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| DEP > SEC Filings for DEP > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
For the three and nine months ended September 30, 2008 and 2007.
The following information should be read in conjunction with our Unaudited Condensed Consolidated/Combined Financial Statements and accompanying footnotes included under Item 1 of this quarterly report on Form 10-Q and with the information contained within our Annual Report on Form 10-K/A for the year ended December 31, 2007. This discussion and analysis includes the following:
††† Cautionary Note Regarding Forward-Looking Statements.
††† Significant Relationships Referenced in this Discussion and Analysis.
††† Overview of Business.
††† Recent Developments - Discusses significant developments since December 31, 2007.
††† Basis of Financial Statement Presentation, including a summary of factors that affect the comparability of our nine month operating results with those of our Predecessor.
††† Results of Operations - Discusses material period-to-period variances in our Unaudited Condensed Statements of Consolidated/Combined Operations.
††† Liquidity and Capital Resources - Addresses available sources of liquidity and capital resources and includes a discussion of our capital spending program.
††† Overview of Critical Accounting Policies and Estimates.
††† Other Items - Includes summary information related to contractual obligations, off-balance sheet arrangements, related party transactions, recent accounting pronouncements and similar disclosures.
As generally used in the energy industry and in this discussion, the identified terms have the following meanings:
/d = per day
BBtus = billion British thermal units
MBPD = thousand barrels per day
MMBbls = million barrels
MMBtus = million British thermal units
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Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP").
Cautionary Note Regarding Forward-Looking Statements
This discussion contains various forward-looking statements and information that are based on our beliefs and those of our general partner, as well as assumptions made by us and information currently available to us. When used in this document, words such as "anticipate," "project," "expect," "plan," "seek," "goal," "forecast," "intend," "could," "should," "will," "believe," "may," "potential" and similar expressions and statements regarding our plans and objectives for future operations, are intended to identify forward-looking statements. Although we and our general partner believe that such expectations reflected in these forward-looking statements are reasonable, neither we nor our general partner can give any assurances that such expectations will prove to be correct. Such statements are subject to a variety of risks, uncertainties and assumptions as described in more detail in Part I, Item 1A, "Risk Factors," included in our Annual Report on Form 10-K/A for the year ended December 31, 2007. If
one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected. You should not put undue reliance on any forward-looking statements.
Significant Relationships Referenced in this Discussion and Analysis
Duncan Energy Partners L.P. did not own any assets prior to February 5, 2007, which was the date it completed its initial public offering of common units. The business and operations of Duncan Energy Partners L.P. prior to February 5, 2007 are referred to as "Duncan Energy Partners Predecessor" or the "Predecessor." Unless the context requires otherwise, references to "we," "us," "our," "the Partnership" or "Duncan Energy Partners" are intended to mean the business and operations of Duncan Energy Partners L.P. and its consolidated subsidiaries since February 5, 2007. References to "DEP GP" mean DEP Holdings, LLC, which is our general partner.
Duncan Energy Partners Predecessor was engaged in the same lines of business as
the Partnership. The principal business entities included in the historical
combined financial statements of Duncan Energy Partners Predecessor were (on a
100% basis): (i) Mont Belvieu Caverns, LLC ("Mont Belvieu Caverns");
(ii) Acadian Gas, LLC ("Acadian Gas"); (iii) Enterprise Lou-Tex Propylene
Pipeline L.P. ("Lou-Tex Propylene"), including its general partner; (iv) Sabine
Propylene Pipeline L.P. ("Sabine Propylene"), including its general partner; and
(v) South Texas NGL Pipelines, LLC ("South Texas NGL").
References to "Enterprise Products Partners" mean Enterprise Products Partners L.P., which owns Enterprise Products Operating LLC ("EPO"). Enterprise Products Partners is a publicly traded partnership, the common units of which are listed on the New York Stock Exchange ("NYSE") under the ticker symbol "EPD." EPO, our Parent, owns our general partner and is a significant owner of our common units. References to "EPGP" mean Enterprise Products GP, LLC, the general partner of Enterprise Products Partners.
