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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report: May 9, 2003
(Date of earliest event reported: July 31, 2002)
ENTERPRISE PRODUCTS PARTNERS L.P.
ENTERPRISE PRODUCTS OPERATING L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 1-14323 76-0568219
DELAWARE 333-93239-01 76-0568220
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification Number)
2727 NORTH LOOP WEST, HOUSTON, TEXAS 77008
(Address of principal executive offices) (Zip Code)
(713) 880-6500
(Registrants' telephone number, including area code)
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EXPLANATORY NOTE
This report constitutes a combined report for Enterprise Products Partners L.P.
("Enterprise") (Commission File No. 1-14323) and its 98.9899% owned subsidiary,
Enterprise Products Operating L.P. (the "Operating Partnership") (Commission
File No. 333-93239-01). Since the Operating Partnership owns substantially all
of Enterprise's consolidated assets and conducts substantially all of
Enterprise's business and operations, the information set forth herein
constitutes combined information for Enterprise and the Operating Partnership.
Unless the context requires otherwise, references to "we," "us" or "our" are
intended to mean the consolidated business and operations of Enterprise Products
Partners L.P., which includes Enterprise Products Operating L.P. and its
subsidiaries.
ITEM 5. OTHER EVENTS.
1. On August 1, 2002, we announced the purchase of equity interests in
affiliates of The Williams Companies, Inc., which in turn, own
controlling interests in Mid-America Pipeline Company, LLC
("Mid-America") and Seminole Pipeline Company ("Seminole"). The
purchase price of the acquisitions was approximately $1.2 billion and
was determined pursuant to arms-length negotiations between the
parties. The effective date of the acquisitions was July 31, 2002. We
filed audited financial statements for the years ended December 31,
1999, 2000 and 2001 and unaudited financial statements for the six
month periods ended June 30, 2001 and 2002 for each of Mid-America and
Seminole on our Current Report on Form 8-K/A-1 dated September 26,
2002. We are refiling those financial statements with this report so
that they will be incorporated by reference in our recently filed
registration statements. In addition, this report also includes a pro
forma income statement of Enterprise for the year ended December 31,
2002.
2. On April 9, 2003, we executed the Sixth Amendment to Conveyance of Gas
Processing Rights, dated as of March 1, 2003 among one of our
subsidiaries, Shell Oil Company and several affiliates of Shell Oil
Company (the "Amendment") and a related letter agreement (the "Letter
Agreement"). The Amendment and the Letter Agreement are included as
exhibits to this report.
The Amendment adds a new Section 6.6 to the original agreement that
provides for certain pricing adjustments if Enterprise's Average Net
Margin (as defined in Section 6.6) is below a certain "floor" amount or
above a certain "ceiling" amount, which in either case, would be
outside Enterprise's expected range of Average Net Margin. The purpose
of the pricing adjustments is to limit the exposure of the parties
during periods of abnormal natural gas and product pricing.
The Letter Agreement provides that (i) for the five calendar year
period beginning March 1, 2008 and for each five calendar year period
thereafter during the term of the agreement (i.e., March 1, 2013
through February 28, 2018), either party shall have the right to
renegotiate the terms of Section 6.6 for such five year period, and
(ii) if the parties fail to reach an agreement with respect to such
renegotiation prior to the beginning of such five year period, such
Section 6.6 and the Letter Agreement shall terminate.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED:
1. Mid-America Pipeline System (A Division of The
Williams Companies, Inc.)--audited financial
statements for the years ended December 31, 1999,
2000 and 2001 and unaudited financial statements for
the six month periods ended June 30, 2001 and 2002.
2. Seminole Pipeline Company--audited financial
statements for the years ended December 31, 1999,
2000 and 2001 and unaudited financial statements for
the six month periods ended June 30, 2001 and 2002.
2
(b) PRO FORMA FINANCIAL INFORMATION:
1. Enterprise Products Partners L.P. and
subsidiaries--unaudited pro forma statement of
consolidated operations for the year ended December
31, 2002.
(c) EXHIBITS:
*10.1 Sixth Amendment to Conveyance of Gas Processing
Rights, dated as of March 1, 2003 among Enterprise
Gas Processing, LLC, Shell Oil Company, Shell
Exploration & Production Company, Shell Offshore
Inc., Shell Consolidated Energy Resources Inc., Shell
Land & Energy Company, Shell Frontier Oil & Gas Inc.
and Shell Gulf of Mexico Inc.
10.2 Letter Agreement dated April 9, 2003, relating to
Sixth Amendment to Conveyance of Gas Processing
Rights filed as Exhibit 10.1 to this report.
23.1 Consent of Ernst & Young LLP.
---------------
*Portions of this exhibit have been omitted pursuant to a
request for confidential treatment.
3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrants have duly caused this report to be signed on their behalf by the
undersigned hereunto duly authorized.
ENTERPRISE PRODUCTS PARTNERS L.P.
ENTERPRISE PRODUCTS OPERATING L.P.
By: Enterprise Products GP, LLC,
as General Partner of both registrants
Date: May 8, 2003 By: /s/ Michael J. Knesek
-----------------------------------------
Michael J. Knesek
Vice President, Controller and
Principal Accounting Officer
4
ITEM 7. FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
PRO FORMA UNAUDITED FINANCIAL INFORMATION
TABLE OF CONTENTS
Page No.
--------
ITEM 7 (a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
Combined Financial Statements of Mid-America Pipeline System 6
Financial Statements of Seminole Pipeline Company 16
ITEM 7 (b) PRO FORMA UNAUDITED FINANCIAL INFORMATION.
Pro Forma Statement of Consolidated Operations. 28
5
COMBINED FINANCIAL STATEMENTS OF MID-AMERICA PIPELINE SYSTEM
Report of Independent Auditors
The Board of Directors of
The Williams Companies, Inc.:
We have audited the accompanying combined balance sheets of Mid-America Pipeline
System (A Division of The Williams Companies, Inc.) (See Note 1) as of December
31, 2000 and 2001 and the related combined statements of operations and owner
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of The Williams
Companies, Inc.'s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Mid-America
Pipeline System (A Division of The Williams Companies, Inc.) (See Note 1) at
December 31, 2000 and 2001 and the combined results of their operations and
their cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
Tulsa, Oklahoma
September 6, 2002
6
MID-AMERICA PIPELINE SYSTEM
(A DIVISION OF THE WILLIAMS COMPANIES, INC.)
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
--------------------------- JUNE 30,
2000 2001 2002
------------ ------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Accounts receivable - affiliates $ 9,396 $ 16,181 $ 20,506
Accounts receivable - other
743 540 1,383
Income taxes due from affiliates
8,213 -- 11,855
Product inventory
30,562 15,416 10,210
Prepaid and other current assets
4,283 2,017 868
------------ ------------ ------------
Total current assets 53,197 34,154 44,822
PROPERTY, PLANT AND EQUIPMENT, NET 680,735 673,627 633,937
OTHER ASSETS 2,851 3,054 2,844
------------ ------------ ------------
TOTAL $ 736,783 $ 710,835 $ 681,603
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 7,263 $ 6,518 $ 5,178
Accounts payable - affiliates 163,552 93,292 26,726
Income taxes due to affiliates -- 381 --
Accrued taxes, other than income taxes 4,616 5,400 7,777
Other current liabilities 475 1,951 2,468
------------ ------------ ------------
Total current liabilities 175,906 107,542 42,149
LONG-TERM DEBT
90,000 90,000 90,000
DEFERRED INCOME TAXES 112,351 119,259 122,611
OTHER LONG-TERM LIABILITIES 342 6,225 384
COMMITMENTS
OWNER EQUITY 358,184 387,809 426,459
------------ ------------ ------------
TOTAL $ 736,783 $ 710,835 $ 681,603
============ ============ ============
See Notes to Financial Statements
7
MID-AMERICA PIPELINE SYSTEM
(A DIVISION OF THE WILLIAMS COMPANIES, INC.)
