UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d)
of the
Security Exchange Act of 1934
Date of
report (Date of earliest event reported): June 30, 2009
DUNCAN
ENERGY PARTNERS L.P.
(Exact
Name of Registrant as Specified in Its Charter)
|
Delaware
|
1-33266
|
20-5639997
|
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(Commission
File
Number)
|
(I.R.S.
Employer
Identification
No.)
|
|
1100
Louisiana, 10th
Floor
Houston,
Texas 77002
(Address
of Principal Executive Offices, including Zip Code)
|
|
(713)
381-6500
(Registrant’s
Telephone Number, including Area
Code)
|
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.
We are filing the Unaudited Condensed
Consolidated Balance Sheet of DEP Holdings, LLC at June 30, 2009, which is
included as Exhibit 99.1 to this Current Report on Form 8-K. DEP
Holdings, LLC is the general partner of Duncan Energy Partners L.P.
Item
9.01. Financial Statements and Exhibits.
(d) Exhibits.
|
Exhibit No.
|
Description
|
|
99.1
|
Unaudited
Condensed Consolidated Balance Sheet of DEP Holdings, LLC at June 30,
2009.
|
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.
| DUNCAN ENERGY PARTNERS L.P. | |
| By: DEP Holdings, LLC, as General Partner | |
| Date: August 10, 2009 | By: /s/ Michael J. Knesek |
| Name: Michael J. Knesek | |
| Title: Senior Vice President, Controller | |
| and Principal Accounting Officer | |
| of DEP Holdings, LLC |
EXHIBIT
99.1
DEP
Holdings, LLC
Unaudited
Condensed Consolidated Balance Sheet at June 30, 2009
DEP
HOLDINGS, LLC
TABLE
OF CONTENTS
|
Page No.
|
||
|
Unaudited
Condensed Consolidated Balance Sheet as of June 30, 2009
|
2
|
|
|
Notes
to Unaudited Condensed Consolidated Balance Sheet:
|
||
|
Note
1 – Business Overview and Basis of Financial Statement
Presentation
|
3
|
|
|
Note
2 – General Accounting Matters
|
4
|
|
|
Note
3 – Accounting for Equity Awards
|
6
|
|
|
Note
4 – Derivative Instruments and Hedging Activities
|
6
|
|
|
Note
5 – Inventories
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11
|
|
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Note
6 – Property, Plant and Equipment
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11
|
|
|
Note
7 – Investments in Unconsolidated Affiliate
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12
|
|
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Note
8 – Intangible Assets and Goodwill
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12
|
|
|
Note
9 – Debt Obligations
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12
|
|
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Note
10 – Equity and Noncontrolling Interest
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13
|
|
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Note
11 – Business Segments
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15
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|
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Note
12 – Related Party Transactions
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15
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|
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Note
13 – Commitments and Contingencies
|
17
|
|
1
DEP
HOLDINGS, LLC
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEET
AT
JUNE 30, 2009
(Dollars
in millions)
|
ASSETS
|
|
|||
|
Current
assets
|
||||
|
Cash
and cash equivalents
|
$ | 16.5 | ||
|
Accounts
receivable – trade, net of allowance for doubtful accounts
|
90.4 | |||
|
Gas
imbalance receivables
|
27.6 | |||
|
Accounts
receivable – related parties
|
5.7 | |||
|
Inventories
|
7.2 | |||
|
Prepaid
and other current assets
|
8.4 | |||
|
Total current assets
|
155.8 | |||
|
Property,
plant and equipment, net
|
4,482.1 | |||
|
Investments
in unconsolidated affiliate
|
5.0 | |||
|
Intangible
assets, net of accumulated amortization of $38.4
|
48.0 | |||
|
Goodwill
|
4.9 | |||
|
Other
assets
|
1.1 | |||
|
Total
assets
|
$ | 4,696.9 | ||
|
LIABILITIES
AND EQUITY
|
||||
|
Current
liabilities
|
||||
|
Accounts
payable – trade
|
$ | 69.6 | ||
|
Accounts
payable – related parties
|
28.4 | |||
|
Accrued
product payables
|
58.7 | |||
|
Accrued
property taxes
|
11.7 | |||
|
Other
current liabilities
|
18.9 | |||
|
Total current liabilities
|
187.3 | |||
|
Long-term debt (see Note
9)
|
466.8 | |||
|
Deferred
tax liabilities
|
6.0 | |||
|
Other
long-term liabilities
|
8.1 | |||
|
Equity: (see Note
10)
|
||||
|
DEP
Holdings, LLC member’s equity:
|
||||
|
Member interest
|
0.3 | |||
|
Accumulated other comprehensive loss (“AOCL”) - member
|
(0.1 | ) | ||
|
Total DEP Holdings, LLC member’s equity
|
0.2 | |||
|
Noncontrolling
interest:
|
||||
|
Limited partner interest in Duncan Energy Partners
|
768.1 | |||
|
DEP I Midstream Businesses – Parent
|
483.8 | |||
|
DEP II Midstream Businesses – Parent
|
2,783.0 | |||
|
AOCL - noncontrolling interest
|
(6.4 | ) | ||
|
Total
noncontrolling interest
|
4,028.5 | |||
|
Total noncontrolling interest and members' equity
|
4,028.7 | |||
|
Total
liabilities and equity
|
$ | 4,696.9 | ||
The
accompanying notes are an integral part of this balance sheet.
See Note
1 for information regarding the basis of financial statement
presentation.
2
DEP
HOLDINGS, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
Except as noted within the context of
each footnote disclosure, dollar amounts presented in the tabular data within
these footnote disclosures are stated in millions of dollars.
