<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JULY 21, 2000
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)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On July 21, 2000, Texas Eastern Products Pipeline Company, LLC, the
general partner of TEPPCO Partners, L.P. (the "Partnership") announced the
completion of its acquisition of certain assets of ARCO Pipe Line Company
("ARCO"), a wholly owned subsidiary of Atlantic Richfield Company, for $318.5
million. The purchase included ARCO's 50-percent ownership interest in Seaway
Crude Pipeline Company's ("Seaway") 500-mile, 30-inch diameter pipeline that
carries mostly imported crude oil from a marine terminal at Freeport, Texas, to
Cushing, Oklahoma. The line has a capacity of 350,000 barrels per day. The
Partnership assumed ARCO's role as operator of Seaway. The Company also
acquired: (i) ARCO's crude oil terminal facilities in Cushing and Midland,
Texas, including the line transfer and pumpover business at each location; (ii)
an undivided ownership interest in both the Rancho Pipeline, a 400-mile, 24-inch
diameter, crude oil pipeline from West Texas to Houston, and the Basin Pipeline,
a 416-mile, crude oil pipeline running from Jal, New Mexico, through Midland to
Cushing, both of which are operated by another joint owner; and (iii) the
receipt and delivery pipelines known as the West Texas Trunk System, which is
located around the Midland terminal. The transaction will be accounted for under
the purchase method for accounting purposes.
The acquisition was financed through a term loan and a revolving credit
facility. SunTrust Bank is the administrative agent of the credit agreements.
The term loan has an eighteen month maturity and the revolving facility has a
three year maturity. The interest rate for the credit agreements is based on the
Partnership's option of either SunTrust Bank's prime rate, the federal funds
rate or the LIBOR rate in effect at the time of the borrowings and is adjusted
monthly, bimonthly, quarterly or semi-annually. The credit agreements contain
restrictive financial covenants that require the Partnership to maintain a
minimum level of partners' capital as well as debt-to-earnings, interest
coverage and capital expenditure coverage ratios.
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 hereunto duly authorized.
TEPPCO Partners, L.P.
(Registrant)
By: Texas Eastern Products Pipeline Company, LLC,
General Partner
/s/ CHARLES H. LEONARD
---------------------------------------------
Charles H. Leonard
Sr. Vice President, Chief Financial Office
and Treasurer
Date: October 3, 2000
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<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired:
ARCO Pipe Line Company's APL Business (as defined in the
Amended and Restated Purchase Agreement with Texas
Eastern Products Pipeline Company, LLC):
Report of Independent Accountants 4
Combined Balance Sheet as of June 30, 2000 (unaudited),
December 31, 1999 and 1998 5
Combined Statement of Operations and Owner's Net
Investment for the Six Months Ended June 30, 2000 (unaudited)
and 1999 (unaudited) and for the Years Ended December 31,
1999 and 1998 6
Combined Statement of Cash Flows for the Six Months Ended
June 30, 2000 (unaudited) and 1999 (unaudited) and for the
Years Ended December 31, 1999 and 1998 7
Notes to Combined Financial Statements 8
Seaway Crude Pipeline Company:
Report of Independent Accountants 18
Balance Sheet as of June 30, 2000 (unaudited),
December 31, 1999 and 1998 19
Statement of Operations for the Six Months Ended June 30, 2000
(unaudited) and 1999 (unaudited) and for the Years Ended
December 31, 1999 and 1998 20
Statement of Partners' Equity for the Six Months Ended
June 30, 2000 (unaudited) and 1999 (unaudited) and for the
Years Ended December 31, 1999 and 1998 21
Statement of Cash Flows for the Six Months Ended June 30, 2000
(unaudited) and 1999 (unaudited) and for the Years Ended
December 31, 1999 and 1998 22
Notes to Financial Statements 23
(b) Pro Forma Financial Information:
Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2000. 31
Unaudited Pro Forma Condensed Combined Statement of Income for the year
ended December 31, 1999. 32
Unaudited Pro Forma Condensed Combined Statement of Income for the six
months ended June 30, 2000. 33
Notes to Unaudited Pro Forma Condensed Combined Financial Statements. 34
(c) Exhibits:
NONE.
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<PAGE> 4
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired:
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
ARCO Pipe Line Company
In our opinion, the accompanying combined balance sheet and the related combined
statements of operations and owner's net investment and of cash flows present
fairly, in all material respects, the financial position of ARCO Pipe Line
Company's APL Business (as defined in the Amended and Restated Purchase
Agreement with Texas Eastern Products Pipeline Company, LLC) at December 31,
1999 and 1998, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Houston, Texas
September 25, 2000
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<PAGE> 5
ARCO PIPE LINE COMPANY'S APL BUSINESS
COMBINED BALANCE SHEET
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) DECEMBER 31,
JUNE 30, -----------------------------
2000 1999 1998
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Accounts receivable $ 3,374 $ 4,697 $ 5,258
Accounts receivable - affiliates 143 262 120
Inventory 2,512 645 --
Other current assets 1,651 1,830 1,847
------------ ------------ ------------
Total current assets 7,680 7,434 7,225
Property and equipment, net 51,582 52,454 51,686
Investment in Seaway Crude Pipeline Company 246,656 244,373 245,293
------------ ------------ ------------
Total assets $ 305,918 $ 304,261 $ 304,204
============ ============ ============
LIABILITIES AND OWNER'S NET INVESTMENT
Current liabilities:
Accounts payable - trade $ 124 $ 44 $ 341
Income taxes payable 14,581 9,901 11,844
Accrued payroll and related costs 1,803 3,349 1,847
Payable to equity investees 3,486 2,337 2,540
Other current liabilities 1,995 2,394 4,047
------------ ------------ ------------
Total current liabilities 21,989 18,025 20,619
Deferred income taxes 36,398 35,699 33,993
Long-term liabilities 250 250 538
Commitments and contingencies -- -- --
------------ ------------ ------------
Total liabilities 58,637 53,974 55,150
Owner's net investment 247,281 250,287 249,054
------------ ------------ ------------
Total liabilities and Owner's net investment $ 305,918 $ 304,261 $ 304,204
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
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<PAGE> 6
ARCO PIPE LINE COMPANY'S APL BUSINESS
COMBINED STATEMENT OF OPERATIONS AND OWNER'S NET INVESTMENT
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
-------------------------- --------------------------
2000 1999 1999 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Transportation revenue - crude oil $ 9,407 $ 10,757 $ 22,527 $ 21,298
Pipeline services 5,148 5,164 10,656 11,135
Equity in earnings of Seaway
Crude Pipeline Company 10,884 13,096 25,195 21,250
Interest and other income 168 225 803 438
---------- ---------- ---------- ----------
Total revenues 25,607 29,242 59,181 54,121
---------- ---------- ---------- ----------
Costs and expenses:
Operations and maintenance 4,499 7,091 14,774 12,669
Depreciation and amortization 2,057 2,099 4,155 3,981
General and administrative 3,873 4,550 7,915 4,187
Other 575 497 935 889
---------- ---------- ---------- ----------
Total costs and expenses 11,004 14,237 27,779 21,726
---------- ---------- ---------- ----------
Income before income taxes 14,603 15,005 31,402 32,395
Income tax provision 5,379 5,557 11,607 11,969
---------- ---------- ---------- ----------
Net income $ 9,224 $ 9,448 $ 19,795 $ 20,426
========== ========== ========== ==========
Owner's net investment:
Balance at beginning of period $ 250,287 $ 249,054 $ 249,054 $ 254,714
Net income 9,224 9,448 19,795 20,426
Cash distributions to Owner (12,230) (16,183) (18,562) (26,086)
---------- ---------- ---------- ----------