COMBINED STATEMENTS OF OPERATIONS AND OWNER EQUITY
(DOLLARS IN THOUSANDS)
Six Months Ended
For Years Ended December 31, June 30,
------------------------------------- -----------------------
1999 2000 2001 2001 2002
--------- --------- --------- --------- ----------
(UNAUDITED)
REVENUES $ 190,686 $ 209,895 $ 214,518 $ 102,244 $ 109,865
COSTS AND EXPENSES
Operating costs and expenses 87,623 105,591 125,349 67,870 45,111
Selling, general and administrative 28,718 29,307 28,364 13,807 15,130
--------- --------- --------- --------- ---------
Total 116,341 134,898 153,713 81,677 60,241
--------- --------- --------- --------- ---------
OPERATING INCOME 74,345 74,997 60,805 20,567 49,624
OTHER INCOME (EXPENSE)
Interest expense (7,673) (13,500) (12,700) (6,947) (4,432)
Other, net 822 880 (1,035) 89 (748)
--------- --------- --------- --------- ---------
Total (6,851) (12,620) (13,735) (6,858) (5,180)
--------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 67,494 62,377 47,070 13,709 44,444
PROVISION FOR INCOME TAXES (23,651) (22,826) (17,445) (4,894) (16,604)
--------- --------- --------- --------- ---------
NET INCOME $ 43,843 $ 39,551 $ 29,625 $ 8,815 $ 27,840
DIVIDEND OF ASSETS -- (4,127) -- -- (23,571)
OWNER CONTRIBUTION -- -- -- -- 34,381
OWNER EQUITY AT BEGINNING OF PERIOD 278,917 322,760 358,184 358,184 387,809
--------- --------- --------- --------- ---------
OWNER EQUITY AT END OF PERIOD $ 322,760 $ 358,184 $ 387,809 $ 366,999 $ 426,459
========= ========= ========= ========= =========
See Notes to Financial Statements
8
MID-AMERICA PIPELINE SYSTEM
(A DIVISION OF THE WILLIAMS COMPANIES, INC.)
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
FOR YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
OPERATING ACTIVITIES
Net income $ 43,843 $ 39,551 $ 29,625 $ 8,815 $ 27,840
Adjustments to reconcile net income to cash flows
provided by (used for) operating activities:
Depreciation
19,020 25,000 25,001 12,392 12,291
Lower of cost or market adjustment -- -- 18,833 12,903 --
Deferred income taxes 13,048 7,175 7,060 1,892 3,196
Net effect of changes in operating accounts
48,456 (51,002) (62,626) (32,600) (41,237)
---------- ---------- ---------- ---------- ----------
Operating activities cash flows 124,367 20,724 17,893 3,402 2,090
---------- ---------- ---------- ---------- ----------
INVESTING ACTIVITIES
Capital expenditures (137,427) (20,844) (18,573) (3,534) (2,192)
Proceeds from sale of assets
13,060 120 680 132 102
---------- ---------- ---------- ---------- ----------
Investing activities cash flows (124,367) (20,724) (17,893) (3,402) (2,090)
---------- ---------- ---------- ---------- ----------
CHANGE IN CASH AND CASH EQUIVALENTS -- -- -- -- --
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD -- -- -- -- --
CASH AND CASH EQUIVALENTS
---------- ---------- ---------- ---------- ----------
AT END OF PERIOD $ -- $ -- $ -- $ -- $ --
========== ========== ========== ========== ==========
See Notes to Financial Statements
9
MID-AMERICA PIPELINE SYSTEM
(A DIVISION OF THE WILLIAMS COMPANIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO JUNE 30, 2002 AND TO THE
SIX MONTHS ENDED JUNE 30, 2001 AND 2002 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements and accompanying notes represent the combined
historical financial information of (i) Mid-America Pipeline Company ("MAPL")
and (ii) certain terminals and storage facilities ("Terminals and Storage"), all
of which is owned by The Williams Companies, Inc. Unless the context requires
otherwise, references to "we", "us", "our", or the "Company" are intended to
mean MAPL and the Terminals and Storage facilities. In addition, references to
"Williams" in these footnotes are intended to mean The Williams Companies, Inc.
and its affiliates.
MAPL, a Delaware corporation, was organized in May 1968 for the purpose of
owning and operating a natural gas liquids ("NGLs") pipeline. Since its
formation, MAPL's operations have expanded to include the transportation,
pumping, metering and underground storage of a variety of NGLs, including
demethanized mix, ethane-propane mix and specification liquid products. Our
primary asset is the pipeline system located in the Rocky Mountains, the Midwest
and a portion of the Southwest United States. Approximately 20 natural gas
processing plants in Wyoming, Utah and Colorado feed NGLs into the MAPL system
for delivery to several destinations.
The Terminals and Storage facilities, were contributed by Williams to Sapling
LLC ("Sapling"), a Delaware corporation, organized in July 2002 by Williams. The
MAPL system serves the Midwestern U.S. heating market via Sapling's 16 propane
truck-loading terminals located on the MAPL system. Sapling also owns
underground NGL storage capacity that provides operating flexibility along the
MAPL system.
Also in July 2002, Williams converted MAPL from a corporation to a limited
liability company, Mid-America Pipeline Company, LLC ("MAPL, LLC"). Williams
then contributed Sapling to MAPL, LLC. On July 31, 2002, Williams contributed
its 100% equity interest in MAPL, LLC to a newly formed affiliate of Williams,
Mapletree, LLC. This contribution was done as part of a subsequent transaction
that took place between Williams and Enterprise Products Operating L.P ("EPOLP")
on the same date, whereby EPOLP purchased a 98% equity interest in Mapletree,
LLC for $940.2 million.
Immediately prior to the sale of 98% of Williams' membership interest in MAPL,
LLC to EPOLP, all long-term debt of MAPL, LLC was repaid.
The interim financial data is unaudited; however, in the opinion of management,
the interim financial data includes all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the financial
position as of June 30, 2002 and the results of operations for the six-month
periods ended June 30, 2001 and 2002. The results of operations for the six
months ended June 30, 2001 and 2002 are not necessarily indicative of the
results to be expected for the full year.
DOLLAR AMOUNTS presented in the tabulations within the notes to our financial
statements are stated in thousands of dollars, unless otherwise indicated.
ENVIRONMENTAL expenditures that relate to current or future revenues are
expensed or capitalized based upon the nature of the expenditures. Expenditures
resulting from an existing condition caused by past operations that do not
contribute to current or future revenue generation are expensed. Environmental
liabilities are recorded independently of any potential claim for recovery.
Receivables are recognized in cases where the realization of reimbursements of
remediation costs are considered probable. Accruals related to environmental
matters are generally determined based on site-specific plans for remediation,
taking into account the prior remediation experience of the Company.
INCOME TAXES are computed using the liability method and are provided on all
temporary differences between the financial basis and the tax basis of the
Company's assets and liabilities. For federal income tax reporting, the Company
is included in Williams' consolidated tax return. The provision for income taxes
has been charged to the Company as if separate income tax returns were filed.
10
LONG-LIVED ASSETS are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Long-lived assets that are held for disposal are valued at the
lower of carrying amount or fair value less cost to sell.
PRODUCT INVENTORY consists of various NGL products we utilize in the operation
of our pipeline. Product inventory is valued at the lower of average cost or
market. For the year ended December 31, 2001, operating costs and expenses
include a lower of average cost or market adjustment of $18.8 million.
PROPERTY, PLANT AND EQUIPMENT is recorded at cost and is depreciated using the
straight-line method over the asset's estimated useful life at annual rates
ranging from 1.40% to 11.30%. Expenditures for maintenance and repairs are
charged to operations in the period incurred.
REVENUE is based on tariffs charged to customers for pipeline volumes
transported. Shippers are invoiced and the related revenue is recorded as
deliveries are made.
USE OF ESTIMATES AND ASSUMPTIONS by management that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period are required for the preparation of
financial statements in conformity with accounting principles generally accepted
in the United States. Our actual results could differ from these estimates.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement
Obligations" in June 2001. This statement establishes accounting standards for
the recognition and measurement of a liability for an asset retirement
obligation and the associated asset retirement cost. This statement is effective
for our fiscal year beginning January 1, 2003. We are evaluating the provisions
of this statement.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement addresses financial accounting
and reporting for the impairment and/or disposal of long-lived assets. We
adopted this statement effective January 1, 2002 and determined that it did not
have any significant impact on our financial statements as of that date.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statements No.
