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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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): JULY 26, 2001
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TEPPCO PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 1-10403 76-0291058
(State or other jurisdiction (Commission File (I.R.S. Employer
of incorporation or organization) Number) Identification No.)
2929 ALLEN PARKWAY
P.O. BOX 2521
HOUSTON, TEXAS 77252-2521
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (713) 759-3636
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Item 5. Other Events
Restructuring of General Partner Interests in Operating Partnerships
On July 26, 2001, TEPPCO Partners, L.P. ("TEPPCO Partners") and its
general partner, Texas Eastern Products Pipeline Company, LLC ("TEPPCO LLC")
restructured the general partner ownership of TEPPCO Partners' two first-tier
operating subsidiary partnerships to cause them to be wholly-owned by TEPPCO
Partners. The restructuring has no adverse economic impact on TEPPCO Partners'
unitholders. A revised general partner interest of TEPPCO LLC in each of TE
Products Pipeline Company, Limited Partnership and TCTM, L.P. was transferred to
a newly formed corporation, TEPPCO GP, Inc. ("TEPPCO GP"), which succeeded
TEPPCO LLC as general partner of the two first-tier operating partnerships. The
capital stock of the new subsidiary general partner and all remaining partner
interests in the first-tier operating partnerships not already owned by TEPPCO
Partners were transferred to TEPPCO Partners. In exchange for this contribution,
TEPPCO LLC received an increased percentage interest as general partner of
TEPPCO Partners. The increased percentage is the economic equivalent to the
aggregate interest that TEPPCO LLC had prior to the restructuring through its
combined interests in TEPPCO Partners and its first-tier operating partnerships.
As a result, TEPPCO Partners holds a 99.999% limited partner interest in the two
first-tier operating partnerships and TEPPCO GP holds a .001% general partner
interest.
Financial Information for Operating Partnerships as Potential Guarantors of
Partnership Debt Securities
In connection with the filing of a shelf registration statement on Form
S-3 with the Securities and Exchange Commission concurrently with this report,
TE Products Pipeline Company, Limited Partnership and TCTM, L.P., TEPPCO
Partners' sole first-tier operating subsidiaries (the "Guarantor Subsidiaries"),
may issue unconditional guarantees of senior or subordinated debt securities of
TEPPCO Partners in the event that TEPPCO Partners issues any debt securities
from time to time under the registration statement. If issued, the guarantees
will be full, unconditional and joint and several.
Supplemental consolidating information for the Guarantor Subsidiaries
has been included as a footnote to the consolidated financial statements
previously filed under TEPPCO Partners' Form 10-K for the year ended December
31, 2000, and Form 10-Q for the quarter ended March 31, 2001. For purposes of
the following consolidating information, TEPPCO Partners' and Guarantor
Subsidiaries' investments in their respective subsidiaries are accounted for by
the equity method of accounting.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(c) Exhibits.
23.1 Consent of KPMG LLP.
99.1 Consolidated Financial Statements of TEPPCO Partners,
L.P., together with independent auditors' report
thereon of KPMG LLP, as required by Item 8 of Form
10-K for the year ended December 31, 2000 and
Consolidated Financial Statements of TEPPCO
Partners, L.P. as required by Item 1 of Form 10-Q
for the quarter ended March 31, 2001.
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99.2 Contribution, Assignment and Amendment Agreement
dated July 26, 2001.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TEPPCO PARTNERS, L.P.
(Registrant)
By: Texas Eastern Products Pipeline
Company, LLC, General Partner
/s/ CHARLES H. LEONARD
--------------------------------------
Charles H. Leonard
Sr. Vice President, Chief Financial
Officer and Treasurer
Dated: July 27, 2001
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
23.1 Consent of KPMG LLP.
99.1 Consolidated Financial Statements of TEPPCO Partners, L.P.,
together with independent auditors' report thereon of KPMG
LLP, as required by Item 8 of Form 10-K for the year ended
December 31, 2000 and Consolidated Financial Statements of
TEPPCO Partners, L.P. as required by Item 1 of Form 10-Q for
the quarter ended March 31, 2001.
99.2 Contribution, Assignment and Amendment Agreement dated
July 26, 2001.
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Partners of
TEPPCO Partners, L.P.:
We consent to incorporation by reference in the Registration Statements
(No. 33-81976) and (No. 333-37112) on Form S-3 of TEPPCO Partners, L.P. of our
report dated January 18, 2001, except as to Note 17, which is as of June 26,
2001, relating to the consolidated balance sheets of TEPPCO Partners, L.P. as of
December 31, 2000 and 1999 and the related consolidated statements of income,
partners' capital and cash flows for each of the years in the three-year period
ended December 31, 2000, which report appears in the Form 8-K of TEPPCO
Partners, L.P. dated July 27, 2001.
/s/ KPMG LLP
Houston, Texas
July 27, 2001
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EXHIBIT 99.1
CONSOLIDATED FINANCIAL STATEMENTS
OF TEPPCO PARTNERS, L.P.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report..................................... F-1
Consolidated Balance Sheets as of December 31, 2000 and 1999..... F-2
Consolidated Statements of Income for the years
ended December 31, 2000, 1999 and 1998......................... F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998............................... F-4
Consolidated Statements of Partners' Capital for the years ended
December 31, 2000, 1999 and 1998............................... F-5
Notes to Annual Consolidated Financial Statements................ F-6
Consolidated Balance Sheets as of March 31, 2001
(Unaudited) and December 31, 2000............................. F-26
Consolidated Statements of Income for the three months
ended March 31, 2001 and 2000 (Unaudited)..................... F-27
Consolidated Statements of Cash Flows for the three months
ended March 31, 2001 and 2000 (Unaudited) .................... F-28
Notes to Quarterly Consolidated Financial Statements
(Unaudited)................................................... F-29
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INDEPENDENT AUDITORS' REPORT
To the Partners of TEPPCO Partners, L.P.:
We have audited the accompanying consolidated balance sheets of TEPPCO
Partners, L.P. as of December 31, 2000 and 1999, and the related consolidated
statements of income, partners' capital, and cash flows for each of the years in
the three-year period ended December 31, 2000. These consolidated financial
statements are the responsibility of the Partnership'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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TEPPCO
Partners, L.P. as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Houston, Texas
January 18, 2001, except as
to Note 17, which is as of
June 26, 2001
F-1
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TEPPCO PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
---------------------------
2000 1999
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents....................... $ 27,096 $ 32,593
Accounts receivable, trade...................... 303,394 205,766
Inventories..................................... 24,784 16,766
Other .......................................... 8,123 7,884
---------- ----------
Total current assets...................... 363,397 263,009
---------- ----------
Property, plant and equipment,
at cost (Net of accumulated depreciation
and amortization of $251,165 and $220,467)...... 949,705 720,919
Equity investments................................ 241,648 --
Intangible assets................................. 38,388 34,926
Other assets...................................... 29,672 22,519
---------- ----------
Total assets.............................. $1,622,810 $1,041,373
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued liabilities........ $ 293,720 $ 201,660
Accounts payable, general partner............... 6,637 4,741
Accrued interest................................ 18,633 13,297
Other accrued taxes............................. 10,501 8,822
Other .......................................... 28,780 14,972
---------- ----------
Total current liabilities................. 358,271 243,492
---------- ----------
Senior Notes...................................... 389,784 389,753
Other long-term debt.............................. 446,000 66,000
Other liabilities and deferred credits............ 3,991 3,073
Minority interest................................. 4,296 3,429
Redeemable Class B Units held by related party.... 105,411 105,859
Partners' capital:
General partner's interest...................... 1,824 657
Limited partners' interests..................... 313,233 229,110
---------- ----------
Total partners' capital................... 315,057 229,767
---------- ----------
Commitments and contingencies
Total liabilities and partners' capital... $1,622,810 $1,041,373
========== ==========
See accompanying Notes to Consolidated Financial Statements.
F-2
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TEPPCO PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
YEARS ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998
----------- ----------- -----------
Operating revenues:
Sales of crude oil and
petroleum products ......... $ 2,821,943 $ 1,692,767 $ 214,463
Transportation -- refined
products ................... 119,331 123,004 119,854
Transportation -- LPGs ....... 73,896 67,701 60,902
Transportation -- crude
oil and NGLs ............... 24,533 11,846 3,392
Mont Belvieu operations ...... 13,334 12,849 10,880
Other ........................ 34,904 26,716 20,147
----------- ----------- -----------
Total operating
revenues ............. 3,087,941 1,934,883 429,638
----------- ----------- -----------
Costs and expenses:
Purchases of crude oil and
petroleum products ......... 2,794,604 1,666,042 212,371
Operating, general and
administrative ............. 104,918 94,340 73,850
Operating fuel and power ..... 34,655 31,265 27,131
Depreciation and
amortization ............... 35,163 32,656 26,938
Taxes -- other than income
taxes ...................... 10,576 10,490 9,382
----------- ----------- -----------
Total costs and expenses 2,979,916 1,834,793 349,672
----------- ----------- -----------
Operating income ....... 108,025 100,090 79,966
Interest expense ............... (48,982) (31,563) (29,784)
Interest capitalized ........... 4,559 2,133 795
Equity earnings -- Seaway Crude
Pipeline Company ............. 12,214 -- --
Other income -- net ............ 2,349 2,196 2,908
----------- ----------- -----------
Income before minority
interest and
extraordinary
loss on debt
extinguishment ....... 78,165 72,856 53,885
Minority interest .............. (789) (736) (544)
----------- ----------- -----------
Income before
extraordinary
loss on debt
extinguishment ....... 77,376 72,120 53,341
Extraordinary loss on debt
extinguishment, net of
minority interest............. -- -- (72,767)
----------- ----------- -----------
Net income (loss) ...... $ 77,376 $ 72,120 $ (19,426)
=========== =========== ===========
Net income (loss) allocated to
Limited Partner Unitholders .. 56,091 55,349 (18,722)
Net income allocated to
Class B Unitholder ........... 7,385 7,475 1,036
Net income (loss) allocated to
General Partner .............. 13,900 9,296 (1,740)
----------- ----------- -----------
Total net income (loss)
allocated ............ $ 77,376 $ 72,120 $ (19,426)
=========== =========== ===========
BASIC AND DILUTED INCOME (LOSS)
PER LIMITED PARTNER AND
CLASS B UNIT:
Income before
extraordinary
loss on debt
extinguishment ....... $ 1.89 $ 1.91 $ 1.61
Extraordinary loss
on debt
extinguishment ....... -- -- (2.21)
----------- ----------- -----------
Net income (loss) ... $ 1.89 $ 1.91 $ (0.60)
=========== =========== ===========
Weighted average Limited Partner
and Class B Units outstanding: 33,594 32,917 29,655
See accompanying Notes to Consolidated Financial Statements.
F-3
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TEPPCO PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
Cash flows from operating
activities:
Net income (loss) ............... $ 77,376 $ 72,120 $ (19,426)
Adjustments to reconcile net
income to cash provided by
operating activities:
Depreciation and amortization . 35,163 32,656 26,938
Extraordinary loss on early
extinguishment of debt ...... -- -- 72,767
Gain on sale of property,
plant and equipment ........ -- -- (356)
Equity in (income) loss
of affiliate ................ (10,084) 393 189
Non-cash portion of
interest expense ............ 2,218 337 270
Increase in accounts
receivable .................. (90,006) (92,225) (93,715)
Decrease (increase) in
inventories ................. (7,567) 1,037 493
Decrease (increase) in other
current assets .............. 1,165 (2,500) 264
Increase in accounts
payable and
accrued expenses ............ 106,662 93,317 106,350
Other ......................... (6,882) (2,065) (559)
----------- ----------- -----------
Net cash provided by
operating
activities ............. 108,045 103,070 93,215
----------- ----------- -----------
Cash flows from investing
activities:
Proceeds from cash investments .. 3,475 6,275 3,105
Purchases of cash investments ... (2,000) (3,235) (748)
Purchase of ARCO assets ......... (322,640) -- --
Purchase of fractionator
assets and related
intangible assets ............. -- -- (40,000)
Purchase of crude oil
assets and NGL system ......... (99,508) (2,250) (1,989)
Proceeds from the sale of
property, plant and equipment . -- -- 525
Investment in Centennial
Pipeline Company .............. (5,040) -- --
Capital expenditures ............ (68,481) (77,431) (23,432)
----------- ----------- -----------
Net cash used in
investing
activities ............. (494,194) (76,641) (62,539)
----------- ----------- -----------
Cash flows from financing
activities:
Principal payment, First
Mortgage Notes ................ -- -- (326,512)
Prepayment premium, First
Mortgage Notes ................ -- -- (70,093)
Issuance of Senior Notes ........ -- -- 389,694
Debt issuance cost .............. (7,074) -- (3,651)
Proceeds from term and
revolving credit
facilities .................... 552,000 33,000 38,000
Repayments on term and
revolving credit
facilities .................... (172,000) (5,000) --
Issuance of Limited
Partner Units, net ............ 88,158 -- --
General partner's
contributions ................. 1,799 -- 2,122
Distributions ................... (82,231) (69,259) (56,774)
----------- ----------- -----------
Net cash provided by
(used in) financing
activities ............. 380,652 (41,259) (27,214)
----------- ----------- -----------
Net increase (decrease)
in cash and cash equivalents .... (5,497) (14,830) 3,462
Cash and cash equivalents
at beginning of period .......... 32,593 47,423 43,961
----------- ----------- -----------
Cash and cash equivalents
at end of period ................ $ 27,096 $ 32,593 $ 47,423
=========== =========== ===========
Non cash investing and
financing activities:
Fair value of crude oil
and NGL systems
purchased .................... $ -- $ -- $ 109,000
Liabilities assumed ............ -- -- (5,000)
Issuance of Class B Units ...... -- -- 104,000
Supplemental disclosure of
cash flows:
Interest paid during the
year (net of capitalized
interest) .................... $ 36,793 $ 28,625 $ 26,179
See accompanying Notes to Consolidated Financial Statements.
F-4
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TEPPCO PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
GENERAL LIMITED
PARTNER'S PARTNERS'
INTEREST INTERESTS TOTAL
------------ ------------ ------------
Partners' capital at
December 31, 1997 ............. $ 5,760 $ 297,207 $ 302,967
Capital contributions ......... 1,051 -- 1,051
1998 net loss allocation ...... (1,740) (18,722) (20,462)
1998 cash distributions ....... (5,451) (50,750) (56,201)
Option exercises, net
of Unit repurchases ......... -- (169) (169)
------------ ------------ ------------
Partners' capital (deficit)
at December 31, 1998 .......... (380) 227,566 227,186
1999 net income allocation .... 9,296 55,349 64,645
1999 cash distributions ....... (8,259) (53,650) (61,909)
Option exercises, net of
Unit repurchases ............ -- (155) (155)
------------ ------------ ------------
Partners' capital at
December 31, 1999 ............. 657 229,110 229,767
Capital contributions ......... 890 -- 890
Issuance of Limited Partner
Units, net .................. -- 88,158 88,158
2000 net income allocation .... 13,900 56,091 69,991
2000 cash distributions ....... (13,623) (59,943) (73,566)
Option exercises, net of
Unit repurchases ............ -- (183) (183)
------------ ------------ ------------
Partners' capital at
December 31, 2000 ............. $ 1,824 $ 313,233 $ 315,057
============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
F-5
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TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. PARTNERSHIP ORGANIZATION
TEPPCO Partners, L.P. (the "Partnership"), a Delaware limited
partnership, was formed in March 1990. The Partnership operates through TE
Products Pipeline Company, Limited Partnership (the "Downstream Segment") and
TCTM, L.P. (the "Upstream Segment"). Collectively the Downstream Segment and the
Upstream Segment are referred to as "the Operating Partnerships." The
Partnership owns a 99% interest as the sole limited partner interest in both the
Downstream Segment and Upstream Segment.
On March 31, 2000, Texas Eastern Products Pipeline Company, a Delaware
corporation and general partner of the Partnership and the Operating
Partnerships, was converted into Texas Eastern Products Pipeline Company, LLC
(the "Company" or "General Partner"), a Delaware limited liability company.
Additionally on March 31, 2000, Duke Energy Corporation ("Duke Energy"),
contributed its ownership of the General Partner to Duke Energy Field Services,
LP ("DEFS"). DEFS is a joint venture between Duke Energy and Phillips Petroleum
Company. Duke Energy holds a majority interest in DEFS.
The Company owns a 1% general partner interest in the Partnership and
a 1% general partner interest in each Operating Partnership. The Company, as
general partner, performs all management and operating functions required for
the Partnership pursuant to the Agreements of Limited Partnership of TEPPCO
Partners, L.P., TE Products Pipeline Company, Limited Partnership and TCTM, L.P.
(the "Partnership Agreements"). The General Partner is reimbursed by the
Partnership for all reasonable direct and indirect expenses incurred in managing
the Partnership.
At formation, the Partnership completed an initial public offering of
26,500,000 Units representing Limited Partner Interests ("Limited Partner
Units") at $10 per Unit. In connection with the formation of the Partnership,
the Company received 2,500,000 Deferred Participation Interests ("DPIs").
Effective April 1, 1994, the DPIs began participating in distributions of cash
and allocations of profit and loss. As of December 31, 2000, 94% of the DPIs
have been converted into an equal number of Limited Partner Units, and the
balance of such DPIs may be converted immediately prior to the sale of the DPIs
by the Company. Pursuant to its Partnership Agreement, the Partnership has
registered the resale of such Limited Partner Units with the Securities and
Exchange Commission. Such Limited Partner Units may be sold from time to time on
the New York Stock Exchange or otherwise at prices and terms then prevailing or
in negotiated transactions. As of December 31, 2000, no such Limited Partner
Units had been sold by the Company.
At December 31, 2000, the Partnership had outstanding 32,700,000
Limited Partner Units and 3,916,547 Class B Limited Partner Units ("Class B
Units"). All of the Class B Units were issued to Duke Energy in connection with
an acquisition of assets in 1998. The Class B Units are substantially identical
to the Limited Partner Units, but they are not listed on the New York Stock
Exchange. The Class B Units may be converted into Limited Partner Units upon
approval by the Limited Partner Unitholders. The Company has the option to seek
approval for the conversion of the Class B Units into Limited Partner Units;
however, if such conversion is denied, the holder of the Class B Units will have
the right to sell them to the Partnership at 95.5% of the market price of the
Limited Partner Units at the time of sale. As a result of such option, the Class
B Units were not included in partners' capital at December 31, 2000.
Collectively, the Limited Partner Units and Class B Units are referred to as
"Units."
F-6
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TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements include the accounts of the Partnership on a
consolidated basis. The Company's 1% general partner interest in the Downstream
Segment and the Upstream Segment, is accounted for as a minority interest. All
significant intercompany items have been eliminated in consolidation. Certain
amounts from prior years have been reclassified to conform to current
presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions 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 periods. Actual results could differ from those estimates.
ENVIRONMENTAL EXPENDITURES
The Partnership accrues for environmental costs that relate to existing
conditions caused by past operations. Environmental costs include initial site
surveys and environmental studies of potentially contaminated sites, costs for
remediation and restoration of sites determined to be contaminated and ongoing
monitoring costs, as well as fines, damages and other costs, when estimable. The
Partnership's accrued undiscounted environmental liabilities are monitored on a
regular basis by management. Liabilities for environmental costs at a specific
site are initially recorded when the Partnership's liability for such costs,
including direct internal and legal costs, is probable and a reasonable estimate
of the associated costs can be made. Adjustments to initial estimates are
recorded, from time to time, to reflect changing circumstances and estimates
based upon additional information developed in subsequent periods. Estimates of
the Partnership's ultimate liabilities associated with environmental costs are
particularly difficult to make with certainty due to the number of variables
involved, including the early stage of investigation at certain sites, the
lengthy time frames required to complete remediation alternatives available and
the evolving nature of environmental laws and regulations.
BUSINESS SEGMENTS
The Partnership operates in two segments: refined products and
liquefied petroleum gases ("LPGs") transportation (Downstream Segment); and
crude oil and natural gas liquids ("NGLs") transportation and marketing
(Upstream Segment). The Partnership's reportable segments offer different
products and services and are managed separately because each requires different
business strategies.
