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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 1-10403
TEPPCO PARTNERS, L.P.
(Exact name of Registrant as specified in its charter)
DELAWARE 76-0291058
(State Of Incorporation or Organization) (I.R.S. Employer
Identification Number)
2929 ALLEN PARKWAY
P.O. BOX 2521
HOUSTON, TEXAS 77252-2521
(Address of principal executive offices, including zip code)
(713) 759-3636
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
Limited Partner Units representing Limited New York Stock Exchange
Partner Interests
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At March 6, 2000 the aggregate market value of the registrant's
Limited Partner Units held by non-affiliates was $611,739,230, which was
computed using the average of the high and low sales prices of the Limited
Partner Units on March 6, 2000.
Limited Partner Units outstanding as of March 6, 2000: 29,000,000.
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TABLE OF CONTENTS
PART I
ITEMS 1. Business and Properties.......................................................................1
AND 2.
ITEM 3. Legal Proceedings............................................................................12
ITEM 4. Submission of Matters to a Vote of Security Holders..........................................13
PART II
ITEM 5. Market for Registrant's Units and Related Unitholder Matters.................................13
ITEM 6. Selected Financial Data......................................................................15
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........16
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risks..................................26
ITEM 8. Financial Statements and Supplementary Data..................................................27
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........27
PART III
ITEM 10. Directors and Executive Officers of the Registrant...........................................27
ITEM 11. Executive Compensation.......................................................................29
ITEM 12. Security Ownership of Certain Beneficial Owners and Management...............................35
ITEM 13. Certain Relationships and Related Transactions...............................................35
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..............................36
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ITEMS 1 AND 2. BUSINESS AND PROPERTIES
GENERAL
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 "Products OLP") and TCTM,
L.P. (the "Crude Oil OLP"). Collectively the Products OLP and the Crude Oil OLP
are referred to as "the Operating Partnerships." The Partnership owns a 99%
interest as the sole limited partner interest in both the Products OLP and the
Crude Oil OLP. Texas Eastern Products Pipeline Company (the "Company" or
"General Partner") owns a 1% general partner interest in the Partnership and 1%
general partner interest in each Operating Partnership. The General Partner
performs all management and operating functions required for the Partnership and
the Operating Partnerships.
The Partnership operates in two industry segments - refined products
and liquefied petroleum gases ("LPGs") transportation; and crude oil and natural
gas liquids ("NGLs") transportation and marketing. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 15 of
the Notes to Consolidated Financial Statements contained elsewhere herein for
additional segment information.
In June 1997, Duke Energy Corporation ("Duke Energy") was formed
through a merger between PanEnergy Corp ("PanEnergy") and Duke Power Company.
The Company, previously a wholly-owned subsidiary of PanEnergy, became an
indirect wholly-owned subsidiary of Duke Energy on the date of the merger.
At December 31, 1999, the Partnership had outstanding 29,000,000
Limited Partnership Units and 3,916,547 Class B Limited Partnership 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 29,000,000 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 Partnership 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, 1999. Collectively, the Limited Partner Units and Class
B Units are referred to as "Units." The acquisition of assets was accounted for
under the purchase method of accounting. Accordingly, the results of the
acquisition are included in the consolidated statements of income for periods
from November 1, 1998.
REFINED PRODUCTS AND LPGS TRANSPORTATION
Operations
The operations of the refined products and LPGs transportation segment
are conducted through the Products OLP. The Products OLP conducts business and
owns properties located in 13 states. Operations 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 Products OLP is one of the largest pipeline common carriers of
refined petroleum products and LPGs in the United States. The Products OLP owns
and operates an approximate 4,300-mile pipeline system (together with the
receiving, storage and terminaling facilities mentioned below, the "Pipeline
System" or "Pipeline" or "System") extending from southeast Texas through the
central and midwestern United States to the northeastern United States. The
Pipeline System includes delivery terminals for outloading product to other
pipelines, tank trucks, rail cars or barges, as well as substantial storage
capacity at Mont Belvieu, Texas, the largest LPGs storage complex in the United
States, and at other locations. The Products OLP also owns two marine receiving
terminals,
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one near Beaumont, Texas, and the other at Providence, Rhode Island. The
Providence terminal is not physically connected to the Pipeline. As an
interstate common carrier, the Pipeline System offers interstate transportation
services, pursuant to tariffs filed with the Federal Energy Regulatory
Commission ("FERC"), to any shipper of refined petroleum products and LPGs who
requests such services, provided that the products tendered for transportation
satisfy the conditions and specifications contained in the applicable tariff. In
addition to the revenues received by the Pipeline System from its interstate
tariffs, it also receives revenues from the shuttling of LPGs between refinery
and petrochemical facilities on the upper Texas Gulf Coast and ancillary
transportation, storage and marketing services at key points along the System.
Substantially all the petroleum products transported and stored in the Pipeline
System are owned by the Partnership's customers. Petroleum products are received
at terminals located principally on the southern end of the Pipeline System,
stored, scheduled into the Pipeline in accordance with customer nominations and
shipped to delivery terminals for ultimate delivery to the final distributor
(e.g., gas stations and retail propane distribution centers) or to other
pipelines. Pipelines are generally the lowest cost method for intermediate and
long-haul overland transportation of petroleum products. The Pipeline System is
the only pipeline that transports LPGs to the Northeast.
The Products OLP's business depends in large part on (i) the level of
demand for refined petroleum products and LPGs in the geographic locations
served by it and (ii) the ability and willingness of customers having access to
the Pipeline System to supply such demand by deliveries through the System. The
Partnership cannot predict the impact of future fuel conservation measures,
alternate fuel requirements, governmental regulation, technological advances in
fuel economy and energy-generation devices, all of which could reduce the demand
for refined petroleum products and LPGs in the areas served by the Partnership.
Products are transported in liquid form from the upper Texas Gulf Coast
through two parallel underground pipelines that extend to Seymour, Indiana. From
Seymour, segments of the Pipeline System extend to the Chicago, Illinois; Lima,
Ohio; Selkirk, New York; and Philadelphia, Pennsylvania, areas. The Pipeline
System east of Todhunter, Ohio, is dedicated solely to LPGs transportation and
storage services.
The Pipeline System includes 30 storage facilities with an aggregate
storage capacity of 13 million barrels of refined petroleum products and 38
million barrels of LPGs, including storage capacity leased to outside parties.
The Pipeline System makes deliveries to customers at 53 locations including 18
Partnership owned truck racks, rail car facilities and marine facilities.
Deliveries to other pipelines occur at various facilities owned by the
Partnership or by third parties.
Pipeline System
The Pipeline System is comprised of a 20-inch diameter line extending
in a generally northeasterly direction from Baytown, Texas (located
approximately 30 miles east of Houston), to a point in southwest Ohio near
Lebanon and Todhunter. A second line, which also originates at Baytown, is 16
inches in diameter until it reaches Beaumont, Texas, at which point it reduces
to a 14-inch diameter line. This second line extends along the same path as the
20-inch diameter line to the Pipeline System's terminal in El Dorado, Arkansas,
before continuing as a 16-inch diameter line to Seymour, Indiana. The Pipeline
System also has smaller diameter lines that extend laterally from El Dorado to
Helena and Arkansas City, Arkansas, from Tyler, Texas, to El Dorado and from
McRae, Arkansas, to West Memphis, Arkansas. The lines from El Dorado to Helena
and Arkansas City have 10-inch diameters. The line from Tyler to El Dorado
varies in diameter from 8 inches to 10 inches. The line from McRae to West
Memphis has a 12-inch diameter. The Pipeline System also includes a 14-inch
diameter line from Seymour, Indiana, to Chicago, Illinois, and a 10-inch
diameter line running from Lebanon to Lima, Ohio. This 10-inch diameter pipeline
connects to the Buckeye Pipe Line Company system that serves, among others,
markets in Michigan and eastern Ohio. Also, the Pipeline System has a 6-inch
diameter pipeline connection to the Greater Cincinnati/Northern Kentucky
International Airport and a 8-inch diameter pipeline connection to the George
Bush Intercontinental Airport, Houston. In addition, there are numerous smaller
diameter lines associated with the gathering and distribution system.
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The Pipeline System continues eastward from Todhunter, Ohio, to
Greensburg, Pennsylvania, at which point it branches into two segments, one
ending in Selkirk, New York (near Albany), and the other ending at Marcus Hook,
Pennsylvania (near Philadelphia). The Pipeline east of Todhunter and ending in
Selkirk is an 8-inch diameter line, whereas the line starting at Greensburg and
ending at Marcus Hook varies in diameter from 6 inches to 8 inches. East of
Todhunter, Ohio, the Partnership transports only LPGs through the Pipeline.
The Pipeline System has been constructed and is in general compliance
with applicable federal, state and local laws and regulations, and accepted
industry standards and practices. The Partnership performs regular maintenance
on all the facilities of the Pipeline System and has an ongoing process of
inspecting segments of the Pipeline System and making repairs and replacements
when necessary or appropriate. In addition, the Partnership conducts periodic
air patrols of the Pipeline System to monitor pipeline integrity and third-party
right of way encroachments.
Major Business Sector Markets
The Pipeline System's major operations are the transportation, storage
and terminaling of refined petroleum products and LPGs along its mainline
system, and the storage and short-haul transportation of LPGs associated with
its Mont Belvieu operations. Product deliveries, in millions of barrels (MMBbls)
on a regional basis, over the last three years were as follows:
PRODUCT DELIVERIES (MMBBLS)
YEARS ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
--------- --------- ---------
Refined Products Transportation:
Central (1).................................................. 67.7 71.5 69.4
Midwest (2).................................................. 37.9 34.8 29.9
Ohio and Kentucky............................................ 27.0 24.2 20.7
--------- --------- ---------
Subtotal................................................. 132.6 130.5 120.0
--------- --------- ---------
LPGs Mainline Transportation:
Central, Midwest and Kentucky (1)(2)......................... 22.9 18.5 23.8
Ohio and Northeast (3)....................................... 14.7 13.5 18.2
--------- --------- ---------
Subtotal................................................. 37.6 32.0 42.0
--------- --------- ---------
Mont Belvieu Operations:
LPGs......................................................... 28.5 25.1 27.8
--------- --------- ---------
Total Product Deliveries................................. 198.7 187.6 189.8
========= ========= =========
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(1) Arkansas, Louisiana, Missouri and Texas.
