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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003 Commission File Number: 000-50195
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
LINK ENERGY LLC
(Exact name of registrant as specified in its charter)
Delaware 76-0424520
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2000 West Sam Houston Parkway South,
Suite 400
Houston, Texas 77042
- --------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(713) 993-5200
----------------------------------------------------
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Units
Warrants to Purchase Common Units
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Exchange Act Rule 12b-2). Yes [X] No [ ]
Aggregate market value of the common units held by non-affiliates of the
registrant on June 30, 2003, based on a closing sale price of $17.50 of the
common units as reported on the OTC Bulletin Board on that date, was
approximately $76 million.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, and 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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2
LINK ENERGY LLC
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business ...................................................................................... 4
Item 2. Properties .................................................................................... 16
Item 3. Legal Proceedings ............................................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders ........................................... 19
PART II
Item 5. Market for Registrant's Common Units and Related Security Holder Matters. ..................... 20
Item 6. Selected Financial Data ....................................................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. ........ 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .................................... 42
Item 8. Financial Statements and Supplementary Data ................................................... 44
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosures ......... 44
Item 9A. Controls and Procedures ....................................................................... 44
PART III
Item 10. Directors and Executive Officers of the Registrant ............................................ 46
Item 11. Executive Compensation ........................................................................ 49
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Security Holder Matters ....................................................................... 55
Item 13. Certain Relationships and Related Transactions ................................................ 56
Item 14. Principal Accounting Fees and Services ........................................................ 57
PART IV
Item 15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K................................ 59
3
PART 1
The statements in this Form 10-K that are not historical information
are forward-looking statements. You can identify forward-looking statements by
words such as "anticipate," "believe," "estimate," "expect," "intend," "plan,"
"forecast," "budget," "goal" or other words that convey the uncertainty of
future events or outcomes. Forward-looking statements are not guarantees of
future performance and involve significant risks and uncertainties, including
those described under the heading "Risk Factors" beginning on page 39. Actual
results may vary materially from those in the forward-looking statements. Each
forward-looking statement speaks only as of the date of the particular
statement, and we undertake no obligation to publicly update or revise any
forward-looking statements.
OUTLOOK: There is substantial doubt about our ability to continue as a
going concern. Although we are in advanced discussions with a potential buyer
regarding the sale of substantially all of our assets, there can be no
assurances that we can consummate a transaction. If the transaction were
consummated, we would have no further operations and would wind down over a
period of time. If we are not successful in consummating the transaction, we
will continue to pursue other strategic alternatives, which include the sale of
additional assets (singularly or in groups) or a voluntary filing under the U.S.
Bankruptcy Code. Based on our existing level of indebtedness, it is unlikely
that either a sale or bankruptcy would yield any material residual value for the
Company's unitholders. For more information, please read "Business -
Liquidity/Going Concern," "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Executive Overview" and Note 3 to our
Consolidated Financial Statements.
ITEM 1. BUSINESS
GENERAL
We are a Delaware limited liability company formed on November 14, 2002 as
EOTT Energy LLC in anticipation of assuming and continuing the business formerly
conducted by EOTT Energy Partners, L.P. ("EOTT MLP"), which filed for bankruptcy
on October 8, 2002 as further described below. We became the successor
registrant to EOTT MLP on March 1, 2003, which was the effective date of EOTT
MLP's Third Amended Joint Chapter 11 Plan of Reorganization (the "Restructuring
Plan").
On October 1, 2003, we changed our name to Link Energy LLC. In connection
with our name change, we have also changed the names of several subsidiaries as
listed in the table below.
NEW NAME FORMER NAME
- -------- -----------
Link Energy Limited Partnership EOTT Energy Operating Limited Partnership
Link Energy Pipeline Limited Partnership EOTT Energy Pipeline Limited Partnership
Link Energy Canada Limited Partnership EOTT Energy Canada Limited Partnership
Link Energy Finance Corp. EOTT Energy Finance Corp.
Link Energy General Partner LLC EOTT Energy General Partner L.L.C.
