================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 15, 2002
ENTERPRISE PRODUCTS PARTNERS L.P.
(Exact name of registrant as specified in its charter)
Delaware 1-14323 76-0568219
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification Number)
2727 North Loop West
Houston, Texas 77008
(Address of principal executive offices) (Zip Code)
(713) 880-6500
(Registrants' telephone number, including area code)
================================================================================
ITEM 5. OTHER EVENTS.
On May 15, 2002, Enterprise Products Partners L.P. completed a
two-for-one split of its Common Units, Subordinated Units and Class A Special
Units. Accordingly, Enterprise is revising its consolidated financial
statements and the notes thereto to retroactively reflect the effects of the
two-for-one split.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
Not applicable.
(b) PRO FORMA FINANCIAL INFORMATION.
Not applicable.
(c) EXHIBITS.
23.1 Consent of Deloitte & Touche LLP
99.1 Enterprise Products Partners L.P. Audited Annual Financial
Statements for the fiscal year ended December 31, 2001, as
revised to retroactively reflect the effects of a May 15, 2002
two-for-one split of its Common Units, Subordinated Units and
Class A Special Units.
-2-
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.
ENTERPRISE PRODUCTS PARTNERS L.P.
By: Enterprise Products GP, LLC,
as General Partner
Date: September 27, 2002 By: /s/ Michael J. Knesek
-------------------------------
Michael J. Knesek
Vice President, Controller and
Principal Accounting Officer of
Enterprise Products GP, LLC
-3-
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
23.1 Consent of Deloitte & Touche LLP
99.1 Enterprise Products Partners L.P. Audited Annual Financial
Statements
-4-
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 333-56082) and related Prospectus of Enterprise Products Partners
L.P. and Enterprise Products Operating L.P. and in the Registration Statement
(Form S-8 No. 333-36856) pertaining to Enterprise Products Company 1998
Long-Term Executive Plan and Enterprise Products GP, LLC 1999 Long-Term
Executive Plan and in the Registration Statement (Form S-8 No. 333-92486)
pertaining to the Enterprise Products Company Employee Unit Purchase Plan of
our report dated March 8, 2002 (May 15, 2002 as to Note 16 for the effects of a
two-for-one split of Limited Partner Units) (which report expresses an
unqualified opinion and includes an explanatory paragraph referring to the
change in accounting for derivative instruments in 2001), with respect to the
consolidated financial statements of Enterprise Products Partners L.P. included
in this Current Report on Form 8-K dated September 27, 2002.
/s/ Deloitte & Touche LLP
Houston, Texas
September 27, 2002
EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
Enterprise Products Partners L.P.:
We have audited the accompanying consolidated balance sheets of Enterprise
Products Partners L.P. and subsidiaries (the "Company") as of December 31, 2001
and 2000, and the related statements of consolidated operations, consolidated
cash flows and consolidated partners' equity for each of the years in the
three-year period ended December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 2001 and 2000, and the results of its consolidated operations and
its consolidated cash flows for each of the years in the three-year period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 13 to the consolidated financial statements, the
Company changed its method of accounting for derivative instruments in 2001.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
March 8, 2002
(May 15, 2002 as to Note 16 for the effects of a two-for-one split of Limited
Partner Units)
ENTERPRISE PRODUCTS PARTNERS L.P.
STATEMENTS OF CONSOLIDATED OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
FOR YEAR ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
REVENUES
Revenues from consolidated operations.................... $3,154,369 $3,049,020 $1,332,979
Equity income in unconsolidated affiliates............... 25,358 24,119 13,477
---------- ---------- ----------
Total.......................................... 3,179,727 3,073,139 1,346,456
COST AND EXPENSES
Operating costs and expenses............................. 2,861,743 2,801,060 1,201,605
Selling, general and administrative...................... 30,296 28,345 12,500
---------- ---------- ----------
Total.......................................... 2,892,039 2,829,405 1,214,105
---------- ---------- ----------
OPERATING INCOME......................................... 287,688 243,734 132,351
---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest expense......................................... (52,456) (33,329) (16,439)
Interest income from unconsolidated affiliates........... 31 1,787 1,667
Dividend income from unconsolidated affiliates........... 3,462 7,091 3,435
Interest income -- other................................. 7,029 3,748 886
Other, net............................................... (1,104) (272) (379)
---------- ---------- ----------
Other income (expense)......................... (43,038) (20,975) (10,830)
---------- ---------- ----------
INCOME BEFORE MINORITY INTEREST.......................... 244,650 222,759 121,521
MINORITY INTEREST........................................ (2,472) (2,253) (1,226)
---------- ---------- ----------
NET INCOME............................................... $ 242,178 $ 220,506 $ 120,295
========== ========== ==========
ALLOCATION OF NET INCOME TO:
Limited partners............................... $ 236,570 $ 217,909 $ 119,092
========== ========== ==========
General partner................................ $ 5,608 $ 2,597 $ 1,203
========== ========== ==========
BASIC EARNINGS PER UNIT
Income before minority interest................ $ 1.72 $ 1.64 $ .90
========== ========== ==========
Net income per Common and Subordinated unit.... $ 1.70 $ 1.63 $ .90
========== ========== ==========
DILUTED EARNINGS PER UNIT
Income before minority interest................ $ 1.40 $ 1.34 $ .83
========== ========== ==========
Net income per Common, Subordinated and Special
unit......................................... $ 1.39 $ 1.32 $ .82
========== ========== ==========
See Notes to Consolidated Financial Statements
ENTERPRISE PRODUCTS PARTNERS L.P.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (includes restricted cash of
$5,752 at December 31, 2001)........................... $ 137,823 $ 60,409
Accounts receivable -- trade, net of allowance for
doubtful accounts of $20,642 at December 31, 2001 and
$10,916 at December 31, 2000........................... 256,927 409,085
Accounts receivable -- affiliates......................... 4,375 6,533
Inventories............................................... 69,443 93,222
Prepaid and other current assets.......................... 50,207 12,107
---------- ----------
Total current assets.............................. 518,775 581,356
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 1,306,790 975,322
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES.... 398,201 298,954
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF
$13,084 AT DECEMBER 31, 2001 AND $5,374 AT DECEMBER 31,
2000...................................................... 202,226 92,869
OTHER ASSETS................................................ 5,201 2,867
---------- ----------
TOTAL............................................. $2,431,193 $1,951,368
========== ==========
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Accounts payable -- trade................................. $ 54,269 $ 96,559
Accounts payable -- affiliates............................ 29,885 56,447
Accrued gas payables...................................... 233,536 377,126
Accrued expenses.......................................... 22,460 21,488
Accrued interest.......................................... 24,302 10,068
Other current liabilities................................. 44,764 24,691
---------- ----------
Total current liabilities......................... 409,216 586,379
LONG-TERM DEBT.............................................. 855,278 403,847
OTHER LONG-TERM LIABILITIES................................. 8,061 15,613
MINORITY INTEREST........................................... 11,716 9,570
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY
Common Units (102,721,830 Units outstanding at December
31, 2001 and 92,514,630 at December 31, 2000).......... 651,872 514,896
Subordinated Units (42,819,740 Units outstanding at
December 31, 2001 and December 31, 2000)............... 193,107 165,253
Special Units (29,000,000 Units outstanding at December
31, 2001 and 33,000,000 at December 31, 2000).......... 296,634 251,132
Treasury Units acquired by Trust, at cost (327,200 Common
Units outstanding at December 31, 2001 and 534,400 at
December 31, 2000)..................................... (6,222) (4,727)
General Partner........................................... 11,531 9,405
---------- ----------
Total Partners' Equity............................ 1,146,922 935,959
---------- ----------
TOTAL............................................. $2,431,193 $1,951,368
========== ==========
See Notes to Consolidated Financial Statements
ENTERPRISE PRODUCTS PARTNERS L.P.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR YEAR ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
OPERATING ACTIVITIES
Net income................................................ $ 242,178 $ 220,506 $ 120,295
Adjustments to reconcile net income to cash flows provided
by (used for) operating activities:
Depreciation and amortization........................... 51,903 41,045 25,315
Equity in income of unconsolidated affiliates........... (25,358) (24,119) (13,477)
Distributions received from unconsolidated affiliates... 45,054 37,267 6,008
Leases paid by EPCO..................................... 10,309 10,537 10,557
Minority interest....................................... 2,472 2,253 1,226
Loss (gain) on sale of assets........................... (390) 2,270 123
Changes in fair market value of financial instruments
(see Note 13)........................................ (5,697)
Net effect of changes in operating accounts............. (37,143) 71,111 27,906
--------- --------- ---------
Operating activities cash flows...................... 283,328 360,870 177,953
--------- --------- ---------
INVESTING ACTIVITIES
Capital expenditures...................................... (149,896) (243,913) (21,234)
Proceeds from sale of assets.............................. 568 92 8
Business acquisitions, net of cash received............... (225,665) (208,095)
Collection of notes receivable from unconsolidated
affiliates.............................................. 6,519 19,979
Investments in and advances to unconsolidated
affiliates.............................................. (116,220) (31,496) (61,887)
--------- --------- ---------
Investing activities cash flows...................... (491,213) (268,798) (271,229)
--------- --------- ---------
FINANCING ACTIVITIES
Long-term debt borrowings................................. 449,717 598,818 350,000
Long-term debt repayments................................. (490,000) (154,923)
Debt issuance costs....................................... (3,125) (4,043) (3,135)
Cash distributions paid to partners....................... (164,308) (139,577) (111,758)
Cash distributions paid to minority interest by Operating
Partnership............................................. (1,687) (1,429) (1,140)
Unit repurchased and retired.............................. (770)
Cash contributions from EPCO to minority interest......... 105 108 86
Treasury Units purchased by Trust......................... (18,003) (4,727)
Treasury Units reissued by Trust.......................... 22,600
Increase in restricted cash............................... (5,752)
--------- --------- ---------
Financing activities cash flows...................... 279,547 (36,893) 74,403
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS................... 71,662 55,179 (18,873)
CASH AND CASH EQUIVALENTS, JANUARY 1...................... 60,409 5,230 24,103
--------- --------- ---------
CASH AND CASH EQUIVALENTS, DECEMBER 31.................... $ 132,071 $ 60,409 $ 5,230
========= ========= =========
See Notes to Consolidated Financial Statements
ENTERPRISE PRODUCTS PARTNERS L.P.
STATEMENTS OF CONSOLIDATED PARTNERS' EQUITY
(DOLLARS IN THOUSANDS)
LIMITED PARTNERS
-------------------------------
COMMON SUBORD. SPECIAL TREASURY GENERAL
UNITS UNITS UNITS UNITS PARTNER TOTAL
--------- -------- -------- -------- ------- ----------
Balance, December 31, 1998.......................... $ 433,082 $123,829 $ 5,625 $ 562,536
Net income........................................ 80,998 38,094 1,203 120,295
Leases paid by EPCO............................... 7,109 3,342 106 10,557
Special Units issued to Shell in connection with
TNGL acquisition................................ $210,436 2,126 212,562
Cash distributions to Unitholders................. (81,993) (28,647) (1,118) (111,758)
Treasury Units acquired by consolidated Trust..... $(4,727) (4,727)
--------- -------- -------- ------- ------- ----------
Balance, December 31, 1999.......................... 439,196 136,618 210,436 (4,727) 7,942 789,465
Net income........................................ 148,656 69,253 2,597 220,506
Leases paid by EPCO............................... 7,117 3,315 105 10,537
Additional Special Units issued to Shell in
connection with contingency agreement........... 55,241 557 55,798
Conversion of 2.0 million Shell Special Units into
Common Units.................................... 14,513 (14,513) --
Units repurchased and retired in connection with
buy-back program................................ (687) (43) (32) (8) (770)
Cash distributions to Unitholders................. (93,899) (43,890) (1,788) (139,577)
--------- -------- -------- ------- ------- ----------
Balance, December 31, 2000.......................... 514,896 165,253 251,132 (4,727) 9,405 935,959
Net income........................................ 163,795 72,775 5,608 242,178
Leases paid by EPCO............................... 7,078 3,128 103 10,309
Additional Special Units issued to Shell in
connection with contingency agreement........... 117,066 1,183 118,249
Conversion of 10.0 million Shell Special Units
into Common Units............................... 72,554 (72,554)
Cash distributions to Unitholders................. (109,969) (49,510) (4,829) (164,308)
Treasury Units acquired by consolidated Trust..... (18,003) (18,003)
Treasury Units reissued by consolidated Trust..... 16,508 16,508
Gain on reissuance of Treasury Units by
consolidated Trust.............................. 3,518 1,461 990 61 6,030
--------- -------- -------- ------- ------- ----------
Balance, December 31, 2001.......................... $ 651,872 $193,107 $296,634 $(6,222) $11,531 $1,146,922
========= ======== ======== ======= ======= ==========
See Notes to Consolidated Financial Statements
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ENTERPRISE PRODUCTS PARTNERS L.P. including its consolidated subsidiaries
is a publicly-traded Delaware limited partnership listed on the New York Stock
Exchange under symbol "EPD". Unless the context requires otherwise, references
to "we","us","our" or the "Company" are intended to mean Enterprise Products
Partners L.P. and subsidiaries. We (including our operating subsidiary,
Enterprise Products Operating L.P. (the "Operating Partnership")) were formed in
April 1998 to own and operate the natural gas liquids ("NGL") business of
Enterprise Products Company ("EPCO"). We conduct substantially all of our
business through the Operating Partnership, in which we own a 98.9899% limited
partner interest. Enterprise Products GP, LLC (the "General Partner") owns
1.0101% of the Operating Partnership and 1% of the Company and serves as the
general partner of both entities. We and the General Partner are affiliates of
EPCO.