(2) Illinois and Indiana.
(3) New York and Pennsylvania.
The mix of products delivered varies seasonally, with gasoline demand
generally stronger in the spring and summer months and LPGs demand generally
stronger in the fall and winter months. Weather and economic conditions in the
geographic areas served by the Pipeline System also affect the demand for and
the mix of the products delivered.
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Refined products and LPGs deliveries over the last three years were as
follows:
PRODUCT DELIVERIES (MMBbls)
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
Refined Products Transportation:
Gasoline....................... 71.6 74.0 66.8
Jet Fuels...................... 26.9 23.8 22.4
Middle Distillates (1)......... 28.4 26.1 24.0
MTBE/Toluene................... 5.7 6.6 6.8
---------- ---------- ----------
Subtotal................... 132.6 130.5 120.0
---------- ---------- ----------
LPGs Mainline Transportation:
Propane........................ 30.8 25.5 34.7
Butanes........................ 6.8 6.5 7.3
---------- ---------- ----------
Subtotal................... 37.6 32.0 42.0
---------- ---------- ----------
Mont Belvieu Operations:
LPGs........................... 28.5 25.1 27.8
---------- ---------- ----------
Total Product Deliveries... 198.7 187.6 189.8
========== ========== ==========
(1) Primarily diesel fuel, heating oil and other middle distillates.
Refined Petroleum Products Transportation
The Pipeline System transports refined petroleum products from the
upper Texas Gulf Coast, eastern Texas and southern Arkansas to the Central and
Midwest regions of the United States with deliveries in Texas, Louisiana,
Arkansas, Missouri, Illinois, Kentucky, Indiana and Ohio. At these points,
refined petroleum products are delivered to Partnership-owned terminals,
connecting pipelines and customer-owned terminals. The volume of refined
petroleum products transported by the Pipeline System is directly affected by
the demand for such products in the geographic regions the System serves. Such
market demand varies based upon the different end uses to which the refined
products deliveries are applied. Demand for gasoline, which accounts for a
substantial portion of the volume of refined products transported through the
Pipeline System, depends upon price, prevailing economic conditions and
demographic changes in the markets served. Demand for refined products used in
agricultural operations is affected by weather conditions, government policy and
crop prices. Demand for jet fuel depends upon prevailing economic conditions and
military usage.
Effective January 1, 1996, the Clean Air Act Amendments of 1990
mandated the use of reformulated gasolines in nine metropolitan areas of the
United States, including the Houston and Chicago areas served by the System. A
portion of the reformulated and oxygenated gasolines includes methyl tertiary
butyl ether ("MTBE") as a major blending component. Effective July 1, 1999, the
Products OLP canceled its tariff for deliveries of MTBE into the Chicago market
area due to reduced demand for transportation of MTBE into such area. The MTBE
tariffs were canceled with the consent of MTBE shippers and resulted in
increased pipeline capacity and tankage available for other products. The
Partnership continues to transport MTBE to its marine terminal near Beaumont,
Texas.
LPGs Mainline Transportation
The Pipeline System transports LPGs from the upper Texas Gulf Coast to
the Central, Midwest and Northeast regions of the United States. The Pipeline
System east of Todhunter, Ohio, is devoted solely to the transportation of LPGs.
Since LPGs demand is generally stronger in the winter months, the Pipeline
System often operates at or near capacity during such time. Propane deliveries
are generally sensitive to the weather and meaningful year-to-year variations
have occurred and will likely continue to occur.
The Products OLP's ability to serve markets in the Northeast is
enhanced by its propane import terminal at Providence, Rhode Island. This
facility includes a 400,000-barrel refrigerated storage tank along with ship
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unloading and truck loading facilities. Although the terminal is operated by the
Products OLP, the utilization of the terminal is committed by contract to a
major propane marketer through May 2001.
Mont Belvieu LPGs Storage and Pipeline Shuttle
A key aspect of the Pipeline System's LPGs business is its storage and
pipeline asset base in the Mont Belvieu, Texas, complex serving the
fractionation, refining and petrochemical industries. The complex is the largest
of its kind in the United States and provides substantial capacity and
flexibility in the transportation, terminaling and storage of natural gas
liquids, LPGs, petrochemicals and olefins.
The Products OLP has approximately 33 million barrels of LPGs storage
capacity, including storage capacity leased to outside parties, at the Mont
Belvieu complex. The Products OLP's Mont Belvieu short-haul transportation
shuttle system, consisting of a complex system of pipelines and interconnects,
ties Mont Belvieu to virtually every refinery and petrochemical facility on the
upper Texas Gulf Coast.
Product Sales and Other
The Products OLP also derives revenue from the sale of product
inventory, terminaling activities and other ancillary services associated with
the transportation and storage of refined petroleum products and LPGs. Since
March 31, 1998, operations also include fractionation of NGLs.
Customers
The Pipeline System's customers for the transportation of refined
petroleum products include major integrated oil companies, independent oil
companies and wholesalers. End markets for these deliveries are primarily (i)
retail service stations, (ii) truck stops, (iii) agricultural enterprises, (iv)
refineries, and (v) military and commercial jet fuel users.
Propane shippers include wholesalers and retailers who, in turn, sell
to commercial, industrial, agricultural and residential heating customers, as
well as utilities who use propane as a fuel source. Refineries constitute the
Partnership's major customers for butane and isobutane, which are used as a
blend stock for gasolines and as a feed stock for alkylation units,
respectively.
At December 31, 1999, the Products OLP had approximately 140 customers.
Transportation revenues (and percentage of total revenues) attributable to the
top 10 shippers were $105 million (46%), $90 million (42%), and $85 million
(38%) for the years ended December 31, 1999, 1998 and 1997, respectively. During
1999 and 1998, billings to Marathon Ashland, LLC, a major integrated oil
company, accounted for approximately 10% of the Products OLP's revenues. During
1997, no single customer accounted for 10% or greater of the Products OLP's
total revenues. Loss of a business relationship with a significant customer
could have an adverse affect on the consolidated financial position, results of
operations and liquidity of the Partnership.
Competition
The Pipeline System conducts operations without the benefit of
exclusive franchises from government entities. Interstate common carrier
transportation services are provided through the System pursuant to tariffs
filed with the FERC.
Because pipelines are generally the lowest cost method for intermediate
and long-haul overland movement of refined petroleum products and LPGs, the
Pipeline System's most significant competitors (other than indigenous production
in its markets) are pipelines in the areas where the Pipeline System delivers
products. Competition among common carrier pipelines is based primarily on
transportation charges, quality of customer service and
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proximity to end users. The General Partner believes the Products OLP is
competitive with other pipelines serving the same markets; however, comparison
of different pipelines is difficult due to varying product mix and operations.
Trucks, barges and railroads competitively deliver products in some of
the areas served by the Pipeline System. Trucking costs, however, render that
mode of transportation less competitive for longer hauls or larger volumes.
Barge fees for the transportation of refined products are generally lower than
the Partnership's tariffs. The Partnership faces competition from rail movements
of LPGs in several geographic areas. The most significant area is the Northeast,
where rail movements of propane from Sarnia, Canada, compete with propane moved
on the Pipeline System.
CRUDE OIL AND NGLS TRANSPORTATION AND MARKETING
Operations
The Crude Oil OLP, through its wholly-owned subsidiary TEPPCO Crude
Oil, LLC ("TCO"), gathers, stores, transports and markets crude oil, NGLs, lube
oils and specialty chemicals, principally in Oklahoma, Texas and the Rocky
Mountain region. The assets of TCO were acquired by the Partnership from a
subsidiary of Duke Energy, on November 1, 1998.
TCO generally utilizes its asset base to aggregate crude oil and
provide transportation and specialized services to its regional customers. TCO
generally purchases crude oil at prevailing prices from producers at the
wellhead, aggregates such crude oil into its equity owned pipelines or third
party owned pipelines utilizing its truck fleet, and transports the crude oil
for ultimate sale to or exchange with its customers. TCO's margins from
its gathering, transportation and marketing operations are generated by the
difference between the price of crude oil at the point of purchase and the price
of crude oil at the point of sale, minus the associated costs of aggregation and
transportation.
Generally, as the Crude Oil OLP purchases crude oil, it simultaneously
establishes a margin by selling crude oil for physical delivery to third party
users or by entering into a future delivery obligation with respect to futures
contracts on the New York Mercantile Exchange. The Partnership seeks to maintain
a balanced position until it makes physical delivery of the crude oil, thereby
minimizing or eliminating exposure to price fluctuations occurring after the
initial purchase. However, certain basis risks (the risk that price
relationships between delivery points, classes of products or delivery periods
will change) cannot be completely hedged or eliminated. It is the Partnership's
policy not to acquire crude oil, futures contracts or other derivative products
for the purpose of speculating on price changes. Risk management policies have
been established by the Risk Management Committee to monitor and control these
market risks. The Risk Management Committee is comprised of senior executives of
the Partnership. Market risks associated with commodity derivatives were not
material at December 31, 1999.
Volume information for the year ended December 31, 1999 and the two
month period ended December 31, 1998 is presented below:
TWO MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
-------------- ---------------
Barrels per day:
Crude oil transportation......... 91,143 90,963
Crude oil marketing.............. 263,703 278,176
NGL transportation............... 12,548 11,919
Lubricants and chemicals (total gallons):... 8,891,056 1,140,000
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Properties
The Crude Oil OLP is based in Oklahoma City. It operates crude oil
gathering and trunkline pipelines principally in Oklahoma and Texas, and two NGL
trunkline pipelines in South Texas. The Crude Oil OLP's crude oil pipelines
include two major systems and various smaller systems. The Red River System,
located on the Texas-Oklahoma border, is the larger system, with 975 miles of
pipeline and 780,000 barrels of storage. The majority of this pipeline's crude
oil is delivered to Cushing, Oklahoma via connecting pipelines or to two local
refineries. The South Texas System, located west of Houston, consists of 670
miles of pipeline and 630,000 barrels of storage. The majority of the crude oil
on this system is delivered on a tariff basis to Houston area refineries. Other
crude oil assets, located primarily in Texas and Louisiana, consist of 310 miles
of pipeline and 240,000 barrels of storage.
