Enterprise
GP Holdings L.P.
1100
Louisiana, 10th
Floor
Houston,
Texas 77002
September
11, 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 August 29, 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,” 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 “Enterprise Products
Partners” mean Enterprise Products Partners L.P. and its consolidated
subsidiaries.
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.
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References to “Energy Transfer Equity”
mean Energy Transfer Equity, L.P. and its consolidated subsidiaries, which
includes Energy Transfer Partners, L.P. (“ETP”). On May 7, 2007, the
Parent Company acquired non-controlling interests in both Energy Transfer Equity
and its general partner.
Form 10-K for the Fiscal
Year Ended December 31, 2007
General
1. Please
consider whether the below comments should also be applied to your public
subsidiaries.
Response
We have considered whether your
comments apply to our public subsidiaries. In future filings, we will
revise our disclosures as noted in responses to Comments 4, 8, 11 and
12.
Management’s Discussion and
Analysis of Financial Condition and Results of Operations
Results of Operations, page
57
2. We
note that you have quantified cost of sales by segment in Note 10 to your
financial statements. We also note that cost of sales accounts for
the vast majority of each segment’s total operating costs and
expenses. Please consider revising your analysis of expenses to
separately address changes in cost of sales from changes in your other operating
costs and expenses. In this regard, we assume that changes in cost of
sales are more directly related to changes in your revenues, while other
operating expenses are more fixed, so we assume that the underlying drivers of
changes in these types of expenses will be different. Additionally,
where you list multiple factors as contributing to the change in each segment’s
operating costs and expenses, please quantify the impact of each factor where
practicable.
Response
We note your comment and will revise
our disclosures in future filings to separately address changes in cost of sales
from changes in our other operating costs and expenses. In addition,
we will, where practicable, enhance our analysis to quantify the impact of each
factor when multiple factors are listed as contributing to changes in segment
operating costs and expenses.
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Financial Statements for the
Year Ended December 31, 2007
Note
1. Partnership Organization and Basis of Presentation, page
92
3. We
note your discussion on page 94 of the impact of TEPPCO’s incentive distribution
rights (“IDRs”) on your historical financial statements. You appear
to indicate that you have reflected the receipt of TEPPCO’s IDRs in your
financial statements using a different methodology than the actual IDRs received
by DFI and DFIGP. Specifically, it appears that for IDR purposes you
have treated the LP units received in December 2006 upon amendment of TEPPCO’s
Partnership Agreement as though they are effectively a component of the GP
interest, and since you did not acquire 100% of those LP units you are
reflecting less than 100% of TEPPCO’s IDRs for periods prior to December
2006. Since the IDRs are rights of the GP interest holder, and since
you acquired 100% of the GP interest, please tell us how you considered
reflecting 100% of TEPPCO’s historical IDRs for periods prior to December
2006.
Response
Our recast consolidated financial
statements and disclosures reflect the economic impact of the May 2007 TEPPCO GP
transaction on a consistent basis across all periods prior to the December 2006
exchange event.As described in our filings, on May 7, 2007, we acquired
4,400,000 common units of TEPPCO, 100% of the membership interests of TEPPCO GP,
and the associated TEPPCO IDRs from DFI and DFIGP. We refer to
DFI and DFIGP on a collective basis as the “related party former owners of
TEPPCO GP.” DFI and DFIGP acquired TEPPCO GP and related TEPPCO
IDRs in February 2005 from a third party. Our May 2007
acquisition was accounted for at historical carrying basis as a reorganization
of ownership interests under common control in a manner similar to a pooling of
interests. As a result, our consolidated financial statements for
periods prior to May 2007 were restated to reflect the common control ownership
of TEPPCO GP and its consolidated subsidiaries, which include
TEPPCO.