The Upstream Segment was acquired as a unit in November 1998, and the
management at the time of the acquisition was retained. The Partnership's
interstate transportation operations, including rates charged to customers, are
subject to regulations prescribed by the Federal Energy Regulatory Commission
("FERC"). Refined products, LPGs, crude oil and NGLs are referred to herein,
collectively, as "petroleum products" or "products."
F-7
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TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
REVENUE RECOGNITION
Substantially all revenues of the Downstream Segment are derived from
interstate and intrastate transportation of petroleum products, storage and
terminaling of petroleum products, intrastate transportation of petrochemicals,
fractionation of natural gas liquids and other ancillary services.
Transportation revenues are recognized as products are delivered to customers.
Storage revenues are recognized upon receipt of products into storage and upon
performance of storage services. Terminaling revenues are recognized as products
are out-loaded. Revenues from the sale of product inventory are recognized when
the products are sold. Fractionation revenues are recognized ratably over the
contract year as products are delivered to DEFS.
Revenues of the Upstream Segment are derived from the gathering,
storage, transportation and marketing of crude oil and NGLs; and the
distribution of lube oils and specialty chemicals principally in Oklahoma, Texas
and the Rocky Mountain region. Revenues are also generated from trade
documentation and pumpover services, primarily at Cushing, Oklahoma, and
Midland, Texas (effective July 20, 2000). Revenues are accrued at the time
title to the product sold transfers to the purchaser, which typically occurs
upon receipt of the product by the purchaser, and purchases are accrued at the
time title to the product purchased transfers to the Partnership's crude oil
marketing company, TEPPCO Crude Oil, L.P. ("TCO"), which typically occurs upon
receipt of the product by TCO. Revenues related to trade documentation and
pumpover services are recognized as completed.
Except for crude oil purchased from time to time as inventory, TCO's
policy is to purchase only crude oil for which it has a market to sell and to
structure sales contracts so that crude oil price fluctuations do not materially
affect the margin received. As TCO purchases crude oil, it establishes a margin
by selling crude oil for physical delivery to third party users or by entering
into a future delivery obligation either physically or a futures contract on the
New York Mercantile Exchange ("NYMEX"). Through these transactions, TCO seeks to
maintain a position that is balanced between crude oil purchases and sales and
future delivery obligations. However, certain basis risks (the risk that price
relationships between delivery points, classes of products or delivery periods
will change) cannot be completely hedged.
USE OF DERIVATIVES
The Partnership may use derivative instruments, such as futures, swaps
and options, to manage its exposure to commodity price risk and interest rate
risk. For derivative contracts to qualify as a hedge, the price movements in the
derivative instrument must be highly correlated with the underlying hedged
commodity or obligation. Contracts that qualify as hedges and held for
non-trading purposes are accounted for using the deferral method of accounting.
Under this method, gains and losses are not recognized until the underlying
physical transaction occurs. Deferred gains and losses related to futures are
reported in the consolidated balance sheet as current assets or current
liabilities. Deferred gains and losses related to swaps and options are carried
off-balance sheet until instruments are settled. It is the Partnership's general
policy not to acquire crude oil futures contracts or other derivative products
for the purpose of speculating on price changes, however, the Partnership may
take limited speculative positions to capitalize on crude oil price
fluctuations. Contracts held for trading purposes are accounted for using the
mark-to-market method. Under this methodology, contracts are adjusted to market
value, and the gains and losses are recognized in current period income. The
Partnership monitors open derivative positions with policies which limit its
exposure to market risk and require reporting to management of potential
financial exposure. At December 31, 2000 and 1999, outstanding commodity
derivative contracts held for trading purposes were not material. Net payments
or receipts under the Partnership's interest swap agreements are recorded as
adjustments to interest expense.
F-8
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TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INVENTORIES
Inventories consist primarily of petroleum products and crude oil which
are valued at the lower of cost (weighted average cost method) or market. The
Downstream Segment acquires and disposes of various products under exchange
agreements. Receivables and payables arising from these transactions are usually
satisfied with products rather than cash. The net balances of exchange
receivables and payables are valued at weighted average cost and included in
inventories.
PROPERTY, PLANT AND EQUIPMENT
Additions to property, plant and equipment, including major
replacements or betterments, are recorded at cost. Replacements and renewals of
minor items of property are charged to maintenance expense. Depreciation expense
is computed on the straight-line method using rates based upon expected useful
lives of various classes of assets (ranging from 2% to 20% per annum). Upon sale
or retirement of properties regulated by the FERC, cost less salvage is normally
charged to accumulated depreciation, and no gain or loss is recognized.
CAPITALIZATION OF INTEREST
The Partnership capitalizes interest on borrowed funds related to
capital projects only for periods that activities are in progress to bring these
projects to their intended use. The weighted average rate used to capitalize
interest on borrowed funds was 7.45%, 7.01% and 7.02% for 2000, 1999 and 1998,
respectively.
INCOME TAXES
The Partnership is a limited partnership. As a result, the
Partnership's income or loss for federal income tax purposes is included in the
tax return of the individual partners, and may vary substantially from income or
loss reported for financial reporting purposes. Accordingly, no recognition has
been given to federal income taxes for the Partnership's operations. At December
31, 2000 and 1999, the Partnership's reported amount of net assets for financial
reporting purposes exceeded its tax basis by approximately $318 million and $293
million, respectively.
CASH FLOWS
For purposes of reporting cash flows, all liquid investments with
maturities at date of purchase of 90-days or less are considered cash
equivalents.
NET INCOME PER UNIT
Basic net income per Unit is computed by dividing net income, after
deduction of the general partner's interest, by the weighted average number of
Limited Partner and Class B Units outstanding (a total of 33.6 million Units for
2000, 32.9 million Units for 1999, and 29.7 million Units for 1998). The general
partner's percentage interest in net income is based on its percentage of cash
distributions from Available Cash for each year (see Note 10). The general
partner was allocated $13.9 million (representing 17.96%) of net income for the
year ended December 31, 2000, $9.3 million (representing 12.89%) of net income
for the year ended December 31, 1999, and $1.7 million (representing 8.96%) of
the net loss for the year ended December 31, 1998.
F-9
11
TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Diluted net income per Unit is similar to the computation of basic net
income per Unit above, except that the denominator was increased to include the
dilutive effect of outstanding Unit options by application of the treasury stock
method. For the years ended December 31, 2000, 1999 and 1998 the denominator was
increased by 20,926 Units, 12,141 Units and 45,278 Units, respectively.
UNIT OPTION PLAN
The Partnership follows the intrinsic value based method of accounting
for its stock-based compensation plans (see Note 11). Under this method, the
Partnership records no compensation expense for unit options granted when the
exercise price of options granted is equal to the fair market value of the Units
on the date of grant.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income" requires certain items such as foreign currency
translation adjustments, minimum pension liability adjustments and unrealized
gains and losses on certain investments to be reported in a financial statement.
For the years ended December 31, 2000, 1999, and 1998, the Partnership's
comprehensive income (loss) equaled its reported net income (loss).
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2001, the Partnership adopted Statement of
Financial Accounting Standards ("SFAS") No. 133 Accounting for Derivative
Instruments and Hedging Activities, and SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133. These statements establish accounting and reporting standards
requiring that derivative instruments, including certain derivative instruments
embedded in other contracts, be recorded on the balance sheet at fair value as
either assets or liabilities. The accounting for changes in the fair value of a
derivative instrument depends on the intended use and designation of the
derivative at its inception. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results of the hedged item in
the statement of income, and requires the Partnership to formally document,
designate and assess the effectiveness of the hedge transaction to receive hedge
accounting. For derivatives designated as cash flow hedges, changes in fair
value, to the extent the hedge is effective, are recognized in other
comprehensive income until the hedged item is recognized in earnings. Overall
hedge effectiveness is measured at least quarterly. Any changes in the fair
value of the derivative instrument resulting from hedge ineffectiveness, as
defined by SFAS 133 and measured based on the cumulative changes in the fair
value of the derivative instrument and the cumulative changes in the estimated
future cash flows of the hedged item, are recognized immediately in earnings.
The Partnership has designated its swap agreement as a cash flow hedge.
Adoption of SFAS 133 resulted in the recognition of approximately $10
million of derivative liabilities on the Partnership's balance sheet and $10
million of hedging losses included in accumulated other comprehensive income,
which is a component of Partners' capital, as the cumulative effect of a change
in accounting principle as of January 1, 2001. Amounts were determined as of
January 1, 2001 based on the market quote of the Partnership's interest swap
agreement.
NOTE 3. ACQUISITIONS
On July 20, 2000, the Company completed an acquisition of ARCO Pipe
Line Company ("ARCO"), a wholly owned subsidiary of Atlantic Richfield Company,
for $322.6 million, which included $4.1 million of acquisition related costs.
The purchase included ARCO's 50-percent ownership interest in Seaway Crude
Pipeline Company ("Seaway"), which owns a pipeline that carries mostly imported
crude oil from a marine terminal at Freeport, Texas, to Cushing, Oklahoma. The
Partnership assumed ARCO's role as operator of this pipeline. The Company also
acquired: (i) ARCO's crude oil terminal facilities in Cushing and Midland,
Texas, including the line transfer and pumpover business at each location; (ii)
an undivided ownership interest in both the Rancho Pipeline, a crude oil
pipeline from West Texas to Houston, and the Basin Pipeline, a crude oil
pipeline running from Jal, New Mexico, through Midland to Cushing, both of which
are operated by another joint owner; and (iii) the receipt and delivery
pipelines known as the West Texas Trunk System, which is located around the
Midland terminal. The acquisition was accounted for under the purchase method of
accounting. Accordingly, the results of the acquisition are included in the
consolidated statements of income from July 20, 2000.
F-10
12
TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table presents the unaudited pro forma results of the
Partnership as though the acquisition of ARCO occurred at the beginning of the
respective year (in thousands, except per Unit amounts).
YEARS ENDED DECEMBER 31,
------------------------
2000 1999
---------- -----------
Revenues ................................ $3,104,177 $1,959,863
Operating income ........................ 110,138 101,637
Net Income .............................. 75,821 71,650
Basic and diluted net income per Unit ... $ 1.85 $ 1.90
On December 31, 2000, the Company completed an acquisition of certain
pipeline assets from DEFS for $91.7 million, which included $0.7 million of
acquisition related costs. The purchase included two natural gas liquids
pipelines in East Texas. The Panola Pipeline, a pipeline from Carthage, Texas,
to Mont Belvieu, Texas, and the San Jacinto Pipeline, a pipeline from Carthage
to Longview, Texas. A lease of a condensate pipeline from Carthage to Marshall,
Texas, was also assumed. All three pipelines originate at DEFS' East Texas Plant
Complex in Panola County, Texas. The acquisition of assets was accounted for
under the purchase method of accounting.
NOTE 4. RELATED PARTY TRANSACTIONS
The Partnership has no employees and is managed by the Company.
Pursuant to the Partnership Agreements, the Company is entitled to reimbursement
of all direct and indirect expenses related to business activities of the
Partnership (see Note 1).
For the years ended December 31, 2000, 1999 and 1998, direct expenses
incurred by the general partner in the amount of $50.4 million, $49.6 million
and $38.8 million, respectively, were charged to the Partnership. Substantially
all such costs related to payroll and payroll related expenses, which included
$3.2 million, $2.9 million and $1.0 million of expense for incentive
compensation plans, respectively.
For the years ended December 31, 2000, 1999 and 1998, expenses for
administrative service and overhead allocated to the Partnership by the general
partner (including Duke Energy and its affiliates) amounted to $0.8 million,
$2.1 million and $2.7 million, respectively. Such costs incurred by the general
partner included general and administrative costs related to business activities
of the Partnership.
Effective with the purchase of the fractionation facilities on March
31, 1998, TEPPCO Colorado, LLC ("TEPPCO Colorado"), a wholly owned subsidiary of
the Downstream Segment, and DEFS entered into a twenty-year Fractionation
Agreement, under which TEPPCO Colorado receives a variable fee for all
fractionated volumes delivered to DEFS. Revenues recognized from the
fractionation facilities totaled $7.5 and $7.3 million for the years ended
December 31, 2000 and 1999, respectively, and $5.5 million for the period from
April 1, 1998 through December 31, 1998. TEPPCO Colorado and DEFS also entered
into a Operation and Maintenance Agreement, whereby DEFS operates and maintains
the fractionation facilities. For these services, TEPPCO Colorado pays DEFS a
set volumetric rate for all fractionated volumes delivered to DEFS. Expenses
related to the Operation and Maintenance Agreement totaled $0.9 million and $0.8
million for the years ended December 31, 2000 and 1999, respectively, and $0.7
million for the period from April 1, 1998 through December 31, 1998.
Included with certain crude oil assets purchased from DEFS effective
November 1, 1998 was the Wilcox NGL Pipeline located along the Texas Gulf Coast.
The Wilcox NGL Pipeline transports NGLs for DEFS from two of their processing
plants and is currently supported by demand fees that are paid by DEFS through
2005. Such fees totaled $1.1 million for each of the years ended December 31,
2000 and 1999, and $0.2 million for the two months ended December 31, 1998.
F-11
13
TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 5. EQUITY INVESTMENTS
Seaway is a partnership between the Upstream Segment and Phillips
Petroleum Company ("Phillips"). The Upstream Segment purchased its 50-percent
ownership interest in Seaway on July 20, 2000 (see Note 3). The Seaway Crude
Pipeline Company Partnership Agreement provides for varying participation ratios
throughout the life of the Seaway Partnership. From July 20, 2000, through May
2002, the Upstream Segment receives 80% of revenue and expense of Seaway. From
June 2002 until May 2006, the Upstream Segment receives 60% of revenue and
expense of Seaway. Thereafter, the sharing ratio becomes 40% of revenue and
expense to the Upstream Segment.
The Partnership uses the equity method of accounting for its investment
in Seaway. Summarized financial information for Seaway as of December 31, 2000
and for the period from July 20, 2000 through December 31, 2000, is presented
below (in thousands):
Current assets ........................................... $ 36,883
Noncurrent assets ........................................ 288,191
Current liabilities ...................................... 9,220
Partners capital ......................................... 325,072
Revenues ................................................. 31,989
Net income ............................................... 12,449
The Partnership's investment in Seaway at December 31, 2000, includes
an excess investment amount of $26.4 million, net of accumulated amortization of
$0.7 million. Such excess investment relates to the Partnership's allocation of
the purchase price on July 20, 2000, in excess of its proportionate share of the
net assets of Seaway. The excess investment is being amortized using the
straight-line method over 20 years.
In August 2000, the Partnership announced the execution of definitive
agreements with CMS Energy Corporation and Marathon Ashland Petroleum LLC to
form Centennial Pipeline, LLC ("Centennial"). Centennial will own and operate an
interstate refined petroleum products pipeline extending from the upper Texas
Gulf Coast to Illinois. Each participant will own a one-third interest in
Centennial. During 2000, the Partnership contributed approximately $5.0 million
for its investment in Centennial. Such amount is included in the equity
investment balance at December 31, 2000.
F-12
14
TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 6. INVENTORIES
Inventories are valued at the lower of cost (based on weighted average
cost method) or market. The major components of inventories were as follows:
DECEMBER 31,
-----------------------
2000 1999
--------- --------
(IN THOUSANDS)
Crude oil ............................. $ 14,635 $ 6,627
Gasolines ............................. 3,795 3,270
Propane ............................... -- 223
Butanes ............................... 267 605
Fuel oil .............................. 82 386
Other products ........................ 2,693 2,301
Materials and supplies ................ 3,312 3,354
-------- --------
Total ............................... $ 24,784 $ 16,766
======== ========
The costs of inventories did not exceed market values at December 31,
2000 and 1999.
NOTE 7. PROPERTY, PLANT AND EQUIPMENT
Major categories of property, plant and equipment were as follows:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(IN THOUSANDS)
Land and right of way ................................. $ 77,798 $ 54,240
Line pipe and fittings ................................ 739,372 521,688
Storage tanks ......................................... 125,890 112,132
Buildings and improvements ............................ 13,127 8,253
Machinery and equipment ............................... 178,227 155,933
Construction work in progress ......................... 66,456 89,140
---------- ----------
Total property, plant and equipment ................. $1,200,870 $ 941,386
Less accumulated depreciation and amortization ...... 251,165 220,467
---------- ----------
Net property, plant and equipment ................. $ 949,705 $ 720,919
========== ==========
Depreciation expense on property, plant and equipment was $33.0
million, $30.7 million and $25.5 million for the years ended December 31, 2000,
1999 and 1998, respectively.
NOTE 8. LONG TERM DEBT
SENIOR NOTES
On January 27, 1998, the Downstream Segment completed the issuance of
$180 million principal amount of 6.45% Senior Notes due 2008, and $210 million
principal amount of 7.51% Senior Notes due 2028 (collectively the "Senior
Notes"). The 6.45% Senior Notes due 2008 are not subject to redemption prior to
January 15, 2008. The 7.51% Senior Notes due 2028 may be redeemed at any time
after January 15, 2008, at the option of the Downstream Segment, in whole or in
part, at a premium. Net proceeds from
F-13
15
TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
the issuance of the Senior Notes totaled approximately $386 million and was used
to repay in full the $61.0 million principal amount of the 9.60% Series A First
Mortgage Notes, due 2000, and the $265.5 million principal amount of the 10.20%
Series B First Mortgage Notes, due 2010. The premium for the early redemption of
the First Mortgage Notes totaled $70.1 million. The Partnership recorded an
extraordinary charge of $73.5 million during the first quarter of 1998
(including $0.7 million allocated to minority interest), which represents the
redemption premium of $70.1 million and unamortized debt issue costs related to
the First Mortgage Notes of $3.4 million.
The Senior Notes do not have sinking fund requirements. Interest on the
Senior Notes is payable semiannually in arrears on January 15 and July 15 of
each year. The Senior Notes are unsecured obligations of the Downstream Segment
and will rank on a parity with all other unsecured and unsubordinated
indebtedness of the Downstream Segment. The indenture governing the Senior Notes
contains covenants, including, but not limited to, covenants limiting the
creation of liens securing indebtedness and sale and leaseback transactions.
However, the indenture does not limit the Partnership's ability to incur
additional indebtedness.
At December 31, 2000 and 1999, the estimated fair value of the Senior
Notes was approximately $385 million and $356 million, respectively. Market
prices for recent transactions and rates currently available to the Partnership
for debt with similar terms and maturities were used to estimate fair value.
OTHER LONG TERM DEBT AND CREDIT FACILITIES
In connection with the purchase of fractionation assets from DEFS as of
March 31, 1998, TEPPCO Colorado received a $38 million bank loan. The interest
rate on this loan was 6.53%, which was payable quarterly. The original maturity
date was April 21, 2001. This loan was refinanced by the Partnership on July 21,
2000, through the credit facility discussed below.
On May 17, 1999, the Downstream Segment entered into a five-year $75
million term loan agreement to finance construction of three new pipelines
between the Partnership's terminal in Mont Belvieu, Texas and Port Arthur,
Texas. This loan was refinanced by the Partnership on July 21, 2000, through the
credit facility discussed below.
On May 17, 1999, the Downstream Segment entered into a five-year $25
million revolving credit agreement and the Upstream Segment entered into a
three-year $30 million revolving credit agreement. Both of the credit facilities
were terminated in connection with the refinancing on July 21, 2000 discussed
below. The Downstream Segment did not make any borrowings under this revolving
credit facility. The Upstream Segment had a $3 million principal amount
outstanding under its revolving credit agreement as of July 21, 2000.
On July 14, 2000, the Partnership entered into a $75 million term
loan and a $475 million revolving credit facility. On July 21, 2000, the
Partnership borrowed $75 million under the term loan and $340 million under the
revolving credit facility. The funds were used to finance the acquisition of the
ARCO assets (see Note 3) and to refinance existing credit facilities, other than
the Senior Notes. The term loan was repaid from proceeds received from the
issuance of additional Limited Partner Units on October 25, 2000. The revolving
facility has a three year maturity. The interest rate is based on the
Partnership's option of either the lender's base rate plus a spread, or LIBOR
plus a spread in effect at the time of the borrowings. The credit agreements
contain restrictive financial covenants that require the Partnership to maintain
a minimum level of partners' capital as well as maximum debt-to-EBITDA (earnings
before interest expense, income tax expense and depreciation and amortization
expense) and minimum fixed charge coverage ratios. At December 31, 2000, $446
million was outstanding under the revolving credit facility at a weighted
average interest rate of 8.23%. At December 31, 2000, the carrying value of the
revolving credit facility approximated its fair value.
