<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
COMMISSION FILE NO. 1-13603
TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0329620
(STATE OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) 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)
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 12 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
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................. $ 25,299 $ 36,723
Short-term investments ..................................... 3,910 3,269
Accounts receivable, trade ................................. 15,606 17,740
Inventories ................................................ 9,222 13,392
Other ...................................................... 1,424 1,509
---------- ----------
Total current assets .................................... 55,461 72,633
---------- ----------
Property, plant and equipment, at cost (Net of accumulated
depreciation and amortization of $207,891 and $192,960) .... 604,010 567,566
Investments .................................................. 5,244 6,490
Intangible assets ............................................ 35,405 36,842
Advances to limited partner .................................. 2,358 1,989
Other assets ................................................. 11,406 10,966
---------- ----------
Total assets ............................................ $ 713,884 $ 696,486
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued liabilities ................... $ 5,794 $ 8,513
Accounts payable, general partner .......................... 3,166 2,815
Accrued interest ........................................... 6,391 13,039
Other accrued taxes ........................................ 6,650 5,878
Other ...................................................... 9,905 6,974
---------- ----------
Total current liabilities ............................... 31,906 37,219
---------- ----------
Senior Notes ................................................. 389,745 389,722
Other long-term debt ......................................... 63,000 38,000
Other liabilities and deferred credits ....................... 3,574 3,407
Partners' capital:
General partner's interest ................................. 2,283 2,306
Limited partner's interests ................................ 223,376 225,832
---------- ----------
Total partners' capital ................................. 225,659 228,138
---------- ----------
Total liabilities and partners' capital ................. $ 713,884 $ 696,486
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE> 3
TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating revenues:
Transportation - Refined products .................. $ 33,448 $ 35,316 $ 92,397 $ 90,533
Transportation - LPGs .............................. 9,484 10,625 46,173 42,202
Mont Belvieu operations ............................ 3,329 2,848 9,584 7,936
Other- net ......................................... 7,386 5,440 20,868 15,323
---------- ---------- ---------- ----------
Total operating revenues ........................ 53,647 54,229 169,022 155,994
---------- ---------- ---------- ----------
Costs and expenses:
Operating, general and administrative .............. 19,427 18,366 55,147 51,182
Operating fuel and power ........................... 7,824 7,550 22,154 20,315
Depreciation and amortization ...................... 6,774 6,651 20,307 19,356
Taxes - other than income taxes .................... 2,419 1,940 7,412 6,976
---------- ---------- ---------- ----------
Total costs and expenses ........................ 36,444 34,507 105,020 97,829
---------- ---------- ---------- ----------
Operating income ................................ 17,203 19,722 64,002 58,165
Interest expense ..................................... (7,992) (7,550) (23,292) (22,227)
Interest costs capitalized ........................... 705 121 1,194 638
Other income - net ................................... 347 571 1,254 2,251
---------- ---------- ---------- ----------
Income before extraordinary loss on debt
extinguishment ................................. 10,263 12,864 43,158 38,827
---------- ---------- ---------- ----------
Extraordinary loss on debt extinguishment ........... -- -- -- (73,509)
---------- ---------- ---------- ----------
Net income (loss) ............................... $ 10,263 $ 12,864 $ 43,158 $ (34,682)
========== ========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 4
TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................ $ 43,158 $ (34,682)
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Depreciation and amortization .................................. 20,307 19,356
Extraordinary loss on early extinguishment of debt ............. -- 73,509
Equity in loss of affiliate .................................... 339 182
Gain on sale of property, plant and equipment .................. -- (356)
Decrease in accounts receivable, trade ......................... 2,134 3,788
Decrease (increase) inventories ................................ 4,170 (795)
Decrease in other current assets ............................... 85 1,818
Decrease in accounts payable and accrued expenses .............. (5,313) (5,427)
Other .......................................................... (975) (2,007)
---------- ----------
Net cash provided by operating activities .................. 63,905 55,386
---------- ----------
Cash flows from investing activities:
Proceeds from cash investments ................................... 3,840 2,105
Purchases of cash investments .................................... (3,235) --
Purchase of fractionator assets and related intangible assets .... -- (40,000)
Proceeds from the sale of property, plant and equipment .......... -- 525
Capital expenditures ............................................. (55,084) (15,200)
---------- ----------
Net cash used in investing activities ...................... (54,479) (52,570)
---------- ----------
Cash flows from financing activities:
Principal payment, First Mortgage Notes .......................... -- (326,512)
Prepayment premium, First Mortgage Notes ......................... -- (70,093)
Issuance of Senior Notes ......................................... -- 389,694
Debt issuance costs, Senior Notes ................................ -- (3,651)
Proceeds from term loan .......................................... 25,000 38,000
Advances to limited partner ...................................... (369) --
Distributions .................................................... (45,481) (42,097)
---------- ----------
Net cash used in financing activities ...................... (20,850) (14,659)
---------- ----------
Net decrease in cash and cash equivalents .......................... (11,424) (11,843)
Cash and cash equivalents at beginning of period ................... 36,723 43,961
---------- ----------
Cash and cash equivalents at end of period ......................... $ 25,299 $ 32,118
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Interest paid during the period (net of capitalized interest) ...... $ 28,472 $ 26,210
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 5
TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
TE Products Pipeline Company, Limited Partnership (the "Partnership"),
a Delaware limited partnership, was formed in March 1990. TEPPCO Partners, L.P.
(the "Parent Partnership") owns a 98.9899% interest as the sole limited partner
interest and Texas Eastern Products Pipeline Company (the "Company" or "General
Partner"), an indirect wholly-owned subsidiary of Duke Energy Corporation ("Duke
Energy"), owns a 1.0101% general partner interest in the Partnership. The
Company, as general partner, performs all management and operating functions
required for the Partnership pursuant to the Agreement of Limited Partnership of
TE Products Pipeline Company, Limited Partnership (the "Partnership Agreement").