Unless the context otherwise requires, the terms "we," "our," "us," and
"Link" refer to Link Energy LLC and our subsidiaries and, for periods prior to
our emergence from bankruptcy in March 2003, such terms and "EOTT MLP" refer to
EOTT Energy Partners, L.P., its general partner and its subsidiaries. For more
information regarding our bankruptcy, please read "Management's Discussion and
Analysis of Financial Condition and Results of Operation - Bankruptcy
Proceedings and Restructuring Plan."
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission ("SEC"). These filings
and any amendments thereto are available free of charge through our internet
website at www.linkenergy.com as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC.
4
LIQUIDITY/GOING CONCERN
As previously discussed, we emerged from bankruptcy on March 1, 2003. Our
Restructuring Plan anticipated profitable Liquids Operations and a quick return
of crude oil volume growth in 2003. After incurring an operating loss of $31.4
million from our Liquids Operations since our emergence from bankruptcy, we sold
our Liquids Operations in December 2003 for approximately $20 million (see Note
8 to our Consolidated Financial Statements). Our pre-bankruptcy customers and
business partners have been less willing to do business with us than we
anticipated as a result of our being highly leveraged and having shown no
substantive improvement in our financial performance. We will not be able to
continue as a viable business unless we reduce our debt and attract new volumes.
Our cash flow from operations is not sufficient to meet our current cash
requirements and, as a result, we have been borrowing under our Trade
Receivables Agreement in order to fund our operations and capital needs. Absent
a significant improvement in our business performance, we expect to continue to
borrow to meet our cash requirements to the extent borrowed funds are available.
Based on our current cash requirements, we may exhaust our sources of available
cash in the second quarter of 2004.
Our Commodity Repurchase and Trade Receivables Agreements mature June 1,
2004, although we have an option to extend the maturity to August 30, 2004,
subject to us being in compliance with our debt covenants. Our Letter of Credit
Facility and Term Loan mature in August 2004. We may be unable to arrange future
financings on acceptable terms, which would limit our ability to refinance our
existing indebtedness, fund our current operations and fund our future capital
requirements.
We have sold substantially all of our non-strategic assets in an effort to
reduce our aggregate indebtedness. We will not be able to use funds from future
asset sales, if any, to meet our current cash needs because the proceeds from
any such sales are likely to be required to reduce our outstanding indebtedness.
In addition to asset sales, we have attempted, without success, to raise
additional equity and to convert indebtedness to equity. We are in advanced
discussions with a potential buyer regarding the sale of substantially all of
our assets; however, there can be no assurances that we can consummate a
transaction. If we are not successful in consummating the transaction, we will
continue to pursue other strategic alternatives, which include the sale of
additional assets (singularly or in groups) or a voluntary filing under the
U.S. Bankruptcy Code. Based on our existing level of indebtedness, it is
unlikely that either a sale or bankruptcy would yield any material residual
value for the Company's unitholders.
Our Consolidated Financial Statements included in this report have been
prepared assuming we will continue as a going concern, which contemplates the
realization of assets and settlement of liabilities in the normal course of
business. The factors discussed above raise substantial doubt about our ability
to continue as a going concern. Our Consolidated Financial Statements do not
include any adjustments that might result from the outcome of this uncertainty.
For more information regarding our financial position, please read "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 23 and our Consolidated Financial Statements beginning on page
F-1.
BUSINESS ACTIVITIES
We are engaged in the purchasing, gathering, transporting, trading, storage
and resale of crude oil and related activities. We are one of the largest
independent crude oil gathering and marketing companies in North America. We
currently gather and market from approximately 17,000 field gathering points in
15 states and Canada averaging 254,000 barrels per day at the end of 2003. In
addition, we are engaged in interstate and intrastate crude oil transportation
and crude oil terminalling and storage activities. We purchase crude oil from
various producers and operators and market the crude oil to refiners and other
customers nationwide. We transport crude oil through pipelines, including
approximately 7,450 miles of active gathering and transmission pipelines that we
own, as well as through our trucking operations, which includes a fleet of 200
owned or leased trucks. We have approximately 8.1 million barrels of active
storage capacity associated with field tanks.
5
Our principal business segments are our North American Crude Oil gathering
and marketing operations and our Pipeline Operations. Please read Note 21 to our
Consolidated Financial Statements for certain financial information by business
segment.