F-14
16
TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On July 21, 2000, the Partnership entered into a three year swap
agreement to hedge its exposure on the variable rate credit facilities. The swap
agreement is based on a notional amount of $250 million. Under the swap
agreement, the Partnership will pay a fixed rate of interest of 7.17% and will
receive a floating rate based on a three month USD LIBOR rate. At December 31,
2000, the estimated fair value of the swap agreement was a loss of approximately
$10 million.
NOTE 9. CONCENTRATIONS OF CREDIT RISK
The Partnership's primary market areas are located in the Northeast,
Midwest and Southwest regions of the United States. The Partnership has a
concentration of trade receivable balances due from major integrated oil
companies, independent oil companies and other pipelines and wholesalers. These
concentrations of customers may affect the Partnership's overall credit risk in
that the customers may be similarly affected by changes in economic, regulatory
or other factors. The Partnership's customers' historical and future credit
positions are thoroughly analyzed prior to extending credit. The Partnership
manages its exposure to credit risk through credit analysis, credit approvals,
credit limits and monitoring procedures, and for certain transactions may
utilize letters of credit, prepayments and guarantees.
NOTE 10. QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
The Partnership makes quarterly cash distributions of all of its
Available Cash, generally defined as consolidated cash receipts less
consolidated cash disbursements and cash reserves established by the general
partner in its sole discretion. Pursuant to the Partnership Agreements, the
Company receives incremental incentive cash distributions on the portion that
cash distributions on a per Unit basis exceed certain target thresholds as
follows:
GENERAL
UNITHOLDERS PARTNER
----------- -------
Quarterly Cash Distribution per Unit:
Up to Minimum Quarterly Distribution
($0.275 per Unit) .................................. 98% 2%
First Target - $0.276 per Unit up to
$0.325 per Unit .................................... 85% 15%
Second Target - $0.326 per Unit up to
$0.45 per Unit ..................................... 75% 25%
Over Second Target - Cash distributions
greater than $0.45 per Unit ........................ 50% 50%
The following table reflects the allocation of total distributions paid
for the years ended December 31, 2000, 1999 and 1998 (in thousands, except per
Unit amounts).
YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
Limited Partner Units ..................... $ 59,943 $ 53,650 $ 50,750
1% General Partner Interest ............... 685 609 513
General Partner Incentive ................. 12,938 7,650 4,938
--------- --------- ---------
Total Partners' Capital Cash
Distributions ......................... 73,566 61,909 56,201
Class B Units ............................. 7,833 6,651 --
Minority Interest ......................... 832 699 573
--------- --------- ---------
Total Cash Distributions Paid ........... $ 82,231 $ 69,259 $ 56,774
========= ========= =========
Total Cash Distributions Paid Per Unit .... $ 2.00 $ 1.85 $ 1.75
========= ========= =========
On February 2, 2001, the Partnership paid a cash distribution of $0.525
per Limited Partner Unit and Class B Unit for the quarter ended December 31,
2000. The fourth quarter 2000 cash distribution totaled $24.0 million.
F-15
17
TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 11. UNIT OPTION PLAN
During 1994, the Company adopted the Texas Eastern Products Pipeline
Company 1994 Long Term Incentive Plan ("1994 LTIP"). The 1994 LTIP provides key
employees with an incentive award whereby a participant is granted an option to
purchase Limited Partner Units together with a stipulated number of Performance
Units. Under the provisions of the 1994 LTIP, no more than one million options
and two million Performance Units may be granted. Each Performance Unit creates
a credit to a participant's Performance Unit account when earnings exceed a
threshold. When earnings for a calendar year (exclusive of certain special
items) exceed the threshold, the excess amount is credited to the participant's
Performance Unit account. The balance in the account may be used to exercise
Limited Partner Unit options granted in connection with the Performance Units or
may be withdrawn two years after the underlying options expire, usually 10 years
from the date of grant. Under the agreement for such Limited Partner Unit
options, the options become exercisable in equal installments over periods of
one, two, and three years from the date of the grant. Options may also be
exercised by normal means once vesting requirements are met. A summary of
Performance Units and Limited Partner Unit options granted under the terms of
the 1994 LTIP is presented below:
PERFORMANCE EARNINGS EXPIRATION
UNITS THRESHOLD YEAR
----------- --------- -----------
Performance Unit Grants:
1994 ................................ 80,000 $ 1.00 2006
1995 ................................ 70,000 $ 1.25 2007
1997 ................................ 11,000 $ 1.875 2009
OPTIONS OPTIONS EXERCISE
OUTSTANDING EXERCISABLE RANGE
----------- ----------- ---------------
Limited Partner Unit Options:
Outstanding at December 31, 1997 .... 92,528 58,098 $13.81 - $14.34
Granted ........................... 111,000 -- $25.69
Became exercisable ................ -- 26,993 $13.81 - $21.66
Exercised ......................... (12,732) (12,732) $13.81 - $14.34
--------- ---------
Outstanding at December 31, 1998 .... 190,796 72,359 $13.81 - $21.66
Granted ........................... 162,000 -- $25.25
Became exercisable ................ -- 40,737 $21.66 - $25.69
Exercised ......................... (14,000) (14,000) $13.81 - $14.34
--------- ---------
Outstanding at December 31, 1999 .... 338,796 99,096 $13.81 - $25.69
Forfeited ......................... (28,000) (4,000) $25.25 - $25.69
Became exercisable ................ -- 85,365 $21.66 - $25.69
Exercised ......................... (19,932) (19,932) $13.81 - $14.34
--------- ---------
Outstanding at December 31, 2000 .... 290,864 160,529 $13.81 - $25.69
========= =========
As discussed in Note 2, the Partnership uses the intrinsic value method
for recognizing stock-based compensation expense. The exercise price of all
options awarded under the 1994 LTIP equaled the market price of the
Partnership's Limited Partner Units on the date of grant. Accordingly, no
compensation was recognized at the date of grant. Had compensation expense been
determined consistent with SFAS No. 123 "Accounting for Stock-Based
Compensation," compensation expense related to option grants would have totaled
$93,771, $226,152 and $202,634 during 1998, 1999 and 2000, respectively. The
disclosures as required by SFAS 123 are not representative of the effects on
proforma net income for future years as options vest over several years and
additional awards may be granted in subsequent years.
F-16
18
TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
For purposes of determining compensation costs using the provisions of
SFAS 123, the fair value of 1999 and 1998 option grants were determined using
the Black-Scholes option-valuation model. The key input variables used in
valuing the options were:
1999 1998
------- -------
Risk-free interest rate ...................... 4.7% 5.5%
Dividend yield ............................... 7.6% 7.8%
Unit price volatility ........................ 23% 18%
Expected option lives ........................ 6 years 6 years
NOTE 12. LEASES
The Partnership utilizes leased assets in several areas of its
operations. Total rental expense during 2000, 1999 and 1998 was $10.4 million,
$8.7 million and $4.8 million, respectively. The minimum rental payments under
the Partnership's various operating leases for the years 2001 through 2005 are
$8.7 million, $7.0 million, $6.3 million, $5.6 million and $5.4 million,
respectively. Thereafter, payments aggregate $4.6 million through 2007.
NOTE 13. EMPLOYEE BENEFITS
RETIREMENT PLANS
Prior to the transfer of the General Partner interest from Duke Energy
to DEFS on April 1, 2000, the Company's employees participated in the Duke
Energy Retirement Cash Balance Plan, which is a noncontributory,
trustee-administered pension plan. Effective January 1, 1999 the benefit formula
for all eligible employees was a cash balance formula. Under a cash balance
formula, a plan participant accumulates a retirement benefit based upon pay
credits and current interest credits. The pay credits are based on a
participant's salary, age, and service. Prior to January 1, 1999, the benefit
formula for all eligible employees was a final average pay formula. In addition,
certain executive officers participated in the Duke Energy Executive Cash
Balance Plan, which is a noncontributory, nonqualified, defined benefit
retirement plan. The Duke Energy Executive Cash Balance Plan was established to
restore benefit reductions caused by the maximum benefit limitations that apply
to qualified plans.
Effective April 1, 2000, the Company adopted the TEPPCO Retirement Cash
Balance Plan ("Retirement Cash Balance Plan") and the TEPPCO Supplemental
Benefit Plan ("Supplemental Benefit Plan"). The benefits and provisions of
these plans are substantially identical to the Duke Energy Retirement Cash
Balance Plan and the Duke Energy Executive Cash Balance Plan previously in
effect prior to April 1, 2000.
The components of net pension benefits costs for the years ended
December 31, 2000, 1999 and 1998 were as follows (in thousands):
2000 1999 1998
------- ------- -------
Service cost benefit earned during the year .... $ 2,054 $ 1,651 $ 1,699
Interest cost on projected benefit obligation .. 782 2,666 2,041
Expected return on plan assets ................. (663) (2,243) (1,555)
Amortization of prior service cost ............. -- 2 (27)
Amortization of net transition (asset)
liability ................................... 4 15 (5)
Recognized net actuarial loss .................. -- 285 --
Settlement gain ................................ -- -- (554)
------- ------- -------
Net pension benefits costs ................... $ 2,177 $ 2,376 $ 1,599
======= ======= =======
F-17
19
TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The assumptions affecting pension expense include:
2000 1999 1998
------- ------- -------
Discount rate ................................ 7.50% 7.50% 6.75%
Salary increase .............................. 4.50% 4.50% 4.67%
Expected long-term rate of return on plan
assets..................................... 9.25% 9.25% 9.25%
Duke Energy also sponsors an employee savings plan which covers
substantially all employees. Plan contributions on behalf of the Company of $2.2
million, $2.2 million and $1.4 million were expensed in 2000, 1999 and 1998,
respectively.
OTHER POSTRETIREMENT BENEFITS
Prior to April 1, 2000, the Company's employees were provided with
certain health care and life insurance benefits for retired employees on a
contributory and non-contributory basis. Employees became eligible for these
benefits if they had met certain age and service requirements at retirement, as
defined in the plans. As part of the change in ownership, the Company is no
longer responsible for the liability associated with these plans. The
components of net postretirement benefits cost for the years ended December 31,
2000, 1999 and 1998 were as follows (in thousands):
2000 1999 1998
----- ----- -------
Service cost benefit earned during the
year .................................... $ 39 $ 172 $ 439
Interest cost on accumulated
postretirement benefit obligation ....... 134 500 796
Expected return on plan assets ............ (85) (299) (240)
Amortization of prior service cost ........ (96) (384) 3
Amortization of net transition liability .. 54 217 202
Recognized net actuarial loss ............. -- -- 173
----- ----- -------
Net postretirement benefits costs ....... $ 46 $ 206 $ 1,373
===== ===== =======
The assumptions affecting postretirement benefits expense include:
2000 1999 1998
------- ------- -------
Discount rate ............................ 7.50% 7.50% 6.75%
Salary increase .......................... 4.50% 4.50% 4.67%
Expected long-term rate of return on
401(h) assets........................... 9.25% 9.25% 9.25%
Expected long-term rate of return on
RLR assets ............................. 6.75% 6.75% 6.75%
Expected long-term rate of return on
VEBA assets ............................ 9.25% 9.25% 9.25%
Assumed tax rate ......................... 39.60% 39.60% 39.60%
NOTE 14. CONTINGENCIES
TOXIC TORT LITIGATION - SEYMOUR, INDIANA
In the fall of 1999 and on December 1, 2000, the Company and the
Partnership were named as defendants in two separate lawsuits in Jackson County
Circuit Court, Jackson County, Indiana, in Ryan E. McCleery and Marcia S.
McCleery, et al. v. Texas Eastern Corporation, et al. (including the Company and
F-18
20
TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Partnership) and Gilbert Richards and Jean Richards v. Texas Eastern
Corporation, et. al. In both cases plaintiffs contend, among other things, that
the Company and other defendants stored and disposed of toxic and hazardous
substances and hazardous wastes in a manner that caused the materials to be
released into the air, soil and water. They further contend that the release
caused damages to the plaintiffs. In their Complaints, the plaintiffs allege
strict liability for both personal injury and property damage together with
gross negligence, continuing nuisance, trespass, criminal mischief and loss of
consortium. The plaintiffs are seeking compensatory, punitive and treble
damages. The Company has filed an Answer to both complaints, denying the
allegations, as well as various other motions. These cases are in the early
stages of discovery and are not covered by insurance. The Company is defending
itself vigorously against the lawsuits. The Partnership cannot estimate the
loss, if any, associated with these pending lawsuits.
The Partnership is involved in various other claims and legal
proceedings incidental to its business. In the opinion of management, these
claims and legal proceedings will not have a material adverse effect on the
Partnership's consolidated financial position, results of operations or cash
flows.
The operations of the Partnership are subject to federal, state and
local laws and regulations relating to protection of the environment. Although
the Partnership believes its operations are in material compliance with
applicable environmental regulations, risks of significant costs and liabilities
are inherent in pipeline operations, and there can be no assurance that
significant costs and liabilities will not be incurred. Moreover, it is possible
that other developments, such as increasingly strict environmental laws and
regulations and enforcement policies thereunder, and claims for damages to
property or persons resulting from the operations of the pipeline system, could
result in substantial costs and liabilities to the Partnership. The Partnership
does not anticipate that changes in environmental laws and regulations will have
a material adverse effect on its financial position, results of operations or
cash flows in the near term.
The Partnership and the Indiana Department of Environmental Management
("IDEM") have entered into an Agreed Order that will ultimately result in a
remediation program for any on-site and off-site groundwater contamination
attributable to the Partnership's operations at the Seymour, Indiana, terminal.
A Feasibility Study, which includes the Partnership's proposed remediation
program, has been approved by IDEM. IDEM is expected to issue a Record of
Decision formally approving the remediation program. After the Record of
Decision has been issued, the Partnership will enter into an Agreed Order for
the continued operation and maintenance of the program. The Partnership has
accrued $0.6 million at December 31, 2000 for future costs of the remediation
program for the Seymour terminal. In the opinion of the Company, the completion
of the remediation program will not have a material adverse impact on the
Partnership's financial condition, results of operations or liquidity.
The Partnership received a compliance order from the Louisiana
Department of Environmental Quality ("DEQ") during 1994 relative to potential
environmental contamination at the Partnership's Arcadia, Louisiana facility,
which may be attributable to the operations of the Partnership and adjacent
petroleum terminals of other companies. The Partnership and all adjacent
terminals have been assigned to the Groundwater Division of DEQ, in which a
consolidated plan will be developed. The Partnership has finalized a negotiated
Compliance Order with DEQ that will allow the Partnership to continue with a
remediation plan similar to the one previously agreed to by DEQ and implemented
by the Company. In the opinion of the General Partner, the completion of the
remediation program being proposed by the Partnership will not have a future
material adverse impact on the Partnership.
Rates of interstate oil pipeline companies are currently regulated by
the FERC, primarily through an index methodology, whereby a pipeline company is
allowed to change its rates based on the change from year to year in the
Producer Price Index for finished goods less 1% ("PPI Index"). In the
alternative, interstate oil pipeline companies may elect to support rate filings
by using a cost-of-service methodology, competitive market showings ("Market
Based Rates") or agreements between shippers and the oil pipeline company that
the rate is acceptable ("Settlement Rates").
F-19
21
TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On May 11, 1999, the Downstream Segment filed an application with the
FERC requesting permission to charge market-based rates for substantially all
refined products transportation tariffs. Along with its application for
market-based rates, the Downstream Segment filed a petition for waiver pending
the FERC's determination on its application for market-based rates, of the
requirements that would otherwise have been imposed by the FERC's regulations
requiring the Downstream Segment to reduce its rates in conformity with the PPI
Index. On June 30, 1999, the FERC granted the waiver stating that it was
temporary in nature and that the Downstream Segment would be required to make
refunds, with interest, of all amounts collected under rates in excess of the
PPI Index ceiling level after July 1, 1999, if the Downstream Segment's
application for market-based rates was ultimately denied. As a result of the
refund obligation potential, the Partnership has deferred all revenue
recognition of rates charged in excess of the PPI Index. On December 31, 2000,
the amount deferred for possible rate refund, including interest totaled
approximately $2.3 million.
On July 31, 2000, the FERC issued an order granting the Downstream
Segment market-based rates in certain markets and set for hearing the Downstream
Segment's application for market-based rates in the Little Rock, Arkansas;
Shreveport-Arcadia, Louisiana; Cincinnati-Dayton, Ohio and Memphis, Tennessee
destination markets and the Shreveport, Louisiana origin market. The FERC also
directed the FERC trial staff to convene a conference to explore the facts and
issues regarding the Western Gulf Coast origin market. After the matter was set
for hearing, the Downstream Segment and the protesting shippers entered into a
settlement agreement resolving their respective differences. On January 9, 2001,
the presiding Administrative Law Judge assigned to the hearing determined that
the offer of settlement provided resolution of issues set for hearing in the
Downstream Segment pending case in a fair and reasonable manner and in the
public interest and certified the offer of settlement and recommended it to the
FERC for approval. The certification of the settlement is currently before the
FERC. The Partnership believes that the Administrative Law Judge's decision in
this matter will be upheld by the FERC.
The settlement, if it is approved by FERC, will require the Downstream
Segment to withdraw the application for market-based rates to the Little Rock,
Arkansas destination market and the Arcadia, Louisiana destination in the
Shreveport-Arcadia, Louisiana destination market. The Downstream Segment also
has agreed to recalculate rates to these destination markets to conform with the
PPI Index from July 1, 1999 and make appropriate refunds. The refund obligation
under the proposed settlement as of December 31, 2000 would be $0.8 million.
On October 16, 2000 the Partnership received a settlement notice from
ARCO for payment of a net aggregate amount of approximately $12.9 million in
post-closing adjustments related to the purchase of the ARCO assets. A large
portion of the requested adjustment relates to ARCO's indemnity for payment of
accrued income taxes. The Partnership is disputing a substantial portion of the
adjustments. The Partnership does not believe that payment of any amount
ultimately determined would have a material adverse impact on the Partnership's
financial condition and results of operations.
Substantially all of the petroleum products transported and stored by
the Partnership are owned by the Partnership's customers. At December 31, 2000,
the Partnership had approximately 16.4 million barrels of products in its
custody owned by customers. The Partnership is obligated for the transportation,
storage and delivery of such products on behalf of its customers. The
Partnership maintains insurance adequate to cover product losses through
circumstances beyond its control.
NOTE 15. SEGMENT DATA
The Partnership operates in two segments: refined products and LPGs
transportation, which operates through the Downstream Segment; and crude oil and
NGLs transportation and marketing, which operates through the Upstream Segment.
F-20
22
TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Operations of the Downstream Segment consist of interstate
transportation, storage and terminaling of petroleum products; short-haul
shuttle transportation of LPGs at the Mont Belvieu, Texas complex; sale of
product inventory; fractionation of natural gas liquids and other ancillary
services. The Downstream Segment is one of the largest pipeline common carriers
of refined petroleum products and LPGs in the United States. The Partnership
owns and operates a pipeline system extending from southeast Texas through the
central and midwestern United States to the northeastern United States.
The Upstream Segment gathers, stores, transports and markets crude oil
principally in Oklahoma, Texas and the Rocky Mountain region; operates two
trunkline NGL pipelines in South Texas; and distributes lube oils and specialty
chemicals to industrial and commercial accounts. Effective with the purchase of
assets from ARCO (see Note 3), the operations of the Upstream Segment also
include the Partnership's 50% ownership interest in Seaway, other crude oil
transportation pipelines in West Texas, undivided joint interest ownership of
two crude oil pipelines systems in Texas and Oklahoma, and other terminaling and
documentation services.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies discussed above (see Note 2).
