<PAGE> 1
================================================================================
UNITED STATES
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, 1996
COMMISSION FILE NO. 1-10403
TEPPCO PARTNERS, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 76-0291058
(STATE OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
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 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
----- -----
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<PAGE> 2
Part I. Financial Information
Item 1. Financial Statements
TEPPCO Partners, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 28,027 $ 39,663
Short-term investments . . . . . . . . . . . . . . . . . . . . . . 25,737 18,587
Accounts receivable, trade . . . . . . . . . . . . . . . . . . . . 14,290 20,031
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,073 22,911
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,105 3,145
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 92,232 104,337
---------- ----------
Property, plant and equipment, at cost (Net of accumulated
depreciation and amortization of $144,644 and $128,927) . . . . . 545,082 533,470
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,013 16,672
Restricted investments held in trust . . . . . . . . . . . . . . . . - 10,553
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,606 4,883
---------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 654,933 $ 669,915
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Current maturities, First Mortgage Notes . . . . . . . . . . . . . $ 13,000 $ 10,000
Accounts payable and accrued liabilities . . . . . . . . . . . . . 6,559 12,224
Accounts payable, general partner . . . . . . . . . . . . . . . . . 3,527 3,001
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . 2,384 11,232
Other accrued taxes . . . . . . . . . . . . . . . . . . . . . . . . 5,496 5,353
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,130 6,221
---------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . 38,096 48,031
---------- ----------
First Mortgage Notes . . . . . . . . . . . . . . . . . . . . . . . . 326,512 339,512
Other liabilities and deferred credits . . . . . . . . . . . . . . . 3,282 3,170
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . 2,900 2,821
Partners' capital:
General partner's interest . . . . . . . . . . . . . . . . . . . . 4,267 3,561
Limited partners' interests . . . . . . . . . . . . . . . . . . . . 279,876 272,820
---------- ----------
Total partners' capital . . . . . . . . . . . . . . . . . . . . 284,143 276,381
---------- ----------
Total liabilities and partners' capital . . . . . . . . . . . . $ 654,933 $ 669,915
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE> 3
TEPPCO PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
ended ended ended ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Operating revenues:
Transportation - Refined products . . $ 26,691 $ 26,140 $ 74,913 $ 72,419
Transportation - LPGs . . . . . . . . 14,759 11,350 54,342 44,424
Gain on sale of inventory . . . . . . 44 44 3,616 4,099
Mont Belvieu operations . . . . . . . 2,741 3,651 8,359 10,074
Other . . . . . . . . . . . . . . . . 5,293 5,105 16,093 14,919
--------- ---------- --------- ----------
Total operating revenues . . . . 49,528 46,290 157,323 145,935
--------- ---------- --------- ----------
Costs and expenses:
Operating, general and administrative 24,340 26,008 70,610 68,022
Depreciation and amortization . . . . 5,912 5,798 17,805 17,410
Taxes - other than income taxes . . . 1,827 776 6,426 5,696
--------- ---------- --------- ----------
Total costs and expenses . . . . 32,079 32,582 94,841 91,128
--------- ---------- --------- ----------
Operating income . . . . . . . . 17,449 13,708 62,482 54,807
Interest expense, First Mortgage Notes (8,685) (8,930) (26,237) (26,915)
Interest costs capitalized . . . . . . 323 243 703 670
Other income - net . . . . . . . . . . 1,410 1,446 4,290 4,266
--------- ---------- --------- ----------
Income before minority interest . 10,497 6,467 41,238 32,828
Minority interest . . . . . . . . . . . (105) (66) (416) (332)
--------- ---------- --------- ----------
Net income . . . . . . . . . . . $ 10,392 $ 6,401 $ 40,822 $ 32,496
========= ========== ========= ==========
Net income per Unit . . . . . . . $ 0.65 $ 0.43 $ 2.64 $ 2.16
========= ========== ========= ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 4
TEPPCO PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Nine Months
ended ended
September 30, September 30,
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,822 $ 32,496
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . 17,805 17,410
Decrease in accounts receivable, trade . . . . . . . . . . . . 5,741 4,369
Decrease in inventories . . . . . . . . . . . . . . . . . . . . 2,838 6,177
Increase in other current assets . . . . . . . . . . . . . . . (960) (3,058)
Decrease in accounts payable and accrued expenses . . . . . . . (12,935) (11,225)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 878 1,000
