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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
COMMISSION FILE NO. 1-10403
TEPPCO PARTNERS, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0291058
(STATE OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NUMBER)
2929 ALLEN PARKWAY
P.O. BOX 2521
HOUSTON, TEXAS 77252-2521
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 759-3636
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEPPCO PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 27,731 $ 34,047
Short-term investments 8,176 24,085
Accounts receivable, trade 15,481 18,326
Inventories 18,989 18,914
Other 5,820 3,371
------------ ------------
Total current assets 76,197 98,743
------------ ------------
Property, plant and equipment, at cost (Net of accumulated
depreciation and amortization of $166,828 and $149,597) 565,339 561,068
Investments 8,736 6,936
Other assets 4,953 4,494
------------ ------------
Total assets $ 655,225 $ 671,241
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Current maturities, First Mortgage Notes $ 17,000 $ 13,000
Accounts payable and accrued liabilities 8,120 8,300
Accounts payable, general partner 3,418 3,007
Accrued interest 2,304 10,930
Other accrued taxes 6,035 5,455
Other 5,564 6,861
------------ ------------
Total current liabilities 42,441 47,553
------------ ------------
First Mortgage Notes 309,512 326,512
Other liabilities and deferred credits 3,597 3,902
Minority interest 3,028 2,963
Partners' capital:
General partner's interest 5,311 4,616
Limited partners' interests 291,336 285,695
------------ ------------
Total partners' capital 296,647 290,311
------------ ------------
Total liabilities and partners' capital $ 655,225 $ 671,241
============ ============
See accompanying Notes to Consolidated Financial Statements.
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TEPPCO PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------ ------------
Operating revenues:
Transportation - Refined products $ 28,359 $ 26,691 $ 81,020 $ 74,913
Transportation - LPGs 14,843 14,759 52,587 54,342
Gain on sale of inventory 191 44 2,247 3,616
Mont Belvieu operations 3,765 2,741 9,385 8,359
Other 6,147 5,293 16,140 16,093
----------- ----------- ----------- -----------
Total operating revenues 53,305 49,528 161,379 157,323
----------- ----------- ----------- -----------
Costs and expenses:
Operating, general and administrative 25,530 24,340 71,550 70,610
Depreciation and amortization 6,039 5,912 17,740 17,805
Taxes - other than income taxes 2,299 1,827 7,191 6,426
----------- ----------- ----------- -----------
Total costs and expenses 33,868 32,079 96,481 94,841
----------- ----------- ----------- -----------
Operating income 19,437 17,449 64,898 62,482
Interest expense, First Mortgage Notes (8,368) (8,685) (25,339) (26,237)
Interest costs capitalized 214 323 1,186 703
Other income - net 277 1,410 2,051 4,290
----------- ----------- ----------- -----------
Income before minority interest 11,560 10,497 42,796 41,238
Minority interest (116) (105) (432) (416)
----------- ----------- ----------- -----------
Net income $ 11,444 $ 10,392 $ 42,364 $ 40,822
=========== =========== =========== ===========
Net income per Unit $ 0.71 $ 0.65 $ 2.70 $ 2.64
=========== =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
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TEPPCO PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
--------------- -------------
Cash flows from operating activities:
Net income $ 42,364 $ 40,822
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization 17,740 17,805
Decrease in accounts receivable, trade 2,845 5,741
Decrease (increase) in inventories (75) 2,838
Increase in other current assets (2,449) (960)
Decrease in accounts payable and accrued expenses (9,112) (12,935)
Other (269) 878
--------- ---------
Net cash provided by operating activities 51,044 54,189
--------- ---------
Cash flows from investing activities:
Proceeds from investments 17,970 10,879
Purchases of investments (3,906) (14,436)
Insurance proceeds related to damaged asset 1,046 --
Proceeds from the sale of property, plant and equipment 1,377 --
Restricted investments designated for property additions -- 10,553
Capital expenditures (24,549) (29,424)
--------- ---------
Net cash used in investing activities (8,062) (22,428)
--------- ---------
Cash flows from financing activities:
Principal payment, First Mortgage Notes (13,000) (10,000)
Distributions (36,298) (33,397)
--------- ---------
Net cash used in financing activities (49,298) (43,397)
--------- ---------
Net decrease in cash and cash equivalents (6,316) (11,636)
Cash and cash equivalents at beginning of period 34,047 39,663
--------- ---------
Cash and cash equivalents at end of period $ 27,731 $ 28,027
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Interest paid during the period (net of capitalized interest) $ 32,376 $ 33,963
========= =========
See accompanying Notes to Consolidated Financial Statements.
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TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
TEPPCO Partners, L.P. is a Delaware limited partnership which operates
through TE Products Pipeline Company, Limited Partnership, a Delaware limited
partnership (collectively the "Partnership"), in which TEPPCO Partners, L.P.
holds a 99% interest as the sole limited partner. Texas Eastern Products
Pipeline Company, (the "Company") is the general partner of the Partnership and
has agreed not to voluntarily withdraw as the general partner of the
Partnership, subject to certain limited exceptions, prior to January 1, 2000. On
June 18, 1997, PanEnergy Corp and Duke Power Company completed a previously
announced merger. At closing, the combined companies became Duke Energy
Corporation ("Duke Energy"). The Company, previously a wholly-owned subsidiary
of PanEnergy Corp, became an indirect wholly-owned subsidiary of Duke Energy on
the date of the merger.
