TEPPCO
Partners, L.P.
1100
Louisiana, Suite 1600
Houston,
Texas 77002
February
9, 2009
Mr. H.
Christopher Owings
Assistant
Director
Division
of Corporation Finance
United
States Securities and Exchange Commission
100 F
Street, N.E.
Washington,
D.C. 20549-0404
| Re: | TEPPCO Partners, L.P. (the “Registrant”) |
| Form 10-K for the Fiscal Year Ended December 31, 2007 | |
| Filed February 28, 2008 | |
| File No. 1-10403 |
Dear Mr.
Owings:
In this letter, we are setting forth
the response of the Registrant to the comment contained in the letter from the
staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”)
dated January 26, 2009 (the “Comment Letter”), with respect to the above
captioned filing. For your convenience, we have repeated the Staff’s
comment as set forth in the Comment Letter. The Registrant’s response
is set forth immediately below the text of the comment.
Unless the context requires otherwise,
references to “we,” “us,” “our,” the “Partnership” or “TEPPCO” are intended to
mean the business and operations of TEPPCO Partners, L.P. and its consolidated
subsidiaries.
References to “TEPPCO GP” or “General
Partner” refer to Texas Eastern Products Pipeline Company, LLC, which is the
general partner of TEPPCO.
Financial Statements of
TEPPCO Partners, L.P. for the Year Ended December 31, 2007
Note 1. Partnership
Organization, page F-9
1. We
have reviewed your response to comment two in our letter dated November 4, 2008
and note that you determined the estimated fair value of the 14,091,275 LP units issued
to your general partner in December 2006 was equal to the estimated fair value
of the 50% IDR tier eliminated at the time of the exchange
transaction. Based on your response, it appears that you are
primarily basing your conclusion on the fact that the
issuance of the new LP units had no impact on total distributions paid or to the
allocation of distributions to the publicly-traded LP unit holders at the
time of the transaction and that the issued LP
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February
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units had
no impact on your fiscal 2006 earnings per LP unit. Please clarify
why your fair value determination appears to focus on distributions and earnings
per LP unit figures for only fiscal 2006 as opposed to fair values calculated
using generally accepted valuation techniques, such as income and/or market
approaches. Explain in sufficient detail how you determined the fair
values of both the LP units and the eliminated IDR tier, including the valuation
techniques and key assumptions you utilized. If you believe the fair
value of the LP units is a value other than the publicly traded market price on
the transaction date, please reconcile your valuation to that market
price.
Response
In our
letter dated December 1, 2008, we confirmed to the Staff that the estimated fair
value of the 14,091,275 LP units issued to our General Partner in December 2006
was equal to the estimated fair value of the 50% incentive distribution right
(“IDR”) tier eliminated at the time of the exchange transaction. We
further elaborated on the exchange transaction’s impact on our cash
distributions and earnings per LP unit in response to the Staff’s comment
regarding how the amendment of the IDR agreement would have no impact on our
financial statements. We emphasized these matters in our prior letter
because the cash neutral concept was the primary consideration on which the
exchange transaction was originally proposed. Even though cash
distributions were emphasized, we implemented generally accepted valuation
techniques, which are discussed below, that support our fair value
conclusions.
To
clarify our fair value determination, we applied the Income Approach to directly
estimate fair value of the IDRs, namely we used a distribution discount
model. The distribution discount model, a generally accepted
valuation technique, estimates fair value by measuring the present worth of an
expected future cash flow stream. Based on the valuation methodology and
our analysis of the exchange transaction, we estimated the fair value of TEPPCO
GP’s eliminated 50% IDR tier to be $562.5 million in December 2006 and
determined that such amount was equal to the fair value of the 14,091,275 LP
units issued to our General Partner in December 2006.
General
IDR
Valuation
Methodology. Our forecast of future cash flows and application
of the distribution discount model to estimate fair value of the IDRs involved
two steps. First, cash distributions payable to our LP unitholders
were forecast over an approximate 60-year discrete forecast
horizon. In the near-term (i.e. generally no more than 5 years from
the valuation date), estimated cash distribution rates reflect management and
industry analyst expectations. Beyond the near-term, cash
distributions per LP unit were forecast to increase at a constant
rate. The annual distribution growth rate represents an estimate
based on such factors as historical paid distributions, industry analyst
expectations and input from a
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February
9, 2009
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valuation
specialist. The Gordon Growth Model (i.e. a perpetual growth model)
was applied to estimate a terminal value at the end of the discrete forecast
horizon.
