at Texas City, Texas, to refineries in the Texas City and Houston,
Texas, areas. Seaway also has a connection to our South Texas system
that allows it to receive both onshore and offshore domestic crude oil in the
Texas Gulf Coast area for delivery to Cushing. The Seaway Crude
Pipeline Company Partnership Agreement provides for varying participation ratios
throughout the life of Seaway. The sharing ratio (including the
amount of distributions we receive) for 2008 was 40% of Seaway. During the year
ended December 31, 2008, we received distributions from Seaway of $13.8
million. During the year ended December 31, 2008, we did not invest
any funds in Seaway. Our share of undistributed earnings of Seaway
totaled approximately $1.4 million at December 31, 2008.
Texas
Offshore Port System
In August 2008, we, together with
Enterprise Products Partners and Oiltanking Holding Americas, Inc.
(“Oiltanking”) formed Texas Offshore Port System, a joint venture to design,
construct, operate and own a new Texas offshore crude oil port and pipeline
system to facilitate delivery of waterborne crude oil to refining centers
located along the upper Texas Gulf Coast. The joint
venture’s primary project, referred to as “TOPS”, includes (i) an offshore port
(which will be located approximately 36 miles from Freeport, Texas), (ii)
an onshore storage facility with approximately 3.9 million barrels of total
crude oil storage capacity, and (iii) an 85-mile pipeline system that will have
the capacity to deliver up to 1.8 million barrels per day of crude oil,
that will extend from the offshore port to a storage facility near Texas City,
Texas. The joint venture’s complementary project, referred to as the Port
Arthur Crude Oil Express (“PACE”) will transport crude oil from Texas City,
including crude oil from TOPS, and will consist of a 75-mile pipeline and 1.2
million barrels of crude oil storage capacity in the Port Arthur, Texas
area. Development of the TOPS and PACE projects is supported by
long-term contracts with affiliates of Motiva Enterprises, LLC and
Exxon Mobil Corporation, which have committed a combined
725,000 barrels per day of crude oil to the projects. The timing
of the construction and related capital costs of the TOPS and PACE projects will
be affected by the acquisition of requisite permits.
We, Enterprise Products Partners and
Oiltanking each own, through our respective subsidiaries, a one-third interest
in the joint venture. A subsidiary of Enterprise Products Partners
acts as construction manager and will act as operator. The aggregate cost of the
TOPS and PACE projects is expected to be approximately $1.8 billion
(excluding capitalized interest), with the majority of such capital expenditures
occurring in 2009 and 2010. TEPPCO and an affiliate of Enterprise
Products Partners have each guaranteed up to approximately
$700.0 million, which includes a contingency amount for potential cost
overruns, of the capital contribution obligations of our respective subsidiary
partners in the joint venture. At December 31, 2008, we have invested
$36.0 million in the joint venture.
27
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
Jonah
Enterprise Products Partners, through
its affiliate, Enterprise Gas Processing, LLC, is our joint venture partner in
Jonah, the partnership through which we have owned our interest in the system
serving the Jonah and Pinedale fields in the greater Green River Basin in
southwestern Wyoming. The joint venture is governed by a management
committee comprised of two representatives approved by Enterprise Products
Partners and two representatives approved by us, each with equal voting
power. Enterprise Products Partners serves as operator. In
June 2008, Jonah completed the Phase V expansion, which increased the combined
system capacity of the Jonah and Pinedale fields from 1.5 billion cubic feet
(“Bcf”) per day to 2.35 Bcf per day. The increased capacity from the
expansion has reduced system operating pressures and increased production rates
and ultimate reserve recoveries. Enterprise Products Partners managed
the Phase V construction project.
From August 1, 2006 through July 2007,
we and Enterprise Products Partners equally shared the costs of the Phase V
expansion, and Enterprise Products Partners shared in the incremental cash flow
resulting from the operation of those new facilities. During August
2007, with the completion of the first portion of the expansion, we and
Enterprise Products Partners began sharing joint venture cash distributions and
earnings based on a formula that takes into account the capital contributions of
the parties, including expenditures by us prior to the
expansion. Based on this formula in the partnership agreement,
beginning in August 2007, our ownership interest in Jonah was approximately
80.64%, and Enterprise Products Partners’ ownership interest in Jonah was
approximately 19.36%. Amounts exceeding an agreed upon base cost
estimate of $415.2 million were shared 19.36% by Enterprise Products Partners
and 80.64% by us. Our ownership interest in Jonah is currently
anticipated to remain at 80.64%. Through December 31, 2008, we have
reimbursed Enterprise Products Partners $306.5 million ($44.9 million in 2008,
$152.2 million in 2007 and $109.4 million in 2006) for our share of the Phase V
cost incurred by it (including its cost of capital incurred prior to the
formation of the joint venture of $1.3 million). At December 31,
2008, we had a payable to Enterprise Products Partners for costs incurred of
$1.0 million.
In early 2008, Jonah began an expansion
of the portion of its system serving the Pinedale field, which is expected to
further increase the combined system capacity of the Jonah and Pinedale fields
from 2.35 Bcf per day to approximately 2.55 Bcf per day. This project
will include an additional 17,000 horsepower of compression at the Paradise and
Bird Canyon stations in Sublette County, Wyoming and involve construction of
approximately 52 miles of 30-inch and 24-inch diameter
pipelines. This expansion is expected to be completed in phases, with
final completion expected in early 2009. The total anticipated cost
of this system expansion is expected to be approximately $125.0
million. Our share of the costs of the construction is expected to be
80.64%, and Enterprise Products Partners’ share is expected to be
19.36%. Enterprise Products Partners is managing this construction
project.
During the year ended December 31,
2008, we received distributions from Jonah of $132.2 million. During
the year ended December 31, 2008, we invested cash of $129.8 million in
Jonah.
Summarized combined balance sheet
information by reporting segment as of December 31, 2008, is presented
below:
|
December
31, 2008
|
||||||||||||||||||||||||
|
Current
Assets
|
Noncurrent
Assets
|
Current
Liabilities
|
Long-term
Debt
|
Noncurrent
Liabilities
|
Equity
|
|||||||||||||||||||
|
Downstream
Segment
|
$ | 12,870 | $ | 239,414 | $ | 20,673 | $ | 120,000 | $ | 358 | $ | 111,253 | ||||||||||||
|
Upstream
Segment (1)
|
52,423 | 338,616 | 11,155 | -- | 22 | 379,862 | ||||||||||||||||||
|
Midstream
Segment
|
53,810 | 1,163,257 | 28,224 | -- | 378 | 1,188,465 | ||||||||||||||||||
__________________
|
(1)
|
Includes
our ownership interest in Texas Offshore Port
System.
|
28
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
NOTE 10. ACQUISITIONS
Cenac
On February 1, 2008, we, through our
subsidiary, TEPPCO Marine Services, entered the marine transportation business
for refined products, crude oil and condensate. We acquired
transportation assets and certain intangible assets that comprised the marine
transportation business of Cenac Towing Co., Inc. (“Cenac Towing”), Cenac
Offshore, L.L.C. and Mr. Arlen B. Cenac, Jr., the sole owner of Cenac Towing
Co., Inc. and Cenac Offshore, L.L.C. (collectively, “Cenac”). The
aggregate value of total consideration we paid or issued to complete the Cenac
acquisition was $444.7 million, which consisted of $258.2 million in cash and
4,854,899 newly issued TEPPCO Units. Additionally, we assumed $63.2
million of Cenac’s long-term debt in this transaction. On February 1,
2008, we repaid the $63.2 million of assumed debt in full with borrowings under
TEPPCO’s term credit agreement (see Note 12).
The following table summarizes the
components of total consideration paid or issued in this
transaction.
|
Cash
payment for Cenac acquisition
|
$ | 256,593 | ||
|
Fair
value of TEPPCO’s 4,854,899 Units
|
186,558 | |||
|
Other
cash acquisition costs paid to third-parties
|
1,589 | |||
|
Total
consideration
|
$ | 444,740 |
We financed the cash portion of the
consideration with borrowings under TEPPCO’s term credit agreement (see Note
12). In accordance with purchase accounting, the value of TEPPCO’s
Units issued in connection with the Cenac acquisition was based on the average
closing price of such Units immediately prior to and on the day of February 1,
2008. For the purpose of this calculation, the average closing price
was $38.43 per TEPPCO Unit.
We acquired 42 tow boats, 89 tank
barges and the economic benefit of certain related commercial
agreements. This business serves refineries and storage terminals
along the Mississippi, Illinois and Ohio rivers, and the Intracoastal Waterway
between Texas and Florida. These assets also gather crude oil from
production facilities and platforms along the U.S. Gulf Coast and in the Gulf of
Mexico. This acquisition is a natural extension of our existing
assets and complements two of our core franchise businesses: the
transportation and storage of refined products and the gathering, transportation
and storage of crude oil.
The results of operations for the Cenac
acquisition are included in our consolidated financial statements beginning at
the date of acquisition, in a newly created business segment, Marine Services
Segment. Our fleet of acquired tow boats and tank barges will
continue to be operated by employees of Cenac under a transitional operating
agreement with TEPPCO Marine Services for a period of up to two years following
the acquisition. These operations will remain headquartered in Houma,
Louisiana during such time.
The purchase agreement gives us the
right to repurchase the approximately 4.9 million TEPPCO Units issued in the
transaction in connection with proposed sales thereof by Cenac and specified
related persons for 10 years. If we or any of our affiliates sell any
of the assets acquired from Cenac Towing prior to June 30, 2018 and recognize
certain “built-in gains” for federal income tax purposes that are allocable to
Cenac Towing, we have indemnification obligations under the purchase agreement
to pay Cenac Towing an amount generally intended to compensate for the
incremental level of double taxation imposed on Cenac Towing as a result of the
sale. The purchase agreement prohibits Cenac from competing with our
marine services business for two years or from soliciting employees and service
providers of TEPPCO Marine Services and its affiliates for four
years. The purchase agreement contains other customary
representations, warranties, covenants and indemnification
provisions.
