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): June 30, 2009
TEPPCO
PARTNERS, L.P.
(Exact
name of registrant as specified in its charter)
|
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
|
|
Incorporation
or Organization)
|
Identification
No.)
|
|
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.
The unaudited condensed consolidated
balance sheet of Texas Eastern Products Pipeline Company, LLC (“TEPPCO GP”) as
of June 30, 2009 is filed herewith as Exhibit 99.1 and is incorporated herein by
reference. TEPPCO GP is the general partner of TEPPCO Partners,
L.P.
Item
9.01 Financial Statements and Exhibits.
(d) Exhibits.
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Exhibit No.
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Description
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99.1
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Unaudited
Condensed Consolidated Balance Sheet of TEPPCO GP as of
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June
30, 2009.
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1
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned hereunto duly
authorized.
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TEPPCO
PARTNERS, L.P.
|
|||
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By:
Texas Eastern Products Pipeline Company, LLC,
its General Partner
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|||
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Date:
August 10, 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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Acting Chief Financial Officer, Controller,
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||
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Assistant Treasurer and Assistant
Secretary
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|||
2
Exhibit
Index
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Exhibit No.
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Description
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|
99.1
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Unaudited
Condensed Consolidated Balance Sheet of TEPPCO GP as of
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|
June 30,
2009.
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3
Exhibit 99.1
Texas
Eastern Products Pipeline Company, LLC and Subsidiaries
Unaudited
Condensed Consolidated Balance Sheet
June
30, 2009
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
TABLE
OF CONTENTS
|
Page
No.
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|
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Unaudited
Condensed Consolidated Balance Sheet as of June 30, 2009
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2
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Notes
to Unaudited Condensed Consolidated Balance Sheet
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1. Company
Organization and Basis of Presentation
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3
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2. General
Accounting Matters
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4
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3. Accounting
for Equity Awards
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6
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4. Derivative
Instruments and Hedging Activities
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9
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5. Inventories
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13
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6. Property,
Plant and Equipment
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13
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7. Investments
in Unconsolidated Affiliates
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14
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8. Business
Combination
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14
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9. Intangible
Assets and Goodwill
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15
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10. Debt
Obligations
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16
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11. Equity
(Deficit) and Noncontrolling Interest
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17
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12. Business
Segments
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18
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13. Related
Party Transactions
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19
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14. Commitments
and Contingencies
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22
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15. Subsequent
Events
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28
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1
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEET
AT
JUNE 30, 2009
(Dollars
in millions)
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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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$ | -- | ||
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Accounts receivable, trade (net of allowance for doubtful accounts of
$2.6)
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984.8 | |||
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Accounts receivable, related parties
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10.7 | |||
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Inventories
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95.6 | |||
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Other
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38.7 | |||
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Total current assets
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1,129.8 | |||
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Property, plant and equipment,
at cost (net of accumulated depreciation of $729.9)
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2,591.6 | |||
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Investments
in unconsolidated affiliates
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1,198.9 | |||
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Intangible assets (net
of accumulated amortization of $172.3)
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195.1 | |||
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Goodwill
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106.6 | |||
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Other
assets
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132.9 | |||
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Total
assets
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$ | 5,354.9 | ||
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LIABILITIES
AND EQUITY
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||||
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Current
liabilities:
|
||||
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Accounts payable and accrued liabilities
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$ | 967.9 | ||
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Accounts payable, related parties
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40.9 | |||
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Accrued interest
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36.0 | |||
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Other accrued taxes
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21.0 | |||
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Other
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21.1 | |||
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Total
current liabilities
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1,086.9 | |||
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Long-term
debt:
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||||
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Senior
notes
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1,710.9 | |||
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Junior
subordinated notes
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299.6 | |||
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Other
long-term debt
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723.3 | |||
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Total
long-term debt
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2,733.8 | |||
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Other
liabilities and deferred credits
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27.8 | |||
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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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(126.3 | ) | ||
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Accumulated other comprehensive loss
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(5.8 | ) | ||
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Total Texas Eastern Products Pipeline Company, LLC member’s equity
(deficit)
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(132.1 | ) | ||
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Noncontrolling interest
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1,638.5 | |||
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Total equity (deficit)
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1,506.4 | |||
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Total liabilities and equity (deficit)
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$ | 5,354.9 | ||
See Notes
to Unaudited Condensed Consolidated Balance Sheet.
2
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC
NOTES
TO UNAUDITED CONDENSED 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
millions.
Note
1. Company Organization and Basis of Presentation
Company
Organization
Texas Eastern Products Pipeline
Company, LLC 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 partnership 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.
On June 28, 2009, we and TEPPCO entered
into definitive merger agreements with Enterprise Products Partners, its general
partner, Enterprise Products GP, LLC (“EPGP”), and two of its
subsidiaries. See Note 13 for information regarding the proposed
merger with Enterprise Products Partners.
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
TEPPCO and its subsidiaries.
We refer to refined products, liquefied
petroleum gases (“LPGs”), petrochemicals, crude oil, lubrication oils and
specialty chemicals, natural gas liquids (“NGLs”), natural gas, asphalt, heavy
fuel oil, other heated oil products and marine bunker fuel, collectively as
“petroleum products” or “products.”
Basis
of Presentation
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.
3
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
Effective January 1, 2009, we adopted
the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 160
(Accounting Standards Codification (“ASC”) 810), Noncontrolling Interests in
Consolidated Financial Statements. SFAS 160 established
accounting and reporting standards for noncontrolling interests, which were
previously identified as minority interest in our consolidated balance
sheet. SFAS 160 requires, among other things, that noncontrolling
interests be presented as a component of equity on our consolidated balance
sheet (i.e., elimination of the “mezzanine” presentation previously used for
minority interest). See Note 11 for additional information regarding
noncontrolling interests.
The unaudited condensed consolidated
balance sheet included in this Current Report on Form 8-K reflects the changes
required by SFAS 160.
The accompanying unaudited condensed
consolidated balance sheet reflects all adjustments that are, in the opinion of
our management, of a normal and recurring nature and necessary for a fair
statement of our financial position as of June 30, 2009. Although we
believe our disclosures are adequate to make the information presented in our
unaudited condensed consolidated balance sheet not misleading, certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
in the United States of America (“GAAP”) have been condensed or omitted pursuant
to those rules and regulations of the U.S. Securities and Exchange Commission
(“SEC” or “Commission”). Our unaudited condensed
consolidated June 30, 2009 balance sheet should be read in conjunction with
our audited December 31, 2008 balance sheet filed on TEPPCO’s Current Report on
Form 8-K on July 8, 2009 (the “Recast Form 8-K”), which retrospectively adjusts
portions of our audited December 31, 2008 balance sheet. The Recast
Form 8-K reflects our adoption of SFAS 160 and the resulting change in
presentation and disclosure requirements. In addition, this financial
information should be read in conjunction with TEPPCO’s annual report on Form
10-K for the year ended December 31, 2008 and its Form 10-Q for the period ended
June 30, 2009. The Commission file number for TEPPCO’s public filings
is 1-10403.
Note
2. General Accounting Matters
Estimates
Preparing our Unaudited Condensed
Consolidated Balance Sheet in conformity with GAAP requires management to make
estimates and assumptions that affect amounts presented in the balance sheet
(e.g. assets and liabilities) and disclosures about contingent assets and
liabilities. Our actual results could differ from these
estimates. On an ongoing basis, management reviews its estimates
based on currently available information. Changes in facts and
circumstances may result in revised estimates.
4
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
Fair
Value Information
Cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses and other current liabilities
are carried at amounts which reasonably approximate their fair values due to
their short-term nature. The estimated fair values of our fixed-rate
debt are based on quoted market prices for such debt or debt of similar terms
and maturities. The carrying amount of our variable-rate debt
obligation reasonably approximates its fair value due to its variable
interest rate. See Note 4 for fair value information associated with
our derivative instruments. The following table presents the estimated fair
values of our financial instruments at June 30, 2009:
|
Carrying
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Fair
|
|||||||
|
Financial
Instruments
|
Value
|
Value
|
||||||
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Financial
assets:
|
||||||||
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Cash
and cash equivalents
|
$ | -- | $ | -- | ||||
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Accounts
receivable, trade
|
984.8 | 984.8 | ||||||
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Financial
liabilities:
|
||||||||
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Accounts
payable and accrued liabilities
|
967.9 | 967.9 | ||||||
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Other
current liabilities
|
21.1 | 21.1 | ||||||
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Fixed-rate
debt (principal amount)
|
2,000.0 | 1,967.0 | ||||||
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Variable-rate
debt
|
723.3 | 723.3 | ||||||
Recent
Accounting Developments
The following information summarizes
recently issued accounting guidance since those reported in our Recast Form 8-K
that will or may affect our future financial statements.