4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections." The purpose
of this statement is to update, clarify and simplify existing accounting
standards. We adopted this statement effective April 30, 2002 and determined
that it did not have any significant impact on our financial statements as of
that date.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Previous accounting guidance was provided by EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
replaces Issue 94-3. SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. This statement is
effective for our fiscal year beginning January 1, 2003. We are evaluating the
provisions of this statement.
11
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at the periods
indicated:
DECEMBER 31,
------------------------ JUNE 30,
2000 2001 2002
---------- ---------- ----------
(UNAUDITED)
Pipelines and related equipment $ 970,393 $ 981,733 $ 943,115
Land 1,303 1,445 1,445
---------- ---------- ----------
Total 971,696 983,178 944,560
Less accumulated depreciation (290,961) (309,551) (310,623)
---------- ---------- ----------
Property, plant and equipment, net $ 680,735 $ 673,627 $ 633,937
========== ========== ==========
During 1999, we capitalized $7.0 million of interest related to a pipeline
expansion project.
During 2002, we contributed fixed assets with a net book value of $23.6 million
to an affiliate of Williams. The transaction was accounted for as a non-cash
dividend.
4. LONG-TERM DEBT
During 1992, we issued five different series of Senior Unsecured Notes in the
private placement market. The notes have a combined principal balance of $90
million with interest rates between 8.20% to 8.95%. The notes have principal
payments beginning in July 2007. Interest is paid semi-annually either January 1
and July 1 or April 30 and October 30. The note agreements contain restrictive
covenants, which limit the payment of advances or dividends to stockholders and
restrict additional borrowing of funds. Such provisions restricted $100 million
of combined net worth related to MAPL at December 31, 2001. We were in
compliance with these covenants at December 31, 2001.
5. INCOME TAXES
The provision for income taxes are as follows for the periods indicated:
FOR YEARS ENDED DECEMBER 31,
------------------------------------
1999 2000 2001
---------- ---------- ----------
Current:
Federal $ 9,327 $ 15,342 $ 9,718
State
1,276 309 667
---------- ---------- ----------
10,603 15,651 10,385
Deferred:
Federal 11,702 6,088 6,105
State 1,346 1,087 955
---------- ---------- ----------
Provision for income taxes $ 23,651 $ 22,826 $ 17,445
---------- ---------- ----------
12
Reconciliations from the provision for income taxes at the U.S federal statutory
rate to the effective tax rate for the provision for income taxes are as
follows:
FOR YEARS ENDED DECEMBER 31,
-------------------------------------
1999 2000 2001
---------- ---------- ----------
Provision at statutory rate $ 23,623 $ 21,832 $ 16,474
Increases (reductions) in taxes resulting from:
State income taxes (net of federal benefit) 1,704 907 1,054
Other (1,676) 87 (83)
---------- ---------- ----------
Provision for income taxes $ 23,651 $ 22,826 $ 17,445
---------- ---------- ----------
Significant components of deferred tax liabilities and assets as of December 31,
2000 and 2001 are as follows:
DECEMBER 31,
-----------------------
2000 2001
---------- ----------
Deferred tax liabilities:
Property, plant and equipment $ 115,474 $ 122,138
Other -- 338
---------- ----------
Total deferred tax liabilities 115,474 122,476
---------- ----------
Deferred tax assets:
Accrued liabilities 167 140
Other 2,956 3,077
---------- ----------
Total deferred tax assets 3,123 3,217
---------- ----------
Net deferred tax liabilities $ 112,351 $ 119,259
========== ==========
6. RELATED PARTY TRANSACTIONS
Williams' affiliated companies transport product in our pipelines. Operating
revenues from affiliates were as follows:
FOR YEARS ENDED DECEMBER 31,
--------------------------------------
1999 2000 2001
---------- ---------- ----------
Revenues from affiliates $ 30,328 $ 40,531 $ 46,954
Revenues from affiliates as
a percentage of total revenues 16% 19% 22%
At December 31, 2000 and 2001, we held affiliate receivable balances of $8.5
million and $14.3 million respectively, from Seminole Pipeline Company
("Seminole"), an 80%-owned subsidiary of Williams, primarily for MAPL's share of
the joint tariff on movements generated in MAPL's pipeline system. MAPL is paid
for its share of the joint tariff following delivery of NGLs to destinations on
Seminole's pipeline system.
Williams charges their affiliates for certain general and administrative
expenses that are directly identifiable or allocable to the affiliates. The
majority of these expenses are reflected within general and administrative
expenses. Allocated general and administrative expenses are based on a
three-factor formula, which is accepted by the Federal Energy Regulatory
Commission and considers operating margins, property, plant and equipment and
payroll. These allocated costs from various Williams subsidiaries were as
follows:
FOR YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 2000 2001
------------ ------------- ----------
Allocated G&A expenses $ 23,321 $ 26,783 $ 19,067
13
In addition to the above allocations, Williams allocates interest based on
intercompany account balances. Allocated interest expense from Williams was as
follows:
FOR YEARS ENDED DECEMBER 31,
------------------------------
1999 2000 2001
-------- -------- --------
Allocated Interest Expense $ 6,931 $ 5,620 $ 4,300
Due to MAPL holding no cash, Williams pays all MAPL payables, causing us to hold
payables to affiliates. Collections on our receivables are netted against the
affiliate payable account.
7. MAJOR CUSTOMERS
Two non-affiliated shippers accounted for 18% and 12% of operating revenues for
the year ended December 31, 1999. One non-affiliated shipper accounted for 21%
and 17% of operating revenues for the years ended December 31, 2000 and 2001.
8. COMMITMENTS
During 2001, we leased certain fixed asset equipment under a 15-year capital
lease. At December 31, 2001, the lease had a balance of $5.8 million and an
implied interest rate of approximately 14%. The balance of the lease along with
the associated fixed assets were transferred to an affiliate in April 2002.
9. SUPPLEMENTAL CASH FLOWS DISCLOSURE
SIX MONTHS ENDED
FOR YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(Increase) decrease in:
Accounts receivable $ (2,124) $ (544) $ (6,582) $ (5,358) $ (5,168)
Income taxes due from affiliates -- (8,213) 8,213 3,076 (11,855)
Product inventory -- (41,455) (3,687) (1,162) 5,206
Prepaid and other current assets (346) (3,392) 2,266 1,633 1,149
Other assets 1,948 183 (203) (68) 210
Increase (decrease) in:
Accounts payable 54,124 23,646 (71,005) (33,906) (33,530)
Accrued taxes (2,579) (14,516) 1,160 2,863 2,001
Other current liabilities (1,762) (6,370) 1,329 322 809
Other liabilities (805) (341) 5,883 -- (59)
---------- ---------- ---------- ---------- ----------
Net effect of changes in operating accounts $ 48,456 $ (51,002) $ (62,626) $ (32,600) $ (41,237)
========== ========== ========== ========== ==========
Income taxes paid were $12.8 million, $39.4 million and $2.0 million for the
year ended December 31, 1999, 2000 and 2001, respectively, and $25.6 million for
the six months ended June 30, 2002. No income taxes were paid during the six
months ended June 30, 2001. Interest paid was $7.8 million, $8.4 million and
$13.0 million for 1999, 2000 and 2001, respectively, and $6.3 million and $3.6
million for the six months ended June 30, 2001 and 2002, respectively.
During 2002, Williams made an equity contribution to us in the amount of $34.4
million. The non-cash transaction was accounted for as a reduction to accounts
payable -- affiliate and an increase to owner equity.
14
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value was determined by us, using
available market information and appropriate valuation methodologies.
Considerable judgment, however, is necessary to interpret market data and
develop the related estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that we could
realize upon disposition of the financial instruments. The use of different
market assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
Long-term debt. Debt consists of private placement senior notes. The fair value
of private debt is valued based on the prices of similar securities with similar
terms and credit ratings.