References to "TEPPCO" mean TEPPCO Partners, L.P., an affiliated publicly traded partnership, the common units of which are listed on the NYSE under the ticker symbol "TPP." References to "TEPPCO GP" mean Texas Eastern Products Pipeline Company, LLC, which is the general partner of TEPPCO and is wholly owned by Enterprise GP Holdings L.P.
References to "EPCO" mean EPCO, Inc., which is a related party affiliate to all of the foregoing named entities.
All of the aforementioned entities are affiliates and under common control of Dan L. Duncan, the Group Co-Chairman and controlling shareholder of EPCO.
Overview of Business
Duncan Energy Partners is a publicly traded Delaware limited partnership, the common units of which are listed on the NYSE under the ticker symbol "DEP." The Partnership is engaged in the business of (i) storing natural gas liquids ("NGLs") and certain petrochemical products, (ii) transporting NGLs and propylene and (iii) gathering, transporting, storing and marketing natural gas. We were formed in September 2006 to acquire, own and operate a diversified portfolio of midstream energy assets and to support the growth objectives of EPO. We are owned 98% by our limited partners and 2% by DEP GP, our general partner, which is responsible for managing all of our operations and activities. EPCO provides all of the personnel necessary for operating our assets and performs certain administrative services for us.
On February 5, 2007, we completed our initial public offering of 14,950,000 common units (including an overallotment amount of 1,950,000 common units) at a price of $21.00 per unit, which generated net proceeds of approximately $291.0 million. At the closing of our public offering, we made a special distribution to EPO of $459.6 million as consideration for equity interests contributed to us by EPO. The distribution amount was funded with approximately $260.6 million of net proceeds from our initial
public offering and $198.9 million in borrowings under our revolving credit facility. In addition to the cash consideration, we issued 5,351,571 of our common units to EPO.
EPO contributed to us a 66% equity interest in each of Mont Belvieu Caverns, Acadian Gas, Lou-Tex Propylene, Sabine Propylene and South Texas NGL effective February 1, 2007. The following is a brief description of these businesses:
††† Mont Belvieu Caverns owns and operates salt dome caverns and a brine system located in Mont Belvieu, Texas.
††† Acadian Gas gathers, transports, stores and markets natural gas in Louisiana utilizing over 1,000 miles of high-pressure transmission lines and lateral and gathering lines with an aggregate throughput capacity of one billion cubic feet per day (the "Acadian Gas System"), which includes a 27-mile pipeline owned by Evangeline and a leased natural gas storage cavern with three billion cubic feet of storage capacity.
††† Lou-Tex Propylene owns a 263-mile pipeline used to transport chemical-grade propylene from Sorrento, Louisiana to Mont Belvieu, Texas.
††† Sabine Propylene owns a 21-mile pipeline used to transport polymer-grade propylene from Port Arthur, Texas to a pipeline interconnect in Cameron Parish, Louisiana on a transport-or-pay basis.
††† South Texas NGL owns the 297-mile DEP South Texas NGL Pipeline System, which extends from Corpus Christi, Texas to Pasadena, Texas. This pipeline commenced operations in January 2007 and is used to transport NGLs from EPO's South Texas fractionation facilities to Mont Belvieu, Texas.
We have an extensive and ongoing relationship with EPO. We believe this relationship will enhance our ability to maintain stable cash flows and optimize our economies of scale, strategic location and pipeline connections. The following information summarizes our current transactions and other arrangements with EPO:
††† We buy natural gas from and sell natural gas to EPO.
††† We provide EPO with underground storage services for its NGL and petrochemical products at our Mont Belvieu Caverns' facility.
††† We provide EPO with NGL transportation services on our DEP South Texas NGL Pipeline System. EPO is our sole customer on this pipeline.