Selection
of a discount rate for IDR valuation purposes was based on the rate that equated
present value of the cash flow forecast to the market price of our LP units on
the valuation date. Stated differently, the forecast of cash
distributions payable to our limited partners over a discrete forecast horizon
plus the terminal value estimate discounted at the selected rate represented the
market price of our LP units on the valuation date. As such, the
discount rate represented the cost of equity for TEPPCO as of the valuation
date. The estimated annual distribution growth rate and discount rate
applied to the discrete forecast period were used as assumptions in the Gordon
Growth Model to estimate terminal values.
In the
second step of the analysis, total cash distributions to be paid by us over the
forecast horizon were estimated. This includes cash distributions we
are required to pay to our General Partner based on our partnership agreement
before incentive distributions as well as incentive
distributions. The relative level of cash distributions paid by us to
our limited partners and General Partner is derived mathematically based on
estimated cash distribution rates per LP unit (estimated in Step 1 above) and
contractually stated distribution rate target levels summarized in the following
table:
|
Cash
Distributions Paid by TEPPCO
|
|||||||
|
98%
Limited
Partner
Equity
Interest
|
2%
General
Partner
Equity
Interest
|
Incentive
Distribution
Rights
|
Distribution
Target
$/LP
unit
|
||||
|
Tier
1
|
98%
|
2%
|
0%
|
$0.2750
|
|||
|
Tier
2
|
85%
|
2%
|
13%
|
$0.3250
|
|||
|
Tier
3
|
75%
|
2%
|
23%
|
$0.4500
|
|||
|
Tier
4
|
50%
|
2%
|
48%
|
||||
We
estimated the cash flow stream associated with the IDRs based on the percentages
referenced in the preceding table applied to our forecast of total cash
distributions. Such cash flows were estimated over a discrete
forecast horizon of approximately 60 years. A terminal value estimate
was made at the end of the discrete forecast horizon using the Gordon Growth
Model. The estimated future cash flows and terminal value were
discounted at our cost of equity as described above. The present
worth of these cash flow streams were then summed to arrive at our estimate
of fair value for the IDRs.
Fair
Value of the Eliminated 50% IDR Tier. On February 24, 2005,
TEPPCO GP was acquired by DFI GP Holdings L.P. (“DFI”), an affiliate of EPCO,
Inc. (“EPCO”), a privately held company controlled by Dan L. Duncan, for
approximately $1.1 billion of cash consideration. DFI primarily
attributed the purchase price to the IDRs owned by our General
Partner. Subsequent to this transaction, we announced in
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February
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a press
release dated April 20, 2006 that EPCO submitted a proposal to the Audit
and Conflicts Committee (“ACC”) of our General Partner to eliminate TEPPCO GP’s
50% IDR tier. EPCO proposed the following:
|
·
|
TEPPCO
GP’s IDRs would be capped at 25% of the total cash distributions with
respect to that portion of our quarterly cash distribution to partners
that exceeded $0.325 per LP unit.
|
|
·
|
As
consideration, TEPPCO GP would receive a number of newly-issued TEPPCO LP
units whose distributions would approximate the amount of actual cash
distributions foregone by TEPPCO GP (based on current cash distribution
rates per LP unit) from eliminating the 50% IDR tier at the time of the
IDR Reduction Transaction.
|
The
primary business purpose and intent of the exchange transaction, as further
described in our proxy statement dated September 5, 2006, was to benefit our
unitholders and us by reducing our cost of capital. Specifically, the
total amount of cash available for distribution that we needed to generate to
pay the current distribution on additional LP units would decrease as a result
of the exchange transaction. Additionally, we believed the exchange
transaction would more equitably align the interests of our General
Partner with that of our limited partners, increase our competitive position and
improve our ability to make acquisitions or pursue internal growth projects
resulting in increases in our per LP unit cash distributions. On
December 8, 2006, our public LP unitholders approved the exchange
transaction. TEPPCO GP’s 50% IDR tier was eliminated and we issued
14,091,275 unregistered LP units to our General Partner having a market value of
approximately $562.5 million (based upon a closing price of our LP units of
$39.92 on that day).