Our recast consolidated financial
statements for periods prior to 2007 reflect the substance and nature of the
December 2006 exchange event, whereby TEPPCO issued 14,091,275 new common units
to TEPPCO GP on December 8, 2006 as consideration for TEPPCO eliminating the
uppermost tier (i.e., the 50% IDR tier) of its IDR
structure. Following the December 2006 exchange event, the TEPPCO
IDRs were capped at 25%. The number of common units issued to TEPPCO
GP was based on a predetermined formula that, based on the distribution rate and
the number of common units outstanding at the time of issuance, resulted in
TEPPCO GP receiving cash distributions from the newly-issued common units and
from its reduced IDRs approximately equal to the cash distributions it would
have received from its
maximum percentage interest in TEPPCO’s quarterly distributions had the 50% IDR tier not been
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eliminated. Subsequently,
DFI and DFIGP received the 14,091,275 common units, which include the 4,400,000
common units we acquired in May 2007. DFI and DFIGP retained the
remaining 9,691,275 common units.
When the 50% IDR tier was eliminated
and exchanged for TEPPCO common units, the historical carrying basis that DFI
and DFIGP attributed to this component of the IDRs was reclassified on the
balance sheet primarily to goodwill. Therefore, DFI and DFIGP’s
contribution of ownership interests in TEPPCO and TEPPCO GP was recorded by us
in periods prior to December 2006 at the historical carrying values of these
affiliates under common control.
As reflected in the minority interest
table on page 102, cash distributions paid to “Related party former owners of
TEPPCO GP” represent that portion of cash distributions paid to DFI and DFIGP
attributable to the 50% tier of IDRs retained by DFI and DFIGP following the
December 2006 exchange event. As reflected on our Statements of
Consolidated Cash Flows, “Distributions paid to former owners of TEPPCO GP”
represent the remainder of cash distributions paid to the owners of TEPPCO GP
prior to our acquisition of such interests in May 2007.
Note 2. Summary
of Significant Accounting Policies
Environmental Costs, page
97
4. We
read that future expenditures for environmental remediation are not discounted
to their present value unless the amount and timing of the expenditures are
fixed and reliably determinable. Please tell us whether any of your
recorded environmental remediation liabilities are discounted. If so,
please tell us where you have provided the disclosure provided by paragraph
161(b) of SOP 96-1 and how you determined the amount and timing of the
expenditures are fixed and reliably determinable. If none of your
recorded environmental remediation liabilities are discounted, please consider
clarifying this to your readers.
Response
None of our estimated environmental
remediation liabilities are discounted to present value since the ultimate
amount and timing of cash payments for such liabilities is not readily
determinable. As a result, the disclosures of paragraph 161(b)
of SOP 96-1 are not required. We note your comment and will revise
our Accounting Policy disclosure in future filings to clarify this current fact
for the reader.
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September
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5
Minority Interest, page
101
5. We
note your disclosures concerning minority interests on pages 101 and
102. Please explain to us in more detail what is represented by the
line titled “Related party former owners of TEPPCO GP,” and tell us how the
amounts shown for 2006 and 2005 were calculated. Also tell us whether
the line titled “Limited partners of TEPPCO” contains an allocation of earnings
for the 9.7 million LP units retained by DFI and DFIGP for periods prior to
December 2006, and if so explain why.
Response
As referenced in this section, the line
titled “Related party former owners of TEPPCO GP” represents ownership interests
in the 50% IDR tier of TEPPCO that were not owned by us prior to the December 8,
2006 exchange event - see our response to Comment
3. Specifically, minority interest amounts presented for the
“Related party former owners of TEPPCO GP” reflect the economic benefit and
carrying basis attributed to the 9,691,275 common units retained by DFI and
DFIGP from the December 2006 exchange event.
As noted in sub note (3) to the table
presenting components of minority interest expense for 2005 and 2006, the line
item titled “Limited partners of TEPPCO” does not contain an allocation of
earnings for the 9,691,275 common units as the economic benefit thereof is
included in the line item titled “Related party former owners of TEPPCO GP.”
Following the December 2006 exchange event, the earnings allocated to the
9,691,275 common units is a component of the “Limited partners of TEPPCO” line
item.
With respect to the table showing
components of distributions paid to minority interests, the 2006 and 2005
amounts presented for “Related party former owners of TEPPCO GP” are based on a
pro rata allocation of incentive distributions from the 50% IDR tier paid by
TEPPCO. The allocation was based on (i) a comparison of actual
quarterly cash distributions paid to TEPPCO GP before and after the December
2006 exchange event and (ii) the relative number of units that DFI and DFIGP
retained in connection with the December 2006 exchange event.