Balance at end of period $ 247,281 $ 242,319 $ 250,287 $ 249,054
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
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<PAGE> 7
ARCO PIPE LINE COMPANY'S APL BUSINESS
COMBINED STATEMENT OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
-------------------------- --------------------------
2000 1999 1999 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:-
Net income $ 9,224 $ 9,448 $ 19,795 $ 20,426
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 2,057 2,099 4,155 3,981
Equity in earnings of Seaway Crude
Pipeline Company (10,884) (13,096) (25,195) (21,250)
Distributions received from Seaway Crude
Pipeline Company 7,618 13,271 24,149 20,151
Deferred income taxes 699 614 1,706 125
Other, net -- (288) (288) --
(Increase) decrease in working capital:
Accounts receivable 1,323 876 561 (2,435)
Accounts receivable - affiliates 119 38 (142) 43
Inventory (1,867) (645) 1,920
Other current assets 179 112 17 (1,053)
Accounts payable - trade 80 (174) (297) (48)
Income taxes payable 4,680 4,943 (1,943) 3,898
Accrued payroll and related costs (1,546) 244 1,502 85
Payable to equity investees 1,149 276 (203) 2,438
Other current liabilities (399) (2,200) (1,653) 587
---------- ---------- ---------- ----------
Net cash provided by operating activities 12,432 16,163 21,519 28,868
---------- ---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (313) (104) (3,015) (2,782)
Proceeds from asset disposals 111 124 58 --
---------- ---------- ---------- ----------
Net cash provided by (used in)
investing activities (202) 20 (2,957) (2,782)
---------- ---------- ---------- ----------
Cash used in financing activities - cash
distributions to Owner (12,230) (16,183) (18,562) (26,086)
---------- ---------- ---------- ----------
Net increase in cash and cash equivalents -- -- -- --
Balance at beginning of year -- -- -- --
---------- ---------- ---------- ----------
Balance at end of year $ -- $ -- $ -- $ --
========== ========== ========== ==========
Income taxes deemed paid $ -- $ -- $ 11,844 $ 7,900
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
-7-
<PAGE> 8
ARCO PIPE LINE COMPANY'S APL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
AND 1999 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
ARCO Pipe Line Company ("APL"), a wholly-owned subsidiary of Atlantic
Richfield Company ("ARCO" or "Owner"), is engaged in the transportation
of crude oil, refined products and petrochemicals. On March 16, 2000,
ARCO entered into a definitive agreement (the "TEPPCO Agreement") to
sell the stock of APL to Texas Eastern Products Pipeline Company,
the general partner of TEPPCO Partners, L.P., for $355 million. On
April 18, 2000, BP/Amoco acquired ARCO in a merger transaction. On May
16, 2000, the TEPPCO Agreement was amended and the purchase price was
reduced to $318.5 million. On July 20, 2000, the sale to Texas Eastern
Products Pipeline Company, LLC was closed. Certain assets of APL,
consisting principally of (1) the petrochemical assets, (2) APL's
interest in Pacific Pipe Line Company, (3) APL's undivided interest in
the Cushing-Chicago Pipeline, (4) offshore assets, (5) all West Coast
assets, (6) the Aneth gathering system, (7) APL's investment in Seaway
Products Pipeline Company, (8) Cuyama Pipeline and (9) Casitas Pipeline
were retained by ARCO and were transferred out of the APL legal entity
prior to the sale. The assets remaining in APL primarily consist of (1)
APL's investment in Seaway Crude Pipeline Company, (2) crude oil and
terminal facilities in Cushing, Oklahoma and Midland, Texas, (3) APL's
undivided interests in the Rancho Pipeline and the Basin Pipeline, (4)
the pipeline services business and (5) the West Texas crude oil system,
and are referred to herein as ARCO Pipe Line Company's APL Business (as
defined in the Amended and Restated Purchase Agreement with Texas
Eastern Products Pipeline Company, LLC). The accompanying Combined
Financial Statements present, in conformity with accounting principles
generally accepted in the United States of America, the combined
assets, liabilities, revenues and expenses related to the historical
operations of ARCO Pipe Line Company's APL Business (as defined in the
Amended and Restated Purchase Agreement with Texas Eastern Products
Pipeline Company, LLC) (the "Carve-Out Company").
The accompanying Combined Financial Statements are presented on a
carve-out basis and include the historical operations applicable to the
defined Carve-Out Company. Accordingly, ARCO's net investment in the
Carve-Out Company (Owner's net investment) is shown in lieu of
stockholder's equity in the Combined Financial Statements. The Combined
Financial Statements included herein have been prepared from APL's
historical accounting records. Net cash distributions to Owner include
funds transferred between the Carve-Out Company and ARCO for operating
needs.
The Combined Statement of Operations and Owner's Net Investment
includes all revenues and costs directly attributable to the Carve-out
Company including costs for certain functions and services performed by
centralized ARCO organizations and directly charged or allocated to the
Carve-Out Company based on usage.
-8-
<PAGE> 9
ARCO PIPE LINE COMPANY'S APL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
AND 1999 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
--------------------------------------------------------------------------------
Throughout the period covered by the Combined Financial Statements,
ARCO provided cash management services to the Carve-Out Company through
centralized treasury systems. As a result, all charges and cost
allocations for facilities, functions and services performed by ARCO
for the Carve-Out Company (Note 3) are deemed to have been paid by the
Carve-Out Company to ARCO, in cash, during the period in which the cost
was recorded in the Combined Financial Statements. Allocations of
current income taxes receivable or payable are deemed remitted, in
cash, by or to ARCO in the year subsequent to that in which the related
income taxes were recorded.
All of the allocations and estimates in the Combined Financial
Statements are based on assumptions that management believes are
reasonable under the circumstances. However, these allocations and
estimates are not necessarily indicative of the costs and expenses that
would have resulted if the Carve-Out Company had been operated as a
separate entity.
2. ACCOUNTING POLICIES
BASIS OF COMBINATION
The Combined Financial Statements include the accounts of the Carve-Out
Company (as defined). Intercompany accounts and transactions within the
Carve-Out Company are eliminated. The equity method is used to account
for investments in which the Carve-Out Company exerts significant
influence. The pro rata consolidation method is used to account for
investments in which the Carve-Out Company owns an undivided interest
in each asset and is severally liable for indebtedness it incurs in
connection with its interest in the investment's assets.
UNAUDITED INTERIM INFORMATION
The accompanying unaudited combined financial information has been
prepared by the Carve-Out Company in accordance with accounting
principles generally accepted in the United States of America for
interim financial information and with the rules and regulations of the
Securities and Exchange Commission. The unaudited information furnished
reflects all adjustments, all of which were of a normal recurring
nature, which are, in the opinion of the Carve-Out Company, necessary
for a fair presentation of the results for the interim periods
presented. Operating results for the six-month period ended June 30,
2000 are not necessarily indicative of the results that may be expected
for the year ended December 31, 2000.
REVENUE RECOGNITION
Revenue from pipeline transportation of crude oil is recognized upon
delivery of the crude oil from the pipeline system to the customer.
Revenue from the Carve-Out Company's pipeline services business, which
provides documentation and other services relating to customers'
trading activity, is recognized in the period in which the service is
provided.