Prior to their consolidation, EPCO and its affiliate companies were
controlled by members of a single family, who collectively owned at least 90% of
each of the entities for all periods prior to the formation of the Company. As
of April 30, 1998, the owners of all the affiliated companies exchanged their
ownership interests for shares of EPCO. Accordingly, each of the affiliated
companies became a wholly-owned subsidiary of EPCO or was merged into EPCO as of
April 30, 1998. In accordance with generally accepted accounting principles, the
consolidation of the affiliated companies with EPCO was accounted for as a
reorganization of entities under common control in a manner similar to a pooling
of interests.
Under terms of a contract entered into on May 8, 1998 between EPCO and our
Operating Partnership, EPCO contributed all of its NGL assets through the
Company and the General Partner to the Operating Partnership and the Operating
Partnership assumed certain of EPCO's debt. As a result, we became the successor
to the NGL operations of EPCO.
Effective July 27, 1998, we filed a registration statement pursuant to an
initial public offering of 24,000,000 Common Units. The Common Units sold for
$11 per unit. We received approximately $243.3 million net of underwriting
commissions and offering costs.
The accompanying consolidated financial statements include the historical
accounts and operations of the NGL business of EPCO, including NGL operations
conducted by affiliated companies of EPCO prior to their consolidation with
EPCO. The consolidated financial statements include our accounts and those of
our majority-owned subsidiaries, after elimination of all material intercompany
accounts and transactions. In general, investments in which we own 20% to 50%
and exercise significant influence over operating and financial policies are
accounted for using the equity method. Investments in which we own less than 20%
are accounted for using the cost method unless we exercise significant influence
over operating and financial policies of the investee in which case the
investment is accounted for using the equity method.
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation. These reclassifications
had no effect on previously reported results of consolidated operations.
CASH FLOWS are computed using the indirect method. For cash flow purposes,
we consider all highly liquid investments with an original maturity of less than
three months at the date of purchase to be cash equivalents.
FINANCIAL INSTRUMENTS such as swaps, forwards and other contracts to manage
the price risks associated with inventories, firm commitments and certain
anticipated transactions are used by the Company. We are required to recognize
in earnings changes in fair value of these financial instruments that are not
offset by changes in the fair value of the inventories, firm commitments and
certain anticipated transactions. Fair value is generally defined as the amount
at which the financial instrument could be exchanged in a current transaction
between willing parties, not in a forced or liquidation sale.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effective portion of these hedged transactions will be deferred until
the firm commitment or anticipated transaction affects earnings. To qualify as a
hedge, the item to be hedged must expose us to commodity or interest rate risk
and the hedging instrument must reduce that exposure and meet the hedging
requirements of SFAS No. 133. Any contracts held or issued that do not meet the
requirements of a hedge (as defined by SFAS No. 133) will be recorded at fair
value on the balance sheet and any changes in that fair value recognized in
earnings (using mark-to-market accounting). A contract designated as a hedge of
an anticipated transaction that is no longer likely to occur is immediately
recognized in earnings.
DOLLAR AMOUNTS (except per Unit amounts) presented in the tabulations
within the notes to our financial statements are stated in thousands of dollars,
unless otherwise indicated.
EARNINGS PER UNIT is based on the amount of income allocated to limited
partners and the weighted-average number of Units outstanding during the period.
Specifically, basic earnings per Unit is calculated by dividing the amount of
income allocated to limited partners by the weighted-average number of Common
and Subordinated Units outstanding during the period. Diluted earnings per Unit
is based on the amount of income allocated to limited partners and the
weighted-average number of Common, Subordinated and Special Units outstanding
during the period. The Special Units are excluded from the computation of basic
earnings per Unit because, under the terms of the Special Units, they do not
share in income nor are they entitled to cash distributions until they are
converted to Common Units. See Notes 7 and 8 for additional information on the
capital structure and earnings per Unit computation.
ENVIRONMENTAL COSTS for remediation are accrued based on the estimates of
known remediation requirements. Such accruals are based on management's best
estimate of the ultimate costs to remediate the site. Ongoing environmental
compliance costs are charged to expense as incurred, and expenditures to
mitigate or prevent future environmental contamination are capitalized.
Environmental costs, accrued environmental liabilities and expenditures to
mitigate or eliminate future environmental contamination for each of the years
in the three-year period ended December 31, 2001 were not significant to the
consolidated financial statements. Costs of environmental compliance and
monitoring aggregated $1.3 million, $1.3 million and $0.9 million for the years
ended December 31, 2001, 2000 and 1999, respectively. Our estimated liability
for environmental remediation is not discounted.
EXCESS COST OVER UNDERLYING EQUITY IN NET ASSETS (or "excess cost") denotes
the excess of our cost (or purchase price) over our underlying equity in the net
assets of our investees. We have excess cost associated with our investments in
K/D/S Promix L.L.C., Dixie Pipeline Company, Neptune Pipeline Company L.L.C. and
Nemo Pipeline Company, LLC. The excess cost of these investments is reflected in
our investments in and advances to unconsolidated affiliates for these entities.
See Note 4 for a further discussion of the excess cost related to these
investments.
EXCHANGES are movements of NGL and petrochemical products and natural gas
between parties to satisfy timing and logistical needs of the parties. Volumes
borrowed from us under such agreements are included in inventory, and volumes
loaned to us under such agreements are accrued as a liability in accrued gas
payables.
FEDERAL INCOME TAXES are not provided because we are a master limited
partnership. As a result, our earnings or losses for Federal income tax purposes
are included in the tax returns of the individual partners. Accordingly, no
recognition has been given to income taxes in our financial statements. State
income taxes are not material to us. Net earnings for financial statement
purposes may differ significantly from taxable income reportable to unitholders
as a result of differences between the tax basis and financial reporting basis
of assets and liabilities and the taxable income allocation requirements under
the partnership agreement.
INVENTORIES are valued at the lower of average cost or market (normal trade
inventories of natural gas, NGLs and petrochemicals) or using specific
identification (volumes dedicated to forward sales contracts).
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE ASSETS include the values assigned to a 20-year natural gas
processing agreement and the excess cost of the purchase price over the fair
market value of the assets acquired from Mont Belvieu Associates (the "MBA
excess cost"), both of which were initially recorded in 1999. Of the intangible
values at December 31, 2001, $194.4 million is assigned to the natural gas
processing agreement and is being amortized on a straight-line basis over the
contract term.
The remaining $7.9 million balance of intangibles relates to the MBA excess
cost which has been amortized on a straight-line basis over 20 years. Upon
adoption of SFAS No. 142 on January 1, 2002, this amount was reclassified to
goodwill and will no longer be amortized but will be subject to periodic
impairment testing in accordance with the new standard. For additional
information regarding this reclassification and other details pertaining to the
adoption of SFAS No. 142, see Note 5.
LONG-LIVED ASSETS are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. We have not recognized any impairment losses for any of the periods
presented.
PROPERTY, PLANT AND EQUIPMENT is recorded at cost and is depreciated using
the straight-line method over the asset's estimated useful life. Maintenance,
repairs and minor renewals are charged to operations as incurred. The cost of
assets retired or sold, together with the related accumulated depreciation, is
removed from the accounts, and any gain or loss on disposition is included in
income.
Additions and improvements to and major renewals of existing assets are
capitalized and depreciated using the straight-line method over the estimated
useful life of the new equipment or modifications. These expenditures result in
a long-term benefit to the Company. We generally classify improvements and major
renewals of existing assets as sustaining capital expenditures and all other
capital spending on existing and new assets referred to as expansion capital
expenditures.
RESTRICTED CASH includes amounts held by a brokerage firm as margin
deposits associated with our financial instruments portfolio and for physical
purchase transactions made on the NYMEX exchange. At December 31, 2001, cash and
cash equivalents includes $5.8 million of restricted cash related to these
requirements.
REVENUE is recognized by our five reportable business segments using the
following criteria: (i) persuasive evidence of an exchange arrangement exists,
(ii) delivery has occurred or services have been rendered, (iii) the buyer's
price is fixed or determinable and (iv) collectibility is reasonably assured.
When the contracts settle (i.e., either physical delivery of product has taken
place or the services designated in the contract have been performed), a
determination of the necessity of an allowance is made and recorded accordingly.
In our Fractionation segment, we enter into NGL fractionation,
isomerization and propylene fractionation tolling arrangements, NGL
fractionation in-kind contracts and propylene fractionation merchant contracts.
Under our tolling arrangements, we recognize revenue once contract services have
been performed. These tolling arrangements typically include a base processing
fee per gallon subject to adjustment for changes in natural gas, electricity and
labor costs, which are the principal variable costs of fractionation and
isomerization operations. At our Norco NGL fractionation facility, certain
tolling arrangements involves the retention of a contractually-determined
percentage of the NGLs produced for the processing customer in lieu of a cash
tolling fee per gallon (i.e., an "in-kind" fee). We recognize revenue from these
in-kind contracts when we sell (at market-related prices) and deliver the NGLs
retained by our fractionator to customers. In our propylene fractionation
merchant contracts, we recognize revenue once the products have been delivered
to the customer. These merchant contracts are based upon market-related prices
as determined by the individual contracts.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In our Pipelines segment, we enter into pipeline, storage and product
loading contracts. Under our liquids pipeline and certain natural gas pipeline
throughput contracts, revenue is recognized when volumes have been physically
delivered for the customer through the pipeline. Revenue from this type of
throughput contract is typically based upon a fixed fee per gallon of liquids or
MMBtus of natural gas transported, whichever the case may be, multiplied by the
volume delivered. The throughput fee is generally contractual or as regulated by
the Federal Energy Regulatory Commission ("FERC"). Additionally, we have
merchant contracts associated with our natural gas pipeline business whereby
revenue is recognized once a quantity of natural gas has been delivered to a
customer. These merchant contracts are based upon market-related prices as
determined by the individual contracts.
In our storage contracts, we collect a fee based on the number of days a
customer has NGL or petrochemical volumes in storage multiplied by a storage
rate for each product. Under these contracts, revenue is recognized ratably over
the length of the storage contract based on the storage rates specified in each
contract. Revenues from product loading contracts (applicable to EPIK, an
unconsolidated affiliate of the Company) are recorded once the loading services
have been performed with the loading rates stated in the individual contracts.
As part of our Processing business, we have entered into a significant
20-year natural gas processing agreement with Shell ("Shell Processing
Agreement"), whereby we have the right to process Shell's current and future
natural gas production (including deepwater developments) from the Gulf of
Mexico within the state and federal waters off Texas, Louisiana, Mississippi,
Alabama and Florida. In addition to the Shell Processing Agreement, we have
contracts to process natural gas for other customers.
Under these contracts, the fee for our natural gas processing services is
based upon contractual terms with Shell or other third parties and may be
specified as either a cash fee or the retention of a percentage of the NGLs
extracted from the natural gas stream. If a cash fee for services is stipulated
by the contract, we record revenue once the natural gas has been processed and
sent back to Shell or other third parties (i.e., delivery has taken place).
If the contract stipulates that we retain a percentage of the NGLs
extracted as payment for its services, revenue is recorded when the NGLs are
sold and delivered to third parties. The Processing segment's merchant
activities may also buy and sell NGLs in the open market (including forward
sales contracts). The revenues recorded for these contracts are recognized upon
the delivery of the products specified in each individual contract. Pricing
under both types of arrangements is based upon market-related prices plus or
minus other determining factors specific to each contract such as location
pricing differentials.
The Octane Enhancement segment consists of our equity interest in Belvieu
Environmental Fuels ("BEF") which owns and operates a facility that produces
motor gasoline additives to enhance octane. This facility currently produces
MTBE. BEF's operations primarily occur as a result of a contract with Sunoco,
Inc. ("Sun") whereby Sun is obligated to purchase all of the facility's MTBE
output at market-related prices through September 2004. Revenue is recognized
once the product has been delivered to Sun.
The Other segment is primarily comprised of fee-based marketing services.
We perform NGL marketing services for a small number of customers for which we
charge a commission. Commissions are based on either a percentage of the final
sales price negotiated on behalf of the client or a fixed-fee per gallon based
on the volume sold for the client. Revenues are recorded at the time the
services are complete.
USE OF ESTIMATES AND ASSUMPTIONS by management that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period are required for the
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America. Our actual results could
differ from these estimates.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS ACQUISITIONS
ACQUISITION OF ACADIAN GAS IN APRIL 2001
On April 2, 2001, we acquired Acadian Gas from an affiliate of Shell, for
approximately $226 million in cash using proceeds from the issuance of the $450
million Senior Notes B (see Note 6). Acadian Gas is involved in the purchase,
sale, transportation and storage of natural gas in Louisiana. Its assets are
comprised of the 438-mile Acadian and 577-mile Cypress natural gas pipelines and
a leased natural gas storage facility. Acadian Gas owns an approximate 49.5% of
Evangeline which owns a 27-mile natural gas pipeline. We operate the systems.
Overall, the Acadian Gas and Evangeline systems are comprised of 1,042 miles of
pipeline with an optimal design capacity of 1.1 Bcf/d.