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With respect to the table showing
components of minority interest expense, the following schedule details how the
2005 and 2006 minority interest amounts for the “Related party former owners of
TEPPCO GP” were calculated (dollars in thousands).
|
2005
|
2006
|
|||||||
|
1.
Determine historical income allocated to IDRs
|
||||||||
|
Total
income allocated to TEPPCO GP
|
$ | 37,707 | $ | 57,405 | ||||
|
Less
2% general partner interest in TEPPCO net income
|
(2,652 | ) | (3,715 | ) | ||||
|
Income
allocated to IDRs
|
$ | 35,055 | $ | 53,690 | ||||
|
2.
Determine components of historical income allocated to
IDRs
|
||||||||
|
Income
allocated to IDRs representing the 25% tier
|
$ | 19,389 | $ | 29,696 | ||||
|
Income
allocated to IDRs representing the 50% tier (1)
|
15,666 | 23,994 | ||||||
|
Income
allocated to IDRs
|
$ | 35,055 | $ | 53,690 | ||||
|
3. Bifurcate income allocated to IDRs representing
the 50% tier
(2)
|
||||||||
|
Earnings
allocated to Parent Company (3)
|
$ | 4,892 | $ | 7,492 | ||||
|
Related
party former owners of TEPPCO GP
|
||||||||
|
(i.e.
earnings allocated to DFI and DFIGP) - (4) and (5)
|
10,774 | 16,502 | ||||||
|
Income
allocated to IDRs representing the 50% tier
|
$ | 15,666 | $ | 23,994 | ||||
|
(1) Based
on a comparison of actual quarterly cash distributions paid to TEPPCO GP
before and after the December 2006 exchange event.
(2) Pro
rata allocation based on 14,091,275 common units issued to Parent Company
and DFI/DFIGP in December 2006.
(3) Allocation
based on 4,400,000 common units issued to Parent Company.
(4) Allocation
based on 9,691,275 common units collectively issued to DFI and
DFIGP.
(5) The
amount in the supplemental table for 2005 excludes a $0.5 million loss
allocated to a third party owner of TEPPCO GP for the approximately
one-month period (i.e. January 2005) that this unrelated third party owned
TEPPCO GP. We viewed this amount as immaterial to the overall
presentation and elected to include this amount within the “Related party
former owners of TEPPCO GP” line item, which totaled $10,321 for the year
2005.
|
|||||||
Note 4. Business
Segments, page 106
6. Please
tell us how you considered the disclosure requirements of paragraph 37 of SFAS
131. In this regard, your consolidated subsidiaries appear to sell a
variety of petroleum products in addition to providing a variety of
services. Also tell us how you considered the guidance concerning
separate presentation of revenues from products versus services in Rule
5-03(b)(1) of Regulation S-X.
Response
Our consolidated subsidiaries provide a
wide variety of midstream energy services to producers and consumers of natural
gas, natural gas liquids (“NGLs”), crude oil and certain
petrochemicals. We use our integrated energy infrastructure to
gather, process, transport, store and distribute hydrocarbons
for customers. In conjunction with the operation of our
integrated assets and as an extension of the primary
services we provide to our energy industry
customers, we also purchase and sell NGLs, natural gas, crude
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September
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oil and
other hydrocarbon products. We do not manufacture or develop tangible
products for sale. Therefore, we believe our presentation of revenues
on the Statements of Consolidated Operations is consistent with Rule 5-03(b)(1)
of Regulation S-X.
The Registrant’s primary business
is the ownership of general and limited partner interests of publicly traded
partnerships engaged in the midstream energy industry and related
businesses. In keeping with our holding company business model, the
Parent Company’s investing activities are organized into business segments that
reflect how the chief executive officer of our general partner routinely manages
and reviews the financial performance of the Parent Company’s
investments. We believe that our segment revenue disclosures provide
investors with an appropriate level of understanding as to the sources of our
consolidated revenues in the context of the Registrant’s business strategy.