The crude oil and NGLs transportation and marketing segment was added by
acquisition, effective November 1, 1998. The acquisition was accounted for under
the purchase method of accounting.
The below table includes financial information by business segment for
the years ended December 31, 2000, 1999 and 1998.
DOWNSTREAM UPSTREAM
SEGMENT SEGMENT CONSOLIDATED
------------- ------------- -------------
2000 (IN THOUSANDS)
- ----
Unaffiliated revenues ....... $ 236,687 $ 2,851,254 $ 3,087,941
Operating expenses,
including power ........... 118,945 2,825,808 2,944,753
Depreciation and
amortization expense ...... 27,743 7,420 35,163
------------- ------------- -------------
Operating income .......... 89,999 18,026 108,025
Interest expense, net ....... (30,573) (13,850) (44,423)
Equity earnings -- Seaway ... -- 12,214 12,214
Other income, net ........... 1,269 291 1,560
------------- ------------- -------------
Net income .................. $ 60,695 $ 16,681 $ 77,376
============= ============= =============
Total assets ................ $ 755,508 $ 867,302 $ 1,622,810
Accounts receivable, trade .. 26,182 277,212 303,394
Accounts payable and accrued
liabilities ............... $ 12,177 $ 281,543 $ 293,720
DOWNSTREAM UPSTREAM
SEGMENT SEGMENT CONSOLIDATED
------------- ------------- -------------
1999 (IN THOUSANDS)
- ----
Unaffiliated revenues ....... $ 230,270 $ 1,704,613 $ 1,934,883
Operating expenses,
including power ........... 113,768 1,688,369 1,802,137
Depreciation and
amortization expense ...... 27,109 5,547 32,656
------------- ------------- -------------
Operating income .......... 89,393 10,697 100,090
Interest expense, net ....... (29,212) (218) (29,430)
Other income, net ........... 1,046 414 1,460
------------- ------------- -------------
Net income .................. $ 61,227 $ 10,893 $ 72,120
============= ============= =============
Total assets ................ $ 721,797 $ 319,576 $ 1,041,373
Accounts receivable, trade .. 22,358 183,408 205,766
Accounts payable and
accrued liabilities ....... $ 7,412 $ 194,248 $ 201,660
F-21
23
TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DOWNSTREAM UPSTREAM
SEGMENT SEGMENT CONSOLIDATED
------------- ------------- -------------
1998 (IN THOUSANDS)
- ----
Unaffiliated revenues ........ $ 211,783 $ 217,855 $ 429,638
Operating expenses,
including power ............ 107,102 215,632 322,734
Depreciation and
amortization expense ....... 26,040 898 26,938
------------- ------------- -------------
Operating income ........... 78,641 1,325 79,966
Interest expense, net ........ (28,982) (7) (28,989)
Other income, net ............ 2,343 21 2,364
------------- ------------- -------------
Income before
extraordinary item ....... 52,002 1,339 53,341
============= ============= =============
Total assets ................. $ 694,636 $ 222,283 $ 916,919
Accounts receivable, trade ... 17,740 95,801 113,541
Accounts payable and accrued
liabilities ................ $ 8,513 $ 109,420 $ 117,933
NOTE 16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
2000 (1)
- ----
Operating revenues ..... $ 750,692 $ 747,704 $ 749,898 $ 839,647
Operating income ....... 30,767 20,151 21,907 35,200
Net income ............. $ 23,881 $ 13,570 $ 17,189 $ 22,736
Basic and diluted
income per
Limited Partner and
Class B Unit (1) ..... $ 0.60 $ 0.35 $ 0.41 $ 0.53
1999
- ----
Operating revenues ..... $ 286,090 $ 455,351 $ 554,368 $ 639,074
Operating income ....... 30,469 21,016 20,406 28,199
Net income ............. 23,372 14,029 13,370 21,349
Basic and diluted
income per Limited
Partner and Class
B Unit ................ $ 0.64 $ 0.38 $ 0.32 $ 0.57
- ----------
(1) Per Unit calculation includes 3,700,000 Limited Partner Units issued on
October 25, 2000.
F-22
24
NOTE 17. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In connection with the Partnership's filing of a shelf registration
statement on Form S-3 with the Securities and Exchange Commission, TE Products
Pipeline Company, Limited Partnership and TCTM, L.P., the Partnership's sole
first-tier operating subsidiaries (the "Guarantor Subsidiaries"), may issue
unconditional guarantees of senior or subordinated debt securities of the
Partnership in the event that the Partnership issues such securities from time
to time under the registration statement. In July 2001, the Partnership
restructured the ownership of the general partner interests in these first-tier
operating subsidiaries to cause them to be wholly-owned by the Partnership. If
issued, the guarantees will be full, unconditional and joint and several. For
purposes of the following consolidating information, the Partnership and
Guarantor Subsidiaries investments in their respective subsidiaries are
accounted for by the equity method of accounting.
TEPPCO GUARANTOR NON-GUARANTOR
DECEMBER 31, 2000 PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES
----------------- -------------- ------------ ------------
(IN THOUSANDS)
Assets
Current assets ................ $ 6,083 $ 52,773 $ 315,488
Property, plant and
equipment - net ............. -- 640,657 309,048
Equity investments ............ 420,433 202,811 236,232
Intercompany notes receivable . 441,836 -- --
Other assets .................. 5,322 15,385 48,475
-------------- ------------ ------------
Total assets ............... $ 873,674 $ 911,626 $ 909,243
============== ============ ============
Liabilities and Partners' Capital
Current liabilities ........... $ 7,206 $ 45,085 $ 318,049
Long term debt ................ 446,000 389,784 --
Intercompany notes payable .... -- 48,037 393,799
Other long term liabilities
and minority interest ....... -- 3,991 --
Redeemable Class B Units
held by related party ........ 105,411 -- --
Total partners' capital ....... 315,057 424,729 197,395
-------------- ------------ ------------
Total liabilities and
partners' capital .......... $ 873,674 $ 911,626 $ 909,243
============== ============ ============
TEPPCO
CONSOLIDATING PARTNERS, L.P.
DECEMBER 31, 2000 ADJUSTMENTS CONSOLIDATED
----------------- ------------- --------------
(IN THOUSANDS)
Assets
Current assets ............... $ (10,947) $ 363,397
Property, plant and
equipment - net ............ -- 949,705
Equity investments ........... (617,828) 241,648
Intercompany notes receivable (441,836) --
Other assets ................. (1,122) 68,060
------------- --------------
Total assets .............. $ (1,071,733) $ 1,622,810
============= ==============
Liabilities and Partners' Capital
Current liabilities .......... $ (12,069) $ 358,271
Long term debt ............... -- 835,784
Intercompany notes payable ... (441,836) --
Other long term liabilities
and minority interest ...... 4,296 8,287
Redeemable Class B Units
held by related party ....... -- 105,411
Total partners' capital ...... (622,124) 315,057
------------- --------------
Total liabilities and
partners' capital ......... $ (1,071,733) $ 1,622,810
============= ==============
TEPPCO GUARANTOR NON-GUARANTOR
DECEMBER 31, 1999 PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES
----------------- -------------- ------------ ------------
(IN THOUSANDS)
Assets
Current assets ................ $ -- $ 51,267 $ 211,808
Property, plant and
equipment - net ............. -- 609,870 111,049
Equity investments ............ 337,984 116,872 --
Other assets .................. -- 19,295 40,502
-------------- ------------ ------------
Total assets ............... $ 337,984 $ 797,304 $ 363,359
============== ============ ============
Liabilities and Partners' Capital
Current liabilities ........... $ 2,358 $ 38,066 $ 205,488
Long term debt ................ -- 414,753 41,000
Other long term liabilities
and minority interest ....... -- 3,073 --
Redeemable Class B Units
held by related party ....... 105,859 -- --
Total partners' capital ....... 229,767 341,412 116,871
-------------- ------------ ------------
Total liabilities and
partners' capital .......... $ 337,984 $ 797,304 $ 363,359
============== ============ ============
TEPPCO
CONSOLIDATING PARTNERS, L.P.
DECEMBER 31, 1999 ADJUSTMENTS CONSOLIDATED
----------------- -------------- ---------------
(IN THOUSANDS)
Assets
Current assets ................ $ (66) $ 263,009
Property, plant and
equipment - net ............. -- 720,919
Equity investments ............ (454,856) --
Other assets .................. (2,352) 57,445
-------------- --------------
Total assets ............... $ (457,274) $ 1,041,373
============== ==============
Liabilities and Partners'
Capital
Current liabilities ........... $ (2,420) $ 243,492
Long term debt ................ -- 455,753
Other long term liabilities
and minority interest ....... 3,429 6,502
Redeemable Class B Units
held by related party ....... -- 105,859
Total partners' capital ....... (458,283) 229,767
-------------- --------------
Total liabilities and
partners' capital .......... $ (457,274) $ 1,041,373
============== ==============
F-23
25
TEPPCO GUARANTOR NON-GUARANTOR
YEAR ENDED DECEMBER 31, 2000 PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES
- ---------------------------- -------------- ------------ ------------
(IN THOUSANDS)
Operating revenues ........... $ -- $ 229,234 $ 2,858,707
Costs and expenses ........... -- 143,793 2,836,123
-------------- ------------ ------------
Operating income ........... -- 85,441 22,584
-------------- ------------ ------------
Interest expense - net ....... (17,773) (27,572) (16,851)
Equity earnings .............. 77,376 18,602 12,214
Other income - net ........... 17,773 1,694 655
-------------- ------------ ------------
Income before minority
interest ................. 77,376 78,165 18,602
Minority interest ............ -- -- --
-------------- ------------ ------------
Net income ................. $ 77,376 $ 78,165 $ 18,602
============== ============ ============
TEPPCO
CONSOLIDATING PARTNERS, L.P.
YEAR ENDED DECEMBER 31, 2000 ADJUSTMENTS CONSOLIDATED
- ---------------------------- -------------- --------------
(IN THOUSANDS)
Operating revenues .......... $ -- $ 3,087,941
Costs and expenses .......... -- 2,979,916
-------------- --------------
Operating income .......... -- 108,025
-------------- --------------
Interest expense - net ...... 17,773 (44,423)
Equity earnings ............. (95,978) 12,214
Other income - net .......... (17,773) 2,349
-------------- --------------
Income before minority
interest ................ (95,978) 78,165
Minority interest ........... (789) (789)
-------------- --------------
Net income ................ $ (96,767) $ 77,376
============== ==============
TEPPCO GUARANTOR NON-GUARANTOR
YEAR ENDED DECEMBER 31, 1999 PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES
- ---------------------------- -------------- ------------ -------------
(IN THOUSANDS)
Operating revenues .......... $ -- $ 222,915 $ 1,711,968
Costs and expenses .......... -- 138,035 1,696,758
-------------- ------------ -------------
Operating income ......... -- 84,880 15,210
-------------- ------------ -------------
Interest expense - net ...... -- (26,682) (2,748)
Equity earnings ............. 72,120 13,188 --
Other income - net .......... -- 1,470 726
-------------- ------------ -------------
Income before minority
interest ............... 72,120 72,856 13,188
Minority interest ........... -- -- --
-------------- ------------ -------------
Net income ............... $ 72,120 $ 72,856 $ 13,188
============== ============ =============
TEPPCO
CONSOLIDATING PARTNERS, L.P.
YEAR ENDED DECEMBER 31, 1999 ADJUSTMENTS CONSOLIDATED
- ---------------------------- -------------- --------------
(IN THOUSANDS)
Operating revenues ........... $ -- $ 1,934,883
Costs and expenses ........... -- 1,834,793
-------------- --------------
Operating income .......... -- 100,090
-------------- --------------
Interest expense - net ....... -- (29,430)
Equity earnings .............. (85,308) --
Other income - net ........... -- 2,196
-------------- --------------
Income before minority
interest ................ (85,308) 72,856
Minority interest ............ (736) (736)
-------------- --------------
Net income ................ $ (86,044) $ 72,120
============== ==============
TEPPCO GUARANTOR NON-GUARANTOR
YEAR ENDED DECEMBER 31, 1998 PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES
- ---------------------------- -------------- ------------ -------------
(IN THOUSANDS)
Operating revenues .......... $ -- $ 206,259 $ 223,379
Costs and expenses .......... -- 130,934 218,738
-------------- ------------ -------------
Operating income ......... -- 75,325 4,641
-------------- ------------ -------------
Interest expense - net ...... -- (27,095) (1,894)
Equity earnings ............. (19,426) 2,855 --
Other income - net .......... -- 2,800 108
-------------- ------------ -------------
Income (loss) before
minority interest and
extraordinary item .... (19,426) 53,885 2,855
Minority interest ........... -- -- --
Extraordinary loss on debt
extinguishment ........... -- (73,509) --
-------------- ------------ -------------
Net income (loss) ....... $ (19,426) $ (19,624) $ 2,855
============== ============ =============
TEPPCO
CONSOLIDATING PARTNERS, L.P.
YEAR ENDED DECEMBER 31, 1998 ADJUSTMENTS CONSOLIDATED
- ---------------------------- -------------- --------------
(IN THOUSANDS)
Operating revenues ........... $ -- $ 429,638
Costs and expenses ........... -- 349,672
-------------- --------------
Operating income .......... -- 79,966
-------------- --------------
Interest expense - net ....... -- (28,989)
Equity earnings .............. 16,571 --
Other income - net ........... -- 2,908
-------------- --------------
Income (loss) before
minority interest and
extraordinary item ..... 16,571 53,885
Minority interest ............ (544) (544)
Extraordinary loss on debt
extinguishment ............ 742 (72,767)
-------------- --------------
Net income (loss) ........ $ 16,769 $ (19,426)
============== ==============
F-24
26
TEPPCO GUARANTOR NON-GUARANTOR
YEAR ENDED DECEMBER 31, 2000 PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES
- ---------------------------- -------------- ------------ -------------
(IN THOUSANDS)
Cash flows from
operating activities
Net income .................... $ 77,376 $ 78,165 $ 18,602
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization ............ -- 25,728 9,435
Equity earnings,
net of distributions .... 4,025 (1,962) (10,260)
Changes in assets and
liabilities and other ... 7,242 1,046 845
---------- -------- ---------
Net cash provided by
operating activities 88,643 102,977 18,622
---------- -------- ---------
Cash flows from investing
activities ................ (535,048) (67,225) (434,113)
Cash flows from financing
activities ................ 446,405 (42,870) 417,112
---------- -------- ---------
Net increase (decrease) in
cash and cash equivalents . -- (7,118) 1,621
Cash and cash equivalents
at beginning of period .... -- 16,284 16,309
---------- -------- ---------
Cash and cash equivalents
at end of period .......... $ -- $ 9,166 $ 17,930
========== ======== =========
TEPPCO
CONSOLIDATING PARTNERS, L.P.
YEAR ENDED DECEMBER 31, 2000 ADJUSTMENTS CONSOLIDATED
- ---------------------------- ------------- --------------
(IN THOUSANDS)
Cash flows from
operating activities
Net income .................... $ (96,767) $ 77,376
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization ............ -- 35,163
Equity earnings,
net of distributions .... (1,887) (10,084)
Changes in assets and
liabilities and other ... (3,543) 5,590
---------- ---------
Net cash provided by
operating activities (102,197) 108,045
---------- ---------
Cash flows from investing
activities ................ 542,192 (494,194)
Cash flows from financing
activities ................ (439,995) 380,652
---------- ---------
Net increase (decrease) in
cash and cash equivalents.. -- (5,497)
Cash and cash equivalents
at beginning of period .... -- 32,593
---------- ---------
Cash and cash equivalents
at end of period .......... $ -- $ 27,096
========== =========
TEPPCO GUARANTOR NON-GUARANTOR
YEAR ENDED DECEMBER 31, 1999 PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES
- ---------------------------- -------------- ------------ -------------
(IN THOUSANDS)
Cash flows from
operating activities
Net income .................... $ 72,120 $ 72,856 $ 13,188
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization ........... -- 25,094 7,562
Equity earnings,
net of distributions ... (3,561) (5,144) --
Changes in assets and
liabilities and other... 369 451 (2,917)
-------------- ------------ -------------
Net cash provided by
operating activities ..... 68,928 93,257 17,833
-------------- ------------ -------------
Cash flows from investing
activities .................. -- (66,282) (10,359)
Cash flows from financing
activities .................. (68,928) (44,628) (4,651)
-------------- ------------ -------------
Net increase (decrease)
in cash and cash
equivalents ................. -- (17,653) 2,823
Cash and cash equivalents
at beginning of period ..... -- 33,937 13,486
-------------- ------------ -------------
Cash and cash equivalents
at end of period ............ $ -- $ 16,284 $ 16,309
============== ============ =============
TEPPCO
CONSOLIDATING PARTNERS, L.P.
YEAR ENDED DECEMBER 31, 1999 ADJUSTMENTS CONSOLIDATED
- ---------------------------- ------------- --------------
(IN THOUSANDS)
Cash flows from
operating activities
Net income .................... $ (86,044) $ 72,120
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization ........... -- 32,656
Equity earnings,
net of distributions ... 9,098 393
Changes in assets and
liabilities and other . (2) (2,099)
-------------- --------------
Net cash provided by
operating activities ..... (76,948) 103,070
-------------- --------------
Cash flows from investing
activities .................. -- (76,641)
Cash flows from financing
activities .................. 76,948 (41,259)
-------------- --------------
Net increase (decrease)
in cash and cash
equivalents ................. -- (14,830)
Cash and cash equivalents
at beginning of period ..... -- 47,423
-------------- --------------
Cash and cash equivalents
at end of period ............ $ -- $ 32,593
============== ==============
TEPPCO GUARANTOR NON-GUARANTOR
YEAR ENDED DECEMBER 31, 1998 PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES
- ---------------------------- -------------- ------------ -------------
(IN THOUSANDS)
Cash flows from
operating activities
Net income (loss) ................. $ (19,426) $ (19,624) $ 2,855
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and
amortization .............. -- 24,529 2,409
Extraordinary loss
on debt
extinguishment ............ -- 73,509 --
Equity earnings, net
of distributions .......... 75,627 (2,666) --
Changes in assets and
liabilities and other ..... 1,989 3,381 8,822
-------------- ------------ -------------
Net cash provided by
operating activities ............ 58,190 79,129 14,086
-------------- ------------ -------------
Cash flows from
investing activities ............ -- (19,828) (42,711)
Cash flows from
financing activities ............ (58,190) (69,325) 42,111
-------------- ------------ -------------
Net increase (decrease)
in cash and cash
equivalents ..................... -- (10,024) 13,486
Cash and cash equivalents
at beginning of period .......... -- 43,961 --
-------------- ------------ -------------
Cash and cash equivalents
at end of period ................ $ -- $ 33,937 $ 13,486
============== ============ =============
TEPPCO
CONSOLIDATING PARTNERS, L.P.