The carrying amounts and fair values for our financial instruments at December
31, 2000 and 2001 are as follows:
2000 2001
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
Long-term debt $ 90,000 $ 99,479 $ 90,000 $ 98,737
11. SIGNIFICANT CONCENTRATIONS OF RISK
All of our revenues are derived from the transportation of NGLs to various
companies in the NGL industry, primarily located in the United States. Although
this concentration could affect our overall exposure to credit risk since these
customers might be affected by similar economic or other conditions, management
believes that the Company is exposed to minimal credit risk, since the majority
of our business is conducted with major companies within the industry. We
perform periodic credit evaluations of our customers' financial condition and
generally do not require collateral for receivables.
15
FINANCIAL STATEMENTS OF SEMINOLE PIPELINE COMPANY
Report of Independent Auditors
The Board of Directors of
Seminole Pipeline Company:
We have audited the accompanying balance sheets of Seminole Pipeline Company as
of December 31, 2000 and 2001 and the related accompanying statements of
operations, statements of stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Seminole Pipeline Company at
December 31, 2000 and 2001 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Tulsa, Oklahoma
March 6, 2002,
except for the matter described in Note 14,
as to which the date is September 6, 2002
16
SEMINOLE PIPELINE COMPANY
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
----------------------- JUNE 30,
2000 2001 2002
---------- ---------- ----------
(RESTATED) (UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 11,535 $ 16,513 $ 11,160
Accounts receivable - trade 6,066 10,995 8,791
Accounts receivable - affiliates 1,582 2,783 7,791
Accounts receivable - other 117 152 408
Income taxes due from affiliates -- -- 1,637
Prepaid and other current assets 87 35 122
---------- ---------- ----------
Total current assets 19,388 30,479 29,909
PROPERTY, PLANT AND EQUIPMENT, NET 261,358 251,751 249,390
OTHER ASSETS 194 170 440
---------- ---------- ----------
TOTAL $ 280,940 $ 282,399 $ 279,739
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 15,000 $ 15,000 $ 15,000
Accounts payable - trade
4,644 2,646 2,389
Accounts payable - affiliates
15,437 15,460 17,948
Accrued income taxes due affiliates
54 8,471 --
Accrued taxes, other than income taxes
2,557 2,717 2,665
Other current liabilities
3,265 796 1,853
---------- ---------- ----------
Total current liabilities
40,957 45,090 39,855
LONG-TERM DEBT
60,000 45,000 45,000
DEFERRED INCOME TAXES
58,858 59,226 59,116
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Capital stock:
Preferred stock, Series A, without par value, $100
stated value; 100 shares authorized and issued; involuntary
liquidation preference aggregated $79,170 10 10 10
Common stock, $100 par value; 1,000 shares
authorized and issued 100 100 100
Paid-in capital 114,357 114,357 114,357
Retained earnings 6,658 18,616 21,301
---------- ---------- ----------
Total stockholders' equity 121,125 133,083 135,768
---------- ---------- ----------
Total $ 280,940 $ 282,399 $ 279,739
========== ========== ==========
See Notes to Financial Statements
17
SEMINOLE PIPELINE COMPANY
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
FOR YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------- --------------------
1999 2000 2001 2001 2002
-------- -------- -------- -------- --------
(RESTATED) (UNAUDITED)
REVENUES $ 64,210 $ 66,609 $ 65,800 $ 30,880 $ 34,856
COSTS AND EXPENSES
Operating costs and expenses 27,278 37,293 33,539 16,430 17,315
Selling, general and administrative 1,035 1,700 1,535 750 796
-------- -------- -------- -------- --------
Total 28,313 38,993 35,074 17,180 18,111
-------- -------- -------- -------- --------
OPERATING INCOME 35,897 27,616 30,726 13,700 16,745
OTHER INCOME (EXPENSE)
Interest expense (5,002) (5,003) (5,160) (2,450) (2,006)
Other, net 670 (1,542) 662 (9) (7)
-------- -------- -------- -------- --------
Total (4,332) (6,545) (4,498) (2,459) (2,013)
-------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES 31,565 21,071 26,228 11,241 14,732
PROVISION FOR INCOME TAXES (11,611) (7,590) (9,470) (3,837) (5,347)
-------- -------- -------- -------- --------
NET INCOME $ 19,954 $ 13,481 $ 16,758 $ 7,404 $ 9,385
======== ======== ======== ======== ========
See Notes to Financial Statements
18
SEMINOLE PIPELINE COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
PREFERRED COMMON PAID-IN RETAINED
STOCK STOCK CAPITAL EARNINGS TOTAL
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1998 $ 10 $ 100 $ 114,357 $ 28,813 $ 143,280
Net income -- -- -- 19,954 19,954
Cash dividends paid to stockholders -- -- -- (24,000) (24,000)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1999 10 100 114,357 24,767 139,234
Net income (restated) -- -- -- 13,481 13,481
Cash dividends paid to stockholders -- -- -- (31,590) (31,590)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2000 (restated) 10 100 114,357 6,658 121,125
Net income (restated) -- -- -- 16,758 16,758
Cash dividends paid to stockholders -- -- -- (4,800) (4,800)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2001 (restated) 10 100 114,357 18,616 133,083
Net income (unaudited) -- -- -- 9,385 9,385
Cash dividends paid to stockholders (unaudited) -- -- -- (6,700) (6,700)
---------- ---------- ---------- ---------- ----------
Balance, June 30, 2002 (unaudited) $ 10 $ 100 $ 114,357 $ 21,301 $ 135,768
========== ========== ========== ========== ==========
See Notes to Financial Statements
19
SEMINOLE PIPELINE COMPANY
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
FOR YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ----------
(RESTATED) (UNAUDITED)
OPERATING ACTIVITIES
Net income $ 19,954 $ 13,481 $ 16,758 $ 7,404 $ 9,385
Adjustments to reconcile net income to cash flows
provided by (used for) operating activities:
Depreciation and amortization 10,125 10,183 10,199 5,095 5,123
Deferred income taxes 1,199 759 368 374 (110)
Net effect of changes in operating accounts (12,030) 10,623 (1,982) (4,504) (10,302)
---------- ---------- ---------- ---------- ----------
Operating activities cash flows 19,248 35,046 25,343 8,369 4,096
---------- ---------- ---------- ---------- ----------
INVESTING ACTIVITIES
Capital expenditures (1,964) (810) (576) (297) (2,763)
Proceeds from sale of assets 18 15 11 11 14
---------- ---------- ---------- ---------- ----------
Investing activities cash flows (1,946) (795) (565) (286) (2,749)
---------- ---------- ---------- ---------- ----------
FINANCING ACTIVITIES
Long-term debt repayments -- -- (15,000) -- --
Cash dividends paid to stockholders (24,000) (31,590) (4,800) (2,000) (6,700)
---------- ---------- ---------- ---------- ----------
Financing activities cash flows (24,000) (31,590) (19,800) (2,000) (6,700)
---------- ---------- ---------- ---------- ----------
CHANGE IN CASH AND CASH EQUIVALENTS (6,698) 2,661 4,978 6,083 (5,353)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 15,572 8,874 11,535 11,535 16,513
---------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 8,874 $ 11,535 $ 16,513 $ 17,618 $ 11,160
========== ========== ========== ========== ==========
See Notes to Financial Statements
20
SEMINOLE PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO JUNE 30, 2002 AND TO THE
SIX MONTHS ENDED JUNE 30, 2001 AND 2002 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Seminole Pipeline Company ("Seminole"), a Delaware corporation, was organized in
1981 for the purpose of constructing and operating a common carrier liquified
petroleum products pipeline. Unless the context requires otherwise, references
to "we", "us", "our", or the "Company" are intended to mean Seminole Pipeline
Company. Seminole's 100 shares of non-voting and non-participating preferred
stock and 1,000 shares of common stock are held by Williams Natural Gas Liquids
Inc. ("WNGL") (80%), AMOCO Pipeline Seminole Investment Company ("AMOCO") (10%)
and Texaco Natural Gas Liquids Inc. ("Texaco") (10%).