---------- ----------
Net cash provided by operating activities . . . . . . . . . 54,189 47,169
---------- ----------
Cash flows from investing activities:
Proceeds from investments . . . . . . . . . . . . . . . . . . . . . 10,879 58,258
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,436) (57,873)
Insurance proceeds related to damaged asset . . . . . . . . . . . . -- 9,750
Restricted investments designated for property additions . . . . . 10,553 (10,168)
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . (29,424) (19,469)
---------- ----------
Net cash used in investing activities . . . . . . . . . . . (22,428) (19,502)
---------- ----------
Cash flows from financing activities:
Principal payment, First Mortgage Notes . . . . . . . . . . . . . . (10,000) (7,000)
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . (33,397) (29,532)
---------- ----------
Net cash used in financing activities . . . . . . . . . . . (43,397) (36,532)
---------- ----------
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . (11,636) (8,865)
Cash and cash equivalents at beginning of period . . . . . . . . . . 39,663 28,567
---------- ----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . $ 28,027 $ 19,702
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Interest paid during the period (net of capitalized interest) . . . . $ 33,963 $ 34,812
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 5
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
TEPPCO Partners, L.P. is a Delaware limited partnership which operates
through TE Products Pipeline Company, Limited Partnership, a Delaware limited
partnership (collectively the "Partnership"), in which TEPPCO Partners, L.P.
holds a 99% interest as the sole limited partner. Texas Eastern Products
Pipeline Company and Subsidiary Companies (the "Company"), a wholly owned
subsidiary of PanEnergy Corp (PanEnergy), is the general partner of the
Partnership and has agreed not to voluntarily withdraw as the general partner
of the Partnership, subject to certain limited exceptions, prior to January 1,
2000.
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, 1996, and the results of operations and cash
flows for the periods presented. The results of operations for the nine months
ended September 30, 1996, are not necessarily indicative of results of
operations for the full year 1996. The interim financial statements should be
read in conjunction with the Partnership's consolidated financial statements
and notes thereto presented in the TEPPCO Partners, L.P. Annual Report on Form
10-K for the year ended December 31, 1995. Certain amounts for the prior year
period have been reclassified to conform to the current presentation.
Net income per Unit is computed by dividing net income, after deduction of
the general partner's interest, by the weighted average number of Units
outstanding (a total of 14,500,000 Units as of September 30, 1996). The
general partner's percentage interest in net income is based on its percentage
of cash distributions from Available Cash for each period (see Note 6). The
general partner was allocated 6.35% and 3.67% of net income for the nine months
ended September 30, 1996 and 1995, respectively.
NOTE 2. ACCOUNTING POLICY CHANGES
Effective January 1, 1996, the Partnership adopted Statement of Financial
Accounting Standards (SFAS) 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," with no impact to the
Partnership's consolidated financial statements. Assets are grouped and
evaluated based on the ability to identify their respective cash flows.
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS
123, "Accounting for Stock-Based Compensation." This standard addresses the
timing and measurement of stock-based compensation expense. The Partnership
has elected to retain the approach of Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees," (the intrinsic value
method) for recognizing stock-based expense in the consolidated financial
statements. The Partnership will adopt SFAS 123 in 1996 with respect to the
disclosure requirements set forth therein for companies retaining the intrinsic
value approach of APB No. 25.
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 and cash equivalents. At
September 30, 1996, short-term investments included $25.7 million of
investment-grade medium-term corporate debt securities, which mature within one
year. All short-term investments are stated at amortized cost, which
approximates the aggregate fair value at September 30, 1996, and are classified
as held-to-maturity securities.
5
<PAGE> 6
TEPPCO Partners, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
LONG-TERM INVESTMENTS
At September 30, 1996, the Partnership had $13.0 million invested in
investment-grade medium-term corporate debt securities, which have varying
maturities from 1997 through 2001. These securities are classified as
held-to-maturity securities and are stated at amortized cost. At September 30,
1996, the aggregate fair value and unrealized gain for these securities was
$13.1 million and $0.1 million, respectively.