Note
1. Business Overview and Basis of Financial Statement
Presentation
Company
Organization and Background
DEP Holdings, LLC (“DEP GP”) is a
Delaware limited liability company that was formed on September 29, 2006,
to own a 2% general partner interest in Duncan Energy Partners L.P. (“Duncan
Energy Partners”). DEP GP is a wholly owned subsidiary of Enterprise Products
Operating LLC (“EPO”). DEP GP’s primary business purpose is to manage
the affairs and operations of Duncan Energy Partners.
The business purpose of Duncan Energy Partners is to acquire, own and operate a
diversified portfolio of midstream energy assets and to support the growth
objectives of EPO and other affiliates under common
control. Unless the context requires otherwise, references to
“we,” “us,” “our,” or “DEP Holdings” are intended to mean the business and
operations of DEP Holdings, LLC and its consolidated subsidiaries, which include
Duncan Energy Partners L.P. and its consolidated
subsidiaries. References to “DEP GP” are intended to mean and include
DEP Holdings, LLC, individually as the general partner of Duncan Energy Partners
L.P., and not on a consolidated basis.
Duncan Energy Partners is a publicly
traded Delaware limited partnership, the common units of which are listed on the
New York Stock Exchange (“NYSE”) under the ticker symbol
“DEP.” Duncan Energy Partners is engaged in the business of (i) the
gathering, transportation and storage of natural gas; (ii) natural gas liquids
(“NGL”) transportation and fractionation; (iii) the storage of NGL and
petrochemical products; (iv) the transportation of petrochemical products; and
(v) the marketing of NGLs and natural gas.
At June 30, 2009, Duncan Energy
Partners was owned 99.3% by its limited partners and 0.7% by its general
partner, DEP GP. At August 1, 2009, EPO owned approximately 58% of Duncan Energy
Partner’s limited partner interests and 100% of DEP GP. A
privately-held affiliate, EPCO, Inc. (“EPCO”), provides all of Duncan Energy
Partners’ employees and certain administrative services to the
partnership. See Note 10 for information regarding the repurchase of
common units beneficially owned by EPO in June 2009 and subsequent cancellation
of such units.
Basis
of Financial Statement Presentation
Since DEP GP exercises control over
Duncan Energy Partners, DEP GP consolidates the financial statements of Duncan
Energy Partners. DEP GP has no independent operations and no material
assets outside those of Duncan Energy Partners.
For financial reporting purposes, the
assets and liabilities of our majority owned subsidiaries are consolidated with
those of our own. The number of reconciling items between our
consolidated balance sheet and that of Duncan Energy Partners are
few.
Effective
February 1, 2007, Duncan Energy Partners acquired controlling ownership
interests in five midstream energy companies (the “DEP I Midstream Businesses”)
from EPO in a dropdown transaction. The DEP I Midstream Businesses
consist of (i) Mont Belvieu Caverns, LLC (“Mont Belvieu Caverns”); (ii) Acadian
Gas, LLC (“Acadian Gas”); (iii) Enterprise Lou-Tex Propylene Pipeline L.P.
(“Lou-Tex Propylene”), including its general partner; (iv) Sabine Propylene
Pipeline L.P. (“Sabine Propylene”), including its general partner; and (v) South
Texas NGL Pipelines, LLC (“South Texas NGL”).
On
December 8, 2008, Duncan Energy Partners entered into a Purchase and Sale
Agreement (the “DEP II Purchase Agreement”) with EPO and Enterprise GTM Holdings
L.P. (“Enterprise GTM”), a wholly owned subsidiary of EPO. Pursuant
to the DEP II Purchase Agreement, DEP Operating Partnership L.P. (“DEP OLP”)
acquired 100% of the membership interests in Enterprise Holding III, LLC
(“Enterprise III”) from Enterprise GTM, thereby acquiring a 66% general partner
interest in Enterprise GC, L.P. (“Enterprise GC”), a 51% general partner
interest in Enterprise Intrastate L.P. (“Enterprise Intrastate”)
and
3
DEP
HOLDINGS, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
a 51% membership interest in Enterprise Texas
Pipeline LLC (“Enterprise Texas”). Collectively, we refer to
Enterprise GC, Enterprise Intrastate and Enterprise Texas as the “DEP II
Midstream Businesses.” EPO was the sponsor
of this second dropdown transaction.
For additional information regarding
the dropdowns of the DEP I and DEP II Midstream Businesses, please read Note 1
of the Notes to Consolidated Balance Sheet for the year ended December 31, 2008,
which was included as an exhibit to the Current Report on Form 8-K filed by
Duncan Energy Partners on March 12, 2009 (“December 2008 Form
8-K”).
Duncan Energy Partners, DEP GP, DEP
OLP, Enterprise Products Partners (including EPO and its consolidated
subsidiaries) and EPCO and affiliates are under common control of Mr. Dan L.
Duncan, the Group Co-Chairman and controlling shareholder of
EPCO. Prior to the dropdown of controlling ownership interests in the
DEP I and DEP II Midstream Businesses to Duncan Energy Partners, EPO owned these
businesses and directed their respective activities for all periods presented
(to the extent such businesses were in existence during such
periods). Each of the dropdown transactions was accounted for at
EPO’s historical costs as a reorganization of entities under common control in a
manner similar to a pooling of interests. On a standalone basis,
Duncan Energy Partners did not own any assets prior to February 1,
2007.
References
to “Duncan Energy Partners” mean the registrant and its consolidated
subsidiaries since February 2007.
Our balance sheet has been prepared in
accordance with U.S. generally accepted accounting principles
(“GAAP”). All intercompany balances and transactions have been
eliminated in consolidation. Transactions between EPO and us have
been identified in our unaudited condensed consolidated balance sheet as
transactions between affiliates.