YEAR ENDED DECEMBER 31, 1998 ADJUSTMENTS CONSOLIDATED
- ---------------------------- -------------- --------------
(IN THOUSANDS)
Cash flows from
operating activities
Net income (loss) ................. $ 16,769 $ (19,426)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and
amortization .............. -- 26,938
Extraordinary loss
on debt
extinguishment ............ (742) 72,767
Equity earnings, net
of distributions .......... (72,772) 189
Changes in assets and
liabilities and other ..... (1,445) 12,747
-------------- --------------
Net cash provided by
operating activities ............ (58,190) 93,215
-------------- --------------
Cash flows from
investing activities ............ -- (62,539)
Cash flows from
financing activities ............ 58,190 (27,214)
-------------- --------------
Net increase (decrease)
in cash and cash
equivalents ..................... -- 3,462
Cash and cash equivalents
at beginning of period .......... -- 43,961
-------------- --------------
Cash and cash equivalents
at end of period ................ $ -- $ 47,423
============== ==============
F-25
27
TEPPCO PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands)
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 16,812 $ 27,096
Accounts receivable, trade ....................... 264,844 303,394
Inventories ...................................... 27,361 24,784
Other ............................................ 9,221 8,123
------------ ------------
Total current assets .......................... 318,238 363,397
------------ ------------
Property, plant and equipment, at cost (Net of
accumulated depreciation and amortization of
$260,345 and $251,165) ........................... 969,917 949,705
Equity investments ................................. 238,295 241,648
Intangible assets .................................. 36,746 38,388
Other assets ....................................... 33,341 29,672
------------ ------------
Total assets .................................. $ 1,596,537 $ 1,622,810
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued liabilities ......... $ 264,333 $ 293,720
Accounts payable, general partner ................ 6,393 6,637
Accrued interest ................................. 7,134 18,633
Other accrued taxes .............................. 8,797 10,501
Other ............................................ 26,525 28,780
------------ ------------
Total current liabilities ..................... 313,182 358,271
------------ ------------
Senior Notes ....................................... 389,791 389,784
Other long-term debt ............................... 413,000 446,000
Other liabilities and deferred credits ............. 10,538 3,991
Minority interest .................................. 4,883 4,296
Redeemable Class B Units held by related party ..... 105,547 105,411
Partners' capital:
General partner's interest ....................... 2,749 1,824
Limited partners' interests ...................... 369,211 313,233
Accumulated other comprehensive loss ............. (12,364) --
------------ ------------
Total partners' capital ....................... 359,596 315,057
------------ ------------
Total liabilities and partners' capital ....... $ 1,596,537 $ 1,622,810
============ ============
See accompanying Notes to Consolidated Financial Statements.
F-26
28
TEPPCO PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2001 2000
------------ ------------
Operating revenues:
Sales of crude oil and petroleum products ...... $ 707,481 $ 682,785
Transportation - Refined products .............. 26,181 28,030
Transportation - LPGs .......................... 24,999 23,117
Transportation - crude oil and NGLs ............ 10,909 4,129
Mont Belvieu operations ........................ 2,897 4,471
Other - Net .................................... 12,768 8,160
------------ ------------
Total operating revenues ..................... 785,235 750,692
------------ ------------
Costs and expenses:
Purchases of crude oil and petroleum products .. 698,576 677,413
Operating, general and administrative .......... 27,950 24,234
Operating fuel and power ....................... 8,614 7,513
Depreciation and amortization .................. 9,907 8,247
Taxes - other than income taxes ................ 3,882 2,518
------------ ------------
Total costs and expenses ..................... 748,929 719,925
------------ ------------
Operating income ............................. 36,306 30,767
Interest expense ................................. (16,294) (8,434)
Interest capitalized ............................. 345 1,010
Equity earnings - Seaway Crude Pipeline Company .. 5,206 --
Other income - net ............................... 434 782
------------ ------------
Income before minority interest .............. 25,997 24,125
Minority interest ................................ (262) (244)
------------ ------------
Net Income ................................... $ 25,735 $ 23,881
============ ============
Net Income Allocation:
Limited Partner Unitholders ...................... $ 18,611 $ 17,533
Class B Unitholder ............................... 2,192 2,368
General Partner .................................. 4,932 3,980
------------ ------------
Total net income allocated ................... $ 25,735 $ 23,881
============ ============
Basic and diluted net income per Limited Partner
and Class B Unit ........................... $ 0.55 $ 0.60
============ ============
Weighted average Limited Partner and Class B Units
outstanding ................................... 37,889 32,917
See accompanying Notes to Consolidated Financial Statements.
F-27
29
TEPPCO PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2001 2000
------------ ------------
Cash flows from operating activities:
Net income ........................................ $ 25,735 $ 23,881
Depreciation and amortization .................... 9,907 8,247
Earnings in equity investments,
net of distributions ........................... 6,300 (78)
Noncash portion of interest expense .............. 520 98
Decrease (increase) in accounts
receivable, trade .............................. 38,550 (37,507)
Decrease (increase) in inventories ............... (2,577) 4,737
Increase in other current assets ................. (1,099) (588)
Increase (decrease) in accounts
payable and accrued expenses ................... (51,236) 29,856
Other ............................................ (3,475) 124
------------ ------------
Net cash provided by operating activities ...... 22,625 28,770
------------ ------------
Cash flows from investing activities:
Proceeds from cash investments ................... 1,000 --
Purchase of crude oil assets ..................... (20,000) --
Proceeds from the sale of assets ................. 1,300 --
Investment in Centennial Pipeline Company ........ (2,947) --
Capital expenditures ............................. (10,940) (18,013)
------------ ------------
Net cash used in investing activities .......... (31,587) (18,013)
------------ ------------
Cash flows from financing activities:
Proceeds from term loan and revolving
credit facility ................................ 8,000 20,000
Repayment on revolving credit facility ........... (41,000) --
Proceeds from the issuance of Limited
Partner Units, net ............................. 54,588 --
General Partner contributions .................... 1,114 --
Distributions .................................... (24,024) (18,305)
------------ ------------
Net cash provided by (used in)
financing activities ......................... (1,322) 1,695
------------ ------------
Net increase (decrease) in cash and
cash equivalents ................................. (10,284) 12,452
Cash and cash equivalents at beginning
of period ........................................ 27,096 32,593
------------ ------------
Cash and cash equivalents at end of
period ........................................... $ 16,812 $ 45,045
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Interest paid during the period (net
of capitalized interest) ....................... $ 26,656 $ 13,835
============ ============
See accompanying Notes to Consolidated Financial Statements.
F-28
30
TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
TEPPCO Partners, L.P. (the "Partnership"), a Delaware limited
partnership, was formed in March 1990. The Partnership operates through TE
Products Pipeline Company, Limited Partnership (the "Downstream Segment") and
TCTM, L.P. (the "Upstream Segment"). Collectively the Downstream Segment and the
Upstream Segment are referred to as "the Operating Partnerships." The
Partnership owns a 99% interest as the sole limited partner in both the
Downstream Segment and Upstream Segment.
On March 31, 2000, Texas Eastern Products Pipeline Company, a Delaware
corporation and general partner of the Partnership and the Operating
Partnerships, was converted into Texas Eastern Products Pipeline Company, LLC
(the "Company" or "General Partner"), a Delaware limited liability company.
Additionally on March 31, 2000, Duke Energy Corporation ("Duke Energy"),
contributed its ownership of the General Partner to Duke Energy Field Services,
LP ("DEFS"). DEFS is a joint venture between Duke Energy and Phillips Petroleum
Company. Duke Energy holds a majority interest in DEFS.
The Company owns a 1% general partner interest in the Partnership and a
1% general partner interest in each Operating Partnership. The Company, as
general partner, performs all management and operating functions required for
the Partnership pursuant to the Agreements of Limited Partnership of TEPPCO
Partners, L.P., TE Products Pipeline Company, Limited Partnership and TCTM, L.P.
(the "Partnership Agreements"). The General Partner is reimbursed by the
Partnership for all reasonable direct and indirect expenses incurred in managing
the Partnership.
In July 2001, the Partnership restructured the ownership of the general
partner interests in the Operating Partnerships to cause them to be wholly-owned
by the Partnership. As of such date, a wholly-owned subsidiary of the
Partnership has succeeded the Company as general partner of each of the
Operating Partnerships and the new general partner owns a .001% general partner
interest in each of the Operating Partnerships.
The accompanying unaudited consolidated financial statements reflect
all adjustments, which are, in the opinion of management, of a normal and
recurring nature and necessary for a fair statement of the financial position of
the Partnership as of March 31, 2001, and the results of operations and cash
flows for the periods presented. The results of operations for the three months
ended March 31, 2001, are not necessarily indicative of results of operations
for the full year 2001. The interim financial statements should be read in
conjunction with the Partnership's consolidated financial statements and notes
thereto presented in the TEPPCO Partners, L.P. Annual Report on Form 10-K for
the year ended December 31, 2000. Certain amounts from the prior year have been
reclassified to conform to current presentation.
The Partnership operates in two segments: refined products and
liquefied petroleum gases ("LPGs") transportation (Downstream Segment); and
crude oil and natural gas liquids ("NGLs") transportation and marketing
(Upstream Segment). The Partnership's reportable segments offer different
products and services and are managed separately because each requires different
business strategies. The Upstream Segment was acquired as a unit in November
1998, and the management at the time of the acquisition was retained. The
Partnership's interstate transportation operations, including rates charged to
customers, are subject to regulations prescribed by the Federal Energy
Regulatory Commission ("FERC"). Refined products, LPGs, crude oil and NGLs are
referred to herein, collectively, as "petroleum products" or "products.
Basic net income per Unit is computed by dividing net income, after
deduction of the general partner's interest, by the weighted average number of
Limited Partner Units and Class B Units outstanding (a total of 37.9 million
Units for the three months ended March 31, 2001, and 32.9 million Units for the
three months ended March 31, 2000). The General Partner's percentage interest in
net income is based on its percentage of cash distributions from Available Cash
for each period (see Note 7. Quarterly Distributions of Available Cash). The
General Partner was allocated $4.9 million (representing 19.17%) and $4.0
million (representing 16.66%) of net income for the three months ended March 31,
2001, and 2000, respectively.
F-29
31
TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Diluted net income per Unit is similar to the computation of basic net
income per Unit above, except that the denominator was increased to include the
dilutive effect of outstanding Unit options by application of the treasury stock
method. For the quarters ended March 31, 2001 and 2000, the denominator was
increased by 26,180 Units and 19,457 Units, respectively.
NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2001, the Partnership adopted Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards requiring that derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded at fair value
and included in the balance sheet as assets or liabilities. The accounting for
changes in the fair value of a derivative instrument depends on the intended use
of the derivative and the resulting designation, which is established at the
inception of a derivative. Special accounting for derivatives qualifying as fair
value hedges allows a derivative's gains and losses to offset related results on
the hedged item in the statement of income. For derivative instruments
designated as cash flow hedges, changes in fair value, to the extent the hedge
is effective, are recognized in other comprehensive income until the hedged item
is recognized in earnings. Hedge effectiveness is measured at least quarterly
based on the relative cumulative changes in fair value between the derivative
contract and the hedged item over time. Any change in fair value resulting from
ineffectiveness, as defined by SFAS 133, is recognized immediately in earnings.
Adoption of SFAS 133 at January 1, 2001 resulted in the recognition of
$10.1 million of derivative liabilities, $4.1 million of which are included in
current liabilities and $6.0 million of which are included in other noncurrent
liabilities on the Partnership's balance sheet, and $10.1 million of hedging
losses included in accumulated other comprehensive loss, a component of
Partners' capital, as the cumulative effect of the change in accounting
principle. The hedging losses included in accumulated other comprehensive loss
will be transferred to earnings as the forecasted transactions actually occur.
Approximately $4.1 million of the loss included in accumulated other
comprehensive loss as of January 1, 2001 is anticipated to be transferred into
earnings over the next twelve months. The cumulative effect of the accounting
change had no effect on the Partnership's net income or its earnings per Unit
amounts for the quarter ended March 31, 2001. Amounts were determined as of
January 1, 2001 based on quoted market values, the Partnership's portfolio of
derivative instruments, and the Partnership's measurement of hedge
effectiveness.
From time to time, the Partnership has utilized and expects to continue
to utilize derivative financial instruments with respect to a portion of its
interest rate risks and its crude oil marketing activities to achieve a more
predictable cash flow by reducing its exposure to interest rate and crude oil
price fluctuations. These transactions generally are swaps and forwards and are
entered into with major financial institutions or commodities trading
institutions. Derivative financial instruments used in the Partnership's
Upstream Segment are intended to reduce the Partnership's exposure to
fluctuations in the market price of crude oil, while derivative financial
instruments related to the Partnership's interest rate risks are intended to
reduce the Partnership's exposure to increases in the benchmark interest rates
underlying the Partnership's variable rate revolving credit facility. Through
December 31, 2000, gains and losses from financial instruments used in the
Partnership's Upstream Segment have been recognized in revenues for the periods
to which the derivative financial instruments relate and gain and losses from
its interest rate financial instruments have been recognized in interest expense
for the periods to which the derivative financial instrument relate.
As of March 31, 2001, the Upstream Segment had open positions on
certain speculative option contracts. During the three months ended March 31,
2001, a loss of $13,000 was recognized on such contracts.
F-30
32
TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Also as of March 31, 2001, the Partnership had in place an interest
rate swap agreement to hedge its exposure to increases in the benchmark interest
rate underlying the variable rate revolving credit facilities. The swap
agreement is based on a notional amount of $250 million. Under the swap
agreement, the Partnership pays a fixed rate of interest of 7.17% and receives a
floating rate based on a three month USD LIBOR rate. The interest rate swap is
designated as a cash flow hedge, therefore, the changes in fair value, to the
extent the swap is effective, are recognized in other comprehensive income until
the hedged interest costs are recognized in earnings. During the quarter ended
March 31, 2001, the Partnership recognized $0.8 million in losses, included in
interest expense, on the interest rate swap attributable to interest costs
occurring in the first quarter of 2001. No gain or loss from ineffectiveness was
required to be recognized. The fair value of the interest rate swap agreement
was a loss of approximately $13.7 million at March 31, 2001. Approximately $6.1
million (inclusive of the $4.1 million related to the cumulative effect of the
accounting change not yet recognized) of such amount is anticipated to be
transferred into earnings over the next twelve months.
During the first quarter of 2001, the Partnership executed three
treasury rate lock agreements to hedge its exposure to increases in the treasury
rate that will be used to establish the fixed interest rate for the debt
offering that is probable to occur in the second quarter of 2001. The treasury
rate lock agreements are based on notional amounts of $200 million, $100 million
and $100 million. Under the treasury rate lock agreements, the Partnership pays
a fixed rate of interest of 5.0%, 4.9% and 4.8%, respectively, and receives a
floating rate based on the three month treasury rate. The treasury rate locks
are designated as cash flow hedges, therefore, the changes in fair value, to the
extent the treasury rate locks are effective, are recognized in other
comprehensive income until the actual debt offering occurs. Upon completion of
the debt offering, the realized gain or loss on the treasury rate locks will be
amortized out of accumulated other comprehensive income into interest expense
over the life of the debt obligation. The fair value of the three treasury rate
locks was a gain of approximately $1.3 million at March 31, 2001.
NOTE 3. ACQUISITIONS
On July 20, 2000, the Partnership completed an acquisition of ARCO Pipe
Line Company ("ARCO"), a wholly owned subsidiary of Atlantic Richfield Company,
for $322.6 million, which included $4.1 million of acquisition related costs.
The purchase included ARCO's 50-percent ownership interest in Seaway Crude
Pipeline Company ("Seaway"), which owns a pipeline that carries mostly imported
crude oil from a marine terminal at Freeport, Texas, to Cushing, Oklahoma, and
from a marine terminal at Texas City, Texas to refineries in the Texas City and
Houston areas. The Partnership assumed ARCO's role as operator of this pipeline.
The Partnership also acquired: (i) ARCO's crude oil terminal facilities in
Cushing and Midland, Texas, including the line transfer and pumpover business at
each location; (ii) an undivided ownership interest in both the Rancho Pipeline,
a crude oil pipeline from West Texas to Houston, and the Basin Pipeline, a crude
oil pipeline running from Jal, New Mexico, through Midland to Cushing, both of
which are operated by another joint owner; and (iii) the receipt and delivery
pipelines known as the West Texas Trunk System, which is located around the
Midland terminal. The acquisition was accounted for under the purchase method of
accounting. Accordingly, the results of the acquisition are included in the
consolidated statements of income from July 20, 2000.
F-31
33
TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
The following table presents the unaudited pro forma results of the
Partnership as though the acquisition of ARCO occurred at the beginning of 2000
(in thousands, except per Unit amounts).
QUARTER ENDED
MARCH 31, 2000
--------------
Revenues................................................ $758,197
Net Income.............................................. 22,302
Basic and diluted net income per Limited
Partner and Class B Unit............................ $ 0.56
NOTE 4. INVENTORIES
Inventories are carried at the lower of cost (based on weighted average
cost method) or market. The major components of inventories were as follows (in
thousands):
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
Crude oil .................. $ 15,070 $ 14,635
Gasolines .................. 4,197 3,795
Butanes .................... 454 267
Fuel oil ................... 242 82
Other products ............. 3,650 2,693
Materials and supplies ..... 3,748 3,312
------------ ------------
Total ............ $ 27,361 $ 24,784
============ ============
The costs of inventories did not exceed market values at March 31,
2001, and December 31, 2000.
NOTE 5. EQUITY INVESTMENTS
Seaway is a partnership between the Upstream Segment and Phillips
Petroleum Company ("Phillips"). The Upstream Segment purchased its 50-percent
ownership interest in Seaway on July 20, 2000 (see Note 3. Acquisitions). The
Seaway Crude Pipeline Company Partnership Agreement provides for varying
participation ratios throughout the life of the Seaway Partnership. From July
20, 2000, through May 2002, the Upstream Segment receives 80% of revenue and
expense of Seaway. From June 2002 until May 2006, the Upstream Segment receives
60% of revenue and expense of Seaway. Thereafter, the sharing ratio becomes 40%
of revenue and expense to the Upstream Segment.
The Partnership uses the equity method of accounting for its investment
in Seaway. Summarized financial information for Seaway as of and for the three
months ended March 31, 2001 is presented below (in thousands):
Current assets ............. $ 23,960
Non current assets ......... 286,264
Current liabilities ........ 2,395
Partners' capital .......... 307,829
Revenues ................... 15,486
Net income ................. $ 6,978
F-32
34
TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 6. LONG TERM DEBT
SENIOR NOTES
On January 27, 1998, the Downstream Segment completed the issuance of
$180 million principal amount of 6.45% Senior Notes due 2008, and $210 million
principal amount of 7.51% Senior Notes due 2028 (collectively the "Senior
Notes"). The 6.45% Senior Notes due 2008 are not subject to redemption prior to
January 15, 2008. The 7.51% Senior Notes due 2028 may be redeemed at any time
after January 15, 2008, at the option of the Downstream Segment, in whole or in
part, at a premium.
The Senior Notes do not have sinking fund requirements. Interest on the
Senior Notes is payable semiannually in arrears on January 15 and July 15 of
each year. The Senior Notes are unsecured obligations of the Downstream Segment
and will rank on a parity with all other unsecured and unsubordinated
indebtedness of the Downstream Segment. The indenture governing the Senior Notes
contains covenants, including, but not limited to, covenants limiting the
creation of liens securing indebtedness and sale and leaseback transactions.
However, the indenture does not limit the Partnership's ability to incur
additional indebtedness.
OTHER LONG TERM DEBT AND CREDIT FACILITIES
On July 14, 2000, the Partnership entered into a $75 million term loan
and a $475 million revolving credit facility. On July 21, 2000, the Partnership
borrowed $75 million under the term loan and $340 million under the revolving
credit facility. The funds were used to finance the acquisition of the ARCO
assets (see Note 3. Acquisitions) and to refinance existing credit facilities,
other than the Senior Notes. The term loan was repaid from proceeds received
from the issuance of additional Limited Partner Units on October 25, 2000. The
revolving facility has a three year maturity. The interest rate is based on the
Partnership's option of either the lender's base rate plus a spread, or LIBOR
plus a spread in effect at the time of the borrowings. The credit agreements
contain restrictive financial covenants that require the Partnership to maintain
a minimum level of partners' capital as well as maximum debt-to-EBITDA (earnings
before interest expense, income tax expense and depreciation and amortization
expense) and minimum fixed charge coverage ratios. At March 31, 2001, $413
million was outstanding under the revolving credit facility at a weighted
average interest rate of 6.4% (see Note 11. Subsequent Events).
On July 21, 2000, the Partnership entered into a three year swap
agreement to hedge its exposure on the variable rate credit facilities. The swap
agreement is based on a notional amount of $250 million. Under the swap
agreement, the Partnership pays a fixed rate of interest of 7.17% and receives a
floating rate based on a three month USD LIBOR rate.