The general partner is reimbursed by the Partnership for all reasonable direct
and indirect expenses incurred in managing the Partnership.
The accompanying unaudited consolidated financial statements reflect
all adjustments, which are, in the opinion of management, of a normal and
recurring nature and necessary for a fair statement of the financial position of
the Partnership as of September 30, 1999, and the results of operations and cash
flows for the periods presented. The results of operations for the nine months
ended September 30, 1999, are not necessarily indicative of results of
operations for the full year 1999. The interim financial statements should be
read in conjunction with the Partnership's consolidated financial statements and
notes thereto presented in the TE Products Pipeline Company, Limited Partnership
Annual Report on Form 10-K for the year ended December 31, 1998. Certain amounts
from the prior year have been reclassified to conform to current presentation.
The Partnership has one business segment: the transportation, storage
and terminaling of refined products and liquefied petroleum gases ("LPGs"). The
Partnership's interstate transportation operations, including rates charged to
customers, are subject to regulations prescribed by the Federal Energy
Regulatory Commission ("FERC"). Refined products and LPGs are referred to
herein, collectively, as "petroleum products" or "products."
NOTE 2. RELATED PARTY TRANSACTIONS
Effective March 31, 1998, TEPPCO Colorado, LLC ("TEPPCO Colorado"), a
wholly-owned subsidiary of the Partnership, purchased two fractionation
facilities located in Weld County, Colorado, from Duke Energy Field Services,
Inc. ("DEFS"), a wholly-owned subsidiary of Duke Energy. TEPPCO Colorado and
DEFS entered into a twenty year Fractionation Agreement, whereby TEPPCO Colorado
will receive a variable fee for all fractionated volumes delivered to DEFS. The
purchase price of these transactions was $40 million. Intangible assets include
$38 million of value assigned to the Fractionation Agreement, which will be
amortized on a straight-line method over the term of the Fractionation
Agreement. The remaining purchase price of $2.0 million was allocated to the
fractionator facilities purchased. TEPPCO Colorado and DEFS also entered into a
Operations and Management Agreement, whereby DEFS will operate and maintain the
fractionation facilities. TEPPCO Colorado pays DEFS a set volumetric rate for
all fractionated volumes delivered to DEFS.
NOTE 3. INVESTMENTS
SHORT-TERM INVESTMENTS
The Partnership routinely invests cash in liquid short-term investments
as part of its cash management program. Investments with maturities at date of
purchase of 90 days or less are considered cash equivalents. At September 30,
1999, short-term investments included $3.9 million of investment-grade corporate
notes, which mature within one year. Such investments at September 30, 1999
included a $0.9 million investment in Duke Power Company corporate notes. All
short-term investments are classified as held-to-maturity securities and are
5
<PAGE> 6
TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
stated at amortized cost. The aggregate fair value of such securities
approximates amortized cost at September 30, 1999.
LONG-TERM INVESTMENTS
At September 30, 1999, the Partnership had $5.2 million invested in
investment-grade corporate notes, which have varying maturities through 2004.
These securities are classified as held-to-maturity securities and are stated at
amortized cost. The aggregate fair value of such securities approximates
amortized cost at September 30, 1999.
NOTE 4. INVENTORIES
Inventories are carried at the lower of cost (based on weighted average
cost method) or market. The major components of inventories were as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Gasolines .......................................... $ 924 $ 4,224
Propane ............................................ 576 1,503
Butanes ............................................ 2,392 1,654
Fuel oil ........................................... 524 564
Other products ..................................... 1,015 1,781
Materials and supplies ............................. 3,791 3,666
---------- ----------
Total .................................... $ 9,222 $ 13,392
========== ==========
</TABLE>
The costs of inventories were lower than market at September 30, 1999,
and December 31, 1998.
NOTE 5. LONG TERM DEBT
SENIOR NOTES
On January 27, 1998, the Partnership 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 Partnership, 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 10.20% Series B First Mortgage Notes, due 2010.
The premium for the early redemption of the First Mortgage Notes totaled $70.1
million. The Partnership recorded an extraordinary charge of $73.5 million
during the first quarter of 1998, 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 Partnership and
will rank on a parity with all other unsecured and unsubordinated indebtedness
of the Partnership. 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.
6
<PAGE> 7
TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
OTHER LONG TERM DEBT
In connection with the purchase of the 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. TEPPCO
Colorado paid interest to DEFS at a per annum rate of 5.75% on the amount of the
total purchase price outstanding for the period from March 31, 1998 until April
21, 1998. The SunTrust loan bears interest at a rate of 6.53%, which is payable
quarterly beginning in July 1998. The principal balance of the loan is payable
in full on April 21, 2001. The Partnership is guarantor on the loan.
On May 17, 1999, the Partnership 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. Approximately $39.7 million of construction cost was included in capital
expenditures during the first nine months of 1999, with a total of approximately
$44.6 million expected to be incurred in 1999, and the remainder in 2000. At
September 30, 1999, $25 million has been borrowed under the term loan agreement.
Principal will be paid quarterly as follows, with the remaining principal
balance payable on May 17, 2004.
<TABLE>
<CAPTION>
QUARTERLY PERIODS ENDING PAYMENT AMOUNT
------------------------ --------------
<S> <C>
June 2001 through March 2002 $2.50 million
June 2002 through March 2003 $3.75 million
June 2003 through March 2004 $5.00 million
</TABLE>
The interest rate for the $75 million term loan is based on the
Partnership'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 6.33%. Commitment fees for the term loan totaled
approximately $47,000 for the period from May 17, 1999 through September 30,
1999.