Effective January 1, 2009, we adopted
the provisions of Statement of Financial Accounting Standards (“SFAS”) 160,
Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51 (FASB
Accounting Standards Codification (“ASC”)
810). SFAS 160 established accounting and reporting standards for
noncontrolling interests, which were previously identified as Parent interest in
our financial statements. This new standard requires, among other
things, that (i) noncontrolling interests be presented as a component of equity
on our consolidated balance sheet (i.e., elimination of the “mezzanine”
presentation previously used for Parent interest); (ii) elimination of “Parent
interest in income of subsidiaries” amounts as a deduction in deriving net
income or loss and, as a result, that net income or loss be allocated between
controlling and noncontrolling interests; and (iii) comprehensive income or loss
to be allocated between controlling and noncontrolling
interest. Earnings per unit amounts are not affected by these
changes.
The unaudited condensed consolidated
balance sheet included in this Current Report on Form 8-K reflects the changes
required by SFAS 160.
Note
2. General Accounting Matters
Estimates
Preparing
our balance sheet in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the balance sheet date.
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
DEP
HOLDINGS, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
Fair
Value Information
Cash and
cash equivalents, accounts receivable, accounts payable and accrued expenses are
carried at amounts which reasonably approximate their fair values due to their
short-term nature. The carrying amounts of our variable rate debt
obligations reasonably approximate their fair values due to their variable
interest rates. 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 the dates indicated:
|
June
30, 2009
|
||||||||
|
Carrying
|
Fair
|
|||||||
|
Financial
Instruments
|
Value
|
Value
|
||||||
|
Financial
assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 16.5 | $ | 16.5 | ||||
|
Accounts receivable
|
123.7 | 123.7 | ||||||
|
Financial
liabilities:
|
||||||||
|
Accounts payable and accrued expenses
|
$ | 168.4 | $ | 168.4 | ||||
|
Other current liabilities
|
18.9 | 18.9 | ||||||
|
Variable-rate revolving credit facility
|
184.5 | 184.5 | ||||||
|
Variable-rate term loan
|
282.3 | 282.3 | ||||||
Recent
Accounting Developments
The
following information summarizes recently issued accounting guidance since those
reported in our December 2008 Form 8-K. This guidance 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 FAS 157-4 (ASC 820), Determining Fair Value When the
Volume 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 balance
sheet or related disclosures.
In May
2009, the FASB issued SFAS 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 balance sheets 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 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
consolidate a VIE when that enterprise has a variable interest that will cover
most of the entity’s expected
5
DEP
HOLDINGS, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
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 variable interest
entity, expands the list of events that triggers 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 consolidated balance sheet.
In June
2009, the FASB issued SFAS 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 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. The new standard 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. The new standard is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. We will adopt this new standard 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 sheets after our adoption of this new guidance 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 123(R) (ASC 505 and 718),
Share-Based
Payment. Such awards were not material to our consolidated
financial position. There has been no change in our accounting for
equity awards since those reported in our December 2008 Form 8-K.
Certain
key employees of EPCO participate in long-term incentive compensation plans
managed by EPCO. The compensation expense we record related to
unit-based awards (which awards currently relate to units of affiliates other
than Duncan Energy Partners L.P.) is based on an allocation
of the total cost of such incentive plans to EPCO. We record our pro
rata share of such costs based on the percentage of time each employee spends on
our consolidated business activities, in accordance with the administrative
services agreement (“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. All of our derivatives are
used for non-trading activities.
6
DEP
HOLDINGS, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
SFAS 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 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 to
manage our exposure to changes in the interest rates of certain consolidated
debt agreements. This strategy is a component in controlling our cost of capital
associated with such borrowings.
The following table summarizes our
interest rate derivative instruments outstanding at June 30, 2009, all of which
were designated as hedging instruments under SFAS 133:
|
Number
and Type of
|
Notional
|
Length
of
|
Rate
|
Accounting
|
||||
|
Hedged
Transaction
|
Derivative
Employed
|
Amount
|
Hedge
|
Swap
|
Treatment
|
|||
|
Revolving
Credit Facility:
|
||||||||
|
Variable-interest
rate borrowings
|
3
floating-to-fixed swaps
|
$ |
175.0
|
9/07
to 9/10
|
0.6%
to 4.6%
|
Cash
flow
|
||
For information regarding
consolidated fair value amounts and gains and losses on interest rate derivative
instruments and related hedged items, see “Tabular Presentation of Fair Value
Amounts on Derivative Instruments and Related Hedged Items” within this Note
4.
7
DEP
HOLDINGS, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
Commodity
Derivative Instruments
The price of natural gas 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 such products, Acadian Gas enters
into commodity derivative instruments such as forwards, basis swaps and futures
contracts. The following table summarizes our commodity derivative instruments
outstanding at June 30, 2009:
|
Volume
(1)
|
Accounting
|
|||||
|
Derivative
Purpose
|
Current
|
Long-Term
|
Treatment
|
|||
|
Derivatives
not designated as hedging instruments under SFAS 133:
|
||||||
|
Acadian
Gas:
|
||||||
|
Natural
gas risk management activities (2)
|
1.6
Bcf
|
n/a |
Mark-to-market
|
|||
|
(1) Volume
for derivatives not designated as hedging instruments reflect the absolute
value of derivative notional volumes.
(2) Reflects
the use of derivative instruments to manage risks associated with natural
gas transportation, processing and storage
assets.
|
||||||
At June 30, 2009, none of Acadian Gas’
derivative instruments met the hedge accounting requirements of SFAS 133 and are
accounted for as economic hedges using mark-to-market accounting.
Acadian Gas’ hedging strategy is to
reduce the variability of its future earnings and cash flows resulting from
changes in natural gas prices. Acadian Gas enters into a limited
number of offsetting mark-to-market derivatives that effectively fix the price
of natural gas for certain of its customers. Acadian Gas may also enter into a
small number of cash flow hedges in connection with its purchase of natural gas
held-for-sale to third parties.
