Enterprise
GP Holdings L.P.
1100
Louisiana, 10th
Floor
Houston,
Texas 77002
December
1, 2008
Ms.
Jennifer Thompson
Accounting
Branch Chief
Division
of Corporate Finance
United
States Securities and Exchange Commission
100 F
Street, N.E.
Washington,
D.C. 20549-0404
| Re: | Enterprise GP Holdings L.P. (the “Registrant”) |
| Form 10-K for the Fiscal Year Ended December 31, 2007 | |
| Filed February 29, 2008 | |
| File No. 1-32610 |
Dear Ms.
Thompson:
In this letter, we are setting forth
the response of the Registrant to the comments contained in the letter from the
staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”)
dated November 4, 2008 (the “Comment Letter”), with respect to the above
captioned filing. For your convenience, we have repeated the Staff’s
comments as set forth in the Comment Letter. The Registrant’s
response to each comment is set forth immediately below the text of the
applicable comment.
Unless the context requires otherwise,
references to “we,” “us,” “our,” “Partnership,” and similar expressions are
intended to mean the business and operations of Enterprise GP Holdings L.P. and
its consolidated subsidiaries. References to “Parent Company” mean Enterprise GP
Holdings L.P., individually as the parent company, and not on a consolidated
basis.
References to “TEPPCO” mean TEPPCO
Partners, L.P. and its consolidated subsidiaries. References to
“TEPPCO GP” refer to Texas Eastern Products Pipeline Company, LLC, which is the
general partner of TEPPCO.
References to “DFI” mean Duncan Family
Interests, Inc. and “DFIGP” mean DFI GP Holdings,
L.P. References to “EPCO” mean EPCO, Inc. DFI
and DFIGP are private company affiliates of EPCO that are under common control
with us.
Form 10-K for the Fiscal
Year Ended December 31, 2007
Financial Statements for the
Year Ended December 31, 2007
Note
1. Partnership Organization and Basis of Presentation, page
92
1. We
have reviewed your response to comments 3 and 5 in our letter dated August 29,
2008. We read on page 94 of your Form 10-K that the economic benefit
of the TEPPCO IDRs for periods prior to December
2006 equals the post-December 2006 maximum IDR threshold of 25% plus the
incremental amount of benefit that would have been received from the 4.4 million
TEPPCO common units that you acquired with the TEPPCO GP units in May
2007. Based on your 10-K disclosures and your response to our prior
comment, it appears that your recast consolidated financial statements reflect
IDR payments at the current 25% maximum threshold for all periods presented
rather than reflecting IDR payments at the amounts that were actually paid in
the prior years, and it appears that the difference between the actual IDR
payments
Division
of Corporate Finance
December
1, 2008
Page 2
and the
current 25% maximum threshold has been treated as though it were cash
distributions made to common unitholders for all periods. If our
understanding is correct, it remains unclear to us why your recast historical
financial statements would not reflect 100% of the actual historical IDR
payments made by TEPPCO to DFI and DFIGP as reductions to your
equity. Please tell us how this accounting is consistent with
accounting for pooling of interests, as it is unclear to us that pooling of
interests accounting would permit you to retroactively restate prior years as
though the IDR maximum threshold had always been 25% rather than combining the
historical financial statements of Enterprise and TEPPCO such that the December
2006 amendment would not impact the financial statements prior to December 2006,
and tell us the specific accounting guidance that you are relying upon in your
accounting for these IDR payments prior to December
2006. Alternatively, if our understanding is incorrect, please
explain this matter to us in more detail, and tell us why the cash distributions
to former owners of TEPPCO GP interests reflected in your financial statements
do not agree to the IDR payments made to GP unitholders in TEPPCO’s stand-alone
financial statements, as we assume these IDR payment amounts should be the
same.