WORKING CAPITAL FACILITIES
On May 17, 1999, the Partnership entered into a five-year $25 million
revolving credit agreement. SunTrust Bank is the administrative agent on the
revolving credit agreement. The interest rate is based on the Partnership'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
Partnership has not made any borrowings under this revolving credit facility.
Commitment fees for the revolving credit agreement totaled approximately $23,000
for the period from May 17, 1999 through September 30, 1999.
NOTE 6. CASH DISTRIBUTIONS
The Partnership makes quarterly cash distributions of all of its
Available Cash, generally defined as consolidated cash receipts less
consolidated cash disbursements and cash reserves established by the general
partner in its sole discretion. Generally, distributions are made 98.9899% to
the Parent Partnership and 1.0101% to the general partner.
On August 7, 1999, the Partnership paid a cash distribution of $16.1
million for the second quarter of 1999. Additionally, on October 18, 1999, the
Partnership declared a cash distribution of $16.1 million for the quarter ended
September 30, 1999. The third quarter distribution was paid on November 5, 1999.
7
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TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Partnership is involved in various claims and legal proceedings
incidental to its business. In the opinion of management, these claims and legal
proceedings will not have a material adverse effect on the Partnership's
consolidated financial position or results of operations.
The operations of the Partnership are subject to federal, state and
local laws and regulations relating to protection of the environment. Although
the Partnership believes its operations are in material compliance with
applicable environmental regulations, risks of significant costs and liabilities
are inherent in pipeline operations, and there can be no assurance that
significant costs and liabilities will not be incurred. Moreover, it is possible
that other developments, such as increasingly strict environmental laws and
regulations and enforcement policies thereunder, and claims for damages to
property or persons resulting from the operations of the pipeline system, could
result in substantial costs and liabilities to the Partnership. The Partnership
does not anticipate that changes in environmental laws and regulations will have
a material adverse effect on its financial position, 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 will 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 will evaluate the
conditions of the Record of Decision and make adjustments to the program as
required. The amount accrued for the program was approximately $0.4 million at
September 30, 1999. In the opinion of the Company, the completion of the
remediation program being proposed by the Partnership, if such program is
approved by IDEM, will not have a material adverse impact on the Partnership's
financial condition, results of operations or liquidity.
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 is
utilizing both internal and external resources to identify, test, remediate or
replace all critical known or discovered non-compliant computerized systems and
applications. The Company continues to evaluate appropriate courses of
corrective action, including replacement of certain systems whose associated
costs would be recorded as assets and amortized. The Partnership has incurred
approximately $3.8 million of costs related to the Year 2000 issue. The Company
estimates the remaining amounts required to address the Year 2000 issue will be
as much as approximately $1.4 million. A portion of such costs would have been
incurred as part of normal system and application upgrades. In certain cases,
the timing of expenditures has been accelerated due to the Year 2000 issue.
Although the Company believes this estimate to be reasonable, due to the
complexities of the Year 2000 issue, there can be no assurance that the actual
costs related to the Year 2000 issue will not be significantly greater.
The Partnership has adopted a three-phase Year 2000 program consisting
of: Phase I - Preliminary Assessment; Phase II Detailed Assessment and
Remediation Planning; and Phase III - Remediation Activities and Testing. The
Partnership has completed Phase I and Phase II; and Phase III is approximately
95% complete. Remediation Activities and Testing of all major process controls
and computer systems have been completed. Remediation Activities and Testing of
other software applications and hardware will be complete by mid-December 1999.
8
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TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
With respect to its third-party relationships, the Partnership has
contacted its primary vendors, suppliers and service providers to assess their
software and hardware products previously sold to the Partnership and other
aspects of their state of Year 2000 readiness. Information continues to be
updated regularly, thus the Partnership anticipates receiving additional
information in the near future that will assist in determining the extent to
which the Partnership may be vulnerable to those third parties' failure to
identify and remediate their Year 2000 issues. However, there can be no
assurance that the systems or products of other companies, on which the
Partnership's systems rely, will be timely converted, or converted in a manner
that is compatible with the Partnership's systems, or that any such failures by
other companies would not have a material adverse effect on the Partnership.
Despite the Partnership's determined efforts to address and remediate
its Year 2000 issue, there can be no assurance that all process controls and
business computer systems will continue without interruption through January 1,
2000, and beyond. The complexity of identifying and testing all embedded
microprocessors that are installed in hardware throughout the pipeline system
used for process or flow control, transportation, security, communication and
other systems may result in unforeseen operational system shutdowns. Although
the amount of potential liability and lost revenue cannot be estimated, failures
that result in substantial disruptions of business activities could have a
material adverse effect on the Partnership. In order to mitigate potential
disruptions, the Partnership will prepare contingency plans for its critical
systems, processes and external relationships by December 1, 1999.
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").
In May 1999, the Partnership filed an application with the FERC to
charge Market Based Rates for substantially all refined products transportation
tariffs. The FERC approved a request of the Partnership 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 Partnership has agreed
to refund, with interest, such amounts collected 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 September 30, 1999, the amount for accrued rate refunds
totaled approximately $0.4 million.
In July 1999, certain shippers filed protests with the FERC on the
Partnership's application for Market Based Rates in four destination markets.
The Partnership believes it will prevail in competitive market determination in
those destination markets under protest.
Substantially all of the petroleum products transported and stored by
the Partnership are owned by the Partnership's customers. At September 30, 1999,
the Partnership had approximately 17.4 million barrels of products in its
custody owned by customers. The Partnership is obligated for the transportation,
storage and delivery of such products on behalf of its customers. The
Partnership maintains insurance it believes to be adequate to cover product
losses through circumstances beyond its control.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Partnership's operations consist primarily of the transportation,
storage and terminaling of petroleum products. 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 Partnership's revenues are derived primarily 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 Partnership. Effective March 31,
1998, the Partnership's operations included the fractionation of natural gas
liquids (see Note 2 in Item 1. Related Party Transactions).