29
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
This acquisition was accounted for
using the purchase method of accounting and, accordingly, the cost has been
allocated to assets acquired and liabilities assumed based on estimated fair
values. Such fair values have been developed using recognized
business valuation techniques.
The
following table summarizes estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition.
|
Property,
plant and
equipment
|
$ | 360,146 | ||
|
Intangible
assets
|
63,500 | |||
|
Other
assets
|
2,726 | |||
|
Total
assets
acquired
|
426,372 | |||
|
Long-term
debt
|
(63,157 | ) | ||
|
Total
liabilities
assumed
|
(63,157 | ) | ||
|
Total
assets acquired less liabilities assumed
|
363,215 | |||
|
Total
consideration
given
|
444,740 | |||
|
Goodwill
|
$ | 81,525 |
The $63.5 million fair value of
acquired intangible assets represents customer relationships and non-compete
agreements. Customer relationship intangible assets represent the
estimated economic value attributable to certain relationships acquired in
connection with the Cenac acquisition whereby (i) we acquired information about
or access to customers and now have regular contact with them and (ii) the
customers now have the ability to make direct contact with us. In
this context, customer relationships arise from contractual arrangements (such
as transportation contracts) and through means other than contracts, such as
regular contact by sales or service representative. The values
assigned to these intangible assets are amortized to earnings on a straight-line
basis over the expected period of economic benefit, which ranges from 2 to 20
years.
Of the $444.7 million in consideration
we paid or issued to complete the Cenac acquisition, $81.5 million has been
assigned to goodwill. Management attributes the value of this
goodwill to potential future benefits we expect to realize as a result of
acquiring these assets.
Horizon
On February 29, 2008, we expanded our
Marine Services Segment with the acquisition of marine assets from Horizon
Maritime, L.L.C. (“Horizon”), a privately-held Houston-based company and an
affiliate of Mr. Cenac for $80.8 million in cash. We acquired 7 tow
boats, 17 tank barges, rights to two tow boats under construction and certain
related commercial and other agreements (or the associated economic
benefits). In April 2008, we paid $3.0 million to Horizon pursuant to
the purchase agreement upon delivery of one of the tow boats under construction,
and in June 2008, we paid $3.8 million upon delivery of the second tow
boat. The acquired vessels transport asphalt, heavy fuel oil and
other heated oil products to storage facilities and refineries along the
Mississippi, Illinois and Ohio Rivers, and the Intracoastal
Waterway. We financed the acquisition with borrowings under TEPPCO’s
term credit agreement.
The results of operations for the
Horizon acquisition are included in our consolidated financial statements
beginning at the date of acquisition, in our Marine Services
Segment. This acquisition was accounted for using the purchase method
of accounting and, accordingly, the cost has been allocated to assets acquired
and liabilities assumed based on estimated fair values. Such fair
values have been developed using recognized business valuation
techniques. The following table summarizes estimated fair values of
the assets acquired and liabilities assumed at the date of
acquisition.
30
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
|
Property,
plant and equipment
|
$ | 71,216 | ||
|
Intangible
assets
|
6,500 | |||
|
Other
assets
|
981 | |||
|
Total
assets acquired
|
78,697 | |||
|
Total
consideration given
|
87,584 | |||
|
Goodwill
|
$ | 8,887 |
The $6.5 million fair value of acquired
intangible assets represents customer relationships and non-compete
agreements. Customer relationship intangible assets represent the
estimated economic value attributable to certain relationships acquired in
connection with the Horizon acquisition whereby (i) we acquired information
about or access to customers and now have regular contact with them and (ii) the
customers now have the ability to make direct contact with us. In
this context, customer relationships arise from contractual arrangements (such
as transportation contracts) and through means other than contracts, such as
regular contact by sales or service representative. The values
assigned to these intangible assets are amortized to earnings on a straight-line
basis over the expected period of economic benefit, which ranges from 2 to 9
years.
Of the $87.6 million in consideration
we paid to complete the acquisition of the Horizon business, $8.9 million has
been assigned to goodwill. Management attributes the value of this
goodwill to potential future benefits we expect to realize as a result of
acquiring these assets and further expanding our Marine Services
Segment.
Lubrication
and Other Fuel Oil Assets
On August 1, 2008, we purchased
lubrication and other fuel oil assets, located in Wyoming, from Quality
Petroleum, Inc. for approximately $6.8 million, which includes $1.3 million
related to a non-compete agreement. The assets, included in our
Upstream Segment, consist of operating inventory, buildings, land and various
equipment and the assignment of certain distributor agreements. We
funded the purchase through borrowings under TEPPCO’s revolving credit facility,
and we allocated the purchase price primarily to property, plant and equipment,
goodwill, inventory and intangible assets. We recorded $0.7 million
of goodwill related to this acquisition.
31
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
NOTE
11. INTANGIBLE
ASSETS AND GOODWILL
Intangible
Assets
The following table summarizes our
intangible assets, including excess investments, being amortized at December 31,
2008:
|
December
31, 2008
|
||||||||
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
|||||||
|
Intangible
assets:
|
||||||||
|
Downstream
Segment:
|
||||||||
|
Transportation
agreements
|
$ | 1,000 | $ | (408 | ) | |||
|
Other
|
5,621 | (764 | ) | |||||
|
Subtotal
|
6,621 | (1,172 | ) | |||||
|
Upstream Segment:
|
||||||||
|
Transportation
agreements
|
888 | (395 | ) | |||||
|
Other
|
10,580 | (3,009 | ) | |||||
|
Subtotal
|
11,468 | (3,404 | ) | |||||
|
Midstream Segment:
|
||||||||
|
Gathering
agreements
|
239,649 | (125,811 | ) | |||||
|
Fractionation
agreements
|
38,000 | (20,425 | ) | |||||
|
Other
|
306 | (164 | ) | |||||
|
Subtotal
|
277,955 | (146,400 | ) | |||||
|
Marine Services
Segment:
|
||||||||
|
Customer relationship
intangibles
|
51,320 | (3,121 | ) | |||||
|
Other
|
18,680 | (4,294 | ) | |||||
|
Subtotal
|
70,000 | (7,415 | ) | |||||
|
Total
intangible
assets
|
366,044 | (158,391 | ) | |||||
|
Excess
investments: (1)
|
||||||||
|
Downstream Segment
(2)
|
33,390 | (26,128 | ) | |||||
|
Upstream Segment
(3)
|
26,908 | (5,820 | ) | |||||
|
Midstream Segment
(4)
|
12,580 | (241 | ) | |||||
|
Subtotal
|
72,878 | (32,189 | ) | |||||
|
Total
intangible assets, including excess investments
|
$ | 438,922 | $ | (190,580 | ) | |||
_____________________
|
(1)
|
Excess
investments are included in “Equity Investments” in our consolidated
balance sheet.
|
|
(2)
|
Relates
to our investment in Centennial.
|
|
(3)
|
Relates
to our investment in Seaway.
|
|
(4)
|
Relates
to our investment in Jonah.
|
SFAS 142 requires that intangible
assets with finite useful lives be amortized over their respective estimated
useful lives. If an intangible asset has a finite useful life, but
the precise length of that life is not known, that intangible asset shall be
amortized over the best estimate of its useful life. At a minimum, we
will assess the useful lives and residual values of all intangible assets on an
annual basis to determine if adjustments are required.
The values assigned to our intangible
assets for natural gas gathering contracts on the Val Verde system are amortized
on a unit-of-production basis, based upon the actual throughput of the systems
compared to the expected
32
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
total
throughput for the lives of the contracts. From time to time, we may
obtain limited production forecasts and updated throughput estimates from some
of the producers on the system, and as a result, we evaluate the remaining
expected useful lives of the contract assets based on the best available
information. Further revisions to these estimates may occur as
additional production information is made available to us.
The values assigned to our
fractionation agreement and other intangible assets are generally amortized on a
straight-line basis. Our fractionation agreement is being amortized
over its contract period of 20 years. The amortization periods for
our other intangible assets, which include non-compete and other agreements,
range from 3 years to 15 years. The value of $8.7
million assigned to our crude supply and transportation intangible customer
contracts is being amortized on a unit-of-production basis. The
values assigned to our customer relationships and non-compete agreements related
to the acquisition of the marine assets are generally amortized on a
straight-line basis from 2 to 20 years (see Note 10).
The value assigned to our excess
investment in Centennial was created upon its
formation. Approximately $30.0 million is related to a contract and
is being amortized on a unit-of-production basis based upon the volumes
transported under the contract compared to the guaranteed total throughput of
the contract over a 10-year life. The remaining $3.4 million is
related to a pipeline and is being amortized on a straight-line basis over the
life of the pipeline, which is 35 years. The value assigned to our
excess investment in Seaway was created upon acquisition of our 50% ownership
interest in 2000. We are amortizing the excess investment in Seaway
on a straight-line basis over a 39-year life related primarily to the life of
the pipeline. The value assigned to our excess investment in Jonah
was created as a result of interest capitalized on the construction of Jonah’s
expansion. We are amortizing the excess investment in Jonah on a
straight-line basis over the life of the assets constructed.
Goodwill
Goodwill represents the excess of
purchase price over fair value of net assets acquired. We account for
goodwill under SFAS No. 142, Goodwill and Other Intangible
Assets, which was issued by the FASB in July 2001. SFAS 142
prohibits amortization of goodwill, but instead requires testing for impairment
at least annually. We test goodwill for impairment annually at December
31.