In April 2009, the Financial Accounting
Standards Board (“FASB”) issued new guidance in the form of FASB Staff Positions
(“FSPs”) in an effort to clarify certain fair value accounting rules. FSP
Financial Accounting Standard (“FAS”) 157-4 (ASC 820), Determining Fair Value When the Volumes and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly, establishes a process to
determine whether a market is not active and a transaction is not
distressed. FSP FAS 157-4 states that companies should look at
several factors and use judgment to ascertain if a formerly active market has
become inactive. When estimating fair value, FSP FAS 157-4 requires
companies to place more weight on observable transactions determined to be
orderly and less weight on transactions for which there is insufficient
information to determine whether the transaction is orderly (entities do not
have to incur undue cost and effort in making this determination). The
FASB also issued FSP FAS 107-1 and APB 28-1 (ASC 825), Interim Disclosures About Fair Value
of Financial Instruments. This FSP requires that companies provide
qualitative and quantitative information about fair value estimates for all
financial instruments not measured on the balance sheet at fair value in each
interim report. Previously, this was only an annual requirement. We
adopted these FSPs effective June 30, 2009. Our adoption of this new
guidance did not have a material impact on our financial position or related
disclosures.
In May 2009, the FASB issued SFAS No.
165 (ASC 855), Subsequent
Events, which establishes general standards of accounting for, and
disclosure of, events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. SFAS 165
requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date. We adopted SFAS 165 on
June 30, 2009. Our adoption of this guidance did not have any impact
on our financial position.
In June
2009, the FASB issued SFAS No. 167 (ASC 810), Amendments to FASB Interpretation
No. 46(R), which amended consolidation guidance for variable interest
entities (“VIEs”) under FASB Interpretation (“FIN”) No. 46(R) (“FIN 46(R)”) (ASC
810-10) Consolidation of
Variable Interest Entities. VIEs are entities whose equity
investors do not have sufficient equity capital at risk such that the entity
cannot finance its own activities. When a business has a controlling
financial interest in a VIE, the assets, liabilities and profit or loss of that
entity must be included in consolidation. A business enterprise
must
5
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
consolidate a VIE when that enterprise has a
variable interest that will cover most of the entity’s expected losses and/or
receive most of the entity’s anticipated residual return. SFAS 167,
among other things, eliminates the scope
exception for qualifying special-purpose entities, amends certain guidance for
determining whether an entity is a VIE, expands the list of events that trigger
reconsideration of whether an entity is a VIE, requires a qualitative rather
than a quantitative analysis to determine the primary beneficiary of a VIE,
requires continuous assessments of whether a company is the primary beneficiary
of a VIE and requires enhanced disclosures about a company’s involvement with a
VIE. SFAS 167 is effective for us on January 1, 2010. At June
30, 2009, we did not have any VIEs; therefore, our adoption of this new guidance
is not expected to have a material impact on our financial
position.
In June 2009, the FASB issued SFAS No.
168 (ASC 105), The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles—a replacement of FASB Statement No. 162, which
establishes the ASC as the source of authoritative GAAP recognized by the FASB
to be applied by nongovernmental entities. The ASC is a reorganization of
current GAAP into a topical format that eliminates the current GAAP hierarchy
and establishes instead two levels of guidance — authoritative and
nonauthoritative. All guidance contained in the ASC carries an equal
level of authority. Rules and interpretive releases of the SEC under
federal securities laws are also sources of authoritative GAAP for SEC
registrants. SFAS 168 identifies the sources of accounting principles
and the framework for selecting the principles used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with GAAP. SFAS 168 is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. We
will adopt SFAS 168 on September 30, 2009. Our adoption of this new
guidance is not expected to have any impact on our financial position.
References to specific GAAP in our consolidated balance sheet after our adoption
of SFAS 168 will refer exclusively to the ASC. We have elected to
provide references to the ASC parenthetically in this Current Report on Form
8-K.
Subsequent
Events
We have evaluated subsequent events
through August 10, 2009, which is the date our Unaudited Condensed Consolidated
Balance Sheet and Notes are being issued.
Note
3. Accounting for Equity Awards
We account for equity awards in
accordance with SFAS No. 123(R) (ASC 718 and 505), Share-Based Payment (“SFAS
123(R)”). Such awards were not material to our consolidated balance
sheet for the period presented.
Certain key employees of EPCO
participate in long-term incentive compensation plans managed by
EPCO. We record our pro rata share of such costs based on the
percentage of time each employee spends on our business activities.
1999
Phantom Unit Retention 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. A
total of 2,800 phantom units were outstanding under the 1999 Plan at June 30,
2009, which cliff vest in January 2010. During the first quarter of
2009, 2,800 additional phantom units which were outstanding at December 31, 2008
under the 1999 Plan were forfeited. Additionally, in April 2009,
13,000 phantom units vested and $0.3 million was paid out to a participant in
April 2009. At June 30, 2009, we had an accrued liability balance of
$0.1 million for compensation related to the 1999 Plan.
6
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
2000
Long Term Incentive Plan
The Texas Eastern Products Pipeline
Company, LLC 2000 Long Term Incentive Plan (“2000 LTIP”) provides key employees
incentives to achieve improvements in our financial performance. At
December 31, 2008, we had an accrued liability balance of $0.2 million for
compensation related to the 2000 LTIP. On December 31, 2008, 11,300
phantom units vested and $0.2 million was paid out to participants in the first
quarter of 2009. There were no remaining phantom units outstanding
under the 2000 LTIP at June 30, 2009.
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 our financial
performance. At December 31, 2008, we had an accrued liability balance of
$0.6 million for compensation related to the 2005 Phantom Unit
Plan. On December 31, 2008, a total of 36,600 phantom units vested
and $0.6 million was paid out to participants in the first quarter of
2009. There were no remaining phantom units outstanding under the 2005
Phantom Unit Plan at June 30, 2009.
EPCO
2006 Long-Term Incentive Plan
The EPCO,
Inc. 2006 TPP Long-Term Incentive Plan (“2006 LTIP”) provides for awards of
TEPPCO’s 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, unit appreciation rights (“UARs”) and distribution
equivalent rights. 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. After giving effect to the issuance or
forfeiture of restricted unit awards and option awards through June 30, 2009, a
total of 4,161,046 additional TEPPCO Units could be issued under the 2006 LTIP
in the future. The merger agreement governing our proposed merger
with a subsidiary of Enterprise Products Partners contains restrictions on the
issuance of additional TEPPCO Units under the 2006 LTIP. See Note 13
for information regarding the proposed merger with Enterprise Products
Partners.
Unit
option
awards. 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)
|
||||||||||
|
Outstanding
at December 31, 2008
|
355,000 | $ | 40.00 | |||||||||
|
Granted (1)
|
329,000 | $ | 24.84 | |||||||||
|
Forfeited
|
(109,500 | ) | $ | 34.38 | ||||||||
|
Outstanding at June 30,
2009 (2)
|
574,500 | $ | 32.39 | 4.78 | ||||||||
|
|
||||||||||||
|
(1) The
total grant date fair value of these unit option awards granted in 2009
was $1.3 million based upon the following assumptions: (i)
weighted-average expected life of options of 4.8 years; (ii)
weighted-average risk-free interest rate of 2.14%; (iii) weighted-average
expected distribution yield on TEPPCO’s Units of 11.31%; (iv) estimated
forfeiture rate of 17.0%; and (v) weighted-average expected unit price
volatility on TEPPCO’s Units of 59.32%.
(2)
No
unit options were exercisable as of June 30, 2009.
|
||||||||||||
At June
30, 2009, the estimated total unrecognized compensation cost related to
nonvested unit option awards granted under the 2006 LTIP was $1.5
million. We expect to recognize our share of this cost over a
weighted-average period of 3.46 years in accordance with the ASA (see Note
13).
7
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
Restricted
unit
awards. The following
table presents restricted unit activity under the 2006 LTIP for the periods
indicated:
|
Weighted-
|
||||||||
|
Average
Grant
|
||||||||
|
Number
|
Date
Fair Value
|
|||||||
|
of
Units
|
per
Unit (1)
|
|||||||
|
Restricted
units at December 31, 2008
|
157,300 | |||||||
|
Granted
(2)
|
140,450 | $ | 23.93 | |||||
|
Vested
|
(5,000 | ) | $ | 34.63 | ||||
|
Forfeited
|
(32,350 | ) | $ | 32.29 | ||||
|
Restricted
units at June 30, 2009
|
260,400 | |||||||
|
(1) Determined
by dividing the aggregate grant date fair value of awards by the number of
awards issued. The weighted-average grant date fair value per unit
for forfeited and vested awards is determined before an allowance for
forfeitures.