The accompanying unaudited consolidated financial statements reflect
all adjustments, which are, in the opinion of management, of a normal and
recurring nature and necessary for a fair statement of the financial position of
the Partnership as of September 30, 1997, and the results of operations and cash
flows for the periods presented. The results of operations for the nine months
ended September 30, 1997, are not necessarily indicative of results of
operations for the full year 1997. The interim financial statements should be
read in conjunction with the Partnership's consolidated financial statements and
notes thereto presented in the TEPPCO Partners, L.P. Annual Report on Form 10-K
for the year ended December 31, 1996.
Net income per Unit is computed by dividing net income, after deduction
of the general partner's interest, by the weighted average number of Units
outstanding (a total of 14,500,000 Units as of September 30, 1997). The general
partner's percentage interest in net income is based on its percentage of cash
distributions from Available Cash for each period (see Note 6). The general
partner was allocated 7.73% and 6.35% of net income for the nine months ended
September 30, 1997 and 1996, respectively.
NOTE 2. ACCOUNTING POLICY CHANGE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") 128, "Earnings per
Share." This statement establishes standards for computing and presenting net
income per Unit and requires, among other things, dual presentation of basic and
diluted net income per Unit on the face of the consolidated statements of
income. This statement is effective for financial statements for periods ending
after December 15, 1997. The Partnership will adopt SFAS 128 by December 31,
1997, and does not expect the adoption to have a material impact on its
calculation of net income per Unit.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of financial statements.
In June 1997, the FASB also issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
reporting information about operating segments in annual financial statements
and requires that enterprises report selected information about operating
segments in interim reports issued to shareholders. Both of these statements are
effective for financial statements for periods beginning after December 15,
1997. As both SFAS 130 and 131 establish standards for reporting and display,
the Partnership does not expect the adoption of these statements to have a
material impact on its financial condition or results of operations.
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TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 3. INVESTMENTS
SHORT-TERM INVESTMENTS
The Partnership routinely invests cash in liquid short-term investments
as part of its cash management program. Investments with maturities at date of
purchase of 90 days or less are considered cash and cash equivalents. At
September 30, 1997, short-term investments included $8.2 million of
investment-grade medium-term corporate debt securities, which mature within one
year. All short-term investments are stated at amortized cost, which
approximates the aggregate fair value at September 30, 1997, and are classified
as held-to-maturity securities.
LONG-TERM INVESTMENTS
At September 30, 1997, the Partnership had $8.7 million invested in
investment-grade medium-term corporate debt securities, which have varying
maturities from 1999 through 2001. These securities are classified as
held-to-maturity securities and are stated at amortized cost. At September 30,
1997, the aggregate fair value and unrealized gain for these securities was $8.8
million and $0.1 million, respectively. Such investments included a $0.9 million
investment in Duke Power Company corporate notes as of September 30, 1997.
NOTE 4. FIRST MORTGAGE NOTES
In connection with its formation, TE Products Pipeline Company, Limited
Partnership issued 9.60% Series A First Mortgage Notes, due 2000, and 10.20%
Series B First Mortgage Notes, due 2010 (collectively the "First Mortgage
Notes"). The First Mortgage Notes, which are secured by a mortgage on
substantially all property, plant and equipment of the Partnership, have
mandatory annual prepayments at par through March 7, 2010. Interest is payable
semiannually on each March 7 and September 7 until retirement of the First
Mortgage Notes. On March 7, 1997, the Partnership paid $13.0 million for current
maturities due on the First Mortgage Notes. At September 30, 1997, the current
maturities of the First Mortgage Notes were $17.0 million, which are payable on
March 6, 1998.
The agreements relating to the First Mortgage Notes contain certain
covenant restrictions, including limitations on cash distributions and on the
amount of future indebtedness, none of which is expected to have a material
adverse effect on the Partnership's operations.
NOTE 5. INVENTORIES
Inventories are carried at the lower of cost (based on weighted average
cost method) or market. The major components of inventories were as follows (in
thousands):
Gasolines $ 614 $ 3,232
Propane 6,689 6,550
Butanes 4,397 4,023
Fuel oils 463 --
Other products 2,920 2,021
Materials and supplies 3,906 3,088
----------- -----------
Total $ 18,989 $ 18,914
=========== ===========
The costs of inventories were lower than market at September 30, 1997,
and December 31, 1996.
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TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 6. CASH DISTRIBUTIONS
The Partnership 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 the general
partner in its sole discretion or as required by the terms of the First Mortgage
Notes.
On August 8, 1997, the Partnership paid the second quarter cash
distribution of $0.80 per Unit to Unitholders of record on July 31, 1997.
Additionally, on October 17, 1997, the Partnership declared a cash distribution
of $0.80 per Unit for the quarter ended September 30, 1997. The third quarter
distribution was paid on November 7, 1997, to Unitholders of record on October
31, 1997.