The Acadian Gas and Evangeline systems link supplies of natural gas from
Gulf of Mexico production (through connections with offshore pipelines) and
various onshore developments to industrial, electrical and local distribution
customers primarily located in Louisiana. In addition, these systems have
interconnects with twelve interstate and four intrastate pipelines and a
bi-directional interconnect with the U.S. natural gas marketplace at the Henry
Hub.The Acadian Gas acquisition was accounted for under the purchase method of
accounting and, accordingly, the initial purchase price has been allocated to
the assets acquired and liabilities assumed based on their estimated fair values
at April 1, 2001 as follows (in millions):
Current assets.............................................. $ 83,123
Investments in unconsolidated affiliates.................... 2,723
Property, plant and equipment............................... 225,169
Current liabilities......................................... (83,890)
Other long-term liabilities................................. (1,460)
--------
Total purchase price...................................... $225,665
========
The balances related to the Acadian Gas acquisition included in the
consolidated balance sheet dated December 31, 2001 are based upon preliminary
information and are subject to change as additional information is obtained. The
initial purchase price is subject to certain post-closing adjustments
attributable to working capital items and is expected to be finalized during the
first half of 2002.
Historical information for periods prior to April 1, 2001 do not reflect
any impact associated with the Acadian Gas acquisition.
PRO FORMA EFFECT OF BUSINESS COMBINATIONS
The following table presents selected unaudited pro forma information for
the years ended December 31, 2001 and 2000 as if the acquisition of Acadian Gas
had been made as of the beginning of the years presented. This table also
incorporates selected unaudited pro forma information for the year ended
December 31, 2000 relating to our equity investments in Starfish and Neptune
(see Note 4).
The pro forma information is based upon data currently available to and
certain estimates and assumptions by management and, as a result, are not
necessarily indicative of our financial results had the transactions actually
occurred on these dates. Likewise, the unaudited pro forma information is not
necessarily indicative of our future financial results.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR YEAR ENDED DECEMBER 31,
----------------------------
2001 2000
------------ ------------
Revenues.................................................... $3,391,654 $3,673,049
Income before extraordinary item and minority interest...... $ 248,934 $ 217,223
Net income.................................................. $ 246,419 $ 215,026
Allocation of net income to
Limited partners.......................................... $ 240,745 $ 212,483
General Partner........................................... $ 5,674 $ 2,542
Units used in earnings per Unit calculations
Basic..................................................... 139,452 134,216
Diluted................................................... 170,786 164,888
Income per Unit before minority interest
Basic..................................................... $ 1.75 $ 1.60
Diluted................................................... $ 1.43 $ 1.30
Net income per Unit
Basic..................................................... $ 1.73 $ 1.59
Diluted................................................... $ 1.41 $ 1.29
3. PROPERTY, PLANT AND EQUIPMENT
Our property, plant and equipment and accumulated depreciation are as
follows:
ESTIMATED
USEFUL LIFE
IN YEARS 2001 2000
----------- ---------- ----------
Plants and pipelines............................ 5-35 $1,398,843 $1,108,519
Underground and other storage facilities........ 5-35 127,900 109,760
Transportation equipment........................ 3-35 3,736 2,620
Land............................................ 15,517 14,805
Construction in progress........................ 98,844 34,358
---------- ----------
Total......................................... 1,644,840 1,270,062
Less accumulated depreciation................... 338,050 294,740
---------- ----------
Property, plant and equipment, net............ $1,306,790 $ 975,322
========== ==========
Depreciation expense for the years ended December 31, 2001, 2000 and 1999
was $43.4 million, $33.3 million and $22.4 million, respectively. The increase
in depreciation expense is primarily due to acquisitions and expansion capital
projects over the last three years.
4. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
We own interests in a number of related businesses that are accounted for
under the equity or cost method. The investments in and advances to these
unconsolidated affiliates are grouped according to the operating segment to
which they relate. For a general discussion of our operating segments, see Note
15.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows investments in and advances to unconsolidated
affiliates at:
DECEMBER 31,
--------------------
2001 2000
-------- --------
Accounted for on equity basis:
Fractionation:
BRF.................................................... $ 29,417 $ 30,599
BRPC................................................... 18,841 25,925
Promix................................................. 45,071 48,670
Pipeline:
EPIK................................................... 14,280 15,998
Wilprise............................................... 8,834 9,156
Tri-States............................................. 26,734 27,138
Belle Rose............................................. 11,624 11,653
Dixie.................................................. 37,558 38,138
Starfish............................................... 25,352
Neptune................................................ 76,880
Nemo................................................... 12,189
Evangeline............................................. 2,578
Octane Enhancement:
BEF.................................................... 55,843 58,677
Accounted for on cost basis:
Processing:
VESCO.................................................. 33,000 33,000
-------- --------
Total..................................................... $398,201 $298,954
======== ========
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows equity in income (loss) of unconsolidated
affiliates for the year ended December 31:
FOR YEAR ENDED DECEMBER 31,
---------------------------
2001 2000 1999
------- ------- -------
Fractionation:
BRF................................................ $ 1,583 $ 1,369 $ (336)
BRPC............................................... 1,161 (284) 16
Promix............................................. 4,201 5,306 630
Other.............................................. 1,256
Pipeline:
EPIK............................................... 345 3,273 1,173
Wilprise........................................... 472 497 160
Tri-States......................................... 1,565 2,499 1,035
Belle Rose......................................... 103 301 (29)
Dixie.............................................. 2,092 751
Starfish........................................... 4,122
Ocean Breeze....................................... 32
Neptune............................................ 4,081
Nemo............................................... 75
Evangeline......................................... (145)
Other.............................................. 1,389
Octane Enhancement:
BEF................................................ 5,671 10,407 8,183
------- ------- -------
Total.............................................. $25,358 $24,119 $13,477
======= ======= =======
At December 31, 2001, our share of accumulated earnings of equity method
unconsolidated affiliates that had not been remitted to us was approximately
$7.0 million.
FRACTIONATION SEGMENT:
At December 31, 2001, the Fractionation segment included the following
unconsolidated affiliates accounted for using the equity method:
- Baton Rouge Fractionators LLC ("BRF") -- an approximate 32.25% interest
in an NGL fractionation facility located in southeastern Louisiana.
- Baton Rouge Propylene Concentrator, LLC ("BRPC") -- a 30.0% interest in a
propylene concentration unit located in southeastern Louisiana.
- K/D/S Promix LLC ("Promix") -- a 33.33% interest in an NGL fractionation
facility and related storage assets located in south Louisiana. Our
investment includes excess cost over the underlying equity in the net
assets of Promix of $8.0 million. The excess cost, which relates to plant
assets, is being amortized against our share of Promix's earnings over a
period of 20 years, which is the estimated useful life of the plant
assets that gave rise to the difference. The unamortized balance of
excess cost was $7.0 million at December 31, 2001.
The combined balance sheet information for the last two years and results
of operations data for the last three years of the Fractionation segment's
equity method investments are summarized below. As used in the
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
following tables, gross operating margin for equity investments represents
operating income before depreciation and amortization expense (both on operating
assets) and selling, general and administrative costs.
AS OF OR FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
BALANCE SHEET DATA:
Current Assets............................................ $ 27,424 $ 31,168
Property, plant and equipment, net........................ 251,519 264,618
Other assets.............................................. 67
-------- --------
Total assets........................................... $278,943 $295,853
======== ========
Current liabilities....................................... $ 9,950 $ 13,661
Combined equity........................................... 268,993 282,192
-------- --------
Total liabilities and combined equity.................. $278,943 $295,853
======== ========
INCOME STATEMENT DATA:
Revenues.................................................. $ 76,480 $ 71,287 $ 36,293
Gross operating margin.................................... 36,321 33,240 14,970
Operating income.......................................... 22,396 19,997 5,930
Net income................................................ 22,738 20,661 4,200
PIPELINES SEGMENT:
At December 31, 2001, our Pipelines operating segment included the
following unconsolidated affiliates accounted for using the equity method:
- EPIK Terminalling L.P. and EPIK Gas Liquids, LLC (collectively,
"EPIK") -- a 50% aggregate interest in a refrigerated NGL marine terminal
loading facility located in southeast Texas. The Company owns 50% of EPIK
Terminalling L.P. which owns 99% of such facilities. We own 50% of EPIK
Gas Liquids, LLC which owns 1% of such facilities. We do not exercise
control over these entities; therefore, we are precluded from
consolidating such entities into our financial statements.
- Wilprise Pipeline Company, LLC ("Wilprise") -- a 37.35% interest in an
NGL pipeline system located in southeastern Louisiana.
- Tri-States NGL Pipeline LLC ("Tri-States") -- an aggregate 33.33%
interest in an NGL pipeline system located in Louisiana, Mississippi and
Alabama.
- Belle Rose NGL Pipeline LLC ("Belle Rose") -- a 41.67% interest in an NGL
pipeline system located in south Louisiana.
- Dixie Pipeline Company ("Dixie") -- an aggregate 19.88% interest in a
1,301-mile propane pipeline and associated facilities extending from Mont
Belvieu, Texas to North Carolina. Our investment includes excess cost
over the underlying equity in the net assets of Dixie of $37.4 million.
The excess cost, which relates to pipeline assets, is being amortized
against our share of Dixie's earnings over a period of 35 years, which is
the estimated useful life of the pipeline assets that gave rise to the
difference. The unamortized balance of excess cost over the underlying
equity in the net assets of Dixie was $35.7 million at December 31, 2001.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- Starfish Pipeline Company LLC ("Starfish") -- a 50% interest in a natural
gas gathering system and related dehydration and other facilities located
in south Louisiana and the Gulf of Mexico offshore Louisiana.
- Neptune Pipeline Company LLC ("Neptune") -- a 25.67% interest in the
natural gas gathering and transmission systems owned by Manta Ray
Offshore Gathering Company, LLC and Nautilus Pipeline Company LLC located
in the Gulf of Mexico offshore Louisiana.
- Nemo Gathering Company, LLC ("Nemo") -- a 33.92% interest in a natural
gas gathering system located in the Gulf of Mexico offshore Louisiana
that became operational in August 2001.
- Evangeline Gas Pipeline Company, L.P. and Evangeline Gas Corp.
(collectively, "Evangeline") -- an approximate 49.5% aggregate interest
in a natural gas pipeline system located in south Louisiana. We acquired
our interest in Evangeline as a result of the Acadian Gas acquisition
(see Note 2 for a description of this acquisition).
The combined balance sheet information for the last two years and results
of operations data for the last three years of the Pipelines segment's equity
method investments are summarized below:
AS OF OR FOR THE YEAR
ENDED DECEMBER 31,
---------------------
2001 2000 1999
--------- --------- -------
BALANCE SHEET DATA:
Current Assets...................................... $ 68,325 $ 25,464
Property, plant and equipment, net.................. 515,327 188,724
Other assets........................................ 50,265 3,666
-------- --------
Total assets..................................... $633,917 $217,854
======== ========
Current liabilities................................. $ 62,347 $ 31,085
Other liabilities................................... 57,965 4,018
Combined equity..................................... 513,605 182,751
-------- --------
Total liabilities and combined equity............ $633,917 $217,854
======== ========
INCOME STATEMENT DATA:
Revenues............................................ $305,404 $ 96,270 $52,386
Gross operating margin.............................. 98,682 51,414 24,845
Operating income.................................... 54,459 41,757 19,988
Net income.......................................... 41,015 31,241 15,637
Equity investments in Gulf of Mexico natural gas pipeline systems in January
2001
On January 29, 2001, we acquired a 50% equity interest in Starfish which
owns the Stingray natural gas pipeline system and a related natural gas
dehydration facility. The Stingray system is a 379-mile, FERC-regulated natural
gas pipeline system that transports natural gas and condensate from certain
production areas located in the Gulf of Mexico offshore Louisiana to onshore
transmission systems located in south Louisiana. The natural gas dehydration
facility is connected to the onshore terminal of the Stingray system in south
Louisiana. The optimal design capacity of the Stingray pipeline is 1.2 Bcf/d.
Shell is the operator of these systems and owns the remaining equity interests
in Starfish.
In addition to Starfish, we acquired a 25.67% interest in Ocean Breeze
Pipeline Company ("Ocean Breeze") and Neptune and a 33.92% interest in Nemo.
Ocean Breeze and Neptune collectively owned the Manta Ray and Nautilus natural
gas pipeline systems located in the Gulf of Mexico offshore Louisiana. The Manta
Ray system comprises approximately 235 miles of unregulated pipelines and
related equipment with an
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
optimal design capacity of 0.75 Bcf/d and the Nautilus system comprises
approximately 101 miles of FERC-regulated pipelines with an optimal design
capacity of 0.6 Bcf/d. The Nemo system, which became operational in August 2001,
comprises 24-mile natural gas pipeline with an optimal design capacity of 0.3
Bcf/d. Like Stingray, Shell is the operator of the Manta Ray and Nemo systems.
Shell is the administrative agent for Nautilus. In November 2001, Ocean Breeze
was merged into Neptune with the Company retaining its 25.67% interest in
Neptune. Shell and Marathon are the co-owners of Neptune and Shell owns the
remaining interest in Nemo.
The cash purchase price of the Starfish interest was $25 million with the
purchase price of the Ocean Breeze, Neptune and Nemo interests being $87
million. The investments were paid for using proceeds from the issuance of the
$450 million Senior Notes B (see Note 6).
Our investment in Neptune and Nemo includes excess cost over the underlying
equity in the net assets of these entities of $13.5 million. The excess cost,
which relates to pipeline assets, is being amortized against our share of
earnings from Neptune and Nemo over a period of 35 years, which is the estimated
useful life of the pipeline assets that gave rise to the difference. The
unamortized balance of excess cost over the underlying equity in the net assets
of Neptune and Nemo was $12.4 million and $0.7 million, respectively, at
December 31, 2001.
Historical information for periods prior to January 1, 2001 do not reflect
any impact associated with our equity investments in Starfish, Neptune and Nemo.