Response
With respect to our investments in
TEPPCO GP and TEPPCO, it is important to understand the transactions that took
place from February 2005 (when TEPPCO GP first became part of the common control
affiliated group) to May 2007 (when we acquired 100% of TEPPCO GP including the
25% incentive distribution right (“IDR”) tier and 4.4 million limited partner
(“LP”) units of TEPPCO). The following information summarizes the key
transactions during this period:
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|
§
|
In
February 2005, private company affiliates of ours purchased from a third
party 100% of TEPPCO GP, including related IDR tiers and
approximately 2.5 million TEPPCO LP
units.
|
|
|
§
|
In
December 2006, upon approval by TEPPCO’s LP unitholders, TEPPCO’s 50% IDR
tier (which was held by our common control affiliate) was eliminated, and
in exchange our affiliate was issued 14.1 million LP units with an equal
value. The 50% IDR tier entitled TEPPCO GP to 50% of TEPPCO’s
quarterly cash distributions that exceeded $0.45 per LP unit paid by
TEPPCO. The 25% IDR tier was not changed. It remains
at 25% of TEPPCO’s quarterly cash distributions that exceed $0.325 per LP
unit paid by TEPPCO. For the period from February 2005
through December 2006, the cash distributions and earnings received by our
affiliate in connection with the 50% IDR tier are presented as to the cash
distributions and earnings that would have been received if our affiliate
had instead owned the 14.1 million LP units throughout the entire
period. Accordingly, the exchange transaction merely changed
the legal form through which TEPPCO made distributions and earnings
allocations to TEPPCO GP with respect to these amounts. The exchange
transaction did not impact TEPPCO’s overall distributions or earnings
allocations to its outside (public) LP
unitholders.
|
|
|
§
|
In
May 2007, we acquired 100% of TEPPCO GP, the remaining IDR tiers and
4.4 million of the 14.1 million LP units discussed in the previous bullet
point from common control affiliates. This acquisition
transaction was accounted for as a reorganization of entities under common
control in a manner similar to a pooling of interests. Our
historical consolidated financial statements were recast to present TEPPCO
GP as if it had been combined for all periods of common ownership (i.e.,
since February 2005).
|
In
connection with recasting our financial statements, we presented the cash
distributions and earnings attributable to all of the interests we acquired in
May 2007 (100% of TEPPCO GP, including the remaining IDR tiers and 4.4 million
LP units) for all periods during which these interests were held by our common
control affiliates. Specifically, with respect to the 4.4 million LP
units that are the subject of this comment, the ownership interest conveyed by
these LP units, regardless of whether classified as IDRs (prior to the December
2006 exchange) or LP units received in May 2007, must be reflected in all
periods for which common control existed. We confirm to the Staff
that, even if we had not given effect to the
Division
of Corporate Finance
December
1, 2008
Page 3
December
2006 exchange transaction on a retrospective basis, we would have reflected the
same amount of cash distributions and earnings related to our TEPPCO interests
in our recast financial statements (this is demonstrated in the following
paragraph). By giving retrospective effect to the December 2006
exchange, the impact to our financial statements was to reflect the legal form
through which distributions and earnings will be made on a prospective basis as
if that legal form had been in place for all periods presented.
For
illustration purposes only and to further clarify TEPPCO’s December 2006
exchange transaction, an alternative way to view the 50% IDR tier exchange
transaction is to assume the December 2006 exchange of 14.1 million LP units for
the 50% IDR tier did not occur. Instead, assume that the full 50% IDR
tier amounts would still be in existence for all periods
presented. In such a hypothetical assumption, we would have acquired,
by issuing our Partnership equity as consideration for this common control
transaction, a 31.2% interest (4.4 million LP units divided by 14.1 million LP
units) in the 50% IDR tier. The cash distributions and earnings
related to that pro rata portion of the 50% IDR tier would have been included in
our financial statements for all comparative periods. The remaining
68.8% interest in the 50% IDR tier not acquired by us would have been reflected
in our recast consolidated statements as minority interests (just as the 9.7
million LP units still held by our common control affiliates are presented as
minority interests).