NOTE 7. QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
The Partnership makes quarterly cash distributions of all of its
Available Cash, generally defined as consolidated cash receipts less
consolidated cash disbursements and cash reserves established by the General
Partner in its sole discretion. Pursuant to the Partnership Agreement, the
Company receives incremental incentive cash distributions on the portion that
cash distributions on a per Unit basis exceed certain target thresholds as
follows:
F-33
35
TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
GENERAL
UNITHOLDERS PARTNER
----------- -------
Quarterly Cash Distribution per Unit:
Up to Minimum Quarterly Distribution
($0.275 per Unit) .......................... 98% 2%
First Target - $0.276 per Unit up to
$0.325 per Unit ............................ 85% 15%
Second Target - $0.326 per Unit up
to $0.45 per Unit .......................... 75% 25%
Over Second Target - Cash distributions
greater than $0.45 per Unit ................ 50% 50%
The following table reflects the allocation of total distributions paid
for the three month periods ended March 31, 2001 and 2000 (in thousands, except
per Unit amounts).
THREE MONTHS ENDED MARCH 31,
------------------------------
2001 2000
------------ ------------
Limited Partner Units .............. $ 17,167 $ 13,775
1% General Partner Interest ........ 194 158
General Partner Incentive .......... 4,364 2,327
------------ ------------
Total Partners' Capital
Cash Distributions ........ 21,725 16,260
Class B Units ...................... 2,056 1,860
Minority Interest .................. 243 185
------------ ------------
Total Cash Distributions
Paid ...................... $ 24,024 $ 18,305
============ ============
Total Cash Distributions Paid
Per Unit .................. $ 0.525 $ 0.475
============ ============
On April 20, 2001, the Partnership declared a cash distribution of
$0.525 per Limited Partner Unit and Class B Unit for the quarter ended March 31,
2001. The distribution was paid on May 4, 2001, to Unitholders of record on
April 30, 2001.
NOTE 8. SEGMENT DATA
The Partnership operates in two segments: refined products and LPGs
transportation, which operates through the Downstream Segment; and crude oil and
NGLs transportation and marketing, which operates through the Upstream Segment.
The Downstream Segment is involved in the interstate transportation,
storage and terminaling of petroleum products and LPGs, intrastate
transportation of petrochemicals and the fractionation of NGLs. Revenues are
derived from the transportation of refined products and LPGs, the storage and
short-haul shuttle transportation of LPGs at the Mont Belvieu, Texas, complex,
sale of product inventory and other ancillary services. The Downstream Segment
is one of the largest pipeline common carriers of refined petroleum products and
LPGs in the United States. The Partnership owns and operates a pipeline system
extending from southeast Texas through the central and midwestern United States
to the northeastern United States.
The Upstream Segment gathers, stores, transports and markets crude oil
principally in Oklahoma, Texas and the Rocky Mountain region; operates two
trunkline NGL pipelines in South Texas and three NGL pipelines in East Texas;
and distributes lube oils and specialty chemicals to industrial and commercial
accounts. On July 20, 2000, the Partnership completed its acquisition of assets
from ARCO (see Note 3. Acquisitions). The acquisition was accounted for under
the purchase method of accounting. The results of the acquisition have been
included in the Upstream Segment since the purchase on July 20, 2000.
The table below includes interim financial information by business
segment for the interim periods ended March 31, 2001 and 2000 (in thousands):
F-34
36
TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2001
------------------------------------------
2001 DOWNSTREAM UPSTREAM
- ---- SEGMENT SEGMENT CONSOLIDATED
------------ ------------ ------------
Unaffiliated revenues ............. $ 64,105 $ 721,130 $ 785,235
Operating expenses, including
power .......................... 27,566 711,456 739,022
Depreciation and amortization
expense ........................ 7,177 2,730 9,907
------------ ------------ ------------
Operating income ............ 29,362 6,944 36,306
Interest expense, net ............. (8,335) (7,614) (15,949)
Equity earnings - Seaway Crude
Pipeline Company ............... -- 5,206 5,206
Other income, net ................. 112 60 172
------------ ------------ ------------
Net income .................. $ 21,139 $ 4,596 $ 25,735
============ ============ ============
Total assets ...................... $ 740,588 $ 855,949 $ 1,596,537
Accounts receivable, trade ........ 16,586 248,258 264,844
Accounts payable and accrued
liabilities .................... $ 11,112 $ 253,221 $ 264,333
THREE MONTHS ENDED MARCH 31, 2000
------------------------------------------
2000 DOWNSTREAM UPSTREAM
- ---- SEGMENT SEGMENT CONSOLIDATED
------------ ------------ ------------
Unaffiliated revenues ............. $ 63,778 $ 686,914 $ 750,692
Operating expenses, including
power .......................... 28,657 683,021 711,678
Depreciation and amortization
expense......................... 6,783 1,464 8,247
------------ ------------ ------------
Operating income ............ 28,338 2,429 30,767
Interest expense, net ............. (7,310) (114) (7,424)
Other income, net ................. 393 145 538
------------ ------------ ------------
Net income .................. $ 21,421 $ 2,460 $ 23,881
============ ============ ============
Total assets ...................... $ 737,111 $ 359,639 $ 1,096,750
Accounts receivable, trade ........ 15,949 227,324 243,273
Accounts payable and accrued
liabilities .................... $ 7,188 $ 234,776 $ 241,964
NOTE 9. CONTINGENCIES
In the fall of 1999 and on December 1, 2000, the Company and the
Partnership were named as defendants in two separate lawsuits in Jackson County
Circuit Court, Jackson County, Indiana, in Ryan E. McCleery and Marcia S.
McCleery, et al. v. Texas Eastern Corporation, et al. (including the Company and
Partnership) and Gilbert Richards and Jean Richards v. Texas Eastern
Corporation, et. al. In both cases plaintiffs contend, among other things, that
the Company and other defendants stored and disposed of toxic and hazardous
substances and hazardous wastes in a manner that caused the materials to be
released into the air, soil and water. They further contend that the release
caused damages to the plaintiffs. In their Complaints, the plaintiffs allege
strict liability for both personal injury and property damage together with
gross negligence, continuing nuisance, trespass, criminal mischief and loss of
consortium. The plaintiffs are seeking compensatory, punitive and treble
damages. The Company has filed an Answer to both complaints, denying the
allegations, as well as various other motions. These cases are in the early
stages of discovery and are not covered by insurance. The Company is defending
itself vigorously against the lawsuits. The Partnership cannot estimate the
loss, if any, associated with these pending lawsuits.
F-35
37
TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
The Partnership is involved in various other claims and legal
proceedings incidental to its business. In the opinion of management, these
claims and legal proceedings will not have a material adverse effect on the
Partnership's consolidated financial position, results of operations or cash
flows.
The operations of the Partnership are subject to federal, state and
local laws and regulations relating to protection of the environment. Although
the Partnership believes its operations are in material compliance with
applicable environmental regulations, risks of significant costs and liabilities
are inherent in pipeline operations, and there can be no assurance that
significant costs and liabilities will not be incurred. Moreover, it is possible
that other developments, such as increasingly strict environmental laws and
regulations and enforcement policies thereunder, and claims for damages to
property or persons resulting from the operations of the pipeline system, could
result in substantial costs and liabilities to the Partnership. The Partnership
does not anticipate that changes in environmental laws and regulations will have
a material adverse effect on its financial position, results of operations or
cash flows in the near term.
The Partnership and the Indiana Department of Environmental Management
("IDEM") have entered into an Agreed Order that will ultimately result in a
remediation program for any on-site and off-site groundwater contamination
attributable to the Partnership's operations at the Seymour, Indiana, terminal.
A Feasibility Study, which includes the Partnership's proposed remediation
program, has been approved by IDEM. IDEM is expected to issue a Record of
Decision formally approving the remediation program. After the Record of
Decision has been issued, the Partnership will enter into an Agreed Order for
the continued operation and maintenance of the program. The Partnership has
accrued $0.5 million at March 31, 2001 for future costs of the remediation
program for the Seymour terminal. In the opinion of the Company, the completion
of the remediation program will not have a material adverse impact on the
Partnership's financial condition, results of operations or liquidity.
The Partnership received a compliance order from the Louisiana
Department of Environmental Quality ("DEQ") during 1994 relative to potential
environmental contamination at the Partnership's Arcadia, Louisiana facility,
which may be attributable to the operations of the Partnership and adjacent
petroleum terminals of other companies. The Partnership and all adjacent
terminals have been assigned to the Groundwater Division of DEQ, in which a
consolidated plan will be developed. The Partnership has finalized a negotiated
Compliance Order with DEQ that will allow the Partnership to continue with a
remediation plan similar to the one previously agreed to by DEQ and implemented
by the Company. In the opinion of the General Partner, the completion of the
remediation program being proposed by the Partnership will not have a future
material adverse impact on the Partnership.
On October 16, 2000 the Partnership received a settlement notice from
ARCO for payment of a net aggregate amount of approximately $12.9 million in
post-closing adjustments related to the purchase of the ARCO assets. A large
portion of the requested adjustment relates to ARCO's indemnity for payment of
accrued income taxes. The Partnership is disputing a substantial portion of the
adjustments. The Partnership does not believe that payment of any amount
ultimately determined would have a material adverse impact on the Partnership's
financial condition and results of operations.
Substantially all of the petroleum products transported and stored by
the Partnership are owned by the Partnership's customers. At March 31, 2001, the
Partnership had approximately 14.5 million barrels of products in its custody
owned by customers. The Partnership is obligated for the transportation, storage
and delivery of such products on behalf of its customers. The Partnership
maintains insurance adequate to cover product losses through circumstances
beyond its control.
F-36
38
TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 10. COMPREHENSIVE INCOME
The table below reconciles reported net income to total comprehensive
income for the three months ended March 31, 2001 (in thousands).
Net income................................................ $ 25,735
Cumulative effect attributable to adoption of SFAS
133 (see Note 2. New Accounting Pronouncements)...... (10,103)
Hedge accounting for derivative instruments............... (2,261)
----------
Total comprehensive income............................ $ 13,371
==========
The accumulated balance of other comprehensive loss related to cash
flow hedges is as follows (in thousands):
Balance at December 31, 2000.............................. $ --
Cumulative effect of accounting change.................... (10,103)
Net losses on cash flow hedges............................ (3,076)
Reclassification adjustments.............................. 815
----------
Balance at March 31, 2001................................. $ (12,364)
==========
NOTE 11. SUBSEQUENT EVENTS
During the first quarter of 2001, Pennzoil-Quaker State Company
("Pennzoil") announced the sale of its Shreveport, Louisiana, refinery. As a
result of the sale, it is anticipated that the refinery will stop refined
products production. Effective April 1, 2001, Pennzoil and the Downstream
Segment negotiated a settlement to terminate a long-term transportation
agreement from the Shreveport origin point on the Downstream Segment's pipeline
system. The terms of the settlement will result in income of approximately $18.9
million being recorded during the second quarter of 2001. The termination of the
contract is expected to result in a loss of transportation revenue of
approximately $7.7 million during 2001. The Partnership is evaluating various
alternatives related to the reduced receipt volumes including making required
system changes to allow for reversed product flow to make deliveries into the
Shreveport market area. The Partnership has evaluated the impact of the contract
termination on the related transportation assets in accordance with SFAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" and does not expect the contract termination to result in an
impairment of the carrying value of the related transportation assets.
On April 6, 2001, the Partnership's $475 million revolving credit
agreement was amended to permit borrowings up to $500 million and to allow for
letters of credit up to $20 million. The term of the revised credit agreement
was extended to April 6, 2004. Additionally, on April 6, 2001, the Partnership
entered into a 364-day, $200 million revolving credit agreement. The interest
rate on this agreement will be based on the Partnership's option of either the
lender's base rate plus a spread, or LIBOR plus a spread.
On May 11, 1999, the Downstream Segment filed an application with the
FERC requesting permission to charge market-based rates for substantially all
refined products transportation tariffs. The Downstream Segment also filed a
petition for waiver of the requirements that would otherwise have been imposed
by the FERC's regulations requiring the Downstream Segment to reduce its rates
in conformity with the PPI Index, pending the FERC's determination on its
application for market-based rates. On June 30, 1999, the FERC granted the
waiver stating that it was temporary in nature and that the Downstream Segment
would be required to make refunds, with interest, of all amounts collected under
rates in excess of the PPI Index ceiling level after July 1, 1999, if the
Downstream Segment's application for market-based rates was ultimately denied.
As a result of the refund obligation potential, the Partnership has deferred all
revenue recognition of rates charged in excess of the PPI Index. On March 31,
2001, the amount deferred for possible rate refund, including interest totaled
approximately $2.6 million.
F-37
39
TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
On July 31, 2000, the FERC issued an order granting the Downstream
Segment market-based rates in certain markets and set for hearing the Downstream
Segment's application for market-based rates in the Little Rock, Arkansas;
Shreveport-Arcadia, Louisiana; Cincinnati-Dayton, Ohio; and Memphis, Tennessee,
destination markets and the Shreveport, Louisiana, origin market. After the
matter was set for hearing, the Downstream Segment and the protesting shippers
entered into a settlement agreement resolving their respective differences. On
January 9, 2001, the presiding Administrative Law Judge assigned to the hearing
determined that the offer of settlement provided resolution of issues set for
hearing in the Downstream Segment pending case in a fair and reasonable manner
and in the public interest and certified the offer of settlement. On April 25,
2001, the FERC issued an order approving the offer of settlement.
As a result of the FERC approval of the settlement, the Downstream
Segment will withdraw the application for market-based rates to the Little Rock,
Arkansas, destination market and the Arcadia, Louisiana, destination in the
Shreveport-Arcadia, Louisiana, destination market. The Downstream Segment also
has agreed to recalculate rates to these destination markets to conform with the
PPI Index from July 1, 1999, and make appropriate refunds. The refund obligation
under the settlement as of March 31, 2001, was $1.0 million. As a result of the
settlement, the Downstream Segment will recognize approximately $1.6 million of
previously deferred transportation revenue in the second quarter of 2001.
NOTE 12. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In connection with the Partnership's filing of a shelf registration
statement on Form S-3 with the Securities and Exchange Commission, TE Products
Pipeline Company, Limited Partnership and TCTM, L.P., the Partnership's sole
first-tier operating subsidiaries (the "Guarantor Subsidiaries"), may issue
unconditional guarantees of senior or subordinated debt securities of the
Partnership in the event that the Partnership issues such securities from time
to time under the registration statement. In July 2001, the Partnership
restructured the ownership of the general partner interests in these first-tier
operating subsidiaries to cause them to be wholly-owned by the Partnership. If
issued, the guarantees will be full, unconditional and joint and several. For
purposes of the following consolidating information, the Partnership and
Guarantor Subsidiaries investments in their respective subsidiaries are
accounted for by the equity method of accounting.
F-38
40
TEPPCO GUARANTOR
MARCH 31, 2001 PARTNERS, L.P. SUBSIDIARIES
- -------------- -------------- ------------
(IN THOUSANDS)
Assets
Current assets ................................. $ 2,758 $ 38,313
Property, plant and equipment - net ............ -- 642,168
Equity investments ............................. 477,466 256,945
Intercompany notes receivable .................. 409,369 --
Other assets ................................... 4,802 17,072
-------------- ------------
Total assets ................................ $ 894,395 $ 954,498
============== ============
Liabilities and partners' capital
Current liabilities ............................ $ 8,695 $ 39,516
Long term debt ................................. 413,000 389,791
Intercompany notes payable ..................... -- 39,861
Other long term liabilities and minority
interest ..................................... 7,557 2,981
Redeemable Class B Units held by related
party ........................................ 105,547 --
Total partners' capital ........................ 359,596 482,349
-------------- ------------
Total liabilities and partners' capital .. $ 894,395 $ 954,498
============== ============
NON-GUARANTOR CONSOLIDATING
MARCH 31, 2001 SUBSIDIARIES ADJUSTMENTS
- -------------- ------------- --------------
(IN THOUSANDS)
Assets
Current assets ................................. $ 284,168 $ (7,001)
Property, plant and equipment - net ............ 327,749 --
Equity investments ............................. 229,957 (726,073)
Intercompany notes receivable .................. -- (409,369)
Other assets ................................... 49,016 (803)
------------- --------------
Total assets ................................ $ 890,890 $ (1,143,246)
============= ==============
Liabilities and partners' capital
Current liabilities ............................ $ 272,772 $ (7,801)
Long term debt ................................. -- --
Intercompany notes payable ..................... 369,508 (409,369)
Other long term liabilities and minority
interest ..................................... -- 4,883
Redeemable Class B Units held by related
party ........................................ -- --
Total partners' capital ........................ 248,610 (730,959)
------------- --------------
Total liabilities and partners' capital .. $ 890,890 $ (1,143,246)
============= ==============
TEPPCO
PARTNERS, L.P.
MARCH 31, 2001 CONSOLIDATED
- -------------- --------------
(IN THOUSANDS)
Assets
Current assets ................................. $ 318,238
Property, plant and equipment - net ............ 969,917
Equity investments ............................. 238,295
Intercompany notes receivable .................. --
Other assets ................................... 70,087
--------------
Total assets ................................ $ 1,596,537
==============
Liabilities and partners' capital
Current liabilities ............................ $ 313,182
Long term debt ................................. 802,791
Intercompany notes payable ..................... --
Other long term liabilities and minority
interest ..................................... 15,421
Redeemable Class B Units held by related
party ........................................ 105,547
Total partners' capital ........................ 359,596
--------------
Total liabilities and partners' capital .. $ 1,596,537
==============
TEPPCO GUARANTOR
DECEMBER 31, 2000 PARTNERS, L.P. SUBSIDIARIES
- ----------------- -------------- ------------
(IN THOUSANDS)
Assets
Current assets ................................. $ 6,083 $ 52,773
Property, plant and equipment - net ............ -- 640,657
Equity investments ............................. 420,433 202,811
Intercompany notes receivable .................. 441,836 --
Other assets ................................... 5,322 15,385
-------------- ------------
Total assets ................................ $ 873,674 $ 911,626
============== ============
Liabilities and Partners' Capital
Current liabilities ............................ $ 7,206 $ 45,085
Long term debt ................................. 446,000 389,784
Intercompany notes payable ..................... -- 48,037
Other long term liabilities and minority
interest ..................................... -- 3,991
Redeemable Class B Units held by related
party ........................................ 105,411 --
Total partners' capital ........................ 315,057 424,729
-------------- ------------
Total liabilities and partners' capital ..... $ 873,674 $ 911,626
============== ============
NON-GUARANTOR CONSOLIDATING
DECEMBER 31, 2000 SUBSIDIARIES ADJUSTMENTS
- ----------------- ------------- --------------
(IN THOUSANDS)
Assets
Current assets ................................. $ 315,488 $ (10,947)
Property, plant and equipment - net ............ 309,048 --
Equity investments ............................. 236,232 (617,828)
Intercompany notes receivable .................. -- (441,836)
Other assets ................................... 48,475 (1,122)
------------- --------------
Total assets ................................ $ 909,243 $ (1,071,733)
============= ==============
Liabilities and Partners' Capital
Current liabilities ............................ $ 318,049 $ (12,069)
Long term debt ................................. -- --
Intercompany notes payable ..................... 393,799 (441,836)
Other long term liabilities and minority
interest ..................................... -- 4,296
Redeemable Class B Units held by related
party ........................................ -- --
Total partners' capital ........................ 197,395 (622,124)
------------- --------------
Total liabilities and partners' capital ..... $ 909,243 $ (1,071,733)
============= ==============
TEPPCO
PARTNERS, L.P.
DECEMBER 31, 2000 CONSOLIDATED
- ----------------- --------------
(IN THOUSANDS)
Assets
Current assets ................................. $ 363,397
Property, plant and equipment - net ............ 949,705
Equity investments ............................. 241,648
Intercompany notes receivable .................. --
Other assets ................................... 68,060
--------------
Total assets ................................ $ 1,622,810
==============
Liabilities and Partners' Capital
Current liabilities ............................ $ 358,271
Long term debt ................................. 835,784
Intercompany notes payable ..................... --
Other long term liabilities and minority
interest ..................................... 8,287
Redeemable Class B Units held by related
party ........................................ 105,411
Total partners' capital ........................ 315,057
--------------
Total liabilities and partners' capital ..... $ 1,622,810
==============
F-39
41
THREE MONTHS ENDED TEPPCO GUARANTOR NON-GUARANTOR
MARCH 31, 2001 PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES
- ------------------------- -------------- ------------ -------------
(IN THOUSANDS)
Operating revenues ...... $ -- $ 62,301 $ 722,934
Costs and expenses ...... -- 34,020 714,909
-------------- ------------ -------------
Operating income ...... -- 28,281 8,025
-------------- ------------ -------------
Interest expense - net .. (9,372) (7,624) (8,325)
Equity earnings ......... 25,735 5,048 5,206
Other income - net ...... 9,372 292 142
-------------- ------------ -------------
Income before
minority interest ... 25,735 25,997 5,048
Minority interest ....... -- -- --
-------------- ------------ -------------
Net income ............ $ 25,735 $ 25,997 $ 5,048
============== ============ =============
TEPPCO
THREE MONTHS ENDED CONSOLIDATING PARTNERS, L.P.