However, we note your comment and propose to add the following information in
future filings to enhance our segment revenue disclosures:
“The following tables present total
segment revenues by business line for each of Enterprise Products Partners and
TEPPCO for the periods indicated. Enterprise Products Partners
operates in four primary business lines: (i) NGL Pipelines & Services; (ii)
Onshore Natural Gas Pipelines & Services; (iii) Offshore Pipelines &
Services; and (iv) Petrochemical Services. At December 31, 2007,
TEPPCO operated in three business lines: (i) Downstream, (ii) Upstream and (iii)
Midstream.
Enterprise
Products Partners
|
Business
Line
|
||||||||||||||||||||||||
|
Onshore
|
||||||||||||||||||||||||
|
NGL
|
Natural
Gas
|
Offshore
|
||||||||||||||||||||||
|
Pipelines
|
Pipelines
|
Pipelines
|
Petrochemical
|
Segment
|
||||||||||||||||||||
|
&
Services
|
&
Services
|
&
Services
|
Services
|
Eliminations
|
Totals
|
|||||||||||||||||||
|
Year
ended December 31, 2007:
|
17,817,940 | 2,261,836 | 225,770 | 2,699,702 | (6,055,123 | ) | 16,950,125 | |||||||||||||||||
|
Year
ended December 31, 2006:
|
14,321,719 | 1,812,027 | 147,542 | 2,340,022 | (4,630,341 | ) | 13,990,969 | |||||||||||||||||
|
Year
ended December 31, 2005:
|
12,358,182 | 1,577,178 | 112,149 | 1,933,600 | (3,724,150 | ) | 12,256,959 | |||||||||||||||||
Sales of NGLs, natural gas and
petrochemical products by Enterprise Products Partners aggregated $15.3 billion,
$12.3 billion and $10.6 billion for the years ended December 31, 2007, 2006 and
2005, respectively.
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TEPPCO
|
Business
Line
|
||||||||||||||||||||
|
Segment
|
||||||||||||||||||||
|
Downstream
|
Upstream
|
Midstream
|
Eliminations
|
Totals
|
||||||||||||||||
|
Year
ended December 31, 2007:
|
362,691 | 9,173,683 | 326,851 | (549 | ) | 9,862,676 | ||||||||||||||
|
Year
ended December 31, 2006:
|
304,301 | 9,109,629 | 285,104 | (7,714 | ) | 9,691,320 | ||||||||||||||
|
Year
ended December 31, 2005:
|
287,191 | 8,110,239 | 224,624 | (3,567 | ) | 8,618,487 | ||||||||||||||
Sales of petroleum products, primarily
crude oil, by TEPPCO were $9.1 billion, $9.1 billion and $8.1 billion for the
years ended December 31, 2007, 2006 and 2005, respectively.
7. Please
refer to your tabular presentation of segment data on page
107. Please briefly explain to us, and clarify to your readers, why
the amounts seen in the Adjustments and Eliminations column for segment assets
and intangible assets are negative amounts.
Response
We note your comment and will add the
following disclosure in future filings:
“Negative amounts presented in the
Adjustments and Eliminations column include approximately $86.1 million of
eliminations related to intercompany receivables and investment balances as well
as $17.6 million of contracts Enterprise Products Partners purchased for cash
from TEPPCO in March 2006.”
Note 5. Revenue
Recognition, page 108
8. We
note that certain operations of your consolidated subsidiaries are regulated by
FERC. We have the following comments:
|
§
|
Please
tell us whether you apply SFAS 71 for the portion of your business that is
regulated.
|
|
§
|
Please
tell us whether the accounting for any of your property, plant and
equipment and related depreciation is based on FERC
regulations.
|
|
§
|
Based
on your response to the above bullet points, please tell us how you
determined additional footnote disclosures were not needed to address the
impact of regulatory accounting on your financial
statements.
|
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Response
For consolidated accounting and
reporting purposes, we do not account for any of our regulated operations under
SFAS 71. Our FERC-regulated businesses that meet the criteria set
forth in paragraph 5 of SFAS 71 represent an immaterial aspect of our
consolidated operations. Such businesses constitute only (i) 2% of
our total consolidated assets at December 31, 2007; (ii) 0.3% of both
consolidated revenues and costs and expenses for the year ended December 31,
2007; and (iii) de minimis amounts of consolidated net income and net cash flows
provided by operating activities for the year ended December 31, 2007.