The following information is provided to facilitate increased
understanding of the 1999 and 1998 interim consolidated financial statements and
accompanying notes presented in Item 1. 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.
RESULTS OF OPERATIONS
Net income for the quarter ended September 30, 1999 was $10.3 million,
compared with net income of $12.9 million for the 1998 third quarter. The
decrease in net income resulted primarily from a $1.9 million increase in costs
and expenses, a $0.6 million decrease in operating revenues and a $0.4 million
increase in interest expense. These decreases of net income were partially
offset by a $0.6 million increase in interest capitalized.
For the nine months ended September 30, 1999, the Partnership reported
net income of $43.2 million, compared with a net loss of $34.7 million for the
first nine months of 1998. The net loss in 1998 included an extraordinary charge
of $73.5 million for early extinguishment of debt. Excluding the extraordinary
loss, net income would have been $38.8 million for the first nine months of
1998. The $4.3 million increase in income before loss on debt extinguishment
resulted primarily from a $13.0 million increase in operating revenues and a
$0.6 million increase in interest capitalized, which were partially offset by a
$7.2 million increase in costs and expenses, a $1.1 million increase in interest
expense and a $1.0 million decrease in other income - net. See discussion below
of factors affecting net income for the comparative periods.
See volume and average tariff information below:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, PERCENTAGE SEPTEMBER 30, PERCENTAGE
---------------------- INCREASE ---------------------- INCREASE
1999 1998 (DECREASE) 1999 1998 (DECREASE)
-------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
VOLUMES DELIVERED
(in thousands of barrels)
Refined products 35,883 37,103 (3%) 99,856 96,797 3%
LPGs 6,404 6,845 (6%) 25,943 22,656 15%
Mont Belvieu operations 8,000 6,890 16% 20,767 18,352 13%
-------- -------- -------- -------- -------- --------
Total 50,287 50,838 (1%) 146,566 137,805 6%
======== ======== ======== ======== ======== ========
AVERAGE TARIFF PER BARREL
Refined products $ 0.93 $ 0.95 (2%) $ 0.93 $ 0.94 (1%)
LPGs 1.48 1.55 (5%) 1.78 1.86 (4%)
Mont Belvieu operations 0.15 0.14 7% 0.16 0.15 7%
Average system tariff $ 0.88 $ 0.92 (4%) $ 0.97 $ 0.98 (1%)
======== ======== ======== ======== ======== ========
</TABLE>
10
<PAGE> 11
RESULTS OF OPERATIONS - (CONTINUED)
Refined products transportation revenues decreased $1.9 million for the
quarter ended September 30, 1999, compared with the prior-year quarter, due to a
3% decrease in total refined products volumes delivered and a 2% decrease in the
refined products average tariff per barrel. Motor fuel volumes delivered
decreased 2.4 million barrels as a result of unfavorable price differentials in
the Midwest and reduced refinery production received into the Ark-La-Tex system.
Additionally, methyl tertiary butyl ether ("MTBE") volumes delivered decreased
0.4 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. Decreases in motor fuel and
MTBE were partially offset by a 1.1 million barrel increase in jet fuel volumes
delivered and a 1.0 million barrel increase in distillate volumes delivered
attributable to strong economic demand in the Midwest market areas. Jet fuel
volumes delivered also benefited as a result of new military supply agreements
that became effective in the fourth quarter of 1998. The decrease in the average
tariff per barrel was primarily attributable to 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 $0.4 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 decreased $1.1 million for the quarter
ended September 30, 1999, compared with the third quarter of 1998, as a result
of a 6% decrease in total LPGs volumes delivered and a 5% decrease in the LPGs
average tariff per barrel. The decrease was primarily attributable to a 0.2
million barrel decrease in long-haul propane volumes delivered in the Northeast
market area attributable to unfavorable price differentials versus competing
Canadian product. Additionally, short-haul propane volumes delivered decreased
0.5 million barrels as a result of lower deliveries along the upper Texas Gulf
Coast. These decreases were partially offset by a 0.2 million barrel increase in
propane volumes delivered in the Midwest market area primarily attributable to
higher demand from a petrochemical facility served by the Partnership. The
decrease in the LPGs average tariff per barrel resulted from the decrease in
long-haul volumes delivered in the Northeast market area in 1999 and tariff rate
reductions under the PPI Index, effective July 1, 1999.
For the nine months ended September 30, 1999, refined products
transportation revenues increased $1.9 million, compared with the corresponding
period in 1998, as a result of a 3% increase in total refined products volumes
delivered, partially offset by a 1% decrease in the average tariff per barrel.
Strong economic demand coupled with lower refinery production resulted in a 2.6
million barrel increase in distillate volumes delivered and a 2.6 million barrel
increase in jet fuel volumes delivered. These increases were partially offset by
a 0.8 million barrel decrease in MTBE volumes delivered as a result of lower
blending demand in the Chicago market area, a 0.7 million barrel decrease in
natural gasoline volumes delivered attributable to lower feed stock and blending
demand, and a 0.4 million barrel decrease in motor fuel volumes delivered due to
unfavorable Midwest price differentials. The decrease in the average tariff per
barrel resulted primarily from the general tariff reduction under the PPI Index,
effective July 1, 1999.
LPGs transportation revenues increased $4.0 million, during the nine
months ended September 30, 1999, compared with the same period in 1998, due to a
15% increase in total LPGs volumes delivered, partially offset by a 4% decrease
in the LPGs average tariff per barrel. Propane deliveries in the Northeast
market area increased 1.2 million barrels from higher weather-related demand in
the first quarter of 1999, partially offset by unfavorable price differentials
during the second and third quarters of 1999. Propane deliveries in the Midwest
market area and the upper Texas Gulf Coast increased 1.2 million barrels and 0.9
million barrels, respectively, from the prior year due primarily to increased
petrochemical feed stock demand. Butane volumes delivered were relatively
unchanged from the prior year due to lower refinery feed stock demand in the
Northeast, partially offset by increased demand from Midwest area refineries.