MARCH 31, 2001 ADJUSTMENTS CONSOLIDATED
- ------------------------- -------------- --------------
(IN THOUSANDS)
Operating revenues ...... $ -- $ 785,235
Costs and expenses ...... -- 748,929
-------------- --------------
Operating income ...... -- 36,306
-------------- --------------
Interest expense - net .. 9,372 (15,949)
Equity earnings ......... (30,783) 5,206
Other income - net ...... (9,372) 434
-------------- --------------
Income before
minority interest ... (30,783) 25,997
Minority interest ....... (262) (262)
-------------- --------------
Net income ............ $ (31,045) $ 25,735
============== ==============
THREE MONTHS ENDED TEPPCO GUARANTOR NON-GUARANTOR
MARCH 31, 2000 PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES
- ------------------------- -------------- ------------ -------------
(IN THOUSANDS)
Operating revenues ...... $ -- $ 61,955 $ 688,737
Costs and expenses ...... -- 34,719 685,206
-------------- ------------ -------------
Operating income ...... -- 27,236 3,531
-------------- ------------ -------------
Interest expense - net .. -- (6,679) (745)
Equity earnings ......... 23,881 2,988 --
Other income - net ...... -- 580 202
-------------- ------------ -------------
Income before
minority interest ... 23,881 24,125 2,988
Minority interest ....... -- -- --
-------------- ------------ -------------
Net income ............ $ 23,881 $ 24,125 $ 2,988
============== ============ =============
TEPPCO
THREE MONTHS ENDED CONSOLIDATING PARTNERS, L.P.
MARCH 31, 2000 ADJUSTMENTS CONSOLIDATED
- ------------------------- -------------- --------------
(IN THOUSANDS)
Operating revenues ...... $ -- $ 750,692
Costs and expenses ...... -- 719,925
-------------- --------------
Operating income ...... -- 30,767
-------------- --------------
Interest expense - net .. -- (7,424)
Equity earnings ......... (26,869) --
Other income - net ...... -- 782
-------------- --------------
Income before
minority interest ... (26,869) 24,125
Minority interest ....... (244) (244)
-------------- --------------
Net income ............ $ (27,113) $ 23,881
============== ==============
F-40
42
TEPPCO GUARANTOR NON-GUARANTOR
THREE MONTHS ENDED MARCH 31, 2001 PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES
- --------------------------------- -------------- ------------ -------------
(IN THOUSANDS)
Cash flows from operating activities
Net income ................................. $ 25,735 $ 25,997 $ 5,048
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization .......... -- 6,673 3,234
Equity earnings, net of distributions .. (1,953) 4,515 6,275
Changes in assets and liabilities
and other ........................... (1) (4,019) (16,093)
-------- -------- --------
Net cash provided by operating activities .... 23,781 33,166 (1,536)
-------- -------- --------
Cash flows from investing activities ......... (22,139) (10,132) (21,455)
Cash flows from financing activities ......... (1,642) (32,200) 21,873
-------- -------- --------
Net decrease in cash and cash equivalents .... -- (9,166) (1,118)
Cash and cash equivalents at beginning of
period ..................................... -- 9,166 17,930
-------- -------- --------
Cash and cash equivalents at end of period ... $ -- $ -- $ 16,812
======== ======== ========
TEPPCO
CONSOLIDATING PARTNERS, L.P.
THREE MONTHS ENDED MARCH 31, 2001 ADJUSTMENTS CONSOLIDATED
- --------------------------------- ------------ --------------
(IN THOUSANDS)
Cash flows from operating activities
Net income ................................. $(31,045) $ 25,735
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization .......... -- 9,907
Equity earnings, net of distributions .. (2,537) 6,300
Changes in assets and liabilities
and other ........................... 796 (19,317)
-------- --------
Net cash provided by operating activities .... (32,786) 22,625
-------- --------
Cash flows from investing activities ......... 22,139 (31,587)
Cash flows from financing activities ......... 10,647 (1,322)
-------- --------
Net decrease in cash and cash equivalents .... -- (10,284)
Cash and cash equivalents at beginning of
period ..................................... -- 27,096
-------- --------
Cash and cash equivalents at end of period ... $ -- $ 16,812
======== ========
TEPPCO GUARANTOR NON-GUARANTOR
THREE MONTHS ENDED MARCH 31, 2000 PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES
- --------------------------------- -------------- ------------ -------------
(IN THOUSANDS)
Cash flows from operating activities
Net Income ................................. $ 23,881 $ 24,125 $ 2,988
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization .......... -- 6,279 1,968
Equity earnings, net of distributions .. (5,761) 4,112 --
Changes in assets and liabilities
and other ........................... -- (609) (2,915)
-------- -------- --------
Net cash provided by operating activities .... 18,120 33,907 2,041
-------- -------- --------
Cash flows from investing activities ......... -- (14,788) (3,225)
Cash flows from financing activities ......... (18,120) 1,695 (7,178)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents ................................ -- 20,814 (8,362)
Cash and cash equivalents at beginning of
period ..................................... -- 16,284 16,309
-------- -------- --------
Cash and cash equivalents at end of period ... $ -- $ 37,098 $ 7,947
======== ======== ========
TEPPCO
CONSOLIDATING PARTNERS, L.P.
THREE MONTHS ENDED MARCH 31, 2000 ADJUSTMENTS CONSOLIDATED
- --------------------------------- ------------- --------------
(IN THOUSANDS)
Cash flows from operating activities
Net Income ................................. $(27,113) $ 23,881
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization .......... -- 8,247
Equity earnings, net of distributions .. 1,571 (78)
Changes in assets and liabilities
and other ........................... 244 (3,280)
-------- --------
Net cash provided by operating activities .... (25,298) 28,770
-------- --------
Cash flows from investing activities ......... -- (18,013)
Cash flows from financing activities ......... 25,298 1,695
-------- --------
Net increase (decrease) in cash and cash
equivalents ................................ -- 12,452
Cash and cash equivalents at beginning of
period ..................................... -- 32,593
-------- --------
Cash and cash equivalents at end of period ... $ -- $ 45,045
======== ========
F-41
1
EXHIBIT 99.2
CONTRIBUTION, ASSIGNMENT AND AMENDMENT AGREEMENT
THIS CONTRIBUTION, ASSIGNMENT AND AMENDMENT AGREEMENT, dated as of July
26, 2001, is entered into by and among TEPPCO Partners, L.P., a Delaware limited
partnership (the "MLP"); TE Products Pipeline Company, Limited Partnership, a
Delaware limited partnership ("TE Products"); TCTM, L.P., a Delaware limited
partnership ("TCTM"); Texas Eastern Product Pipeline Company, LLC, a Delaware
limited liability company ("TEPPCO"); and TEPPCO GP, Inc., a Delaware
corporation ("GP Inc."). TE Products and TCTM are sometimes referred to herein
collectively as the "OLPs" and individually as an "OLP."
RECITALS
WHEREAS, each of the MLP and the OLPs were formed under the
Delaware Revised Uniform Limited Partnership Act (the "Delaware Act") and TEPPCO
acts as sole general partner of each of the MLP and the OLPs;
WHEREAS, TEPPCO owns a 1.00% general partner interest in the MLP
and a 1.0101% general partner interest in each of the OLPs;
WHEREAS, the Board of Directors of TEPPCO has determined that it
would be in the best interests of TEPPCO and the MLP to contribute TEPPCO's
interests in each of the OLPs to the MLP and GP Inc., and to cause GP Inc. to
become a wholly-owned corporate subsidiary of the MLP;
WHEREAS, in order to accomplish the objectives and purposes in the
preceding recital, prior to the date hereof, TEPPCO has formed GP Inc. and
contributed $1,000 in exchange for all of the capital stock in GP Inc.;
NOW, THEREFORE, in consideration of their mutual undertakings and
agreements hereunder, the parties to this Agreement undertake and agree as
follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. In addition to the capitalized terms defined in the
opening paragraph of this Agreement, the following capitalized terms shall have
the meanings given below.
"Additional OLP Limited Partner Interests" has the meaning set
forth in Section 2.2.
"Agreement" means this Contribution, Assignment and Amendment
Agreement.
"Delaware Act" has the meaning assigned to such term in the
Recitals to this Agreement.
"GP Inc. Common Stock" has the meaning set forth in Section 2.2.
2
"Laws" means any and all laws, statutes, ordinances, rules or
regulations promulgated by a governmental authority, orders of a governmental
authority, judicial decisions, decisions of arbitrators or determinations of any
governmental authority or court.
"MLP Partnership Agreement" means the Second Amended and Restated
Agreement of Limited Partnership of TEPPCO Partners, L.P. dated as of November
30, 1998, as the same may be amended or restated pursuant to the terms hereof.
"OLP Excess Liabilities" means any liability of GP Inc., whether
as general partner of each OLP or pursuant to the assumption by GP Inc. of
liabilities and obligations of each OLP pursuant to Section 4.1, for liabilities
of each OLP existing at the time of the assignment of the Revised OLP General
Partner Interests to GP Inc. pursuant to Section 2.1, but only to the extent
that TEPPCO's share of such liabilities immediately prior to any assignment
under Section 2.1 exceeds TEPPCO's federal income tax basis in its aggregate
partnership interest in the OLP.
"Revised OLP General Partner Interests" has the meaning set forth
in Section 2.1.
"TE Products Partnership Agreement" means the Amended and Restated
Agreement of Limited Partnership of TE Products Pipeline Company, Limited
Partnership dated as of July 21, 1998, as the same may be amended or restated
pursuant to the terms hereof.
"TCTM Partnership Agreement" means the Agreement of Limited
Partnership of TCTM, L.P. dated as of November 30, 1998, as the same may be
amended or restated pursuant to the terms hereof.
ARTICLE II
CONTRIBUTIONS OF VARIOUS ASSETS AND PARTNERSHIP INTERESTS
2.1 Contribution by TEPPCO to GP Inc. TEPPCO hereby grants,
contributes, transfers and conveys to GP Inc., its successors and assigns, all
right, title and interest in and to a .001% general partner interest in each of
the OLPs (the "Revised OLP General Partner Interests") and GP Inc. hereby
accepts the Revised OLP General Partner Interests as a contribution to the
capital of GP Inc.
TO HAVE AND TO HOLD the Revised OLP General Partner Interests unto GP
Inc., its successors and assigns, together with all and singular the rights and
appurtenances thereto in anywise belonging, subject, however, to the terms and
conditions stated in this Agreement, forever.
TE Products and TCTM each acknowledge receipt of the opinion of counsel
required in Section 10.2(b) of the TE Products Partnership Agreement and the
TCTM Partnership Agreement, respectively.
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2.2 Contributions by TEPPCO to the MLP. Effective immediately following
the contribution and assignment set forth in Section 2.1, TEPPCO hereby grants,
contributes, transfers, assigns and conveys to the MLP, its successors and
assigns, all right, title and interest of TEPPCO in and to (i) all the issued
and outstanding capital stock of GP Inc., consisting of 100 shares of common
stock, par value $.01 per share (the "GP Inc. Common Stock") and (ii) its
remaining partnership interests in each of the OLPs, which interests, following
the assignment of the Revised OLP General Partner Interests pursuant to Section
2.1 and the recharacterization of such remaining interests as limited partner
interests as a result of the amendments adopted in Sections 5.1 and 5.2 hereof,
consist of a 1.0091% limited partner interest in each of the OLPs (the
"Additional OLP Limited Partner Interests"), and the MLP hereby accepts the GP
Inc. Common Stock and the Additional OLP Limited Partner Interests, as a
contribution to the capital of the MLP and in exchange for the increase in the
general partner interest of TEPPCO in the MLP as set forth in Section 5.3
hereof.
TO HAVE AND TO HOLD the GP Inc. Common Stock and the Additional OLP
Limited Partner Interests unto the MLP, its successors and assigns, together
with all and singular the rights and appurtenances thereto in anywise belonging,
subject, however, to the terms and conditions stated in this Agreement, forever.
2.3 Further Assurances. From time to time after the date hereof, and
without any further consideration, TEPPCO shall execute, acknowledge and deliver
all such additional assignments, stock powers, instruments, notices, releases,
acquittances and other documents, and will do all such other acts and things,
all in accordance with applicable law, as may be necessary or appropriate (i)
more fully and effectively to assure GP Inc., its successors and assigns, all of
the properties, rights, titles, interests, estates, remedies, powers and
privileges by this Agreement granted to GP Inc. with respect to the Revised OLP
General Partner Interests or which are intended so to be and (ii) more fully and
effectively to vest in the MLP, its successors and assigns, beneficial and
record title to the GP Inc. Common Stock and the Additional OLP Limited Partner
Interests hereby contributed and assigned to the MLP or intended so to be and to
more fully and effectively carry out the purposes and intent of this Agreement.
ARTICLE III
SUCCESSION OF GENERAL PARTNER OF THE OLPS
3.1 Withdrawal of TEPPCO as General Partner of OLPs. Effective
immediately prior to the contribution of the Revised OLP General Partner
Interests pursuant to Section 2.1 and, pursuant to Section 12.1(a)(ii) of each
of the TE Products Partnership Agreement and the TCTM Partnership Agreement,
TEPPCO hereby withdraws as general partner of each of the OLPs and proposes GP
Inc. to act and serve as sole general partner of each of the OLPs. TE Products
and TCTM each acknowledge receipt of the opinion of counsel required in Section
12.1(b) of the TE Products Partnership Agreement and the TCTM Partnership
Agreement, respectively.
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3.2 GP Inc. as Successor General Partner of OLPs. Effective immediately
prior to the later of (i) GP Inc.'s acceptance of the contributions to GP Inc.
of the Revised OLP General Partner Interests pursuant to Section 2.1 and (ii)
the withdrawal of TEPPCO as general partner of each of the OLPs, GP Inc. accepts
and agrees to duly and timely pay, perform and discharge the rights, duties and
obligations of general partner of each of the OLPs and all of the terms and
conditions of each of the TE Products Partnership Agreement and the TCTM
Partnership Agreement in accordance with Section 11.2 of each of the TE Products
Partnership Agreement and the TCTM Partnership Agreement, and GP Inc. agrees to
serve as general partner of each of the OLPs and to be bound by each of the TE
Products Partnership Agreement and the TCTM Partnership Agreement (and, to the
extent applicable, the MLP Partnership Agreement), as each is amended by this
Agreement or as may be further amended by the terms of the respective
partnership agreement, and GP Inc. is hereby admitted as the successor general
partner of each of TE Products and TCTM.
ARTICLE IV
ASSUMPTION OF AND INDEMNIFICATION FOR CERTAIN LIABILITIES
4.1 Assumption of Certain Liabilities and Obligations of TEPPCO by GP
Inc. In connection with the transfer of the Revised OLP General Partner
Interests and the succession by GP Inc. as general partner of each of the OLPs,
GP Inc. hereby assumes and agrees to duly and timely pay, perform and discharge
all liabilities and obligations of each OLP to the full extent (and only to the
extent) that TEPPCO, as general partner of such OLP, has been heretofore or
would have been in the future, were it not for the execution and delivery of
this Agreement, obligated to pay, perform and discharge such liabilities and
obligations; provided, however, that such assumption by GP Inc. is subject to
the indemnification provided in Section 4.2.
4.2 Indemnification of GP Inc. Upon the transfer of the Revised OLP
General Partner Interests to GP Inc. pursuant to Section 2.1 hereof, TEPPCO
hereby indemnifies, defends and holds harmless GP Inc. from and against any and
all claims, demands, costs, liabilities and expenses (including court costs and
reasonable attorneys' fees) arising from or relating to the OLP Excess
Liabilities
4.3 Indemnification Relating to the MLP. Upon the transfer of the GP
Inc. Common Stock and the Additional MLP Limited Partner Interest to the MLP
pursuant to Section 2.2 hereof, (i) the MLP hereby indemnifies, defends and
holds harmless GP Inc. from and against any and all claims, demands, costs,
liabilities and expenses (including court costs and reasonable attorneys' fees)
arising from or relating to the OLP Excess Liabilities and (ii) TEPPCO hereby
indemnifies, defends and holds harmless the MLP from and against any and all
claims, demands, costs, liabilities and expenses (including court costs and
reasonable attorneys' fees) arising by reason of clause (i) of this paragraph.
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ARTICLE V
AMENDMENTS TO PARTNERSHIP AGREEMENTS
5.1 Amendments to TE Products Partnership Agreement. In order to
further the purposes of this Agreement, each of TEPPCO, as withdrawing general
partner of TE Products, GP Inc., as successor general partner of TE Products,
and the MLP, as limited partner of TE Products, hereby approve and adopt the
following amendments to the TE Products Partnership Agreement in accordance with
Article XIV thereof:
(a) Article II - Definitions is hereby amended by amending the
definitions of the following terms to read in their entirety as follows:
"Investor Partnership Agreement" means the Agreement of Limited
Partnership of the Investor Partnership, dated March 7, 1990, as such
agreement has been amended or restated, or may in the future be amended
or restated in accordance with its terms."
"Percentage Interest" means as of the date of such determination (a) as
to the General Partner, .001% and (b) as to the Limited Partner,
99.999%.
(b) Section 10.2(b) is hereby amended to read in its entirety as
follows:
"(b) Neither Section 10.2(a) nor any other provision of this Agreement
shall be construed to prevent (and the Limited Partner does hereby
expressly consent to) (i) the transfer by the General Partner of all or
a portion of its Partnership Interest to one or more Affiliates, which
transferred Partnership Interest, to the extent not transferred to a
successor General Partner, shall constitute a Limited Partner's
Partnership Interest or (ii) the transfer by the General Partner of all
its Partnership Interest upon its merger, consolidation or other
combination into any other Person or the transfer by it of all or
substantially all of its assets to another Person if, in the case of a
transfer described in either clause (i) or (ii) of this sentence, the
rights and duties of the General Partner with respect to the
Partnership Interest so transferred as a General Partner's Partnership
Interest (or the rights and duties of a Limited Partner with respect to
the Partnership Interest so transferred as a Limited Partner's
Partnership Interest) are assumed by the transferee and the transferee
agrees to be bound by the provisions of this Agreement and the Investor
Partnership Agreement; provided, that in either such case, such
transferee furnishes to the Partnership an Opinion of Counsel that such
merger, consolidation, combination, transfer or assumption will not
result in a loss of limited liability of the Limited Partner or cause
the Partnership to be taxable as a corporation or otherwise taxed as an
entity for federal income tax purposes. In the case of a transfer
pursuant to this Section 10.2(b) to a Person proposed as a successor
general partner of the Partnership, the transferee or successor (as the
case may be) shall be admitted to the Partnership as the General
Partner immediately prior to the transfer of the Partnership Interest,
and the business of the Partnership shall continue without
dissolution."
(c) Section 12.3 is hereby amended to read in its entirety as follows:
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"12.3 Interest of Departing Partner and Successor General Partner. The
Partnership Interest of a Departing Partner departing as a result of
withdrawal or removal pursuant to Section 12.1 or 12.2 shall (unless it
is otherwise required to be converted into Units pursuant to Section
13.2(b) of the Investor Partnership Agreement) be purchased by the
successor to the Departing Partner for cash in amount equal to the fair
market value of the Departing Partner's Partnership Interest,
determined as of the effective date of its departure in the manner
specified in the Investor Partnership Agreement. Such purchase (or
conversion into Units, as applicable) shall be a condition to the
admission to the Partnership of the successor as the General Partner.