The NGL pipelines are located along the Texas Gulf Coast. The Dean NGL
Pipeline consists of 338 miles of pipeline originating in South Texas and
terminating at Mont Belvieu, Texas, and has a capacity of 20,000 barrels per
day. The Dean NGL Pipeline is currently supported by a 17,000 barrel per day
volume commitment through 2002. The Wilcox NGL Pipeline is 90 miles long, has a
capacity of 5,000 barrels per day and currently transports NGLs for Duke Energy
Field Services ("DEFS") from two of their natural gas processing plants. The
Wilcox NGL Pipeline is currently supported by demand fees that are paid by DEFS
through 2005.
Through its wholly-owned subsidiary Lubrication Services, LLC ("LSI"),
the Crude Oil OLP distributes lube oils and specialty chemicals to natural gas
pipelines, gas processors, and industrial and commercial accounts. LSI's
distribution networks are located in Colorado, Oklahoma, Southwest Kansas, East
Texas, and Northwest Louisiana.
Customers
The Crude Oil OLP purchases crude oil primarily from major integrated
oil companies and independent oil producers. Crude oil sales are primarily to
major integrated oil companies and independent refiners. The loss of any single
customer would not have a material adverse effect on the consolidated financial
position, results of operations and liquidity of the Partnership.
Competition
The Crude Oil OLP's most significant competitors in its pipeline
operations are primarily common carrier and proprietary pipelines owned and
operated by major oil companies, large independent pipeline companies and other
companies in the areas where its pipeline systems deliver crude oil and NGLs.
Competition among common carrier pipelines is based primarily on posted tariffs,
quality of customer service, knowledge of products and markets, and proximity to
refineries and connecting pipelines. The crude oil gathering and marketing
business is characterized by thin margins and intense competition for supplies
of lease crude oil. A decline in domestic crude oil production has intensified
competition among gatherers and marketers. Within the past few years, the number
of companies involved in the gathering of crude oil in the United States has
decreased as a result of business consolidations.
Credit
As crude oil or lube oils are marketed, the Partnership must determine
the amount, if any, of credit to be extended to any given customer. Due to the
nature of individual sales transactions, risk of non-payment and non-performance
by customers is a major consideration in the Crude Oil OLP's business. The Crude
Oil OLP manages its exposure to credit risk through credit analysis, credit
approvals, credit limits and monitoring procedures. The Crude Oil OLP utilizes
letters of credit and guarantees for certain of its receivables.
The Crude Oil OLP's credit standing is a major consideration for
parties with whom the Crude Oil OLP does business. In connection with the Crude
Oil OLP's acquisition of this business, Duke Capital, an affiliate of
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Duke Energy, agreed to provide up to $100 million of guarantee credit to the
Crude Oil OLP through November 2001.
TITLE TO PROPERTIES
The Partnership believes it has satisfactory title to all of its
assets. Such properties are subject to liabilities in certain cases, such as
customary interests generally contracted in connection with acquisition of the
properties, liens for taxes not yet due, easements, restrictions, and other
minor encumbrances. The Partnership believes none of these liabilities
materially affects the value of such properties or the Partnership's interest
therein or will materially interfere with their use in the operation of the
Partnership's business.
CAPITAL EXPENDITURES
Capital expenditures by the Partnership totaled $77.4 million for the
year ended December 31, 1999. This amount includes capitalized interest of $2.1
million. Approximately $43.8 million of spending was used for on-going
construction of three new pipelines between the Partnership's terminal in Mont
Belvieu, Texas and Port Arthur, Texas. The project includes three 12-inch
diameter common-carrier pipelines and associated facilities. Each pipeline will
be approximately 70 miles in length. Upon completion, the new pipelines will
transport ethylene, propylene and natural gasoline. The cost of this project is
expected to total approximately $75 million. The Partnership has entered into an
agreement for turnkey construction of the pipelines and related facilities and
has separately entered into agreements for guaranteed throughput commitments.
The anticipated commencement date is the fourth quarter of 2000. Of the
remaining capital expenditures during 1999, $23.4 million related to the
Products OLP and $8.1 million related to the Crude Oil OLP. Approximately $24.9
million of capital expenditures related to life-cycle replacements and upgrading
current facilities, and approximately $6.6 million of capital expenditures
related to other pipeline expansion projects and revenue-generating projects.
The Partnership estimates that capital expenditures for 2000 will be
approximately $82 million (which includes $4 million of capitalized interest).
Approximately $31 million is expected to be used to complete construction of the
three new pipelines between Mont Belvieu and Port Arthur and approximately $10
million will be used to replace seven pipelines under the Houston Ship Channel
as required by the United States Army Corp of Engineers for the deepening of the
channel. Approximately $14 million of the remaining amount is expected to be
used for the Products OLP and $23 million is expected to be used for the Crude
Oil OLP. Substantially all remaining expenditures related to the Products OLP
are expected to be used for life-cycle replacements and upgrading current
facilities. Approximately $17 million of planned expenditures of the Crude Oil
OLP are expected to be used in revenue-generating projects, with the remaining
$6 million being used for life-cycle replacements and upgrading current
facilities.
REGULATION
The Partnership's interstate common carrier pipeline operations are
subject to rate regulation by the FERC under the Interstate Commerce Act
("ICA"), the Energy Policy Act of 1992 ("Act") and rules and orders promulgated
pursuant thereto. FERC regulation requires that interstate oil pipeline rates be
posted publicly and that these rates be "just and reasonable" and
nondiscriminatory.
Rates of interstate oil pipeline companies, like the Partnership, are
currently regulated by the FERC primarily through an index methodology, whereby
a pipeline 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").
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In May 1999, the Products OLP filed an application with the FERC to
charge Market Based Rates for substantially all refined products transportation
tariffs. Such application is currently under review by the FERC. The FERC
approved a request of the Products OLP waiving the requirement to adjust refined
products transportation tariffs pursuant to the PPI Index while its Market Based
Rates application is under review. Under the PPI Index, refined products
transportation rates in effect on June 30, 1999 would have been reduced by
approximately 1.83% effective July 1, 1999. If any portion of the Market Based
Rates application is denied by the FERC, the Products OLP has agreed to refund,
with interest, amounts collected after June 30, 1999, under the tariff rates in
excess of the PPI Index. As a result of the refund obligation potential, the
Partnership has deferred all revenue recognition of rates charged in excess of
the PPI Index. At December 31, 1999, the amount deferred for possible rate
refunds, including interest, totaled approximately $0.8 million.
In July 1999, certain shippers filed protests with the FERC on the
Products OLP's application for Market Based Rates in four destination markets.
The Partnership believes it will prevail in a competitive market determination
in those destination markets under protest.
Effective July 1, 1999, the Products OLP established Settlement Rates
with certain shippers of LPGs under which the rates in effect on June 30, 1999,
would not be adjusted for a period of either two or three years. Other LPGs
transportation tariff rates were reduced pursuant to the PPI Index
(approximately 1.83%), effective July 1, 1999.
In a 1995 decision involving an unrelated oil pipeline limited
partnership, the FERC partially disallowed the inclusion of income taxes in that
partnership's cost of service. In another FERC proceeding involving a different
oil pipeline limited partnership, the FERC held that the oil pipeline limited
partnership may not claim an income tax allowance for income attributable to
non-corporate limited partners, both individuals and other entities. These FERC
decisions do not effect the Partnership's current rates and rate structure
because the Partnership does not use the cost of service methodology to support
its rates. However, the FERC decisions might become relevant to the Partnership
should it (i) elect in the future to use the cost-of-service methodology or (ii)
be required to use such methodology to defend its indexed rates against a
shipper protest alleging that an indexed rate increase substantially exceeds
actual cost increases. Should such circumstances arise, there can be no
assurance with respect to the effect of such precedents on the Partnership's
rates in view of the uncertainties involved in this issue.
ENVIRONMENTAL MATTERS
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 its operations, could result in substantial
costs and liabilities to the Partnership.
Water
The Federal Water Pollution Control Act of 1972, as renamed and amended
as the Clean Water Act ("CWA"), imposes strict controls against the discharge of
oil and its derivatives into navigable waters. The CWA provides penalties for
any discharges of petroleum products in reportable quantities and imposes
substantial potential liability for the costs of removing an oil or hazardous
substance spill. State laws for the control of water pollution also provide
varying civil and criminal penalties and liabilities in the case of a release of
petroleum or its derivatives in surface waters or into the groundwater. Spill
prevention control and countermeasure requirements of federal laws require
appropriate containment berms and similar structures to help prevent the
contamination of navigable waters in the event of a petroleum tank spill,
rupture or leak.
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Contamination resulting from spills or release of refined petroleum
products is an inherent risk within the petroleum pipeline industry. To the
extent that groundwater contamination requiring remediation exists along the
Pipeline System as a result of past operations, the Partnership believes any
such contamination could be controlled or remedied without having a material
adverse effect on the financial condition of the Partnership, but such costs are
site specific, and there can be no assurance that the effect will not be
material in the aggregate.
The primary federal law for oil spill liability is the Oil Pollution
Act of 1990 ("OPA"), which addresses three principal areas of oil pollution --
prevention, containment and cleanup, and liability. It applies to vessels,
offshore platforms, and onshore facilities, including terminals, pipelines and
transfer facilities. In order to handle, store or transport oil, shore
facilities are required to file oil spill response plans with the appropriate
agency being either the United States Coast Guard, the United States Department
of Transportation Office of Pipeline Safety ("OPS") or the Environmental
Protection Agency ("EPA"). Numerous states have enacted laws similar to OPA.