OCTANE ENHANCEMENT SEGMENT:
At December 31, 2001, the Octane Enhancement segment included our 33.33%
interest in Belvieu Environmental Fuels ("BEF"), a facility located in southeast
Texas that produces motor gasoline additives to enhance octane. The BEF facility
currently produces MTBE. The production of MTBE is driven by oxygenated fuel
programs enacted under the federal Clean Air Act Amendments of 1990 and other
legislation and as an additive to increase octane in motor gasoline. Any changes
to these oxygenated fuel programs that enable localities to elect to not
participate in these programs, lessen the requirements for oxygenates or favor
the use of non-isobutane based oxygenated fuels reduce the demand for MTBE and
could have an adverse effect on our results of operations.
In recent years, MTBE has been detected in water supplies. The major source
of the ground water contamination appears to be leaks from underground storage
tanks. Although these detections have been limited and the great majority have
been well below levels of public health concern, there have been calls for the
phase-out of MTBE in motor gasoline in various federal and state governmental
agencies and advisory bodies.
In light of these regulatory developments, the owners of BEF have been
formulating a contingency plan for use of the BEF facility if MTBE were banned
or significantly curtailed. Management is exploring a possible conversion of the
BEF facility from MTBE production to alkylate production. The Company believes
that if MTBE usage is banned or significantly curtailed, the motor gasoline
industry would need a substitute additive to maintain octane levels in motor
gasoline and that alkylate would be an attractive substitute. Depending upon the
type of alkylate process chosen and the level of alkylate production desired,
the cost to convert the facility from MTBE production to alkylate production
would range from $20 million to $90 million, with our share of these costs
ranging from $6.7 million to $30 million.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Balance sheet information for the last two years and results of operations
data for the last three years for BEF are summarized below:
AS OF OR FOR THE
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
BALANCE SHEET DATA:
Current Assets..................................... $ 29,301 $ 20,640
Property, plant and equipment, net................. 140,009 150,603
Other assets....................................... 10,067 11,439
-------- --------
Total assets.................................... $179,377 $182,682
======== ========
Current liabilities................................ $ 13,352 $ 8,042
Other liabilities.................................. 3,438 5,779
Combined equity.................................... 162,587 168,861
-------- --------
Total liabilities and combined equity........... $179,377 $182,682
======== ========
INCOME STATEMENT DATA:
Revenues........................................... $213,734 $258,180 $193,219
Gross operating margin............................. 28,701 43,328 43,479
Operating income................................... 15,984 30,529 30,025
Income before accounting change.................... 17,014 31,220 29,029
Net income......................................... 17,014 31,220 24,550
PROCESSING SEGMENT:
At December 31, 2001, our investments in and advances to unconsolidated
affiliates also includes Venice Energy Services Company, LLC ("VESCO"). The
VESCO investment consists of a 13.1% interest in a company owning a natural gas
processing plant, fractionation facilities, storage, and gas gathering pipelines
in Louisiana. We account for this investment using the cost method.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued two new pronouncements: SFAS No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 prohibits the use of the pooling-of-interest method for
business combinations initiated after June 30, 2001 and also applies to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001. There are also transition provisions that apply to business
combinations completed before July 1, 2001, that were accounted for by the
purchase method. SFAS No. 142 is effective for our fiscal year that began
January 1, 2002 for all goodwill and other intangible assets recognized in our
consolidated balance sheet at that date, regardless of when those assets were
initially recognized. We adopted SFAS No. 141 on January 1, 2002.
Within six months of our adoption of SFAS No. 142 (by June 30, 2002), we
will have completed a transitional impairment review to identify if there is an
impairment to the December 31, 2001 recorded goodwill or intangible assets of
indefinite life using a fair value methodology. Professionals in the business
valuation industry will be consulted to validate the assumptions used in such
methodologies. Any impairment loss resulting from the transitional impairment
test will be recorded as a cumulative effect of a change in accounting principle
for the quarter ended June 30, 2002. Subsequent impairment losses will be
reflected in operating income in the Statements of Consolidated Operations.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At January 1, 2002, our intangible assets included the values assigned to
the 20-year Shell natural gas processing agreement (the "Shell agreement") and
the excess cost of the purchase price over the fair market value of the assets
acquired from Mont Belvieu Associates (the "MBA excess cost"), both of which
were initially recorded in 1999. The value of the Shell agreement ($194.4
million net book value at December 31, 2001) is being amortized on a
straight-line basis over its contract term. Likewise, the MBA excess cost ($7.9
million net book value at December 31, 2001) was being amortized on a
straight-line basis over 20 years. Based upon initial interpretations of the new
accounting standards, we anticipate that the intangible asset related to the
Shell agreement will continue to be amortized over its contract term ($11.1
million annually for 2002 through July 2019); however, the MBA excess cost will
be reclassified to goodwill in accordance with the new standard and its
amortization will cease (currently, $0.5 million annually). This goodwill would
then be subject to impairment testing as prescribed in SFAS No. 142. We are
continuing to evaluate the complex provisions of SFAS No. 142 and will fully
adopt the standard during 2002 within the prescribed time periods.
In addition to SFAS No. 141 and No. 142, the FASB also issued SFAS No. 143,
"Accounting for Asset Retirement Obligations", in June 2001. This statement
establishes accounting standards for the recognition and measurement of a
liability for an asset retirement obligation and the associated asset retirement
cost. This statement is effective for our fiscal year beginning January 1, 2003.
We are continuing to evaluate the provisions of this statement. In August 2001,
the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". This statement addresses financial accounting and reporting
for the impairment and/or disposal of long-lived assets. We adopted this
statement effective January 1, 2002 and determined that it will have no material
impact on our financial statements as of that date.
6. LONG-TERM DEBT
Our long-term debt consisted of the following at:
DECEMBER 31,
-------------------
2001 2000
-------- --------
Borrowings under:
Senior Notes A, 8.25% fixed rate, due March 2005.......... $350,000 $350,000
MBFC Loan, 8.70% fixed rate, due March 2010............... 54,000 54,000
Senior Notes B, 7.50% fixed rate, due February 2011....... 450,000
-------- --------
Total principal amount............................ 854,000 404,000
Unamortized balance of increase in fair value related to
hedging a portion of fixed-rate debt...................... 1,653
Less unamortized discount on:
Senior Notes A............................................ (117) (153)
Senior Notes B............................................ (258)
Less current maturities of long-term debt................... --
-------- --------
Long-term debt.................................... $855,278 $403,847
======== ========
Long-term debt does not reflect the $250 million Multi-Year Credit Facility
or the $150 million 364-Day Credit Facility. No amount was outstanding under
either of these two revolving credit facilities at December 31, 2001. See below
for a complete description of these facilities.
At December 31, 2001, we had a total of $75 million of standby letters of
credit capacity under our $250 Million Multi-Year Credit Facility of which $2.4
million was outstanding.
Enterprise Products Partners L.P. acts as guarantor of certain debt
obligations of its major subsidiary, the Operating Partnership. This
parent-subsidiary guaranty provision exists under the Company's Senior Notes,
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MBFC Loan and its two current revolving credit facilities. In the descriptions
that follow, the term "MLP" denotes Enterprise Products Partners L.P. in this
guarantor role.
SENIOR NOTES A. On March 13, 2000, we completed a public offering of $350
million in principal amount of 8.25% fixed-rate Senior Notes due March 15, 2005
at a price to the public of 99.948% per Senior Note (the "Senior Notes A").
These notes were issued to retire certain revolving credit loan balances that
were created as a result of the TNGL acquisition and other general partnership
activities.
The Senior Notes A are subject to a make-whole redemption right. The notes
are an unsecured obligation and rank equally with existing and future unsecured
and unsubordinated indebtedness and senior to any future subordinated
indebtedness. The notes are guaranteed by the MLP through an unsecured and
unsubordinated guarantee and were issued under an indenture containing certain
restrictive covenants. These covenants restrict our ability, with certain
exceptions, to incur debt secured by liens and engage in sale and leaseback
transactions. We were in compliance with these restrictive covenants at December
31, 2001.
SENIOR NOTES B. On January 24, 2001, we completed a public offering of $450
million in principal amount of 7.50% fixed-rate Senior Notes due February 1,
2011 at a price to the public of 99.937% per Senior Note (the "Senior Notes B").
These notes were issued to finance the acquisition of Acadian Gas, Ocean Breeze,
Neptune, Nemo and Starfish; to cover construction costs of certain NGL pipelines
and related projects; and to fund other general partnership activities.
The Senior Notes B were issued under the same indenture as Senior Notes A
and therefore are subject to similar terms and restrictive covenants. The Senior
Notes B are guaranteed by the MLP through an unsecured and unsubordinated
guarantee. We were in compliance with the restrictive covenants at December 31,
2001.
MBFC LOAN. On March 27, 2000, we executed a $54 million loan agreement with
the Mississippi Business Finance Corporation ("MBFC") having a 8.70% fixed-rate
and a maturity date of March 1, 2010. In general, the proceeds from this loan
were used to retire certain revolving credit loan balances attributable to
acquiring and constructing the Pascagoula, Mississippi natural gas processing
facility.
The MBFC Loan is subject to a make-whole redemption right and is guaranteed by
the MLP through an unsecured and unsubordinated guarantee. The indenture
agreement contains an acceleration clause whereby the outstanding principal and
interest on the loan may become due and payable if our credit ratings decline
below a Baa3 rating by Moody's (currently Baa2) and below a BBB- rating by
Standard and Poors (currently BBB). Under these circumstances, the trustee (as
defined in the indenture agreement) may, and if requested to do so by holders of
at least 25% in aggregate of the principal amount of the outstanding underlying
bonds, shall accelerate the maturity of the MBFC Loan, whereby the principal and
all accrued interest would become immediately due and payable. If such an event
occurred, we would have the option (a) to redeem the MBFC loan or (b) to provide
an alternate credit agreement (as defined in the indenture agreement) to support
our obligation under the MBFC loan, with both options exercisable within 120
days of receiving notice of the decline in our credit ratings from the ratings
agencies.
The loan agreement contains certain covenants including maintaining
appropriate levels of insurance on the Pascagoula facility and restrictions
regarding mergers. We were in compliance with the restrictive covenants at
December 31, 2001.
MULTI-YEAR CREDIT FACILITY. On November 17, 2000, we entered into a $250
million five-year revolving credit facility that includes a sublimit of $75
million for letters of credit. The November 17, 2005 maturity date may be
extended for one year at our option with the consent of the lenders, subject to
the extension provisions in the agreement. We can increase the amount borrowed
under this facility, with the consent of the Administrative Agent (whose consent
may not be unreasonably withheld), up to an amount not exceeding $350 million by
adding to the facility one or more new lenders and/or increasing the commitments
of existing lenders, so long as the aggregate amount of the funds borrowed under
this credit facility and the 364-Day
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Credit Facility (described below) does not exceed $500 million. No lender will
be required to increase its original commitment, unless it agrees to do so at
its sole discretion. This credit facility is guaranteed by the MLP through an
unsecured guarantee.
Proceeds from this credit facility will be used for working capital,
acquisitions and other general partnership purposes. No amount was outstanding
for this credit facility at December 31, 2001.
Our obligations under this bank credit facility are unsecured general
obligations and are non-recourse to the General Partner. As defined within the
agreement, borrowings under this bank credit facility will generally bear
interest at either (i) the greater of the Prime Rate or the Federal Funds
Effective Rate plus one-half percent or (ii) a Eurodollar Rate plus an
applicable margin or (iii) a Competitive Bid Rate. We elect the basis for the
interest rate at the time of each borrowing.
The credit agreement contains various affirmative and negative covenants
applicable to the Company to, among other things, (i) incur certain
indebtedness, (ii) grant certain liens, (iii) enter into certain merger or
consolidation transactions and (iv) make certain investments. In addition, we
may not directly or indirectly make any distribution in respect of its
partnership interests, except those payments in connection with the Buy-Back
Program (not to exceed $30 million in the aggregate, see Note 7) and
distributions from Available Cash from Operating Surplus, both as defined within
the agreement.
The credit agreement also requires that we satisfy certain financial
covenants at the end of each fiscal quarter. As defined within the agreement, we
(i) must maintain Consolidated Net Worth of $750 million and (ii) not permit our
ratio of Consolidated Indebtedness to Consolidated EBITDA, including pro forma
adjustments (as defined within the agreement), for the previous four quarter
period to exceed 4.0 to 1.0. We were in compliance with the restrictive
covenants at December 31, 2001.
364-DAY CREDIT FACILITY. In conjunction with the Multi-Year Credit
Agreement, we entered into a 364-day $150 million revolving bank credit
facility. In November 2001, we and our lenders amended the revolving credit
agreement to extend the maturity date to November 15, 2002 with the option to
convert any revolving credit balance outstanding at November 15, 2002 to a
one-year term loan.
We can increase the amount borrowed under this facility, with the consent
of the Administrative Agent (whose consent may not be unreasonably withheld), up
to an amount not exceeding $250 million by adding to the facility one or more
new lenders and/or increasing the commitments of existing lenders, so long as
the aggregate amount of the funds borrowed under this credit facility and the
Multi-Year Credit Facility do not exceed $500 million. No lender will be
required to increase its original commitment, unless it agrees to do so at its
sole discretion. This credit facility is guaranteed by the MLP through an
unsecured guarantee.
Proceeds from this credit facility will be used for working capital,
acquisitions and other general partnership purposes. No amount was outstanding
for this credit facility at December 31, 2001.
Our obligations under this bank credit facility are unsecured general
obligations and are non-recourse to the General Partner. As defined within the
agreement, borrowings under this bank credit facility will generally bear
interest at either (i) the greater of the Prime Rate or the Federal Funds
Effective Rate plus one-half percent or (ii) a Eurodollar Rate plus an
applicable margin or (iii) a Competitive Bid Rate. We elect the basis for the
interest rate at the time of each borrowing.