††† In connection with the equity interests EPO contributed to us at the time of our initial public offering, we and EPO entered into an Omnibus Agreement that governs the following matters:
††† indemnification for certain environmental liabilities, tax liabilities and right-of-way defects with respect to the underlying assets of such businesses;
††† reimbursement of certain capital expenditures incurred by South Texas NGL and Mont Belvieu Caverns with respect to projects under construction at the time of our initial public offering;
††† a right of first refusal to EPO in our current and future subsidiaries and a right of first refusal on the material assets of these entities, other than sales of inventory and other assets in the ordinary course of business; and
††† a preemptive right with respect to equity securities issued by certain of our subsidiaries, other than as consideration in an acquisition or in connection with a loan or debt financing.
††† EPO may contribute or sell other equity interests in its subsidiaries or other of its subsidiaries' assets to us. However, EPO has no obligation or commitment to make such contributions or sales to us in the future.
Please read Note 12 of the Notes to Unaudited Condensed Consolidated/Combined Financial Statements included under Item 1 of this quarterly report for additional information regarding related party transactions with EPO and other affiliates.
Recent Developments
In July 2008, Mr. A. J. Teague, Executive Vice President of Enterprise Products Partners, was elected a Director to the board of our general partner and as Chief Commercial Officer responsible for managing our commercial activities.
In March 2008, we filed a universal shelf registration statement with the U.S. Securities and Exchange Commission ("SEC") to periodically issue up to $1.00 billion in debt and equity securities. Please see "Liquidity and Capital Resources" included in this Item 2 for more information regarding this universal shelf registration.
Basis of Financial Statement Presentation
The Partnership's operating results are presented separately from those of Duncan Energy Partners Predecessor. There were a number of contracts and other arrangements that went into effect at the time of the Partnership's initial public offering that affect the comparability of its results (i.e., post-February 1, 2007 periods) with those of Duncan Energy Partners Predecessor (i.e., pre-February 1, 2007 periods). These differences and other factors are summarized as follows:
††† The Partnership's net income reflects its 66% ownership interest in the subsidiaries that hold its operating assets. The 34% ownership interest retained by EPO in these operating subsidiaries is recorded as Parent interest and deducted in determining the Partnership's net income. The net income of Duncan Energy Partners Predecessor reflects EPO's previous 100% ownership of these subsidiaries;
††† The fees Mont Belvieu Caverns charges EPO for underground storage services increased to market rates as a result of new agreements executed in connection with our initial public offering;
††† Storage well measurement gains and losses relating to the Mont Belvieu Caverns' facility are now retained by EPO;
††† Mont Belvieu Caverns makes a special allocation of its operational measurement gains and losses to EPO, which results in such gains and losses not impacting the net income or loss of Mont Belvieu Caverns. However, operational measurement gains and losses continue to be a component of gross operating margin;
††† The transportation revenues recorded by Lou-Tex Propylene and Sabine Propylene decreased following our initial public offering due to the assignment of certain exchange agreements to us by EPO;
††† The Partnership did not have any debt obligations prior to February 5, 2007 when it borrowed $200.0 million under its revolving credit facility. Duncan Energy Partners Predecessor did not have any debt obligations; and
††† The Partnership incurs additional general and administrative costs as a result of being a publicly traded entity. These costs include fees associated with annual and quarterly reports to unitholders, tax returns and Schedule K-1 preparation and distribution, investor relations, registrar and transfer agent fees, and accounting and legal services. These costs also include estimated related party amounts payable to EPCO in connection with the administrative services agreement.
The financial information of Duncan Energy Partners Predecessor has been prepared using EPO's separate historical accounting records related to the operations owned by Mont Belvieu Caverns, Acadian Gas, Lou-Tex Propylene, Sabine Propylene and South Texas NGL.
Results of Operations
We have four reportable business segments: NGL & Petrochemical Storage Services; Onshore Natural Gas Pipelines & Services; Petrochemical Pipeline Services; and NGL Pipelines & Services. Our business segments are generally organized and managed according to the type of services rendered (or technologies employed) and products produced and/or sold.