To perform an impairment test of
goodwill, we have identified our reporting units and have determined the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill, to those reporting units. We then
determine the fair value of each reporting unit and compare it to the carrying
value of the reporting unit. We will continue to compare the fair
value of each reporting unit to its carrying value on an annual basis to
determine if an impairment loss has occurred. There have been
no goodwill impairment losses recorded since the adoption of SFAS
142.
The
following table presents the carrying amount of goodwill at December 31, 2008,
by business segment:
|
December
31,
|
||||
|
2008
|
||||
|
Downstream
Segment
|
$ | 1,339 | ||
|
Upstream
Segment
|
14,860 | |||
|
Marine
Services
Segment
|
90,412 | |||
|
Total
goodwill
|
$ | 106,611 | ||
33
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
NOTE
12. DEBT OBLIGATIONS
The following table summarizes the
principal amounts outstanding under all of TEPPCO’s debt instruments at December
31, 2008:
|
December
31,
|
||||
|
2008
|
||||
|
Long-term:
|
||||
|
Senior debt obligations:
(1)
|
||||
|
Revolving
Credit Facility, due December 2012
|
$ | 516,654 | ||
|
7.625%
Senior Notes, due February 2012
|
500,000 | |||
|
6.125%
Senior Notes, due February
2013
|
200,000 | |||
|
5.90%
Senior Notes, due April 2013
|
250,000 | |||
|
6.65%
Senior Notes, due April 2018
|
350,000 | |||
|
7.55%
Senior Notes, due April 2038
|
400,000 | |||
|
Total principal amount of
long-term senior debt obligations
|
2,216,654 | |||
|
7.000%
Junior Subordinated Notes, due June 2067 (1)
|
300,000 | |||
|
Total principal
amount of long-term debt obligations
|
2,516,654 | |||
|
Adjustment to carrying value
associated with hedges of fair value and
unamortized
discounts (2)
|
12,865 | |||
|
Total Debt Instruments
(2)
|
$ | 2,529,519 | ||
_________________
|
(1)
|
TE
Products, TCTM, TEPPCO Midstream and Val Verde (collectively, the
“Subsidiary Guarantors”) have issued full, unconditional, joint and
several guarantees of TEPPCO’s senior notes, junior subordinated notes and
revolving credit facility.
|
|
(2)
|
From
time to time TEPPCO enters into interest rate swap agreements to hedge its
exposure to changes in the fair value on a portion of the debt obligations
presented above (see Note 6). Amount includes $5.2 million of
unamortized discounts and $18.1 million related to fair value
hedges.
|
Revolving
Credit Facility
TEPPCO has in place an unsecured
revolving credit facility (“Revolving Credit Facility”), which matures on
December 12, 2012. The Revolving Credit Facility allows TEPPCO to
request unlimited one-year extensions of the maturity date, subject to lender
approval and satisfaction of certain other conditions. In July 2008,
commitments under TEPPCO’s facility were increased from $700.0 million to $950.0
million. The aggregate outstanding principal amount of swing line
loans or same day borrowings permitted under the Revolving Credit Facility is
$40.0 million. The interest rate is based, at TEPPCO’s option, on
either the lender’s base rate, or LIBOR rate, plus a margin, in effect at the
time of the borrowings. The applicable margin with respect to LIBOR
rate borrowings is based on TEPPCO’s senior unsecured non-credit enhanced
long-term debt rating issued by Standard & Poor’s Rating Services
(“S&P”) and Moody’s Investors Service, Inc. (“Moody’s”). The
Revolving Credit Facility contains a term-out option in which TEPPCO may, on the
maturity date, convert the principal balance of all revolving loans then
outstanding into a non-revolving one-year term loan. Upon the
conversion of the revolving loans to term loans pursuant to the term-out option,
the applicable LIBOR spread will increase by 0.125% per year, and if immediately
prior to such borrowing the total outstanding revolver borrowings then
outstanding exceeds 50% of the total lender commitments, the applicable LIBOR
spread with respect to borrowings will increase by an additional 10 basis
points.
During September 2008, Lehman Brothers
Bank, FSB (“Lehman”), which had a 4.05% participation in TEPPCO’s Revolving
Credit Facility, stopped funding its commitment following the bankruptcy filing
of its parent. Assuming that future fundings are not received for the
Lehman percentage commitment, aggregate available capacity would be reduced by
approximately $28.9 million.
34
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
The Revolving Credit Facility contains
financial covenants that require TEPPCO to maintain a ratio of Consolidated
Funded Debt to Pro Forma EBITDA (as defined and calculated in the facility) of
less than 5.00 to 1.00 (and, if after giving effect to a permitted acquisition
the ratio exceeds 5.00 to 1.00, the threshold ratio will be increased to 5.50 to
1.00 for the fiscal quarter in which such acquisition occurs and the first full
fiscal quarter following such acquisition). Other restrictive
covenants in the Revolving Credit Facility limit TEPPCO’s ability, and the
ability of certain of its subsidiaries, to, among other things, incur certain
additional indebtedness, make distributions in excess of “Available Cash,” as
that term is defined in TEPPCO’s partnership agreement, incur certain liens,
engage in specified transactions with affiliates and complete mergers,
acquisitions and sales of assets. The credit agreement restricts the
amount of outstanding debt of the Jonah joint venture to debt owing to the
owners of its partnership interests and other third-party debt in the aggregate
principal amount of $50.0 million and allows for the issuance of certain hybrid
securities of up to 15% of TEPPCO’s Consolidated Total Capitalization (as
defined therein). At December 31, 2008, $516.7 million was
outstanding under TEPPCO’s Revolving Credit Facility at a weighted average
interest rate of 1.4%, and available borrowing capacity under the facility was
approximately $404.4 million. At December 31, 2008, TEPPCO was in
compliance with the covenants of the Revolving Credit Facility.
Senior
Notes
On January 27, 1998, TE Products issued
$180.0 million principal amount of 6.45% Senior Notes due 2008 and $210.0
million principal amount of 7.51% Senior Notes due 2028 (collectively the “TE
Products Senior Notes”). Interest on the TE Products Senior Notes was
payable semiannually in arrears on January 15 and July 15 of each
year. The 6.45% TE Products Senior Notes were issued at a discount of
$0.3 million and were being accreted to their face value over the term of the
notes. The 6.45% TE Products Senior Notes due 2008 were redeemed at
maturity on January 15, 2008. The 7.51% TE Products Senior Notes due
2028, issued at par, became redeemable at any time after January 15, 2008, at
the option of TE Products, in whole or in part, at varying fixed annual
redemption prices. In October 2007, TE Products repurchased $35.0
million principal amount of the 7.51% TE Products Senior Notes for $36.1 million
and accrued interest. On January 28, 2008, TE Products redeemed the
remaining $175.0 million of 7.51% TE Products Senior Notes at a redemption price
of 103.755% of the principal amount plus accrued and unpaid interest at the date
of redemption. TEPPCO funded the retirement of both series of senior
notes with borrowings under its term credit agreement.
On February 20, 2002 and January 30,
2003, TEPPCO issued $500.0 million principal amount of 7.625% Senior Notes due
2012 (“7.625% Senior Notes”) and $200.0 million principal amount of 6.125%
Senior Notes due 2013 (“6.125% Senior Notes), respectively. These
senior notes were issued at discounts of $2.2 million and $1.4 million,
respectively, and are being accreted to their face value over the applicable
term of the senior notes. The senior notes may be redeemed at any
time at TEPPCO’s option with the payment of accrued interest and a make-whole
premium determined by discounting remaining interest and principal payments
using a discount rate equal to the rate of the United States Treasury securities
of comparable remaining maturity plus 35 basis points.
On March 27, 2008, TEPPCO issued (i)
$250.0 million principal amount of 5.90% Senior Notes due 2013, (ii) $350.0
million principal amount of 6.65% Senior Notes due 2018, and (iii) $400.0
million principal amount of 7.55% Senior Notes due 2038. The senior
notes were issued at discounts of $0.2 million, $1.3 million and $2.2 million,
respectively, and are being accreted to their face value over the applicable
terms of the senior notes. The senior notes may be redeemed at any
time at TEPPCO’s option with the payment of accrued interest and a make-whole
premium determined by discounting remaining interest and principal payments
using a discount rate equal to the rate of the United States Treasury securities
of comparable remaining maturity plus 50 basis points.
The indentures governing TEPPCO’s
senior notes contain covenants, including, but not limited to, covenants
limiting the creation of liens securing indebtedness and sale and leaseback
transactions. However, the indentures do not limit TEPPCO’s ability
to incur additional indebtedness. At December 31, 2008, TEPPCO was in
compliance with the covenants of its senior notes.
35
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
Junior
Subordinated Notes
In May 2007, TEPPCO issued and sold
$300.0 million in principal amount of fixed/floating, unsecured, long-term
subordinated notes due June 1, 2067 (“Junior Subordinated
Notes”). TEPPCO’s payment obligations under the Junior Subordinated
Notes are subordinated to all of its current and future senior indebtedness (as
defined in the related indenture). The Subsidiary Guarantors have
issued full, unconditional, and joint and several guarantees, on a junior
subordinated basis, of payment of the principal of, premium, if any, and
interest on the Junior Subordinated Notes.