As such,
the ownership interests acquired by us in May 2007, whether viewed as a 31.2%
ownership of the 50% IDR tier (based upon the hypothetical example above), or as
4.4 million LP units actually acquired, our recast consolidated financial
statements reflect 100% of the actual historical 50% IDR tier cash distributions
paid and earnings as attributed to: (i) our 31.2% ownership of the
50% IDR tier (equal to the 4.4 million LP units) and (ii) the other 68.8% held
by our common control affiliates as minority interest ownership (equal to the
9.7 million LP units issued to such affiliates). Our
consolidated net income included TEPPCO earnings attributed to the 4.4 million
LP units. Likewise, our consolidated minority interest expense
included TEPPCO earnings allocated to the 9.7 million LP
units. Regardless of the form of the interest acquired, whether as LP
units or a percentage of the 50% IDR tier, we presented such ownership interests
on an as-if-pooled basis for all periods presented.
We
believe the accounting and presentation in our recast consolidated financial
statements is appropriate. Our approach provides a consistent and
comparative depiction of our Partnership equity structure related to the
consideration given in the acquisition and the related allocation of income,
cash receipts, and cash distributions related to our current ownership interests
in TEPPCO GP, including related IDR tiers, and the 4.4 million LP
units. In our judgment, such important financial disclosure is
compliant with applicable accounting pronouncements (as discussed below) and
provides readers with realistic and relevant comparative financial information
that is reflective of the business purpose of the underlying
transactions.
We
believe the accounting literature supports our accounting and reporting of the
transactions in several respects, as summarized below:
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|
§
|
According
to APB 16, Business
Combinations, paragraph 57, “financial statements and financial
information of the separate companies presented for prior years should
also be restated on a combined basis to furnish comparative
information.” In addition, according to SFAS 141
paragraphs D11-D18, transactions between entities under common control are
recorded at historical carryover basis. Specifically, paragraph
D17 states, in part, “Financial statements and financial information
presented for prior years should also be restated to furnish comparative
information.” Regardless of the form of the transaction (i.e., LP units or
proration of the 50% IDR tier), we, in effect, acquired in May 2007 a
31.2% (or 4.4/14.1) interest in the 50% IDR tier cash flows as illustrated
above. Our recast financial statements reflect the underlying
TEPPCO interests acquired and our Partnership limited partner equity
issued as if they were owned and in effect for all periods of common
ownership.
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Division
of Corporate Finance
December
1, 2008
Page 4
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§
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Our accounting and presentation also aligns with SFAS 128, Earnings per Share, paragraph 54, which requires the computations of basic and diluted EPS to be adjusted retroactively for all periods presented to reflect a change in capital structure. |
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§
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Also,
our recast presentation and disclosures related to the acquired 4.4
million TEPPCO LP units follows ARB 43 Chapter 2 – Form of
Statements, A. Comparative Financial Statements, paragraph 2, which
states, in part, “If, because of reclassifications or for other reasons,
changes have occurred in the manner of or basis for presenting
corresponding items for two or more periods, information should be
furnished which will explain the change. This procedure is in
conformity with the well recognized principle that any change in practice
which affects comparability should be disclosed.” In addition,
ARB 43, paragraph 3 indicates, “It is necessary that prior-year figures
shown for comparative purposes be in fact comparable with those shown for
the most recent period.”
|
We note
your comment and will review our disclosures regarding the basis of presentation
of the December 2006 exchange in future filings.
Lastly,
the following table presents a reconciliation of the IDR payments made by TEPPCO
as reflected in their standalone financial statements to the IDR payments
received by the Parent Company (dollars in thousands).
|
For
the Years Ended December 31,
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||||||||||||
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2007
|
2006
|
2005 (2)
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||||||||||
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General
partner IDRs paid by TEPPCO:
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||||||||||||
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General
partner IDRs paid by TEPPCO to TEPPCO GP (1)
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$ | 43,274 | $ | 77,887 | $ | 69,555 | ||||||
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Distributions
retained by TEPPCO GP
|
(64 | ) | (2 | ) | (9 | ) | ||||||
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Total
general partner IDRs paid to owners of TEPPCO
GP
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$ | 43,210 | $ | 77,885 | $ | 69,546 | ||||||
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General
partner IDRs received from TEPPCO GP:
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||||||||||||
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IDRs
equivalent to 4.4 million LP units of TEPPCO (3)
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$ | -- | $ | 10,869 | $ | 7,463 | ||||||
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IDRs
through first 25% Tier (3)
|
43,210 | 43,077 | 29,576 | |||||||||
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Total
IDRs received by the Parent Company
|
43,210 | 53,946 | 37,039 | |||||||||
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IDRs
retained by private company affiliates of EPCO
equivalent
to 9.7 million LP units of TEPPCO
(i.e.
distributions paid to minority interests) (4)
|
-- | 23,939 | 16,437 | |||||||||
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Total
general partner IDRs received from TEPPCO GP
|
$ | 43,210 | $ | 77,885 | $ | 53,476 | ||||||
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(1)
See
TEPPCO 2007 Form 10-K, page F-50 for amounts.