The Company receives incremental incentive distributions of 15%, 25%
and 50% on quarterly distributions of Available Cash that exceed $0.55, $0.65
and $0.90 per Unit, respectively. During the nine months ended September 30,
1997 and 1996, incentive distributions paid to the Company totaled $2.3 million
and $1.6 million, respectively.
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Partnership is involved in various claims and legal proceedings
incidental to its business. In the opinion of management, these claims and legal
proceedings will not have a material adverse effect on the Partnership's
consolidated financial position or results of operations.
The operations of the Partnership are subject to federal, state and
local laws and regulations relating to protection of the environment. Although
the Partnership believes the operations of the pipeline system are in material
compliance with applicable environmental regulations, risks of significant costs
and liabilities are inherent in pipeline operations, and there can be no
assurance that significant costs and liabilities will not be incurred. Moreover,
it is possible that other developments, such as increasingly strict
environmental laws and regulations and enforcement policies thereunder, and
claims for damages to property or persons resulting from the operations of the
pipeline system, could result in substantial costs and liabilities to the
Partnership. The Partnership does not anticipate that changes in environmental
laws and regulations will have a material adverse effect on its financial
position, operations or cash flows in the near term.
The Partnership and the Indiana Department of Environmental Management
("IDEM") have entered into an Agreed Order that will ultimately result in a
remediation program for any on-site and off-site groundwater contamination
attributable to the Partnership's operations at the Seymour, Indiana, terminal.
As part of the Agreed Order, the Partnership has completed the remedial
investigation sampling for groundwater contamination. In November 1997, IDEM
approved the final remedial investigation report for the Seymour terminal. The
Partnership is currently negotiating with IDEM the clean-up levels to be
attained at the Seymour terminal. In the opinion of the general partner, the
completion of the remediation program to be proposed by the Partnership, if such
program is approved by IDEM, will not have a material adverse impact on the
Partnership.
Substantially all of the petroleum products transported and stored by
the Partnership are owned by the Partnership's customers. At September 30, 1997,
The Partnership had approximately 20.8 million barrels of products in its
custody owned by customers. The Partnership is obligated for the transportation,
storage and delivery of such products on behalf of its customers. The
Partnership maintains insurance adequate to cover product losses through
circumstances beyond its control.
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TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 8. SUBSEQUENT EVENT
On October 22, 1997, TE Products Pipeline Company, Limited Partnership
filed a Registration Statement on Form S-3 under the Securities Act of 1933 for
the registration of $150 million principal amount of Senior Notes due 2007 and
$240 million principal amount of Senior Notes due 2027 (collectively the
"Notes"). The net proceeds from the sale of the Notes, estimated to be
approximately $387 million, will be used to repay the First Mortgage Notes of
approximately $327 million, together with a redemption premium thereon currently
estimated at approximately $60 million. The precise amount of the redemption
premium will depend upon U. S. Treasury interest rates in effect on the day
prior to the redemption of the First Mortgage Notes. The closing of the Notes
and the redemption of the First Mortgage Notes are expected to occur
simultaneously.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Partnership's operations consist of the transportation, storage and
terminaling of refined petroleum products and liquefied petroleum gases
("LPGs"). Operations are somewhat seasonal with higher revenues generally
realized during the first and fourth quarters of each year. Refined products
volumes are generally higher during the second and third quarters because of
greater demand for gasolines during the spring and summer driving seasons. LPGs
volumes are generally higher from November through March due to higher demand in
the Northeast for propane, a major fuel for residential heating.
The Partnership's revenues are derived from the transportation of
refined products and LPGs, the storage and short-haul shuttle transportation of
LPGs at the Mont Belvieu, Texas complex, sale of product inventory and other
ancillary services. Labor and electric power costs comprise the two largest
operating expense items of the Partnership.
The following information is provided to facilitate increased
understanding of the 1997 and 1996 interim consolidated financial statements and
accompanying notes presented in Item 1. Material period-to-period variances in
the consolidated statements of income are discussed under "Results of
Operations." The "Financial Condition and Liquidity" section analyzes cash flows
and financial position. Discussion included in "Other Matters" addresses key
trends, future plans and contingencies. Throughout these discussions, management
addresses items that are reasonably likely to materially affect future liquidity
or earnings.
RESULTS OF OPERATIONS
Net income for the quarter ended September 30, 1997 was $11.4 million,
compared with net income of $10.4 million for the 1996 third quarter. The
increase in net income resulted from a $3.8 million increase in operating
revenues and a $0.3 million decrease in interest expense. These increases were
partially offset by a $1.8 million increase in costs and expenses and a $1.1
million decrease in other income.
Net income for the nine months ended September 30, 1997 increased $1.6
million to $42.4 million, compared with net income of $40.8 million for the nine
months ended September 30, 1996, due primarily to a $4.1 million increase in
operating revenues, a $0.9 million decrease in interest expense and a $0.5
million increase in interest costs capitalized, partially offset by a $1.6
million increase in costs and expenses and a $2.2 million decrease in other
income. See discussion below of factors affecting net income for the comparative
periods.