ACCOUNTS RECEIVABLE
The Carve-Out Company's customers consist of companies in the petroleum
industry. The Carve-Out Company performs ongoing credit evaluations of
its customers and generally does not require material collateral. At
June 30, 2000, December 31, 1999 and 1998, the balance in the allowance
for doubtful accounts was $0.
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<PAGE> 10
ARCO PIPE LINE COMPANY'S APL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
AND 1999 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
--------------------------------------------------------------------------------
OIL MOVEMENTS
Adjustments for overages and shortages of crude oil are charged to
income or expense at the time of the overage or shortage using a flat
rate per barrel cost which approximates the average market value of
crude contained within the pipeline systems.
INVENTORIES
Inventories of materials and supplies are carried at the lower of cost
or current market value. Cost is determined using the weighted-average
method. Inventories of materials and supplies are included in "Other
current assets" on the Combined Balance Sheet.
Inventories of crude oil are carried at the lower of cost or current
market value and determined under the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment is carried at historical cost, less accumulated
depreciation. Additions and improvements that expand the productive
capacity or extend the useful life of the assets are capitalized.
Expenditures for maintenance and repairs are expensed as incurred.
Property and equipment consists primarily of crude oil pipeline
facilities which include the cost of land, rights-of-way, pipe, pump
stations, equipment, material, labor and overhead.
When FERC-regulated property and equipment is retired due to
abandonment or replacement, the original cost, plus the cost of
retirement, less salvage, is charged to accumulated depreciation. No
gain or loss is recognized unless an entire operating unit, as defined
by the FERC, has been retired. When nonregulated properties are retired
due to abandonment or replacement, the original cost, plus retirement
cost, less accumulated depreciation and salvage is charged as a gain
or loss in income.
Depreciation is calculated for FERC-regulated assets using the
composite method which generally results in assets being depreciated
over their estimated economic useful lives. Assets with similar
economic characteristics are grouped. The depreciation rate
specifically approved by the FERC is applied to the gross investment
for the group until net book value of the group is equal to salvage
value. For non-FERC-regulated assets, depreciation is calculated using
the straight-line method over the estimated economic useful lives of
the assets.
IMPAIRMENT OF LONG-LIVED ASSETS
The Carve-Out Company accounts for impairment of long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of."
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<PAGE> 11
ARCO PIPE LINE COMPANY'S APL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
AND 1999 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
--------------------------------------------------------------------------------
SFAS No. 121 requires recognition of impairment losses on long-lived
assets in the event facts and circumstances indicate that the carrying
amount of such assets may not be recoverable and an estimate of
undiscounted future cash flows is less than the carrying amount of such
assets. Impairment is recorded as the difference between the fair
market value and the carrying value of the assets.
INCOME TAXES
The Carve-Out Company is included with ARCO and its domestic
subsidiaries in a consolidated United States federal income tax return.
There is no contractual tax-sharing agreement between the Carve-Out
Company and ARCO. For financial statement purposes, federal income
taxes of the Carve-Out Company are recorded at statutory rates, less
allowable credits. State tax expense is computed using an allocation of
ARCO's effective tax rate for unitary filings.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Carve-Out Company's financial instruments consist of accounts
receivable and accounts payable. The carrying amounts of these items
approximate fair value because of their short-term maturities.
ENVIRONMENTAL REMEDIATION
Environmental remediation costs are accrued as operating expenses based
on the estimated timing and extent of remedial actions required by
applicable governmental authorities and the amount of the Carve-Out
Company's liability in consideration of the liability and financial
wherewithal of other responsible parties. Estimated liabilities are not
discounted to present value. The environmental remediation accrual was
not material at June 30, 2000, December 31, 1999 or 1998. As a
condition to the sale of the Carve-Out Company to Texas Eastern
Products Pipeline Company, LLC, ARCO will retain all environmental
liabilities related to the Carve-Out Company.
EARNINGS PER SHARE
Earnings per share information is not provided because it is not a
meaningful presentation for the intended purpose of the financial
statements.
ESTIMATES, RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of certain assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the
related reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Management
believes that its estimates are reasonable.
-11-
<PAGE> 12
ARCO PIPE LINE COMPANY'S APL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
AND 1999 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
--------------------------------------------------------------------------------
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that
all derivative instruments be recorded on the balance sheet at their
fair value. Changes in the fair value will be recorded each period in
either current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction, and
if so, the type of hedge transaction. SFAS 133, as amended by SFAS 137
and SFAS 138, is effective for fiscal years beginning after June 15,
2000. Management does not believe that adoption of SFAS 133 will have
a significant effect on the Carve-Out Company's financial position,
results of operations or cash flows.
3. RELATED PARTY TRANSACTIONS
The Carve-Out Company engages in certain transactions with related
parties, primarily with companies within ARCO. Such transactions are in
the ordinary course of business and include operating, administrative,
marketing and various services which are reflected in operating
expenses in the accompanying Combined Statement of Operations and
Owner's Net Investment. Related parties can be shippers which utilize
the pipelines and pay posted tariffs or negotiate separate contracts
for leased capacity. Revenues totaling approximately $1,227 and $1,988
were earned from related parties during the years ended December 31,
1999 and 1998, respectively.
The Carve-Out Company has various business transactions with ARCO and
other ARCO companies, involving general corporate services (such as
cash management, legal, marketing and other financial services)
provided by ARCO and other ARCO companies on behalf of the Carve-Out
Company. The costs of services have been directly charged to, or
allocated between, the Carve-Out Company and other divisions of ARCO
using methods which management believes are reasonable. These methods
included dedicated asset assignment and proportionate corporate
formulas using assets, revenues and employees. Such charges and
allocations are not necessarily indicative of amounts that would have
been incurred had the Carve-Out Company operated as a separate entity.
-12-
<PAGE> 13
ARCO PIPE LINE COMPANY'S APL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
AND 1999 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
--------------------------------------------------------------------------------
4. OTHER CURRENT ASSETS
Other current assets at December 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Advances to operators $ 1,386 $ 1,372
Materials and supplies inventory 439 405
Other 5 70
---------- ----------
Total $ 1,830 $ 1,847
========== ==========
</TABLE>
5. INVESTMENT IN SEAWAY CRUDE PIPELINE COMPANY
Pursuant to the Original Agreement of General Partnership of Seaway
Pipeline Company (the "Original Partnership Agreement"), the Carve-Out
Company contributed and transferred the beneficial interest in certain
pipeline and related assets and properties with a net historical cost
of approximately $132,000 in exchange for a 50% interest in Seaway
Pipeline Company (the "Partnership") (100 Class A Units).
The Original Partnership Agreement provided for varying participation
ratios throughout the life of the Partnership. The Carve-Out Company
incurred 80% of the total Partnership capital expenditures during the
period from March 31, 1995 to May 13, 1996 (the "Commencement Date")
(Pre-Phase I). From the period beginning on the Commencement Date and
ending on the sixth anniversary of the Commencement Date (Phase I), the
Carve-Out Company will continue to recognize 80% of revenue, expense
and capital. For the period beginning at the end of Phase I and ending
on the fourth anniversary following the end of Phase I (Phase II), the
sharing ratio becomes 60% to the Carve-Out Company. Beginning at the
end of Phase II until the termination of the Partnership (Phase III),
40% of revenue, expense and capital will be allocated to the Carve-Out
Company.