There are no regulatory assets or liabilities associated with such operations in
our consolidated financial statements.
Note
12. Investments In and Advances to Unconsolidated Affiliates, page
134
9. We
note that you recognized approximately $3.1 million of equity earnings from your
investment in Energy Transfer Equity (“ETE”). Please tell us how this
amount was determined considering that ETE had net income of $319.4 million for
the year ended August 31, 2007 and you acquired 17.6% of ETE’s common units and
34.9% of its general partner interests.
Response
Equity earnings from Energy Transfer
Equity and its general partner represent our ownership interest in the
reported net income of these companies from the date we acquired an ownership
interest, or May 7, 2007, to December 31, 2007 of $29.8 million, which was
reduced to $3.1 million due to $26.7 million of excess cost amortization related
to these investments. The amount we paid for these investments
exceeded the underlying book value of the capital accounts
acquired. We amortize that portion of excess cost attributed to fixed
assets and amortizable intangible assets as a reduction in equity
earnings.
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The following table presents our
calculation of equity earnings from Energy Transfer Equity, or “ETE” as
presented in the table, and its general partner, LE GP, for the year ended
December 31, 2007 (dollars in thousands).
|
Energy
Transfer Equity, L.P.
|
LE
GP
|
Total
|
||||||||||
|
ETE
net income for the twelve months ended August 31, 2007
|
$ | 318,312 | $ | 1,048 | $ | 319,360 | ||||||
|
Less: ETE
net income for the six months ended February 28, 2007
|
(177,784 | ) | (612 | ) | (178,396 | ) | ||||||
|
ETE net income for the 67 days ended May 6, 2007
|
(64,682 | ) | (201 | ) | (64,883 | ) | ||||||
|
ETE
net income for the period May 7 - August 31, 2007
|
75,846 | 235 | 76,081 | |||||||||
|
ETE
net income for the four months ended December 31, 2007
|
92,390 | 287 | 92,677 | |||||||||
|
ETE
net income for the period May 7 - December 31, 2007
|
168,236 | 522 | 168,758 | |||||||||
|
Parent
Company’s ownership percentage
|
17.6 | % | 34.9 | % | ||||||||
|
Parent
Company’s share of net income
|
29,610 | 182 | 29,792 | |||||||||
|
Less:
amortization of excess cost
|
(26,500 | ) | (197 | ) | (26,697 | ) | ||||||
|
Parent
Company’s equity income from investment in ETE
|
$ | 3,110 | $ | (15 | ) | $ | 3,095 | |||||
Our
disclosure of consolidated financial information for Energy Transfer Equity
represents summarized annual financial data of this investee based on publicly
available information. Our disclosure includes information
regarding Energy Transfer Equity’s year ended August 31, 2007 (which included
four months in which we owned an interest in Energy Transfer Equity) and the
subsequent four months ended December 31, 2007. Our ownership
period during 2007 extended from May 7, 2007 to December 31, 2007.
Note
14. Intangible Assets and Goodwill, page 145
10. We
note that you recorded an indefinite-lived intangible asset of $606.9 million
representing contractual rights to the incentive cash distributions paid by
TEPPCO in connection with the contribution of the general partner
IDRs. We further note your disclosures on page 135 indicating that
$513.5 million of your investment in Energy Transfer Equity exceeding the
historical cost of the underlying net assets has been allocated to
indefinite-lived IDRs (an intangible asset). We have the following
comments regarding these IDRs:
|
§
|
Please
provide us with a detailed explanation of why you believe these IDRs
should be accounted for as intangible assets. Your response
should include an explanation of why you believe the IDRs are a separable
asset and how you considered whether the IDRs are a financial
asset.
|
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Response
The amounts we (or, with respect to the
TEPPCO interests, by related parties) paid to acquire ownership interests in
TEPPCO and Energy Transfer Equity reflected a significant amount of value
attributable to IDRs. Specifically, TEPPCO GP holds IDRs in the cash
distributions of TEPPCO, and Energy Transfer Equity, through its ownership of
the general partner of ETP, holds IDRs in the cash distributions of
ETP. Such IDRs are (i) identifiable within the contractual
agreements of the partnership; (ii) separable from the general partner interest
for independent sale or transfer or pledged as security; and (iii) measurable by
the purchaser of the IDRs based on the expected value of future cash
distributions. We ascribed value to the IDRs in connection with our
identification and allocation of value to assets acquired in purchase
accounting.