See volume and average tariff information below:
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, PERCENTAGE SEPTEMBER 30, PERCENTAGE
--------------------- INCREASE ----------------------- INCREASE
1997 1996 (DECREASE) 1997 1996 (DECREASE)
--------- --------- ----------- ---------- --------- ----------
VOLUMES DELIVERED
(in thousands of barrels)
Refined products 31,226 30,646 2% 90,820 87,187 4%
LPGs 9,041 8,712 4% 29,052 28,866 1%
Mont Belvieu operations 7,782 5,778 35% 20,601 17,124 20%
--------- --------- -------- ---------- --------- ------
Total 48,049 45,136 6% 140,473 133,177 5%
========= ========= ======== ========== ========= ======
AVERAGE TARIFF PER BARREL
Refined products $ 0.91 $ 0.87 5% $ 0.89 $ 0.86 3%
LPGs 1.64 1.69 (3%) 1.81 1.88 (4%)
Mont Belvieu operations 0.14 0.14 -- 0.14 0.16 (13%)
Average system
Tariff per barrel $ 0.92 $ 0.94 (2%) $ 0.97 $ 0.99 (2%)
========= ========= ======== ========== ========= ======
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - (CONTINUED)
Refined products transportation revenues increased $1.7 million for the
quarter ended September 30, 1997, compared with the prior year quarter, as a
result of higher deliveries of natural gasoline and methyl tertiary butyl ether
("MTBE"), higher tariff rates on the Ark-La-Tex system and higher tariff rates
on barrels originating from the pipeline connection with Colonial Pipeline
Company's ("Colonial") pipeline at Beaumont, Texas. The increase in natural
gasoline deliveries was attributable to higher feedstock and blending demand in
the Midwest due to increased gasoline production in that region. The increase in
MTBE deliveries was due primarily to higher short-haul deliveries at the
Partnership's marine terminal near Beaumont, Texas. Additionally, approximately
$0.2 million of revenue was recognized on previously deferred deficit
transportation payments for MTBE deliveries in the Midwest. Deliveries of motor
fuel decreased, as compared to the third quarter of 1996, as a result of
increased refinery utilization rates in the Midwest, refinery production
problems along the upper Texas Gulf Coast and more favorable economics for Gulf
Coast produced gasoline to be transported to other regions of the United States
not supplied by the Partnership's pipeline system. The increase in tariff rates
on the Ark-La-Tex system was due to new tariff structures for volumes
transported on the expanded portion between Shreveport, Louisiana, and El
Dorado, Arkansas, which was placed in service on March 31, 1997.
LPGs transportation revenues increased slightly during the 1997 third
quarter, compared with the prior year third quarter, as a result of higher
butane deliveries due primarily to a Northeast area refinery, which was shut
down throughout 1996, resuming operations during the second quarter of 1997, and
increased demand for propane in the Midwest. These increases were partially
offset by lower propane deliveries in the Northeast due to higher amounts of
Canadian imports in that market area. The decrease in the LPGs transportation
average tariff rate per barrel resulted from the lower percentage of long-haul
propane deliveries.
For the nine months ended September 30, 1997, refined products
transportation revenues increased $6.1 million, compared with the corresponding
period in 1996, due to a 4% increase in volumes delivered and a 3% increase in
the refined products average tariff per barrel. The increase in refined products
transportation volumes was attributable to increased feedstock and blending
demand for natural gasoline in the Midwest, the full period impact in 1997 of
the pipeline connection at the Little Rock Air Force Base, which was completed
in June 1996, and increased MTBE deliveries at the marine terminal near
Beaumont, Texas. Additionally, higher revenues were generated from the
Ark-La-Tex system expansion and the pipeline connection with Colonial. These
increases were partially offset by lower motor fuel and distillate deliveries
due to higher refinery utilization rates in the Midwest during 1997.
LPGs transportation revenues decreased $1.8 million during the nine
months ended September 30, 1997, compared with the same period in 1996, due to a
4% decrease in the LPGs average tariff per barrel, partially offset by a 1%
increase in LPGs volumes delivered. Long-haul propane deliveries were lower than
the prior year because of warmer winter weather in the Northeast during the
first quarter of 1997. Increased Canadian imports of propane in the Northeast
and butane in the Midwest market areas also resulted in decreased volumes
delivered in 1997. These decreases were partially offset by stronger demand for
butane and isobutane as a refinery feedstock due to the resumption during the
second quarter of 1997 of operations at a Northeast refinery that was shut down
throughout 1996. Increased propane demand along the upper Texas Gulf Coast
resulted in a 33% increase in short-haul propane deliveries. The 4% decrease in
the LPGs average tariff per barrel resulted from the higher percentage of
short-haul propane deliveries during 1997.
Revenues generated from Mont Belvieu operations increased $1.0 million
during the quarter and nine months ended September 30, 1997, compared with the
corresponding periods in 1996, due primarily to higher terminaling fees on
butane received into the system, increased propane dehydration fees and higher
petrochemical demand for LPGs along the upper Texas Gulf Coast. The decrease in
the Mont Belvieu operations average tariff per barrel for the nine months ended
September 30, 1997, compared with the prior year, was due to a higher percentage
of contract deliveries in 1997, which generally carry lower tariffs.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - (CONTINUED)
Gains on the sale of inventory decreased $1.4 million during the nine
months ended September 30, 1997, compared with the corresponding period in 1996,
as a result of lower volumes of gasoline being sold during 1997.