Under OPA and similar state laws, responsible parties for a regulated facility
from which oil is discharged may be liable for removal costs and natural
resources damages. The General Partner believes that the Partnership is in
material compliance with regulations pursuant to OPA and similar state laws.
The EPA has adopted regulations that require the Partnership to have
permits in order to discharge certain storm water run-off. Storm water discharge
permits may also be required by certain states in which the Partnership
operates. Such permits may require the Partnership to monitor and sample the
effluent. The General Partner believes that the Partnership is in material
compliance with effluent limitations at existing facilities.
Air Emissions
The operations of the Partnership are subject to the federal Clean Air
Act and comparable state and local statutes. The Clean Air Act Amendments of
1990 (the "Clean Air Act") will require most industrial operations in the United
States to incur future capital expenditures in order to meet the air emission
control standards that are to be developed and implemented by the EPA and state
environmental agencies during the next decade. Pursuant to the Clean Air Act,
any Partnership facilities that emit volatile organic compounds or nitrogen
oxides and are located in ozone non-attainment areas will face increasingly
stringent regulations, including requirements that certain sources install the
reasonably available control technology. The EPA is also required to promulgate
new regulations governing the emissions of hazardous air pollutants. Some of the
Partnership's facilities are included within the categories of hazardous air
pollutant sources which will be affected by these regulations. The Partnership
does not anticipate that changes currently required by the Clean Air Act
hazardous air pollutant regulations will have a material adverse effect on the
Partnership.
The Clean Air Act also introduced the new concept of federal operating
permits for major sources of air emissions. Under this program, one federal
operating permit (a "Title V" permit) is issued. The permit acts as an umbrella
that includes all other federal, state and local preconstruction and/or
operating permit provisions, emission standards, grandfathered rates, and record
keeping, reporting, and monitoring requirements in a single document. The
federal operating permit is the tool that the public and regulatory agencies use
to review and enforce a site's compliance with all aspects of clean air
regulation at the federal, state and local level. The Partnership has completed
applications for all twelve facilities for which such regulations apply, and has
received the final permit for eight facilities.
Solid Waste
The Partnership generates hazardous and non-hazardous solid wastes that
are subject to requirements of the federal Resource Conservation and Recovery
Act ("RCRA") and comparable state statutes. Amendments to RCRA require the EPA
to promulgate regulations banning the land disposal of all hazardous wastes
unless the wastes meet certain treatment standards or the land-disposal method
meets certain waste containment criteria. In 1990, the EPA issued the Toxicity
Characteristic Leaching Procedure, which substantially expanded the number of
materials defined as hazardous waste. Certain wastewater and other wastes
generated from the Partnership's business activities
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previously classified as nonhazardous are now classified as hazardous due to the
presence of dissolved aromatic compounds. The Partnership utilizes waste
minimization and recycling processes and has installed pre-treatment facilities
to reduce the volume of its hazardous waste. The Partnership currently has three
permitted on-site waste water treatment facilities. Operating expenses of these
facilities have not had a material adverse effect on the financial position or
results of operations of the Partnership.
Superfund
The Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"), also known as "Superfund," imposes liability, without regard to
fault or the legality of the original act, on certain classes of persons who
contributed to the release of a "hazardous substance" into the environment.
These persons include the owner or operator of a facility and companies that
disposed or arranged for the disposal of the hazardous substances found at a
facility. CERCLA also authorizes the EPA and, in some instances, third parties
to take actions in response to threats to the public health or the environment
and to seek to recover from the responsible classes of persons the costs they
incur. In the course of its ordinary operations, the Pipeline System generates
wastes that may fall within CERCLA's definition of a "hazardous substance."
Should a disposal facility previously used by the Partnership require clean up
in the future, the Partnership may be responsible under CERCLA for all or part
of the costs required to clean up sites at which such wastes have been disposed.
The Company was notified by the EPA in the fall of 1998 that it might
have potential liability for waste material allegedly disposed by the Company at
the Casmalia Disposal Site in Santa Barbara County, California. The EPA has
offered the Company a de minimus settlement offer of $0.3 million to settle
liability associated with the Company's alleged involvement. The Company
believes based on the information furnished by the EPA that it has been
erroneously named as an entity that disposed of waste material at the Casmalia
Disposal Site. The Company intends to continue to vigorously pursue dismissal
from this matter.
In December 1999, the Company was notified by EPA of potential
liability for alleged waste disposal at Container Recycling, Inc., located in
Kansas City, Kansas. The Company was also asked to respond to an EPA Information
Request. The Company's response has been filed with the EPA Region VII office.
Based on information the Company has received from the EPA, as well as through
its internal investigations, the Company intends to pursue dismissal from this
matter.
Other Environmental Proceedings
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 $0.8 million at December 31, 1999 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.
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SAFETY REGULATION
The Partnership is subject to regulation by the United States
Department of Transportation ("DOT") under the Hazardous Liquid Pipeline Safety
Act of 1979 ("HLPSA") and comparable state statutes relating to the design,
installation, testing, construction, operation, replacement and management of
its pipeline facilities. HLPSA covers petroleum and petroleum products and
requires any entity that owns or operates pipeline facilities to comply with
such regulations, to permit access to and copying of records and to make certain
reports and provide information as required by the Secretary of Transportation.
The Partnership believes it is in material compliance with HLPSA requirements.
The Partnership is also subject to the requirements of the federal
Occupational Safety and Health Act ("OSHA") and comparable state statutes. The
Partnership believes it is in material compliance with OSHA and state
requirements, including general industry standards, record keeping requirements
and monitoring of occupational exposures.
The OSHA hazard communication standard, the EPA community right-to-know
regulations under Title III of the federal Superfund Amendment and
Reauthorization Act, and comparable state statutes require the Partnership to
organize and disclose information about the hazardous materials used in its
operations. Certain parts of this information must be reported to employees,
state and local governmental authorities, and local citizens upon request. In
general, the Partnership expects to increase its expenditures during the next
decade to comply with higher industry and regulatory safety standards such as
those described above. Such expenditures cannot be accurately estimated at this
time, although the General Partner does not believe that they will have a future
material adverse impact on the Partnership.
The Partnership is subject to OSHA Process Safety Management ("PSM")
regulations which are designed to prevent or minimize the consequences of
catastrophic releases of toxic, reactive, flammable, or explosive chemicals.
These regulations apply to any process which involves a chemical at or above the
specified thresholds; or any process which involves a flammable liquid or gas,
as defined in the regulations, stored on site in one location, in a quantity of
10,000 pounds or more. The Partnership utilizes certain covered processes and
maintains storage of LPGs in pressurized tanks, caverns and wells in excess of
10,000 pounds at various locations. Flammable liquids stored in atmospheric
tanks below their normal boiling point without benefit of chilling or
refrigeration are exempt. The Partnership believes it is in material compliance
with the PSM regulations.
EMPLOYEES
The Partnership does not have any employees, officers or directors. The
General Partner is responsible for the management of the Partnership and
Operating Partnerships. As of December 31, 1999, the General Partner had 757
employees.
ITEM 3. LEGAL PROCEEDINGS
TOXIC TORT LITIGATION - SEYMOUR, INDIANA
In the fall of 1999, the Company and the Partnership became involved in
a lawsuit 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), plaintiffs contend, among other things,
that the Company and other defendants stored and disposed of toxic and hazardous
substances and hazardous wastes in such a manner which caused the materials to
be released into the air, soil and water. They further contend that such release
caused damages to the plaintiffs. In their Complaint, 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. Furthermore, the plaintiffs are seeking compensatory, punitive and
treble damages. The Company has filed an Answer to the Complaint, denying the
allegations, as well as various other motions. This case
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is in the early stages of discovery and is not covered by insurance. The Company
is defending itself vigorously against this lawsuit. The Partnership cannot
estimate the loss, if any, associated with this pending lawsuit.
OTHER LITIGATION
In addition to the litigation discussed above, the Partnership has
been, in the ordinary course of business, a defendant in various lawsuits and a
party to various other legal proceedings, some of which are covered in whole or
in part by insurance. The General Partner believes that the outcome of such
lawsuits and other proceedings will not individually or in the aggregate have a
material adverse effect on the Partnership's financial condition, operations or
cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
ITEM 5. MARKET FOR REGISTRANT'S UNITS AND RELATED UNITHOLDER MATTERS
On July 21, 1998, the Partnership announced a two-for-one split of the
Partnership's outstanding Limited Partner Units. The Limited Partner Unit split
entitled Unitholders of record at the close of business on August 10, 1998 to
receive one additional Limited Partner Unit for each Limited Partner Unit held.
All references to the number of Units and per Unit amounts have been adjusted to
reflect the two-for-one split for all periods presented.
The Limited Partner Units of the Partnership are listed and traded on
the New York Stock Exchange under the symbol TPP. The high and low trading
prices of the Limited Partner Units in 1999 and 1998, respectively, as reported
in The Wall Street Journal, were as follows:
1999 1998
---------------------------- ----------------------------
QUARTER HIGH LOW HIGH LOW
- ------- ---------- ---------- ---------- ----------
First.................................................. $ 26.1875 $ 22.3750 $ 30.3750 $ 25.0000
Second................................................. 28.2500 22.9375 30.6875 25.5000
Third.................................................. 26.4375 20.0000 29.4375 25.5000
Fourth................................................. 23.8750 17.1250 30.5625 23.2500
Based on the information received from its transfer agent and from
brokers/nominees, the Company estimates the number of beneficial Unitholders of
Limited Partner Units of the Partnership as of March 6, 2000 to be approximately
21,000.