Pursuant to the Plan of Merger of Seaway Pipeline Company into Seaway
Crude Pipeline Company and Seaway Products Pipeline Company dated July
20, 2000 ("Plan of Merger"), in a divisive merger transaction, Seaway
Pipeline Company was merged into two separate legal entities, Seaway
Crude Pipeline Company ("Seaway Crude") and Seaway Products Pipeline
Company ("Seaway Products"). Certain assets of the Partnership,
consisting primarily of the 20-inch pipeline owned by the Partnership
and operated in refined products transportation service, were allocated
to and vested in Seaway Products. The remaining assets of the
Partnership,
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<PAGE> 14
ARCO PIPE LINE COMPANY'S APL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
AND 1999 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
--------------------------------------------------------------------------------
consisting primarily of the 30-inch pipeline owned by the Partnership
and operated in crude oil transportation service, were allocated to and
vested in Seaway Crude. The Plan of Merger also provides for the
Amended and Restated Agreement of General Partnership of Seaway Crude
Pipeline Company dated July 20, 2000 (the "Amended Partnership
Agreement") to restate the rights and obligations of the Seaway Crude
Partnership.
The Amended Partnership Agreement restates the Original Partnership
Agreement to incorporate all prior amendments, changes the name of the
partnership to Seaway Crude Pipeline Company and ratifies the
allocations and distributions that have occurred to date under the
Original Partnership Agreement.
The Company uses the equity method of accounting for its investment in
Seaway Crude. Summarized financial information for Seaway Crude as of
and for the years ended December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Current assets $ 20,782 $ 34,786
Noncurrent assets 286,859 268,691
Current liabilities 10,561 7,385
Noncurrent liabilities 659
Revenues 62,115 56,261
Net income before cumulative effect of
accounting change 29,407 23,894
Net income 29,177 23,894
</TABLE>
The Carve-Out Company received distributions from this investment
totaling $24,149 and $20,151 during the years ended December 31, 1999
and 1998, respectively.
Also included in the "Investment in Seaway Crude Pipeline Company" on
the Combined Balance Sheet is excess investment totaling $51,953 and
$53,920, net of accumulated amortization of $7,047 and $5,080, at
December 31, 1999 and 1998, respectively. Such excess investment
relates to a payment made by the Carve-Out Company in excess of its
proportionate share of the net assets of Seaway Crude, and is being
amortized using the straight-line method over 30 years.
-14-
<PAGE> 15
ARCO PIPE LINE COMPANY'S APL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
AND 1999 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
--------------------------------------------------------------------------------
6. PROPERTY AND EQUIPMENT
The components of property and equipment at December 31, 1999 and 1998
were:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Land $ 1,641 $ 1,641
Line pipe, equipment and other pipeline constructions 43,094 42,754
Office, communication and data handling equipment 13,733 13,473
Buildings 2,877 2,877
Leasehold improvements 1,157 1,157
Vehicles 2,224 2,504
Rights-of-way 184 184
Construction work-in-process 7,365 5,114
-------- --------
72,275 69,704
Less - accumulated depreciation 19,821 18,018
-------- --------
Total $ 52,454 $ 51,686
-------- --------
</TABLE>
The above assets are being depreciated over their estimated economic
useful lives which range from five years for vehicles to 25 to 40 years
for crude oil pipeline facilities.
7. TAXES
The income tax provision for the years ended December 31, 1999 and 1998
comprised the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Federal:
Current $ 9,224 $ 11,033
Deferred 1,588 117
---------- ----------
Total federal 10,812 11,150
---------- ----------
State:
Current 677 811
Deferred 118 8
---------- ----------
Total state 795 819
---------- ----------
Total income tax provision $ 11,607 $ 11,969
---------- ----------
</TABLE>
-15-
<PAGE> 16
ARCO PIPE LINE COMPANY'S APL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
AND 1999 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
--------------------------------------------------------------------------------
The major components of the net deferred income tax liability at
December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Excess book basis over tax basis of investment in
Seaway Crude Pipeline Company $ 26,520 $ 26,857
Excess book basis over tax basis of property and
equipment 9,843 7,802
---------- ----------
Total deferred tax liabilities 36,363 34,659
---------- ----------
Other (664) (666)
---------- ----------
Total deferred tax assets (664) (666)
---------- ----------
Net deferred income tax liability $ 35,699 $ 33,993
========== ==========
</TABLE>
A reconciliation of income tax expense with tax at the effective
federal statutory rate (35%) for the years ended December 31, 1999 and
1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
PERCENT OF PERCENT OF
PRE-TAX PRE-TAX
INCOME INCOME
<S> <C> <C> <C> <C>
Income before income taxes $ 31,402 100.0 $ 32,395 100.0
========== ========== ========== ==========
Tax at 35% $ 10,991 35.0 $ 11,338 35.0
Increase in taxes resulting from:
State income taxes (net of federal
effect) 516 1.6 533 1.6
Other 100 0.3 98 0.3
---------- ---------- ---------- ----------
Income tax provision $ 11,607 36.9 $ 11,969 36.9
========== ========== ========== ==========
</TABLE>
8. PENSION PLANS, OTHER POSTRETIREMENT BENEFITS AND OTHER BENEFITS
Substantially all of the Carve-Out Company's employees participate in
ARCO-sponsored postretirement benefit plans that provide pension
benefits, healthcare and life insurance benefits for retirees and their
eligible dependents. The costs of such plans are shared by ARCO and its
employees. Plan assets of funded plans and plan obligations have not
been allocated to the Carve-Out Company. The Carve-Out Company's
allocated share of
-16-
<PAGE> 17
ARCO PIPE LINE COMPANY'S APL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
AND 1999 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
--------------------------------------------------------------------------------
benefit income for the plans was $1,700 and $2,919 in 1999 and 1998,
respectively.
9. COMMITMENTS AND CONTINGENCIES
The Carve-Out Company has commitments, including those related to the
acquisition, construction and development of facilities, all made in
the normal course of business.
Based on currently available information, the Carve-Out Company
believes that it is remote that future costs related to known
contingent liability exposures will exceed current accruals by an
amount that would have a material adverse impact on the Carve-Out
Company's financial position, results of operations or cash flows.
At December 31, 1999, the Carve-Out Company had certain noncancelable,
long-term operating leases, principally for office space and
facilities, with various expiration dates. Future minimum rentals under
such leases aggregate $1,552 for 2000, $1,173 for 2001, $132 for 2002,
$112 for 2003 and $399 thereafter. Rental expense for all operating
leases was $2,837 and $2,795 for the years ended December 31, 1999 and
1998, respectively.