The 4% decrease in the average 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.
11
<PAGE> 12
RESULTS OF OPERATIONS - (CONTINUED)
Revenues generated from Mont Belvieu operations increased during both
the quarter and nine months ended September 30, 1999, compared with the
corresponding periods in 1998, due primarily to increased storage revenue and
increased demand for shuttle deliveries of propane and butane.
Other operating revenues increased $1.9 million during the third
quarter of 1999, as compared with the third quarter of 1998, due primarily to a
$1.7 million increase in gains on the sale of product inventory attributable to
favorable market prices and increased revenue earned on contracts for butane
storage during the summer months.
During the nine months ended September 30, 1999, other operating
revenues increased $5.5 million, as compared to the same period in 1998, due
primarily to a $2.8 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, lower exchange losses incurred to position product
in the Midwest market area, and higher propane imports received at the marine
terminal at Providence, Rhode Island.
Costs and expenses increased $1.9 million for the quarter ended
September 30, 1999, compared with the third quarter of 1998, primarily due to a
$1.1 million increase in operating, general and administrative expenses, a $0.3
million increase in operating fuel and power expense, and a $0.5 million
increase in taxes - other than income. The increase in operating, general and
administrative expenses was primarily attributable to a $0.7 million increase in
expenses associated with Year 2000 activities, a $0.5 million increase in rental
fees from higher volume through the connection from Colonial Pipeline at
Beaumont, and increased general and administrative supplies and services. These
increases were partially offset by a $0.5 million decrease in product
measurement losses. The increase in operating fuel and power expense was
primarily attributable to a heavier mix of products transported during the third
quarter of 1999. The increase in taxes - other than income was primarily due to
credits recorded during the third quarter of 1998 for the over accrual of
previous years' property taxes.
Costs and expenses increased $7.2 million for the nine-months ended
September 30, 1999, compared with the same period in 1998, due to a $4.0 million
increase in operating, general and administrative expenses, a $1.8 million
volume-related increase in operating fuel and power expense, a $1.0 million
increase in depreciation and amortization expense and a $0.4 million increase in
taxes - other than income. The increase in operating, general and administrative
expenses was primarily attributable to a $1.8 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
$0.3 million insurance reimbursement received in June 1998 for past litigation
costs related to the Seymour, Indiana, terminal; nine months of fractionation
fees in 1999 related to the facilities acquired on March 31, 1998; and higher
general and administrative supplies and services. Depreciation and amortization
expense increased as a result of the completion of capital projects, coupled
with nine months of expense in 1999 for amortization of the value assigned to
the Fractionation Agreement. The increase in taxes - other than income increased
due to factor noted above during the third quarter of 1998.
Interest expense increased $1.1 million during the nine-months ended
September 30, 1999, compared with the prior year period. Approximately $0.6
million of the increase was attributable to nine months of interest expense in
1999 on the $38 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 both the quarter ended and nine
months ended September 30, 1999, compared with the corresponding periods in
1998, as a result of higher balances associated with construction-in-progress of
the new pipelines between Mont Belvieu and Port Arthur.
Other income decreased during both the quarter and nine-months ended
September 30, 1999, compared with the corresponding periods in 1998, due
primarily to lower interest income earned on cash investments in 1999, and a
$0.4 million gain on the disposition of non-carrier assets in June 1998.
12
<PAGE> 13
FINANCIAL CONDITION AND LIQUIDITY
Net cash from operations for the nine-month period ended September 30,
1999, totaled $63.9 million, comprised of $63.5 million of income before charges
for depreciation and amortization and $0.4 million provided by working capital
changes. This compares with cash flows from operations of $55.4 million for the
corresponding period in 1998, comprised of $57.4 million of income before
extraordinary loss on early extinguishment of debt and charges for depreciation
and amortization, partially offset by $2.0 million used for working capital
changes. Net cash from operations for the nine months ended September 30, 1999
and 1998, included interest payments of $29.7 million and $26.8 million,
respectively.
Cash flows used in investing activities during the first nine months of
1999 included $55.1 million of capital expenditures and $3.2 million of
additional cash investments. These decreases of cash were offset by $3.8 million
from investment maturities. Cash flows used in investing activities during the
first nine months of 1998 included $40.0 million for the purchase price of the
fractionation assets and related intangible assets and $15.2 million of capital
expenditures, partially offset by $2.1 million from investment maturities and
$0.5 million received from the sale of non-carrier assets.
In February 1999, the Partnership announced plans to construct 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 anticipated completion date is the fourth
quarter of 2000. 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 cost of this project
is expected to total approximately $74.5 million. Approximately $39.7 million of
construction cost was included in capital expenditures during the nine month
period ended September 30, 1999, with a total of approximately $44.6 million
expected to be incurred in 1999, and the remainder in 2000.
Exclusive of the pipeline construction between Mont Belvieu and Port
Arthur, the Partnership estimates that capital expenditures for 1999 will total
approximately $25 million. Approximately $23 million of planned expenditures are
expected to be used for life-cycle replacements and to upgrade current
facilities, with the remaining $2 million expected to be used for
revenue-generating projects. The Partnership revises capital spending estimates
periodically in response to changes in cash flows and operations.
On January 27, 1998, the Partnership 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 Partnership, 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, 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, commencing July 15, 1998. The Senior Notes are unsecured obligations
of the Partnership and rank on a parity with all other unsecured and
unsubordinated indebtedness of the Partnership. 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.
13
<PAGE> 14
FINANCIAL CONDITION AND LIQUIDITY - (CONTINUED)
In connection with the purchase of the 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 Partnership is
guarantor on the loan.