The quarterly cash distributions applicable to 1998 and 1999 were as
follows:
AMOUNT
RECORD DATE PAYMENT DATE PER UNIT
- ----------- ------------ --------
April 30, 1998................................. May 8, 1998...................................... $ 0.425
July 31, 1998.................................. August 7, 1998................................... 0.450
October 30, 1998............................... November 6, 1998................................. 0.450
January 29, 1999............................... February 5, 1999................................. 0.450
April 30, 1999................................. May 7, 1999...................................... $ 0.450
July 30, 1999.................................. August 6, 1999................................... 0.475
October 29, 1999............................... November 5, 1999................................. 0.475
January 31, 2000............................... February 4, 2000................................. 0.475
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The Partnership makes quarterly cash distributions of its Available
Cash, as defined by the Partnership Agreements. Available Cash consists
generally of all cash receipts less cash disbursements and cash reserves
necessary for working capital, anticipated capital expenditures and
contingencies the General Partner deems appropriate and necessary.
The Partnership is a publicly traded master limited partnership that is
not subject to federal income tax. Instead, Unitholders are required to report
their allocable share of the Partnership's income, gain, loss, deduction and
credit, regardless of whether the Partnership makes distributions.
Distributions of cash by the Partnership to a Unitholder will not
result in taxable gain or income except to the extent the aggregate amount
distributed exceeds the tax basis of the Units held by the Unitholder.
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ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth, for the periods and at the dates
indicated, selected consolidated financial and operating data for the
Partnership. The financial data was derived from the consolidated financial
statements of the Partnership and should be read in conjunction with the
Partnership's audited consolidated financial statements included in the Index to
Financial Statements on page F-1 of this report. See also Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 (1) 1997 1996 1995
---------- -------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
INCOME STATEMENT DATA:
Operating revenues:
Sales of crude oil and petroleum products ..... $1,692,767 $214,463 $ -- $ -- $ --
Transportation -- refined products ............ 123,004 119,854 107,304 98,641 96,190
Transportation -- LPGs ........................ 67,701 60,902 79,371 80,219 70,576
Transportation -- crude oil and NGLs .......... 11,846 3,392 -- -- --
Mont Belvieu operations ....................... 12,849 10,880 12,815 11,811 13,570
Other ......................................... 26,716 20,147 22,603 25,354 23,380
---------- -------- --------- --------- ---------
Total operating revenues ............. 1,934,883 429,638 222,093 216,025 203,716
Purchases of crude oil and petroleum products .... 1,666,042 212,371 -- -- --
Operating expenses ............................... 136,095 110,363 106,771 105,182 103,938
Depreciation and amortization .................... 32,656 26,938 23,772 23,409 23,286
---------- -------- --------- --------- ---------
Operating income ................................. 100,090 79,966 91,550 87,434 76,492
Interest expense -- net .......................... (29,430) (28,989) (32,229) (33,534) (34,987)
Other income -- net .............................. 1,460 2,364 1,979 4,748 5,212
---------- -------- --------- --------- ---------
Income before extraordinary item ................. 72,120 53,341 61,300 58,648 46,717
Extraordinary loss on debt extinguishment,
net of minority interest (2) .................. -- (72,767) -- -- --
---------- -------- --------- --------- ---------
Net income (loss) ................................ $ 72,120 $(19,426) $ 61,300 $ 58,648 $ 46,717
========== ======== ========= ========= =========
Basic and diluted income per Unit: (3)
Before extraordinary item ........................ $ 1.91 $ 1.61 $ 1.95 $ 1.89 $ 1.54
Extraordinary loss on debt extinguishment (2) .... -- (2.21) -- -- --
---------- -------- --------- --------- ---------
Net income (loss) per Unit ....................... $ 1.91 $ (0.60) $ 1.95 $ 1.89 $ 1.54
========== ======== ========= ========= =========
BALANCE SHEET DATA (AT PERIOD END):
Property, plant and equipment -- net ............. $ 720,919 $671,611 $ 567,681 $ 561,068 $ 533,470
Total assets ..................................... 1,041,373 916,919 673,909 671,241 669,915
Long-term debt (net of current maturities)........ 455,753 427,722 309,512 326,512 339,512
Class B Units .................................... 105,859 105,036 -- -- --
Partners' capital ................................ 229,767 227,186 302,967 290,311 276,381
CASH FLOW DATA:
Net cash from operations ......................... $ 103,070 $ 93,215 $ 83,604 $ 86,121 $ 78,456
Capital expenditures ............................. (77,431) (23,432) (32,931) (51,264) (25,967)
Cash investments -- net .......................... 3,040 2,357 18,860 4,148 6,527
Distributions .................................... (69,259) (56,774) (49,042) (45,174) (40,342)
- --------------------
(1) Data reflects the operations of the fractionator assets effective March
31, 1998, and the operations of the crude oil and NGL assets purchased
effective November 1, 1998.
(2) Extraordinary item reflects the loss related to the early
extinguishment of the First Mortgage Notes on January 27, 1998.
(3) Per Unit amounts for all periods have been adjusted to reflect the
two-for-one split on August 10, 1998. Per Unit calculation includes
3,916,547 Class B Units issued for the acquisition of the crude oil and
NGL assets, effective November 1, 1998.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following information is provided to facilitate increased
understanding of the 1999, 1998 and 1997 consolidated financial statements and
accompanying notes of the Partnership included in the Index to Financial
Statements on page F-1 of this report. Material period-to-period variances in
the consolidated statements of income are discussed under "Results of
Operations." The "Financial Condition and Liquidity" section analyzes cash flows
and financial position. Discussion included in "Other Matters" addresses key
trends, future plans and contingencies. Throughout these discussions, management
addresses items that are reasonably likely to materially affect future liquidity
or earnings.
Through its ownership of the Products OLP and the Crude Oil OLP, the
Partnership operates in two industry segments - refined products and LPGs
transportation; and crude oil and NGLs transportation and marketing. The
Partnership's reportable segments offer different products and services and are
managed separately because each requires different business strategies.
The Products OLP segment is involved in the transportation, storage and
terminaling of petroleum products 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. Labor and electric power
costs comprise the two largest operating expense items of the Products OLP.
Operations are somewhat seasonal with higher revenues generally realized during
the first and fourth quarters of each year. Refined products volumes are
generally higher during the second and third quarters because of greater demand
for gasolines during the spring and summer driving seasons. LPGs volumes are
generally higher from November through March due to higher demand in the
Northeast for propane, a major fuel for residential heating.
The Crude Oil OLP segment is involved in the transportation,
aggregation and marketing of crude oil, NGLs, lube oils and specialty chemicals.
Revenues are earned from the gathering, storage, transportation and marketing of
crude oil, NGLs, lube oils and specialty chemicals principally in Oklahoma,
Texas and the Rocky Mountain region. Marketing operations consist primarily of
purchasing crude oil along its gathering and pipeline systems and third party
pipelines to facilitate the aggregation, transportation and ultimate sale of
crude oil to local refineries or transportation to major oil hubs. Operations of
this segment are included from November 1, 1998, the date of its acquisition
from a Duke Energy subsidiary.
RESULTS OF OPERATIONS
Summarized below is financial data by business segment (in thousands):
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
Operating revenues:
Refined Products and LPGs Transportation ........... $ 230,270 $ 211,783 $ 222,093
Crude Oil and NGLs Transportation and Marketing..... 1,704,613 217,855 --
------------ ------------ ------------
Total operating revenues ........................ 1,934,883 429,638 222,093
------------ ------------ ------------
Operating income:
Refined Products and LPGs Transportation ............ 89,393 78,641 91,550
Crude Oil and NGLs Transportation and Marketing...... 10,697 1,325 --
------------ ------------ ------------
Total operating income .......................... 100,090 79,966 91,550
------------ ------------ ------------
Income before extraordinary item:
Refined Products and LPGs Transportation ........... 61,227 52,002 61,300
Crude Oil and NGLs Transportation and Marketing..... 10,893 1,339 --
------------ ------------ ------------
Total income before extraordinary item ........... $ 72,120 $ 53,341 $ 61,300
============ ============ ============
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For the year ended December 31, 1999, the Partnership reported net
income of $72.1 million, compared with a net loss of $19.4 million for year
ended December 31, 1998. The net loss in 1998 included an extraordinary charge
of $72.8 million for early extinguishment of debt, net of $0.7 million allocated
to minority interest. Excluding the extraordinary loss, net income for the year
would have been $53.3 million for year ended December 31, 1998. The $18.8
million increase in income before the loss on debt extinguishment resulted from
a $9.6 million increase in income provided by the crude oil and NGLs
transportation and marketing segment, which was acquired effective November 1,
1998, and a $9.2 million increase in income provided by the refined products and
LPGs transportation segment. The increase in income provided by the refined
products and LPGs transportation segment resulted primarily from a $18.5 million
increase in operating revenues, partially offset by a $7.7 million increase in
costs and expenses and a $1.2 million decrease in other income - net.
For the year ended December 31, 1998, the Partnership reported a net
loss of $19.4 million, which included the extraordinary loss for early
extinguishment of debt of $72.8 million. Excluding the extraordinary loss, net
income for the year would have been $53.3 million, compared with net income of
$61.3 million for 1997. The $8.0 million decrease in income before loss on debt
extinguishment resulted from a $9.3 million decrease in income provided by the
refined products and LPGs transportation segment, partially offset by $1.3
million in income provided by the crude oil and NGLs transportation and
marketing segment, which was acquired effective November 1, 1998. The decrease
in income provided by the refined products and LPGs transportation segment
resulted primarily from a $10.3 million decrease in operating revenues and a
$2.6 million increase in costs and expenses, partially offset by a $3.9 million
decrease in interest expense. See discussion below of factors affecting net
income for the comparative periods by business segment.