NORTH AMERICAN CRUDE OIL OPERATIONS
General
Our crude oil gathering and marketing operations consist of purchasing and
gathering crude oil from approximately 1,400 producers, operators and other
sellers in 15 states and Canada for subsequent sale to refiners and other
customers. Gathering and marketing of crude oil consists of:
- purchasing lease crude oil from producers and operators at field
gathering points and in bulk from aggregators at major pipeline
interconnections and marketing locations;
- providing accounting and administrative services to some
producers and operators;
- transporting crude oil through our own proprietary or common
carrier pipelines, through our fleet of trucks or on assets owned
and operated by third parties;
- buying and selling crude oil or exchanging it for either another
grade of crude oil or for crude oil at a different geographic
location or delivery time in order to increase margins or meet
contract delivery requirements; and
- marketing crude oil to refiners, large integrated oil companies
and other customers.
As a gatherer and marketer, we seek to earn profits primarily by buying
crude oil at competitive prices, efficiently transporting and handling the
purchased crude oil and marketing the crude oil to refinery customers or other
trade partners. We believe that our ability to offer reliable and reasonably
priced services to producers and operators is a key factor in maintaining lease
crude oil volumes.
We purchase and sell crude oil primarily under contracts with 30-day
renewable terms, with some contracts having terms from two months to one year.
In connection with the December 1998 acquisition of assets from Koch Oil
Company, now Koch Supply & Trading, L.P. ("Koch"), we entered into a 15-year
supply contract at market-based prices, which currently accounts for
approximately 32% of our lease crude oil volumes. Our bankruptcy had no impact
upon this supply contract with Koch. For further details, please read Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Bankruptcy Proceedings and Restructuring Plan."
Crude Oil Gathering
In a typical producer's operation, crude oil flows from the oil well to a
separator where the petroleum gases are removed. After separation, the crude oil
is treated to remove water, sand and other contaminants and is then moved into
the producer's on-site storage tanks. When the tank is full, the producer
contacts field personnel to purchase and transport the crude oil to market. We
use our pipelines and trucks to transport to market most of the crude oil we
purchase.
We engage in several types of purchases, sales and exchanges of crude oil.
Most transactions we enter into are at market responsive prices, with a large
number of transactions on a 30-day renewable basis. Such purchases are
automatically renewable on a month-to-month basis until terminated by either
party. The purchases are typically based on our daily posted prices or other
quoted market related prices plus a bonus or market adjustment. The bonus is
determined based on the grade of oil, transportation costs and other competitive
factors. Both the posted price and the bonus change in response to market
conditions. Posted prices can change daily, and bonuses, in general, can change
every 30 days as contracts renew. Conducting business under these short-term
contracts with multiple producers helps us reduce our overall basis risk (i.e.,
the risk that price relationships between delivery points, grades of crude oil
or delivery periods will change). Please read "Risk Management/Derivatives"
below.
6
Crude Oil Marketing
The marketing of crude oil is complex and requires detailed knowledge of
the crude oil market and a familiarity with a number of factors including: types
of crude oil, individual refinery demand for specific grades of crude oil, area
market price structures for the different grades of crude oil, location of
customers, availability of transportation facilities, and timing and costs
(including storage) involved in delivering crude oil to the appropriate
customer. We market crude oil through our extensive gathering and marketing
asset base, which allows us to select among several transportation, storage and
delivery alternatives.
Generally, as we purchase lease crude oil, we enter into corresponding sale
transactions involving physical deliveries of crude oil to third-party users,
such as independent refineries, or corresponding sales of futures contracts on
the New York Mercantile Exchange ("NYMEX"). This process enables us to minimize
our exposure related to price risk until we make physical delivery of the crude
oil. After the initial purchase of a lease barrel, we may re-market that barrel
both in the futures and physical markets in order to maximize the value of the
lease crude oil volumes. Throughout the process, we seek to maintain a
substantially balanced position with respect to the price and volume of crude
oil purchases and sales; however, we have certain risks that cannot be
completely hedged. For more information, please read - "Risk
Management/Derivatives" below.
Market conditions significantly impact our sales and marketing strategies.