(2)
The
difference between general partner IDRs paid to owners of TEPPCO GP and
general partner IDRs the Parent Company received from TEPPCO GP is due to
$16.1 million of IDRs that were paid to former third party owners of
TEPPCO GP during the first quarter of 2005.
(3)
See
the Partnership’s 2007 Form 10-K, page 187 for
amounts.
(4)
See
the Partnership’s 2007 Form 10-K, page 103 for 2006 and 2005
amounts. In our filing, we characterized these amounts as
distributions to “related party former owners of TEPPCO
GP.”
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2. We
note from your response to comment 3 in our letter dated August 29, 2008 that
DFI and DFIGP reduced the amount of the IDR intangible asset and recorded an
offsetting increase to goodwill related to TEPPCO at the time of the December
2006 amendment to TEPPCO’s IDR agreement. Please explain to us in
more detail why DFI and DFIGP, and as a result of using accounting similar to a
pooling of interests, why you, increased goodwill by an offsetting amount when
the top IDR payment tier was eliminated in exchange for additional TEPPCO common
units, including telling us the accounting guidance you are relying
upon. Additionally, similar to comment 1 above, explain to us your
basis in GAAP for reflecting this change in goodwill for all periods presented,
since you appear to have retroactively restated prior periods as though the
current 25% maximum IDR threshold were in existence at the time that DFI and
DFIGP originally acquired TEPPCO’s GP units and related IDRs.
Division
of Corporate Finance
December
1, 2008
Page 5
Response
TEPPCO GP was originally purchased in
February 2005 for approximately $1.1 billion in cash by common control
affiliates. Similar to Response 1 above, it is important to
understand the transactions that took place from February 2005 to May
2007. The following information summarizes the key transactions
during this period:
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|
§
|
In
February 2005, private company affiliates of ours purchased from a third
party 100% of TEPPCO GP, including related IDR tiers and approximately 2.5
million TEPPCO LP units. The purchase price was allocated to the
underlying fair value of the assets acquired and liabilities assumed,
which include property, plant and equipment, amortizable intangible
assets, the TEPPCO IDRs and goodwill. We recorded the IDRs as a
$1.1 billion indefinite life intangible asset and assigned $490 million of
this amount to the maximum 50% IDR tier (i.e., the top 25% of IDRs that
were eliminated in December 2006). We assigned the remainder of the $1.1
billion to the other IDR tiers.
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§
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In
December 2006, TEPPCO’s LP unitholders approved an exchange transaction
with TEPPCO GP whereby the 50% IDR tier was eliminated and replaced with
14.1 million of TEPPCO LP units (see comment 1 above). As a
result of the December 2006 exchange event, our private company affiliates
reclassified $490 million of the carrying basis of the IDR intangible
asset (representing that portion of the 50% IDR tier that was eliminated)
to property, plant and equipment, amortizable intangible assets and
goodwill based on the underlying fair value of the assets and liabilities
of TEPPCO. Of the $490 million, approximately $477 million was
reclassified to goodwill. Management attributes this goodwill
to the future benefits we may realize from our investments in TEPPCO and
TEPPCO GP. Specifically, we will benefit from the cash
distributions paid by TEPPCO with respect to TEPPCO GP’s 2% general
partner interest in TEPPCO and ownership of its LP
units.