We evaluate segment performance based on the non-GAAP financial measure of gross operating margin. Gross operating margin (either in total or by individual segment) is an important performance measure of the core profitability of our operations. This measure forms the basis of our internal financial reporting and is used by senior management in deciding how to allocate capital resources among our business segments. We believe that investors benefit from having access to the same financial measures that our management uses in evaluating segment results. The GAAP financial measure most directly comparable to total segment gross operating margin is operating income. Our non-GAAP financial measure of total segment gross operating margin should not be considered as an alternative to GAAP operating income.
We define total segment gross operating margin as consolidated/combined
operating income before (i) depreciation, amortization and accretion expense;
(ii) gains and losses from asset sales and related transactions; and
(iii) general and administrative expenses. Gross operating margin by segment is
calculated by subtracting segment operating costs and expenses (net of items (i)
through (iii) noted in the preceding sentence) from segment revenues, with both
segment totals before the elimination of any intersegment and intrasegment
transactions. Gross operating margin is exclusive of other income and expense
transactions, provision for income taxes, Parent interest in income of
subsidiaries, extraordinary charges and the cumulative effect of changes in
accounting principles. In accordance with GAAP, intercompany accounts and
transactions are eliminated in consolidation.
Acadian Gas, through a wholly owned subsidiary, owns a collective 49.51% equity interest in Evangeline, which consists of a 45% direct ownership interest in Evangeline Gas Pipeline Company, L.P. ("EGP") and a 45.05% direct interest in Evangeline Gas Corp. ("EGC"). EGC owns a 10% direct interest in EGP. Third parties own the remaining equity interests in EGP and EGC. We include equity earnings from Evangeline in our measurement of segment gross operating margin and operating income. Our equity investment in Evangeline is a vital component of our business strategy and important to the operations of Acadian Gas. This method of operation enables us to achieve favorable economies of scale relative to the level of investment and business risk assumed versus what we could accomplish on a stand-alone basis. Evangeline performs complementary roles to the other business operations of Acadian Gas. As circumstances dictate, we may increase our ownership interest in Evangeline or make other equity method investments.
For additional information regarding our business segments, see Note 11 of the Notes to Unaudited Condensed Consolidated/Combined Financial Statements included under Item 1 of this quarterly report.
Selected Volumetric Data
The following table presents selected average volumes for the periods indicated:
Duncan
Energy
Partners
Duncan Energy Partners Predecessor
For the Three For the For the For the One
Nine Eight
Months Ended Months Ended Month Ended
September 30, September 30,
2008 2007 2008 2007 January 31,
2007
Onshore Natural Gas Pipelines &
Services, net:
Natural gas volumes (BBtus/d)
Acadian Gas System 344 402 374 404 420
transportation volumes
Acadian Gas System sales 349 359 337 317 281
volumes
Total natural gas volumes 693 761 711 721 701
Petrochemical Pipeline
Services:
Propylene transportation
volumes (MBPD)
Lou-Tex Propylene Pipeline 24 28 28 25 24
Sabine Propylene Pipeline 9 11 10 12 13
Total propylene 33 39 38 37 37
transportation volumes
NGL Pipelines & Services:
Dedicated NGL volumes (MBPD)
DEP South Texas NGL 73 73 73 72 67
Pipeline System
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Comparison of Results of Operations
The following table summarizes the key components of our results of operations
for the periods indicated (dollars in thousands):
Duncan Energy
Partners
Duncan Energy Partners Predecessor
For the Three For the Nine For the Eight For the One
Months Ended September 30, Months Ended September 30, Month Ended
January
2008 2007 2008 2007 31, 2007
Revenues $ 321,365 $ 220,572 $ 943,539 $ 591,342 $ 66,674
Operating costs and
expenses 309,153 208,657 905,103 555,799 61,187
General and administrative
costs 1,614 1,146 5,333 2,529 477
Operating income 10,909 10,764 33,800 33,169 5,035
Interest expense (2,887 ) (3,180 ) (8,355 ) (6,721 ) --
Parent interest in income
of subsidiaries (4,348 ) (3,188 ) (9,365 ) (13,840 ) --
Net income 3,803 4,494 16,439 12,965 5,035
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In connection with our initial public offering, EPO contributed to us 66% of the equity interests in Mont Belvieu Caverns, Acadian Gas, Lou-Tex Propylene, Sabine Propylene and South Texas NGL. EPO retained the remaining 34% equity interest in each of these entities. We account for EPO's share of our subsidiaries' net assets and earnings as "Parent interest in subsidiaries" and "Parent interest in income of subsidiaries," respectively, in a manner similar to minority interest.