(2) Aggregate
grant date fair value of restricted unit awards issued during 2009 was
$3.4 million based on grant date market prices ranging from $28.81 to
$29.83 per TEPPCO Unit and an estimated forfeiture rate of
17.0%.
|
||||||||
The total fair value of restricted unit
awards that vested during the three months and six months ended June 30, 2009
was $0.1 million. At June 30, 2009, the estimated total unrecognized
compensation cost related to restricted unit awards under the 2006
LTIP was $6.2 million. We expect to recognize our share of this cost over a
weighted-average period of 3.17 years in accordance with the ASA.
Phantom
unit
awards. At June 30, 2009, a total of 1,647 phantom units were
outstanding, which were awarded in 2007 under the 2006 LTIP to three of the then
non-executive members of the board of directors. 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. Phantom unit awards to non-executive directors are
accounted for in a manner similar to SFAS 123(R) liability awards.
UAR
awards. At
June 30, 2009, a total of 392,788 UARs were outstanding, which were awarded in
2007 under the 2006 LTIP to non-executive members of the board of directors and
to certain employees providing services directly to us.
|
§
|
Non-Executive
Members of the Board of Directors. At June 30, 2009, a
total of 95,654 UARs, awarded to non-executive members of the 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 the 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 the
board of directors in connection with his election to the
board). UARs awarded to non-executive directors are accounted
for in a manner similar to SFAS 123(R) liability awards. Mr.
Hutchison, who was a non-executive member of the board of directors at the
time of issuance of these UARs (and the phantom unit awards discussed
above), became interim executive chairman in March
2009.
|
|
§
|
Employees. At
June 30, 2009, a total of 297,134 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. 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
In 2008, EPCO formed TEPPCO Unit, L.P.
(“TEPPCO Unit I”) and TEPPCO Unit II, L.P. (“TEPPCO Unit II”) (collectively,
“Employee Partnerships”) to serve as long-term incentive
arrangements
8
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
for key
employees of EPCO by providing them with a “profits interest” in the Employee
Partnerships. At June 30, 2009, the estimated unrecognized
compensation cost related to TEPPCO Unit I and TEPPCO Unit II was $1.4 million
and $1.2 million, respectively. We expect to recognize our share of
these costs over a weighted-average period of 4.27 years in accordance with the
ASA.
Note
4. Derivative Instruments and Hedging Activities
In the course of our normal business
operations, we are exposed to certain risks, including changes in interest rates
and commodity prices. In order to manage risks associated with certain
identifiable and anticipated transactions, we use derivative instruments.
Derivatives are financial instruments whose fair value is determined by
changes in a specified benchmark such as interest rates or commodity prices.
Typical derivative instruments include futures, forward contracts, swaps and
other instruments with similar characteristics. Substantially all of
our derivatives are used for non-trading activities.
SFAS No. 133 (ASC 815), Accounting for Derivative
Instruments and Hedging Activities, requires companies to recognize
derivative instruments at fair value as either assets or liabilities on the
balance sheet. While the standard requires that all derivatives be
reported at fair value on the balance sheet, changes in fair value of the
derivative instruments will be reported in different ways depending on the
nature and effectiveness of the hedging activities to which they are
related. After meeting specified conditions, a qualified derivative
may be specifically designated as a total or partial hedge of:
|
§
|
Changes
in the fair value of a recognized asset or liability, or an unrecognized
firm commitment – In a fair value hedge, all gains and losses (of
both the derivative instrument and the hedged item) are recognized in
income during the period of change.
|
|
§
|
Variable
cash flows of a forecasted transaction – In a cash flow hedge, the
effective portion of the hedge is reported in other comprehensive income
and is reclassified into earnings when the forecasted transaction affects
earnings.
|
An effective hedge is one in which the
change in fair value of a derivative instrument can be expected to offset 80% to
125% of changes in the fair value of a hedged item at inception and throughout
the life of the hedging relationship. The effective portion of a
hedge is the amount by which the derivative instrument exactly offsets the
change in fair value of the hedged item during the reporting
period. Conversely, ineffectiveness represents the change in the fair
value of the derivative instrument that does not exactly offset the change in
the fair value of the hedged item. Any ineffectiveness associated
with a hedge is recognized in earnings immediately. Ineffectiveness
can be caused by, among other things, changes in the timing of forecasted
transactions or a mismatch of terms between the derivative instrument and the
hedged item.
On January 1, 2009, we adopted the
disclosure requirements of SFAS No. 161 (ASC 815), Disclosures About Derivative
Financial Instruments and Hedging Activities. SFAS 161
requires enhanced qualitative and quantitative disclosure requirements regarding
derivative instruments. This footnote reflects the new disclosure
standard.
Interest
Rate Derivative Instruments
We utilize interest rate swaps,
treasury locks and similar derivative instruments to manage our exposure to
changes in the interest rates of certain debt agreements. This strategy is a
component in controlling our cost of capital associated with such
borrowings. At June 30, 2009, we had no interest rate derivative
instruments outstanding.
At times, we may use treasury lock
derivative instruments to hedge the underlying U.S. treasury rates related to
forecasted issuances of debt. As cash flow hedges, gains or losses on
these instruments are recorded in other comprehensive income and amortized to
earnings using the effective interest method over
9
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
the
estimated term of the underlying fixed-rate debt. During March 2008,
we terminated treasury locks having a combined notional value of $600.0 million
and recognized an aggregate loss of $23.2 million in other comprehensive income
during the first quarter of 2008. We recognized approximately $3.6
million of this loss in interest expense during the six months ended June 30,
2008 as a result of interest payments hedged under the treasury locks not
occurring as forecasted.
Commodity
Derivative Instruments
We seek to maintain a position that is
substantially balanced between crude oil purchases and related sales and future
delivery obligations. The price of crude oil is subject to
fluctuations in response to changes in supply, demand, general market
uncertainty and a variety of additional factors that are beyond our
control. In order to manage the price risk associated with crude oil, we
enter into commodity derivative instruments such as forwards, basis swaps and
futures contracts. The purpose of such hedging strategy is to either
balance our inventory position or to lock in a profit margin.
At June 30, 2009, we had no outstanding
commodity derivatives designated as hedging instruments under SFAS
133. Currently, our commodity derivative instruments do not meet the
hedge accounting requirements of SFAS 133 and are accounted for as economic
hedges using mark-to-market accounting. These financial instruments
had a minimal impact on our earnings. The following table summarizes
our outstanding commodity derivative instruments not designated as hedging
instruments under SFAS 133 at June 30, 2009:
|
Accounting
|
||
|
Derivative
Purpose
|
Volume
(1)
|
Treatment
|
|
Derivatives
not designated as hedging instruments under SFAS 133:
|
||
|
Crude
oil risk management activities (2)
|
4.5
MMBbls
|
Mark-to-market
|
|
(1) Reflects
the absolute value of the derivative notional volumes.
(2) Reflects
the use of derivative instruments to manage risks associated with our
portfolio of crude oil storage assets. These commodity
derivative instruments have forward positions through March
2010.
|
||
For information regarding fair value
amounts and gains and losses on commodity derivative instruments and related
hedged items, see “Tabular Presentation of Fair Value Amounts on Derivative
Instruments and Related Hedged Items” within this Note 4.
Credit-Risk Related Contingent Features
in Derivative Instruments
We have no credit-risk related
contingent features in any of our derivative
instruments.
Tabular Presentation of Fair Value
Amounts on Derivative Instruments and Related Hedged Items
The
following table provides a balance sheet overview of our derivative assets and
liabilities at June 30, 2009:
|
Asset
Derivatives
|
Liability
Derivatives
|
|
||||||||||
| Derivatives not designated as hedging instruments under SFAS 133: | ||||||||||||
|
Balance
Sheet
|
Fair
|
Balance
Sheet
|
Fair
|
|
||||||||
|
Location
|
Value
|
Location
|
Value
|
|
||||||||
|
|
Commodity derivatives |
Other current
assets
|
$ |
2.7
|
Other current
liabilities
|
$ |
2.3
|
|
||||
|
Total
derivatives not
|
||||||||||
|
designated
as hedging
|
||||||||||
|
instruments
|
$ | 2.7 |
$
|
2.3 |
Over the
next twelve months, we expect to reclassify $6.0 million of accumulated other
comprehensive loss attributable to settled treasury locks to earnings as an
increase to interest expense.