NOTE 4. FIRST MORTGAGE NOTES
In connection with its formation, TE Products Pipeline Company, Limited
Partnership issued 9.60% Series A First Mortgage Notes, due 2000, and 10.20%
Series B First Mortgage Notes, due 2010 (collectively the "Notes"). The Notes,
which are secured by a mortgage on substantially all property, plant and
equipment of the Partnership, have mandatory annual prepayments at par through
March 7, 2010. Interest is payable semiannually on each March 7 and September
7 until retirement of the Notes. On March 7, 1996, the Partnership paid $10.0
million for current maturities due on the Notes. At September 30, 1996, the
current maturities of the Notes were $13.0 million, which is payable on March
7, 1997.
The agreements relating to the Notes contain certain covenant restrictions,
including limitations on cash distributions and on the amount of future
indebtedness, none of which is expected to have a material adverse effect on
the Partnership's operations.
NOTE 5. 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,
1996 1995
------------- ------------
<S> <C> <C>
Gasolines . . . . . . . . . . . . . . . . . . . . . . $1,241 $ 4,582
Propane . . . . . . . . . . . . . . . . . . . . . . . 7,044 6,624
Butanes . . . . . . . . . . . . . . . . . . . . . . . 6,687 6,868
Fuel oils . . . . . . . . . . . . . . . . . . . . . . 362 548
Other products . . . . . . . . . . . . . . . . . . . 1,648 1,440
Materials and supplies . . . . . . . . . . . . . . . 3,091 2,849
----- ---------
Total . . . . . . . . . . . . . . . . . . . . $20,073 $ 22,911
======= =========
</TABLE>
The costs of inventories were lower than market at September 30, 1996, and
December 31, 1995.
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 or as required by the terms of the Notes.
On August 9, 1996, the Partnership paid the second quarter cash distribution
of $0.75 per Unit to Unitholders of record on July 31, 1996. Additionally, on
October 17, 1996, the Partnership declared a cash distribution of $0.75 per
Unit for the quarter ended September 30, 1996. The third quarter
distribution is payable on November 8, 1996, to Unitholders of record on
October 31, 1996.
6
<PAGE> 7
TEPPCO Partners, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The Company receives incremental incentive distributions of 15%, 25% and 50%
on quarterly distributions of Available Cash that exceed $0.55, $0.65 and $0.90
per Unit, respectively. During the nine months ended September 30, 1996 and
1995, incentive distributions paid to the Company totaled $1.6 million and $0.7
million, respectively.
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Indiana Department of Environmental Management (IDEM) has approved a
remedial investigation phase II sampling plan for the Partnership's Seymour,
Indiana, terminal. The phase II sampling plan is part of the Agreed Order
entered into between the Partnership and IDEM that will ultimately result in a
remediation program for any on-site and off-site environmental problems
attributable to the Partnership's operations at Seymour. In the opinion of the
general partner, the completion of the remediation program to be proposed by
the Partnership, if such program is approved by IDEM, will not have a material
adverse impact on the Partnership.
The Partnership is involved in various other claims and legal proceedings
incidental to its business. In the opinion of management, these claims and
legal proceedings will not have a material adverse effect on the Partnership's
consolidated financial position 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 the operations of the pipeline system are in general
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. At September 30, 1996, the Partnership had $2.7 million included
in accrued liabilities for environmental remediation programs at certain
facilities. The Partnership expects this amount will be paid during 1996 and
1997. The completion of these programs is not expected to have a future
material adverse impact on the Partnership.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Partnership's operations consist of the transportation, storage and
terminaling of refined petroleum products and liquefied petroleum gases (LPGs).
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
Midwest and Northeast for propane, a major fuel for residential heating, and
higher demand for butane, an additive for gasoline blending.
Net income for the quarter ended September 30, 1996 was $10.4 million,
compared with net income of $6.4 million for the 1995 third quarter. Operating
revenues increased $3.2 million to $49.5 million, compared with revenues of
$46.3 million during the third quarter of 1995. Costs and expenses decreased
$0.5 million as a result of lower operating, general and administrative
expenses, which included a $4.5 million charge during the 1995 third quarter
for the settlement of certain litigation and remediation costs at the
Partnership's Seymour, Indiana, terminal, partially offset by a $1.1 million
increase in taxes - other than income taxes, during the 1996 third quarter.