REFINED PRODUCTS AND LPGS TRANSPORTATION SEGMENT
Volume and average tariff information for 1999, 1998 and 1997 is presented
below:
PERCENTAGE
INCREASE
YEARS ENDED DECEMBER 31, (DECREASE)
------------------------------ ----------------
1999 1998 1997 1999 1998
-------- -------- -------- ------ -----
(IN THOUSANDS, EXCEPT TARIFF INFORMATION)
Volumes Delivered
Refined products ........................... 132,642 130,467 119,971 2% 9%
LPGs ....................................... 37,575 32,048 41,991 17% (24%)
Mont Belvieu operations .................... 28,535 25,072 27,869 14% (10%)
-------- -------- -------- ------ -----
Total ................................... 198,752 187,587 189,831 6% (1%)
======== ======== ======== ====== =====
Average Tariff per Barrel
Refined products ........................... $ 0.93 $ 0.92 $ 0.89 1% 3%
LPGs ....................................... 1.80 1.90 1.89 (5%) 1%
Mont Belvieu operations .................... 0.16 0.16 0.15 -- 7%
Average system tariff per barrel ........ $ 0.98 $ 0.98 $ 1.00 -- (2%)
======== ======== ======== ====== =====
1999 Compared to 1998
Operating revenues for the year ended 1999 increased 9% to $230.3
million from $211.8 million for the year ended 1998. This $18.5 million increase
resulted from a $3.1 million increase in refined products transportation
revenues, a $6.8 million increase in LPGs transportation revenues, a $2.0
million increase in revenues generated from Mont Belvieu operations and a $6.6
million increase in other operating revenues.
Refined products transportation revenues increased $3.1 million for the
year ended December 31, 1999, compared with the prior year, as a result of a 2%
increase in total refined products volumes delivered and a 1% increase in the
refined products average tariff per barrel. Strong economic demand coupled with
lower refinery
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production resulted in a 3.1 million barrel increase in jet fuel volumes
delivered and a 2.3 million barrel increase in distillate volumes delivered. Jet
fuel volumes delivered also benefited as a result of new military supply
agreements that became effective in the fourth quarter of 1998. These increases
were partially offset by a 1.8 million barrel decrease in motor fuel volumes
delivered due to unfavorable Midwest price differentials and reduced refinery
production received into the Ark-La-Tex system and a 0.6 million barrel decrease
in natural gasoline volumes delivered attributable to lower feed stock and
blending demand. Additionally, MTBE volumes delivered decreased 0.9 million
barrels as a result of the Partnership canceling its tariffs to Midwest
destinations, effective July 1, 1999. This action was taken with the consent of
MTBE shippers as a result of lower demand for MTBE transportation caused by
changing blending economics, and resulted in increased pipeline capacity and
tankage available for other products. The 1% increase in the refined products
average tariff per barrel was primarily attributable to a higher percentage of
long-haul distillate volumes delivered in the Midwest, partially offset by the
1.83% general tariff reduction pursuant to the Producer Price Index for finished
goods less 1% ("PPI Index"), effective July 1, 1999. The Partnership has
deferred recognition of approximately $0.8 million of revenue with respect to
potential refund obligations for rates charged in excess of the PPI index while
its application for Market Based Rates is under review by FERC. See further
discussion regarding Market Based Rates included in "Other Matters - Market and
Regulatory Environment."
LPGs transportation revenues increased $6.8 million for the year ended
December 31, 1999, compared with the prior year, due to a 17% increase in
volumes delivered, partially offset by a 5% decrease in the average LPGs tariff
per barrel. Propane volumes delivered in the Northeast increased 14% from the
prior year primarily due to colder winter weather during the first and fourth
quarters of 1999. Propane deliveries in the Midwest market area and the upper
Texas Gulf Coast increased 19% and 44%, respectively, from the prior year
primarily due to increased petrochemical feed stock demand. The 5% decrease in
the average LPGs tariff per barrel resulted from the larger percentage of
short-haul barrels during 1999, coupled with the reduction in tariffs rates
pursuant to the PPI Index, effective July 1, 1999.
Revenues generated from Mont Belvieu operations increased $2.0 million
for the year ended December 31, 1999, compared with the prior year, primarily
due to higher storage revenue and increased petrochemical and refinery demand
for shuttle deliveries of LPGs along the upper Texas Gulf Coast.
Other operating revenues increased $6.6 million during the year ended
December 31, 1999, compared with 1998, primarily due to a $3.6 million increase
in gains on the sale of product inventory, a $1.8 million increase in operating
revenues from the fractionator facilities acquired on March 31, 1998, and lower
exchange losses incurred to position product in the Midwest market area.
Costs and expenses increased $7.7 million during the year ended
December 31, 1999, compared with the prior year, due to a $3.4 million increase
in operating, general and administrative expenses, a $2.7 million increase in
operating fuel and power expense, a $1.1 million increase in depreciation and
amortization charges, and a $0.5 million increase in taxes - other than income.
The increase in operating, general and administrative expenses was primarily
attributable to a $2.8 million increase in expenses associated with Year 2000
activities; a $1.5 million increase in rental fees from higher volume through
the connection from Colonial Pipeline at Beaumont; a $1.5 million increase in
labor related expenses attributable to merit increases and increased incentive
compensation accruals, partially offset by lower post retirement benefit
accruals; and increased outside services for pipeline maintenance. These
increases in operating, general and administrative expenses were partially
offset by $3.4 million of expense recorded in 1998 to write down the book-value
of product inventory to market-value, and lower product measurement losses. The
increase in operating fuel and power expense from the prior year resulted from
increased pipeline throughput. Depreciation and amortization expense increased
as a result of amortization of the value assigned to the Fractionation Agreement
beginning on March 31, 1998, and capital additions placed in service. The
increase in taxes - other than income was primarily due to a higher property
base in 1999 and credits recorded during 1998 for the over accrual of previous
years' property taxes.
Interest expense increased $1.6 million during the year ended December
31, 1999, compared with 1998. Approximately $0.6 million of the increase was
attributable to a full year of interest expense in 1999 on the $38
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million term-loan used to finance the purchase of the fractionation assets on
March 31, 1998. The remaining increase resulted from $25 million of borrowings
during the second quarter of 1999 against the term loan to finance construction
of the pipelines between Mont Belvieu and Port Arthur, Texas. Capitalized
interest increased during 1999, compared with 1998, as a result of higher
balances associated with construction-in-progress of the new pipelines between
Mont Belvieu and Port Arthur.
Other income - net decreased $1.2 million during the year ended
December 31, 1999, compared with the prior year, as a result of a $0.4 million
gain on the sale of non-carrier assets in June 1998, and lower interest income
earned on cash investments in 1999.
1998 Compared to 1997
Operating revenues for the year ended 1998 decreased 5% to $211.8
million from $222.1 million for the year ended 1997. This $10.3 million decrease
resulted from an $18.5 million decrease in LPGs transportation revenues, a $2.5
million decrease in other operating revenues and a $1.9 million decrease in
revenues generated from Mont Belvieu operations, partially offset by a $12.6
million increase in refined products transportation revenues.
Refined products transportation revenues increased $12.6 million for
the year ended December 31, 1998, compared with the prior year, as a result of
the 9% increase in volumes delivered and a 3% increase in the refined products
average tariff per barrel. The 9% increase in volumes delivered in 1998 was
attributable to (i) favorable Midwest price differentials for motor fuel,
distillate, jet fuel and natural gasoline; and (ii) the full-period impact of
capacity expansions of the mainline System between El Dorado, Arkansas, and
Seymour, Indiana, the Ark-La-Tex System between Shreveport, Louisiana, and El
Dorado, and the connection to the Colonial pipeline at Beaumont, Texas. The 3%
increase in the refined products average tariff per barrel reflects new tariff
structures for volumes transported on the expanded portion of the Ark-La-Tex
system and barrels originating from the pipeline connection with Colonial's
pipeline.
LPGs transportation revenues decreased $18.5 million for the year ended
December 31, 1998, compared with the prior year, due to a 24% decrease in
volumes delivered, partially offset by a 1% increase in the LPGs average tariff
per barrel. Propane revenues decreased $16.7 million, or 25%, from the prior
year primarily due to decreased propane deliveries in the Midwest and Northeast
market areas attributable to warmer winter and spring weather during 1998 and
unfavorable differentials versus competing Canadian product. Butane revenues
decreased $1.7 million, or 13%, from the prior year due primarily to unfavorable
blending economics in the Midwest and termination of a throughput agreement
during the second quarter of 1998. Decreased petrochemical demand along the
upper Texas Gulf Coast resulted in a 32% decrease in short-haul propane
deliveries. The 1% increase in the LPGs average tariff per barrel resulted from
an increase in 1998 of the ratio of long-haul to short-haul propane deliveries.
Revenues generated from Mont Belvieu operations decreased $1.9 million
for the year ended December 31, 1998, compared with the prior year, primarily
due to lower storage revenue, lower product receipt charges and decreased
propane dehydration fees. Additionally, Mont Belvieu shuttle deliveries
decreased 10% during the year ended 1998, compared with the prior year, due to
lower petrochemical and refinery demand for LPGs along the upper Texas Gulf
Coast. The decrease in the Mont Belvieu shuttle deliveries was largely offset by
a 7% increase in the average tariff per barrel attributable to a lower
percentage in 1998 of contract deliveries, which generally carry lower tariffs.
Other operating revenues decreased $2.5 million during the year ended
December 31, 1998, compared with 1997, primarily due to decreased product
inventory volumes sold, unfavorable product location exchange differentials
incurred to position system inventory, lower amounts of butane received in the
Midwest for summer storage and decreased terminaling revenues. These decreases
were partially offset by $5.5 million of operating revenues from the
fractionator facilities acquired on March 31, 1998.
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Costs and expenses increased $2.6 million during the year ended
December 31, 1998, compared with the prior year, due to a $3.7 million increase
in operating, general and administrative expenses and a $2.3 million increase in
depreciation and amortization charges, partially offset by a $3.0 million
decrease in operating fuel and power expense and a $0.4 million decrease in
taxes - other than income. The increase in operating, general and administrative
expenses was primarily attributable to $3.4 million of expense to write down the
book-value of product inventory to market-value, credits of $3.0 million
recorded during 1997 for insurance recovery of past litigation costs related to
the Seymour, Indiana, terminal, a $0.9 million increase in expenses related to
Year 2000 activities, $0.6 million of expense related to the fractionator
facilities acquired on March 31, 1998, and increased product measurement losses.