Notwithstanding the foregoing, an assignment of all or any portion of a
General Partner's (or Departing Partner's) Partnership Interest to the
Investor Limited Partnership as Limited Partner, or to any other Person
(other than an individual) the ownership interest of which is then
transferred to the Investor Limited Partnership, can be made in
exchange for an increased interest in the Investor Limited Partnership
and in lieu of a cash purchase."
(d) In addition to the foregoing amendments to the TE Products
Partnership Agreement contained in this Section 5.1, the TE Products
Partnership Agreement shall be deemed to be further amended and
modified to the extent necessary, but only to the extent necessary, to
carry out the purposes and intent of this Agreement.
5.2 Amendments to TCTM Partnership Agreement. In order to further the
purposes of this Agreement, each of TEPPCO, as withdrawing general partner of
TCTM, GP Inc., as successor general partner of TCTM, and the MLP, as limited
partner of TCTM, hereby approve and adopt the following amendments to the TCTM
Partnership Agreement in accordance with Article XIV thereof:
(a) Article II - Definitions is hereby amended by amending the
definitions of the following terms to read in their entirety as follows:
"Investor Partnership Agreement" means the Agreement of Limited
Partnership of the Investor Partnership, dated March 7, 1990, as such
agreement has been amended or restated, or may in the future be amended
or restated in accordance with its terms."
"Percentage Interest" means as of the date of such determination (a) as
to the General Partner, .001% and (b) as to the Limited Partner,
99.999%.
(b) Section 10.2(b) is hereby amended to read in its entirety as
follows:
"(b) Neither Section 10.2(a) nor any other provision of this Agreement
shall be construed to prevent (and the Limited Partner does hereby
expressly consent to) (i) the transfer by the General Partner of all or
a portion of its Partnership Interest to one or more Affiliates, which
Partnership Interest to the extent not transferred to a successor
General Partner, shall be a Limited Partner's Partnership Interest or
(ii) the transfer by the General Partner of all its Partnership
Interest upon its merger, consolidation or other combination into any
other Person or the transfer by it of all or substantially all of its
assets to another Person if, in the case of a transfer described
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in either clause (i) or (ii) of this sentence, the rights and duties of
the General Partner with respect to the Partnership Interest so
transferred as a General Partner's Partnership Interest (or the rights
and duties of a Limited Partner with respect to the Partnership
Interest so transferred as a Limited Partner's Partnership Interest)
are assumed by the transferee and the transferee agrees to be bound by
the provisions of this Agreement and the Investor Partnership
Agreement; provided, that in either such case, such transferee
furnishes to the Partnership an Opinion of Counsel that such merger,
consolidation, combination, transfer or assumption will not result in a
loss of limited liability of the Limited Partner or cause the
Partnership to be taxable as a corporation or otherwise taxed as an
entity for federal income tax purposes. In the case of a transfer of a
Partnership Interest pursuant to this Section 10.2(b) to a Person
proposed as a successor general partner of the Partnership, the
transferee or successor (as the case may be) shall be admitted to the
Partnership as the General Partner immediately prior to the transfer of
the Partnership Interest, and the business of the Partnership shall
continue without dissolution."
(c) Section 12.3 is hereby amended to read in its entirety as follows:
"12.3 Interest of Departing Partner and Successor General Partner. The
Partnership Interest of a Departing Partner departing as a result of
withdrawal or removal pursuant to Section 12.1 or 12.2 shall (unless it
is otherwise required to be converted into Units pursuant to Section
13.2(b) of the Investor Partnership Agreement) be purchased by the
successor to the Departing Partner for cash in amount equal to the fair
market value of the Departing Partner's Partnership Interest,
determined as of the effective date of its departure in the manner
specified in the Investor Partnership Agreement. Such purchase (or
conversion into Units, as applicable) shall be a condition to the
admission to the Partnership of the successor as the General Partner.
Notwithstanding the foregoing, an assignment of all or any portion of a
General Partner's (or Departing Partner's) Partnership Interest to the
Investor Limited Partnership as Limited Partner, or to any other Person
(other than an individual) the ownership interest of which is then
transferred to the Investor Limited Partnership, can be made in
exchange for an increased interest in the Investor Limited Partnership
and in lieu of a cash purchase."
(d) In addition to the foregoing amendments to the TCTM Partnership
Agreement contained in this Section 5.2, the TCTM Partnership Agreement
shall be deemed to be further amended and modified to the extent
necessary, but only to the extent necessary, to carry out the purposes
and intent of this Agreement.
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5.3 Amendments to MLP Partnership Agreement. In order to further the
purposes of this Agreement and to evidence the increased interest of the general
partner in the MLP issued in exchange for the contributions to the MLP made
pursuant to Section 2.2 hereof, TEPPCO, as general partner of the MLP, having
determined that the following amendments would not materially adversely affect
the limited partners of the MLP or have a material adverse effect on the holders
of any class of the MLP's outstanding limited partner units, hereby exercises
its rights and powers to amend the MLP Partnership Agreement without the
approval of any limited partner or assignee pursuant to Section 15.1(d)(i) of
the MLP Partnership Agreement, and hereby approves and adopts the following
amendments to the MLP Partnership Agreement in accordance with Article 15
thereof:
(a) Article 2 - Definitions is hereby amended by amending the
definitions of the following terms to read in their entirety as follows:
"Operating Partnerships" means TE Products Pipeline Company, Limited
Partnership, a Delaware limited partnership, TCTM, L.P., a Delaware
limited partnership, and such other Persons that are directly
majority-owned by the Partnership and controlled by the Partnership
(whether by direct or indirect ownership of the general partner of such
Person or otherwise) and established or acquired for the purpose of
conducting the business of the Partnership.
"Operating Partnership Agreements" means the agreements of limited
partnership of any Operating Partnership that is a limited partnership,
or any limited liability company agreement of any Operating Partnership
that is a limited liability company that is treated as a partnership
for federal income tax purposes, as such may be amended, supplemented
or restated from time to time.
"Percentage Interest" means as of the date of such determination (a) as
to the General Partner, 1.999999% and (b) as to any Limited Partner or
Assignee holding LP Units, the product of (i) 98.000001% multiplied by
(ii) the quotient of (x) the number of LP Units held by such Limited
Partner or Assignee divided by (y) the total number of all LP Units
then Outstanding; provided, however, that following any issuance of
additional LP Units by the Partnership in accordance with Section 4.1
hereof, proper adjustment shall be made to the Percentage Interest
represented by each LP Unit to reflect such issuance.
(b) References in the MLP Partnership Agreement to the defined terms
"Operating Partnership" and "Operating Partnership Agreement" are hereby amended
to refer to such terms in the plural.
(c) Section 4.1(d)(i) is hereby amended to read in its entirety as
follows:
"(d) Upon the issuance of any LP Units by the Partnership, the General
Partner shall be required to make additional Capital Contributions to
the Partnership such that the General Partner shall at all times have a
balance in its Capital Account equal to 1.999999% of the total positive
Capital Account balances of all Partners."
(d) Section 5.1(c)(i) is hereby amended to read in its entirety as
follows:
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"(i) If a Net Termination Gain is recognized (or deemed recognized
pursuant to Section 4.3(d)) from Termination Capital Transactions, such
Net Termination Gain shall be allocated between the General Partner and
the Limited Partners in the following manner (and the Capital Accounts
of the Partners shall be increased by the amount so allocated in each
of the following subclauses, in the order listed, before an allocation
is made pursuant to the next succeeding subclause):
(A) First, to each Partner having a deficit balance in its
Capital Account, in the proportion that such deficit balance bears to
the total deficit balances in the Capital Accounts of all Partners,
until each such Partner has been allocated Net Termination Gain equal
to any such deficit balance in its Capital Account;
(B) Second, 100% to the General Partner and to all Limited
Partners, in accordance with their respective Percentage Interests,
until the Capital Account in respect of each LP Unit then Outstanding
is equal to the Unrecovered Capital attributable to such LP Unit;
(C) Third, 100% to the General Partner and to all Limited
Partners, in accordance with their respective Percentage Interests,
until the Per LP Unit Capital Account (determined on a per Unit basis)
in respect of each Unit is equal to the sum of (l) the Unrecovered
Capital attributable to each such Unit plus (2) any cumulative
arrearages in the payment of the Minimum Quarterly Distribution in
respect of such Unit for any quarter following December 31, 1994.
(D) Fourth, 85.002627% to all Limited Partners, in accordance
with their respective Percentage Interests, and 14.997373% to the
General Partner until the Per LP Unit Capital Account in respect of
each Unit (determined on a per Unit basis) is equal to the sum of (l)
the Unrecovered Capital attributable to such Unit, plus (2) any
cumulative arrearages in the payment of the Minimum Quarterly
Distribution in respect of such Unit for any quarter following December
31, 1994, plus (3) the excess of the First Target Distribution over the
Minimum Quarterly Distribution for each quarter of the Partnership's
existence, less (4) the amount of any distributions of Cash from
Operations that were distributed pursuant to Section 5.4(b) (the sum of
(2) plus (3) less (4) is hereinafter defined as the "First Liquidation
Target Amount");
(E) Fifth, 75.004647% to all Limited Partners, in accordance
with their respective Percentage Interests, and 24.995353% to the
General Partner until the Per LP Unit Capital Account in respect of
each Unit (determined on a per Unit basis) is equal to the sum of (l)
the Unrecovered Capital attributable to such Unit, plus (2) the First
Liquidation Target Amount, plus (3) the excess of the Second Target
Distribution over the First Target Distribution for each quarter of the
Partnership's existence less (4) the amount of any distributions of
Cash from Operations distributed pursuant to Section 5.4(c) (the sum of
(2) plus (3) less (4) is hereinafter defined as the "Second Liquidation
Target Amount"); and
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(F) Sixth, the balance, if any, 49.999798% to all Limited
Partners, in accordance with their respective Percentage Interests, and
50.000202% to the General Partner."
(e) Sections 5.4 and 5.5 are hereby amended to read in its entirety as
follows:
"5.4 Allocations of Distributions. Available Cash that is deemed to be
Cash from Operations pursuant to the provisions of Section 5.3 or 5.5
shall be distributed as follows:
(a) First, 98.000001% to all Limited Partners, in accordance with
their respective Percentage Interest, and 1.999999% to the General
Partner until there has been distributed in respect of each LP Unit
then Outstanding an amount equal to the Minimum Quarterly Distribution;
(b) Second, 85.002627% to all Limited Partners, in accordance with
their respective Percentage Interest, and 14.997373% to the General
Partner until there has been distributed in respect of each LP Unit
then Outstanding an amount equal to the First Target Distribution;
(c) Third, 75.004647% to all Limited Partners, in accordance with
their respective Percentage Interests, and 24.995353% to the General
Partner until there has been distributed in respect of each LP Unit
then Outstanding an amount equal to the Second Target Distribution; and
(d) Fourth, 49.999798% to all Limited Partners, in accordance with
their respective Percentage Interest, and 50.000202% to the General
Partner.
Provided, however, if the Minimum Quarterly Distribution, the First
Target Distribution and the Second Target Distribution have been
reduced to zero pursuant to Section 5.7(a)(ii), then distributions of
Available Cash constituting Cash from Operations with respect to any
quarter will be made 98.000001% to all Limited Partners in accordance
with their respective Percentage Interest and 1.999999% to the General
Partner until there has been distributed in respect of each LP Unit
then Outstanding Cash from Operations since Partnership Inception equal
to the Minimum Quarterly Distribution (as from time to time adjusted)
for all periods since Partnership Inception, and thereafter in
accordance with Section 5.4(d) above.
5.5 Distributions of Cash from Interim Capital Transactions. Available
Cash that constitutes Cash from Interim Capital Transactions shall be
distributed, unless the provisions of Section 5.3 require otherwise,
98.000001% to all Limited Partners, in accordance with their respective
Percentage Interests, and 1.999999% to the General Partner until a
hypothetical holder of a Unit acquired at the time of the Initial
Offering has received with respect to each Unit, from Partnership
Inception through such date, distributions of Available Cash that are
deemed to be Cash from Interim Capital Transactions in an aggregate
amount per LP Unit equal to the Initial Unit
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Price. Thereafter, all Available Cash shall be distributed as if it
were Cash from Operations and shall be distributed in accordance with
Section 5.4."
(f) In addition to the foregoing amendments to the MLP Partnership
Agreement contained in this Section 5.1, the MLP Partnership Agreement
shall be deemed to be further amended and modified to the extent
necessary, but only to the extent necessary, to carry out the purposes
and intent of this Agreement.
5.4 Restatement of Partnership Agreements. Each of the partners of the
MLP and the OLPs that is a party hereto agrees to execute and deliver a restated
and amended version of each of the MLP Partnership Agreement, the TE Products
Partnership Agreement and the TCTM Partnership Agreement to which it is a party
incorporating the amendments to such agreement adopted by this Agreement
together with such other amendments intended to clarify the agreement as the
general partner of such limited partnership determines as are appropriate and
not having a material adverse effect on the limited partners of the partnership,
and in the case of the MLP, the holders of outstanding LP Units therein.
ARTICLE VI
MISCELLANEOUS
6.1 Other Assurances. From time to time after the date hereof, and
without any further consideration, each of the parties to this Agreement shall
execute, acknowledge and deliver all such additional instruments, notices and
other documents, and will do all such other acts and things, all in accordance
with applicable law, as may be necessary or appropriate to more fully and
effectively carry out the purposes and intent of this Agreement.
6.2 Consents; Restriction on Assignment. If there are prohibitions
against or conditions to the contribution and assignment of one or more portions
of the assets contributed pursuant to Sections 2.1 and 2.2 without the prior
written consent of third parties, including, without limitation, governmental
agencies (other than consents of a ministerial nature that are normally granted
in the ordinary course of business), which if not satisfied would result in a
breach of such prohibitions or conditions or would give an outside party the
right to terminate the MLP's or GP Inc.'s rights with respect to such portion of
the contributed assets (herein called a "Restriction"), then any provision
contained in this Agreement to the contrary notwithstanding, the transfer of
title to or interest in each such portion of the contributed assets (herein
called the "Restriction-Asset") pursuant to this Agreement shall not become
effective unless and until such Restriction is satisfied, waived or no longer
applies. When and if such a Restriction is so satisfied, waived or no longer
applies, to the extent permitted by applicable law and any applicable
contractual provisions, the assignment of the Restriction-Asset subject thereto
shall become effective automatically as of the date of this Agreement, without
further action on the part of the MLP, GP Inc., TEPPCO or either of OLPs and
TEPPCO agrees to use its reasonable best efforts to obtain satisfaction of any
Restriction on a timely basis. In the event that any Restriction-Asset exists,
TEPPCO agrees to hold such Restriction-Asset in trust for the exclusive benefit
of the assignee, the MLP or GP Inc., as the case may be, and to otherwise use
its reasonable best efforts to provide the assignee with the benefits thereof,
and TEPPCO will enter into other agreements, or take such other action as it may
deem reasonably necessary, in order to help ensure that such assignee is
entitled to the benefits of the contributed assets and concomitant rights in all
material respects as of the date of this Agreement.
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6.3 Costs. The MLP shall pay all sales, use and similar taxes arising
out of the contributions, assignments and deliveries to be made hereunder, and
shall pay all documentary, filing, recording, transfer, deed, and conveyance
taxes and fees required in connection therewith. In addition, the MLP shall be
responsible for all costs, liabilities and expenses (including court costs and
reasonable attorneys' fees) incurred in connection with the satisfaction or
waiver of any Restriction pursuant to Section 6.2.
6.4 Headings; References; Interpretation. All Article and Section
headings in this Agreement are for convenience only and shall not be deemed to
control or affect the meaning or construction of any of the provisions hereof.
The words "hereof," "herein" and "hereunder" and words of similar import, when
used in this Agreement, shall refer to this Agreement as a whole, including
without limitation, all Exhibits attached hereto, and not to any particular
provision of this Agreement. All references herein to Articles, Sections, and
Exhibits shall, unless the context requires a different construction, be deemed
to be references to the Articles, Sections and Exhibits of this Agreement,
respectively, and all such Exhibits attached hereto are hereby incorporated
herein and made a part hereof for all purposes. All personal pronouns used in
this Agreement, whether used in the masculine, feminine or neuter gender, shall
include all other genders, and the singular shall include the plural and vice
versa. The use herein of the word "including" following any general statement,
term or matter shall not be construed to limit such statement, term or matter to
the specific items or matters set forth immediately following such word or to
similar items or matters, whether or not non-limiting language (such as "without
limitation," "but not limited to," or words of similar import) is used with
reference thereto, but rather shall be deemed to refer to all other items or
matters that could reasonably fall within the broadest possible scope of such
general statement, term or matter.
6.5 Successors and Assigns. The Agreement shall be binding upon and
inure to the benefit of the parties signatory hereto and their respective
successors and assigns.
6.6 No Third-Party Rights. The provisions of this Agreement are
intended to bind the parties signatory hereto as to each other and are not
intended to and do not create rights in any other person or confer upon any
other person any benefits, rights or remedies and no person is or is intended to
be a third-party beneficiary of any of the provisions of this Agreement.
6.7 Counterparts. This Agreement may be executed in any number of
counterparts, all of which together shall constitute one agreement binding on
the parties hereto.
6.8 Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Delaware applicable to contracts
made and to be performed wholly within such state without giving effect to
conflict of law principles thereof, except to the extent that it is mandatory
that the law of some other jurisdiction, wherein the contributed assets are
deemed located, shall apply.
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6.9 Severability. If any of the provisions of this Agreement are held
by any court of competent jurisdiction to contravene, or to be invalid under,
the laws of any political body having jurisdiction over the subject matter
hereof, such contravention or invalidity shall not invalidate the entire
Agreement. Instead, this Agreement shall be construed as if it did not contain
the particular provision or provisions held to be invalid, and an equitable
adjustment shall be made and necessary provision added so as to give effect to
the intention of the parties as expressed in this Agreement at the time of
execution of this Agreement.
6.10 Assignment. To the extent required by applicable law, this
Agreement shall also constitute an "assignment" of the assets transferred and
contributed as set forth in Article II hereof.
6.11 Amendment or Modification. This Agreement may be amended or
modified from time to time only by the written agreement of all the parties
hereto.
6.12 Integration. This Agreement supersedes all previous understandings
or agreements between the parties, whether oral or written, with respect to its
subject matter. This document is an integrated agreement which contains the
entire understanding of the parties. No understanding, representation, promise
or agreement, whether oral or written, is intended to be or shall be included in
or form part of this Agreement unless it is contained in a written amendment
hereto executed by the parties hereto after the date of this Agreement.
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IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties hereto as of the date first above written.
TEPPCO PARTNERS, L.P., a Delaware limited
partnership
By: Texas Eastern Products Pipeline Company,
LLC, a Delaware limited liability company,
as general partner
By: /s/ CHARLES H. LEONARD
--------------------------------------------
Name: Charles H. Leonard
Title: Senior V.P., C.F.O. & Treasurer
TE PRODUCTS PIPELINE COMPANY, LIMITED
PARTNERSHIP, a Delaware limited partnership
By: Texas Eastern Products Pipeline Company,
LLC, a Delaware limited liability company,
as general partner
By: /s/ CHARLES H. LEONARD
--------------------------------------------
Name: Charles H. Leonard
Title: Senior V.P., C.F.O. & Treasurer
TCTM, L.P., a Delaware limited partnership
By: Texas Eastern Products Pipeline Company,
LLC, a Delaware limited liability company,
as general partner
By: /s/ CHARLES H. LEONARD
--------------------------------------------
Name: Charles H. Leonard
Title: Senior V.P., C.F.O. & Treasurer
15
TEXAS EASTERN PRODUCTS PIPELINE COMPANY, LLC, a
Delaware limited liability company
By: /s/ CHARLES H. LEONARD
--------------------------------------------
Name: Charles H. Leonard
Title: Senior V.P., C.F.O. & Treasurer
TEPPCO GP, INC., a Delaware corporation
By: /s/ WILLIAM L. THACKER
--------------------------------------------
Name: William L. Thacker
Title: Chief Executive Officer