Net income for the nine months ended September 30, 1996 increased $8.3
million to $40.8 million, compared with net income of $32.5 million for the
nine months ended September 30, 1995, due primarily to a $11.4 million increase
in operating revenues and a $0.7 million decrease in interest expense,
partially offset by a $3.7 million increase in costs and expenses.
See volume and average tariff information below:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, PERCENTAGE SEPTEMBER 30, PERCENTAGE
----------------- INCREASE -------------------- INCREASE
1996 1995 (DECREASE) 1996 1995 (DECREASE)
-------- -------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
VOLUMES DELIVERED
(in thousands of barrels)
Refined products 30,646 29,531 4% 87,187 82,328 6%
LPGs 8,712 6,779 29% 28,866 25,893 11%
Mont Belvieu operations 5,778 8,511 (32%) 17,124 22,548 (24%)
------- ------- ------- -------- -------- -------
Total 45,136 44,821 1% 133,177 130,769 2%
======= ======= ======= ======== ======== =======
AVERAGE TARIFF PER BARREL
Refined products $ 0.87 $ 0.89 (2%) $ 0.86 $ 0.88 (2%)
LPGs 1.69 1.67 1% 1.88 1.72 9%
Mont Belvieu operations 0.14 0.15 (7%) 0.16 0.14 14%
Average system tariff per barrel $ 0.94 $ 0.87 8% $ 0.99 $ 0.92 8%
</TABLE>
Refined products transportation revenues increased $0.6 million for the
quarter ended September 30, 1996, compared with the prior-year quarter, as a
result of higher deliveries of jet fuel, motor fuel, and distillates. The
increase in jet fuel volumes delivered resulted from the completion of the
pipeline connection to the United States Air Force Base at Little Rock,
Arkansas, in June 1996 and higher demand from commercial airlines in the
Midwest. Motor fuel and distillate deliveries increased from the prior year
due to higher demand in the Central and Midwest market areas. These increases
were partially offset by lower demand for methyl tertiary butyl ether (MTBE)
and gasoline blend stocks in the Chicago market area.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - (CONTINUED)
LPGs transportation revenues increased during the quarter ended September
30, 1996, compared with the third quarter of 1995, as a result of a $4.5
million increase in propane revenue, partially offset by a $1.1 million
decrease in butane revenue. Lower inventory levels in the Northeast region,
favorable price differentials and increased agricultural demand in the Midwest
region and higher demand along the upper Texas Gulf Coast resulted in higher
propane deliveries throughout the pipeline system. Butane deliveries decreased
in the 1996 third quarter due to increased Canadian supply imported into the
Midwest and the shut down of a refinery served by the pipeline system in the
Northeast.
For the nine months ended September 30, 1996, refined products
transportation revenues increased $2.5 million, compared with the corresponding
period in 1995, due to a 6% increase in volumes delivered, partially offset by
a 2% decrease in average tariff per barrel. Increased motor fuel and
distillate deliveries resulted from growing local economies in areas served by
the Partnership. Jet fuel deliveries increased as a result of continued higher
demand from commercial airlines, and the completion of the pipeline connection
to the United States Air Force Base at Little Rock in 1996. These increases
were partially offset by lower deliveries of reformulated gasoline, MTBE and
gasoline blend stocks in the Midwest. The decrease in the average tariff per
barrel was attributable to higher short-haul deliveries of MTBE at the
Partnership's marine terminal near Beaumont, Texas.
LPGs transportation revenues increased $9.9 million during the nine months
ended September 30, 1996, compared with the same period in 1995, as a result of
a 11% increase in volumes delivered and a 9% increase in the LPGs average
tariff per barrel. Volumes delivered increased due primarily to higher
long-haul propane deliveries attributable to the colder winter in the upper
Midwest and Northeast, lower inventory supplies and favorable price
differentials. The increase in propane deliveries was partially offset by
lower butane deliveries due to increased Canadian supply imported into the
Midwest and the shutdown of a refinery in the Northeast. The 9% increase in the
LPGs average tariff per barrel resulted from lower short-haul propane
deliveries along the upper Texas Gulf Coast, coupled with an increase in
long-haul propane deliveries.