Limitations on certain actions by the Company and financial condition
covenants of this bank credit facility are substantially consistent with those
existing for the Multi-Year Credit Facility as described previously. We were in
compliance with the restrictive covenants at December 31, 2001.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
February 2001 Registration Statement
On February 23, 2001, we filed a $500 million universal shelf registration
(the "February 2001 Shelf") covering the issuance of an unspecified amount of
equity or debt securities or a combination thereof. We expect to use the net
proceeds from any sale of securities for future business acquisitions and other
general corporate purposes, such as working capital, investments in
subsidiaries, the retirement of existing debt and/or the repurchase of Common
Units or other securities. The exact amounts to be used and when the net
proceeds will be applied to partnership purposes will depend on a number of
factors, including our funding requirements and the availability of alternative
funding sources. We routinely review acquisition opportunities.
Increase in fair value of fixed-rate debt
Upon adoption of SFAS No. 133 (see Note 13), we recorded a $2.3 million
fair value adjustment associated with our fixed-rate debt. The fair value
adjustment is not a cash obligation of the Company and does not alter the amount
of our indebtedness. Under the specific rules of SFAS 133, the fair value
adjustment will be amortized over the remaining life of the fixed-rate debt to
which it is associated, which approximates 10 years. See "Interest Rate Swaps"
under Note 13 for additional information concerning this item.
Impact of interest rate swap agreements upon interest expense
During 2001 and 2000, we utilized interest rate swap agreements to manage
debt service costs by converting a portion of our fixed-rate debt into
variable-rate debt. Income or losses sustained on these financial instruments
are reflected as a component of consolidated interest expense. At December 31,
2000, we had three interest rate swaps outstanding having a combined notional
value of $154 million (attributable to fixed-rate debt) with an estimated fair
value of $2.0 million. Due to the early termination of two of the swaps, the
notional amount and fair value of the remaining swap was $54 million and $2.3
million (an asset), respectively, at December 31, 2001.
We recorded as a reduction of interest expense $13.2 million from our
interest rates swaps during 2001 and $10.0 million during 2000. The income
recognized in 2001 from these swaps includes the $2.3 million in non-cash
mark-to-market income at December 31, 2001 (attributable to the sole remaining
swap). The remaining $10.9 million has been realized. No mark-to-market income
was recorded prior to the implementation of SFAS No. 133. For additional
information regarding our interest rate swaps, see Note 13.
7. CAPITAL STRUCTURE
The Second Amended and Restated Agreement of Limited Partnership of the
Company (the "Partnership Agreement") sets forth the calculation to be used to
determine the amount and priority of cash distributions that the Common and
Subordinated Unitholders and the General Partner will receive. The Partnership
Agreement also contains provisions for the allocation of net earnings and losses
to the Unitholders and the General Partner. For purposes of maintaining partner
capital accounts, the Partnership Agreement specifies that items of income and
loss shall be allocated among the partners in accordance with their respective
percentage interests. Normal allocations according to percentage interests are
done only, however, after giving effect to priority earnings allocations in an
amount equal to incentive cash distributions allocated 100% to the General
Partner. As an incentive, the General Partner's percentage interest in quarterly
distributions is increased after certain specified target levels are met. When
quarterly distributions exceed $0.253 per Unit, the General Partner receives a
percentage of the excess between the actual distribution rate and the target
level ranging from approximately 15% to 50% depending on the target level
achieved.
The Partnership Agreement generally authorizes us to issue an unlimited
number of additional limited partner interests and other equity securities for
such consideration and on such terms and conditions as shall
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
be established by the General Partner in its sole discretion without the
approval of Unitholders. During the Subordination Period (as described under
"Subordinated Units" below), however, we are limited with regards to the number
of equity securities that we may issue that rank senior to Common Units (except
for Common Units upon conversion of Subordinated Units, pursuant to employee
benefit plans, upon conversion of the general partner interest as a result of
the withdrawal of the General Partner or in connection with acquisitions or
capital improvements that are accretive on a per Unit basis) or an equivalent
number of securities ranking on a parity with the Common Units, without the
approval of the holders of at least a Unit Majority. A Unit Majority is defined
as at least a majority of the outstanding Common Units (during the Subordination
Period), excluding Common Units held by the General Partner and its affiliates,
and at least a majority of the outstanding Common Units (after the Subordination
Period). After adjusting for the Units issued in connection with the TNGL
acquisition, the number of Common Units available (and unreserved) to us for
general partnership purposes during the Subordination Period was 54,550,000 at
December 31, 2001.
SUBORDINATED UNITS. The 42,819,740 Subordinated Units have no voting rights
until converted into Common Units at the end of the Subordination Period. The
Subordination Period will generally extend until the first day of any quarter
beginning after June 30, 2003 when the Conversion Tests have been satisfied.
Generally, the Conversion Test will have been satisfied when we have paid from
Operating Surplus and generated from Adjusted Operating Surplus the minimum
quarterly distribution on all Units for each of the three preceding four-quarter
periods. Upon expiration of the Subordination Period, all remaining Subordinated
Units will convert into Common Units on a one-for-one basis and will thereafter
participate pro rata with the other Common Units in distributions of Available
Cash.
The Partnership Agreement stipulates that 50% of the Subordinated Units may
undergo an early conversion into Common Units should certain criteria be
satisfied. Based upon these criteria, the earliest that the first 25% of the
Subordinated Units would convert into Common Units is May 1, 2002. Should the
criteria continue to be satisfied through the first quarter of 2003, an
additional 25% of the Subordinated Units would undergo an early conversion into
Common Units on May 1, 2003. The remaining 50% of Subordinated Units would
convert on August 1, 2003 should the balance of the conversion requirements be
met.
SPECIAL UNITS. The Special Units issued to Shell in conjunction with the
1999 TNGL acquisition and a related-contingent unit agreement do not accrue
distributions and are not entitled to cash distributions until their conversion
into Common Units on a one for one basis. For financial accounting and tax
purposes, the Special Units are generally not allocated any portion of net
income; however, for tax purposes, the Special Units are allocated a certain
amount of depreciation until their conversion into Common Units.
We issued 29.0 million Special Units to Shell in August 1999 in connection
with TNGL acquisition. Subsequently, Shell met certain performance criteria in
2000 and 2001 that obligated us to issue an additional 12.0 million Special
Units to Shell -- 6.0 million were issued in August 2000 and 6.0 million in
August 2001 under a contingent unit agreement. Of the cumulative 41.0 million
Special Units issued, 12.0 million have already converted to Common Units (2.0
million in August 2000 and 10.0 million in August 2001). The remaining Special
Units will convert to Common Units on a one for one basis as follows: 19.0
million in August 2002 and 10.0 million in August 2003. These conversions have a
dilutive effect on basic earnings per Unit.
Under the rules of the New York Stock Exchange, the conversion of Special
Units into Common Units requires the approval of a majority of Common
Unitholders. An affiliate of EPCO, which owns in excess of 62% of the
outstanding Common Units, has voted its Units in favor of past conversions,
which provided the necessary votes for approval.
BUY-BACK PROGRAM. In 2000, the General Partner authorized us to repurchase
and retire up to 2,000,000 of our publicly-held Common Units. The repurchase and
retirements will be made during periods of temporary market weakness at price
levels that would be accretive to our remaining Unitholders.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In September 2001, the General Partner approved a modification to the
Buy-Back Program that allows both the Company (specifically, Enterprise Products
Partners L.P.) and its consolidated revocable grantor trust (EPOLP 1999 Grantor
Trust or the "Trust") to repurchase Common Units under the program. Under the
terms of the modification, purchases made by the Company will continue to be
retired whereas purchases made by the Trust will remain outstanding and not be
retired. The Common Units purchased by the Trust will be accounted for as
Treasury Units.
During 2000, the Company repurchased and retired 56,800 Common Units under
this program. The Trust purchased 792,800 Common Units under this program in
2001. At December 31, 2001, 1,150,400 Common Units could be repurchased and/or
retired under this program. (see Note 16 for a discussion of a subsequent event
involving the declaration of a two-for-one split of Common Units that occurred
in May 2002).
TREASURY UNITS ACQUIRED BY TRUST. During the first quarter of 1999, the
Operating Partnership established the Trust to fund potential future obligations
under the EPCO Agreement with respect to EPCO's long-term incentive plan
(through the exercise of options granted to EPCO employees or directors of the
General Partner). The Common Units purchased by the Trust are accounted for in a
manner similar to treasury stock under the cost method of accounting. The Trust
purchased 534,400 Common Units in 1999 at a cost of $4.7 million and 792,800
Common Units in 2001 at a cost of $18.0 million.
In November 2001, the Trust sold 1,000,000 Common Units previously held in
treasury to EPCO for $22.6 million. The sales price of the treasury Common Units
sold exceeded the purchase price of the Treasury Units by $6.0 million and has
been credited to Partners' Equity accounts in a manner similar to additional
paid-in capital.
UNIT HISTORY. The following table details the outstanding balance of each
class of Units at the end of the periods indicated:
LIMITED PARTNERS
---------------------------
COMMON SUBORDINATED TREASURY
UNITS UNITS SPECIAL UNITS UNITS
----------- ------------ ------------- ----------
Balance, December 31, 1997.............. 67,105,830 42,819,740
Units issued to public................ 24,000,000
----------- ----------
Balance, December 31, 1998.............. 91,105,830 42,819,740
Special Units issued to Shell in
connection with TNGL acquisition... 29,000,000
Treasury Units purchased by
consolidated Trust................. (534,400) 534,400
----------- ---------- ----------- ----------
Balance, December 31, 1999.............. 90,571,430 42,819,740 29,000,000 534,400
Additional Special Units issued to
Coral Energy, LLC in connection
with contingency agreement......... 6,000,000
Conversion of 2.0 million Coral
Energy, LLC Special Units into
Common Units....................... 2,000,000 (2,000,000)
Units repurchased and retired in
connection with buy-back program... (56,800)
----------- ---------- ----------- ----------
Balance, December 31, 2000.............. 92,514,630 42,819,740 33,000,000 534,400
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LIMITED PARTNERS
---------------------------
COMMON SUBORDINATED TREASURY
UNITS UNITS SPECIAL UNITS UNITS
----------- ------------ ------------- ----------
Additional Special Units issued to
Coral Energy, LLC in connection
with contingency agreement......... 6,000,000
Conversion of 10.0 million Coral
Energy, LLC Special Units into
Common Units....................... 10,000,000 (10,000,000)
Treasury Units purchased by
consolidated Trust................. (792,800) 792,800
Treasury Units reissued by
consolidated Trust................. 1,000,000 (1,000,000)
----------- ---------- ----------- ----------
Balance, December 31, 2001.............. 102,721,830 42,819,740 29,000,000 327,200
=========== ========== =========== ==========
8. EARNINGS PER UNIT
Basic earnings per Unit is computed by dividing net income available to
limited partner interests by the weighted-average number of Common and
Subordinated Units outstanding during the period. Diluted earnings per Unit is
computed by dividing net income available to limited partner interests by the
weighted-average number of Common, Subordinated and Special Units outstanding
during the period. The following table reconciles the number of Units used in
the calculation of basic earnings per Unit and diluted earnings per Unit for
each of the three years ended December 31, 2001, 2000 and 1999.
The weighted-average number of Common Units outstanding in 2001 and 2000
reflect the conversion of a portion of Shell's Special Units to Common Units in
August of each year. Specifically, ten million Special Units converted to Common
Units in August 2001 and two million Special Units converted in August 2000. The
weighted-average number of Special Units outstanding in 2001 and 2000 reflect
the above conversions and the issuance of six million Special Units in August
2001 and August 2000. See Note 7 for additional information regarding Shell's
Special Units.
FOR YEAR ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
-------- -------- --------
Income before minority interest.................... $244,650 $222,759 $121,521
General partner interest........................... (5,608) (2,597) (1,203)
-------- -------- --------
Income before minority interest available to
Limited Partners................................. 239,042 220,162 120,318
Minority interest.................................. (2,472) (2,253) (1,226)
-------- -------- --------
Net income available to Limited Partners........... $236,570 $217,909 $119,092
======== ======== ========
BASIC EARNINGS PER UNIT
NUMERATOR
Income before minority interest available to
Limited Partners............................ $239,042 $220,162 $120,318
======== ======== ========
Net income available to Limited Partners...... $236,570 $217,909 $119,092
======== ======== ========
DENOMINATOR (WEIGHTED-AVERAGE)
Common Units outstanding...................... 96,632 91,396 90,600
Subordinated Units outstanding................ 42,820 42,820 42,820
-------- -------- --------
Total......................................... 139,452 134,216 133,420
======== ======== ========
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR YEAR ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
-------- -------- --------
BASIC EARNINGS PER UNIT
Income before minority interest available to
Limited Partners............................ $ 1.72 $ 1.64 $ .90
======== ======== ========
Net income available to Limited Partners...... $ 1.70 $ 1.63 $ .90
======== ======== ========
DILUTED EARNINGS PER UNIT
NUMERATOR
Income before minority interest available to
Limited Partners............................ $239,042 $220,162 $120,318
======== ======== ========
Net income available to Limited Partners...... $236,570 $217,909 $119,092
======== ======== ========
DENOMINATOR (WEIGHTED-AVERAGE)
Common Units outstanding...................... 96,632 91,396 90,600
Subordinated Units outstanding................ 42,820 42,820 42,820
Special Units outstanding..................... 31,334 30,672 12,156
-------- -------- --------
Total......................................... 170,786 164,888 145,576
======== ======== ========
DILUTED EARNINGS PER UNIT
Income before minority interest available to
Limited Partners............................ $ 1.40 $ 1.34 $ .83
======== ======== ========
Net income available to Limited Partners...... $ 1.39 $ 1.32 $ .82
======== ======== ========
9. DISTRIBUTIONS
We intend, to the extent there is sufficient available cash from Operating
Surplus, as defined by the Partnership Agreement, to distribute to each holder
of Common Units at least a minimum quarterly distribution of $0.225 per Common
Unit. The minimum quarterly distribution is not guaranteed and is subject to
adjustment as set forth in the Partnership Agreement. With respect to each
quarter during the Subordination Period, the Common Unitholders will generally
have the right to receive the minimum quarterly distribution, plus any
arrearages thereon, and the General Partner will have the right to receive the
related distribution on its interest before any distributions of available cash
from Operating Surplus are made to the Subordinated Unitholders. As an
incentive, the General Partner's interest in quarterly distributions is
increased after certain specified target levels are met. We made incentive
distributions to the General Partner of $3.2 million during 2001 and $0.4
million during 2000.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table is a summary of cash distributions to partnership
interests since the first quarter of 1999.