Credit-Risk
Related Contingent Features in Derivative Instruments
Commodity
derivative instruments can include provisions related to minimum credit ratings
and/or adequate assurance clauses. At June 30, 2009, our derivative
instruments in a net liability position were $0.2 million; however, such
instruments were not subject to these contingent features. The
potential for derivatives with contingent features to enter a net liability
position may change in the future as positions and prices
fluctuate.
8
DEP
HOLDINGS, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
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 the dates indicated:
|
Asset
Derivatives
|
Liability
Derivatives
|
||||
|
June
30, 2009
|
June
30, 2009
|
||||
|
Balance
Sheet
|
Fair
|
Balance
Sheet
|
Fair
|
||
|
Location
|
Value
|
Location
|
Value
|
||
|
Derivatives designated as hedging instruments
under SFAS 133
|
||||||||||
|
Interest
rate derivatives
|
Other
current
assets
|
$ | -- |
Other
current liabilities
|
$ | 5.3 | ||||
|
Interest
rate derivatives
|
Other
assets
|
-- |
Other
liabilities
|
1.4 | ||||||
|
Total
interest rate derivatives
|
-- | 6.7 | ||||||||
|
Total
derivatives
|
||||||||||
|
designated
as hedging
|
||||||||||
|
instruments
|
$ | -- | $ | 6.7 | ||||||
|
Derivatives not designated as hedging instruments
under SFAS 133
|
||||||||||
|
Commodity
derivatives
|
Other
current
assets
|
$ | 0.2 |
Other
current liabilities
|
$ | 0.2 | ||||
|
Total
derivatives not
|
||||||||||
|
designated
as hedging
|
||||||||||
|
instruments
|
$ | 0.2 | $ | 0.2 | ||||||
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 New York
Mercantile Exchange). Our Level 1 fair values primarily consist
of financial assets and liabilities such as exchange-traded commodity
financial instruments.
|
|
§
|
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
|
9
DEP
HOLDINGS, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
|
|
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, 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
rate and yield curves at commonly quoted intervals). Our Level
2 fair values primarily consist of commodity financial instruments such as
forwards, swaps and other instruments transacted on an exchange or over
the counter. The fair values of these derivatives are based on
observable price quotes for similar products and locations. Our interest
rate derivatives are valued by using appropriate financial models with the
implied forward LIBOR yield curve for the same period as the future
interest swap settlements.
|
|
§
|
Level
3 fair values are based on unobservable inputs. Unobservable
inputs are used to measure fair value to the extent that observable inputs
are not available, thereby allowing for situations in which there is
little, if any, market activity for the asset or liability at the
measurement date. Unobservable inputs reflect the reporting
entity’s own ideas about the assumptions that market participants would
use in pricing an asset or liability (including assumptions about
risk). Unobservable inputs are based on the best information
available in the circumstances, which might include the reporting entity’s
internally developed data. The reporting entity must not ignore
information about market participant assumptions that is reasonably
available without undue cost and effort. Level 3 inputs are
typically used in connection with internally developed valuation
methodologies where management makes its best estimate of an instrument’s
fair value. Level 3 generally includes specialized or unique
financial instruments that are tailored to meet a customer’s specific
needs. At June 30, 2009, we did not have any Level 3 financial
assets or liabilities.
|
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
1
|
Level
2
|
Total
|
||||||||||
|
Financial
assets:
|
||||||||||||
|
Commodity
derivatives
|
$ | 0.1 | $ | 0.1 | $ | 0.2 | ||||||
|
Financial
liabilities:
|
||||||||||||
|
Commodity
derivatives
|
$ | 0.1 | $ | 0.1 | $ | 0.2 | ||||||
|
Interest
rate derivatives
|
-- | 6.7 | 6.7 | |||||||||
|
Total derivative liabilities
|
$ | 0.1 | $ | 6.8 | $ | 6.9 | ||||||
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). There were no fair value adjustments for such assets or
liabilities reflected in our consolidated balance sheet at June 30,
2009.
10
DEP
HOLDINGS, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
Note
5. Inventories
Our inventory amounts were as follows
at June 30, 2009:
|
Working
inventory (1)
|
$ | 1.4 | ||
|
Forward
sales inventory (2)
|
5.8 | |||
|
Total
inventory
|
$ | 7.2 | ||
|
(1) Working
inventory is comprised of inventories of natural gas, NGLs and certain
petrochemical products that are either available-for-sale or used in the
provision for services.
(2) Forward
sales inventory consists of identified NGL and natural gas volumes
dedicated to the fulfillment of forward sales contracts.
|
||||
Due to fluctuating market prices for
natural gas, we record non-cash, lower of average cost or market (“LCM”)
adjustments in connection with our available-for-sale
inventory. Our LCM adjustments were immaterial for the six
months ended June 30, 2009.
Note
6. Property, Plant and Equipment
Our
property, plant and equipment values and accumulated depreciation balances were
as follows:
|
Estimated
Useful
|
June
30,
|
|||||||
|
Life
in Years
|
2009
|
|||||||
|
Plant
and pipeline facilities (1)
|
3-45(4)
|
$ | 4,618.8 | |||||
|
Underground
storage wells and related assets (2)
|
5-35(5)
|
421.3 | ||||||
|
Transportation
equipment (3)
|
3-10
|
10.4 | ||||||
|
Land
|
27.8 | |||||||
|
Construction
in progress
|
235.0 | |||||||
|
Total
|
5,313.3 | |||||||
| Less: accumulated depreciation | 831.2 | |||||||
|
Property,
plant and equipment, net
|
$ | 4,482.1 | ||||||
|
(1) Includes
natural gas, NGL and petrochemical pipelines, NGL fractionation plants,
office furniture and equipment, buildings, and related
assets.