Revenues generated from Mont Belvieu operations decreased during both the
quarter and nine months ended September 30, 1996, compared with the
corresponding periods in 1995, due primarily to lower storage revenues and
lower terminaling fees on butane received into the system. Lower inventory
levels along the upper Texas Gulf Coast resulted in decreased demand for Mont
Belvieu operations shuttle deliveries. Higher contract deliveries, which
generally carry lower tariffs, resulted in the lower average tariff per barrel
of shuttle deliveries during the third quarter of 1996.
Gains on the sale of inventory decreased $0.5 million during the nine months
ended September 30, 1996, compared with the same period during 1995, as a
result of lower volumes of product sold during the first six months of 1996.
Other operating revenues increased $1.2 million during the first nine months
of 1996, compared to the same period in 1995, due to increased propane imports
at the Providence, Rhode Island, marine terminal attributable to colder winter
weather in the Northeast and increased refined products terminaling revenues.
These increases were partially offset by lower butane storage revenue in the
Midwest and lower barge receipts at the Partnership's marine terminal near
Beaumont, Texas.
Costs and expenses decreased $0.5 million during the third quarter of 1996,
compared with the prior year quarter, due primarily to a $1.7 million decrease
in operating, general and administrative expenses, partially offset by a $1.1
million increase in taxes - other than income taxes. The decrease in
operating, general and administrative expenses reflects the $4.5 million charge
during the 1995 third quarter related to the settlement of certain
environmental remediation costs at the Partnership's Seymour, Indiana,
terminal. The decrease resulting from the 1995 special
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - (CONTINUED)
charge was offset by higher throughput-related power costs, increased contract
labor used for system maintenance and increased benefits and labor costs in
1996. The increase in other taxes was primarily attributable to a $0.9 million
adjustment recorded during the 1995 third quarter related to the
reclassification of the Partnership as a non-utility for Ohio property taxes.
Costs and expenses increased $3.7 million during the nine month period ended
September 30, 1996, compared with the corresponding period in 1995, due to a
$2.6 million increase in operating, general and administrative expenses, a $0.7
million increase in taxes - other than income taxes, and a $0.4 million
increase in charges for depreciation and amortization. The increase in
operating, general and administrative expenses was primarily due to a $1.9
million increase in power costs due to higher mainline transportation volumes,
increased system maintenance and increased labor and benefits costs, partially
offset by the $4.5 million special charge recorded in 1995. Other taxes
increased as a result of the adjustment recorded in 1995 related to the filing
status change for Ohio. Increased depreciation and amortization charges
reflects an increased property base resulting from higher capital expenditures.
Interest expense decreased during both the quarter and nine-month periods in
1996, compared with the same periods in 1995, due to principal payments on the
First Mortgage Notes of $7.0 million and $10.0 million in March 1995 and 1996,
respectively.
FINANCIAL CONDITION AND LIQUIDITY
Net cash from operations increased $7.0 million to $54.2 million for the
nine-month period ended September 30, 1996, compared with $47.2 million for the
corresponding period in 1995. The increase was attributable to an $8.7 million
increase in income before charges for depreciation and amortization during the
1996 period, which was partially offset by a $1.7 million decrease in other
working capital changes. Net cash from operations for the nine months ended
September 30, 1996 and 1995 reflect semi-annual interest payments related to
the Notes of $34.7 million and $35.5 million, respectively.
Cash flows used in investing activities during the first nine months of 1996
included additional investments of $14.4 million, partially offset by matured
investments of $10.9 million. Cash flows used in investing activities during
the first nine months of 1995 included additional investments of $57.9 million,
offset by $58.3 million of matured investments. Interest income earned on all
investments is included in cash from operations.
During the first quarter of 1995, the Partnership received $9.8 million in
insurance proceeds related to the failure of a LPGs storage cavern in Ohio
during April 1993. Pursuant to the agreements relating to the Notes, these
proceeds were placed in a trust account and were invested in discounted
commercial paper. The proceeds and interest income were released by the
trustee during August 1996 after storage and capacity modifications were
completed along the pipeline system to replace the reduced storage capacity of
the failed storage cavern in Ohio.
Capital expenditures totaled $29.4 million during the nine-month period
ended September 30, 1996, compared with capital expenditures of $19.5 million
for the same period in 1995. The increase in capital expenditures during 1996
reflects higher spending for system expansion projects including the completion
of facilities to deliver jet fuel to the United States Air Force Base at Little
Rock, Arkansas, and projects to expand the capacity to receive additional
product from a refinery near Shreveport, Louisiana, and to increase the
mainline capacity by 50,000 barrels per day to serve the Midwest market area.