Other operating revenues increased $0.9 million during the 1997 third
quarter, as compared to the same period in 1996, due primarily to revenue
recognition of deficiency volumes on butane storage contracts and increased
terminaling revenues, partially offset by lower refined products storage
revenue.
During the nine months ended September 30, 1997, other operating
revenues increased slightly due to the factors noted above, being offset by
write downs of product inventory recorded during the second quarter of 1997 and
lower propane imports received at the marine terminal at Providence, Rhode
Island, during the first quarter of 1997.
Costs and expenses increased $1.8 million during the third quarter of
1997, compared with the prior year, due primarily to a $1.2 million increase in
operating, general and administrative expenses and a $0.5 million increase in
taxes - other than income taxes. The increase in operating, general and
administrative expenses resulted primarily from increased throughput-related
power costs, expenses recorded for environmental remediation at the
Partnership's Seymour, Indiana, terminal, rental expense associated with the
capacity lease with Colonial, which began in May 1997, and increased labor and
benefits costs. These increases were partially offset by a reduction of expense
related to the settlement of insurance claims for previously incurred
environmental litigation costs. The increase in taxes - other than income taxes
resulted from a credit recorded during the third quarter of 1996 due to 1995 ad
valorem taxes being lower than estimated.
Costs and expenses increased $1.6 million during the first nine months
of 1997, compared with the same period in 1996, due primarily to a $0.9 million
increase in operating, general and administrative expenses and a $0.8 million
increase in taxes - other than income taxes. The increase in operating, general
and administrative expenses was primarily attributable to throughput-related
expenses and rental expense of the Colonial capacity lease, partially offset by
the insurance settlement during the third quarter of 1997, lower outside service
costs for system maintenance and lower product measurement losses. The increase
in taxes - other than income taxes was due to higher ad valorem tax assessments
in 1997 and the credit for ad valorem taxes recorded during the third quarter of
1996.
Interest expense decreased during both the quarter and nine-month
periods in 1997, compared with the same periods in 1996, due to principal
payments on the First Mortgage Notes of $10.0 million and $13.0 million in March
1996 and 1997, respectively. Capitalized interest increased $0.5 million during
the nine month period ended September 30, 1997, compared with the same period in
1996, as a result of higher construction balances related to capital projects,
which commenced during 1996 and were completed during 1997.
Other income - net decreased during both the quarter and nine months
ended September 30, 1997, compared with the corresponding periods in 1996, due
primarily to lower interest income attributable to lower cash balances during
1997. Additionally, during the third quarter of 1997, a loss of $0.5 million was
recorded on the sale of the Partnership's Arkansas City, Arkansas, terminal.
FINANCIAL CONDITION AND LIQUIDITY
Net cash from operations totaled $51.0 million for the nine-month
period ended September 30, 1997, compared with $54.2 million for the
corresponding period in 1996. The decrease resulted from a $4.6 million increase
in working capital uses of cash, partially offset by a $1.5 million increase in
income before charges for depreciation and amortization. The increase in working
capital uses of cash resulted primarily from a receivable
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATONS
FINANCIAL CONDITION AND LIQUIDITY - (CONTINUED)
related to insurance claims settled in September 1997, lower trade accounts
receivable balances during 1997 and lower inventory sales during 1997, which
were partially offset by lower cash payments for accrued expenses during 1997.
Additionally, net cash from operations for the nine months ended September 30,
1997 and 1996 reflect semi-annual interest payments related to the First
Mortgage Notes of $33.6 million and $34.7 million, respectively.
Cash flows used in investing activities during the first nine months of
1997 included $24.5 million of capital expenditures and $3.9 million of
additional cash investments, partially offset by $18.0 million from investment
maturities, $1.0 million of insurance proceeds related to the replacement value
of a 20-inch diameter auxiliary pipeline at the Red River in central Louisiana,
which was damaged in 1994 and subsequently removed from service and $1.4 million
from the proceeds of the sale of the Arkansas City terminal. Cash flows used in
investing activities during the first nine months of 1996 included $29.4 million
of capital expenditures and additional investments of $14.4 million, partially
offset by matured investments of $10.9 million. Capital expenditures are
expected to total approximately $34 million for the full year of 1997. The
Partnership revises capital spending periodically in response to changes in cash
flows and operations. Interest income earned on all investments is included in
cash from operations.
The Partnership paid cash distributions of $36.3 million during the
nine months ended September 30, 1997. Additionally, on October 17, 1997, the
Partnership declared a cash distribution of $0.80 per Unit for the three months
ended September 30, 1997. The third quarter cash distribution was paid on
November 7, 1997 to Unitholders of record on October 31, 1997.
The First Mortgage Notes, which are secured by a mortgage on
substantially all property, plant and equipment of the Partnership, require
annual principal payments through March 2010. Interest is payable semi-annually
on March 7 and September 7. Cash and cash equivalents were reduced by the $13.0
million principal payment related to the First Mortgage Notes on March 7, 1997.
At September 30, 1997, the current maturities of the First Mortgage Notes were
$17.0 million. The note agreement relating to the First Mortgage Notes limits
the amount of cash distributions that can be made by TE Products Pipeline
Company, Limited Partnership to TEPPCO Partners, L.P. Such restriction is not
anticipated to preclude the Partnership from making quarterly distributions to
Unitholders of at least $0.80 per Unit during the remainder of 1997.