-17-
<PAGE> 18
REPORT OF INDEPENDENT ACCOUNTANTS
To the Management Committee and Partners of
Seaway Crude Pipeline Company
In our opinion, the accompanying balance sheet and the related statements of
operations, of partners' equity and of cash flows present fairly, in all
material respects, the financial position of Seaway Crude Pipeline Company
(Seaway Crude) at December 31, 1999 and 1998, and the results of its operations
and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of Seaway Crude's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Houston, Texas
September 25, 2000
-18-
<PAGE> 19
SEAWAY CRUDE PIPELINE COMPANY
BALANCE SHEET
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) JUNE 30, DECEMBER 31,
-------------------
2000 1999 1998
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 4,069 $ 12,146 $ 22,807
Receivable from affiliates 2,316 1,101 1,931
Accounts receivable 6,545 4,362 7,102
Inventory 982 -- --
Other current assets 4,569 3,173 2,946
-------- -------- --------
Total current assets 18,481 20,782 34,786
Property and equipment, net 283,316 282,857 261,351
Other assets 4,002 4,002 7,340
-------- -------- --------
Total assets $305,799 $307,641 $303,477
======== ======== ========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable $ 6,145 $ 10,561 $ 7,385
-------- -------- --------
Total current liabilities 6,145 10,561 7,385
Deferred revenue -- 659 --
-------- -------- --------
Total liabilities 6,145 11,220 7,385
Partners' equity 299,654 296,421 296,092
-------- -------- --------
Total liabilities and partners' equity $305,799 $307,641 $303,477
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-19-
<PAGE> 20
SEAWAY CRUDE PIPELINE COMPANY
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
----------------------- -------------------
2000 1999 1999 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Transportation revenue $ 29,723 $ 32,006 $ 59,150 $ 55,518
Gain on sale of operating oil supply -- -- 2,687 --
Interest and other income 554 707 278 743
-------- -------- -------- --------
Total 30,277 32,713 62,115 56,261
-------- -------- -------- --------
Costs and expenses:
Operations and maintenance 7,198 7,172 12,245 11,945
General and administrative 4,692 4,245 8,731 8,488
Depreciation 4,586 4,703 9,051 9,315
Taxes other than income 1,394 1,420 2,681 2,619
-------- -------- -------- --------
Total 17,870 17,540 32,708 32,367
-------- -------- -------- --------
Net income before cumulative effect of
accounting change 12,407 15,173 29,407 23,894
Cumulative effect of accounting change -- -- (230) --
-------- -------- -------- --------
Net income $ 12,407 $ 15,173 $ 29,177 $ 23,894
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-20-
<PAGE> 21
SEAWAY CRUDE PIPELINE COMPANY
STATEMENT OF PARTNERS' EQUITY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) PHILLIPS
ARCO GAS SEAGAS
SEAWAY PIPELINE PIPELINE
INC. COMPANY COMPANY TOTAL
<S> <C> <C> <C> <C>
Partners' equity at December 31, 1997 $ 190,268 $ 28,605 $ 78,843 $ 297,716
Cash distributions to partners (20,045) (1,629) (3,844) (25,518)
Noncash equity adjustments (106) 38 68 --
Net income 21,250 899 1,745 23,894
--------- --------- --------- ---------
Partners' equity at December 31, 1998 191,367 27,913 76,812 296,092
Cash distributions to partners (24,149) (1,854) (2,845) (28,848)
Net income 25,195 1,351 2,631 29,177
--------- --------- --------- ---------
Partners' equity at December 31, 1999 192,413 27,410 76,598 296,421
Cash distributions to partners (unaudited) (7,618) (608) (948) (9,174)
Net income (unaudited) 10,884 518 1,005 12,407
--------- --------- --------- ---------
Partners' equity at June 30, 2000
(unaudited) $ 195,679 $ 27,320 $ 76,655 $ 299,654
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-21-
<PAGE> 22
SEAWAY CRUDE PIPELINE COMPANY
STATEMENT OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------------ ----------------------
2000 1999 1999 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:-
Net income $ 12,407 $ 15,173 $ 29,177 $ 23,894
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 4,586 4,703 9,051 9,315
Gain on sale of operating oil supply -- -- (2,687) --
Cumulative effect of accounting change -- -- 230 --
Other assets -- 149 (81) 8
Other, net (659) -- 659 (548)
Decrease (increase) in working capital:
Receivable from affiliates (1,215) 1,925 830 (833)
Accounts receivable (2,183) (131) 2,740 (3,367)
Inventory (982) (961) (1,237) (1,717)
Other current assets (1,396) 293 (227) (1,102)
Accounts payable (4,416) (3,684) 3,176 4,573
--------- --------- --------- ---------
Net cash provided by operating activities 6,142 17,467 41,631 30,223
--------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures (5,045) (5,671) (30,557) (4,678)
Proceeds from sale of operating oil supply -- -- 7,113 --
--------- --------- --------- ---------
Net cash used in investing activities (5,045) (5,671) (23,444) (4,678)
--------- --------- --------- ---------
Net cash used in financing activities - cash
distributions (9,174) (17,040) (28,848) (25,518)
--------- --------- --------- ---------
Net (decrease) increase in cash and cash equivalents (8,077) (5,244) (10,661) 27
Balance at beginning of year 12,146 22,807 22,807 22,780
--------- --------- --------- ---------
Balance at end of year $ 4,069 $ 17,563 $ 12,146 $ 22,807
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-22-
<PAGE> 23
SEAWAY CRUDE PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED) AND JUNE 30, 1999
(UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------
(IN THOUSANDS)
1. BASIS OF ACCOUNTING
The accompanying financial statements are the statements of Seaway
Crude Pipeline Company ("Seaway Crude").
HISTORY
Seaway Pipeline Company ("Seaway" or the "Partnership") was a Texas
general partnership among ARCO Seaway, Inc. ("ASI"), an indirect
wholly-owned subsidiary of Atlantic Richfield Company ("ARCO") and
wholly-owned subsidiaries of Phillips Petroleum Company ("Phillips"),
Phillips Gas Pipeline Company ("PGPL") and Seagas Pipeline Company
("Seagas"). The Partnership provided crude oil and products
transportation services and related terminaling, storage and other
activities to Cushing, Oklahoma, from the Texas Gulf Coast. The
Partnership was created effective March 13, 1995.
Pursuant to the Agreement of General Partnership of Seaway (the
Partnership Agreement), ASI contributed and transferred the beneficial
interest in certain pipeline and related assets and properties with a
net historical cost of approximately $132,000 in exchange for a 50%
interest in the Partnership (100 Class A Units). PGPL and Seagas
together contributed certain pipeline and related assets and properties
with a net historical cost of approximately $114,000 to the Partnership
in exchange for a 50% interest in the Partnership (100 Class B Units).
PGPL and Seagas partnership interests were 17% and 33%, respectively.
The Partnership Agreement provided for varying participation ratios
throughout the life of the Partnership. ARCO incurred 80% of the total
Partnership capital expenditures during the period from March 13, 1995
to May 13, 1996 and Phillips incurred 20%. From the period beginning on
May 13, 1996 and ending on May 13, 2002 ("Phase I"), the sharing of
revenue, expense and capital between ARCO and Phillips continued to be
80% and 20%, respectively. For the period beginning at the end of Phase
I and ending on the fourth anniversary following the end of Phase I
("Phase II"), the sharing ratios would have become 60% ARCO and 40%
Phillips. Beginning at the end of Phase II until the termination of the
Partnership (Phase "III"), the sharing of revenue, expense and capital
would be 40% ARCO and 60% Phillips.
Pursuant to the Operating Agreement between the Partnership and ARCO
Pipe Line Company ("APL") dated March 13, 1995, APL served as operator
of the Pipeline System owned by the Partnership. As operator, APL
provided operating, administrative, marketing, construction and other
services related to the business and affairs of the Partnership.
Pursuant to the Plan of Merger of Seaway Pipeline Company into Seaway
Crude Pipeline Company and Seaway Products Pipeline Company dated July
20, 2000 ("Plan of Merger"), in a divisive
-23-
<PAGE> 24
SEAWAY CRUDE PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED) AND JUNE 30, 1999
(UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
--------------------------------------------------------------------------------
merger transaction, Seaway Pipeline Company was merged into two
separate legal entities, Seaway Crude and Seaway Products Pipeline
Company ("Seaway Products"). Certain assets of the Partnership,
consisting primarily of the 20-inch pipeline owned by the Partnership
and operated in refined products transportation service, were allocated
to and vested in Seaway Products. The remaining assets of the
Partnership, consisting primarily of the 30-inch pipeline (the
"Pipeline System") owned by the Partnership and operated in crude oil
transportation service, were allocated to and vested in Seaway Crude.