10
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
SFAS
157 – Fair Value Measurements
SFAS 157
(ASC 820) 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 a specified 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, including
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:
|
§
|
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 with 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. At June 30, 2009, we had no Level 1
financial assets and liabilities.
|
|
§
|
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, the time value of money, volatility
factors for stocks, current market and contractual prices for the
underlying instruments and other relevant economic
measures. Substantially all of these assumptions are (i)
observable in the marketplace throughout the full term of the instrument,
(ii) can be derived from observable data or (iii) are validated by inputs
other than quoted prices (e.g., interest rates and yield curves at
commonly quoted intervals). Our Level 2 fair values primarily
consist of commodity forward agreements transacted
over-the-counter. The fair values of these derivatives are
based on observable price quotes for similar products and
locations.
|
|
§
|
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. Our Level 3 fair values largely consist of
commodity contracts generally less than one year in term. We
rely on broker quotes for these
|
11
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
|
|
prices
due to the limited observability of locational and quality-based pricing
differentials. At June 30, 2009, our Level 3 financial assets
were less than $0.1 million.
|
The
following table sets forth, by level within the fair value hierarchy, our
financial assets and liabilities measured on a recurring basis at June 30,
2009. 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, in addition to their
placement within the fair value hierarchy levels.
|
Level
2
|
Level
3
|
Total
|
||||||||||
|
Financial
assets:
|
||||||||||||
|
Commodity
derivative instruments
|
$ | 2.7 | $ | -- | $ | 2.7 | ||||||
|
Total
|
$ | 2.7 | $ | -- | $ | 2.7 | ||||||
|
Financial
liabilities:
|
||||||||||||
|
Commodity
derivative instruments
|
$ | 2.3 | $ | -- | $ | 2.3 | ||||||
|
Total
|
$ | 2.3 | $ | -- | $ | 2.3 | ||||||
The
following table sets forth a reconciliation of changes in the fair value of our
Level 3 financial assets and liabilities for the three months and six months
ended June 30, 2009:
|
Balance,
January 1
|
$ | (0.1 | ) | |
|
Total
gains included in net income
|
0.4 | |||
|
Purchases,
issuances, settlements
|
0.1 | |||
|
Balance,
March 31
|
0.4 | |||
|
Purchases,
issuances, settlements
|
(0.4 | ) | ||
|
Balance,
June 30
|
$ | -- |
We adopted the provisions of SFAS 157
that apply to nonfinancial assets and liabilities on January 1,
2009. Our adoption of this guidance had no impact on our financial
position.
Certain nonfinancial assets and
liabilities are measured at fair value on a nonrecurring basis and are subject
to fair value adjustments in certain circumstances (for example, when there is
evidence of impairment). The following table presents the fair value
of an asset carried on the balance sheet by caption and by level within the SFAS
157 valuation hierarchy (as described above) at the date indicated for which a
nonrecurring change in fair value has been recorded during the
period:
|
June
30,
2009
|
Level
1
|
Level
2
|
Level
3
|
Total
Losses
|
||||||||||||||||
|
Property,
plant and equipment
|
$ | 3.0 | $ | -- | $ | -- | $ | 3.0 | $ | 2.3 | ||||||||||
As a result of idling a river terminal
at Helena, Arkansas, in our Downstream Segment, during the six months ended June
30, 2009, we recorded a non-cash impairment charge of $2.3
million. We estimated fair value of the asset using appropriate
valuation techniques.
12
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
Note
5. 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 at June 30, 2009:
|
Crude
oil (1)
|
$ |
58.1
|
|||
|
Refined
products and LPGs (2)
|
17.2
|
||||
|
Lubrication
oils and specialty chemicals
|
10.2
|
||||
|
Materials
and supplies
|
10.0
|
||||
|
NGLs
|
0.1
|
||||
|
Total
|
$ |
95.6
|
|||
|
(1) $57.8
million of our crude oil inventory was subject to forward sales
contracts.
(2) Refined
products and LPGs inventory is managed on a combined
basis.
|
|||||
Due to fluctuating commodity prices, we
recognize lower of average cost or market adjustments when the carrying value of
our inventories exceeds their net realizable value.
Note
6. Property, Plant and Equipment
Our property, plant and equipment
values and accumulated depreciation balance were as follows at June 30,
2009:
|
Estimated
|
||||||||
|
Useful
Life
|
||||||||
|
in
Years
|
||||||||
|
Plants
and pipelines (1)
|
5-40(5)
|
$ |
1,943.9
|
|||||
|
Underground
and other storage facilities (2)
|
5-40(6)
|
315.8
|
||||||
|
Transportation
equipment (3)
|
5-10
|
13.0
|
||||||
|
Marine
vessels (4)
|
20-30
|
508.6
|
||||||
|
Land
and right of way
|
144.1
|
|||||||
|
Construction
work in progress
|
396.1
|
|||||||
|
Total
property, plant and equipment
|
$ |
3,321.5
|
||||||
|
Less:
accumulated depreciation
|
729.9
|
|||||||
|
Property,
plant and equipment, net
|
$ |
2,591.6
|
||||||
|
(1) Plants
and pipelines include refined products, LPGs, NGLs, 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.
(3) Transportation
equipment includes vehicles and similar assets used in our
operations.
(4) Includes
$50.0 million related to the vessels acquired from TransMontaigne Products
Services Inc. (see Note 8).
(5) 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.
(6) 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
Asset retirement obligations (“AROs”)
are legal obligations associated with the retirement of certain tangible
long-lived assets that result from acquisitions, construction, development
and/or normal operations or a combination of these factors. Our ARO
liability balance at June 30, 2009 was $1.5 million. Property, plant
and equipment at June 30, 2009 includes $0.7 million of asset retirement costs
capitalized as an increase in the associated long-lived asset.
13
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
Note
7. Investments In Unconsolidated Affiliates
We own interests in related businesses
that are accounted for using the equity method of accounting. These
investments are identified in the following table by reporting business segment
(see Note 12 for a general discussion of our business segments). The
following table presents our investments in unconsolidated affiliates at June
30, 2009:
|
Ownership
|
||||||||
|
Percentage
|
||||||||
|
Downstream
Segment:
|
||||||||
|
Centennial
Pipeline LLC (“Centennial”)
|
50.0%
|
$ |
66.4
|
|||||
|
Other
|
25.0%
|
|
0.4
|
|||||
|
Upstream
Segment:
|
|
|
|
|||||
|
Seaway
Crude Pipeline Company (“Seaway”)
|
50.0%
|
|
182.9
|
|||||
|
Midstream
Segment:
|
|
|
|
|||||
|
Jonah
Gas Gathering Company (“Jonah”)
|
80.64%
|
949.2
|
||||||
|
Total
|
$ |
1,198.9
|
||||||
Our
investments in Centennial, Seaway and Jonah included excess cost amounts
totaling $73.3 million at June 30, 2009. The value assigned to our
excess investment in Centennial was created upon its formation, the value
assigned to our excess investment in Seaway was created upon acquisition of our
ownership interest in Seaway and 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 amortize such excess cost as a reduction in
equity earnings in a manner similar to depreciation over the life of
applicable contracts or assets acquired or constructed.
In August 2008, a wholly owned
subsidiary of ours, together with a subsidiary of Enterprise Products Partners
and Oiltanking Americas, Inc. (“Oiltanking”), formed the Texas Offshore Port
System partnership (“TOPS”). Effective April 16, 2009, our wholly
owned subsidiary dissociated from TOPS. We believe that the
dissociation discharged our affiliate with respect to further obligations under
the TOPS partnership agreement, and accordingly, TEPPCO from the associated
liability under the related parent guarantee; therefore, we have not recorded
any amounts related to such guarantee. The wholly owned subsidiary of
Enterprise Products Partners that was a partner in TOPS also dissociated from
the partnership effective April 16, 2009. See Note 14 for litigation
matters associated with our dissociation from TOPS.
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 second quarter of 2009,
no impairment charges were required. We have the intent and ability
to hold these investments, which are integral to our operations.
Note
8. Business Combination
On June 4, 2009, we expanded our Marine
Services Segment with the acquisition of 19 tow boats and 28 tank barges from
TransMontaigne Product Services Inc. (“TransMontaigne”), for $50.0 million in
cash. The acquired vessels provide marine vessel fueling services for
cruise liners and cargo ships, referred to as bunkering, and other ship-assist
services and transport fuel oil for electric generation plants. The
acquisition complements our existing fleet of vessels that currently transport
petroleum products along the nation’s inland waterway system and in the Gulf of
Mexico. The newly acquired marine assets are generally supported by
contracts that have a three to five year term and are based primarily in Miami,
Florida, with additional assets located in Mobile, Alabama, and Houston,
Texas. We financed the acquisition with borrowings under TEPPCO’s
revolving credit facility.