CASH DISTRIBUTION HISTORY
------------------------------------------------------
PER PER
COMMON SUBORDINATED
UNIT UNIT RECORD DATE PAYMENT DATE
------- ------------ ------------- -------------
1999
1st Quarter....................... $0.2250 $0.0350 Apr. 30, 1999 May 12, 1999
2nd Quarter....................... $0.2250 $0.1850 Jul. 30, 1999 Aug. 11, 1999
3rd Quarter....................... $0.2250 $0.2250 Oct. 29, 1999 Nov. 10, 1999
4th Quarter....................... $0.2500 $0.2500 Jan. 31, 2000 Feb. 10, 2000
2000
1st Quarter....................... $0.2500 $0.2500 Apr. 28, 2000 May 10, 2000
2nd Quarter....................... $0.2625 $0.2625 Jul. 31, 2000 Aug. 10, 2000
3rd Quarter....................... $0.2625 $0.2625 Oct. 31, 2000 Nov. 10, 2000
4th Quarter....................... $0.2750 $0.2750 Jan. 31, 2001 Feb. 9, 2001
2001
1st Quarter....................... $0.2750 $0.2750 Apr. 30, 2001 May 10, 2001
2nd Quarter....................... $0.2938 $0.2938 Jul. 31, 2001 Aug. 10, 2001
3rd Quarter....................... $0.3125 $0.3125 Oct. 31, 2001 Nov. 9, 2001
4th Quarter....................... $0.3125 $0.3125 Jan. 31, 2002 Feb. 11, 2002
The quarterly cash distribution amounts shown in the table correspond to
the cash flows for the quarters indicated. The actual cash distributions (i.e.,
payments to our limited partners) occur within 45 days after the end of such
quarter.
10. RELATED PARTY TRANSACTIONS
We have no employees. All management, administrative and operating
functions are performed by employees of EPCO pursuant to the EPCO Agreement (in
effect since July 1998). Under the terms of the EPCO Agreement, EPCO agreed to:
- employ the personnel necessary to manage our business and affairs
(through the General Partner);
- employ the operating personnel involved our business for which we
reimburse EPCO at cost (based upon EPCO's actual salary costs and related
fringe benefits);
- allow us to participate as named insureds in EPCO's current insurance
program with the costs being allocated among the parties on the basis of
formulas set forth in the agreement;
- grant us an irrevocable, non-exclusive worldwide license to use all of
the EPCO trademarks and trade names;
- indemnify us against any losses resulting from certain lawsuits; and to
- sublease to us all of the equipment which it holds pursuant to operating
leases relating to an isomerization unit, a deisobutanizer tower, two
cogeneration units and approximately 100 railcars for one dollar per year
and to assign its' purchase option under such leases to us. EPCO remains
liable for the lease payments associated with these assets.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Operating costs and expenses (as shown in the audited Statements of
Consolidated Operations) treat the full amount of lease payments being made by
EPCO as a non-cash operating expense (with the offset to Partners' Equity on the
Consolidated Balance Sheet). In addition, operating costs and expenses include
compensation charges for EPCO's employees who operate the facilities.Pursuant to
the EPCO Agreement, we reimburse EPCO for our portion of the costs of certain of
its employees who manage our business and affairs. In general, our reimbursement
of EPCO's expense associated with administrative positions that were active at
the time of our initial public offering in July 1998 is capped by the
Administrative Services Fee that we pay (currently at $16 million annually). The
General Partner, with the approval and consent of the Audit and Conflicts
Committee, may agree to annual increases of such fee up to ten percent per year
during the 10-year term of the EPCO Agreement. Any difference between the actual
costs of this "pre-expansion" group (including those associated with
equity-based awards granted to certain individuals within this group) and the
Administrative Services Fee will be retained by EPCO (i.e., EPCO solely bears
any shortfall in reimbursement for this group).
Beginning in January 2000, we began reimbursing EPCO for our share of the
compensation of administrative personnel that it had hired in response to our
expansion and business development activities (through the construction of new
facilities, business acquisitions or the like). EPCO began hiring "expansion"
administrative personnel during 1999 in connection with the TNGL acquisition and
other development activities. In general, we reimburse EPCO for our share of its
compensation expense associated with these "expansion" administrative positions,
including those costs attributable to equity-based awards.
The following table summarizes the Administrative Services Fee paid to EPCO
during the last three years. In addition, the table shows the total compensation
reimbursed to EPCO for operations personnel and "expansion" administrative
positions.
FOR YEAR ENDED DECEMBER 31,
-----------------------------
2001 2000 1999
------- ------- -------
Administrative Services Fee paid to EPCO.............. $15,125 $13,750 $12,500
Compensation reimbursed to EPCO....................... 48,507 44,717 26,889
------- ------- -------
Total............................................... $63,632 $58,467 $39,389
======= ======= =======
We elected to prepay EPCO a discounted amount of $15.7 million for the 2002
Administrative Services Fee in December 2001 (the undiscounted amount was $16.0
million). We will owe EPCO for any undiscounted amount above the $16.0 million
if the General Partner approves an increase in the fee during 2002.
Other related party and similar transactions with EPCO or its affiliates
EPCO also operates the facilities owned by BEF and EPIK and charges them
for actual salary costs and related fringe benefits. In addition, EPCO is paid a
management fee by these entities in lieu of reimbursement for the actual cost of
providing management services; such charges aggregated $0.8 for 2001, $0.9
million for 2000 and $0.8 million in 1999.
We have entered into an agreement with EPCO to provide trucking services
related to the loading and transportation of NGL products. EPCO charged us $9.0
million in 2001, $7.9 million in 2000 and $5.7 million in 1999 for these
services. On occasion, in the normal course of business, we may engage in
transactions with EPCO involving the buying and selling of NGL products. No such
sales or purchases were transacted with EPCO during 2001 and 2000; however, we
purchased a net $20.6 million of such products from EPCO during 1999.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, trust affiliates of EPCO (Enterprise Products 1998 Unit Option
Plan Trust and the Enterprise Products 2000 Rabbi Trust) purchase Common Units
for the purpose of granting options to EPCO management and certain key employees
(many of whom also serve in similar capacities with the General Partner). During
2001, these trusts purchased 423,036 Common Units on the open market or through
privately negotiated transactions. At December 31, 2001, these trusts owned a
total of 2,923,036 Common Units. In November 2001, EPCO directly purchased
1,000,000 Common Units at market prices from our consolidated trust, EPOLP 1999
Grantor Trust, on behalf of a key executive.
Our agreements with EPCO are not the result of arm's-length transactions,
and there can be no assurance that any of the transactions provided for therein
are effected on terms at least as favorable to the parties to such agreement as
could have been obtained from unaffiliated third parties.
Relationships with Shell
We have an extensive and ongoing relationship with Shell as a partner,
customer and vendor. Shell, through its subsidiary Shell US Gas & Power LLC,
owns approximately 23.2% of our limited partnership interests and 30.0% of the
General Partner. Currently, three members of the Board of Directors of the
General Partner are employees of Shell.
The most significant contract affecting our natural gas processing business
is the 20-year Shell Processing Agreement which grants us the right to process
Shell's current and future production from the Gulf of Mexico within the state
and federal waters off Texas, Louisiana, Mississippi, Alabama and Florida (on a
keepwhole basis). This includes natural gas production from deepwater
developments. Shell is the largest oil and gas producer and holds one of the
largest lease positions in the deepwater Gulf of Mexico. Generally, this
contract has the following rights and obligations:
- the exclusive right to process any and all of Shell's Gulf of Mexico
natural gas production from existing and future dedicated leases; plus
- the right to all title, interest and ownership in the mixed NGL stream
extracted by our gas plants from Shell's natural gas production from such
leases; with
- the obligation to deliver to Shell the natural gas stream after the mixed
NGL stream is extracted.
Apart from operating expenses arising from the Shell Processing Agreement,
we also sell NGL and petrochemical products to Shell.
The following table shows the related party amounts by major category in
the Company's Statements of Consolidated Operations for the last three years.
The table also shows the total amounts paid to EPCO separately under the EPCO
Agreement for employee-related costs for the last three years.
FOR YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
REVENUES FROM CONSOLIDATED OPERATIONS
Unconsolidated affiliates.......................... $173,684 $ 61,988 $ 40,352
Shell.............................................. 333,333 292,741 56,301
EPCO and subsidiaries.............................. 5,439 4,750 9,148
OPERATING COSTS AND EXPENSES
Unconsolidated affiliates.......................... 41,062 58,202 20,696
Shell.............................................. 705,440 736,655 188,570
EPCO and subsidiaries.............................. 10,075 9,492 35,046
EPCO AGREEMENT....................................... 63,632 58,467 39,389
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
REDELIVERY COMMITMENTS
From time to time, we store NGL, petrochemical and natural gas volumes for
third parties under various processing, storage and similar agreements. Under
the terms of these agreements, we are generally required to redeliver to the
owner volumes on demand. We are insured for any physical loss of such volumes
due to catastrophic events. At December 31, 2001, NGL and petrochemical volumes
aggregating 320 million gallons were due to be redelivered to their owners along
with 887,414 MMBtus of natural gas.
LEASE COMMITMENTS
We lease certain equipment and processing facilities under noncancelable
and cancelable operating leases. Minimum future rental payments on such leases
with terms in excess of one year at December 31, 2001 are as follows:
2002........................................................ $ 5,115
2003........................................................ 4,862
2004........................................................ 4,324
2005........................................................ 279
2006........................................................ 181
Thereafter.................................................. 1,077
-------
Total minimum obligations................................. $15,838
=======
The operating lease commitments shown above exclude the expense associated
with various equipment leases contributed to us by EPCO at our formation for
which EPCO has retained the liability. During 2001, 2000 and 1999, our non-cash
lease expense associated with these EPCO "retained" leases was $10.4 million,
$10.6 million and $10.6 million, respectively.
Lease and rental expense (including Retained Leases) included in operating
income for the years ended December 31, 2001, 2000 and 1999 was approximately
$23.4 million, $21.2 million and $20.6 million. EPCO has assigned us the
purchase options associated with the retained leases. Should we decide to
exercise our purchase options under the retained leases, up to $26.0 million
will be payable in 2004, $3.4 million in 2008 and $3.1 million in 2016.
PURCHASE COMMITMENTS
Gas purchase commitments. We have long-term purchase commitments for NGL
products and related-streams including natural gas with several suppliers. The
purchase prices contained within these contracts
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximate market value at the time of delivery. The following table shows our
long-term volume commitments under these contracts.
2002 2003 2004 2005 2006 THEREAFTER
------ ------ ------ ------ ------ ----------
NGLs (000s barrels):
Ethane................................ 2,154 2,154 1,677 1,089 126
Propane............................... 2,898 2,826 1,899 900 102
Isobutane............................. 498 498 387 252 30
Normal Butane......................... 1,134 964 735 303 34
Natural Gasoline...................... 1,944 1,944 1,488 846 48
Other................................. 960 460 180
------ ------ ------ ------ ------
Total NGLs.................... 9,588 8,846 6,366 3,390 340
====== ====== ====== ====== ======
Natural gas (BBtus)..................... 13,726 13,726 12,996 12,996 12,996 75,600
====== ====== ====== ====== ====== ======
Capital spending commitments. As of December 31, 2001, we had capital
expenditure commitments totaling approximately $5.3 million, of which $0.3
million relates to our portion of internal growth projects of unconsolidated
affiliates.
LITIGATION
We are indemnified for any litigation pending as of the date of our
formation by EPCO. We are sometimes named as a defendant in litigation relating
to our normal business operations. Although we insure against various business
risks, to the extent management believes 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 asa
result of ordinary business activity. Except as noted below, management is not
aware of any significant litigation, pending or threatened, that would have a
significant adverse effect on our financial position or results of operations.
Our operations are subject to the Clean Air Act and comparable state
statutes. Amendments to the Clean Air Act were adopted in 1990 and contain
provisions that may result in the imposition of certain pollution control
requirements with respect to air emissions from our pipelines and processing and
storage facilities. For example, the Mont Belvieu processing and storage
facilities are located in the Houston-Galveston ozone non-attainment area, which
is categorized as a "severe" area and, therefore, is subject to more restrictive
regulations for the issuance of air permits for new or modified facilities. The
Houston-Galveston area is among nine areas of the country in this "severe"
category. One of the other consequences of this non-attainment status is the
potential imposition of lower limits on emissions of certain pollutants,
particularly oxides of nitrogen which are produced through combustion, as in the
gas turbines at the Mont Belvieu complex.