The indenture governing the Junior
Subordinated Notes does not limit TEPPCO’s ability to incur additional debt,
including debt that ranks senior to or equally with the Junior Subordinated
Notes. The indenture allows TEPPCO to defer interest payments on one
or more occasions for up to ten consecutive years, subject to certain
conditions. The indenture also provides that during any period in
which TEPPCO defers interest payments on the Junior Subordinated Notes, subject
to certain exceptions, (i) TEPPCO cannot declare or make any distributions with
respect to, or redeem, purchase or make a liquidation payment with respect to,
any of its equity securities; (ii) neither TEPPCO nor the Subsidiary Guarantors
will make, and TEPPCO and the Subsidiary Guarantors will cause its respective
majority-owned subsidiaries not to make, any payment of interest, principal or
premium, if any, on or repay, purchase or redeem any of TEPPCO’s or the
Subsidiary Guarantors’ debt securities (including securities similar to the
Junior Subordinated Notes) that contractually rank equally with or junior to the
Junior Subordinated Notes or the guarantees, as applicable; and (iii) neither
TEPPCO nor the Subsidiary Guarantors will make, and TEPPCO and the Subsidiary
Guarantors will cause its respective majority-owned subsidiaries not to make,
any payments under a guarantee of debt securities (including under a guarantee
of debt securities that are similar to the Junior Subordinated Notes) that
contractually ranks equally with or junior to the Junior Subordinated Notes or
the guarantees, as applicable.
The Junior Subordinated Notes bear
interest at a fixed annual rate of 7.000% from May 2007 to June 1, 2017, payable
semi-annually in arrears. After June 1, 2017, the Junior Subordinated
Notes will bear interest at a variable annual rate equal to the 3-month LIBOR
rate for the related interest period plus 2.7775%, payable quarterly in
arrears. Interest payments may be deferred on a cumulative basis for
up to ten consecutive years, subject to certain provisions. Deferred
interest will accumulate additional interest at the then-prevailing interest
rate on the Junior Subordinated Notes. The Junior Subordinated Notes
mature in June 2067. The Junior Subordinated Notes are redeemable in
whole or in part prior to June 1, 2017 for a “make-whole” redemption price
determined by discounting remaining interest and principal payments using a
discount rate equal to the rate of the United States Treasury securities of
comparable remaining maturity plus 50 basis points; and thereafter at a
redemption price equal to 100% of their principal amount plus accrued and unpaid
interest. The Junior Subordinated Notes are also redeemable prior to
June 1, 2017 in whole (but not in part) upon the occurrence of certain tax or
rating agency events at specified redemption prices. At December 31,
2008, TEPPCO was in compliance with the covenants of the Junior Subordinated
Notes.
In connection with the issuance of the
Junior Subordinated Notes, TEPPCO and its Subsidiary Guarantors entered into a
replacement capital covenant in favor of holders of a designated series of
senior long-term indebtedness (as provided in the underlying documents) pursuant
to which TEPPCO and its Subsidiary Guarantors agreed for the benefit of such
debt holders that TEPPCO would not redeem or repurchase or otherwise satisfy,
discharge or defease any of the Junior Subordinated Notes on or before June 1,
2037, unless, subject to certain limitations, during the 180 days prior to the
date of that redemption, repurchase, defeasance or purchase, TEPPCO has or one
of its subsidiaries has received a specified amount of proceeds from the sale of
qualifying securities that have characteristics that are the same as, or more
equity-like than, the applicable characteristics of the Junior Subordinated
Notes. The replacement capital covenant is not a term of the
indenture or the Junior Subordinated Notes.
36
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
Fair
Values
The following table summarizes the
estimated fair values of the TEPPCO Senior Notes and Junior Subordinated Notes
at December 31, 2008:
|
Face
Value
|
Fair
Value
|
|||||||
|
7.625%
Senior Notes, due February 2012
|
$ | 500,000 | $ | 468,083 | ||||
|
6.125%
Senior Notes, due February 2013
|
200,000 | 174,201 | ||||||
|
5.90%
Senior Notes, due April 2013
|
250,000 | 214,506 | ||||||
|
6.65%
Senior Notes, due April 2018
|
350,000 | 280,698 | ||||||
|
7.55%
Senior Notes, due April 2038
|
400,000 | 295,190 | ||||||
|
7.000%
Junior Subordinated Notes, due June 2067
|
300,000 | 120,540 | ||||||
Term
Credit Agreement
TEPPCO had in place a senior unsecured
term credit agreement (“Term Credit Agreement”), with a borrowing capacity of
$1.0 billion and a maturity date of December 19, 2008. During the
first quarter of 2008, TEPPCO borrowed $1.0 billion under the Term Credit
Agreement to finance the retirement of TE Products’ senior notes, the Cenac and
Horizon acquisitions and for other partnership purposes. In March
2008, TEPPCO repaid the outstanding balance of the Term Credit Agreement with
proceeds from the issuance of senior notes and other cash on hand and terminated
the agreement.
Debt
Obligations of Unconsolidated Affiliates
We have one unconsolidated affiliate,
Centennial, with long-term debt obligations. The following table
shows the total debt of Centennial at December 31, 2008 (on a 100% basis) and
the corresponding scheduled maturities of such debt.
|
Scheduled
Maturities of Debt
|
||||
|
2009
|
$ | 9,900 | ||
|
2010
|
9,100 | |||
|
2011
|
9,000 | |||
|
2012
|
8,900 | |||
|
2013
|
8,600 | |||
|
After
2013
|
84,400 | |||
|
Total
scheduled maturities of debt
|
$ | 129,900 | ||
At December 31, 2008, Centennial’s debt
obligations consisted of $129.9 million borrowed under a master shelf loan
agreement. Borrowings under the master shelf agreement mature in May
2024 and are collateralized by substantially all of Centennial’s assets and
severally guaranteed by Centennial’s owners.
In January 2008, TEPPCO entered into an
amended and restated guaranty agreement (“Amended Guaranty”) in which TEPPCO,
TCTM, TEPPCO Midstream and TE Products (collectively, “TEPPCO Guarantors”) are
required, on a joint and several basis, to pay 50% of any past-due amount under
Centennial’s master shelf loan agreement not paid by Centennial (see Note
17).
NOTE
13. NONCONTROLLING
INTEREST
Noncontrolling interest represents
third-party ownership interests, including those of TEPPCO’s public unitholders,
in the net assets of TEPPCO through TEPPCO’s publicly traded
Units. The Parent Company owns a 2%
general partner interest in TEPPCO and the associated incentive distribution
rights of TEPPCO. For financial
37
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
reporting
purposes, the assets and liabilities of TEPPCO are consolidated with those of
our own, with any third party investor’s interest in our consolidated balance
sheet amounts shown as noncontrolling interest. Distributions to and
contributions from noncontrolling interests represent cash payments and cash
contributions, respectively. At December 31, 2008, TEPPCO had
outstanding 104,704,861 Units.
Equity
Offerings and Registration Statements
In September 2008, TEPPCO filed a
universal shelf registration statement with the U.S. Securities and Exchange
Commission (“SEC”) that allows it to issue an unlimited amount of debt and
equity securities and removed from registration securities remaining under its
previous universal shelf registration statement.
On September 9, 2008, TEPPCO issued and
sold in an underwritten public offering 9.2 million Units at a price to the
public of $29.00 per Unit, including 1.2 million Units sold upon exercise of the
underwriters’ over-allotment option granted in connection with the
offering. The proceeds from the offering, net of underwriting
discount and offering expenses, totaled approximately $257.0
million. Concurrently with this offering, TEPPCO sold 241,380
unregistered Units at the public offering price of $29.00 to TEPPCO Unit I, an
affiliate of EPCO in which certain EPCO employees who perform services for us,
including the executive officers, were issued Class B limited partner interests
to incentivize them to enhance the long-term value of TEPPCO’s
Units. The net proceeds from the offering and the unregistered
issuance to TEPPCO Unit I were used to reduce indebtedness under TEPPCO’s
Revolving Credit Facility. For additional information regarding
TEPPCO Unit I and the equity-based compensatory awards issued therein, please
see Note 4.
EPCO,
Inc. TPP Employee Unit Purchase Plan
The EPCO,
Inc. TPP Employee Unit Purchase Plan (the “Unit Purchase Plan”) provides for
discounted purchases of TEPPCO Units by employees of EPCO and its
affiliates. A maximum of 1,000,000 of TEPPCO’s Units may be delivered
under the Unit Purchase Plan (subject to adjustment as provided in the
plan). The Unit Purchase Plan is effective until the earlier of (i)
December 8, 2016 (ii) the time that all available TEPPCO Units under the plan
have been purchased on behalf of the participants or (iii) the time of
termination of the plan by EPCO or the Chairman or Vice Chairman of
EPCO. As of December 31, 2008, 27,604 TEPPCO Units have been issued
to employees under this plan.
Distribution
Reinvestment Plan
Our distribution reinvestment plan
(“DRIP”) provides for the issuance of up to 10,000,000 TEPPCO’s
Units. TEPPCO Units purchased through the DRIP may be acquired at a
discount rating from 0% to 5% (currently set at 5%), which will be set from time
to time by TEPPCO. As of December 31, 2008, 418,233 TEPPCO Units have
been issued in connection with the DRIP.
NOTE
14. EQUITY
(DEFICIT)
At
December 31, 2008, the Parent Company’s member’s equity (deficit) consisted of
our capital account and accumulated other comprehensive loss.
At
December 31, 2008, we had a deficit balance of $110.3 million in our member’s
equity account. This negative balance does not represent an asset to us and do
not represent obligations of our member to contribute cash or other property to
us. The member’s equity account generally consists of our member’s cumulative
share of our net income less cash distributions made to it plus capital
contributions that it has made to us. Cash distributions that we
receive during a period from TEPPCO may exceed TEPPCO’s net income for the
period. In turn, cash distributions
we make to our member during a period may exceed our net income for the
period. TEPPCO makes
38
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
quarterly cash
distributions of all of its Available Cash, generally defined as consolidated
cash receipts less consolidated cash disbursements and cash reserves established
by us, as general partner, in our reasonable discretion (these cash
distributions paid to us are eliminated upon consolidation of the Parent
Company’s financial statements with TEPPCO’s financial
statements). Cash distributions by us to our member in excess of our
net income during previous years resulted in a deficit in the member’s equity
account at December 31, 2008. Future cash distributions that exceed
net income will result in an increase in the deficit balance in the member’s
equity account.