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§
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In
May 2007, we acquired 4.4 million of the 14.1 million TEPPCO LP units in a
common control transaction. As discussed in the previous bullet
point, the value attributable to the 14.1 million TEPPCO LP units was
assigned to property, plant and equipment, amortizable intangible assets
and goodwill. As a result, we recorded on our balance sheet
31.2% (i.e. 4.4/14.1) of such property, plant and equipment, amortizable
intangible assets and goodwill. The carrying basis of these
assets was allocated back to the date of the original common control
purchase in February 2005 in our recast comparative financial
statements.
|
Similar
to our response to Comment 1, we have consistently applied the carryover basis
in the various TEPPCO interests we acquired in May 2007 in our recast
comparative consolidated financial statements. Our recast
presentation reflects the nature and character of our current ownership
interests in TEPPCO. We believe such comparative information provides a
benchmark for comparison to our current and anticipated income and cash
distributions from our TEPPCO investments. This characterization
follows the spirit and intent of the fundamental accounting guidance and results
in realistic, relevant and comparable financial disclosures with respect to such
common control transactions.
We supplementally note that both
goodwill and the IDR intangible assets have similar balance sheet
classifications. Both assets are not amortized and there have been no
differences in the impairment testing results. Regardless of balance sheet
presentation, the reclassification of that portion of the IDR intangible asset
attributed to the eliminated IDRs to goodwill had no impact on our historical
results of operations.
Division
of Corporate Finance
December
1, 2008
Page 6
Note
14. Intangible Assets and Goodwill, page 145
3. We
have reviewed your response to comment 10 in our letter dated August 29,
2008. As an indeterminable life is not the equivalent of an
indefinite life, please provide us with additional information regarding how you
determined the IDR intangible assets to have indefinite lives. In
particular, since TEPPCO and ETP cannot guarantee that they will have sufficient
available cash to pay a specific level of cash distributions to their
unitholders and available cash is dependent on numerous factors, such as debt
service requirements, capital expenditures, acquisitions, product costs, prices,
and volumes, the level of competition, fluctuations in working capital needs,
weather, the ability to access capital markets, and cash reserves established by
the general partner, please tell us in further detail how you determined that
there is no foreseeable limit to the period over which these assets are expected
to contribute to your cash flows and how you considered these risks when
calculating the fair value of this asset. In supporting your
conclusion, provide us with additional information regarding your application of
the income approach in determining the fair value of the
IDRs. Explain the specific assumptions used in your valuation, such
as discount rates, growth rates, and forecasted periods, discuss how they were
determined and clarify how you concluded that TEPPCO and ETP will continue to
pay incentive cash distributions for the foreseeable future at amounts at least
equal to current distributions. Please ensure you discuss the
propriety of using a perpetual growth model in estimating terminal value, which,
we assume, estimates that cash flows beyond the terminal year will grow at a
constant rate forever. Also, tell us if you utilized a valuation firm
in determining the fair value of the IDRs. Finally, please provide us
with a detailed explanation of how you determine and measure impairment for the
IDR intangible assets.
Response
Master limited partnerships (“MLPs”)
have two classes of ownership – a general partner and limited
partners. As equity holders in an MLP, both classes of ownership are
entitled to an allocable share of declared cash distributions. In
addition, the general partner often has a contractual right to incentive
distributions, which increase its percentage interest in the MLP’s total cash
distribution. These IDRs are determined and paid based on the level
of cash distributions declared by the MLP in accordance with specified
distribution rate target levels.
The Parent Company owns 100% of the
membership interests of TEPPCO GP, which includes TEPPCO GP’s contractual right
to the IDRs of TEPPCO. The Parent Company accounts for the IDRs of
TEPPCO as an indefinite-life intangible asset. Similarly, the Parent
Company owns common units representing limited partnership interests in Energy
Transfer Equity, L.P. (“Energy Transfer Equity”) and accounts for this
investment using the equity method of accounting. Energy Transfer
Equity, through its 100% membership interest in the general partner of Energy
Transfer Partners, L.P. (“ETP”), owns the IDRs of ETP. The Parent
Company’s investment in Energy Transfer Equity exceeds its share of the
historical cost of the underlying net assets of Energy Transfer
Equity. We attribute a component of this excess cost to the IDRs of
ETP.