Regulations imposing more strict air emissions requirements on existing
facilities in the Houston-Galveston area were issued in December 2000. These
regulations may necessitate extensive redesign and modification of our Mont
Belvieu facilities to achieve the air emissions reductions needed for federal
Clean Air Act compliance. The technical practicality and economic reasonableness
of these regulations have been challenged under state law in litigation filed on
January 19, 2001, against the Texas Natural Resource Conservation Commission and
its principal officials in the District Court of Travis County, Texas, by a
coalition of major Houston-Galveston area industries, including us. Until this
litigation is resolved, the precise level of technology to be employed and the
cost for modifying the facilities to achieve the required amount of reductions
cannot be determined. Currently, the litigation has been stayed by agreement of
the parties pending the outcome of expanded, cooperative scientific research to
more precisely define sources and mechanisms of air pollution in the
Houston-Galveston area. Completion of this research is anticipated in mid-2002.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SUPPLEMENTAL CASH FLOWS DISCLOSURE
The net effect of changes in operating assets and liabilities is as
follows:
FOR YEAR ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
--------- -------- ---------
(Increase) decrease in:
Accounts receivable....................................... $ 230,629 $(93,716) $(152,363)
Inventories............................................... 30,862 (21,452) 7,471
Prepaid and other current assets.......................... (25,524) 2,352 (7,523)
Intangible assets......................................... (5,226)
Other assets.............................................. 162 (1,410) 1,164
Increase (decrease) in:
Accounts payable.......................................... (82,075) 18,723 (6,276)
Accrued gas payable....................................... (197,916) 143,457 206,178
Accrued expenses.......................................... (1,576) 4,978 (27,788)
Accrued interest.......................................... 14,234 8,743 863
Other current liabilities................................. 3,073 6,540 5,884
Other liabilities......................................... (9,012) 8,122 296
--------- -------- ---------
Net effect of changes in operating accounts................. $ (37,143) $ 71,111 $ 27,906
========= ======== =========
Cash payments for interest, net of $2,946,
$3,277 and $153 capitalized in 2001,
2000 and 1999, respectively............................... $ 37,536 $ 17,774 $ 15,780
========= ======== =========
On April 1, 2001, we paid approximately $225.7 million in cash to Shell to
acquire Acadian Gas. This acquisition was recorded using the purchase method of
accounting and as a result the initial purchase price has been allocated to
various balance sheet asset and liability accounts. For additional information
regarding the acquisition of Acadian Gas (including the allocation of the
purchase price), see Note 2.
On August 1, 1999, we paid $166 million in cash and issued 29.0 million
non-distribution bearing, convertible Special Units (valued at $210.4 million at
time of issuance) to Shell in connection with the TNGL acquisition. Also, we
issued 12.0 million additional non-distribution bearing, convertible Special
Units to Shell based on Shell having met certain performance criteria in
calendar years 2000 and 2001. Of the 12.0 million additional Special Units
issued, 6.0 million were issued in 2000 and 6.0 million during 2001. The value
of the Special Units issued in 2000 was $55.2 million while the value of those
issued during 2001 was $117.1 million, both values determined using present
value techniques. The $172.3 million combined value of these two issues
increased the overall purchase price of the TNGL acquisition and was allocated
to the intangible asset, Shell Processing Agreement. In addition, during 2000,
we increased the value of the Shell Processing Agreement by $25.2 million for
non-cash purchase accounting adjustments related to the acquisition. The offset
to such adjustment was various working capital accounts. With these adjustments
completed, the final purchase price of TNGL increased to $528.8 million.
On July 1, 1999, we paid approximately $42.1 million in cash to EPCO and
Kinder Morgan and assumed approximately $4 million of debt in connection with
the acquisition of an additional interest in the Mont Belvieu NGL fractionation
facility.
As a result of our adoption of SFAS No. 133 on January 1, 2001, we record
various financial instruments relating to commodity positions and interest rate
swaps at their respective fair values using mark-to-market accounting. During
2001, we recognized a net $5.7 million in non-cash mark-to-market income
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
related to increases in the fair value of these financial instruments. See Note
13 for additional information on our financial instruments.
13. FINANCIAL INSTRUMENTS
We are exposed to financial market risks, including changes in commodity
prices in our natural gas and NGL businesses and in interest rates with respect
to a portion of our debt obligations. We may use financial instruments (i.e.,
futures, forwards, swaps, options, and other financial instruments with similar
characteristics) to mitigate the risks of certain identifiable and anticipated
transactions, primarily in its Processing segment. In general, the types of
risks hedged are those relating to the variability of future earnings and cash
flows caused by changes in commodity prices and interest rates. As a matter of
policy, we do not use financial instruments for speculative (or trading)
purposes.
Our disclosure of fair value estimates are determined using available
market information and appropriate valuation methodologies. We must use
considerable judgment, however, in interpreting market data and to develop the
related estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts that we could realize upon disposition
of the financial instruments. The use of different market assumptions and/or
estimation methodologies may have a material effect on our estimates of fair
value.
COMMODITY FINANCIAL INSTRUMENTS
Our Processing and Octane Enhancement segments are directly exposed to
commodity price risk through their respective business operations. The prices of
natural gas, NGLs and MTBE are subject to fluctuations in response to changes in
supply, market uncertainty and a variety of additional factors that are beyond
our control. In order to manage the risks associated with its Processing
segment, we may enter into swaps, forwards, commodity futures, options and other
commodity financial instruments with similar characteristics that are permitted
by contract or business custom to be settled in cash or with another financial
instrument. The primary purpose of these risk management activities is to hedge
exposure to price risks associated with natural gas, NGL production and
inventories, firm commitments and certain anticipated transactions. We do not
hedge our exposure to the MTBE markets. Also, in its Pipelines segment, we may
utilize a limited number of commodity financial instruments to manage the price
Acadian Gas charges certain of its customers for natural gas.
We have adopted a commercial policy to manage our exposure to the risks of
its natural gas and NGL businesses. The objective of this policy is to assist us
in achieving our profitability goals while maintaining a portfolio with an
acceptable level of risk, defined as remaining within the position limits
established by the General Partner. We enter into risk management transactions
to manage price risk, basis risk, physical risk or other risks related to its
commodity positions on both a short-term (less than 30 days) and long-term
basis, not to exceed 18 months. The General Partner oversees the our strategies
associated with physical and financial risks (such as those mentioned
previously), approves specific activities subject to the policy (including
authorized products, instruments and markets) and establishes specific
guidelines and procedures for implementing and ensuring compliance with the
policy.
On January 1, 2001, we adopted SFAS No. 133 (as amended and interpreted)
which required us to recognize the fair value of our commodity financial
instrument portfolio on the balance sheet based upon then current market
conditions. The fair market value of the then outstanding commodity financial
instruments portfolio was a net payable of $42.2 million (the "cumulative
transition adjustment") with an offsetting equal amount recorded in Other
Comprehensive Income ("OCI"). The amount in OCI was fully reclassified to
earnings during 2001.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2001, we had open commodity financial instruments that
settle at different dates extending through December 2002. We routinely review
our outstanding instruments in light of current market conditions. If market
conditions warrant, some instruments may be closed out in advance of their
contractual settlement dates thus realizing income or loss depending on the
specific exposure. When this occurs, we may enter into a new commodity financial
instrument to reestablish the economic hedge to which the closed instrument
relates.
These commodity financial instruments may not qualify for hedge accounting
treatment under the specific guidelines of SFAS No. 133 because of
ineffectiveness. A hedge is normally regarded as effective if, among other
things, at inception and throughout the term of the financial instrument, we
could expect changes in the fair value of the hedged item to be almost fully
offset by the changes in the fair value of the financial instrument. Currently,
a majority of our commodity financial instruments do not qualify as effective
hedges under the guidelines of SFAS No. 133, with the result being that changes
in the fair value of these positions are recorded on the balance sheet and in
earnings through mark-to-market accounting. The use of mark-to-market accounting
for these commodity financial instruments results in a degree of non-cash
earnings volatility that is dependent upon changes in the underlying commodity
prices. Even though these financial instruments do not qualify for hedge
accounting treatment under the specific guidelines of SFAS No. 133, we continue
to view these financial instruments as hedges inasmuch as this was the intent
when such contracts were executed. This characterization is consistent with the
actual economic performance of these contracts to date and we expect these
financial instruments to continue to mitigate (or offset) commodity price risk
in future. The specific accounting for these contracts, however, is consistent
with the requirements of SFAS No. 133.
We recognized income of $101.3 million in 2001 from our commodity hedging
activities that is treated as a decrease of operating costs and expenses in the
Statements of Consolidated Operations. Of this amount, $95.7 million was
realized during 2001. The remaining $5.6 million represents mark-to-market
income on positions open at December 31, 2001 (based on market prices at that
date).
INTEREST RATE SWAPS
Our interest rate exposure results from variable-rate borrowings from
commercial banks and fixed-rate borrowings pursuant to its Senior Notes and MBFC
Loan. We manage its exposure to changes in interest rates by utilizing interest
rate swaps. The objective of holding interest rate swaps is to manage debt
service costs by converting a portion of fixed-rate debt into variable-rate debt
or a portion of variable-rate debt into fixed-rate debt. An interest rate swap,
in general, requires one party to pay a fixed-rate on the notional amount while
the other party pays a floating-rate based on the notional amount. We believe
that it is prudent to maintain an appropriate mixture of variable-rate and
fixed-rate debt.
We assess interest rate cash flow risk by identifying and measuring changes
in interest rate exposure that impact future cash flows and evaluating hedging
opportunities. We use analytical techniques to measure its exposure to
fluctuations in interest rates, including cash flow sensitivity analysis to
estimate the expected impact of changes in interest rates on our future cash
flows.
The General Partner oversees the strategies associated with financial risks
and approves instruments that are appropriate for our requirements. The notional
amount of an interest rate swap does not represent exposure to credit loss. We
monitor our positions and the credit ratings of counterparties. Management
believes the risk of incurring a credit loss is remote, and that if incurred,
such losses would be immaterial.
At December 31, 2001, we had one interest rate swap outstanding having a
notional amount of $54 million extending through March 2010. Under this
agreement, we exchanged a fixed-rate of 8.70% for a variable-rate that ranged
from 4.28% to 7.66% during 2001 (the variable-rate may fluctuate over time
depending on market conditions). If it elects to do so, the counterparty may
terminate this swap in March
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2003. During 2001, two counterparties terminated their swap agreements with us
either through early termination clauses or negotiation. The closed agreements
had a combined notional amount of $100 million.
Upon adoption of SFAS No. 133, we were required to recognize the fair value
of the interest rate swaps on the balance sheet offset by an equal increase in
the fair value of associated fixed-rate debt and, therefore, the adoption of the
new standard had no impact on earnings at transition. Subsequently, it was
determined that the interest rate swaps would not qualify for hedge accounting
treatment under SFAS No. 133 due to differences between the maturity dates of
the swaps and the associated fixed-rate debt; thus, changes in the fair value of
the interest rate swaps would be recorded in earnings through mark-to-market
accounting (i.e., the interest rate swaps were deemed ineffective under SFAS No.
133). As a result, the increase in fair value of the associated fixed-rate debt
will not be adjusted for future changes in its fair value and will be amortized
to earnings over the remaining life of the underlying debt instrument, which
approximates 10 years.
We recognized income of $13.2 million in 2001 from our interest rate swaps
that is treated as a reduction of interest expense in the Statements of
Consolidated Operations. Of this amount, $2.3 million represents the
mark-to-market income on the remaining swap at December 31, 2001 (estimated fair
value of swap based on market rates at that date). The balance of $10.9 million
was realized during 2001.
The $2.3 million estimated fair value of the remaining swap at December 31,
2001 is based on market rates (assuming its early termination option in March
2003 is exercised). The fair value estimate represents the amount that we would
receive to terminate the swap, taking into consideration current interest rates.
FUTURE ISSUES CONCERNING SFAS NO. 133
Due to the complexity of SFAS No. 133, the FASB is continuing to provide
guidance about implementation issues. Since this guidance is still continuing,
our initial conclusions regarding the application of SFAS No. 133 upon adoption
may be altered. As a result, additional SFAS No. 133 transition adjustments may
be recorded in future periods as we adopt new FASB interpretations.
OTHER FAIR VALUE INFORMATION
Cash and cash equivalents, Accounts Receivable, Accounts Payable and
Accrued Expenses are carried at amounts which reasonably approximate their fair
value at year end due to their short-term nature.
Fixed-rate long term debt. The estimated fair value of our fixed-rate
long-term debt is estimated based on quoted market prices for debt of similar
terms and maturities. No variable rate long-term debt was outstanding at
December 31, 2001.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the estimated fair values of our various
financial instruments at December 31, 2001 and 2000:
2001 2000
------------------- -------------------
CARRYING FAIR CARRYING FAIR
FINANCIAL INSTRUMENTS AMOUNT VALUE AMOUNT VALUE
- --------------------- -------- -------- -------- --------
Financial assets:
Cash and cash equivalents........................ $137,823 $137,823 $ 60,409 $ 60,409
Accounts receivable(1)........................... 261,302 261,302 415,618 415,618
Commodity financial instruments(2)............... 9,992 9,992 n/a n/a
Interest rate swaps(3)........................... 2,324 2,324 n/a n/a
Financial liabilities:
Accounts payable and accrued expenses............ 364,452 364,452 561,688 561,688
Fixed-rate debt (principal amount)............... 854,000 894,005 404,000 423,836
Commodity financial instruments(4)............... 3,206 3,206 725 705
Off-balance sheet instruments:(5)
Interest rate swaps receivable................... n/a n/a 2,030 2,030
Commodity financial instruments payable.......... n/a n/a 40,020 39,266
- ---------------
(1) 2001 includes a $1.2 million receivable related to the remaining interest
rate swap.