We
considered possible alternative balance sheet classifications of the IDR asset
value, including presentation as a long term investment held for sale or a
non-marketable financial asset. We believe that
characterization and presentation of the IDRs as a long term financial
asset/instrument could be misleading to the reader. Such a
characterization may incorrectly indicate a marketable type financial security
that represents an equity ownership interest in the partnership similar to our
ownership of general partner and limited partner interests in the consolidated
financial statements. IDRs are neither cash nor evidence of a
residual ownership interest in the partnership entity. In addition, these rights
do not represent a fixed and determinable future obligation or
receivable. IDRs may have some of the characteristics of an equity
ownership interest in a partnership; however, they do not provide the holder
with residual or preferred ownership interest, voting privileges, or obligate
the holder to assume any of the entity’s management and liability
obligations. Unlike our general partner and limited partner
ownership interests, IDRs do not have permanent at risk invested equity in the
partnership.
Futhermore, while TEPPCO GP and Energy
Transfer Equity have a contractual right to receive incentive distributions,
neither TEPPCO nor ETP have a present or future obligation to declare and pay
future cash distributions. In addition, TEPPCO and ETP do not record
a liability for such possible declaration events. TEPPCO GP and
Energy Transfer Equity, as owners of IDRs, only have a right to future
declared cash distributions, similar to a royalty agreement (a contract-based
intangible asset). Such rights do not involve cumulative or arrears
features similar to some forms of financial assets or equity
instruments.
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Upon consideration of all the
characteristics of these IDRs and possible alternative classifications, the
nature and characteristics of the IDRs most closely align with the criteria that
define a purchased long term intangible asset - an identifiable and separable
right. Accordingly, we believe our balance sheet classification of
this asset and disclosure of the features of these IDRs are
appropriate.
|
§
|
Please
explain in more detail how you determined the IDRs should have indefinite
lives. In doing so, please explain why you believe there is no
foreseeable limit to the period over which these assets are expected to
contribute to your cash flows and explain why there are no legal,
regulatory, contractual, economic, or other factors that limit the useful
lives of these assets. Your responses should expand on the
renewal provisions of the TEPPCO partnership agreement, disclosed on page
147, that provide for TEPPCO to continue as a going concern beyond the
initial term of its partnership agreement. Your response should
also explain how you considered limitations to the amounts of oil, gas and
related products that will be available in the future and how such
limitations will impact the partnerships’ ability to generate
revenues.
|
Response
In our judgment, we consider the IDRs
held by TEPPCO GP and Energy Transfer Equity to be indefinite-life intangible
assets. This view reflects a long history of positive results of
operations and related cash distributions from such operating
entities. Furthermore, we believe, based on current information, that
TEPPCO and ETP will continue to pay incentive cash distributions in accordance
with their respective partnership agreements for the foreseeable future at
amounts at least equal to current distributions.
In accordance with paragraph 11 of SFAS
142 our determination of an indefinite-life for the IDRs is based upon
consideration of all pertinent factors (i.e. legal, regulatory, contractual,
competitive, economic or other factors, including demand for our services in the
midstream energy sector) that may indicate a limit to the useful life of the
IDRs. We defined the useful life as the period over which the asset
is expected to contribute to our future consolidated cash flows. We
understand and agree that the term indefinite does not mean infinite (e.g.,
an indefinite life does not necessarily indicate an infinite
life). As indefinite-life intangible assets, the IDRs are subject to
annual impairment testing and interim reviews for events or
circumstances indicating that a change in our useful life assumptions is
warranted.
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As a legal entity, TEPPCO shall
continue in existence until the close of business on December 31,
2084. We do not believe that TEPPCO’s legal partnership
structure implies that its fundamental ongoing and future operations have a
similar limited existence. TEPPCO may renew its partnership agreement
or restructure to a similar form of organization and continue as a going concern
beyond such date without incurring substantial cost or material modifications
that would change the IDRs. In the absence of evidence to the
contrary and based on the favorable economic factors noted below, we assume
renewal by TEPPCO of its partnership agreement on December 31,
2084. Thus, there are no identifiable contractual factors that limit
the useful life of the IDRs over the foreseeable
horizon. Additionally, there are no known legal or regulatory
factors.