We recorded the TEPPCO IDRs on our
balance sheet based on our estimate of the fair value for this contractual right
to receive future cash flows as of February 2005 (the date our common control
affiliates initially acquired interests in TEPPCO and TEPPCO GP). The
amount of excess cost we attribute to the ETP IDRs is based on our estimate of
the fair value for this contractual right as of May 2007 (the date that the
Parent Company acquired interests in Energy Transfer Equity and its general
partner, LE GP, LLC). We used Ernst & Young LLP’s valuation
services group to assist us in the evaluation of fair value for both the TEPPCO
IDRs and the ETP IDRs.
IDR
Valuation. An application of the Income Approach was used to
directly estimate fair value of the TEPPCO IDRs and ETP IDRs, namely we used a
distribution discount model. The distribution discount model
estimates fair value by measuring the present worth of an expected future cash
flow stream. Our cash flow forecast and application of the
distribution discount model to estimate fair value of the TEPPCO IDRs and ETP
IDRs involved two steps.
Division
of Corporate Finance
December
1, 2008
Page 7
First, cash distributions payable to
the common unit holders (i.e. the limited partners) of TEPPCO and ETP were
forecast over an approximate 60-year discreet forecast horizon. In
the near-term (i.e. approximately 1 to 5 years from the respective valuation
dates), estimated cash distribution rates reflect analyst
expectations. Beyond the near-term, TEPPCO’s and ETP’s cash
distributions per common unit were forecast to increase at a 2% annual
distribution growth rate over the forecast horizon. The annual
distribution growth rate represents a subjective, conservative estimate based on
such factors as past distributions, analyst expectations and input from Ernst
& Young LLP. The Gordon Growth Model (i.e. a perpetual growth
model) was applied to estimate a terminal value at the end of the discreet
forecast horizon.
The following table summarizes the key
assumptions used to forecast cash distributions payable to the limited partners
of TEPPCO and ETP:
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TEPPCO
|
ETP
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||
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Price
per common unit on valuation date
|
$43.00
|
$62.20
|
|
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Declared
quarterly cash distribution rate per common unit on valuation
date
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$0.6625
|
$0.7688
|
|
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Estimated
annual distribution growth rate
|
2.00%
|
2.00%
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|
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Discount
rate
|
8.50%
|
8.69%
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Outstanding
common units on valuation date (in millions)
|
63.000
|
136.977
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The discount rates stated in the
preceding table equate the present value of our cash flow forecast to the market
price of TEPPCO’s and ETP’s respective common units on the valuation
date. Stated differently, our forecast of the cash distributions
payable to the limited partners of TEPPCO and ETP over a discreet forecast
horizon plus the terminal value estimate discounted at the rates referenced
above represents the market price of TEPPCO’s and ETP’s respective common units
on the valuation date. As such, the discount rates represent the cost
of equity for TEPPCO and ETP as of the respective valuation
dates. The estimated annual distribution growth rates and discount
rates noted in the table above were also used as assumptions in the Gordon
Growth Model to estimate terminal values.
Division
of Corporate Finance
December
1, 2008
Page 8
In the second step of the analysis,
total cash distributions to be paid by TEPPCO and ETP over the forecast horizon
were estimated. This includes cash distributions to the respective
general partners before incentive distributions as well as incentive
distributions. The relative level of cash distributions paid by
TEPPCO and ETP to their respective limited partners and general partners is
derived mathematically based on estimated cash distribution rates per common
unit (estimated in Step 1 above) and contractually stated distribution rate
target levels summarized in the following table:
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Cash
Distributions Paid by TEPPCO
|
||||
|
98%
Limited
Partner
Equity
Interest
|
2%
General
Partner
Equity
Interest
|
Incentive
Distribution
Rights
|
Distribution
Target
$/Common
unit
|
|
|
Tier
1
|
98%
|
2%
|
0%
|
$0.2750
|
|
Tier
2
|
85%
|
2%
|
13%
|
$0.3250
|
|
Tier
3
|
75%
|
2%
|
23%
|
$0.4500
|
|
Tier
4
|
50%
|
2%
|
48%
|
|
|
Cash
Distributions Paid by ETP
|
||||
|
98%
Limited
Partner
Equity
Interest
|
2%
General
Partner
Equity
Interest
|
Incentive
Distribution
Rights
|
Distribution
Target
$/Common
unit
|
|
|
Tier
1
|
98%
|
2%
|
0%
|
$0.2750
|
|
Tier
2
|
85%
|
2%
|
13%
|
$0.3175
|
|
Tier
3
|
75%
|
2%
|
23%
|
$0.4125
|
|
Tier
4
|
50%
|
2%
|
48%
|
|
We estimated the cash flow stream
associated with the IDRs of TEPPCO and ETP based on the percentages referenced
in the preceding table applied to our forecast of total cash distributions for
TEPPCO and ETP. Such cash flows were estimated over a discreet
forecast horizon of approximately 60 years. A terminal value estimate
was made at the end of the discreet forecast horizon using the Gordon Growth
Model and a cash flow growth rate of 2%. The summation of our cash
flow forecasts and terminal values were discounted at TEPPCO’s and ETP’s
respective cost of equity as described above. The present worth of
these cash flow streams were summed to arrive at our estimate of fair value for
the TEPPCO IDRs and ETP IDRs.