The following table presents our gross operating margin by business segment and in total for the periods indicated (dollars in thousands):
Duncan Energy
Duncan Energy Partners Partners Predecessor
For the Three For the Nine For the Eight For the One
Months Ended September 30, Months Ended September 30, Month Ended
2008 2007 2008 2007 January 31, 2007
Gross operating margin by
segment:
NGL & Petrochemical
Storage Services $ 9,238 $ 7,652 $ 22,887 $ 25,073 $ 1,770
Onshore Natural Gas
Pipelines & Services 4,543 3,308 17,515 7,364 1,605
Petrochemical Pipeline
Services 2,497 3,047 8,802 8,551 2,700
NGL Pipelines & Services 4,650 5,135 14,641 13,658 1,646
Total segment gross
operating margin $ 20,928 $ 19,142 $ 63,845 $ 54,646 $ 7,721
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See "Other Items - Non-GAAP reconciliations" included within this Item 2 for a reconciliation of our non-GAAP gross operating margin to GAAP operating income and further to GAAP net income.
The following table summarizes the contribution to revenues from each business segment during the periods indicated (dollars in thousands):
Duncan Energy
Partners
Duncan Energy Partners Predecessor
For the Three For the Nine For the Eight For the One
Months Ended September 30, Months Ended September 30, Month Ended
January
2008 2007 2008 2007 31, 2007
NGL & Petrochemical Storage
Services $ 22,000 $ 18,380 $ 64,137 $ 47,358 $ 5,164
Onshore Natural Gas
Pipelines & Services 290,716 192,825 851,152 518,720 56,769
Petrochemical Pipeline
Services 3,148 3,803 11,143 10,578 2,990
NGL Pipelines & Services 5,501 5,564 17,107 14,686 1,751
Total revenues $ 321,365 $ 220,572 $ 943,539 $ 591,342 $ 66,674
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With respect to our Onshore Natural Gas Pipelines & Services segment, changes in segment revenues and costs and expenses are explained in part by changes in the price of natural gas. In general, higher natural gas prices result in an increase in our revenues attributable to the sale of natural gas; however, these same higher prices also increase the associated cost of sales as purchase prices rise. The following table provides additional information regarding the natural gas marketing activities of Acadian Gas for the periods indicated (dollars in thousands):
Duncan Energy
Partners
Duncan Energy Partners Predecessor
For the Three For the Nine For the Eight For the One
Months Ended September 30, Months Ended September 30, Month Ended
January
2008 2007 2008 2007 31, 2007
Natural gas sales volumes
(BBtus/d) 349 359 337 317 281
Natural gas marketing sales
revenue $ 288,215 $ 190,948 $ 843,654 $ 512,946 $ 55,868
Natural gas marketing cost
of sales $ 281,382 $ 185,716 $ 821,370 $ 500,407 $ 54,221
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Comparison of Three Months Ended September 30, 2008 with Three Months Ended September 30, 2007
Consolidated revenues for the third quarter of 2008 were $321.4 million compared to $220.6 million for the third quarter of 2007, a quarter-to-quarter increase of $100.8 million. Revenues from our NGL & Petrochemical Storage Services . . .
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