(2) 2001 values are a component of other current assets in our consolidated
balance sheet.
(3) 2001 value represents the aggregate fair value of the remaining swap (net of
the $1.2 million receivable reflected under accounts receivable). $1.3
million of the $2.3 million mark-to-market value is a component of other
current assets while the balance of $1.0 million is reflected in other
assets.
(4) 2001 values are a component of other current liabilities in our consolidated
balance sheet.
(5) Prior to our adoption of SFAS No. 133 on January 1, 2001, interest rate
swaps and certain commodity financial instruments were off-balance sheet
instruments. As a result of SFAS No. 133, these financial instruments are
now recorded as part of balance sheet assets and liabilities, as the
circumstances warrant.
14. SIGNIFICANT CONCENTRATIONS OF RISK
CREDIT RISK. A substantial portion of our revenues are derived from
various companies in the NGL and petrochemical industry, located in the United
States. Although this concentration could affect our overall exposure to credit
risk since these customers might be affected by similar economic or other
conditions, management believes we are exposed to minimal credit risk, since the
majority of our business is conducted with major companies within the industry
including those with whom it has joint operations. We do not require collateral
for our accounts receivable.
NATURE OF OPERATIONS. We are subject to a number of risks inherent in the
industry in which it operates, including fluctuating gas and liquids prices. Our
financial condition and results of operation will depend significantly on the
prices received for NGLs and the price paid for gas consumed in the NGL
extraction process. These prices are subject to fluctuations in response to
changes in supply, market uncertainty, weather and a variety of additional
factors that are beyond our control.
In addition, we must obtain access to new natural gas volumes along the
Gulf Coast of the United States for its processing business in order to maintain
or increase gas plant throughput levels to offset natural declines in field
reserves. The number of wells drilled by third-parties to obtain new volumes
will depend on,
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
among other factors, the price of gas and oil, the energy policy of the federal
government and the availability of foreign oil and gas, none of which is in our
control.
The products that we process, sell or transport are principally used as
feedstocks in petrochemical manufacturing and in the production of motor
gasoline and as fuel for residential and commercial heating. A reduction in
demand for our products or services by industrial customers, whether because of
general economic conditions, reduced demand for the end products made with NGL
products, increased competition from petroleum-based products due to pricing
differences, adverse weather conditions, governmental regulations affecting
prices and production levels of natural gas or the content of motor gasoline or
other reasons, could have a negative impact on our results of operation. A
material decrease in natural gas production or crude oil refining, as a result
of depressed commodity prices or otherwise, or a decrease in imports of mixed
butanes, could result in a decline in volumes processed and sold by us.
COUNTERPARTY RISK. From time to time, we have credit risk with our
counterparties in terms of settlement risk associated with its financial
instruments. On all transactions where we are exposed to credit risk, we analyze
the counterparty's financial condition prior to entering into an agreement,
establish credit and/or margin limits and monitor the appropriateness of these
limits on an ongoing basis.
In December 2001, Enron Corp., or Enron, filed for protection under Chapter
11 of the U.S. Bankruptcy Code. As a result, we established a $10.6 million
reserve for amounts owed to us by Enron North America, a subsidiary of Enron.
Enron North America was our counterparty to various past financial instruments.
The Enron amounts were unsecured and the amount that we may ultimately recover,
if any, is not presently determinable. Of the reserve amount established, $4.3
million was attributable to various unbilled commodity financial instrument
positions that terminate during the first quarter of 2002.
15. SEGMENT INFORMATION
Operating segments are components of a business about which separate
financial information is available and that are regularly evaluated by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
We have five reportable operating segments: Fractionation, Pipelines,
Processing, Octane Enhancement and Other. The reportable segments are generally
organized according to the type of services rendered (or process employed) and
products produced and/or sold, as applicable. The segments are regularly
evaluated by the Chief Executive Officer of the General Partner. Fractionation
primarily includes NGL fractionation, isomerization, and polymer grade propylene
fractionation services. Pipelines consists of both liquids and natural gas
pipeline systems, storage and import/export terminal services. Processing
includes the natural gas processing business and its related merchant
activities. Octane Enhancement represents our equity interest in BEF, a facility
that produces motor gasoline additives to enhance octane (currently producing
MTBE). The Other operating segment consists of fee-based marketing services and
other plant support functions.
We evaluate segment performance based on gross operating margin. Gross
operating margin reported for each segment represents operating income before
depreciation and amortization, lease expense obligations retained by EPCO, gains
and losses on the sale of assets and general and administrative expenses. In
addition, segment gross operating margin is exclusive of interest expense,
interest income (from unconsolidated affiliates or others), dividend income from
unconsolidated affiliates, minority interest, extraordinary charges and other
income and expense transactions.
We include equity earnings from unconsolidated affiliates in segment gross
operating margin and as a component of revenues. Our equity investments with
industry partners are a vital component of our business strategy and a means by
which we conduct our operations to align our interests with a supplier of raw
materials to a facility or a consumer of finished products from a facility. This
method of operation also
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
enables us to achieve favorable economies of scale relative to the level of
investment and business risk assumed versus what we could accomplish on a stand
alone basis. Many of these businesses perform supporting or complementary roles
to our other business operations. For example, we use the Promix NGL
fractionator to process NGLs extracted by our gas plants. The NGLs received from
Promix then can be sold by our merchant businesses. Another example would be our
relationship with the BEF MTBE facility. Our isomerization facilities process
normal butane for this plant and our HSC pipeline transports MTBE for delivery
to BEF's storage facility on the Houston Ship Channel.
Consolidated property, plant and equipment and investments in and advances
to unconsolidated affiliates are allocated to each segment on the basis of each
asset's or investment's principal operations. The principal reconciling item
between consolidated property, plant and equipment and segment property is
construction-in-progress. Segment property represents those facilities and
projects that contribute to gross operating margin and is net of accumulated
depreciation on these assets. Since assets under construction do not generally
contribute to segment gross operating margin, these assets are not included in
the operating segment totals until they are deemed operational.
Segment gross operating margin is inclusive of intersegment revenues, which
are generally based on transactions made at market-related rates. These revenues
have been eliminated from the consolidated totals.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information by operating segment, together with reconciliations to the
consolidated totals, is presented in the following table:
OPERATING SEGMENTS
----------------------------------------------------------------------
OCTANE ADJS. AND CONSOL.
FRACTIONATION PIPELINES PROCESSING ENHANCEMENT OTHER ELIMS. TOTALS
------------- ---------- ------------------ ----------- ------ --------- ----------
Revenues from external
customers:
2001.................... $324,276 $403,430 $2,424,281 $2,382 $3,154,369
2000.................... 396,995 28,172 2,620,975 2,878 3,049,020
1999.................... 247,579 11,498 1,073,171 731 1,332,979
Intersegment revenues:
2001.................... 158,853 89,907 683,524 389 $(932,673)
2000.................... 177,963 55,690 630,155 375 (864,183)
1999.................... 118,103 43,688 216,720 444 (378,955)
Equity income in
unconsolidated affiliates:
2001.................... 6,945 12,742 $ 5,671 25,358
2000.................... 6,391 7,321 10,407 24,119
1999.................... 1,566 3,728 8,183 13,477
Total revenues:
2001.................... 490,074 506,079 3,107,805 5,671 2,771 (932,673) 3,179,727
2000.................... 581,349 91,183 3,251,130 10,407 3,253 (864,183) 3,073,139
1999.................... 367,248 58,914 1,289,891 8,183 1,175 (378,955) 1,346,456
Gross operating margin by
segment:
2001.................... 118,610 96,569 154,989 5,671 944 376,783
2000.................... 129,376 56,099 122,240 10,407 2,493 320,615
1999.................... 110,424 31,195 28,485 8,183 908 179,195
Segment assets:
2001.................... 357,122 717,348 124,555 8,921 98,844 1,306,790
2000.................... 356,207 448,920 126,895 8,942 34,358 975,322
1999.................... 362,198 249,453 122,495 113 32,810 767,069
Investments in and advances
to unconsolidated
affiliates:
2001.................... 93,329 216,029 33,000 55,843 398,201
2000.................... 105,194 102,083 33,000 58,677 298,954
1999.................... 99,110 85,492 33,000 63,004 280,606
Our revenues are derived from a wide customer base. Shell accounted for
10.5% of consolidated revenues in 2001 (up from 9.5% of consolidated revenues in
2000). No single external customer accounted for more than 10% of consolidated
revenues during 2000 and 1999. Approximately 80% of our revenues from Shell
during 2001 and 2000 are attributable to sales of NGL products which are
recorded in our Processing segment. No single third-party customer provided more
than 10% of consolidated revenues during 2000 or 1999. All consolidated revenues
were earned in the United States. Our operations are centered along the Texas,
Louisiana and Mississippi Gulf Coast areas.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of segment gross operating margin to consolidated income
before minority interest follows:
FOR YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
Total segment gross operating margin................. $376,783 $320,615 $179,195
Depreciation and amortization...................... (48,775) (35,621) (23,664)
Retained lease expense, net........................ (10,414) (10,645) (10,557)
(Gain) loss on sale of assets...................... 390 (2,270) (123)
Selling, general and administrative................ (30,296) (28,345) (12,500)
-------- -------- --------
Consolidated operating income........................ 287,688 243,734 132,351
Interest expense................................... (52,456) (33,329) (16,439)
Interest income from unconsolidated affiliates..... 31 1,787 1,667
Dividend income from unconsolidated affiliates..... 3,462 7,091 3,435
Interest income -- other........................... 7,029 3,748 886
Other, net......................................... (1,104) (272) (379)
-------- -------- --------
Consolidated income before minority interest......... $244,650 $222,759 $121,521
======== ======== ========
16. SUBSEQUENT EVENTS (UNAUDITED)
PURCHASE OF DIAMOND-KOCH STORAGE ASSETS. On January 17, 2002, we completed
the purchase of various hydrocarbon storage assets from affiliates of Valero
Energy Corporation and Koch Industries, Inc. The purchase price of the storage
assets was approximately $129 million (subject to certain post-closing
adjustments) and will be accounted for as an asset purchase. The purchase price
was funded entirely by internally generated funds.
The storage facilities include 30 salt dome storage caverns with a total
useable capacity of 68 million barrels, local distribution pipelines and related
equipment. The facilities provide storage services for mixed natural gas
liquids, ethane, propane, butanes, natural gasoline and olefins (such as
ethylene), polymer grade propylene, chemical grade propylene and refinery grade
propylene. The facilities are located in Mont Belvieu, Texas.
PURCHASE OF DIAMOND-KOCH PROPYLENE FRACTIONATION ASSETS. On February 1,
2002, we completed the purchase of various propylene fractionation assets from
affiliates of Valero Energy Corporation and Koch Industries, Inc. and certain
inventories of refinery grade propylene, propane and polymer grade propylene
owned by such affiliates. The purchase price of these assets was approximately
$238.5 million (subject to certain post-closing adjustments) and will be
accounted for as an asset purchase. The purchase price was funded by a drawdown
on our existing revolving bank credit facilities.
The propylene fractionation assets being acquired include a 66.67% interest
in a polymer grade propylene fractionation facility located in Mont Belvieu,
Texas, a 50.0% interest in an entity which owns a polymer grade propylene export
terminal located on the Houston Ship Channel in La Porte, Texas and varying
interests in several supporting distribution pipelines and related equipment.
The propylene fractionation facility has the gross capacity to produce
approximately 41,000 barrels per day of polymer grade propylene.
Both the storage and propylene fractionation acquisitions have been
approved by the requisite regulatory authorities. The post-closing purchase
price adjustments of both transactions are expected to be completed during the
second quarter of 2002.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TWO-FOR-ONE SPLIT OF LIMITED PARTNER UNITS. On February 27, 2002, the
General Partner approved a two-for-one split for each class of our partnership
Units. The partnership Unit split was accomplished by distributing one
additional partnership Unit for each partnership Unit outstanding to holders of
record on April 30, 2002. The Units were distributed on May 15, 2002. All
references to number of Units or earnings per Unit contained in this document
reflect the Unit split, unless otherwise indicated.
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
FOR THE YEAR ENDED DECEMBER 31, 2000:
Revenues......................................... $753,724 $604,010 $721,863 $993,542
Operating income................................. 75,434 50,046 55,864 62,390
Income before minority interest.................. 70,156 46,026 50,777 55,800
Minority interest................................ (709) (466) (514) (564)
Net income....................................... 69,447 45,560 50,263 55,236
Net income per Unit, basic....................... $ 0.52 $ 0.34 $ 0.37 $ 0.41
Net income per Unit, diluted..................... $ 0.43 $ 0.28 $ 0.30 $ 0.33
FOR THE YEAR ENDED DECEMBER 31, 2001:
Revenues......................................... $838,326 $968,447 $729,618 $643,336
Operating income................................. 54,417 109,071 87,406 36,794
Income before minority interest.................. 52,804 93,975 75,774 22,097
Minority interest................................ (534) (944) (767) (227)
Net income....................................... 52,270 93,031 75,007 21,870
Net income per Unit, basic....................... $ 0.38 $ 0.68 $ 0.52 $ 0.14
Net income per Unit, diluted..................... $ 0.31 $ 0.55 $ 0.43 $ 0.12
Earnings in the fourth quarter of 2001 declined relative to the third
quarter of 2001 primarily due to a decrease in the mark-to-market value of our
commodity financial instruments. The decrease was due to (1) the settlement of
certain positions during the fourth quarter, (2) a decrease in the relative
amount of hedging activities at December 31, 2001 versus September 30, 2001 and
(3) a decrease in the value of certain outstanding financial instruments from
September 30, 2001 due to changes in natural gas prices.