The results of operations for the
TransMontaigne acquisition are included in our consolidated financial statements
beginning at the date of acquisition. This acquisition was accounted
for as a business combination using the acquisition method of accounting in
accordance with SFAS 141(R) (ASC 805). Under SFAS 141(R), all of the
assets acquired in the transaction are recognized at their acquisition-date
fair
14
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
values,
while transaction costs associated with the transaction are expensed as
incurred. Accordingly, the cost of the acquisition has been recorded
as property, plant and equipment based on estimated fair values. Such
fair values have been developed using recognized business valuation
techniques.
Note
9. Intangible Assets and Goodwill
Intangible
Assets
The following table summarizes
intangible assets by business segment being amortized at June 30,
2009:
|
Gross
|
Accum.
|
Carrying
|
||||||||||
|
Value
|
Amort.
|
Value
|
||||||||||
|
Intangible
assets:
|
|
|||||||||||
|
Downstream
Segment:
|
|
|||||||||||
|
Transportation
agreements
|
$ |
1.0
|
$ |
(0.4
|
) | $ |
0.6
|
|||||
|
Other
|
7.0
|
(1.0
|
) |
6.0
|
||||||||
|
Subtotal
|
8.0
|
(1.4
|
) |
6.6
|
||||||||
|
Upstream
Segment:
|
|
|
|
|||||||||
|
Transportation
agreements
|
0.9
|
(0.4
|
) |
0.5
|
||||||||
|
Other
|
10.5
|
(3.3
|
) |
7.2
|
||||||||
|
Subtotal
|
11.4
|
(3.7
|
) |
7.7
|
||||||||
|
Midstream
Segment:
|
|
|
|
|||||||||
|
Gathering
agreements
|
239.7
|
(134.1
|
) |
105.6
|
||||||||
|
Fractionation
agreements
|
38.0
|
(21.4
|
) |
16.6
|
||||||||
|
Other
|
0.3
|
(0.2
|
) |
0.1
|
||||||||
|
Subtotal
|
278.0
|
|
(155.7
|
) |
122.3
|
|||||||
|
Marine
Services Segment:
|
|
|
|
|
||||||||
|
Customer
relationship intangibles
|
51.3
|
|
(4.8
|
) |
46.5
|
|||||||
|
Other
|
18.7
|
|
(6.7
|
) |
12.0
|
|||||||
|
Subtotal
|
70.0
|
|
(11.5
|
) |
58.5
|
|||||||
|
Total
intangible assets
|
$ |
367.4
|
$ |
(172.3
|
) | $ |
195.1
|
|
||||
Goodwill
The following table presents the
carrying amount of goodwill by business segment at June 30,
2009:
|
Downstream
Segment
|
$ |
1.3
|
||
|
Upstream
Segment
|
14.9
|
|
||
|
Marine
Services Segment
|
90.4
|
|
||
|
Total
|
$ |
106.6
|
15
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
Note
10. Debt Obligations
The
following table summarizes the principal amounts outstanding under all of our
debt instruments at June 30, 2009:
|
Senior
debt obligations: (1)
|
||||
|
Revolving Credit Facility, due December 2012 (2)
|
$ | 723.3 | ||
|
7.625% Senior Notes, due February 2012
|
500.0 | |||
|
6.125% Senior Notes, due February 2013
|
200.0 | |||
|
5.90% Senior Notes, due April 2013
|
250.0 | |||
|
6.65% Senior Notes, due April 2018
|
350.0 | |||
|
7.55% Senior Notes, due April 2038
|
400.0 | |||
|
Total principal amount of long-term senior debt
obligations
|
2,423.3 | |||
|
7.000% Junior Subordinated Notes, due June 2067 (1)
|
300.0 | |||
|
Total principal amount of long-term debt obligations
|
2,723.3 | |||
|
Adjustment to carrying value associated with hedges of fair value
and
|
||||
|
unamortized discounts (3)
|
10.5 | |||
|
Total long-term debt obligations
|
2,733.8 | |||
|
Total
Debt Instruments (3)
|
$ |
2,733.8
|
||
|
(1) TE
Products, TCTM, TEPPCO Midstream and Val Verde Gas Gathering Company, L.P.
have issued full, unconditional, joint and several guarantees of TEPPCO’s
senior notes, junior subordinated notes and revolving credit facility
(“Revolving Credit Facility”).
(2) The
weighted-average interest rate paid on TEPPCO’s variable-rate Revolving
Credit Facility was 0.92%.
(3) 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 4). Amount includes $5.0 million of
unamortized discounts and $15.5 million related to fair value
hedges.
|
||||
Except
for routine fluctuations in TEPPCO’s unsecured Revolving Credit Facility, there
have been no material changes in the terms of TEPPCO’s debt obligations
since December 31, 2008.
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
entity. Assuming that future fundings are not received for the Lehman
percentage commitment, aggregate available capacity would be reduced by
approximately $28.9 million. At June 30, 2009, TEPPCO’s available
borrowing capacity under the Revolving Credit Facility was approximately
$197.8 million.
See Note 15 for a subsequent event
regarding a loan agreement TEPPCO entered into with Enterprise Products
Partners.
Covenants
TEPPCO was in compliance with the
covenants of its long-term debt obligations at June 30, 2009.
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 June 30, 2009 (on a 100% basis) and the
corresponding scheduled maturities of such debt.
|
Our
|
Scheduled
Maturities of Debt
|
|||||||||||||||||||||||||||||||
|
Ownership
|
After
|
|||||||||||||||||||||||||||||||
|
Interest
|
Total
|
2009
|
2010
|
2011
|
2012
|
2013
|
2013
|
|||||||||||||||||||||||||
|
Centennial
|
|
50%
|
$ |
124.8
|
$ |
4.8
|
$ |
9.1
|
$ |
9.0
|
|
$ |
8.9
|
$ |
8.6
|
$ |
84.4
|
|||||||||||||||
At June
30, 2009, Centennial’s debt obligations consisted of $124.8 million borrowed
under a master shelf loan agreement. Borrowings under the master
shelf agreement mature in May 2024 and are
16
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
collateralized
by substantially all of Centennial’s assets and severally guaranteed by
Centennial’s owners (see Note 14).
There
have been no material changes in the terms of the debt obligations of Centennial
since December 31, 2008.
Note
11. Equity (Deficit) and Noncontrolling Interest
Texas Eastern Products Pipeline
Company, LLC Member’s Equity (Deficit)
At June 30, 2009, the Parent Company’s
member’s equity (deficit) consisted of its capital account and accumulated other
comprehensive loss.
At June 30, 2009, we had a deficit
balance of $126.3 million in our member’s equity account. This negative balance
does not represent an asset to us and does 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 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 June 30, 2009. 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.
Noncontrolling Interests
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 incentive distribution rights of TEPPCO. For financial
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 June 30, 2009, TEPPCO had
outstanding 104,943,004 Units.
Registration
Statements. TEPPCO has a universal shelf registration
statement on file with the SEC that allows it to issue an unlimited amount of
debt and equity securities.
TEPPCO
also has a registration statement on file with the SEC authorizing the issuance
of up to 10,000,000 of its Units in connection with its distribution
reinvestment plan (“DRIP”). A total of 533,936 TEPPCO Units have
been issued under this registration statement from inception of the DRIP through
June 30, 2009. See Note 15 for information regarding the suspension
of the DRIP.
17
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
In
addition, TEPPCO has a registration statement on file related to its employee
unit purchase plan (“EUPP”), under which TEPPCO can issue up to 1,000,000 of its
Units. A total of 43,506 TEPPCO Units have been issued to
employees under this plan from inception of the EUPP through June 30,
2009. See Note 15 for information regarding the suspension of the
EUPP.
During the six months ended June 30,
2009, a total of 131,605 TEPPCO Units were issued in connection with the DRIP
and the EUPP. Total net proceeds received during the six months ended
June 30, 2009 from these TEPPCO Unit offerings was $3.3 million.
Accumulated Other Comprehensive
Loss
Our accumulated other comprehensive
loss balance consisted of losses of $43.0 million, of which $37.1 million was
attributable to noncontrolling interests, related to interest rate and treasury
lock derivative instruments at June 30, 2009.
Note
12. 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
petroleum products and provision of marine vessel fueling and other
ship-assist services.
|
Amounts indicated in the following
table 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).