(2) Underground
storage facilities include underground product storage caverns and related
assets such as pipes and compressors.
(3) Transportation
equipment includes vehicles and similar assets used in our
operations.
(4) In
general, the estimated useful life of major components of this category
is: pipelines, 18-45 years (with some equipment at 5 years); office
furniture and equipment, 3-20 years; buildings 20-35 years; and
fractionation facilities, 28 years.
(5) In
general, the estimated useful life of underground storage facilities is
20-35 years (with some components at 5 years).
|
||||||||
Asset
retirement obligations (“AROs”) are legal obligations associated with the
retirement of a tangible long-lived asset that results from its acquisition,
construction, development and/or normal operation. The following
table presents information regarding our AROs since December 31,
2008.
|
ARO
liability balance, December 31, 2008
|
$ | 4.6 | ||
|
Accretion
expense
|
0.2 | |||
|
Revisions
in estimated cash flows
|
3.0 | |||
|
ARO
liability balance, June 30, 2009
|
$ | 7.8 |
Net
property, plant and equipment at June 30, 2009 includes $3.7 of asset retirement
costs capitalized as an increase in the associated long-lived
asset.
11
DEP
HOLDINGS, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
Note
7. Investments in Unconsolidated Affiliate
Acadian
Gas, through a wholly owned subsidiary, owns a collective 49.51% equity interest
in Evangeline, which consists of a 45% direct ownership interest in Evangeline
Gas Pipeline, L.P. (“EGP”) and a 45.05% direct interest in Evangeline Gas Corp.
(“EGC”). EGC also owns a 10% direct interest in EGP. Third
parties own the remaining equity interests in EGP and EGC. Acadian
Gas does not have a controlling interest in the Evangeline entities, but does
exercise significant influence on Evangeline’s operating
policies. Acadian Gas accounts for its financial investment in
Evangeline using the equity method. Our investment in Evangeline is
classified within our Natural Gas Pipelines & Services business
segment. See Note 11 for additional information regarding our
business segments
Note
8. Intangible Assets and Goodwill
The
following table summarizes our intangible asset balances by
business:
|
At
June 30, 2009
|
||||||||||||
|
Gross
|
Accum.
|
Carrying
|
||||||||||
|
Value
|
Amort.
|
Value
|
||||||||||
|
NGL
Pipelines & Services:
|
||||||||||||
|
Customer
relationship intangibles
|
$ | 24.6 | $ | (7.7 | ) | $ | 16.9 | |||||
|
Contract-based
intangibles
|
40.8 | (22.4 | ) | 18.4 | ||||||||
|
Natural
Gas Pipelines & Services:
|
||||||||||||
|
Customer
relationship intangibles
|
21.0 | (8.3 | ) | 12.7 | ||||||||
|
Total
all segments
|
$ | 86.4 | $ | (38.4 | ) | $ | 48.0 | |||||
Goodwill
Our
goodwill totaled $4.9 million at June 30, 2009. Our goodwill was
allocated $0.5 million and $4.4 million to our NGL Pipelines & Services
segment and our Natural Gas Pipelines & Services segment,
respectively.
Note
9. Debt Obligations
Our
consolidated debt obligations consisted of the following:
|
At
June 30,
|
||||
|
2009
|
||||
|
Revolving
Credit Facility, variable rate, due February 2011
|
$ | 184.5 | ||
|
Term
Loan Agreement, variable rate, due December 2011
|
282.3 | |||
|
Total
principal amount of long-term debt obligations
|
$ | 466.8 | ||
|
Standby
letter of credit outstanding
|
$ | 1.0 | ||
There have been no changes in the terms
of our Revolving Credit Facility and our Term Loan Agreement since those
reported in our December 2008 Form 8-K.
Covenants
We were in compliance with the
covenants of our consolidated debt agreements at June 30, 2009.
12
DEP
HOLDINGS, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
Information
regarding variable interest rates paid
The
following table presents the weighted-average interest rate paid on our
consolidated variable-rate debt obligations during the six months ended June 30,
2009.
|
Weighted-average
|
||||
|
interest
rate paid
|
||||
|
Revolving
Credit Facility
|
1.89%
|
|||
|
Term
Loan Agreement
|
1.31%
|
|||
Evangeline
joint venture debt obligation
At June
30, 2009, Evangeline’s debt consisted of $8.2 million of 9.9% fixed rate senior
notes due 2010 and a $7.5 million subordinated note payable due 2011. Evangeline
was in compliance with its debt covenants at June 30, 2009. There
have been no changes in the terms of Evangeline’s debt agreements since those
reported in our December 2008 Form 8-K. Duncan Energy Partners has
furnished a letter of credit on behalf of Evangeline’s debt service
requirements. At June 30, 2009, the letter of credit amount was $1.0
million.
Note
10. Equity and Noncontrolling Interest
Member’s
equity
At June 30, 2009, member’s equity
consisted of the capital account of EPO and accumulated other comprehensive
loss. Subject to the terms of our limited liability company
agreement, we distribute available cash to EPO within 45 days of the end of each
calendar quarter. No distributions have been made to date. The
capital account balance of EPO was $0.3 million at June 30, 2009. At June 30,
2009, we recognized an accumulated other comprehensive loss of $0.1 million
related to the fair value of Duncan Energy Partners’ interest rate swaps (see
Note 4).