OTHER MATTERS
The operations of the Partnership are subject to federal, state and
local laws and regulations relating to protection of the environment. Although
the Partnership believes the operations of the pipeline system are in material
compliance with applicable environmental regulations, risks of significant costs
and liabilities are inherent in pipeline operations, and there can be no
assurance that significant costs and liabilities will not be incurred. Moreover,
it is possible that other developments, such as increasingly strict
environmental laws and regulations and enforcement policies thereunder, and
claims for damages to property or persons resulting from the operations of the
pipeline system could result in substantial costs and liabilities to the
Partnership. The Partnership does not anticipate that changes in environmental
laws and regulations will have a material adverse effect on its financial
position, operations or cash flows in the near term.
The Partnership and the Indiana Department of Environmental Management
("IDEM") have entered into an Agreed Order that will ultimately result in a
remediation program for any on-site and off-site environmental groundwater
contamination attributable to the Partnership's operations at the Seymour,
Indiana, terminal. As part of the Agreed Order, the Partnership has completed
the remedial investigation sampling for groundwater contamination. In November
1997, IDEM approved the final remedial investigation report for the Seymour
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATONS
OTHER MATTERS - (CONTINUED)
terminal. The Partnership is currently negotiating with IDEM the clean-up levels
to be attained at the Seymour terminal. In the opinion of the general partner,
the completion of the remediation program to be proposed by the Partnership, if
such program is approved by IDEM, will not have a material adverse impact on the
Partnership.
During June 1997, the Partnership filed rate increases on selective
refined products tariffs and LPGs tariffs, averaging 1.7%. These rate increases
became effective July 1, 1997 without suspension or refund obligation.
On October 22, 1997, TE Products Pipeline Company, Limited Partnership
filed a Registration Statement on Form S-3 under the Securities Act of 1933 for
the registration of $150 million principal amount of Senior Notes due 2007 and
$240 million principal amount of Senior Notes due 2027 (collectively the
"Notes"). The net proceeds from the sale of the Notes, estimated to be
approximately $387 million, will be used to repay the First Mortgage Notes of
approximately $327 million, together with a redemption premium thereon currently
estimated at approximately $60 million. The precise amount of the redemption
premium will depend upon U. S. Treasury interest rates in effect on the day
prior to the redemption of the First Mortgage Notes. The closing of the Notes
and the redemption of the First Mortgage Notes are expected to occur
simultaneously.
The matters discussed herein include forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 based on current management expectations that
involve risk and uncertainties which could cause actual results to differ
materially from those anticipated. For additional discussion of such risks and
uncertainties, see the Partnership's 1996 Annual Report on Form 10-K.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit
Number Description
10 Texas Eastern Products Pipeline Company 1997
Employee Incentive Compensation Plan amended
and restated on July 14, 1997.
27 Financial Data Schedule as of and for the nine
months ended September 30, 1997.
(b) Reports on Form 8-K: None
Items 1, 2, 3, 4 and 5 of Part II were not applicable and have been omitted.
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15
SIGNATURE
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 duly authorized officer and principal financial officer.
TEPPCO Partners, L.P.
(Registrant)
By: Texas Eastern Products Pipeline Company,
General Partner
CHARLES H. LEONARD
---------------------------------------------
Charles H. Leonard
Sr. Vice President, Chief Financial Officer
and Treasurer
Date: November 13, 1997
15
16
EXHIBIT INDEX
Exhibit
Number Description
10 Texas Eastern Products Pipeline Company 1997
Employee Incentive Compensation Plan amended
and restated on July 14, 1997.
27 Financial Data Schedule as of and for the nine
months ended September 30, 1997.
1
EXHIBIT 10
TEXAS EASTERN PRODUCTS PIPELINE COMPANY
AMENDED AND RESTATED
1997 EMPLOYEE INCENTIVE COMPENSATION PLAN
Texas Eastern Products Pipeline Company ("TEPPCO") hereby establishes,
effective as of January 1, 1997, the Texas Eastern Products Pipeline Company
1997 Employee Incentive Compensation Plan providing as follows:
I. PURPOSE
The Plan is intended to provide a method whereby eligible employees of
TEPPCO may be motivated through personal financial gain linked to the
performance of TEPPCO Partners, L.P. (the "Partnership"), to strive to further
enhance the Partnership's financial performance.
II. DEFINITIONS
Unless the meaning is clearly different when used in context, these
terms shall have the meanings set forth below. Wherever applicable, the
masculine pronoun as used herein shall be deemed to mean the feminine, the
feminine pronoun the masculine, the singular the plural and the plural the
singular.
A. "Attainable Earnings Level" shall mean the earnings level,
expressed in terms of net income, that the Committee determines, for purposes
of this Plan, that the Partnership might expect for its fiscal year coinciding
with a particular Plan Year, assuming current business activity, expected new
projects, and some growth or other improvement.
B. "Award Amount" shall have the meaning set forth in Article
V.B. of this Plan.