The
following table includes information by segment, together with reconciliations
to our consolidated totals, for June 30, 2009:
|
Reportable
Segments
|
||||||||||||||||||||||||
|
Marine
|
||||||||||||||||||||||||
|
Downstream
|
Upstream
|
Midstream
|
Services
|
|||||||||||||||||||||
|
Segment
|
Segment
|
Segment
|
Segment
|
Other
|
Consolidated
|
|||||||||||||||||||
|
Segment
assets
|
$ | 1,417.9 | $ | 1,697.8 | $ | 1,517.8 | $ | 703.1 | $ | 18.3 | $ | 5,354.9 | ||||||||||||
|
Investments
in unconsolidated affiliates
|
58.1 | 182.9 | 949.2 | -- | 8.7 | 1,198.9 | ||||||||||||||||||
|
Intangible
assets, net
|
6.6 | 7.7 | 122.3 | 58.5 | -- | 195.1 | ||||||||||||||||||
|
Goodwill
|
1.3 | 14.9 | -- | 90.4 | -- | 106.6 | ||||||||||||||||||
18
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
Note
13. Related Party Transactions
The
following table summarizes our related party receivable and payable amounts at
June 30, 2009:
|
Accounts
receivable, related parties (1)
|
$ |
10.7
|
||
|
Accounts
payable, related parties (2)
|
40.9
|
|||
|
(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, advances from Seaway for operating
expenses and $3.0 million related to operational related charges from
Cenac Towing Co., Inc., Cenac Offshore, L.L.C. and Mr. Arlen B. Cenac, Jr.
(collectively, “Cenac”). See Note 15 for information regarding the
termination of the transitional operating agreement.
|
||||
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
privately-held affiliates;
|
|
§
|
Enterprise
GP Holdings, which owns all of the Parent Company’s 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; and
|
|
§
|
the
Employee Partnerships, which are controlled by EPCO (see Note
3).
|
See Note 15 for a subsequent event
regarding a loan agreement TEPPCO entered into with Enterprise Products
Partners.
Dan L. Duncan directly owns and
controls EPCO and, through Dan Duncan LLC, owns and controls EPE Holdings, LLC,
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 privately-held 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 $31.0 million during the
six months ended June 30, 2009 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 a privately-held affiliate of EPCO. All of the
membership interests in us and the limited partner interests in TEPPCO owned or
controlled by Enterprise GP Holdings are pledged as security under its credit
facility. If
19
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
Enterprise
GP Holdings were to default under its credit facility, its lender banks could
own the Parent Company.
In August 2008, we, together with
Enterprise Products Partners and Oiltanking, announced the formation of
TOPS. On April 16, 2009, we, along with a subsidiary of Enterprise
Products Partners, dissociated ourselves from TOPS (see Note 7).
EPCO
ASA. We have no
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 our respective general partners are among
the parties to the ASA. The Audit, Conflicts and Governance Committee
(“ACG Committee”) of each general partner has 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.
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. Jerry
Thompson, our chief executive officer and an employee of EPCO. The
Fifth Amended and Restated ASA also extends the term of EPCO’s service
obligations from December 2010 to December 2013.
Proposed
Merger
with
Enterprise
Products Partners. On June 28, 2009, we and TEPPCO entered
into definitive merger agreements with Enterprise Products Partners, EPGP
and two of its subsidiaries. Under the terms of the definitive agreements,
the Parent Company and TEPPCO would become wholly owned subsidiaries of
Enterprise Products Partners, and each of TEPPCO’s outstanding Units, other than
3,645,509 of its Units owned by a privately-held affiliate of EPCO,
would be cancelled and converted into the right to receive 1.24 Enterprise
Products Partners common units. The 3,645,509 TEPPCO Units owned
by a privately-held affiliate of EPCO would be converted, based on the 1.24
exchange ratio, into the right to receive 4,520,431 of Enterprise Products
Partners Class B units (“Class B Units”). The Class B Units would not
be entitled to regular quarterly cash distributions of Enterprise Products
Partners for sixteen quarters following the closing of the merger and, except
for the payment of distributions, would have the same rights and privileges as
Enterprise Products Partners common units. The Class B Units would
convert automatically into the same number of Enterprise Products Partners
common units on the date immediately following the payment date for the
sixteenth quarterly distribution following the closing of the
merger. No fractional Enterprise Products Partners common units would
be issued in the proposed merger, and TEPPCO’s unitholders would, instead,
receive cash in lieu of fractional Enterprise Products Partners common units, if
any.
Under the
terms of the definitive agreements, Enterprise GP Holdings would receive
1,331,681 common units of Enterprise Products Partners and an increase in the
capital account of EPGP to maintain its 2% general partner interest in
Enterprise Products Partners as consideration for 100% of the Parent Company’s
membership interests.
A Special Committee of our ACG
Committee unanimously determined that the merger is fair and reasonable to
TEPPCO and TEPPCO’s unaffiliated unitholders and recommended that the merger be
approved by our board of directors, our ACG Committee and TEPPCO’s unaffiliated
unitholders. Based upon such determination and recommendation, our
ACG Committee unanimously determined that the merger is fair and reasonable to
TEPPCO and TEPPCO’s unaffiliated unitholders and approved the
merger,
20
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
such
approval constituting “Special Approval” under TEPPCO’s partnership
agreement. Our ACG Committee also recommended that our board of
directors approve the merger. Based on the Special Committee’s
determination and recommendation, as well as the ACG Committee’s determination,
Special Approval and recommendation, our board of directors unanimously approved
the merger and recommended that TEPPCO’s unaffiliated unitholders vote in favor
of the merger proposal. In addition, the ACG Committee of the general
partner of each of Enterprise Products Partners and Enterprise GP Holdings also
approved the transaction.
Completion of the proposed merger is
subject to the approval of holders of at least a majority of TEPPCO’s
outstanding Units. In addition, pursuant to the merger agreement
providing for the merger of the TEPPCO partnership, the number of votes cast in
favor of the merger agreement by TEPPCO’s unitholders (excluding certain
unitholders affiliated with EPCO and other specified officers and directors of
us, Enterprise GP Holdings and Enterprise Products Partners) must exceed the
votes cast against the merger agreement by such
unitholders. Affiliates of EPCO, including Enterprise GP Holdings,
have executed a support agreement with Enterprise Products Partners in which
they have agreed to vote their TEPPCO Units in favor of the merger agreement.
The closing is also subject to customary regulatory approvals, including
that under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended. Subject to the receipt of regulatory and TEPPCO unitholder
approvals, completion of the proposed merger is expected to occur during the
fourth quarter of 2009. See Note 14 for information regarding
litigation associated with the proposed merger.
The merger agreement providing for the
merger of TEPPCO’s partnership contains provisions granting both TEPPCO and
Enterprise Products Partners the right to terminate the agreement for certain
reasons, including, among others, (i) if TEPPCO’s merger into Enterprise
Products Partners’ subsidiary has not occurred on or before December 31, 2009,
and (ii) TEPPCO’s failure to obtain its unitholder approval as described
above.
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 June 30, 2009, we have reimbursed
Enterprise Products Partners $308.3 million ($1.8 million in 2009, $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 June 30, 2009, we
had a payable to Enterprise Products Partners for costs incurred of less than
$0.1 million. At June 30, 2009, we had a receivable from Jonah of
$9.2 million for operating expenses. During the six months ended June
30, 2009, we received distributions from Jonah of $76.0
million. During the six months ended June 30, 2009, Jonah paid
distributions of $18.2 million to the affiliate of Enterprise Products
Partners that is our joint venture partner.
Ownership
of the
Parent Company by Enterprise GP
Holdings; Relationship with Energy Transfer Equity. Enterprise GP
Holdings owns and controls our 2% general partner interest in TEPPCO and has the
right (through its 100% ownership of us) to receive the incentive distribution
rights. Enterprise GP Holdings, DFIGP and other entities controlled
by Mr. Duncan own 17,073,315 of TEPPCO’s Units.
Enterprise GP Holdings acquired equity
method investments in Energy Transfer Equity, L.P. (“Energy Transfer Equity”)
and its general partner in May 2007. As a result, Energy Transfer
Equity and its consolidated subsidiaries became related parties to
us.
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 7.
21
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
See “Jonah Joint Venture” within this
Note 13 for a description of ongoing transactions involving our Jonah joint
venture with Enterprise Products Partners.
Note
14. Commitments and Contingencies
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 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 their last demand had been approximately $175.0 million. Following a
hearing, the trial court ruled that the prerequisites for certifying a class do
not exist. We expect that a final order dismissing the matter is
forthcoming. Accordingly, 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 system to the Opal
Plant, in violation of the Interconnect Agreement. Jonah denies any
liability to Williams. Discovery is ongoing.