Our operations include the transportation, pumping, metering and underground
storage of natural gas liquids ("NGLs"), including demethanized mix,
ethane-propane mix and specification liquid products. Our primary asset, the
Seminole pipeline primarily transports natural gas liquids ("NGLs") from Hobbs,
Texas and the Permian Basin to Mont Belvieu, Texas. We have only one operating
segment, pipeline transportation.
These financial statements are prepared in accordance with generally accepted
accounting principles in the United States. The information contained in these
financial statements may differ in some respects from the information filed with
the Federal Energy Regulatory Commission ("FERC").
The interim financial data are unaudited; however, in the opinion of management,
the interim financial data includes all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the results as of
June 30, 2002 and for the six-month periods ended June 30, 2001 and 2002. The
results of operations for the six months ended June 30, 2002 and 2001 are not
necessarily indicative of the results to be expected for the full year.
CASH AND CASH EQUIVALENTS consist of short-term, highly liquid investments that
are readily convertible into cash. All investments classified as cash
equivalents have maturities at the date of purchase of three months or less.
Cash flows are computed using the indirect method.
DOLLAR AMOUNTS (except per share amounts) presented in the tabulations within
the notes to our financial statements are stated in thousands of dollars, unless
otherwise indicated.
EARNINGS PER SHARE is generally computed by dividing net income by either common
stock outstanding (for basic earnings per share) or common and preferred stock
outstanding (for diluted earnings per share). We have 1,000 shares of common
stock outstanding and 100 shares of preferred stock outstanding during all
periods presented within these financial statements. Earnings per share is not
presented since the Company is a nonpublic entity that has a simple capital
structure and few stockholders. As a result, we believe an earnings per share
computation would not be meaningful to users of our financial statements.
ENVIRONMENTAL expenditures that relate to current or future revenues are
expensed or capitalized based upon the nature of the expenditures. Expenditures
resulting from an existing condition caused by past operations that do not
contribute to current or future revenue generation are expensed. Environmental
liabilities are recorded independently of any potential claim for recovery.
Receivables are recognized in cases where the realization of reimbursements of
remediation costs are considered probable. Accruals related to environmental
matters are generally determined based on site-specific plans for remediation,
taking into account the prior remediation experience of the Company.
21
INCOME TAXES are computed using the liability method and are provided on all
temporary differences between the financial basis and the tax basis of the
Company's assets and liabilities. For federal income tax reporting, the Company
is included in The Williams Companies, Inc. ("Williams") consolidated tax
return. The provision for income taxes has been charged to Seminole as if
separate income tax returns were filed.
LONG-LIVED ASSETS are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Long-lived assets that are held for disposal are valued at the
lower of carrying amount or fair value less cost to sell.
PROPERTY, PLANT AND EQUIPMENT is recorded at cost and is depreciated using the
straight-line method over the asset's estimated useful life at annual rates
ranging from 2.25% to 25%. Expenditures for maintenance and repairs are charged
to operations in the period incurred. The cost of assets retired or sold,
together with the related accumulated depreciation, is removed from the
accounts, and any gain or loss on disposition is included in income.
REVENUE is based on tariffs charged to customers for pipeline volumes
transported. Shippers are invoiced and the related revenue is recorded as
deliveries are made.
USE OF ESTIMATES AND ASSUMPTIONS by management that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period are required for the preparation of
financial statements in conformity with accounting principles generally accepted
in the United States. Our actual results could differ from these estimates.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement
Obligations" in June 2001. This statement establishes accounting standards for
the recognition and measurement of a liability for an asset retirement
obligation and the associated asset retirement cost. This statement is effective
for our fiscal year beginning January 1, 2003. We are evaluating the provisions
of this statement.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement addresses financial accounting
and reporting for the impairment and/or disposal of long-lived assets. We
adopted this statement effective January 1, 2002 and determined that it did not
have any significant impact on our financial statements as of that date.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statements No.
4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections." The purpose
of this statement is to update, clarify and simplify existing accounting
standards. We adopted this statement effective April 30, 2002 and determined
that it did not have any significant impact on our financial statements as of
that date.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Previous accounting guidance was provided by EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
replaces Issue 94-3. SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. This statement is
effective for our fiscal year beginning January 1, 2003. We are evaluating the
provisions of this statement.
22
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at the periods
indicated:
DECEMBER 31,
---------------------- JUNE 30,
2000 2001 2002
--------- --------- ----------
(UNAUDITED)
Pipelines and related equipment $ 381,010 $ 381,381 $ 384,065
Land 964 964 964
--------- --------- ----------
Total 381,974 382,345 385,029
Less accumulated depreciation (120,616) (130,594) (135,639)
--------- --------- ----------
Property, plant and equipment, net $ 261,358 $ 251,751 $ 249,390
========= ========= ==========
Depreciation expense for the years ended December 31, 1999, 2000 and 2001 was
$10.1 million, $10.2 million and $10.2 million, respectively. Depreciation
expense for each of the six month periods ended June 30, 2001 and 2002 was $5.1
million.
4. LONG-TERM DEBT
In December 1993, we issued $75 million of 6.67% Senior Unsecured Notes in the
private placement market. These notes are payable at $15 million annually on
December 1 from 2001 through 2005. Interest is paid semi-annually on June 1 and
December 1. The Senior Notes agreement contains restrictive covenants, which
limit the payment of advances or dividends to stockholders and restrict
additional borrowing of funds. Such provisions restricted $90 million of
consolidated net worth at December 31, 2001. We were in compliance with these
covenants at December 31, 2001.
5. CAPITAL STRUCTURE
In the event of involuntary liquidation or dissolution the Company, the holders
of the preferred stock are entitled to be paid an amount equal to the
subscription price (stated value of $100 per share) and paid-in capital
(contributions less distributions of paid-in capital) before any holders of
common stock or any other class of stock receive distributions.
Cash dividends paid to stockholders are calculated each quarter based on the
amount of cash flow available. The stockholders receive an amount proportionate
to their ownership percentage.
6. INCOME TAXES
The provision for income taxes are as follows for the periods indicated:
FOR YEARS ENDED DECEMBER 31,
-------------------------------
1999 2000 2001
-------- -------- --------
Current:
Federal $ 10,139 $ 6,473 $ 8,718
State 273 358 384
-------- -------- --------
10,412 6,831 9,102
-------- -------- --------
Deferred:
Federal 1,012 797 334
State 187 (38) 34
-------- -------- --------
Provision for income taxes $ 11,611 $ 7,590 $ 9,470
======== ======== ========
23
Reconciliation from the provision for income taxes at the U.S federal statutory
rate to the effective tax rate for the provision for income taxes are as
follows:
FOR YEARS ENDED DECEMBER 31,
------------------------------
1999 2000 2001
-------- -------- --------
Provision at statutory rate $ 11,048 $ 7,375 $ 9,180
Increases (reductions) in taxes resulting from:
State income taxes (net of federal benefit) 299 208 272
Other 264 7 18
-------- -------- --------
Provision for income taxes $ 11,611 $ 7,590 $ 9,470
======== ======== ========
Significant components of deferred tax liabilities and assets as of December 31,
2000 and 2001 are as follows:
DECEMBER 31,
-----------------------
2000 2001
---------- ----------
Deferred tax liabilities:
Property, plant and equipment $ 61,184 $ 61,729
---------- ----------
Total deferred tax liabilities 61,184 61,729
---------- ----------
Deferred tax assets:
Accrued liabilities 2,184 2,361
Other 142 142
---------- ----------
Total deferred tax assets 2,326 2,503
---------- ----------
Net deferred tax liabilities $ 58,858 $ 59,226
========== ==========
7. RELATED PARTY TRANSACTIONS
Our stockholders or their affiliated companies transport product in our pipeline
system. Operating revenues from affiliates for the last three years were as
follows:
FOR YEARS ENDED DECEMBER 31,
--------------------------------
1999 2000 2001
-------- -------- --------
Revenues from affiliates $ 30,477 $ 32,784 $ 33,006
Revenues from affiliates as
a percentage of total revenues 47% 49% 50%
At December 31, 2000 and 2001, we owed $8.5 million and $14.3 million
respectively, to Mid-America Pipeline Company ("MAPL"), a wholly-owned
subsidiary of WNGL, primarily for its share of the joint tariff on movements
originating in MAPL's pipeline system. MAPL is paid for its share of the joint
tariff following delivery of the NGLs to destinations on our system.