These increases in operating, general and administrative expenses were partially
offset by expenses recorded for environmental remediation at the Partnership's
Seymour terminal in the third quarter of 1997, and lower supplies and services
related to pipeline operations and maintenance. Depreciation and amortization
expense increased as a result of amortization of the value assigned to the
Fractionation Agreement beginning on March 31, 1998, and capital additions
placed in service. Operating fuel and power expense decreased from the prior
year due primarily to increased mainline pumping efficiencies, lower long-haul
LPGs volumes and lower summer peak power rates in Arkansas.
Interest expense decreased $3.9 million during the year ended December
31, 1998, compared with 1997, as a result of the repayment on January 27, 1998
of the remaining $326.5 million principal balance of the First Mortgage Notes,
partially offset by interest expense on the $390.0 million principal amount of
the Senior Notes issued on January 27, 1998, and interest expense on the $38.0
million term-loan used to finance the purchase of the fractionation assets on
March 31, 1998. The weighted average interest rate of the $326.5 million
principal amount of the First Mortgage Notes was 10.09%, compared with the
weighted average interest rate of the $390.0 million principal amount of the
Senior Notes of 7.02%. The interest rate on the $38.0 million term loan is
6.53%. Interest capitalized decreased $0.7 million from the prior year as a
result of lower construction balances related to capital projects.
Other income - net increased during the year ended December 31, 1998,
compared with the prior year, as a result of a $0.4 million gain on the sale of
non-carrier assets in June 1998 and a $0.5 million loss on the sale of
non-carrier assets in August 1997. These factors were partially offset by lower
interest income earned on cash investments in 1998.
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CRUDE OIL AND NGLs TRANSPORTATION AND MARKETING SEGMENT
The crude oil and NGLs transportation and marketing segment was added
to the Partnership's operations with the acquisition of the assets of a Duke
Energy subsidiary effective November 1, 1998. The acquisition was accounted for
as a purchase for accounting purposes. Accordingly, only operations from
November 1, 1998 have been included in the Partnership's financial statements.
Margin is a more meaningful measure of financial performance than
operating revenues and operating expenses due to the significant fluctuations in
revenues and expense caused by the level of marketing activity. Margin is
calculated as revenues generated from crude oil and lube oil sales and crude oil
and NGLs transportation less the cost of crude oil and lube oil purchases.
Margin and volume information for the year ended December 31, 1999 and the two
month period ended December 31, 1998 is presented below:
YEAR ENDED TWO MONTHS ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------- --------------------------
Margins (dollars in thousands):
Crude oil transportation ................... $ 17,873 46% $ 2,787 51%
Crude oil marketing ........................ 12,065 31% 1,253 23%
NGL transportation ......................... 6,123 16% 1,062 19%
Lubrication oil sales ...................... 2,510 7% 382 7%
---------- -------- ----------- ---------
Total margin .......................... $ 38,571 100% $ 5,484 100%
========== ======== =========== =========
Barrels per day:
Crude oil transportation ................... 91,143 90,963
Crude oil marketing ........................ 263,703 278,176
NGL transportation ......................... 12,548 11,919
Lubrication oil volume (total gallons): ....... 8,891,056 1,140,000
Margin per barrel:
Crude oil transportation ................... $ 0.537 $ 0.504
Crude oil marketing ........................ $ 0.125 $ 0.071
NGL transportation ......................... $ 1.337 $ 1.515
Lubrication oil margin (per gallon): .......... $ 0.282 $ 0.335
Year Ended December 31, 1999
Net income contributed by the crude oil transportation and marketing
segment totaled $10.9 million for the year ended December 31, 1999; comprised of
$38.6 million of gross margin and $0.5 million of other income (primarily
consists of interest income earned on cash investments), partially offset by
$21.6 million of operating, general and administrative expenses (including
operating fuel and power), $5.6 million of depreciation and amortization
charges, $0.7 million of taxes - other than income and $0.2 million of interest
expense.
For the year ended December 31, 1999, crude oil transportation and NGL
transportation contributed 46% and 16% of the margin, respectively, while crude
oil marketing operations accounted for 31% of the margin. Operations of
Lubrication Services LLC ("LSI") contributed $2.5 million, or 7%, of the margin
for the year ended December 31, 1999. Operating, general and administrative
expenses (including operating fuel and power) totaled $21.6 million, or 56% of
the margin, during the year ended December 31, 1999. Depreciation and
amortization expenses and taxes - other than income totaled $6.3 million, or 16%
of the margin.
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Two Months Ended December 31, 1998
Net income contributed by the crude oil transportation and marketing
segment totaled $1.3 million for the two months ended December 31, 1998;
comprised of $5.5 million of gross margin, offset by $3.2 million of operating,
general and administrative expenses (including operating fuel and power), $0.9
million of depreciation and amortization charges, and $0.1 million of taxes -
other than income.
During the two months ended December 31, 1998, crude oil transportation
and NGL transportation contributed 51% and 19% of the margin, respectively,
while crude oil marketing operations accounted for 23% of the margin. Operations
of LSI contributed $0.4 million, or 7%, of the margin for the two month period
ended December 31, 1998. Operating, general and administrative expenses of the
crude oil and NGLs transportation and marketing segment totaled $3.2 million, or
58% of the margin. Depreciation and amortization expenses and taxes - other than
income totaled $1.0 million, or 18% of the margin.
FINANCIAL CONDITION AND LIQUIDITY
Net cash from operations for the year ended December 31, 1999, totaled
$103.1 million, comprised of $104.8 million of income before charges for
depreciation and amortization, partially offset by $1.7 million of cash used for
working capital changes. Net cash from operations for the year ended December
31, 1998, totaled $93.2 million, comprised of $80.3 million of income before the
extraordinary loss on early extinguishment of debt and charges for depreciation
and amortization, and $12.9 million of cash provided from working capital
changes. The $14.6 million increase of cash used for working capital changes
resulted primarily from timing of collections and payments related to crude oil
marketing activity. Net cash from operations for the year ended December 31,
1997 totaled $83.6 million, which was comprised of $85.1 million of income
before charges for depreciation and amortization, partially offset by $1.5
million of cash used for working capital changes. Net cash from operations
includes interest payments of $30.7 million, $27.0 million and $33.6 million for
each of the years ended 1999, 1998 and 1997, respectively.
The Partnership routinely invests excess cash in liquid investments as
part of its cash management program. Investments of cash in discounted
commercial paper and Eurodollar time deposits with original maturities at date
of purchase of 90 days or less are included in cash and cash equivalents.
Short-term investments of cash consist of investment-grade corporate notes with
maturities during 2000. Long-term investments are comprised of investment-grade
corporate notes with varying maturities between 2001 and 2004. Interest income
earned on all investments is included in cash from operations. Cash flows from
investing activities included proceeds from investments of $6.3 million, $3.1
million and $25.0 million for each of the years ended 1999, 1998 and 1997,
respectively. Cash flows from investing activities also included additional
investments of $3.2 million, $0.7 million and $6.2 million for each of the years
ended 1999, 1998 and 1997, respectively. Cash balances related to the investment
of cash and proceeds from the investment of cash were $39.3 million, $57.2
million and $56.1 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
Cash flows used in investing activities for the year ended December 31,
1999, included $77.4 million of capital expenditures and $2.3 million for the
purchase of a 125-mile crude oil system in Southeast Texas. Capital expenditures
during 1999 included $43.8 million of spending for on-going construction of
three new pipelines between the Partnership's terminal in Mont Belvieu, Texas
and Port Arthur, Texas. The project includes three 12-inch diameter
common-carrier pipelines and associated facilities. Each pipeline will be
approximately 70 miles in length. Upon completion, the new pipelines will
transport ethylene, propylene and natural gasoline. The cost of this project is
expected to total approximately $75 million. The Partnership has entered into an
agreement for turnkey construction of the pipelines and related facilities and
has separately entered into agreements for guaranteed throughput commitments.
The anticipated commencement date is the fourth quarter of 2000. Cash flows used
in investing activities for the year ended December 31, 1998 included $40.0
million for the purchase price of the fractionation assets and related
intangible assets, $23.4 million of capital expenditures and $2.0 million
related to the acquisition of assets, partially offset by $0.5 million received
from the sale of non-carrier assets. Cash flows used in investing activities for
the year ended December 31, 1997 included $32.9 million of capital expenditures,
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partially offset by $1.4 million received from the sale of non-carrier assets
and $1.0 million of insurance proceeds related to the replacement value of a
20-inch diameter auxiliary pipeline at the Red River in central Louisiana, which
was damaged in 1994 and subsequently removed from service.
On July 21, 1998, the Partnership announced a two-for-one split of the
Partnership's outstanding Limited Partner Units. The Limited Partner Unit split
entitled Unitholders of record at the close of business on August 10, 1998 to
receive one additional Limited Partner Unit for each Limited Partner Unit held.
All per Limited Partner Unit amounts have been adjusted to reflect the
two-for-one Unit split.
The Partnership paid cash distributions of $69.3 million ($1.85 per
Unit), $56.8 million ($1.75 per Unit), and $49.0 million ($1.55 per Unit) for
each of the years ended December 31, 1999, 1998 and 1997, respectively. On
January 14, 2000, the Partnership declared a cash distribution of $0.475 per
Limited Partner Unit and Class B Unit for the quarter ended December 31, 1999.
The distribution of $18.3 million was paid on February 4, 2000, to Unitholders
of record on January 31, 2000.
On January 27, 1998, the Products OLP 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 Products OLP, in whole or in part,
at a premium. Net proceeds from 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 repayment of the First Mortgage Notes and the issuance of the
Senior Notes reduced the level of cash required for debt service until 2008. 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 Products OLP and
will rank on a parity with all other unsecured and unsubordinated indebtedness
of the Products OLP. The indenture governing the Senior Notes contains
covenants, including, but not limited to, covenants limiting (i) the creation of
liens securing indebtedness and (ii) sale and leaseback transactions. However,
the indenture does not limit the Partnership's ability to incur additional
indebtedness.