On September 18, 2006, Peter
Brinckerhoff, a purported unitholder of TEPPCO, filed a complaint in the Court
of Chancery of the State of Delaware (the “Delaware Court”), 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; 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 its unitholders and
constituted a breach by the defendants of fiduciary duties owed to its
unitholders and that the Proxy Statement failed to provide its 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 the Parent Company 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 alleging that TEPPCO did not receive fair value
for Enterprise Products Partners’ participation in the joint venture), and the
sale by TEPPCO to an Enterprise Products Partners’ affiliate of the Pioneer
plant in March 2006 (alleging that the purchase price did not provide fair value
for the purchased assets to TEPPCO). As more fully described in the
Proxy Statement, the ACG Committee recommended the
22
TEXAS
EASTERN PRODUCTS PIPELINE COMPANY, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
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 the 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. By its Opinion and Order dated November 25, 2008, the
Delaware Court dismissed Mr. Brinckerhoff’s individual and putative class action
claims with respect to the amendments to TEPPCO’s partnership
agreement. We refer to this action and the remaining claims in this
action as the “Derivative Action.”
On April 29, 2009, Peter Brinckerhoff
and Renee Horowitz, as Attorney in Fact for Rae Kenrow, purported unitholders of
TEPPCO, filed separate complaints in the Delaware Court as putative class
actions on behalf of the other unitholders of TEPPCO, concerning the proposed
merger of the Parent Company and TEPPCO with Enterprise Products Partners (see
Note 13). On May 11, 2009, these actions were consolidated under the
caption Texas Eastern Products
Pipeline Company, LLC Merger Litigation, C.A. No. 4548-VCL (“Merger
Action”). The complaints name as defendants the Parent Company;
Enterprise Products Partners and its general partner; EPCO; Dan L. Duncan; and
each of our directors.
The Merger Action complaints allege,
among other things, that the terms of the merger (as proposed as of the time the
Merger Action complaints were filed) are grossly unfair to TEPPCO’s unitholders,
that Mr. Duncan and other defendants who control us have acted to drive down the
price of TEPPCO’s Units and that the proposed merger is an attempt to extinguish
the Derivative Action, without consideration and without adequate information
having been provided to TEPPCO’s unitholders to cast a vote with respect to the
proposed merger. The complaints further allege that the process
through which the Special Committee of our ACG Committee was appointed to
consider the proposed merger is contrary to the spirit and intent of TEPPCO’s
partnership agreement and constitutes a breach of the implied covenant of fair
dealing.
The complaints seek relief (i)
enjoining the defendants and all persons acting in concert with them from
pursuing the proposed merger; (ii) rescinding the proposed merger to the extent
it is consummated, or awarding rescissory damages in respect thereof; (iii)
directing the defendants to account for all damages suffered or to be suffered
by the plaintiffs and the purposed class as a result of the defendants’ alleged
wrongful conduct; and (iv) awarding plaintiffs’ costs of the actions, including
fees and expenses of their attorneys and experts.
On June 28, 2009, the parties entered
into a Memorandum of Understanding pursuant to which the Parent Company, TEPPCO,
Enterprise Products Partners, EPCO, all other individual defendants and the
plaintiffs have proposed to settle the Merger Action and the Derivative
Action. On August 5, 2009, the parties entered into a Stipulation and
Agreement of Compromise, Settlement and Release (the “Settlement Agreement”)
contemplated by the Memorandum of Understanding. Pursuant to the
Settlement Agreement, our board of directors will recommend to TEPPCO’s
unitholders that they approve the adoption of the merger agreement and take all
necessary steps to seek unitholder approval for the merger as soon as
practicable. Pursuant to the Settlement Agreement, approval of the merger
will require, in addition to votes required under TEPPCO’s partnership
agreement, that the actual votes cast in favor of the proposal by holders of
TEPPCO’s outstanding Units, excluding those held by defendants to the Derivative
Action, exceed the actual votes cast against the proposal by those
holders. The Settlement Agreement further provides that the Derivative
Action was considered by the Special Committee to be a significant TEPPCO asset
for which fair value was obtained in the merger
consideration.
The Settlement Agreement is subject to
customary conditions, including Delaware Court approval. There can be no
assurance that the Delaware Court will approve the settlement in the Settlement
Agreement. In such event, the proposed settlement as contemplated by the
Settlement Agreement may be
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terminated.
Among other things, the plaintiffs’ agreement to settle the Derivative Action
and Merger Action litigation, including their agreement to the fairness of the
proposed terms and process of the merger negotiations is subject to (i) the
drafting and execution of other such documentation as may be required
to obtain final Delaware Court approval and dismissal of the actions, (ii)
Delaware Court approval and the mailing of the notice of settlement which sets
forth the terms of settlement to TEPPCO’s unitholders,
(iii) consummation of the proposed merger and (iv) final Delaware Court certification and approval
of the settlement and dismissal of the actions. See Note 13 for
additional information regarding our relationship with Enterprise Products
Partners, including information related to the proposed merger.
Additionally,
on June 29 and 30, 2009, respectively, M. Lee Arnold and Sharon Olesky,
purported unitholders of TEPPCO, filed separate complaints in the District
Courts of Harris County, Texas, as putative class actions on behalf of other
unitholders of TEPPCO, concerning the proposed merger of the Parent Company and
TEPPCO with Enterprise Products Partners. The complaints name as defendants
us; TEPPCO; Enterprise Products Partners and its general partner; EPCO; Dan
L. Duncan; Jerry Thompson; and our board of directors. These
allegations in the complaints are similar to the complaints filed in Delaware on
April 29, 2009 and seek similar relief.
In connection with the dissociation of
Enterprise Products Partners and us from TOPS (see Note 7), Oiltanking has
filed an original petition against Enterprise Offshore Port System, LLC,
Enterprise Products Operating, LLC, TEPPCO O/S Port System, LLC, us and our
General Partner in the District Court of Harris County, Texas, 61st Judicial
District (Cause No. 2009-31367), asserting, among other things, that the
dissociation was wrongful and in breach of the TOPS partnership agreement,
citing provisions of the agreement that, if applicable, would continue to
obligate us and Enterprise Products Partners to make capital contributions to
fund the project and impose liabilities on us and Enterprise Products
Partners. Since we believe that our actions in dissociating from TOPS
are expressly permitted by, and in accordance with, the terms of the TOPS
partnership agreement, we intend to vigorously defend such
actions. We have not recorded any reserves for potential liabilities
relating to this litigation, although we may determine in future periods that an
accrual of reserves for potential liabilities (including costs of litigation)
should be made. If these payments are substantial, we could
experience a material adverse impact on our liquidity.
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,
results of operations or cash flows.
We evaluate our ongoing litigation
based upon a combination of litigation and settlement
alternatives. These reviews are updated as the facts and combinations
of the cases develop or change. Assessing and predicting the outcome
of these matters involves substantial uncertainties. In the event
that the assumptions we used to evaluate these matters change in future periods
or new information becomes available, we may be required to record a liability
for an adverse outcome. In an effort to mitigate potential adverse
consequences of litigation, we could also seek to settle legal proceedings
brought against us. We have not recorded any significant reserves for
any litigation in our financial statements.
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
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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 results of operations and cash flows.
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 results of operations or 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, financial position, results of operations and
cash flows. At June 30, 2009, our accrued liability for
environmental remediation projects totaled $6.2 million.
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 June 30, 2009, 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, results of operations or cash flows.
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. In June 2009, we paid $0.4 million to the U.S.
Department of Transportation in settlement of the matter. This
settlement did not have a material adverse effect on our financial position,
results of operations or cash flows.
The
Federal Energy Regulatory Commission (“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.
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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.
Recent scientific studies have
suggested that emissions of certain gases, commonly referred to as “greenhouse
gases” or “GHGs” and including carbon dioxide and methane, may be contributing
to climate change. On April 17, 2009, the U.S. Environmental
Protection Agency (“EPA”) issued a notice of its proposed finding and
determination that emission of carbon dioxide, methane, and other GHGs present
an endangerment to human health and the environment because emissions of such
gases are, according to the EPA, contributing to warming of the earth’s
atmosphere. The EPA’s finding and determination would allow it to
begin regulating emissions of GHGs under existing provisions of the federal
Clean Air Act. Although it may take the EPA several years to adopt
and impose regulations limiting emissions of GHGs, any such regulation could
require us to incur costs to reduce emissions of GHGs associated with our
operations. In addition, on June 26, 2009, the U.S. House of
Representatives approved adoption of the “American Clean Energy and Security Act
of 2009,” also known as the “Waxman-Markey cap-and-trade legislation” or
“ACESA.” ACESA would establish an economy-wide cap on emissions of
GHGs in the United States and would require most sources of GHG emissions to
obtain GHG emission “allowances” corresponding to their annual emissions of
GHGs. The U.S. Senate has also begun work on its own legislation for
controlling and reducing emissions of GHGs in the United States. Any
laws or regulations that may be adopted to restrict or reduce emissions of GHGs
would likely require us to incur increased operating costs, and may have an
adverse effect on our business, financial position, demand for our products,
results of operations and cash flows.