C. "Board" shall mean the Board of Directors of TEPPCO.
2
D. "Eligible Employee" shall mean a person who is a regular,
full-time employee of TEPPCO and performs services on a full-time basis for
TEPPCO and/or the Partnership, but who is not eligible to participate in the
TEPPCO MICP and who is not a member of the Committee identified in Article III.
E. "L.P. Unit" shall mean a single unit representing a limited
partnership interest in TEPPCO Partners, L.P.
F. "Incentive Unit" shall mean an award unit attributable to a
specified earnings level as set forth in Article V, but shall not represent or
be construed in any way as being a L.P. Unit.
G. "Net Income" shall mean the Partnership's year end net income
as set forth in the Partnership's publicly reported consolidated financial
statements for the Partnership's fiscal year, except, that the Committee, in
its sole discretion, may adjust net income to disregard any financial item that
it determines to be inappropriate for Plan purposes and may utilize such
adjusted net income as net income for all Plan purposes.
H. "PanEnergy" shall mean PanEnergy Corp. and its Subsidiaries.
I. "Plan" shall mean the Texas Eastern Products Pipeline Company
1997 Employee Incentive Compensation Plan.
J. "Plan Year" shall mean each 12-month period beginning on
January 1 and ending on December 31, with the initial Plan Year beginning
January 1, 1997.
K. "Stretch Earnings Level" shall mean the earnings level,
expressed in terms of net income, that the Committee determines,
2
3
for purposes of the Plan, that the Partnership might expect for its fiscal year
coinciding with a particular Plan year, assuming better than anticipated
operating conditions, growth or other earnings improvement.
L. "Subsidiary" shall mean any corporation in which PanEnergy
directly or indirectly owns more than 50% of the issued and outstanding voting
stock.
M. "Sustainable Earnings Level" shall mean the earnings level,
expressed in terms of net income, that the Committee determines, for purposes
of this Plan, that the Partnership might expect for its fiscal year coinciding
with a particular Plan Year, assuming continuation of base business and normal
operating conditions.
N. "TEPPCO MICP" shall mean the Texas Eastern Products Pipeline
Company Management Incentive Compensation Plan.
III. ADMINISTRATION AND INTERPRETATION
A. The Plan shall be administered by a committee of the Board
consisting of not less than three members appointed by the Board and serving at
the Board's pleasure (the "Committee"). Each member of the Committee shall be
a member of the Board and no Committee member shall be eligible to participate
in the Plan. Any vacancy occurring in the membership of the Committee shall be
filled by appointment by the Board.
B. The Committee shall, in its discretion, have full authority to
administer and interpret the Plan and to make all determinations under the
Plan, and may prescribe, amend, and
3
4
rescind rules and procedures and take such other action as it deems necessary
or advisable for the administration of the Plan, except as otherwise expressly
reserved to the Board in the Plan. Any interpretation, determination or other
action made or taken by the Committee shall be final, binding and conclusive
upon all parties.
C. The Committee may authorize persons other than its members to
carry out its duties, including the authority to approve an individual's
becoming a Participant, subject to the limitations and guidelines set by the
Committee. Subject to the provisions of the Plan, any person to whom such
authority is delegated may continue to be a Participant provided that any
non-ministerial determination with respect to such person's participation in
the Plan shall be made directly by the Committee and independent of such
delegation.
IV. ELIGIBLE EMPLOYEES
A. Each individual who is an Eligible Employee on January 1,
1997, shall become a Participant for the 1997 Plan Year.
B. An individual who is an Eligible Employee on the first day of
any subsequent Plan Year shall become a Participant for such Plan Year.
C. Except as otherwise provided in Section A above, in the case
of an individual who is an Eligible Employee during a Plan Year, but not on the
first day of such Plan year, the individual shall become a Participant for such
Plan Year only with the approval of the Committee or its authorized
representative.
4
5
V. AWARDS
A. During April of the 1997 Plan Year, and during January of each
subsequent Plan Year, the Committee shall determine the sustainable Earnings
Level, the Attainable Earnings Level and the Stretch Earnings Level, each with
a corresponding number of Incentive Units, that shall apply to each Participant
for such Plan Year, and shall cause such information to be communicated to such
Participants. Following the end of a Plan Year and the public announcement of
the Partnership's net income for the Partnership's fiscal year coinciding with
the Plan Year, the Committee shall credit each Participant for the Plan Year
who is an Eligible Employee as of the last day of such Plan Year with the
appropriate number of Incentive Units, determined on the basis of which one, if
any, of the Sustainable, Attainable or Stretch Earnings Levels has been
achieved by such net income. For purposes of the preceding sentence, a
Participant who ceases to be an Eligible Employee on account of death,
disability or retirement under a retirement plan in which TEPPCO participates,
nevertheless, shall be deemed to be an Eligible Employee as of the last day of
such Plan Year.
B. The Committee shall credit each Participant for a Plan Year
with an Award Amount for the Plan Year equal to the dollar amount produced by
multiplying the total number of Incentive Units credited to such participant
for such Plan Year times the total quarterly cash distributions paid by the
Partnership on one (1) L.P. Unit with respect to the Partnership's fiscal
quarters covered by such Plan Year. It is intended that the resulting monetary
5
6
amount will be substantially equivalent to the total distributions that would
have been paid by the Partnership to the Participant had the Participant been
the owner during the respective period of a number of L.P. Units equal to the
number of Incentive Units credited to the Participant for the Plan Year.