On May 17, 1999, the Partnership 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 September 30, 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 Partnership'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 6.33%.
Commitment fees for the term loan agreement totaled approximately $47,000 for
the period from May 17, 1999 through September 30, 1999.
On May 17, 1999, the Partnership entered into a five-year $25 million
revolving credit agreement. SunTrust Bank is the administrative agent on the
revolving credit agreement. The interest rate is based on the Partnership'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
Partnership has not borrowed any amounts under the revolving credit facility.
Commitment fees for the revolving credit agreement totaled approximately $23,000
for the period from May 17, 1999 through September 30, 1999.
The Partnership paid cash distributions of $45.5 million during the
nine months ended September 30, 1999. Additionally, on October 18, 1999, the
Partnership declared a cash distribution of $16.1 million for the quarter ended
September 30, 1999. The third quarter cash distribution was paid on November 5,
1999.
OTHER MATTERS
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 will 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 will evaluate the
conditions of the Record of Decision and make adjustments to the program as
required. The amount accrued for the program was approximately $0.4 million at
September 30, 1999. In the opinion of the Company, the completion of the
remediation program being proposed by the Partnership, if such program is
14
<PAGE> 15
OTHER MATTERS - (CONTINUED)
approved by IDEM, 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 is
utilizing both internal and external resources to identify, test, remediate or
replace all critical known or discovered non-compliant computerized systems and
applications. The Company continues to evaluate appropriate courses of
corrective action, including replacement of certain systems whose associated
costs would be recorded as assets and amortized. The Partnership has incurred
approximately $3.8 million of costs related to the Year 2000 issue. The Company
estimates the remaining amounts required to address the Year 2000 issue will be
as much as approximately $1.4 million. A portion of such costs would have been
incurred as part of normal system and application upgrades. In certain cases,
the timing of expenditures has been accelerated due to the Year 2000 issue.
Although the Company believes this estimate to be reasonable, due to the
complexities of the Year 2000 issue, there can be no assurance that the actual
costs related to the Year 2000 issue will not be significantly greater.
The Partnership has adopted a three-phase Year 2000 program consisting
of: Phase I - Preliminary Assessment; Phase II Detailed Assessment and
Remediation Planning; and Phase III - Remediation Activities and Testing. The
Partnership has completed Phase I and Phase II; and Phase III is approximately
95% complete. Remediation Activities and Testing of all major process controls
and computer systems have been completed. Remediation Activities and Testing of
other software applications and hardware will be complete by mid-December 1999.
With respect to its third-party relationships, the Partnership has
contacted its primary vendors, suppliers and service providers to assess their
software and hardware products previously sold to the Partnership and other
aspects of their state of Year 2000 readiness. Information continues to be
updated regularly, thus the Partnership anticipates receiving additional
information in the near future that will assist in determining the extent to
which the Partnership may be vulnerable to those third parties' failure to
identify and remediate their Year 2000 issues. However, there can be no
assurance that the systems or products of other companies, on which the
Partnership's systems rely, will be timely converted, or converted in a manner
that is compatible with the Partnership's systems, or that any such failures by
other companies would not have a material adverse effect on the Partnership.
Despite the Partnership's determined efforts to address and remediate
its Year 2000 issue, there can be no assurance that all process controls and
business computer systems will continue without interruption through January 1,
2000, and beyond. The complexity of identifying and testing all embedded
microprocessors that are installed in hardware throughout the pipeline system
used for process or flow control, transportation, security, communication and
other systems may result in unforeseen operational system shutdowns. Although
the amount of potential liability and lost revenue cannot be estimated, failures
that result in substantial disruptions of business activities could have a
material adverse effect on the Partnership. In order to mitigate potential
disruptions, the Partnership will prepare contingency plans for its critical
systems, processes and external relationships by December 1, 1999.
Market and Regulatory Environment
In July 1999, the Partnership announced plans to build a new 360-mile
pipeline from Beaumont, Texas, to Little Rock, Arkansas. The new pipeline will
parallel the Partnership's two existing pipelines and will increase delivery
capability of refined petroleum products by 100,000 barrels per day. The
expansion will also include construction of additional storage tanks,
connections to other pipelines to increase volumes entering the pipeline system
and increased delivery capability in the Partnership's Midwest market areas. The
expansion is scheduled to
15
<PAGE> 16
OTHER MATTERS - (CONTINUED)
be completed in 18 to 24 months. The Partnership currently anticipates
finalizing its evaluation of various construction alternatives of the capacity
expansion during the fourth quarter of 1999.
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").
In May 1999, the Partnership filed an application with the FERC to
charge Market Based Rates for substantially all refined products transportation
tariffs. The FERC approved a request of the Partnership 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 Partnership has agreed
to refund, with interest, such amounts collected 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 September 30, 1999, the amount for accrued rate refunds
totaled approximately $0.4 million.
In July 1999, certain shippers filed protests with the FERC on the
Partnership's application for Market Based Rates in four destination markets.
The Partnership believes it will prevail in competitive market determination in
those destination markets under protest.
Effective July 1, 1999, the Partnership established Settlement Rates
with all shippers that utilize certain LPGs transportation tariff rates, whereby
such 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 under which
such agreements could not be reached with all shippers were reduced pursuant to
the PPI Index (approximately 1.83%), effective July 1, 1999. Effective July 1,
1999, the Partnership 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
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 substantially realized, that they will
have the expected consequences to or effect on the Partnership or its business
or operations.
16
<PAGE> 17
OTHER MATTERS - (CONTINUED)
For additional discussion of such risks and uncertainties, see TE Products
Pipeline Company, Limited Partnership's 1998 Annual Report on Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
At September 30, 1999, the Partnership 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 Partnership 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 September 30, 1999, the estimated fair value
of the Senior Notes and the SunTrust loan was approximately $361.2 million and
$37.8 million, respectively.