According to TEPPCO’s
partnership agreement, in the event of TEPPCO’s dissolution, after satisfying
its liabilities, TEPPCO’s remaining assets would be divided among the limited
partners of TEPPCO and us, as general partner, generally in the same
proportion as Available Cash but calculated on a cumulative
basis over the life of TEPPCO. If a deficit balance still remains in
our equity account after all allocations are made between TEPPCO’s partners, we
would not be required to make whole any such deficit.
Accumulated
Other Comprehensive Income (Loss)
SFAS No. 130, Reporting Comprehensive
Income requires certain items such as foreign currency translation
adjustments, gains or losses associated with pension or other postretirement
benefits, prior service costs or credits associated with pension or other
postretirement benefits, transition assets or obligations associated with
pension or other postretirement benefits and unrealized gains and losses on
certain investments in debt and equity securities to be reported in a financial
statement. Our accumulated other comprehensive loss balance consisted
of a $45.8 million loss related to interest rate and treasury lock financial
instruments at December 31, 2008, of which $39.5 million was attributable to
noncontrolling interests.
NOTE
15. BUSINESS
SEGMENTS
We have
four reporting segments:
|
§
|
Our
Downstream Segment, which is engaged in the pipeline transportation,
marketing and storage of refined products, LPGs and
petrochemicals;
|
|
§
|
Our
Upstream Segment, which is engaged in the gathering, pipeline
transportation, marketing and storage of crude oil, distribution of
lubrication oils and specialty chemicals and fuel transportation
services;
|
|
§
|
Our
Midstream Segment, which is engaged in the gathering of natural gas,
fractionation of NGLs and pipeline transportation of NGLs;
and
|
|
§
|
Our
Marine Services Segment, which is engaged in the marine transportation of
refined products, crude oil, condensate, asphalt, heavy fuel oil and other
heated oil products via tow boats and tank
barges.
|
Amounts indicated below as “Other”
include the elimination of intersegment related party receivables and investment
balances among our reporting segments and assets that we hold that have not been
allocated to any of our reporting segments (including such items as corporate
furniture and fixtures, vehicles, computer hardware and software, prepaid
insurance and unamortized debt issuance costs on debt issued at the TEPPCO
level).
39
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
The table below includes
information by segment, together with reconciliations to our consolidated totals
for the period ended December 31, 2008:
|
Downstream
Segment
|
Upstream
Segment
|
Midstream
Segment
|
Marine
Services
Segment
|
Other
|
Consolidated
|
|||||||||||||||||||
|
Segment
assets
|
$ | 1,320,870 | $ | 1,586,345 | $ | 1,529,125 | $ | 653,262 | $ | (39,782 | ) | $ | 5,049,820 | |||||||||||
|
Investments
in unconsolidated affiliates
|
63,222 | 226,044 | 957,706 | -- | 8,951 | 1,255,923 | ||||||||||||||||||
|
Intangible
assets
|
5,449 | 8,064 | 131,555 | 62,585 | -- | 207,653 | ||||||||||||||||||
|
Goodwill
|
1,339 | 14,860 | -- | 90,412 | -- | 106,611 | ||||||||||||||||||
NOTE
16. RELATED
PARTY TRANSACTIONS
The
following table summarizes related party balances at December 31,
2008:
|
December
31,
|
||||
|
2008
|
||||
|
Accounts
receivable, related parties (1)
|
$ | 15,758 | ||
|
Accounts
payable, related parties (2)
|
17,219 | |||
_____________________
|
(1)
|
Relates
to sales and transportation services provided to Enterprise Products
Partners and certain of its subsidiaries and EPCO and certain of its
affiliates and direct payroll, payroll related costs and other operational
expenses charged to unconsolidated
affiliates.
|
|
(2)
|
Relates
to direct payroll, payroll related costs and other operational related
charges from Enterprise Products Partners and certain of its subsidiaries
and EPCO and certain of its affiliates, transportation and other services
provided by unconsolidated affiliates and advances from Seaway for
operating expenses and $3.4 million related to operational related charges
from Cenac.
|
As an affiliate of EPCO and other
companies controlled by Mr. Duncan, our transactions and agreements with them
are not necessarily on an arm’s length basis. As a result, we cannot
provide assurance that the terms and provisions of such transactions or
agreements are at least as favorable to us as we could have obtained from
unaffiliated third parties.
Relationship
with EPCO and Affiliates
We have an extensive and ongoing
relationship with EPCO and its affiliates, which include the following
significant entities:
|
§
|
EPCO
and its consolidated private company
subsidiaries;
|
|
§
|
Enterprise
GP Holdings, which owns all of our membership
interests;
|
|
§
|
Enterprise
Products Partners, which is controlled by affiliates of EPCO, including
Enterprise GP Holdings;
|
|
§
|
Duncan
Energy Partners, which is controlled by affiliates of
EPCO;
|
|
§
|
Enterprise
Gas Processing LLC, which is controlled by affiliates of EPCO and is our
joint venture partner in Jonah;
|
|
§
|
Enterprise
Offshore Port System, LLC, which is controlled by affiliates of EPCO and
is one of our joint venture partners in Texas Offshore Port System;
and
|
|
§
|
the
Employee Partnerships, which are controlled by EPCO (see Note
4).
|
40
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
Dan L.
Duncan directly owns and controls EPCO and, through Dan Duncan LLC, owns and
controls EPE Holdings, the general partner of Enterprise GP
Holdings. Enterprise GP Holdings owns all of our membership
interests. Our principal business activity is to act as managing
partner of TEPPCO. Our executive officers are employees of EPCO (see
Note 1).
We and
TEPPCO are both separate legal entities apart from each other and apart from
EPCO and its other affiliates, with assets and liabilities that are separate
from those of EPCO and its other affiliates. EPCO and its
consolidated private company subsidiaries and affiliates depend on the cash
distributions they receive from the Parent Company and other investments to fund
their operations and to meet their debt obligations. We paid cash
distributions of $54.9 million during the year ended December 31, 2008 to our
member.
The ownership interests in us and the
limited partner interests in TEPPCO that are owned or controlled by EPCO and
certain of its affiliates, other than those interests owned by Dan Duncan LLC
and certain trusts affiliated with Dan L. Duncan, are pledged as security under
the credit facility of an affiliate of EPCO. All of the membership
interests in us and the limited partner interests in TEPPCO that are owned or
controlled by Enterprise GP Holdings are pledged as security under its credit
facility. If Enterprise GP Holdings were to default under its credit
facility, its lender banks could own the Parent Company.
EPCO
Administrative Services Agreement
We do not have any employees, and all
of our management, administrative and operating functions are performed by
employees of EPCO, pursuant to the ASA or by other service
providers. We, TEPPCO, Enterprise Products Partners, Duncan Energy
Partners, Enterprise GP Holdings and the respective general partners are parties
to the ASA. The ACG Committees of each general partner
have approved the ASA.
Under the ASA, we reimburse EPCO for
all costs and expenses it incurs in providing management, administrative and
operating services for us, including compensation of employees (i.e., salaries,
medical benefits and retirement benefits) (see Note 1). Since the
vast majority of such expenses are charged to us on an actual basis (i.e., no
mark-up or subsidy is charged or received by EPCO), we believe that such
expenses are representative of what the amounts would have been on a standalone
basis. With respect to allocated costs, we believe that the
proportional direct allocation method employed by EPCO is reasonable and
reflective of the estimated level of costs we would have incurred on a
standalone basis.
The significant terms of the ASA are as
follows:
|
§
|
EPCO
provides administrative, management and operating services as may be
necessary to manage and operate our business, properties and assets (in
accordance with prudent industry practices). EPCO will employ
or otherwise retain the services of such personnel as may be necessary to
provide such services.
|
|
§
|
We
are required to reimburse EPCO for its services in an amount equal to the
sum of all costs and expenses (direct and indirect) incurred by EPCO which
are directly or indirectly related to our business or activities
(including EPCO expenses reasonably allocated to us). In
addition, we have agreed to pay all sales, use, excise, value added or
similar taxes, if any, that may be applicable from time to time in respect
of the services provided to us by
EPCO.
|
|
§
|
EPCO
allows us to participate as named insureds in its overall insurance
program with the associated costs being allocated to
us.
|
Our operating costs and expenses for
the year ended December 31, 2008 include reimbursement payments to EPCO for the
costs it incurs to operate our facilities, including compensation of
employees. We reimburse EPCO for actual direct and indirect expenses
it incurs related to the operation of our assets.
41
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
Likewise, our general and
administrative costs for the year ended December 31, 2008 include amounts we
reimburse to EPCO for administrative services, including compensation of
employees. We are responsible to reimburse EPCO for the amount of
distributions of cash or securities, if any, made by TEPPCO Unit II to Mr.
Thompson. In general, our reimbursement to EPCO for administrative
services is either (i) on an actual basis for direct expenses it may incur on
our behalf (e.g., the purchase of office supplies) or (ii) based on an
allocation of such charges between the various parties to the ASA based on the
estimated use of such services by each party (e.g., the allocation of general
legal or accounting salaries based on estimates of time spent on each entity’s
business and affairs).
EPCO and its affiliates have no
obligation to present business opportunities to us or our operating companies,
and we and our operating companies have no obligation to present business
opportunities to EPCO and its affiliates. However, the ASA requires
that business opportunities offered to or discovered by EPCO be offered first to
certain Enterprise Products Partners’ affiliates before they may be pursued by
EPCO and its other affiliates or offered to us.