In addition, MAPL employees provide pipeline management services to us pursuant
to a service agreement. MAPL charged us $1.0 million, $1.2 million and $1.2
million for such services during 1999, 2000 and 2001, respectively.
We lease land under an operating lease from an affiliate of AMOCO. Operating
lease expense related to this arrangement was approximately $0.1 million for
each of the years 1999, 2000 and 2001. The fee is adjusted annually in
accordance with the Gross National Product price deflator. The original term of
the lease was fifteen years, beginning August 1, 1981, with a renewal option for
three consecutive five-year periods. The lease was renewed on August 1, 1996 and
August 1, 2001. Future minimum payments for this lease are as follows:
24
2002 $ 140
2003 143
2004 148
2005 151
2006 106
--------
Total minimum obligations $ 688
========
8. MAJOR CUSTOMERS
One non-affiliated shipper accounted for 17%, 15% and 15% of operating revenues
for the years ended 1999, 2000 and 2001, respectively.
9. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
We lease land from an affiliate of AMOCO under an operating lease agreement. See
Note 7 for a description of this arrangement.
LITIGATION
On August 10, 1999, a subcontractor installing utility poles for a local
electric utility struck our pipeline. The accident resulted in the death of one
of the subcontractor's employees, destroyed the subcontractor's equipment and
burned the vegetation on nearby lots. During January 2000, the decedent's family
filed suit against us, the subcontractor and the local electric utility. We
recorded an estimate for the settlement in 2000. Settlement was reached with the
decedent's family during February 2001 for $2.3 million. The payment was made
March 9, 2001. The remaining liability of $79,000 is included in other current
liabilities at December 31, 2001, which is to cover remaining legal expenses.
In addition to the foregoing, various proceedings are pending against the
Company incidental to our operations. Management believes the ultimate
resolution of these matters will not have a material adverse effect upon our
future financial position, results of operations or cash flow requirements.
10. SUPPLEMENTAL CASH FLOWS DISCLOSURE
SIX MONTHS ENDED
FOR YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------- --------------------
1999 2000 2001 2001 2002
-------- -------- -------- -------- --------
(UNAUDITED)
(Increase) decrease in:
Accounts receivable $ (6,760) $ 8,222 $ (6,165) $ (2,526) $ (3,060)
Income taxes due from affiliates -- -- -- -- (1,637)
Prepaid and other current assets 115 (22) 52 (175) (87)
Other assets 32 1 (2) 26 (283)
Increase (decrease) in:
Accounts payable (351) 10,678 (1,975) (4,500) 2,231
2,317 (10,324) 8,577 4,783 (8,523)
Other current liabilities (7,350) 2,068 (2,469) (2,112) 1,057
Other liabilities (33) -- -- -- --
-------- -------- -------- -------- --------
Net effect of changes in operating accounts $(12,030) $ 10,623 $ (1,982) $ (4,504) $(10,302)
======== ======== ======== ======== ========
25
Income taxes paid were $9.3 million, $7.5 million and $10.3 million for the year
ended December 31, 1999, 2000 and 2001, respectively, and $5.2 million for the
six months ended June 30, 2002. No income taxes were paid during the six months
ended June 30, 2001. Interest paid was $5.0 million, $5.1 million and $4.8
million for 1999, 2000 and 2001, respectively, and $2.5 million and $2.1 million
for the six months ended June 30, 2001 and 2002, respectively.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value was determined by us, using
available market information and appropriate valuation methodologies.
Considerable judgment, however, is necessary to interpret market data and
develop the related estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that we could
realize upon disposition of the financial instruments. The use of different
market assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
Cash and cash equivalents. The carrying values reported in the balance sheets
for cash and cash equivalents approximate their fair value.
Long-term debt. Debt consists of a private placement of 6.67% Senior Notes. The
fair value of private debt is valued based on the prices of similar securities
with similar terms and credit ratings.
The carrying amounts and fair values for our financial instruments at December
31, 2000 and 2001 are as follows:
2000 2001
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
Long-term debt $ 75,000 $ 74,634 $ 60,000 $ 60,300
12. SIGNIFICANT CONCENTRATIONS OF RISK
All of our revenues are derived from the transportation of NGLs to various
companies in the NGL industry, primarily located in the United States. Although
this concentration could affect our overall exposure to credit risk since these
customers might be affected by similar economic or other conditions, management
believes that the Company is exposed to minimal credit risk, since the majority
of our business is conducted with major companies within the industry. We
perform periodic credit evaluations of our customers' financial condition and
generally do not require collateral for receivables.
13. SUBSEQUENT EVENTS (UNAUDITED)
On July 31, 2002, WNGL contributed its 80% equity interest in the Company to a
newly-formed affiliate of Williams, E-Oaktree, LLC. This contribution was done
as part of a subsequent transaction which took place between Williams and
Enterprise Products Operating L.P. ("EPOLP") on the same date, whereby EPOLP
purchased a 98% equity interest in E-Oaktree, LLC.
14. RESTATEMENT OF FINANCIAL STATEMENTS
In June 2002, the Company discovered an error in the way their revenue system
was calculating joint tariff revenue. The impact of this error to revenues and
net income was a decrease of $2.9 million and $1.8 million for the year ended
December 31, 2000, respectively, and a decrease of $4.3 million and $2.8 million
for the year ended December 31, 2001, respectively. The correction of these
errors has been reflected in the accompanying restated financial statements.
26
ENTERPRISE PRODUCTS PARTNERS L.P.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION
The following pro forma financial information has been prepared to
assist in your analysis of the financial effects of strategic acquisitions we
have completed since January 2002. These pro forma statements also give effect
to (i) our January 2003 equity offering of 14,662,500 Common Units, (ii) our
January 2003 issuance of $350 million in principal amount of our 6.375% Senior
Notes due 2013 ("Senior Notes C") and (iii) our February 2003 issuance of $500
million in principal amount of our 6.875% Senior Notes due 2033 ("Senior Notes
D").
Unless the context requires otherwise, references to "we," "us," "our,"
"Enterprise" or the "Company" are intended to mean the consolidated business and
operations of Enterprise Products Partners L.P., which includes Enterprise
Products Operating L.P. and its subsidiaries. References to "General Partner"
are intended to mean Enterprise Products GP, LLC.
Since January 2002, we have completed a number of strategic business
acquisitions including:
o controlling interests in the natural gas liquid ("NGL")
pipeline systems owned by Mid-America Pipeline Company, LLC
("Mid-America") and Seminole Pipeline Company ("Seminole")
from affiliates of The Williams Companies Inc. ("Williams") in
July 2002;
o a propylene fractionation business from affiliates of Valero
Energy Corporation and Koch Industries, Inc. (collectively,
"Diamond-Koch") in February 2002; and
o an NGL and petrochemical storage business from Diamond-Koch in
January 2002.
The pro forma consolidated balance sheet presents the financial effects
of our January 2003 equity offering, our January 2003 issuance of Senior Notes C
and our February 2003 issuance of Senior Notes D, assuming they had all occurred
on December 31, 2002. Our December 31, 2002 historical balance sheet already
reflects the previously noted acquisitions. The pro forma statement of
consolidated operations assume the acquisitions, January 2003 equity offering
and January and February 2003 note offerings had occurred as of the beginning of
2002. In general, the pro forma financial information is based on the following
information:
o The audited financial statements of Enterprise.
o The unaudited income statements of the acquired businesses for
the seven month period in 2002 prior to the July 31, 2002
acquisition. The unaudited information was derived from the
records of the previous owners and is believed to be reliable.
o Earnings from the acquired businesses are included in the
financial statements of Enterprise from the date of their
respective acquisition. For example, our historical statement
of consolidated operations for 2002 reflects the earnings of
Mid-America and Seminole since July 31, 2002 (e.g., from
August through December). The earnings of Mid-America and
Seminole for the first seven months of 2002 are reflected in
the columns labeled "Mid-America Historical" and "Seminole
Historical."