The Plan of Merger also provides for the Amended and Restated Agreement
of General Partnership of Seaway Crude Pipeline Company dated July 20,
2000 (the "Amended Partnership Agreement") to restate the rights and
obligations of the Seaway Crude Partnership.
The Amended Partnership Agreement restates the Original Partnership
Agreement to incorporate all prior amendments, changes the name of the
partnership to Seaway Crude Pipeline Company and ratifies the
allocations and distributions that have occurred to date under the
Original Partnership Agreement.
The accompanying financial statements are presented on a carve-out
basis and include the historical operations applicable to Seaway Crude.
The financial statements included herein have been prepared from the
Partnership's historical accounting records. Net cash distributions
include funds transferred between Seaway Crude and the partners for
operating needs.
The statement of operations includes all revenues and costs directly
attributable to Seaway Crude including costs for certain functions and
services performed by APL and directly charged or allocated to Seaway
Crude based on usage.
All of the allocations and estimates in the financial statements are
based on assumptions that management believes are reasonable under the
circumstances. However, these allocations and estimates are not
necessarily indicative of the costs and expenses that would have
resulted if Seaway Crude had been operated as a separate entity.
Seaway Crude, as an owner of common carrier pipelines, is subject to
regulation by the Federal Energy Regulatory Commission ("FERC"), the
governmental body with jurisdiction over oil pipelines.
RECENT EVENTS
On April 18, 2000, BP/Amoco acquired ARCO in a merger
transaction. On July 20, 2000, ARCO sold the stock of APL, including
its interest in Seaway Crude, to Texas Eastern Products Pipeline
Company, LLC, the general partner of TEPPCO Partners, L.P.
-24-
<PAGE> 25
SEAWAY CRUDE PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED) AND JUNE 30, 1999
(UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
--------------------------------------------------------------------------------
2. ACCOUNTING POLICIES
UNAUDITED INTERIM INFORMATION
The accompanying unaudited combined financial information has been
prepared by Seaway Crude in accordance with accounting principles
generally accepted in the United States of America for interim
financial information and with the rules and regulations of the
Securities and Exchange Commission. The unaudited information furnished
reflects all adjustments, all of which were of a normal recurring
nature, which are, in the opinion of Seaway Crude, necessary for a
fair presentation of the results for the interim periods presented.
Operating results for the six-month period ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 2000.
REVENUE RECOGNITION
Revenue from pipeline transportation of crude oil is recognized upon
delivery of the crude oil from the Pipeline System.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all cash balances and highly
liquid investments which have an original maturity of three months or
less. Cash equivalents are stated at cost, which approximates market
value. Pursuant to the Plan of Merger, cash totaling $5,000 was
allocated to Seaway Products. All other cash was allocated to Seaway
Crude.
ACCOUNTS RECEIVABLE
Seaway Crude's customers consist of companies in the petroleum
industry. Seaway Crude performs ongoing credit evaluations of its
customers and generally does not require material collateral. At
June 30, 2000, December 31, 1999 and 1998, the balance in the allowance
for doubtful accounts was $0.
OIL MOVEMENTS
Adjustments for overages and shortages of crude oil are charged to
income or expense at the time of the overage or shortage using a flat
rate per barrel cost which approximates the average market value of
crude contained within the Pipeline System.
INVENTORIES
Inventories of materials and supplies are carried at the lower of cost
or current market value. Cost is determined using the weighted-average
method. Inventories of materials and supplies are included in other
current assets on the balance sheet.
Inventories of crude oil are carried at the lower of cost or current
market value and determined under the first-in, first-out method.
Operating oil supply is carried at historical cost and assessed for
impairment on a permanent basis. Operating oil supply, which totaled
$4,002, $4,002 and $7,191 at June 30, 2000, December 31, 1999 and 1998,
respectively, is included in other assets on the balance sheet.
PROPERTY AND EQUIPMENT
Property and equipment contributed by the partners is valued at net
historical cost at the time of contribution. Additions and improvements
that expand the productive capacity or extend the useful life of the
assets are capitalized. Expenditures for maintenance and repairs are
expensed as incurred. Property and equipment consists primarily of
crude oil pipeline facilities
-25-
<PAGE> 26
SEAWAY CRUDE PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
AND 1999 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
--------------------------------------------------------------------------------
which include the cost of land, rights-of-way, pipe, pump stations,
equipment, material, labor and overhead.
When FERC-regulated property and equipment is retired due to
abandonment or replacement, the original cost, plus the cost of
retirement, less salvage, is charged to accumulated depreciation. No
gain or loss is recognized unless an entire operating unit, as defined
by the FERC, has been retired. When nonregulated properties are retired
due to abandonment or replacement, the original cost, plus retirement
cost, less accumulated depreciation and salvage, is charged as a gain
or loss in income.
Depreciation is calculated for FERC-regulated assets using the
composite method which generally results in assets being depreciated
over their estimated economic useful lives. Assets with similar
economic characteristics are grouped. The depreciation rate
specifically approved by the FERC is applied to the gross investment
for the group until net book value of the group is equal to salvage
value. For non-FERC-regulated assets, depreciation is calculated using
the straight-line method over the estimated economic useful lives of
the assets.
IMPAIRMENT OF LONG-LIVED ASSETS
Seaway Crude accounts for impairment of long-lived assets in accordance
with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 requires recognition of
impairment losses on long-lived assets in the event facts and
circumstances indicate that the carrying amount of such assets may not
be recoverable and an estimate of undiscounted future cash flows is
less than the carrying amount of such assets. Impairment is recorded as
the difference between the fair market value and the carrying value of
the assets.
INCOME TAXES
In accordance with the provisions of the Internal Revenue Code, Seaway
Crude is not subject to federal income tax. Each partner includes its
share of Seaway Crude's income or loss in its own federal and state
income tax returns. Accordingly, no recognition has been given to
income taxes in the accompanying financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Seaway Crude's financial instruments consist of cash and cash
equivalents, accounts receivable and accounts payable. The carrying
amounts of these items approximate fair value due to the highly liquid
nature of these short-term instruments.
-26-
<PAGE> 27
SEAWAY CRUDE PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
AND 1999 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
--------------------------------------------------------------------------------
ESTIMATES, RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of certain assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the
related reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Management
believes that its estimates are reasonable.
Realization of Seaway Crude's assets is subject to various risks
including, but not limited to, the accumulation and maintenance of
adequate shipper linefill and throughput.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value will be recorded each period in either
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction, and if so, the
type of hedge transaction. SFAS 133, as amended by SFAS 137 and SFAS
138, is effective for fiscal years beginning after June 15, 2000.
Management does not believe that adoption of SFAS 133 will have a
significant effect on Seaway Crude's financial position, results of
operations or cash flows.
3. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 requires that the costs of start-up
activities, including organization costs, be expensed as incurred. In
addition, it requires that any such costs that exist on the balance
sheet be expensed upon adoption of the pronouncement. Seaway Crude
adopted the pronouncement effective January 1, 1999, and reported a
charge of $230 as a cumulative effect of an accounting change.