On January 30, 2009, we entered into
the Fifth Amended and Restated ASA, which amended the previous ASA to provide
for the cash reimbursement to EPCO by us of distributions of cash or securities,
if any, made by TEPPCO Unit II to its Class B limited partner, Mr. Thompson, our
chief executive officer and an employee of EPCO (see Note 4). The
Fifth Amended and Restated ASA also extends the term of EPCO’s service
obligations from December 2010 to December 2013.
Jonah
Joint Venture
Enterprise Products Partners (through
an affiliate) is our joint venture partner in Jonah, the partnership through
which we have owned our interest in the system serving the Jonah and Pinedale
fields. Through December 31, 2008, we have reimbursed Enterprise Products
Partners $306.5 million ($44.9 million in 2008, $152.2 million in 2007 and
$109.4 million in 2006) for our share of the Phase V cost incurred by it
(including its cost of capital incurred prior to the formation of the joint
venture of $1.3 million). At December 31, 2008, we had a payable to
Enterprise Products Partners for costs incurred of $1.0 million (see Note
9). At December 31, 2008, we had a receivable from Jonah of $4.7
million for operating expenses. During the year ended December 31,
2008, we received distributions from Jonah of $132.2 million. During
the year ended December 31, 2008, Jonah paid distributions of $31.7 million to
the affiliate of Enterprise Products Partners that is our joint venture
partner.
TEPPCO has agreed to indemnify
Enterprise Products Partners from any and all losses, claims, demands, suits,
liability, costs and expenses arising out of or related to breaches of our
representations, warranties, or covenants related to the formation of the Jonah
joint venture, Jonah’s ownership or operation of the Jonah-Pinedale system prior
to the effective date of the joint venture, and any environmental activity, or
violation of or liability under environmental laws arising from or related to
the condition of the Jonah-Pinedale system prior to the effective date of the
joint venture. In general, a claim for indemnification cannot be
filed until the losses suffered by Enterprise Products Partners exceed $1.0
million, and the maximum potential amount of future payments under the indemnity
is limited to $100.0 million. However, if certain representations or
warranties are breached, the maximum potential amount of future payments under
the indemnity is capped at $207.6 million. All indemnity payments are
net of insurance recoveries that Enterprise Products Partners may receive from
third-party insurers. TEPPCO carries insurance coverage that may offset any
payments required under the indemnity. TEPPCO does not expect that
these indemnities will have a material adverse effect on our financial position,
results of operations or cash flows.
Texas Offshore Port System Joint
Venture
Enterprise Products Partners (through
an affiliate) is one of our joint venture partners in Texas Offshore Port
System, which was formed in August 2008 to design, construct, operate and own a
new Texas offshore crude
42
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
oil port
and pipeline system to facilitate delivery of waterborne crude oil to refining
centers located along the upper Texas Gulf Coast. We, Enterprise
Products Partners and Oiltanking each own, through our respective subsidiaries,
a one-third interest in the joint venture. A subsidiary of Enterprise
Products Partners acts as construction manager and will act as operator. TEPPCO
and an affiliate of Enterprise Products Partners have each guaranteed up to
approximately $700.0 million, which includes a contingency amount for
potential cost overruns, of the capital contribution obligations of our
respective subsidiary partners in the joint venture. Through December 31,
2008, we have invested $36.0 million in Texas Offshore Port System (see Note
9).
Sale
of Parent Company to Enterprise GP Holdings; Relationship with Energy Transfer
Equity
On May 7, 2007, all of our membership
interests, together with 4,400,000 of TEPPCO’s Units, were sold by DFIGP to
Enterprise GP Holdings, a publicly traded partnership also controlled indirectly
by Dan L. Duncan. As of May 7, 2007, Enterprise GP Holdings
owns and controls our 2% general partner interest in TEPPCO and has the right
(through its 100% ownership in us) to receive the incentive distribution rights
associated with our general partner interest in TEPPCO. Enterprise GP
Holdings, DFIGP and other entities controlled by Mr. Duncan own 17,073,315 of
TEPPCO’s Units.
Concurrently with the acquisition of
the Parent Company, Enterprise GP Holdings acquired non-controlling ownership
interests, accounted for as equity method investments, in Energy Transfer
Equity, L.P. (“Energy Transfer Equity”) and LE GP, LLC, the general partner of
Energy Transfer Equity.
Other Transactions
In
December 2008, we entered into a lease agreement with Seminole Pipeline Company
(“Seminole”) and Mid-America Pipeline Company, LLC, (MAPL) for the use of excess
capacity on the Seminole pipeline system, a pipeline extending from Hobbs, New
Mexico to Mont Belvieu, Texas. For Chaparral to use the excess
capacity on Seminole, it must also access a segment of the MAPL pipeline as
well. The primary term of this lease expired on January 31, 2009, and
will continue on a month-to-month basis. Seminole and MAPL are
subsidiaries of Enterprise Products Partners.
Relationship
with Unconsolidated Affiliates
Our significant related party revenues
and expense transactions with unconsolidated affiliates consist of management,
rental and other revenues, transportation expense related to movements on
Centennial and Seaway and rental expense related to the lease of pipeline
capacity on Centennial. For additional information regarding our
unconsolidated affiliates, see Note 9.
See “Jonah Joint Venture” and “Texas
Offshore Port System Joint Venture” within this Note 16 for descriptions of
ongoing transactions involving our Jonah and Texas Offshore Port System joint
ventures with Enterprise Products Partners.
NOTE
17. COMMITMENTS
AND CONTINGENCIES
As TEPPCO’s general partner, the Parent
Company generally has liability for the liabilities and obligations of
TEPPCO.
Litigation
In 1991, we were named as a defendant
in a matter styled Jimmy R.
Green, et al. v. Cities Service Refinery, et al. as filed in the 26th
Judicial District Court of Bossier Parish, Louisiana. The plaintiffs
in this matter reside or
43
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
formerly
resided on land that was once the site of a refinery owned by one of our
co-defendants. The former refinery is located near our Bossier City
facility. Plaintiffs have claimed personal injuries and property
damage arising from alleged contamination of the refinery
property. The plaintiffs have pursued certification as a class and
have significantly increased their demand to approximately $175.0 million. We
have never owned any interest in the refinery property made the basis of this
action, and we do not believe that we contributed to any alleged contamination
of this property. While we cannot predict the ultimate outcome, we do
not believe that the outcome of this lawsuit will have a material adverse effect
on our financial position, results of operations or cash flows.
On September 18, 2006, Peter
Brinckerhoff, a purported unitholder of TEPPCO, filed a complaint in the Court
of Chancery of New Castle County in the State of Delaware, in his individual
capacity, as a putative class action on behalf of TEPPCO’s other unitholders,
and derivatively on TEPPCO’s behalf, concerning proposals made to its
unitholders in its definitive proxy statement filed with the SEC on September
11, 2006 (“Proxy Statement”) and other transactions involving TEPPCO
and Enterprise Products Partners or its affiliates. Mr. Brinckerhoff
filed an amended complaint on July 12, 2007. The amended complaint
names as defendants the Parent Company; our Board of Directors; the Parent
Company’s parent companies, including EPCO; Enterprise Products Partners and
certain of its affiliates and Dan L. Duncan. TEPPCO is named as a
nominal defendant.
The amended complaint alleges, among
other things, that certain of the transactions adopted at a special meeting of
TEPPCO’s unitholders on December 8, 2006, including a reduction of the Parent
Company’s maximum percentage interest in TEPPCO’s distributions in exchange for
TEPPCO’s Units (the “Issuance Proposal”), were unfair to TEPPCO’s unitholders
and constituted a breach by the defendants of fiduciary duties owed to TEPPCO’s
unitholders and that the Proxy Statement failed to provide TEPPCO’s unitholders
with all material facts necessary for them to make an informed decision whether
to vote in favor of or against the proposals. The amended complaint
further alleges that, since Mr. Duncan acquired control of us in 2005, the
defendants, in breach of their fiduciary duties to TEPPCO and its unitholders,
have caused TEPPCO to enter into certain transactions with Enterprise Products
Partners or its affiliates that were unfair to TEPPCO or otherwise unfairly
favored Enterprise Products Partners or its affiliates over
TEPPCO. The amended complaint alleges that such transactions include
the Jonah joint venture entered into by TEPPCO and an Enterprise Products
Partners affiliate in August 2006 (citing the fact that our ACG Committee did
not obtain a fairness opinion from an independent investment banking firm in
approving the transaction), and the sale by TEPPCO to an Enterprise Products
Partners’ affiliate of the Pioneer plant in March 2006. As more fully
described in the Proxy Statement, our ACG Committee recommended the Issuance
Proposal for approval by our Board of Directors. The amended
complaint also alleges that Richard S. Snell, Michael B. Bracy and Murray H.
Hutchison, constituting the three members of our ACG Committee at the time,
cannot be considered independent because of their alleged ownership of
securities in Enterprise Products Partners and its affiliates and/or their
relationships with Mr. Duncan.
The amended complaint seeks relief (i)
awarding damages for profits and special benefits allegedly obtained by
defendants as a result of the alleged wrongdoings in the complaint; (ii)
rescinding all actions taken pursuant to the Proxy vote and (iii) awarding
plaintiff costs of the action, including fees and expenses of his attorneys and
experts. Pre-trial discovery in this proceeding is
underway. While we cannot predict the ultimate outcome, we do not
believe that the outcome of this lawsuit will have a material adverse effect on
our financial position, results of operations or cash flows.
In October 2005, Williams Gas
Processing, n/k/a Williams Field Services Company, LLC (“Williams”) notified
Jonah that the gas delivered to Williams’ Opal Gas Processing Plant (“Opal
Plant”) allegedly failed to conform to quality specifications of the
Interconnect and Operator Balancing Agreement (“Interconnect Agreement”) which
has allegedly caused damages to the Opal Plant in excess of $28.0 million.