The table below provides a
reconciliation of the amount presented in Member’s Equity on our consolidated
balance sheet at June 30, 2009: (dollars in millions)
|
Member’s
|
Total
|
|||||||||||
|
Capital
|
AOCL
|
Member’s
|
||||||||||
|
Account
|
To
Member
|
Equity
|
||||||||||
|
Balance
at December 31, 2008
|
$ | 1.0 | $ | (0.1 | ) | $ | 0.9 | |||||
|
Net income
|
0.1 | -- | 0.1 | |||||||||
|
Distributions
|
(0.8 | ) | -- | (0.8 | ) | |||||||
|
Change in fair value of cash flow hedges
|
-- | * | * | |||||||||
|
Balance
at June 30, 2009
|
$ | 0.3 | $ | (0.1 | ) | $ | 0.2 | |||||
|
* Amounts are
immaterial
|
||||||||||||
Limited
partner interest
Limited partner interest in Duncan
Energy Partners is presented as “Noncontrolling interest – Limited partner
interest in Duncan Energy Partners” on our unaudited condensed consolidated
balance sheet. The following table presents the components of this
line item at June 30, 2009:
|
Limited
partners interest in Duncan Energy Partners:
|
||||
|
Common units outstanding (22,950,000 publicly owned units)
|
$ | 400.9 | ||
|
Common units outstanding (34,726,987 EPO owned units)
|
367.2 | |||
|
Limited partner interest in Duncan Energy Partners
|
$ | 768.1 | ||
13
DEP
HOLDINGS, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
In connection with the DEP II dropdown,
Duncan Energy Partners issued 37,333,887 Class B units to EPO. The
Class B units automatically converted to common units on February 1,
2009.
In June 2009, Duncan Energy Partners
completed a common unit offering of 8,000,000 units that generated net proceeds
of approximately $123.2 million after underwriting discounts and other expenses.
In July 2009, the underwriters to this offering exercised their option to
purchase an additional 943,400 common units, which generated approximately $14.5
million of additional net proceeds. The total net proceeds from this offering,
including the overallotment amount, were used to repurchase an equal number of
Duncan Energy Partner common units beneficially owned by EPO – 8,000,000 units
were repurchased in June 2009 and 943,400 units were repurchased in July
2009. The repurchased common units were subsequently
cancelled.
DEP
I Midstream Businesses – Parent
The following table provides a
reconciliation of the changes since December 31, 2008 in “Noncontrolling
interest – DEP I Midstream Businesses – Parent,” as presented on our unaudited
condensed consolidated balance sheet:
|
December
31, 2008 balance
|
$ | 478.4 | ||
|
Net income attributable to noncontrolling interest – DEP I Midstream
Businesses – Parent
|
4.6 | |||
|
Contributions by EPO to DEP I Midstream Businesses:
|
||||
|
Contributions from EPO to Mont Belvieu Caverns in
connection with capital projects in which
|
||||
|
EPO is funding 100% of the
expenditures in accordance with the Mont Belvieu Caverns’
LLC
|
||||
|
Agreement,
including accrued receivables at June 30, 2009 (see Note
12)
|
12.7 | |||
|
Contributions from EPO to Mont Belvieu Caverns
and South Texas NGL in connection with capital
|
||||
|
projects in which EPO is funding
100% of the expenditures in excess of certain thresholds
in
|
||||
|
accordance with the Omnibus
Agreement, including accrued receivables at June 30, 2009 (see Note
12)
|
1.4 | |||
|
Other contributions by EPO to the DEP I Midstream
Businesses
|
0.9 | |||
|
Cash distributions to EPO of operating cash flows of DEP I Midstream
Businesses
|
(14.2 | ) | ||
|
June
30, 2009 balance
|
$ | 483.8 |
For additional information regarding
our agreements with EPO in connection with the DEP I dropdown transaction, see
“Significant Relationships and Agreements with EPO – Omnibus Agreement” and
“Significant Relationships and Agreements with EPO – Mont Belvieu Caverns’ LLC
Agreement” under Note 12.
DEP
II Midstream Businesses – Parent
We account for EPO’s ownership
interests in the DEP II Midstream Businesses as a noncontrolling
interest. EPO’s ownership interest in the net assets of the DEP
II Midstream Businesses is presented as noncontrolling interest in subsidiaries
on our Unaudited Condensed Consolidated Balance Sheet as a component of
equity.
The following table provides a
reconciliation of the changes since December 31, 2008 in “Noncontrolling
interest – DEP II Midstream Businesses – Parent,” as presented on our Unaudited
Condensed Consolidated Balance Sheet:
|
December
31, 2008 balance
|
$ | 2,613.0 | ||
|
Allocated loss from DEP II Midstream Businesses to EPO as
Parent
|
(32.2 | ) | ||
|
Contributions by EPO in connection with expansion cash
calls
|
192.1 | |||
|
Distributions to noncontrolling interest of subsidiary operating cash
flows
|
(11.2 | ) | ||
|
Other general cash contributions from noncontrolling
interest
|
21.3 | |||
|
June
30, 2009 balance
|
$ | 2,783.0 |
For additional information regarding
our agreements with EPO in connection with the DEP II dropdown transaction, see
“Significant Relationships and Agreements with EPO – Company and Limited
Partnership Agreements – DEP II Midstream Businesses” under Note
12.
14
DEP
HOLDINGS, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
AOCL
to noncontrolling interest
The table below presents a
reconciliation of our AOCL to noncontrolling interest balance:
|
December
31, 2008 balance
|
$ | (9.5 | ) | |
|
Change
in fair value of interest rate hedges
|
3.1 | |||
|
June
30, 2009 balance
|
$ | (6.4 | ) |
Note
11. Business Segments
We have
three reportable business segments: (i) Natural Gas Pipelines & Services;
(ii) NGL Pipelines & Services; and (iii) Petrochemical
Services. Our business segments are generally organized and managed
according to the type of services rendered (or technologies employed) and
products produced and/or sold.