-27-
<PAGE> 28
SEAWAY CRUDE PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED) AND JUNE 30, 1999
(UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
--------------------------------------------------------------------------------
4. OTHER CURRENT ASSETS
Other current assets at December 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Advances to operators $ 2,042 $ 2,421
Materials and supplies inventory 127 127
Other 1,004 398
-------- --------
Total $ 3,173 $ 2,946
-------- --------
</TABLE>
5. PROPERTY AND EQUIPMENT
The components of property and equipment at December 31, 1999 and 1998
were:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Land $ 3,120 $ 3,120
Rights-of-way 12,604 12,604
Buildings 2,992 3,582
Office, communication and data handling equipment 711 707
Vehicles 2,257 2,343
Line pipe, equipment and other pipeline constructions 256,578 255,602
Construction work-in-process 36,380 6,365
-------- --------
314,642 284,323
Less - accumulated depreciation 31,785 22,972
-------- --------
Total $282,857 $261,351
======== ========
</TABLE>
The above assets are being depreciated over their estimated economic
useful lives which range from five years for vehicles to 25 to 40 years
for crude oil pipeline facilities.
6. RELATED PARTY TRANSACTIONS
Seaway Crude engages in certain transactions with the partners and
their affiliates, including operating, administrative, marketing,
construction and various other services which are reflected in
operating expenses in the accompanying statement of operations.
Partners and their affiliates can be shippers which utilize the
pipelines and pay posted tariffs or negotiate
-28-
<PAGE> 29
SEAWAY CRUDE PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
AND 1999 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
--------------------------------------------------------------------------------
separate contracts for leased capacity. Tariff revenues totaling
approximately $4,675 and $8,643 were earned from the partners and their
affiliates during the years ended December 31, 1999 and 1998,
respectively. Seaway Crude has no employees; all functions are
performed by APL on behalf of Seaway Crude. In accordance with the
terms of the Operating Agreement, APL, as operator, was reimbursed for
costs and expenses allocated to and incurred on behalf of Seaway Crude
in amounts aggregating approximately $15,768 and $15,652 in 1999 and
1998, respectively. All such transactions are settled on a monthly
basis.
The costs of services have been directly charged to, or allocated
between, Seaway Crude and Seaway Products using methods which
management believes are reasonable. These methods included dedicated
asset assignment and proportionate corporate formulas using assets,
revenues and employees. Such charges and allocations are not
necessarily indicative of amounts that would have been incurred had
Seaway Crude operated as a separate entity.
7. COMMITMENTS AND CONTINGENCIES
As of December 31, 1999 and 1998, Seaway Crude was obligated under a
term lease contract to provide crude oil pipeline capacity to a
customer. The terms of the contract require the customer to pay an
annual reservation fee for leased capacity. As of December 31, 1999 and
1998, deferred revenue relating to the unamortized annual reservation
fee was $659 and $0, respectively.
Based on currently available information, Seaway Crude believes that it
is remote that future costs related to known contingent liability
exposures will exceed current accruals by an amount that would have a
material adverse impact on Seaway Crude's financial position, results
of its operations or its cash flows.
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<PAGE> 30
TEPPCO PARTNERS, L.P.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(b) Pro Forma Financial Information:
The following tables set forth summary unaudited pro forma condensed
combined financial statements which are presented to give effect to the
purchase. The information was prepared based on the following assumptions:
o The purchase will be accounted for pursuant to the purchase method of
accounting in accordance with generally accepted accounting
principles.
o The statements of income assume that the purchase was consummated on
January 1, 1999. The balance sheet assumes that the purchase was
consummated on June 30, 2000.
o The expected cost savings through the consolidation of the corporate
headquarters of the two entities, the elimination of duplicate staffs
and expenses, and improved operating efficiencies are excluded from
the pro forma combined financial statements. A significant portion of
the expected annual savings is expected to be realized in the year
ending December 31, 2001 and substantially all of the amount is
expected to be realized in the year ending December 31, 2002.
o See Item 2 above and the Partnership's Form 10-Q for the quarter ended
June 30, 2000 for a description of the new credit agreements entered
into in conjunction with the acquisition.
The unaudited pro forma condensed combined financial statements are
presented for illustration purposes only and are not necessarily indicative of
the results of operations or the financial position which would have occurred
had the merger been consummated on the dates indicated above, nor are they
necessarily indicative of future results of operations or financial position.
The unaudited pro forma condensed combined financial statements should be read
in conjunction with the historical consolidated financial statements of TEPPCO
Partners, L.P. (the "Partnership"), as on file with the Securities and Exchange
Commission, and the historical combined financial statements of ARCO Pipe Line
Company's APL Business ("APL Business") and Seaway Crude Pipeline Company,
included in this document. Certain reclassifications have been made to the APL
Business' historical financial statements to reflect the Partnership's
presentation of financial information.
-30-
<PAGE> 31
TEPPCO PARTNERS, L.P.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------ ---------------------------
TEPPCO APL
Partners, LP Business Adjustments Combined
------------ ----------- -------------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets 290,609 7,680 (2,512)(e) 295,777
Property, plant and equipment - net 744,437 51,582 43,670 (a) 839,689
Investments 6,227 -- 6,227
Investment in Seaway Crude Pipeline Company -- 246,656 (21,131)(a) 225,525
Intangible asset 33,969 -- 3,853 (a) 37,822
Other assets 18,657 -- 7,074 (b) 25,731
---------- ---------- ---------- ----------
Total assets 1,093,899 305,918 30,954 1,430,771
========== ========== ========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities 276,066 21,989 4,140 (c) 287,364
(14,581)(d)
(250)(e)
Senior Notes 389,768 -- 389,768
Other long term debt 86,000 -- 325,574 (b) 411,574
Deferred income taxes -- 36,398 (36,398)(d) --
Other liabilities and deferred credits 3,581 250 (250)(e) 3,581
Minority interest 3,425 -- 3,425
Redeemable Class B Units held by related party 105,754 -- 105,754
Partners' capital
General partners' interest 1,122 -- 1,122
Limited partners' interest 228,183 -- 228,183
Owner's net investment -- 247,281 (247,281)(f) --
---------- ---------- ---------- ----------
Total partners' capital 229,305 247,281 (247,281) 229,305
---------- ---------- ---------- ----------
Total liabilities and partners' capital 1,093,899 305,918 30,954 1,430,771
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
-31-
<PAGE> 32
TEPPCO PARTNERS, L.P.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------------- -----------------------------
TEPPCO APL
Partners, LP Business Adjustments Combined
------------ ----------- --------------- ------------
<S> <C> <C> <C> <C>
Operating revenues:
Sales of crude oil and petroleum products $ 1,692,767 $ -- $ 1,692,767
Transportation - Refined products 123,004 -- 123,004
Transportation - LPGs 67,701 -- 67,701
Transportation - Crude oil and NGLs 11,846 22,527 34,373
Mont Belvieu operations 12,849 -- 12,849
Pipeline services -- 10,656 10,656
Equity in earnings of Seaway Crude Pipeline Co. -- 25,195 (1,492)(g) 23,703
Other 26,716 803 27,519
----------- ----------- ----------- -----------
Total operating revenues 1,934,883 59,181 (1,492) 1,992,572
----------- ----------- ----------- -----------
Costs and expenses:
Purchases of crude oil and petrol. products 1,666,042 -- 1,666,042
Operating, general and administrative 94,340 22,689 3,825 (l) 120,854
Operating fuel and power 31,265 -- 31,265
Depreciation and amortization 32,656 4,155 193 (g) 35,630
2,781 (g)
(1,967)(h)
(2,188)(h)
Taxes - other than income taxes 10,490 -- 10,490
Other -- 935 935
----------- ----------- ----------- -----------
Total costs and expenses 1,834,793 27,779 2,644 1,865,216
----------- ----------- ----------- -----------
Operating income 100,090 31,402 (4,136) 127,356
Interest expense (31,563) -- (27,132)(i) (61,479)
(2,784)(i)
Interest capitalized 2,133 -- 2,133
Other income - net 2,196 -- 2,196
----------- ----------- ----------- -----------
Income before minority interest and
income tax provision 72,856 31,402 (34,052) 70,206
Minority interest (736) -- 27 (j) (709)
Income tax provision -- 11,607 (11,607)(k) --
----------- ----------- ----------- -----------
Net income $ 72,120 $ 19,795 $ (22,418) $ 69,497
=========== =========== ========== ===========
Net Income Allocation:
Limited Partner Unitholders 55,349 53,336
Class B Unitholder 7,475 7,203
General Partner 9,296 8,958
----------- -----------
Total net income allocated 72,120 69,497
=========== ===========
Basic and diluted net income per Limited
Partner and Class B Unit $ 1.91 $ 1.84
=========== ===========
Weighted average Limited Partner
and Class B Units Outstanding: 32,917 32,917
=========== ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
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<PAGE> 33
TEPPCO PARTNERS, L.P.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
Historical Pro Forma
---------------------------- ----------------------------
TEPPCO APL
Partners, LP Business Adjustments Combined
------------ ----------- --------------- ------------
<S> <C> <C> <C> <C>
Operating revenues:
Sales of crude oil and petroleum products $ 1,372,428 $ -- $ 1,372,428
Transportation - Refined products 60,715 -- 60,715
Transportation - LPGs 33,484 -- 33,484
Transportation - Crude oil and NGLs 7,902 9,407 17,309
Mont Belvieu operations 7,354 -- 7,354
Pipeline services -- 5,148 5,148
Equity in earnings of Seaway Crude Pipeline Co. -- 10,884 (746)(g) 10,138
Other 16,513 168 16,681
----------- ----------- --------- -----------
Total operating revenues 1,498,396 25,607 (746) 1,523,257
----------- ----------- --------- -----------
Costs and expenses:
Purchases of crude oil and petrol. products 1,360,304 -- 1,360,304
Operating, general and administrative 49,568 8,372 1,863 (l) 59,803
Operating fuel and power 15,839 -- 15,839
Depreciation and amortization 16,586 2,057 96 (g) 18,073
1,391 (g)
(983)(h)
(1,074)(h)
Taxes - other than income taxes 5,181 -- 5,181
Other -- 575 575
----------- ----------- --------- -----------
Total costs and expenses 1,447,478 11,004 1,293 1,459,775
----------- ----------- --------- -----------
Operating income 50,918 14,603 (2,039) 63,482
Interest expense (16,982) -- (13,566)(i) (31,940)
(1,392)(i)
Interest capitalized 2,265 -- 2,265
Other income - net 1,632 -- 1,632
----------- ----------- --------- -----------
Income before minority interest and
income tax provision 37,833 14,603 (16,997) 35,439
Minority interest (382) -- 24 (j) (358)
Income tax provision -- 5,379 (5,379)(k) --
----------- ----------- --------- -----------
Net income $ 37,451 $ 9,224 $ (11,594) $ 35,081
=========== =========== ========= ===========
Net Income Allocation:
Limited Partner Unitholders 27,496 25,756
Class B Unitholder 3,714 3,479
General Partner 6,241 5,846
----------- -----------
Total net income allocated $ 37,451 $ 35,081
=========== ===========
Basic and diluted net income per Limited Partner
and Class B Unit: $ 0.95 $ 0.89
=========== ===========
Weighted average Limited Partner
and Class B Units Outstanding: 32,917 32,917
=========== ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
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<PAGE> 34
TEPPCO PARTNERS, L.P.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The acquisition will be accounted for using the purchase method of
accounting with the Partnership acquiring the APL Business. Under this method of
accounting, the Partnership will record the assets and liabilities of the APL
Business at fair market value as of the date of closing, with any excess
purchase price reflected as goodwill.
The following notes set forth the explanations and assumptions used in the
preparation of the unaudited pro forma condensed combined financial statements.
The pro forma adjustments are based on the best estimate of the Company's
management using information currently available. The Partnership is in the
process of completing the final purchase price allocation, and consequently it
is likely that the final purchase price allocation will be different from the
pro forma purchase price allocation included herein. However, the Partnership
does not anticipate that the difference will be material to the pro forma
financial position and results of operations included herein.
The preliminary pro forma allocation of the purchase price paid and the
financing of the acquisition are summarized as follows (in thousands):
<TABLE>
<S> <C>
Estimated purchase price paid:
Proceeds of bank debt issued for purchase price $ 318,500
Estimated acquisition costs 4,140
---------
322,640
---------
Working capital, net (1,990)
Property, plant and equipment 95,252
Investment in Seaway Crude Pipeline Company 225,525
---------
Total allocation 318,787
=========
Goodwill (excess purchase price over allocation to identifiable assets and liabilities) $ 3,853
=========
</TABLE>
The following adjustments were made to the unaudited pro forma
condensed combined balance sheet pursuant to the purchase method of accounting:
(a) To adjust the historical APL Business asset balances to fair
value and to record the excess purchase price as goodwill, in
accordance with the purchase method of accounting.
(b) To reflect the issuance of debt, and the related debt issuance
costs, for the financing of the cash portion of the purchase
price.
(c) To record the liabilities associated with the acquisition
costs, consisting primarily of financial advisory,
accounting, and legal fees.
(d) To eliminate the historical APL Business income tax payable
because the Partnership is not assuming this liability and
deferred income taxes as the Partnership is not a taxable
entity.
(e) To eliminate the historical APL Business crude oil inventory
assets and accrued environmental contingencies, as the
Partnership is not assuming these assets and liabilities.
(f) To eliminate the historical APL Business net investment
account.
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<PAGE> 35
The following adjustments were made to the unaudited pro forma
condensed combined statements of income pursuant to the purchase method of
accounting:
(g) To record pro forma depreciation and amortization expense on
the preliminary purchase price allocation to depreciable and
amortizable assets. Goodwill and excess cost for Seaway Crude
Pipeline over the underlying equity in net assets are assumed
to be amortized over a period of 20 years and property, plant
and equipment over estimated remaining lives ranging from five
years to 40 years.
(h) To reverse the historical amortization expense resulting from
APL Business' excess investment in Seaway Crude Pipeline and
the historical depreciation expense of the APL Business.
(i) To reflect the increase in interest expense resulting from
the issuance of debt for the cash portion of the purchase
price and the related estimated debt issuance costs. The
interest rate on the term loan is assumed to be 8.42% and the
interest rate on the revolving credit facility is assumed to
be 8.32%. Debt issue costs of approximately $7.1 million are
assumed to be amortized over the life of the credit
facilities. Assuming market interest rates change by 1/8
percent, the potential annual change in interest expense is
approximately $0.4 million.
(j) To record the effect of the pro forma statement of income
adjustments on minority interest expense.
(k) To eliminate the APL Business income tax provision as the
Partnership is not a taxable entity.
(l) To reverse the historical APL Business benefits income and
record estimated benefits expense for the APL Business
employees assuming participation in the Partnership's benefit
plans.
-35-