On July 24, 2007, Jonah filed suit against Williams in Harris County, Texas
seeking a declaratory order that Jonah was not liable to Williams. In
addition, on August 24, 2007, Williams filed a complaint in the 3rd Judicial
District Court of Lincoln County, Wyoming alleging that Jonah was delivering
non-conforming gas from its gathering customers in the Jonah
44
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
system to
the Opal Plant, in violation of the Interconnect Agreement. Jonah denies
any liability to Williams. Discovery is ongoing.
In addition to the proceedings
discussed above, we have been, in the ordinary course of business, a defendant
in various lawsuits and a party to various other legal proceedings, some of
which are covered in whole or in part by insurance. We believe that the outcome
of these other proceedings will not individually or in the aggregate have a
future material adverse effect on our consolidated financial
position.
Regulatory
Matters
Our pipelines and other facilities are
subject to multiple environmental obligations and potential liabilities under a
variety of federal, state and local laws and regulations. These include, without
limitation: the Comprehensive Environmental Response, Compensation, and
Liability Act; the Resource Conservation and Recovery Act; the Clean Air Act;
the Federal Water Pollution Control Act or the Clean Water Act; the Oil
Pollution Act; and analogous state and local laws and regulations. Such laws and
regulations affect many aspects of our present and future operations, and
generally require us to obtain and comply with a wide variety of environmental
registrations, licenses, permits, inspections and other approvals, with respect
to air emissions, water quality, wastewater discharges, and solid and hazardous
waste management. Failure to comply with these requirements may expose us to
fines, penalties and/or interruptions in our operations that could influence our
results of operations. If an accidental leak, spill or release of hazardous
substances occurs at any facilities that we own, operate or otherwise use, or
where we send materials for treatment or disposal, we could be held jointly and
severally liable for all resulting liabilities, including investigation,
remedial and clean-up costs. Likewise, we could be required to remove or
remediate previously disposed wastes or property contamination, including
groundwater contamination. Any or all of this could materially affect
our financial position.
We believe that our operations and
facilities are in substantial compliance with applicable environmental laws and
regulations, and that the cost of compliance with such laws and regulations will
not have a material adverse effect on our financial position. We cannot ensure,
however, that existing environmental regulations will not be revised or that new
regulations will not be adopted or become applicable to us. The clear trend in
environmental regulation is to place more restrictions and limitations on
activities that may be perceived to affect the environment, and thus there can
be no assurance as to the amount or timing of future expenditures for
environmental regulation compliance or remediation, and actual future
expenditures may be different from the amounts we currently anticipate. Revised
or additional regulations that result in increased compliance costs or
additional operating restrictions, particularly if those costs are not fully
recoverable from our customers, could have a material adverse effect on our
business or financial position. At December 31, 2008, we had an
accrued liability of $6.9 million related to sites requiring environmental
remediation activities.
In 1999, our Arcadia, Louisiana,
facility and adjacent terminals were directed by the Remediation Services
Division of the Louisiana Department of Environmental Quality (“LDEQ”) to pursue
remediation of environmental contamination. Effective March 2004, we
executed an access agreement with an adjacent industrial landowner who is
located upgradient of the Arcadia facility. This agreement enables
the landowner to proceed with remediation activities at our Arcadia facility for
which it has accepted shared responsibility. At December 31, 2008, we
have an accrued liability of $0.5 million for remediation costs at our Arcadia
facility. We do not expect that the completion of the remediation
program proposed to the LDEQ will have a future material adverse effect on our
financial position.
We
received a notice of probable violation from the U.S. Department of
Transportation on April 25, 2005, for alleged violations of pipeline safety
regulations at our Todhunter facility, with a proposed $0.4 million civil
penalty. We responded on June 30, 2005, by admitting certain of the
alleged violations, contesting others and requesting a reduction in the proposed
civil penalty. We do not expect any settlement, fine or penalty to
have a material adverse effect on our financial position.
45
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
The FERC,
pursuant to the Interstate Commerce Act of 1887, as amended, the Energy Policy
Act of 1992 and rules and orders promulgated thereunder, regulates the tariff
rates for our interstate common carrier pipeline operations. To be
lawful under that Act, interstate tariff rates, terms and conditions of service
must be just and reasonable and not unduly discriminatory, and must be on file
with FERC. In addition, pipelines may not confer any undue preference
upon any shipper. Shippers may protest, and the FERC may investigate,
the lawfulness of new or changed tariff rates. The FERC can suspend
those tariff rates for up to seven months. It can also require
refunds of amounts collected with interest pursuant to rates that are ultimately
found to be unlawful. The FERC and interested parties can also
challenge tariff rates that have become final and effective. Because
of the complexity of rate making, the lawfulness of any rate is never
assured. A successful challenge of our rates could adversely affect
our revenues.
The FERC uses prescribed rate
methodologies for approving regulated tariff rates for transporting crude oil
and refined products. Our interstate tariff rates are either
market-based or derived in accordance with the FERC’s indexing methodology,
which currently allows a pipeline to increase its rates by a percentage linked
to the producer price index for finished goods. These methodologies
may limit our ability to set rates based on our actual costs or may delay the
use of rates reflecting increased costs. Changes in the FERC’s
approved methodology for approving rates could adversely affect
us. Adverse decisions by the FERC in approving our regulated rates
could adversely affect our cash flow.
The intrastate liquids pipeline
transportation and gas gathering services we provide are subject to various
state laws and regulations that apply to the rates we charge and the terms and
conditions of the services we offer. Although state regulation
typically is less onerous than FERC regulation, the rates we charge and the
provision of our services may be subject to challenge.
Although our natural gas gathering
systems are generally exempt from FERC regulation under the Natural Gas Act of
1938, FERC regulation still significantly affects our natural gas gathering
business. Our natural gas gathering operations could be adversely
affected in the future should they become subject to the application of federal
regulation of rates and services or if the states in which we operate adopt
policies imposing more onerous regulation on gathering. Additional
rules and legislation pertaining to these matters are considered and adopted
from time to time at both state and federal levels. We cannot predict
what effect, if any, such regulatory changes and legislation might have on our
operations or revenues.
Contractual
Obligations
The following table summarizes TEPPCO’s
various contractual obligations at December 31, 2008. A description
of each type of contractual obligation follows:
46
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
|
Payment
or Settlement due by Period
|
||||||||||||||||||||||||||||
|
Total
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
||||||||||||||||||||||
|
Maturities
of long-term debt (1)
|
$ | 2,516,654 | $ | -- | $ | -- | $ | -- | $ | 1,016,654 | $ | 450,000 | $ | 1,050,000 | ||||||||||||||
|
Interest
payments (2)
|
$ | 2,624,102 | $ | 146,838 | $ | 146,838 | $ | 146,839 | $ | 127,474 | $ | 87,975 | $ | 1,968,138 | ||||||||||||||
|
Operating
leases (3)
|
$ | 55,696 | $ | 12,467 | $ | 10,640 | $ | 9,712 | $ | 9,045 | $ | 6,156 | $ | 7,676 | ||||||||||||||
|
Purchase
obligations (4):
|
||||||||||||||||||||||||||||
|
Product
purchase commitments:
|
||||||||||||||||||||||||||||
|
Estimated
payment obligation:
|
||||||||||||||||||||||||||||
|
Crude
oil
|
$ | 212,435 | $ | 212,435 | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | ||||||||||||||
|
Refined
Products
|
$ | 10,594 | $ | 10,594 | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | ||||||||||||||
|
Other
|
$ | 3,057 | $ | 1,772 | $ | 884 | $ | 401 | $ | -- | $ | -- | $ | -- | ||||||||||||||
|
Underlying
major volume commitments:
|
||||||||||||||||||||||||||||
|
Crude
oil (in barrels)
|
4,409 | 4,409 | -- | -- | -- | -- | -- | |||||||||||||||||||||
|
Refined
Products (in barrels)
|
353 | 353 | -- | -- | -- | -- | -- | |||||||||||||||||||||
|
Service
payment commitments (5)
|
$ | 5,024 | $ | 4,675 | $ | 349 | $ | -- | $ | -- | $ | -- | $ | -- | ||||||||||||||
|
Contributions
to Jonah (6)
|
$ | 27,000 | $ | 27,000 | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | ||||||||||||||
|
Contributions
to Texas Offshore Port
System (7)
|
$ | 70,000 | $ | 70,000 | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | ||||||||||||||
|
Capital
expenditure obligations (8)
|
$ | 116,733 | $ | 116,733 | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | ||||||||||||||
|
Other
liabilities and deferred credits (9)
|
$ | 28,826 | $ | -- | $ | 5,616 | $ | 5,607 | $ | 5,607 | $ | 2,096 | $ | 9,900 | ||||||||||||||
__________________
|
(1)
|
TEPPCO
has long-term payment obligations under its Revolving Credit Facility, its
Senior Notes and its Junior Subordinated Notes. Amounts shown
in the table represent TEPPCO’s scheduled future maturities of long-term
debt principal for the periods indicated (see Note 12 for additional
information regarding TEPPCO’s consolidated debt
obligations).
|
|
(2)
|
Includes
interest payments due on TEPPCO’s Senior Notes and Junior Subordinated
Notes and interest payments and commitment fees due on its Revolving
Credit Facility. The interest amount calculated on the
Revolving Credit Facility and the Junior Subordinated Notes is based on
the assumption that the amount outstanding and the interest rate charged
both remain at their current
levels.
|
|
(3)
|
We
lease certain property, plant and equipment under noncancelable and
cancelable operating leases. Amounts shown in the table
represent minimum cash lease payment obligations under our operating
leases with terms in excess of one year for the periods
indicated. Lease expense is charged to operating costs and
expenses on a straight line basis over the period of expected economic
benefit. Contingent rental payments are expensed as
incurred.