Using
generally accepted valuation techniques, we applied the IDR valuation
methodology discussed above to estimate fair value of the IDRs immediately
before the closing of the exchange transaction on December 8, 2006 (i.e. with
TEPPCO GP’s eliminated 50% IDR tier). Subsequently, we modified
certain assumptions in our valuation model to estimate fair value of the IDRs on
December 8, 2006 immediately following the transaction (i.e. without the
eliminated IDR tier). Utilizing a “with-and-without” analysis, the
difference between our IDR fair value estimate including the top 50% IDR tier
and that which does not include the top 50% IDR tier represents a reasonable
fair value estimate of $562.5 million for TEPPCO GP’s eliminated 50% IDR
tier.
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February
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The
following table summarizes the key assumptions used in our fair value
estimates:
|
IDR
Valuation Analysis
|
|||
|
With
50% IDR tier
|
Without
50% IDR tier
|
||
|
Price
per LP unit on December 8, 2006
|
$ 39.92
|
$ 39.92
|
|
|
Declared
quarter cash distribution rate per LP unit on valuation
date
|
$ 0.6750
|
$ 0.6750
|
|
|
Estimated
annual distribution growth rate per LP unit
|
2.00%
|
3.00%
|
|
|
Discount
rate
|
9.35%
|
7.94%
|
|
|
Outstanding
LP units on valuation date (in millions)
|
75.7
|
89.8
|
|
|
Estimated
fair value of IDRs (in millions)
|
$ 1,580.0
|
$ 1,017.5
|
|
Our fair
value estimate of the IDRs immediately following the exchange transaction
includes modifications to the estimated annual distribution growth rate per LP
unit and discount rate applied in our analysis. Such modifications
reflect the lower cost of equity anticipated to result from the exchange
transaction. A lower cost of equity, or the need to generate less
cash available for distribution in the aggregate, would result in a cash savings
to us. Such cash savings may be reinvested in growth projects and
acquisitions to generate additional cash flows from operations and further
increase our cash distribution rate per LP unit. Modifications to the
estimated annual distribution growth rate per LP unit and discount rate we made
represent estimates based on the financial forecast expectations of management
and industry analysts and input from a valuation specialist. Lastly,
cash distribution forecasts made in connection with our IDR fair value estimate
without the 50% IDR tier included the additional 14,091,275 LP units issued to
TEPPCO GP on December 8, 2006.
Based on
the foregoing assumptions, valuation methodology, our analysis of the exchange
transaction and that of the ACC of our General Partner which included the
analysis of an investment banking firm, we estimate that TEPPCO GP’s eliminated
50% IDR tier had a fair value of $562.5 million on December 8,
2006. Our fair value estimate of the eliminated 50% IDR tier was
equal to the $562.5 million market value of 14,091,275 LP units issued to our
General Partner on December 8, 2006. As such, we believe the
substance of the transaction was an exchange based on equal fair values and no
deemed preferential distribution with our General Partner occurred that
would have changed the 2006 income allocable to our limited
partners.
* * * *
*
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Finance
February
9, 2009
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In connection with responding to the
Staff’s comments, the Registrant acknowledges that:
|
·
|
it
is responsible for the adequacy and accuracy of disclosures in its
filings;
|
|
·
|
Staff
comments or changes to disclosures in response to Staff comments do not
foreclose the Commission from taking any action with respect to its
filings; and
|
|
·
|
it
may not assert Staff comments as a defense in any proceeding initiated by
the Commission or any person under the federal securities laws of the
United States.
|
Please
direct any questions that you have with respect to the foregoing responses to
the undersigned at (713) 381-3690 (direct line) or (713) 381-6938
(fax).
| Regards, | |||
|
|
/s/
Tracy E. Ohmart
|
||
|
Name:
|
Tracy E. Ohmart | ||
|
Title:
|
Acting Chief Financial Officer of
Texas Eastern Products Pipeline
Company,
LLC, as General
Partner
|
||
| cc: | Jerry E. Thompson |
| Patricia Totten | |
| Virginia Krobot | |
| Michael Hanson | |
| Phil Neisel | |
| Paul Perea (Baker Botts) | |
|
Michael
J. Knesek
|