The Partnership periodically enters into futures contracts to hedge its
exposure to price risk on product inventory transactions. Recognized gains and
losses related to futures contracts which qualify as hedges are recognized in
income when the related inventory transactions are completed. Gains and losses
related to futures contracts, to the extent settled in cash, are reported as a
component of product inventory in the consolidated balance sheet until
recognized as income. At September 30, 1999, there were no outstanding futures
contracts.
At September 30, 1999, the Partnership had $25 million outstanding
under a variable interest rate term loan. The interest rate for this credit
facility is based on the Partnership's option of either SunTrust Bank's prime
rate, the federal funds rate or LIBOR rate in effect at the time of the
borrowing and is adjusted monthly, bimonthly, quarterly or semi-annually.
Utilizing the balances of variable interest rate debt outstanding at September
30, 1999, and assuming market interest rates increase 1%, the potential annual
increase in interest expense is approximately $0.3 million.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
3.1 Certificate of Formation of TEPPCO Colorado, LLC
(Filed as Exhibit 3.2 to Form 10-Q of TEPPCO
Partners, L.P. (Commission File No. 1-10403) for the
quarter ended March 31, 1998 and incorporated herein
by reference).
3.2 Amended and Restated Agreement of Limited Partnership
of TE Products Pipeline Company, Limited Partnership,
effective July 21, 1998 (Filed as Exhibit 3.2 to Form
8-K of TEPPCO Partners, L.P. (Commission File No.
1-10403) dated July 21, 1998 and incorporated herein
by reference).
4.1 Form of Indenture between TE Products Pipeline
Company, Limited Partnership and The Bank of New
York, as Trustee, dated as of January 27, 1998 (Filed
as Exhibit 4.3 to TE Products Pipeline Company,
Limited Partnership's Registration Statement on Form
S-3 (Commission File No. 333-38473) and incorporated
herein by reference).
10.1 Assignment and Assumption Agreement, dated March 24,
1988, between Texas Eastern Transmission Corporation
and the Company (Filed as Exhibit 10.8 to the
Registration Statement of TEPPCO Partners, L.P.
(Commission File No. 33-32203) and incorporated
herein by reference).
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<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K- (CONTINUED)
10.2 Texas Eastern Products Pipeline Company 1997 Employee
Incentive Compensation Plan executed on July 14, 1997
(Filed as Exhibit 10 to Form 10-Q of TEPPCO Partners,
L.P. (Commission File No. 1-10403) for the quarter
ended September 30, 1997 and incorporated herein by
reference).
10.3 Agreement Regarding Environmental Indemnities and
Certain Assets (Filed as Exhibit 10.5 to Form 10-K of
TEPPCO Partners, L.P. (Commission File No. 1-10403)
for the year ended December 31, 1990 and incorporated
herein by reference).
10.4 Texas Eastern Products Pipeline Company Management
Incentive Compensation Plan executed on January 30,
1992 (Filed as Exhibit 10 to Form 10-Q of TEPPCO
Partners, L.P. (Commission File No. 1-10403) for the
quarter ended March 31, 1992 and incorporated herein
by reference).
10.5 Texas Eastern Products Pipeline Company Long-Term
Incentive Compensation Plan executed on October 31,
1990 (Filed as Exhibit 10.9 to Form 10-K of TEPPCO
Partners, L.P. (Commission File No. 1-10403) for the
year ended December 31, 1990 and incorporated herein
by reference).
10.6 Form of Amendment to Texas Eastern Products Pipeline
Company Long-Term Incentive Compensation Plan (Filed
as Exhibit 10.7 to the Partnership's Form 10-K
(Commission File No. 1-10403) for the year ended
December 31, 1995 and incorporated herein by
reference).
10.7 Employees' Savings Plan of Panhandle Eastern
Corporation and Participating Affiliates (Effective
January 1, 1991) (Filed as Exhibit 10.10 to the
Partnership's Form 10-K (Commission File No. 1-10403)
for the year ended December 31, 1990 and incorporated
herein by reference).
10.8 Retirement Income Plan of Panhandle Eastern
Corporation and Participating Affiliates (Effective
January 1, 1991) (Filed as Exhibit 10.11 to Form 10-K
of TEPPCO Partners, L.P. (Commission File No.
1-10403) for the year ended December 31, 1990 and
incorporated herein by reference).
10.9 Panhandle Eastern Corporation Key Executive
Retirement Benefit Equalization Plan, adopted
December 20, 1993; effective January 1, 1994 (Filed
as Exhibit 10.12 to Form 10-K of Panhandle Eastern
Corporation (Commission File No. 1-8157) for the year
ended December 31, 1993 and incorporated herein by
reference).
10.10 Employment Agreement with William L. Thacker, Jr.
(Filed as Exhibit 10 to Form 10-Q of TEPPCO Partners,
L.P. (Commission File No. 1-10403) for the quarter
ended September 30, 1992 and incorporated herein by
reference).
10.11 Texas Eastern Products Pipeline Company 1994 Long
Term Incentive Plan executed on March 8, 1994 (Filed
as Exhibit 10.1 to Form 10-Q of TEPPCO Partners, L.P.
(Commission File No. 1-10403) for the quarter ended
March 31, 1994 and incorporated herein by reference).
10.12 Texas Eastern Products Pipeline Company 1994 Long
Term Incentive Plan, Amendment 1, effective January
16, 1995 (Filed as Exhibit 10.12 to Form 10-Q of
TEPPCO Partners, L.P. (Commission File No. 1-10403)
for the quarter ended June 30, 1999 and incorporated
herein by reference).
10.13 Panhandle Eastern Corporation Key Executive Deferred
Compensation Plan established effective January 1,
1994 (Filed as Exhibit 10.2 to Form 10-Q of TEPPCO
Partners, L.P. (Commission File No. 1-10403) for the
quarter ended March 31, 1994 and incorporated herein
by reference).