During periods when the demand for crude oil is weak, the market for crude oil
is often in "contango," meaning that the price of crude oil in a given month is
less than the price of crude oil in a subsequent month. In a contango market,
storing crude oil is favorable, because storage owners at major trading
locations can simultaneously purchase production at lower current prices for
storage and sell at higher prices for future delivery. When there is a higher
demand than supply of crude oil in the near term, the market is "backwardated,"
meaning that the price of crude oil in the prompt month exceeds the price of
crude oil in a subsequent month. A backwardated market has a positive impact on
marketing margins because crude oil gatherers can capture a premium for prompt
deliveries.
Producer Services
Purchasing crude oil from producers and operators is done on the basis of
competitive pricing and reliable and responsive customer service. We believe
that our ability to offer services to producers and operators is an important
factor in maintaining lease crude oil volumes and in obtaining new volumes. Our
gathering and marketing assets and related service capabilities allow us to
provide timely pickup of crude oil from producers' tanks at the lease or
production point, accurate measurement of crude oil volumes delivered, and
certain accounting and administrative services. Accounting and administrative
services include processing division orders (dividing payments among the owners
of interests in a lease), providing statements of the crude oil purchased by us
each month, disbursing production proceeds to interest owners and calculation
and payment of severance and production taxes on behalf of interest owners. In
order to compete effectively, we must efficiently handle title and division
order issues and payment and regulatory reporting of all severance and
production taxes. We must do this in a professional and timely manner, thereby
ensuring the prompt and correct processing or payment of crude oil production
proceeds and taxes. These producer services will continue to be a key component
in our strategy as the smaller producers find it difficult to maintain these
services internally.
Competition
Competitive factors in the crude oil gathering and marketing business
include price, quality of service, transportation facilities, financial strength
and knowledge of products and markets. See further discussion in Note 3 to our
Consolidated Financial Statements for information regarding our financial
strength and the impact on our business. There are a number of structural and
economic factors impacting all of our market segments that drive new customer
needs, change competitor dynamics and, consequently, create new challenges and
opportunities for responsive market participants. The general decline in
domestic lease crude oil production has made competition among gatherers and
marketers even more intense.
7
In our crude oil gathering and marketing business, we compete with major
oil companies, large independent crude gatherers and a large number of small
regional independent gatherers. Our principal competitors in the purchase of
leasehold crude oil production include BP, Shell, Plains All American, Sun
Refining and Marketing, TEPPCO and various regional competitors.
PIPELINE OPERATIONS
General
Through our common carrier pipeline systems, we transport crude oil for our
North American Crude Oil business segment and third-party customers pursuant to
published tariff rates regulated by the Federal Energy Regulatory Commission
("FERC") and state regulatory authorities. Accordingly, we offer transportation
services to any shipper of crude oil, provided that the crude oil meets the
conditions and specifications contained in the applicable pipeline tariff. The
table below sets forth the average daily number of barrels of crude oil
transported by our Pipeline Operations in each of the years presented.
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 2000 2001 2002 2003
------ ------ ------ ------ ------
Crude oil transported (thousands bpd) 513.7 561.5 511.1 407.0 391.7
Pipeline revenues are primarily a function of the amount of crude oil
transported through the pipeline, known as throughput, and the applicable
pipeline tariffs. Approximately 79% of the revenues from our Pipeline Operations
business segment for the twelve months ended December 31, 2003 were generated
from tariffs charged to our North American Crude Oil business segment and sales
of crude oil inventory to our North American Crude Oil business segment. Our
operating income from our Pipeline Operations business segment is primarily
generated by the difference between the published tariff and the fixed and
variable costs of operating the pipelines.
We believe that pipelines provide the lowest-cost method of transportation,
and accordingly, in the past we focused on increasing the percentage of barrels
transported via pipelines through acquisitions of pipeline assets. Our extensive
pipeline network allows us to be the low-cost operator in many of the regions in
which we operate.
Competition
Our Pipeline Operations face competition from a number of major oil
companies and smaller entities. Pipeline competition among common carrier
pipelines is based primarily on transportation charges, access to producing
areas, and demand for the crude oil by end users. We believe that high capital
costs make it unlikely for other companies to build competing crude oil pipeline
systems in areas served by our pipelines. The principal competitors of our
Pipelines Operations are Sunoco Logistics, Plains All American, ConocoPhillips,
Genesis, Seminole Trading and Gathering, and TEPPCO.