Propriety
of Perpetual Growth Model and Risk Assumptions. As noted
above, cash distributions paid pursuant to IDRs are determined by (i) an MLP’s
cash distribution rate per common unit and (ii) contractually stated
distribution target levels. In this nature, cash flow streams
associated with IDRs bear the same legal, regulatory, contractual, competitive,
economic and other general and company-specific risks as do the distributions to
limited partners of an MLP. These risk factors are considered by
investors when pricing publicly traded common units of an MLP in an orderly and
active market. Units of equity in a corporation or MLP are often
valued using a dividend discount model (or distribution discount model with
respect to an MLP) with terminal value estimates derived using a perpetual
growth model. In this regard, valuation practitioners make the
underlying assumption that the entity will remain a going concern and continue
to pay dividends or distributions indefinitely. Given this underlying
assumption, regulatory, economic and company-specific factors affect the value
of cash flows paid to equity holders but not the life of such cash
flows.
Our estimate of fair value for
the IDRs of TEPPCO and ETP relies on a forecast of each entity’s respective cash
distribution rates per common unit as well as the cost of equity for each
entity. The assumptions used in our cash flow forecast reflect our
expectations as of the respective valuation dates as well as analyst
expectations and input from Ernst & Young LLP. The use of a
perpetual growth rate to forecast cash flows in a distribution discount model
beyond the terminal year is consistent with industry practice. Given
our forecast of the cash distributions payable to the limited partners of TEPPCO
and ETP,
Division
of Corporate Finance
December
1, 2008
Page 9
we solved
for the discount rate that equates the perpetual cash distribution forecast to
the market price of TEPPCO’s and ETP’s common units on the respective valuation
dates. Such a discount rate (or cost of equity) reflects all risks
that market participants would evaluate when investing in the common units of
TEPPCO and ETP.
It is important to note that our
perpetual growth assumption matches the discount rate used to estimate fair
value of the TEPPCO IDRs and ETP IDRs. A lower cost of equity would
have been implied for TEPPCO and ETP had we used a lower or negative growth rate
to forecast each entity’s respective cash distribution rates per common
unit. In our judgment, the assumption of a lower cost of equity would
have been inconsistent with observable market information as of the respective
valuation dates.
Finally, we used several applications
of the Market Approach to fair value to corroborate our Income Approach fair
value estimates for the IDRs of TEPPCO and ETP. Specifically, we
analyzed indications of fair value for the TEPPCO IDRs and ETP IDRs as implied
by (i) the relative common unit prices of Energy Transfer Equity and ETP, (ii)
similar transactions, and (iii) observed market yields on other publicly traded
partnerships that own IDRs. The results of our Market Approach
analysis corroborated our fair value estimates for the IDRs of TEPPCO and ETP
and support the use of a perpetual growth model to estimate cash flows beyond a
terminal year.