Notwithstanding the foregoing, in the case of a Participant who is not an
Eligible Employee for any portion of a Partnership fiscal quarter covered by a
Plan Year (other than on account of termination after TEPPCO employment by
reason of death, disability or retirement under a retirement plan in which
TEPPCO participates), such Participant shall not receive credit for any
distributions paid by the Partnership with respect to such fiscal quarter.
C. For the Plan Year 1997, the Committee, in its sole discretion,
may add a premium to the Award Amount (as determined pursuant to the provisions
of Article V.B. directly above) equal to not less than ten percent (10%) nor
more than thirty percent (30%) of the 1997 Award Amount, provided attainment of
the following goals for Plan Year 1997, is meet:
1. Safety: Achieve a total OSHA accident frequency of
1.10 or less;
2. Product Quality: Hold costs of correcting product
quality incidents to $200,000 or less, and
3. Leaks, Spills and Releases: Reduce the number of
leaks, spills and releases recorded in 1996 by 10
percent to 48 or fewer;
The term "Award Amount," as used hereafter, shall include any added
6
7
premium amount. The provisions of this Article V.C., shall apply only to Plan
Year 1997.
VI. PAYMENT OF AWARDED AMOUNT
A. A Participant's Award Amount for a Plan Year shall be paid in
a cash lump sum, subject to withholding for taxes and other lawful purposes, as
of February 15 following the close of the Plan Year (except that if February 15
is not a business day, the first succeeding business day).
B. If a Participant dies before payment of an unforfeited Award
Amount, such unpaid Award Amount shall be paid to the Participant's surviving
spouse, or if no surviving spouse exists, to the Participant's estate or legal
representative.
VII. LIMITATIONS
A. No Participant or any other person shall have any interest in
TEPPCO, the Partnership, TE Products Pipeline Company, Limited Partnership, or
PanEnergy, any fund or in any specific asset or assets of TEPPCO, the
Partnership, TE Products Pipeline Company, Limited Partnership, or PanEnergy by
reason of participation in the Plan. No Participant shall have the right to
assign, pledge or otherwise dispose of or otherwise encumber any Plan benefit,
nor shall such Participant's contingent interest in such benefit be subject to
garnishment, attachment, transfer by operation of law, or any legal process.
B. Participation in the Plan does not confer any right of
continued TEPPCO employment or any right to receive any payment under the Plan.
7
8
C. Any unpaid Award Amount credited to a Participant shall be
forfeited in the following circumstances (unless the Committee, in its sole
discretion, determines otherwise):
1. The Participant engages in willful, deliberate or
gross misconduct during TEPPCO employment; or
2. If the Participant engages in activities competitive
with, or activities otherwise to the detriment of,
TEPPCO, the Partnership or PanEnergy, following
termination of TEPPCO employment.
VIII. NATURE OF PLAN
The obligation to make cash payments under the Plan shall be a
general, unsecured obligation of TEPPCO payable solely from the general assets
of TEPPCO, and no Participant shall have any interest in any assets of TEPPCO
by virtue of this Plan. Nothing in this Article VIII shall be construed to
prevent TEPPCO from implementing or setting aside funds in a grantor trust
subject to the claims of TEPPCO's creditors. The establishment and operation
of the Plan or the setting aside of any funds shall not be deemed to create a
trust. Legal and equitable title to any funds set aside for the purposes of
the Plan, other than any grantor trust subject to the claims of TEPPCO's
creditors, shall remain in TEPPCO and shall remain subject to the general
creditors of TEPPCO, present and future.
IX. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN
The Board may at any time amend, suspend or terminate the Plan, in
whole or in part, except that no amendment, suspension or
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9
termination shall reduce any Award Amount credited to a Participant prior to
the date of such amendment, suspension or termination. The Texas Eastern
Products Pipeline Company 1995 Employee Incentive Compensation Plan shall
terminate as of the 1997 Plan Year, except for any awards to be made
thereunder.
X. SUCCESSORS AND ASSIGNS
The provisions of the Plan shall be binding upon TEPPCO and its
successors and assigns and upon the Participant, his or her surviving spouse,
estate (including heirs, legatees, executors and administrators) or other legal
representative.
XI. GOVERNING LAW
The Plan shall be governed by, and construed and enforced in
accordance with, the laws of the State of Texas applicable to transactions that
take place entirely within the State of Texas, and, where applicable, the laws
of the United States of America.
IN WITNESS WHEREOF, the undersigned have executed this Plan this 14th
day of July, 1997.
TEXAS EASTERN PRODUCTS PIPELINE COMPANY
ATTEST:
/s/ JAMES RUTH By: /s/ W.L. THACKER
- ------------------ -------------------------------------
9
5
1,000
9-MOS
DEC-31-1997
JAN-01-1997
SEP-30-1997
27,731
8,176
15,481
0
18,989
76,197
732,167
166,828
655,225
42,441
309,512
0
0
0
296,647
655,225
0
161,379
0
96,481
0
0
25,339
42,796
0
42,364
0
0
0
42,364
2.70
2.70