The unaudited pro forma financial statements should be read in
conjunction with and are qualified in their entirety by reference to the notes
accompanying such pro forma consolidated financial statements and with the
historical consolidated financial statements and related notes of Enterprise
included in our Annual Report on Form 10-K/A for the year ended December 31,
2002 and with the historical financial statements and related notes of
Mid-America and Seminole included elsewhere in this Current Report on Form 8-K.
The unaudited pro forma information is not necessarily indicative of the
financial results that would have occurred if the acquisitions described herein
had taken place on the dates indicated or if we had issued equity and borrowed
funds on the dates indicated, nor is it indicative of our future consolidated
financial results.
27
ENTERPRISE PRODUCTS PARTNERS L.P.
PRO FORMA STATEMENT OF CONSOLIDATED OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
ADJUSTMENTS
FOR 1ST AS
QUARTER 2003 ADJUSTED
ENTERPRISE MID-AMERICA SEMINOLE ENTERPRISE CAPITAL ENTERPRISE
HISTORICAL HISTORICAL HISTORICAL OTHER ADJUSTMENTS PRO FORMA TRANSACTIONS PRO FORMA
---------- ----------- ---------- -------- ----------- ----------- ------------ ----------
REVENUES
Revenues from
consolidated
operations
Third parties $3,102,066 $ 125,796 $ 41,281 $ 17,434 $ (2,442)(a) $ 3,284,135 $ 3,284,135
Related parties 482,717 -- -- -- -- 482,717 482,717
---------- ---------- -------- -------- ------------ ----------- -----------
Total revenues 3,584,783 125,796 41,281 17,434 (2,442) 3,766,852 3,766,852
---------- ---------- -------- -------- ------------ ----------- -----------
COSTS AND EXPENSES
Operating costs
and expenses
Third parties 2,686,982 48,485 20,672 16,122 (2,442)(a) 2,771,063 2,771,063
126 (b)
1,118 (c)
Related parties 695,579 -- -- -- -- 695,579 695,579
Selling, general and
administrative
Third parties 18,686 16,871 1,004 260 -- 36,821 36,821
Related parties 24,204 -- -- -- -- 24,204 24,204
---------- ---------- -------- -------- ------------ ----------- -----------
Total costs
and expenses 3,425,451 65,356 21,676 16,382 (1,198) 3,527,667 3,527,667
---------- ---------- -------- -------- ------------ ----------- -----------
EQUITY IN INCOME OF
UNCONSOLIDATED
AFFILIATES 35,253 -- -- (109) -- 35,144 35,144
---------- ---------- -------- -------- ------------ ----------- -----------
OPERATING INCOME 194,585 60,440 19,605 943 (1,244) 274,329 274,329
---------- ---------- -------- -------- ------------ ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (101,580) (5,407) (2,340) -- 4,777 (d) (135,646) $ 52,091 (e) (140,905)
(30,596)(e) (57,350)(g)
(500)(f)
Interest income from
related parties 139 -- -- -- -- 139 -- 139
Dividend income from
unconsolidated
affiliates 4,737 -- -- -- -- 4,737 -- 4,737
Interest income - other 2,313 -- -- -- -- 2,313 -- 2,313
Other, net (113) (743) (7) -- -- (863) -- (863)
---------- ---------- -------- -------- ------------ ----------- --------- -----------
Other income
(expense) (94,504) (6,150) (2,347) -- (26,319) (129,320) (5,259) (134,579)
---------- ---------- -------- -------- ------------ ----------- --------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES AND
MINORITY INTEREST 100,081 54,290 17,258 943 (27,563) 145,009 (5,259) 139,750
PROVISION FOR INCOME
TAXES (1,634) (20,050) (6,231) -- 20,050(h) (7,865) -- (7,865)
---------- ---------- -------- -------- ------------ ----------- --------- -----------
INCOME BEFORE MINORITY
INTEREST 98,447 34,240 11,027 943 (7,513) 137,144 (5,259) 131,885
MINORITY INTEREST (2,947) -- -- -- (3,920)(i) (6,867) 53(i) (6,814)
---------- ---------- -------- -------- ------------ ----------- --------- -----------
NET INCOME $ 95,500 $ 34,240 $ 11,027 $ 943 $ (11,433) $ 130,277 $ (5,206) $ 125,071
========== ========== ======== ======== ============ =========== ========= ===========
ALLOCATION OF NET
INCOME TO:
Limited partners $ 84,837 $ 34,429(j) $ 119,266 $ (5,154)(j) $ 114,112
========== ============ =========== ========= ===========
General partner $ 10,663 $ 348(j) $ 11,011 $ (52)(j) $ 10,959
========== ============ =========== ========= ===========
BASIC EARNINGS
PER UNIT:
Number of Units
used in computing
basic earnings
per Unit 155,454 7,517(k) 162,971 14,663(k) 177,634
========== =========== ===========
Income before
minority
interest $ 0.56 $ 0.77 $ 0.68
========== =========== ===========
Net income
per Unit $ 0.55 $ 0.73 $ 0.64
========== =========== ===========
DILUTED EARNINGS
PER UNIT:
Number of Units
used in computing
diluted earnings
per Unit 176,490 7,517(k) 184,007 14,663(k) 198,670
========== =========== ===========
Income before
minority
interest $ 0.50 $ 0.69 $ 0.61
========== =========== ===========
Net income
per Unit $ 0.48 $ 0.65 $ 0.57
========== =========== ===========
The accompanying notes are an integral part of these unaudited pro
forma condensed financial statements.
28
ENTERPRISE PRODUCTS PARTNERS L.P.
PRO FORMA CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 2002
(DOLLARS IN THOUSANDS, UNAUDITED)
ADJUSTMENTS FOR AS ADJUSTED
ENTERPRISE 1ST QUARTER 2003 ENTERPRISE
ASSETS HISTORICAL CAPITAL TRANSACTIONS PRO FORMA
-------------- --------------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 22,568 $ 252,815 (l) $ 34,550
5,275 (l)
(252,815)(l)
836,135 (m)
(828,643)(m)
(785)(n)
Accounts and notes receivable - trade, net 399,187 399,187
Accounts receivable - affiliates 228 228
Inventories 167,369 167,369
Prepaid and other current assets 48,216 469 (m) 37,383
(11,302)(o)
-------------- --------------------- -------------
Total current assets 637,568 1,149 638,717
PROPERTY, PLANT AND EQUIPMENT, NET 2,810,839 2,810,839
INVESTMENTS IN AND ADVANCES TO
UNCONSOLIDATED AFFILIATES 396,993 396,993
INTANGIBLE ASSETS 277,661 277,661
GOODWILL 81,547 81,547
DEFERRED TAX ASSET 15,846 15,846
OTHER ASSETS 9,818 7,606 (m) 17,424
-------------- --------------------- -------------
TOTAL $ 4,230,272 $ 8,755 $ 4,239,027
============== ===================== =============
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Current maturities of debt $ 15,000 $ 15,000
Accounts payable - trade 67,283 67,283
Accounts payable - affiliates 40,772 40,772
Accrued gas payables 489,562 489,562
Accrued expenses 35,760 35,760
Accrued interest 30,338 (243)(m) 30,095
Other current liabilities 42,641 42,641
-------------- --------------------- -------------
Total current liabilities 721,356 (243) 721,113
LONG-TERM DEBT 2,231,463 (252,815)(l) 1,993,673
350,000 (m)
494,210 (m)
(828,400)(m)
(785)(n)
OTHER LONG-TERM LIABILITIES 7,666 7,666
MINORITY INTEREST 68,883 2,495 (l) 71,378
PARTNERS' EQUITY
Common Units 949,835 252,927 (l) 1,193,576
(9,186)(o)
Subordinated Units 116,288 (1,891)(o) 114,397
Special Units 143,926 143,926
Treasury Units (17,808) (17,808)
General Partner 12,223 2,555 (l) 14,666
(112) (o)
Accumulated Other Comprehensive Loss (3,560) (3,560)
-------------- --------------------- -------------
Total Partners' Equity 1,200,904 244,293 1,445,197
-------------- --------------------- -------------
TOTAL $ 4,230,272 $ 8,755 $ 4,239,027
============== ===================== =============
The accompanying notes are an integral part of these unaudited pro forma
condensed financial statements.