In connection with the purchase of fractionation assets from DEFS as of
March 31, 1998, TEPPCO Colorado received a $38 million bank loan from SunTrust
Bank. Proceeds from the loan were received on April 21, 1998. The loan bears
interest at a rate of 6.53%, which is payable quarterly. The principal balance
of the loan is payable in full on April 21, 2001. The Products OLP is guarantor
on the loan.
On May 17, 1999, the Products OLP entered into a $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. The loan
agreement has a term of five years. SunTrust Bank is the administrator of the
loan. At December 31, 1999, $25 million has been borrowed under the term loan
agreement. Principal will be paid quarterly beginning in 2001. The interest rate
for the $75 million term loan is based on the borrower's option of either
SunTrust Bank's prime rate, the federal funds rate or LIBOR rate in effect at
the time of the borrowings and is adjusted monthly, bimonthly, quarterly or
semi-annually. Interest is payable quarterly from the time of borrowing. The
current interest rate for amounts outstanding under the term loan is 7.27%.
Commitment fees for the term loan agreement totaled approximately $78,000 for
the period from May 17, 1999 through December 31, 1999.
On May 17, 1999, the Products OLP entered into a $25 million revolving
credit agreement and TCO entered into a $30 million revolving credit agreement.
SunTrust Bank is the administrative agent on both revolving credit agreements.
The $25 million revolving credit agreement has a five year term and the $30
million revolving
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credit agreement has a three year term. The interest rate on both agreements is
based on the borrower's option of either SunTrust Bank's prime rate, the federal
funds rate or LIBOR rate in effect at the time of the borrowings and is payable
quarterly. Interest rates are adjusted monthly, bimonthly, quarterly or
semi-annually. The Products OLP has not borrowed any amounts under the revolving
credit facility. TCO had $3 million principal amount outstanding under its
revolving credit agreement as of December 31, 1999. Commitment fees for the
revolving credit agreements totaled approximately $83,000 for the period from
May 17, 1999 through December 31, 1999.
Each of the loan agreements with SunTrust Bank discussed above contains
restrictive financial covenants that require the Operating Partnerships to
maintain a minimum level of partners' capital as well as debt-to-earnings,
interest coverage and capital expenditure coverage ratios. At December 31, 1999,
the Operating Partnerships were in compliance with all financial covenants
related to these loan agreements.
In connection with the purchase of assets from a Duke Energy subsidiary
by the Crude Oil OLP, Duke Capital, an affiliate of Duke Energy, agreed to
guarantee the payment by the Crude Oil OLP under certain commercial contracts
with third parties. Duke Capital will provide up to $100 million of guarantee
credit to TCO and its subsidiaries for a period of three years from November 30,
1998. Pursuant to this agreement, the Partnership has agreed to pay Duke Capital
a commitment fee of $100,000 per year.
In March 2000, the Partnership, CMS Energy Corporation and Marathon
Ashland Petroleum LLC announced an agreement to form a limited liability company
that will own and operate an interstate refined petroleum products pipeline
extending from the upper Texas Gulf Coast to Illinois. Each of the companies
will own a one-third interest in the limited liability company. The
Partnership's participation in this joint venture will replace its previously
announced expansion plan to construct a new pipeline parallel to the
Partnership's two existing pipelines from Beaumont, Texas, to Little Rock,
Arkansas.
The limited liability company will build a 70-mile, 24-inch diameter
pipeline connecting the Partnership's facility in Beaumont, Texas, with the
start of an existing 720-mile, 26-inch diameter pipeline extending from
Longville, Louisiana, to Bourbon, Illinois. The pipeline, which has been named
Centennial Pipeline, will pass through portions of seven states -- Texas,
Louisiana, Arkansas, Mississippi, Tennessee, Kentucky and Illinois. CMS
Panhandle Pipe Line Companies, which owns the existing 720-mile pipeline, has
made a filing with the FERC to take the line out of natural gas service as part
of the regulatory process. Conversion of the pipeline to refined products
service is expected to be completed by the end of 2001. The Centennial Pipeline
will intersect the Partnership's existing mainline near Lick Creek, Illinois,
where a new two million barrel refined petroleum products storage terminal will
be built.
OTHER MATTERS
Regulatory and Environmental
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 the operations of the Pipeline System 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, 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 $0.8 million at December 31, 1999 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.
Year 2000 Issues
In 1997, the Company initiated a program to prepare the Partnership's
process controls and business computer systems for the "Year 2000" issue.
Process controls are the automated equipment including hardware and software
systems which run operational activities. Business computer systems are the
computer hardware and software used by the Partnership. The Partnership incurred
approximately $5.6 million of expense from 1997 through 1999 related to the Year
2000 issue. The Partnership did not encounter any critical system application or
hardware failures during the date roll over to the Year 2000, and has not
experienced any disruptions of business activities as a result of Year 2000
failures encountered by customers, suppliers and service providers.
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Market and Regulatory Environment
Tariff 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").
During June 1997, the Partnership filed rate increases on selective
refined products tariffs and LPGs tariffs, averaging 1.7%. These rate increases
became effective July 1, 1997 without suspension or refund obligation. On July
1, 1998, general rate decreases of 0.62% for both refined products tariffs and
LPGs tariffs became effective. The rate decreases were calculated pursuant to
the index methodology promulgated by the FERC.
In May 1999, the Products OLP filed an application with the FERC to
charge Market Based Rates for substantially all refined products transportation
tariffs. Such application is currently under review by the FERC. The FERC
approved a request of the Products OLP waiving the requirement to adjust refined
products transportation tariffs pursuant to the PPI Index while its Market Based
Rates application is under review. Under the PPI Index, refined products
transportation rates in effect on June 30, 1999 would have been reduced by
approximately 1.83% effective July 1, 1999. If any portion of the Market Based
Rates application is denied by the FERC, the Products OLP has agreed to refund,
with interest, amounts collected after June 30, 1999, under the tariff rates in
excess of the PPI Index. As a result of the refund obligation potential, the
Partnership has deferred all revenue recognition of rates charged in excess of
the PPI Index. At December 31, 1999, the amount deferred for possible rate
refunds, including interest, totaled approximately $0.8 million.
In July 1999, certain shippers filed protests with the FERC on the
Products OLP's application for Market Based Rates in four destination markets.
The Partnership believes it will prevail in a competitive market determination
in those destination markets under protest.
Effective July 1, 1999, the Products OLP established Settlement Rates
with certain shippers of LPGs under which the rates in effect on June 30, 1999,
would not be adjusted for a period of either two or three years. Other LPGs
transportation tariff rates were reduced pursuant to the PPI Index
(approximately 1.83%), effective July 1, 1999. Effective July 1, 1999, the
Products OLP canceled its tariff for deliveries of MTBE into the Chicago market
area reflecting reduced demand for transportation of MTBE into such area. The
MTBE tariffs were canceled with the consent of MTBE shippers and resulted in
increased pipeline capacity and tankage available for other products.
Other
In February 2000, the Partnership and Louis Dreyfus Plastics
Corporation ("Louis Dreyfus") announced a joint development alliance whereby the
Partnership's Mont Belvieu petroleum liquids storage and transportation shuttle
system assets will be marketed by Louis Dreyfus. The alliance will expand
services to the upper Texas Gulf Coast energy marketplace. The alliance is a
service-oriented, fee-based venture with no commodity trading.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
standards for and disclosures of derivative instruments and hedging activities.
In July 1999,
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the FASB issued SFAS No. 137 to delay the effective date of SFAS No. 133 until
fiscal years beginning after June 15, 2000. The Partnership expects to adopt
this standard effective January 1, 2001. The Partnership has not determined the
impact of this statement on its financial condition and results of operations.
The matters discussed herein include "forward-looking statements"
within the meaning of various provisions of the Securities Act of 1933 and the
Securities Exchange Act of 1934. All statements, other than statements of
historical facts, included in this document that address activities, events or
developments that the Partnership expects or anticipates will or may occur in
the future, including such things as estimated future capital expenditures
(including the amount and nature thereof), business strategy and measures to
implement strategy, competitive strengths, goals, expansion and growth of the
Partnership's business and operations, plans, references to future success,
references to intentions as to future matters and other such matters are
forward-looking statements. These statements are based on certain assumptions
and analyses made by the Partnership in light of its experience and its
perception of historical trends, current conditions and expected future
developments as well as other factors it believes are appropriate under the
circumstances. However, whether actual results and developments will conform
with the Partnership's expectations and predictions is subject to a number of
risks and uncertainties, including general economic, market or business
conditions, the opportunities (or lack thereof) that may be presented to and
pursued by the Partnership, competitive actions by other pipeline companies,
changes in laws or regulations, and other factors, many of which are beyond the
control of the Partnership. Consequently, all of the forward-looking statements
made in this document are qualified by these cautionary statements and there can
be no assurance that actual results or developments anticipated by the
Partnership will be realized or, even if realized, that they will have the
expected consequences to or effect on the Partnership or its business or
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Partnership may be exposed to market risk through changes in
commodity prices and interest rates as discussed below. The Partnership has no
foreign exchange risks.
The Partnership mitigates exposure to commodity price fluctuations by
maintaining a balanced position between crude oil purchases and sales. As a
hedging strategy to manage crude oil price fluctuations, the Partnership enters
into futures contracts on the New York Mercantile Exchange, and makes limited
use of other derivative instruments. 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. Any
contracts held for trading purposes or speculative positions 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. Risk management policies have been established by the Risk Management
Committee to monitor and control these market risks. The Risk Management
Committee is comprised of senior executives of the Partnership. Market risks
associated with commodity derivatives were not material at December 31, 1999.
At December 31, 1999, the Products OLP had outstanding $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").
Additionally, the Products OLP had a $38 million bank loan outstanding from
SunTrust Bank. The SunTrust loan bears interest at a fixed rate of 6.53% and is
payable in full in April 2001. At December 31, 1999, the estimated fair value of
the Senior Notes and the SunTrust loan was approximately $356.0 million