Contractual
Obligations
Scheduled
maturities of long-term debt. With the exception of routine
fluctuations in the balance of TEPPCO’s Revolving Credit Facility, there have
been no material changes in our scheduled maturities of long-term debt since
December 31, 2008.
Operating
lease obligations. There have been no material changes in our
operating lease commitments since December 31, 2008.
Purchase
obligations. Apart from that discussed below, there have been
no material changes in our purchase obligations since December 31,
2008.
Due to our exit from TOPS, our capital
expenditure commitments decreased by an estimated $68.0 million. See
Note 7 for additional information regarding our dissociation from
TOPS.
Other
Guarantees. At June 30,
2009, Centennial’s debt obligations consisted of $124.8 million borrowed under a
master shelf loan agreement. TEPPCO, TE Products, TEPPCO Midstream
and TCTM (collectively, 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. TEPPCO may be
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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 Standard & Poor’s Ratings
Group and Moody’s Investors Service, Inc. falls below investment grade
levels. If Centennial defaults on its debt obligations, the estimated
maximum potential amount of future payments for the TEPPCO Guarantors and
Marathon Petroleum Company LLC (“Marathon”) is $62.4 million each at June 30,
2009. At June 30, 2009, we have a liability of $8.7 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 June 30, 2009, TE Products has a liability of $3.7 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.
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. Through June 30, 2009, we have spent approximately $245.6
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.
TOPS. We, through a
subsidiary, owned a one-third interest in TOPS until April 16,
2009. We had guaranteed up to approximately $700.0 million of the
project costs to be incurred by this partnership. Upon our
dissociation (see Note 7), our obligations under this commitment
terminated.
Insurance
Matters
EPCO completed its annual insurance
renewal process during the second quarter of 2009. In light of recent
hurricane and other weather-related events, the renewal of policies for
weather-related risks resulted in significant increases in premiums and certain
deductibles, as well as changes in the scope of coverage.
EPCO’s deductible for onshore physical
damage from windstorms increased from $10.0 million per storm to $25.0 million
per storm. EPCO’s onshore program currently provides $150.0 million
per occurrence for named windstorm events compared to $175.0 million per
occurrence in the prior year. For non-windstorm events, EPCO’s
deductible for onshore physical damage remained at $5.0 million per
occurrence. Business interruption coverage in connection with a
windstorm event remained unchanged for onshore assets. Onshore assets
covered by business interruption insurance must be out-of-service in excess of
60 days before any losses from business interruption will be
covered. Furthermore, pursuant to the current policy, we will now
absorb 50% of the first $50.0 million of any loss in excess of deductible
amounts for our onshore assets. There were no changes to insurance
coverage for our marine transportation assets.
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Note
15. Subsequent Events
Suspension
of DRIP and EUPP
In July
2009, TEPPCO suspended the opportunity for investors to acquire additional
TEPPCO Units under its DRIP, pursuant to the terms of the definitive merger
agreements with Enterprise Products Partners (see Note 13). We expect
this suspension to remain in place pursuant to such terms while the transaction
is pending. Additionally, the EUPP will suspend operations in August
2009 pursuant to the terms of the definitive merger agreements.
Loan Agreement with Enterprise Products
Operating LLC
On August
5, 2009, TEPPCO entered into a Loan Agreement (the “Loan Agreement”) with
Enterprise Products Operating LLC (“EPO”), a wholly-owned subsidiary of
Enterprise Products Partners, under which EPO agreed to make an unsecured
revolving loan to TEPPCO in an aggregate maximum outstanding principal amount
not to exceed $100.0 million. Borrowings under the Loan Agreement
mature on the earliest to occur of (i) the consummation of
our proposed merger with Enterprise Products Partners, (ii) the termination
of the related merger agreement in accordance with the provisions thereof, (iii)
December 31, 2009, (iv) the date upon which the maturity of the loan is
otherwise accelerated upon an event of default, and (v) the date upon which
EPO’s commitment to make the loan is terminated by TEPPCO pursuant to the Loan
Agreement. Borrowings under the Loan Agreement will bear
interest at a floating rate equivalent to the one-month LIBOR Rate (as defined
in the Loan Agreement) plus 2.00%. Interest is payable
monthly.
The Loan
Agreement provides that amounts borrowed are non-recourse to the Parent Company
and TEPPCO’s limited partners. The Loan Agreement contains customary
events of default, including (i) nonpayment of principal when due or nonpayment
of interest or other amounts within three business days of when due; (ii)
bankruptcy or insolvency with respect to TEPPCO; (iii) a change of control; or
(iv) an event of default under TEPPCO’s Revolving Credit
Facility. Any amounts due by TEPPCO under the Loan Agreement will be
unconditionally and irrevocably guaranteed by each of TEPPCO’s subsidiaries that
guarantee its obligations under its Revolving Credit Facility (see Note
10). EPO’s obligation to fund any borrowings under the Loan Agreement
is subject to specified conditions, including the condition that, on and as of
the applicable date of funding, no additional amounts are available to TEPPCO
pursuant to its Revolving Credit Facility (either as borrowings or under any
letters of credit). The ACG Committee reviewed and approved the Loan
Agreement, such approval constituting “Special Approval” under the conflict of
interest provisions of TEPPCO’s Partnership Agreement. The execution
of the Loan Agreement was also unanimously approved by the ACG Committee of
EPGP.
Settlement Agreement
On August
5, 2009, the parties to the Merger Action and the Derivative Action described in
Note 14 entered into a Settlement Agreement contemplated by the Memorandum of
Understanding. Pursuant to the Settlement Agreement, our board of
directors will recommend to TEPPCO’s unitholders that they approve the adoption
of the merger agreement governing TEPPCO’s proposed merger with a subsidiary of
Enterprise Products Partners and take all necessary steps to seek TEPPCO
unitholder approval for the merger as soon as practicable. Pursuant
to the Settlement Agreement, approval of the merger will require, in addition to
votes required under TEPPCO’s partnership agreement, that the actual votes cast
in favor of the proposal by holders of TEPPCO’s outstanding Units, excluding
those held by defendants to the Derivative Action, exceed the actual votes cast
against the proposal by those holders. The Settlement Agreement
further provides that the Derivative Action was considered by the Special
Committee to be a significant TEPPCO asset for which fair value was obtained in
the merger consideration.
The Settlement Agreement is subject to
customary conditions, including Delaware Court approval. There can be
no assurance that the Delaware Court will approve the settlement in the
Settlement Agreement. In such event, the proposed settlement as
contemplated by the Settlement Agreement may be
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terminated. See
Note 13 for additional information regarding our relationship with Enterprise
Products Partners, including information related to the proposed
merger. See Note 14 for additional information related to the Merger
Action and the Derivative Action, including the Settlement
Agreement.
Termination of Transitional
Operating Agreement
Effective August 1, 2009, personnel
providing services to us under the transitional operating agreement with Cenac
became employees of EPCO, and the transitional operating agreement was
terminated. Concurrently with the termination, TEPPCO Marine Services
entered into a two-year consulting agreement with Mr. Cenac and Cenac Marine
Services, L.L.C. under which Mr. Cenac has agreed to supervise TEPPCO Marine
Services’ day-to-day operations on a part-time basis and, at TEPPCO Marine
Services’ request, provide related management and transitional
services. The agreement entitles Mr. Cenac to $500,000 per year in
fees, plus a one-time retainer of $200,000. The consulting agreement
contains noncompetition and nonsolitation provisions similar to those contained
in the transitional operating agreement, which apply until the expiration of the
two-year period following the date of last service provided under the consulting
agreement.
Borrowing
under Revolving Credit Facility
On August 4, 2009, TEPPCO submitted a
request for borrowings under its Revolving Credit Facility received on August 7,
2009 in an aggregate amount of $95.9 million. Such borrowings were
used to pay the $91.6 million aggregate amount of TEPPCO’s cash distribution on
its outstanding TEPPCO Units with respect to the quarter ended June 30, 2009 and
for general partnership purposes. Immediately following the payment
of such distribution, TEPPCO expects to have approximately $820 million
principal amount outstanding under its Revolving Credit Facility.
29