Payment of incentive cash distributions
by TEPPCO (not to mention TEPPCO’s ability to exist as a going concern) is
dependent upon the economic viability of TEPPCO’s underlying business
operations. TEPPCO provides a wide range of services to producers and
consumers of refined products, liquefied petroleum gasses, natural gas, NGLs and
crude oil. The assets underlying these business activities are
located in several key geographic regions within the continental United States
and represent core infrastructure for the midstream energy
industry. Many of these assets have been in operation for decades and
are not subject to significant technology obsolescence since they represent
infrastructure to gather, move, store and process energy-related
commodities. We believe that TEPPCO has not experienced compelling
challenges or situations that prevent it from continuing business operations in
a manner similar to other perpetual structures. Further, TEPPCO’s
management is dedicated to the growth of its core businesses as evidenced by
TEPPCO’s (i) recent entrance into a complementary marine services business and
(ii) announcement of participation in an offshore crude oil import facility in
the Gulf of Mexico.
The historical experience of TEPPCO’s
management and TEPPCO’s competitive market position are key factors underlying
our assumption of economic viability within the foreseeable
future. There is no evidence to suggest that limitations on the
quantity of crude oil, natural gas or related petroleum products will diminish
TEPPCO’s ability to generate revenues on a determinable future
date. This is supported by the diversity of TEPPCO’s underlying
business and TEPPCO’s ability to source products from several resource
basins, both domestic and international. Likewise, there is no
evidence that suggests a determinable negative change in TEPPCO’s competitive
industry position.
In
addition, based on our industry knowledge of the midstream energy operations of
ETP and its consolidated subsidiaries, we believe its ability to continue to
make incentive cash distributions is equally as positive as
TEPPCO for the foreseeable future. Similar to
TEPPCO, ETP may renew its partnership
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September
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agreement
or restructure to a similar form of organization and continue as a going concern
beyond such date without incurring substantial cost or material modifications
that would change the IDRs. We also believe there are no significant legal,
regulatory, economic, competitive or other known material
restrictions.
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Please
tell us the periods of cash flows originally used in determining the fair
values of the IDRs.
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Response
We relied on an application of the
Income Approach to fair value that employed a forecast of discounted future
expected cash distributions associated with the subject IDRs. Our
valuation analysis for the TEPPCO and ETP IDRs was based on expected cash flows
into perpetuity. For modeling purposes, we estimated a cash flow
stream attributable to the TEPPCO IDRs over a discrete horizon of approximately
60 years plus an estimated terminal value. Likewise, our
valuation of the ETP IDRs held by Energy Transfer Equity is based on a cash flow
stream over an approximate 60-year discrete forecast horizon plus an estimated
terminal value. Terminal value estimates were made in each analysis
using a perpetual growth model.
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Please
explain in more detail how the IDRs were originally valued, including
whether you used the residual method under purchase price
accounting.
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Response
We directly estimated fair value of the
IDR intangible assets through an application of the Income Approach to fair
value. As mentioned above, our Income Approach analysis incorporated
long-term discrete forecast horizons with terminal value estimates representing
cash flows into perpetuity. We corroborated our fair value estimates
with an analysis of recent transactions and comparable publicly traded companies
(i.e. applications of the Market Approach to fair value).
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For
the TEPPCO IDRs, please explain how the December 2006 reduction in the top
tier of IDR rates from 50% to 25% was considered when testing this asset
for impairment. In this regard, we assume this change lowered
your projection of future cash
flows.
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Response
When the 50% IDR tier was eliminated
and exchanged for TEPPCO common units, the historical carrying basis that DFI
and DFIGP attributed to this component of the IDRs was reclassified on the
balance sheet primarily to goodwill. Our projected future cash flows reflect the
reduction in the 50% IDR tier. As a result, the December 2006
exchange event did not impact our impairment test of the IDR intangible
asset.