Information
by segment, together with reconciliations to our consolidated totals, is
presented in the following table:
|
Natural
Gas
|
NGL
|
Adjustments
|
||||||||||||||||||
|
Pipelines
|
Pipelines
|
Petrochemical
|
and
|
Consolidated
|
||||||||||||||||
|
&
Services
|
&
Services
|
Services
|
Eliminations
|
Totals
|
||||||||||||||||
|
Segment
assets:
|
||||||||||||||||||||
|
At
June 30, 2009
|
3,256.5 | 905.6 | 85.0 | 235.0 | 4,482.1 | |||||||||||||||
|
Investments in
unconsolidated affiliate (see Note 7):
|
||||||||||||||||||||
|
At
June 30, 2009
|
5.0 | -- | -- | -- | 5.0 | |||||||||||||||
|
Intangible
assets:
|
||||||||||||||||||||
|
At
June 30,2009
|
12.7 | 35.3 | -- | -- | 48.0 | |||||||||||||||
|
Goodwill:
|
||||||||||||||||||||
|
At
June 30, 2009
|
4.4 | 0.5 | -- | -- | 4.9 | |||||||||||||||
Note
12. Related Party Transactions
The
following information summarizes our business relationships and transactions
with related parties at June 30, 2009. We believe that the terms and
provisions of our related party agreements are fair to us; however, such
agreements and transactions may not be as favorable to us as we could have
obtained from unaffiliated third parties.
The
following table summarizes our consolidated balance sheet amounts with related
parties:
|
June
30,
|
||||
|
2009
|
||||
|
Accounts
receivable – related parties
|
||||
|
EPO
and affiliates
|
$ | 5.1 | ||
|
Energy
Transfer Equity and affiliates (1)
|
0.6 | |||
|
Total
|
$ | 5.7 | ||
|
Accounts
payable – related parties
|
||||
|
EPO
and affiliates
|
$ | 19.2 | ||
|
EPCO
and affiliates
|
9.2 | |||
|
Total
|
$ | 28.4 | ||
|
(1) Refers
to Energy Transfer Equity, L.P. (“Energy Transfer Equity”) and its
consolidated subsidiaries.
|
||||
One of
our principal advantages is our relationship with EPO and EPCO. EPO
is a wholly owned subsidiary of Enterprise Products Partners through which
Enterprise Products Partners conducts its
15
DEP
HOLDINGS, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
business. Enterprise Products
Partners is controlled by its general partner, Enterprise Products GP, LLC
(“EPGP”), which in turn is a wholly owned subsidiary of Enterprise GP Holdings
L.P. (“Enterprise GP Holdings”). The general
partner of Enterprise GP Holdings is EPE Holdings, LLC (“EPE Holdings”), which
is a wholly owned subsidiary of a privately-held company controlled by Dan L.
Duncan. Mr. Duncan is our Chairman and is the Group Co-Chairman and
the controlling shareholder of EPCO. We are wholly owned by EPO and
EPCO provides all of Duncan Energy Partners’ employees, including our executive
officers.
Significant
Relationships and Agreements with EPO
At August 1, 2009, EPO owned
approximately 58% of our limited partner interests and 100% of our general
partner. EPO was the sponsor of the DEP I and DEP II dropdown
transactions and owns varying interests (as Parent) in the DEP I and DEP II
Midstream Businesses. For a description of EPO’s noncontrolling
interest in the income and net assets of the DEP I and DEP II Midstream
Businesses, see Note 10. EPO may contribute or sell other equity
interests or assets to us; however, EPO has no obligations or commitment to make
such contributions or sales to us, nor do we have any obligation or commitments
to accept such contributions or make such purchases.
EPO has continued involvement with all
of our subsidiaries, including the following types of transactions: (i) it
utilizes our storage services to support its Mont Belvieu fractionation and
other businesses; (ii) it buys from, and sells to, us natural gas in connection
with its normal business activities; and (iii) it is currently the sole shipper
on an NGL pipeline system located in south Texas that is owned by
us.
Omnibus
Agreement. On December 8, 2008, we entered into an
amended and restated Omnibus Agreement (the “Omnibus Agreement”) with
EPO. The provisions of the Omnibus Agreement have not changed since
reported in our December 2008 Form 8-K.
EPO indemnified us for certain
environmental liabilities, tax liabilities and right-of-way defects associated
with the assets it contributed to us in connection with the DEP I and DEP II
dropdown transactions. These indemnifications terminate on February
5, 2010. We made no claims to EPO during the six months ended June
30, 2009.
Mont
Belvieu Caverns’ LLC Agreement. The Mont Belvieu
Caverns’ Limited Liability Company Agreement (the “Caverns LLC Agreement”)
states that if Duncan Energy Partners elects to not participate in certain
projects of Mont Belvieu Caverns, then EPO is responsible for funding 100% of
such projects. To the extent such non-participated projects generate
identifiable incremental cash flows for Mont Belvieu Caverns in the future, the
earnings and cash flows of Mont Belvieu Caverns will be adjusted to allocate
such incremental amounts to EPO, by special allocation or otherwise. Under the
terms of the Caverns LLC Agreement, Duncan Energy Partners may elect to acquire
a 66% share of these projects from EPO within 90 days of such projects being
placed in service. The constructed assets will be the property of
Mont Belvieu Caverns.
The Caverns LLC Agreement also requires
the allocation to EPO of operational measurement gains and
losses. Operational measurement gains and losses are created when
product is moved between storage wells and are attributable to pipeline and well
connection measurement variances.
In November 2008, the Caverns LLC
Agreement was amended to provide that EPO would prospectively receive a special
allocation (through noncontrolling interest) of 100% of the depreciation related
to projects that it has fully funded.