|
|
(4)
|
We
have long and short-term purchase obligations for products and services
with third-party suppliers. The prices that we are obligated to
pay under these contracts approximate current market
prices. The preceding table shows our commitments and estimated
payment obligations under these contracts for the periods
indicated. Our estimated future payment obligations are based
on the contractual price under each contract for products and services at
December 31, 2008. The majority of contractual commitments we
make for the purchase of crude oil range in term from a thirty-day
evergreen to one year. A substantial portion of the contracts
for the purchase of crude oil that extend beyond thirty days include
cancellation provisions that allow us to cancel the contract with thirty
days written notice.
|
|
(5)
|
Includes
approximately $4.5 million related to a shipment commitment on Centennial,
approximately $0.4 million related to a commitment to pay for compression
services on Val Verde and approximately $0.1 million related to the
monthly service fee we pay Cenac to operate the marine assets in
accordance with the transitional operating
agreement.
|
|
(6)
|
Expected
contributions to Jonah in 2009 for our share of capital
expenditures.
|
|
(7)
|
Expected
contributions to Texas Offshore Port System for our share of costs related
to the TOPS and PACE projects. TEPPCO is obligated under the
joint venture agreement to contribute one-third of the funds to complete
the projects, which TEPPCO currently estimate will total $600.0 million
for its share.
|
|
(8)
|
We
have short-term payment obligations relating to capital projects we have
initiated. These commitments represent unconditional payment
obligations that we have agreed to pay vendors for services rendered or
products purchased.
|
|
(9)
|
Includes
approximately $9.6 million of long-term deferred revenue payments,
primarily in the Downstream and Upstream segments, which are being
recognized into income as the services are performed and approximately
$12.0
|
47
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
|
|
million
related to our estimated long-term portions of our liabilities under our
guarantees to Centennial for its credit agreement and for a catastrophic
event. The amount of commitment by year is our best estimate of
projected payments of these long-term
liabilities.
|
Other
Guarantees
At
December 31, 2008, Centennial’s debt obligations consisted of $129.9 million
borrowed under a master shelf loan agreement. In January 2008, TEPPCO
entered into an Amended Guaranty agreement with Centennial’s lenders, under
which the TEPPCO Guarantors are required, on a joint and several basis, to pay
50% of any past-due amount under Centennial’s master shelf loan agreement not
paid by Centennial. The Amended Guaranty also has a credit
maintenance requirement whereby TEPPCO may be required to provide additional
credit support in the form of a letter of credit or pay certain fees if either
of its credit ratings from S&P and Moody’s falls below investment grade
levels as specified in the Amended Guaranty. If Centennial defaults
on its debt obligations, the estimated maximum potential amount of future
payments for the TEPPCO Guarantors and Marathon is $65.0 million each at
December 31, 2008. At December 31, 2008, we have a liability of $9.0
million, which is based upon the expected present value of amounts we would have
to pay under the guarantee.
TE Products, Marathon and Centennial
have also entered into a limited cash call agreement, which allows each member
to contribute cash in lieu of Centennial procuring separate insurance in the
event of a third-party liability arising from a catastrophic
event. There is an indefinite term for the agreement and each member
is to contribute cash in proportion to its ownership interest, up to a maximum
of $50.0 million each. As a result of the catastrophic event
guarantee, at December 31, 2008, TE Products has a liability of $3.9 million,
which is based upon the expected present value of amounts we would have to pay
under the guarantee. If a catastrophic event were to occur and we
were required to contribute cash to Centennial, such contributions might be
covered by our insurance (net of deductible), depending upon the nature of the
catastrophic event.
One of our subsidiaries, TCO, has
entered into master equipment lease agreements with finance companies for the
use of various pieces of equipment. We currently estimate that our
minimum lease payment related to this equipment will be $3.9 million for
2009. We have guaranteed the full and timely payment and performance
of TCO’s obligations under the agreements. Generally, events of
default would trigger our performance under the guarantee. The
maximum potential amount of future payments under the guarantee is not
estimable, but would include base rental payments for both current and future
equipment, stipulated loss payments in the event any equipment is stolen,
damaged, or destroyed and any future indemnity payments. We carry
insurance coverage that may offset any payments required under the
guarantees. We do not believe that any performance under the
guarantee would have a material effect on our financial condition.
Motiva Project
In December 2006, we signed an
agreement with Motiva Enterprises, LLC (“Motiva”) for us to construct and
operate a new refined products storage facility to support the expansion of
Motiva’s refinery in Port Arthur, Texas. Under the terms of the
agreement, we are constructing a 5.4 million barrel refined products storage
facility for gasoline and distillates. The agreement also provides
for a 15-year throughput and dedication of volume, which will commence upon
completion of the refinery expansion or July 1, 2010, whichever comes
first. The project includes the construction of 20 storage tanks,
five 5.4-mile product pipelines connecting the storage facility to Motiva’s
refinery, 21,000 horsepower of pumping capacity, and distribution pipeline
connections to the Colonial, Explorer and Magtex pipelines. As a part
of a separate but complementary initiative, we are constructing an 11-mile,
20-inch pipeline to connect the new storage facility in Port Arthur to our
refined products terminal in Beaumont, Texas, which is one of the primary
origination facilities for our mainline system. These projects will
facilitate connections to additional markets through the Colonial, Explorer and
Magtex pipeline systems and provide the Motiva refinery with access to our
pipeline system. The total cost of the project is expected to be
approximately
48
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
$355.0
million, which includes $25.0 million for the 11-mile, 20-inch pipeline, $24.0
million of capitalized interest and $17.0 million of mutually agreed upon scope
changes requested by Motiva. Through December 31, 2008, we have spent
approximately $170.1 million on this construction project. Under the
terms of the agreement, if Motiva cancels the agreement prior to the
commencement date of the project, Motiva will reimburse us the actual reasonable
expenses we have incurred after the effective date of the agreement, including
both internal and external costs that would be capitalized as a part of the
project, plus a ten percent cancellation fee.
Texas Offshore Port System
We, through a subsidiary, own a
one-third interest in the Texas Offshore Port System joint
venture. The aggregate cost of the TOPS and PACE projects is expected
to be approximately $1.8 billion (excluding capitalized interest), with the
majority of such expenditures currently expected to occur in 2010 and
2011. TEPPCO has guaranteed up to approximately $700.0 million, which
includes a contingency amount for potential cost overruns, of the capital
expenditure obligations of our subsidiary in the joint venture. See
Note 9 for further information.
Other
Substantially all of the petroleum
products that we transport and store are owned by our customers. At
December 31, 2008, TCTM and TE Products had approximately 5.2 million barrels
and 11.3 million barrels, respectively, of products in their custody that were
owned by customers. We are obligated for the transportation, storage
and delivery of such products on behalf of our customers. We maintain
insurance to cover product losses through circumstances beyond our control at
levels we believe are consistent with the associated exposures.
Insurance
We carry insurance coverage we believe
to be consistent with the exposures associated with the nature and scope of our
operations. As of December 31, 2008, our current insurance coverage
includes (1) commercial general liability insurance for liabilities to third
parties for bodily injury and property damage resulting from our operations; (2)
workers’ compensation coverage to required statutory limits; (3)
automobile liability insurance for all owned, non-owned and hired vehicles
covering liabilities to third parties for bodily injury and property damage, (4)
property insurance covering the replacement value of all real and personal
property damage, including damages arising from earthquake, flood damage and
business interruption/extra expense and (5) hulls and certain liabilities which
may arise from marine vessel operations. For select assets, we also
carry pollution liability insurance that provides coverage for historical and
gradual pollution events. All coverages are subject to certain
deductibles, limits or sub-limits and policy terms and conditions.
We also maintain excess liability
insurance coverage above the established primary limits for commercial general
liability and automobile liability insurance. Limits, terms,
conditions and deductibles are commensurate with the nature and scope of our
operations. The cost of our general insurance coverage has increased
over the past year reflecting the changing conditions of the insurance
markets. These insurance policies, except for the pollution liability
policies, are through EPCO (see Note 16).
Commitments
under our EPCO equity compensation plans
In accordance with our agreements with
EPCO, we reimburse EPCO for our share of its compensation expense associated
with certain employees who perform management, administrative and operating
functions for us (see Note 1). This includes costs associated with
unit option awards granted to these employees to purchase TEPPCO’s
Units. At December 31, 2008, there were 355,000 unit options
outstanding for which we were responsible for reimbursing EPCO for the costs of
such awards (see Note 4).
49
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED BALANCE SHEET – (Continued)
The
weighted-average strike price of unit option awards outstanding at December 31,
2008 was $40.00 per TEPPCO Unit. At December 31, 2008, none of these
unit options were exercisable. As these options are exercised, we
will reimburse EPCO for the gross unit option value of the options exercised to
make EPCO whole for related employee tax withholding
requirements. See Note 4 for additional information regarding our
accounting for equity awards.
NOTE
18. CONCENTRATIONS
OF CREDIT RISK
Our primary market areas are located in
the Northeast, Midwest and Southwest regions of the United States. We
have a concentration of trade receivable balances due from major integrated oil
companies, independent oil companies and other pipelines and wholesalers. These
concentrations of customers may affect our overall credit risk in that the
customers may be similarly affected by changes in economic, regulatory or other
factors. We analyze our customers’ historical and future credit
positions prior to extending credit. We manage our exposure to credit
risk through credit analysis, credit approvals, credit limits and monitoring
procedures, and for certain transactions may utilize letters of credit,
prepayments and guarantees.
For the year ended December 31, 2008,
Valero Energy Corp., BP Oil Supply Company and Shell Trading Company accounted
for 21%, 16% and 12%, respectively, of our total consolidated
revenues. No other single customer accounted for 10% or more of our
total consolidated revenues for the year ended December 31, 2008.
50