DISPOSITIONS
For information regarding the sale of our liquids operations and other
dispositions in 2003, please read "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
- - Asset Dispositions."
RISK MANAGEMENT/DERIVATIVES
We attempt to minimize our exposure to commodity prices. Generally, as we
purchase lease crude oil at prevailing market prices, we enter into
corresponding sales transactions involving physical deliveries of crude oil to
third-party users, such as refiners or other trade partners, or a sale of
futures contracts on the NYMEX. This process gives us the
8
opportunity to profit on the transaction at the time of purchase and to minimize
our exposure to commodity price fluctuations.
Price risk management strategies, including those involving price hedges
using NYMEX futures contracts, are very important in maintaining or increasing
our gross margins. Such hedging techniques require resources that manage both
futures positions and physical inventories. Another important element of the
hedging techniques is the accurate estimation of lease crude oil volumes that
will actually be purchased when we pick them up from the producers. We effect
transactions both in the futures and physical markets in order to deliver the
crude oil to its highest value location or otherwise to maximize the value of
the crude oil we control. Throughout the process, we seek to maintain a
substantially balanced risk position at all times. We do have certain risks that
cannot be completely hedged such as basis risks (the risk that price
relationships between delivery points, grades of crude oil or delivery periods
will change) and the risk that transportation costs will change. From time to
time we enter into transactions providing for purchases and sales in future
periods in which the volumes of crude oil are balanced, but where either the
purchase or sale prices are not fixed at the time at which the transactions are
consummated. In such cases, we are subject to the risk that prices may change or
that price changes will not occur as anticipated.
Our ability to maintain or increase gross profit and to protect ourselves
from adverse price changes is dependent on the success of our marketing and
price risk management strategies. Our marketing and price risk management
strategies may not be successful in protecting us from risks or in maintaining
our gross margins at desirable levels.
CREDIT
Credit review and analysis are integral to our marketing activities.
Payment for all or substantially all of the monthly lease crude oil gathered is,
in many instances, made to the operator of the lease. The operator, in turn, is
responsible for the correct payment and distribution of such production proceeds
to the proper parties.
In our marketing activities, we have historically used a credit rating
system and independent analysis to determine the amount, if any, of the open
credit to be extended to any given customer. We then monitor the exposure to the
customer in comparison to the line of credit extended and pursue any variances.
Certain customers post letters of credit enabling them to transact business with
us. Since typical sales transactions can involve tens of thousands of barrels of
crude oil or other products, the risk of non-payment and non-performance by
customers is a major consideration in our business. Our credit system, policies
and procedures, however, may not be successful in preventing a significant loss
from customer default.
The amount and profitability of our business is also dependent on our own
credit standing and the willingness of third parties to engage in transactions
with us without requiring us to furnish third-party credit support. As discussed
in Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" and primarily as a
result of our bankruptcy and the Enron bankruptcy, our trade creditors have been
less willing than before these events to extend credit to us on an unsecured
basis. Since our bankruptcy, the amount of letters of credit we have been
required to post for our business has increased significantly. Letters of credit
were approximately $250 million as of December 31, 2003, $274 million as of
December 31, 2002 and $196 million as of December 31, 2001.
ENVIRONMENTAL MATTERS
We are subject to federal, state and local laws and regulations governing
the discharge of materials into the environment or otherwise relating to
environmental protection. At the federal level, such laws include, among others,
the Clean Air Act ("CAA") the Clean Water Act ("CWA"), the Oil Pollution Act of
1990 ("OPA"), the Federal Resources Conservation and Recovery Act ("RCRA"), the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
and the National Environmental Policy Act ("NEPA"), as each may be amended from
time to time. Failure to comply with these laws and regulations may result in
the assessment of administrative, civil, and criminal penalties or the
imposition of injunctive relief. Moreover, compliance with such laws and
regulations in the future could prove to be costly, and there can be no
assurance that we will not incur such costs in material amounts. Environmental
9
laws and regulations have changed substantially and rapidly over the last 20
years, and we anticipate that there will be continuing changes. The clear trend
in environmental regulation is to place more restrictions and limitations on
activities that may impact the environment, such as emissions of pollutants,
generation and disposal of wastes and use and handling of chemical substances.