Company
and Limited Partnership Agreements – DEP II Midstream
Businesses. On December 8, 2008, the DEP II Midstream
Businesses amended and restated their governing documents in connection with the
DEP II dropdown transaction. Collectively, these amendments include,
but are not limited to, (i) the payment of cash distributions in accordance with
an overall “waterfall” approach, (ii) the funding of
16
DEP
HOLDINGS, LLC
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
operating
cash flow deficits and (iii) the election by either owner to fund cash calls
associated with expansion capital projects. See Note 13 of the
December 2008 Form 8-K
Enterprise III has not yet participated
in expansion project spending with respect to the DEP II Midstream Businesses,
although it may elect to invest in existing or future expansion projects at a
later date. As a result, Enterprise GTM has funded 100% of such growth capital
spending and its Distribution Base has increased from $473.4 million at December
31, 2008 to $665.5 million at June 30, 2009. The Enterprise III
Distribution Base was unchanged at $730.0 million at June 30, 2009.
Common
Unit Purchase Agreement – June 2009 equity offering. Pursuant
to a common unit purchase agreement, Duncan Energy Partners repurchased
8,000,000 of our common units beneficially owned by EPO in June
2009. Duncan Energy Partners repurchased an additional 943,400 of our
common units beneficially owned by EPO in July 2009. The repurchase
of common units beneficially owned by EPO was reviewed and approved by both our
and EPGP’s respective ACG Committees. See Note 10 for additional
information regarding Duncan Energy Partners’ June 2009 equity
offering.
Relationship
with EPCO
We have no employees. Substantially all
of Duncan Energy Partners’ operating functions and general and administrative
support services are provided by employees of EPCO pursuant to the
ASA. We, Enterprise Products Partners, Enterprise GP Holdings, TEPPCO
Partners, L.P. (“TEPPCO”) and our respective general partners are among the
parties to the ASA.
Relationship
with Evangeline
Evangeline has entered into a natural
gas purchase contract with Acadian Gas that contains annual purchase provisions.
The pricing terms of the purchase agreement are based on a monthly
weighted-average market price of natural gas (subject to certain market index
price ceilings and incentive margins) plus a predetermined margin.
Duncan
Energy Partners has furnished letters of credit on behalf of Evangeline’s debt
service requirements. The outstanding letters of credit totaled $1.0
million at June 30, 2009.
Relationship
with Energy Transfer Equity
In May
2007, Enterprise GP Holdings acquired equity method investments in, and
therefore is a related party to, Energy Transfer Equity and its general
partner. As a result of the common control of Enterprise GP Holdings
and us, Energy Transfer Equity became a related party to us.
Relationship
with TEPPCO
Beginning in 2008, Mont Belvieu Caverns
commenced providing NGL and petrochemical storage services to
TEPPCO. For the period January 2007 through March 2008, we leased
from TEPPCO an 11-mile pipeline that was part of our South Texas NGL
System. We discontinued this lease during the first quarter of 2008
when we completed the construction of a parallel pipeline.
Note
13. Commitments and Contingencies
Litigation
On
occasion, we are named as a defendant in litigation relating to our normal
business operations, including regulatory and environmental
matters. Although we insure against various business risks to the
extent we believe it is prudent, there is no assurance that the nature and
amount of such insurance will be adequate, in every case, to indemnify us
against liabilities arising from future legal proceedings as a
result
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of our ordinary business
activities. We are not aware of any litigation, pending or
threatened, that may have a significant adverse effect on our financial
position.
Redelivery
Commitments
We
transport and store natural gas and NGLs and store petrochemical products for
customers under various contracts. These volumes are (i) accrued as
product payables on our Unaudited Condensed Consolidated Balance Sheet, (ii) in
transit for delivery to our customers or (iii) held at our storage facilities
for redelivery to our customers. We are insured against any physical
loss of such volumes due to catastrophic events. Under the terms of
our NGL and petrochemical product storage agreements, we are generally required
to redeliver volumes to the owner on demand. At June 30, 2009, NGL
and petrochemical products aggregating 27.2 million barrels were due to be
redelivered to their owners along with 7.3 TBtus of natural gas.
Regulatory
Matters
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 Duncan Energy Partners’ business, financial position or demand
for its operations.
Contractual
Obligations
Scheduled
maturities of long-term debt. With the
exception of routine fluctuations in the balance of our Revolving Credit
Facility, there have been no significant changes in our scheduled maturities of
long-term debt since those reported in our December 2008 Form 8-K.
Operating
lease obligations. We lease certain property, plant and
equipment under noncancelable and cancelable operating leases. Our
significant lease agreements involve (i) the lease of underground caverns for
the storage of natural gas and NGLs, primarily our lease for the Wilson natural
gas storage facility and (ii) land held pursuant to right-of-way
agreements. There
have been no material changes in our operating lease commitments since those
reported in our December 2008 Form 8-K.
Purchase
obligations. There have been
no material changes in our consolidated purchase obligations since those
reported in our December 2008 Form 8-K.
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
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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 million per occurrence for named windstorm events
compared to $175 million per occurrence in the prior year. With
respect to offshore assets, the windstorm deductible increased significantly
from $10.0 million per storm (with a one-time aggregate deductible of $15.0
million) to $75.0 million per storm. EPCO’s offshore program
currently provides $100 million in the aggregate compared to $175 million in the
aggregate for the prior year. For non-windstorm events, EPCO’s
deductible for both onshore and offshore physical damage remained at $5.0
million per occurrence.
Business
interruption coverage in connection with a windstorm event remained unchanged
for onshore assets, but was eliminated for offshore assets. Onshore
assets covered by business interruption insurance must be out-of-service in
excess of 60 days before any losses from business interruptions will be
covered. Furthermore, EPCO will now absorb 50% of the first $50.0
million of any loss in excess of deductible amounts for our onshore
assets.
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