29
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
These unaudited pro forma consolidated financial statements and
underlying pro forma adjustments are based upon currently available information
and certain estimates and assumptions made by us; therefore, actual results will
differ from pro forma results. However, we believe the assumptions provide a
reasonable basis for presenting the significant effects of the transactions
noted herein. We believe the pro adjustments give appropriate effect to those
assumptions and are properly applied in the pro forma financial information.
Our December 31, 2002 historical balance sheet reflects all
acquisitions made through that date, including the $1.2 billion Mid-America and
Seminole acquisitions completed on July 31, 2002. In our pro forma statement of
consolidated operations, the column labeled "Other" represents the historical
financial amounts of the propylene fractionation business we acquired from
Diamond-Koch in the first quarter of 2002 through its respective date of
acquisition. The pro forma adjustments we made to our historical financial
statements are described as follows:
(a) Reflects the elimination of material intercompany revenues and expenses
between acquired businesses and Enterprise as appropriate in
consolidation.
(b) As a result of the propylene fractionation business we purchased from
Diamond-Koch during the first quarter of 2002, we acquired certain
contract-based intangible assets that are subject to amortization. On a
pro forma basis, amortization expense associated with these intangible
assets increased by $0.1 million for the year ended December 31, 2002.
(c) Reflects the pro forma depreciation expense adjustment for the
Mid-America and Seminole pipeline assets. For purposes of calculating
pro forma depreciation expense, we have applied the straight-line
method using an estimated remaining useful life of the Mid-America and
Seminole assets of 35 years to our new basis in these assets of
approximately $1.3 billion. After adjusting for historical depreciation
recorded on Mid-America and Seminole during the first seven months of
2002, pro forma depreciation expense increased $1.1 million for the
year ended December 31, 2002.
(d) Reflects the removal of interest expense associated with Mid-America's
$90.0 million in private placement debt, which was extinguished prior
to our purchase of the Mid-America interest. The pro forma entry gives
effect to the removal of interest expense associated with this debt of
$4.8 million in 2002.
(e) To fund the Mid-America and Seminole acquisitions on July 31, 2002, we
entered into a $1.2 billion 364-Day Term Loan and accessed $10 million
from our 364-Day Revolving Credit Facility. Assuming that this debt was
outstanding for the full year of 2002, pro forma interest expense would
increase by $30.6 million, which includes related loan cost
amortization. If the underlying variable interest rate used in the pro
forma calculation were 0.125% higher, pro forma interest expense for
2002 would increase by approximately $0.7 million.
We used proceeds from our January 2003 equity offering, our January
2003 issuance of Senior Notes C and our February 2003 issuance of
Senior Notes D to completely repay these initial borrowings by
mid-February 2003. The pro forma adjustment for these first quarter of
2003 capital transactions reflects the removal of $52.1 million of
variable-rate interest and related loan cost amortization associated
with the debt we incurred to initially finance the Mid-America and
Seminole acquisitions. This pro forma adjustment reverses both the
historical interest expense we recorded and the $30.6 million pro forma
adjustment noted above. This debt was partially refinanced using
fixed-rate borrowings (see "g" below).
(f) We financed our purchase of Diamond-Koch's propylene fractionation
business in February 2002 with approximately $239.0 million of
variable-rate debt. The pro forma entry gives effect to an increase in
interest expense associated with this debt of $0.5 million for the year
ended December 31, 2002. If the underlying variable-rate interest used
in the pro forma calculation were to increase by 0.125%, pro forma
interest expense would increase by $0.1 million for the year ended
December 31, 2002.
(g) Reflects the $57.4 million increase in annual interest expense
resulting from our issuance of Senior Notes C in January 2003 and
Senior Notes D in February 2003. The pro forma increase in annual
interest expense resulting from our issuance of Senior Notes C ($350
million in principal amount at a fixed-rate of 6.375%) is $22.6
million, which includes bond issue cost amortization of $0.3 million.
The pro forma increase in annual interest expense resulting from our
issuance of Senior Notes D ($500 million in principal amount at a
fixed-rate of 6.875%) is $34.8 million, which includes bond issue cost
and discount amortization of $0.4 million.
(h) In connection with the Mid-America acquisition, immediately prior to
the acquisition's effective date, Williams converted Mid-America from a
corporation to a limited liability company. The pro forma adjustment
reflects this change in Mid-America's tax structure by eliminating
historical income tax-related expense amounts. The impact on
Mid-America's pro forma earnings was the elimination of $20.1 million
in income tax expense for the year ended December 31, 2002.
(i) Reflects the allocation of pro forma earnings to minority interest
holders. Williams has a 2% interest in Mid-America and Seminole. The
other owners of Seminole hold a 20% minority interest. Finally, our
General Partner holds an approximate 1% minority interest in the
earnings of our Operating Partnership.
30
(j) Reflects the adjustments necessary to allocate pro forma earnings
between our Limited Partners and General Partner.
(k) Since closing the Mid-America and Seminole acquisitions in July 2002,
we have completed two Common Unit offerings, the proceeds of which were
primarily used to reduce the debt financing of the acquisition. We
completed the first offering in October 2002 when we sold 9,800,000
Common Units. We completed the second offering in January 2003 when we
sold 14,662,500 Common Units. The pro forma adjustment for 2002
reflects the increase in weighted-average number of Common Units
outstanding had both offerings occurred on January 1, 2002.
(l) Reflects the sale of 14,662,500 Common Units at an offering price of
$18.01 per Unit on January 15, 2003. Net proceeds from this sale of
Common Units were approximately $252.8 million after deducting
applicable underwriting discounts, commissions and estimated offering
expenses of $11.1 million. In connection with this offering, our
General Partner made a net capital contribution of $5.3 million to
maintain its approximate 2% combined General Partner interest in the
Company after deducting its share of the underwriting discounts,
commissions and offering expenses. The combined proceeds from this
equity offering were used to partially repay the principal balance
outstanding under the 364-Day Term Loan that we incurred to finance the
Mid-America and Seminole acquisitions. The remaining proceeds were used
for working capital purposes.
(m) Reflects the issuance of our $350 million Senior Notes C in January
2003 and $500 million Senior Notes D in February 2003. The proceeds and
use of proceeds of each note offering are as follows:
Use of Proceeds
--------------------------------------------------------
Repay Repay 364-Day Payment For other
Principal Offering Net 364-Day Revolving of working
Obligation Discount Expenses Proceeds Term Loan Credit facility interest purposes
------------ ---------- ------------ ------------ ------------- --------------- ---------- ----------
Senior Notes C $ 350,000 $ $ (3,000) $ 347,000 $ (347,000)
Senior Notes D 500,000 $ (5,790) (5,075) 489,135 (421,400) $ (60,000) $ (243) $ (7,492)
------------ ---------- ------------ ------------ ------------- -------------- ---------- ----------
Total $ 850,000 $ (5,790) $ (8,075) $ 836,135 $ (768,400) $ (60,000) $ (243) $ (7,492)
============ ========== ============ ============ ============= ============== ========== ==========
(n) Reflects the use of cash in February 2003 to repay the remaining
balance under the 364-Day Term Loan after the application of proceeds
from our January 2003 equity offering, our January 2003 Senior Notes C
offering and February 2003 Senior Notes D offering.
(o) Reflects the removal of $11.3 million of prepaid loan issuance costs
associated with the 364-Day Term Loan resulting from the early
repayment of this debt in February 2003.
31
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
*10.1 Sixth Amendment to Conveyance of Gas Processing Rights, dated as of
March 1, 2003 among Enterprise Gas Processing, LLC, Shell Oil Company,
Shell Exploration & Production Company, Shell Offshore Inc., Shell
Consolidated Energy Resources Inc., Shell Land & Energy Company, Shell
Frontier Oil & Gas Inc. and Shell Gulf of Mexico Inc.
10.2 Letter Agreement dated April 9, 2003, relating to Sixth Amendment to
Conveyance of Gas Processing Rights filed as Exhibit 10.1 to this
report.
23.1 Consent of Ernst & Young LLP.
---------------
*Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.