Note 17. Related
Party Transactions, page 163
11. We
note that all of your management, administrative and operating functions are
performed by employees of EPCO. Since it appears that certain of these
transactions are not at arms length, please disclose your estimates of what the
related expense would have been on a stand alone basis, or tell us why such
disclosure is not practicable. Please provide this disclosure for
each year for which a statement of income was required when such basis produced
materially different results. See Question 2 of SAB Topic
1B.
Response
As noted in our disclosures related to
the “EPCO Administrative Services Agreement,” we are required to reimburse EPCO
for actual direct and indirect expenses it incurs related to our business
activities. Our reimbursement to EPCO for administrative services is
either (i) on an actual basis for direct expenses it may incur on our behalf
(e.g., the purchase of office supplies) or (ii) based on an allocation of such
charges between the various parties to the administrative services agreement
based on the estimated use of such services by each party (e.g., the allocation
of general legal or accounting salaries based on estimates of time spent on each
entity’s business and affairs). With respect to the costs of our
management, administrative and operating functions, EPCO does not subsidize such
costs for us nor does it charge us a mark-up. We believe our
reimbursements to EPCO for these services are equivalent to the level of costs
we would incur as a stand alone entity.
We believe that our related party
disclosures address the scope and intent of Question 2 of SAB Topic 1B. However,
in future filings we will include the additional following disclosure to
highlight our view:
“Since the vast majority of such
expenses are charged to us on an actual basis (i.e. no mark-up or subsidy
is charged or received by EPCO),
we believe that such expenses are representative of what
the
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amounts
would have been on a stand alone basis. With respect to allocated
costs, we believe that the proportional direct allocation method employed by
EPCO is reasonable and reflective of the estimated level of costs we would have
incurred on a standalone basis.”
Item 9A. Controls
and Procedures, page 190
12. We
read that your disclosure controls and procedures are designed to provide
reasonable assurance that relevant information is accumulated and communicated
to management, including the CEO and CFO of your general partner, as
appropriate, to allow such persons to make timely decisions regarding required
disclosures. You appear to be providing a partial definition of
disclosure controls and procedures, and it is unclear from this statement
whether your disclosure controls and procedures were designed to meet all the
criteria of the definition of disclosure controls and procedures as defined in
Exchange Act Rule 13a-15(e). Please revise future filings to clarify,
if true, that your disclosure controls and procedures are designed to provide
reasonable assurance that information required to be disclosed by you in reports
that you file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Commission’s
rules and forms and is accumulated and communicated to management, including the
CEO and CFO of your general partner, as appropriate, to allow such persons to
make timely decisions regarding required disclosures.
Response
We note your comment and will revise
our Item 9A disclosure to read as follows in future Annual Reports on Form
10-K:
“Our management, with the participation
of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of
EPE Holdings, has evaluated the effectiveness of our disclosure controls and
procedures, including internal controls over financial reporting, as of December
31, 2007. Our disclosure controls and procedures are designed to
provide reasonable assurance that information required to be disclosed by us in
reports that are filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time specified in the Commission’s
rules and forms. Our disclosure controls and procedures include
controls and procedures designed to provide reasonable assurance that this
information is accumulated and communicated to our management, including the CEO
and CFO of our general partner, as appropriate to allow timely decisions
regarding required disclosure. Based on their evaluation,
the
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CEO and
CFO of EPE Holdings have concluded that our disclosure controls and procedures
(as defined in Rule 13a-15(e)) are effective at a reasonable assurance
level.
Our management does not expect that our
disclosure controls and procedures will prevent all errors and all
fraud. The design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Based on the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Partnership have
been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because
of simple errors or mistakes. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any
system of controls is also based in part upon certain assumptions about the
likelihood of future events. Therefore, a control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met.”
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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).
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Regards,
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| /s/ Michael J. Knesek |
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Name: Michael
J. Knesek
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Title: Senior
Vice President, Controller and
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Principal Accounting Officer
of
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EPE Holdings LLC, general partner
of
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Enterprise GP Holdings
L.P.
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cc: Dr.
Ralph S. Cunningham
W.
Randall Fowler
Richard
H. Bachmann
Michael
Hanson
Phil Neisel
David Buck (Andrews
Kurth)