Indefinite
Life and Impairment Testing. Based on information as of the
respective valuation dates, and currently, we have not identified factors that
would limit TEPPCO’s and ETP’s ability to pay cash distributions to their
respective limited partners. As stated in response to comment 10 in
our letter to the Staff dated September 11, 2008, we considered all pertinent
factors including legal, regulatory, contractual, competitive, economic, and
other factors (including demand for services in the midstream energy sector)
that may indicate a limit to the useful life of the TEPPCO IDRs and ETP
IDRs. In the absence of evidence to the contrary, we expect TEPPCO
and ETP to pay cash distributions to their respective limited partners for an
indefinite period of time. Therefore, we forecast these cash
distributions into perpetuity based on available information and accepted
industry practice. Based on our forecast of TEPPCO’s and ETP’s future
cash distributions to limited partners and each entity’s contractually stated
distribution rate target levels, we concluded that TEPPCO and ETP will continue
to pay incentive cash distributions in accordance with their respective
partnership agreements for the foreseeable future in amounts at least equal to
current distributions.
Our consolidated balance sheet reflects
an indefinite-life intangible asset we recorded in connection with the TEPPCO
IDRs. In accordance with paragraph 17 of SFAS 142, we will test our
IDR intangible asset for impairment annually or more frequently if events or
changes in circumstances indicate impairment. The impairment test
shall consist of a comparison of the intangible asset’s fair value with its
carrying value. If the carrying value of our IDR intangible asset
exceeds its fair value on the testing date, we will record an impairment loss in
the amount equal to that excess. Fair value of the IDR intangible
asset will be measured for impairment testing purposes using the methodology
described above initially employed to value the asset. Changes in
legal, regulatory, contractual, competitive, economic and other general and
company-specific factors affect the fair value of our IDR intangible
asset. Consideration will be given to these factors as of the
relevant measurement date when estimating fair value of our IDR intangible asset
for impairment testing purposes.
Changes in legal, regulatory,
contractual, competitive, economic and other general and company-specific
factors may also affect the economic useful life of our IDR intangible
asset. As such, and in accordance with paragraph 16 of SFAS 142, we
will evaluate the remaining useful life of our IDR intangible asset each
reporting period to determine whether events and circumstances continue to
support an indefinite useful life. We will incorporate observable
active market data to the extent possible when evaluating our indefinite useful
life assumption. If we subsequently determine that our IDR intangible
asset has a finite useful life as a result of events or changes in
circumstances, we will test our asset for impairment and amortize it
prospectively.
Division
of Corporate Finance
December
1, 2008
Page 10
Our consolidated balance sheet also
reflects the Parent Company’s investments in Energy Transfer Equity and LE GP,
LLC, which include related excess cost amounts we attribute to the IDRs of
ETP. We monitor the underlying business fundamentals of our
investments in unconsolidated affiliates on a quarterly basis and test
equity-method investments, including related excess cost amounts, for impairment
when events or changes in circumstances indicate that there is a loss in value
of the investment that is other than a temporary decline. Examples of
such circumstances include changes in the regulatory environment and/or a
long-term adverse change in the entity’s industry that would impair the entity’s
ability to make cash distributions similar to current amounts. In
accordance with paragraph 19(h) of APB 18, we will evaluate and recognize an
impairment charge to the extent that the Parent Company’s investment balance in
Energy Transfer Equity and LE GP, LLC experiences a loss in value that is
other-than-temporary.
*
* * * *
In
connection with responding to the Staff’s comments, the Registrant acknowledges
that:
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it
is responsible for the adequacy and accuracy of disclosures in its
filings;
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Staff
comments or changes to disclosures in response to Staff comments do not
foreclose the Commission from taking any action with respect to its
filings; and
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it
may not assert Staff comments as a defense in any proceeding initiated by
the Commission or any person under the federal securities laws of the
United States.
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Please
direct any questions that you have with respect to the foregoing responses to
the undersigned at (713) 381-6545 (direct line) or (713) 381-6938
(fax).
| Regards, | ||
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/s/
Michael J.
Knesek
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| Name: | Michael J. Knesek | |
| Title: | Senior Vice President, Controller and | |
| Principal Accounting Officer of | ||
| EPE Holdings LLC, general partner of | ||
| Enterprise GP Holdings L.P. | ||
| cc: | Dr. Ralph S. Cunningham |
| W. Randall Fowler | |
| Richard H. Bachmann | |
| Michael Hanson | |
| Phil Neisel | |
|
David
Buck (Andrews Kurth)
|