10.14 Asset Purchase Agreement between Duke Energy Field
Services, Inc. and TEPPCO Colorado, LLC, dated March
31, 1998 (Filed as Exhibit 10.14 to Form 10-Q of
TEPPCO Partners, L.P. (Commission File No. 1-10403)
for the quarter ended March 31, 1998 and incorporated
herein by reference).
10.15 Credit Agreement between TEPPCO Colorado, LLC,
SunTrust Bank, Atlanta, and Certain Lenders, dated
April 21, 1998 (Filed as Exhibit 10.15 to Form 10-Q
of TEPPCO
18
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K- (CONTINUED)
Partners, L.P. (Commission File No. 1-10403) for the
quarter ended March 31, 1998 and incorporated herein
by reference).
10.16 First Amendment to Credit Agreement between TEPPCO
Colorado, LLC, SunTrust Bank, Atlanta, and Certain
Lenders, effective June 29, 1998 (Filed as Exhibit
10.15 to Form 10-Q of TEPPCO Partners, L.P.
(Commission File No. 1-10403) for the quarter ended
June 30, 1998 and incorporated herein by reference).
10.17 Form of Employment Agreement between the Company and
O. Horton Cunningham, Ernest P. Hagan, Thomas R.
Harper, David L. Langley, Charles H. Leonard and
James C. Ruth, dated December 1, 1998 (Filed as
Exhibit 10.20 to Form 10-K of TEPPCO Partners, L.P.
(Commission File No. 1-10403) for the year ended
December 31, 1998 and incorporated herein by
reference).
10.18 Agreement Between Owner and Contractor between TE
Products Pipeline Company, Limited Partnership and
Eagleton Engineering Company, dated February 4, 1999
(Filed as Exhibit 10.21 to Form 10-Q of TEPPCO
Partners, L.P. (Commission File No. 1-10403) for the
quarter ended March 31, 1999 and incorporated herein
by reference).
10.19 Services and Transportation Agreement between TE
Products Pipeline Company, Limited Partnership and
Fina Oil and Chemical Company, BASF Corporation and
BASF Fina Petrochemical Limited Partnership, dated
February 9, 1999 (Filed as Exhibit 10.22 to Form 10-Q
of TEPPCO Partners, L.P. (Commission File No.
1-10403) for the quarter ended March 31, 1999 and
incorporated herein by reference).
10.20 Call Option Agreement, dated February 9, 1999 (Filed
as Exhibit 10.23 to Form 10-Q of TEPPCO Partners,
L.P. (Commission File No. 1-10403) for the quarter
ended March 31, 1999 and incorporated herein by
reference).
10.21 Credit Agreement between TE Products Pipeline
Company, Limited Partnership, SunTrust Bank, Atlanta,
and Certain Lenders, dated May 17, 1999 (Filed as
Exhibit 10.26 to Form 10-Q of TEPPCO Partners, L.P.
(Commission File No. 1-10403) for the quarter ended
June 30, 1999 and incorporated herein by reference).
10.22 Second Amendment to Credit Agreement between TEPPCO
Colorado, LLC, SunTrust Bank, Atlanta, and Certain
Lenders, effective May 17, 1999 (Filed as Exhibit
10.28 to Form 10-Q of TEPPCO Partners, L.P.
(Commission File No. 1-10403) for the quarter ended
June 30, 1999 and incorporated herein by reference).
10.23 Texas Eastern Products Pipeline Company Nonemployee
Directors Unit Accumulation Plan, effective April 1,
1999 (Filed as Exhibit 10.30 to Form 10-Q of TEPPCO
Partners, L.P. (Commission File No. 1-10403) for the
quarter ended September 30, 1999 and incorporated
herein by reference).
10.24 Texas Eastern Products Pipeline Company Nonemployee
Directors Deferred Compensation Plan, effective
November 1, 1999 (Filed as Exhibit 10.31 to Form 10-Q
of TEPPCO Partners, L.P. (Commission File No.
1-10403) for the quarter ended September 30, 1999 and
incorporated herein by reference).
10.25 Texas Eastern Products Pipeline Company Phantom Unit
Retention Plan, effective August 25, 1999 (Filed as
Exhibit 10.32 to Form 10-Q of TEPPCO Partners, L.P.
(Commission File No. 1-10403) for the quarter ended
September 30, 1999 and incorporated herein by
reference).
27* Financial Data Schedule as of and for the nine months
ended September 30, 1999.
-------------
* Filed herewith.
(b) Reports on Form 8-K: None
Items 1, 2, 3, 4 and 5 of Part II were not applicable and have been omitted.
19
<PAGE> 20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer and principal financial officer.
TE Products Pipeline Company, Limited Partnership
(Registrant)
By: Texas Eastern Products Pipeline Company,
General Partner
/s/ CHARLES H. LEONARD
--------------------------------------------------
Charles H. Leonard
Senior Vice President, Chief Financial Officer
and Treasurer
Date: November 9, 1999
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 25,299
<SECURITIES> 3,910
<RECEIVABLES> 15,606
<ALLOWANCES> 0
<INVENTORY> 9,222
<CURRENT-ASSETS> 55,461
<PP&E> 811,901
<DEPRECIATION> 207,891
<TOTAL-ASSETS> 713,884
<CURRENT-LIABILITIES> 31,906
<BONDS> 389,745
0
0
<COMMON> 0
<OTHER-SE> 225,659
<TOTAL-LIABILITY-AND-EQUITY> 713,884
<SALES> 0
<TOTAL-REVENUES> 169,022
<CGS> 0
<TOTAL-COSTS> 105,020
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,292
<INCOME-PRETAX> 43,158
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,158
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