Capital expenditures for the full year of 1996 are expected to total
approximately $50.0 million (including capitalized interest of $0.9 million).
Approximately $16.0 million of fourth quarter 1996 expenditures will be used
for the above expansion projects, with the remaining amount used for other
revenue-generating and system integrity projects. The Partnership revises
capital spending periodically
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY - (CONTINUED)
in response to changes in cash flows and operations.
The Partnership paid cash distributions of $33.4 million during the nine
months ended September 30, 1996. Additionally, on October 17, 1996, the
Partnership declared a cash distribution of $0.75 per Unit for the three months
ended September 30, 1996. The third quarter cash distribution is payable on
November 8, 1996 to Unitholders of record on October 31, 1996.
The Notes, which are secured by a mortgage on substantially all property,
plant and equipment of the Partnership, require annual principal payments
through March 2010. Interest is payable semi-annually on March 7 and September
7. Cash and cash equivalents were reduced by the $10.0 million principal
payment related to the Notes on March 7, 1996. At September 30, 1996, the
current maturities of the Notes were $13.0 million. The note agreement
relating to the Notes limits the amount of cash distributions that can be made
by TE Products Pipeline Company, Limited Partnership to TEPPCO Partners, L.P.
Such restriction is not anticipated to preclude the Partnership from making
quarterly distributions to Unitholders of at least $0.75 per Unit during the
remainder of 1996.
OTHER 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 the operations of the pipeline system are in general
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 IDEM has approved a remedial investigation phase II sampling plan for
the Partnership's Seymour, Indiana, terminal. The phase II sampling plan is
part of the Agreed Order entered into between the Partnership and IDEM that
will ultimately result in a remediation program for any on-site and off-site
environmental problems attributable to the Partnership's operations at Seymour.
In the opinion of the general partner, the completion of the remediation
program to be proposed by the Partnership, if such program is approved by IDEM,
will not have a material adverse impact on the Partnership.
Effective January 1, 1996, the Partnership adopted SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," with no impact to the Partnership's consolidated financial statements.
Assets are grouped and evaluated based on the ability to identify their
respective cash flows.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." This standard addresses the timing and measurement of
stock-based compensation expense. The Partnership has elected to retain the
approach of APB No. 25, "Accounting for Stock Issued to Employees," (the
intrinsic value method) for recognizing stock-based expense in the consolidated
financial statements. The Partnership will adopt SFAS 123 in 1996 with respect
to the disclosure requirements set forth therein for companies retaining the
intrinsic value approach of APB No. 25.
11
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
------- -----------
27 Financial Data Schedule as of and for the nine
months ended September 30, 1996.
(b) Reports on Form 8-K: None
Items 1, 2, 3, 4 and 5 of Part II were not applicable and have been omitted.
12
<PAGE> 13
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.
TEPPCO Partners, L.P.
(Registrant)
By: Texas Eastern Products Pipeline
Company General Partner
CHARLES H. LEONARD
-----------------------------------
Charles H. Leonard
Sr. Vice President, Chief Financial
Officer and Treasurer
Date: November 6, 1996
13
<PAGE> 14
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
27 Financial Data Schedule as of and for the nine
months ended September 30, 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 28,027
<SECURITIES> 25,737
<RECEIVABLES> 14,290
<ALLOWANCES> 0
<INVENTORY> 20,073
<CURRENT-ASSETS> 92,232
<PP&E> 689,726
<DEPRECIATION> 144,644
<TOTAL-ASSETS> 654,933
<CURRENT-LIABILITIES> 38,096
<BONDS> 326,512
0
0
<COMMON> 0
<OTHER-SE> 284,143
<TOTAL-LIABILITY-AND-EQUITY> 654,933
<SALES> 0
<TOTAL-REVENUES> 157,323
<CGS> 0
<TOTAL-COSTS> 94,841
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,237
<INCOME-PRETAX> 41,238
<INCOME-TAX> 0
<INCOME-CONTINUING> 40,822
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,822
<EPS-PRIMARY> 2.64
<EPS-DILUTED> 2.64
</TABLE>