Increasingly strict environmental restrictions and limitations have resulted in
increased operating costs for us and other businesses throughout the United
States, and it is possible that the costs of compliance with environmental laws
and regulations will continue to increase. We will attempt to anticipate future
regulatory requirements that might be imposed and to plan accordingly in order
to remain in compliance with changing environmental laws and regulations and to
minimize the costs of such compliance.
The CAA controls, among other things, the emission of volatile organic
compounds, nitrogen oxides, and all other ozone-producing compounds in order to
protect national ambient air quality in accordance with standards established
for ozone and other pollutants. Such emissions may occur from the handling or
storage of petroleum. The sources of emissions that are subject to control and
the types of controls required are a matter of individual state air quality
control implementation plans that set forth emission limitations. Both federal
and state laws impose substantial administrative, civil and even criminal
penalties for violation of applicable requirements. As part of our regular
overall evaluation of current operations, we assess the need for new, or
amendment of existing, air permits at our properties. We believe that our
overall operations are in substantial compliance with applicable air quality
requirements.
We generate wastes, including hazardous wastes, that are subject to the
RCRA and comparable state statutes. The Environmental Protection Agency ("EPA")
and various state agencies have limited the approved methods of disposal for
certain hazardous and nonhazardous wastes. Furthermore, certain oil and gas
exploration and production wastes handled by us that are currently exempt from
treatment as "hazardous wastes" may in the future be designated as "hazardous
wastes" and therefore be subject to more rigorous and costly operating and
disposal requirements.
CERCLA, also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons that are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the generator of a
"hazardous substance," the current or former owner or operator of the disposal
site or sites where the release occurred and companies that transported or
disposed or arranged for the transport or disposal of the hazardous substances
that have been released at the site. Persons who are or were responsible for
releases of hazardous substances under CERCLA may be subject to joint and
several liability for the costs of cleaning up the hazardous substances that
have been released into the environment and for damages to natural resources,
and it is not uncommon for neighboring landowners and other third parties to
file claims for personal injury and property damage allegedly caused by the
hazardous substances released into the environment. In the ordinary course of
our operations, substances may be generated that fall within the definition of
"hazardous substances." Our operations are also impacted by regulations
governing the disposal of naturally occurring radioactive materials. Although we
have utilized operating and disposal practices that were standard in the
industry at the time, hydrocarbons or other wastes may have been disposed of or
released on or under the properties owned or leased by us or under other
locations where such wastes have been taken for disposal, whether by us or by
other operators or owners of property acquired by us. Moreover, we may own or
operate properties that in the past were operated by third parties whose
operations were not under our control. Those properties and any wastes that may
have been disposed or released on them may be subject to CERCLA, RCRA and
analogous state laws, and we potentially could be required to remediate such
properties.
The CWA, as amended by the OPA, controls, among other things, the discharge
of oil and other petroleum products into waters of the United States. The CWA
provides penalties for any unauthorized discharges of pollutants (including
petroleum products) into waters of the United States and imposes substantial
potential liability for the costs of responding to an unauthorized discharge of
pollutants, such as an oil spill. State laws governing the control of water
pollution also provide varying administrative, civil and criminal penalties and
liabilities in the event of a release of petroleum or other related products
into surface waters or onto the ground. Federal and state permits for such water
discharges may be required. In addition, the CWA governs the discharge of
dredged or fill material into waters of the United States, including certain
wetlands. The discharge of dredged or fill material into waters of the United
States in connection with the construction of pipelines or other facilities may
require permits issued under Section 404 of the CWA.
10
OPA also imposes a variety of requirements on "responsible parties" for oil
and gas facilities related to the prevention of oil spills and liability for
damages resulting from such spills in waters of the United States. The term
"responsible parties" includes the owner or operator of an oil or gas facility
that could be the source of an oil spill affecting jurisdictional waters of the
United States. The term "waters of the United States" has been broadly defined
to include inland water bodies, such as wetlands, rivers, and creeks, as well as
coastal waters. OPA assigns liability to each responsible party for oil spill
removal costs and a variety of public and private damages from oil spills. OPA
establishes a liability limit for onshore facilities of up to $350 million while
the limit for offshore facilities is all removal costs plus up to $75 million in
other damages. Responsible parties, however, cannot take advantage of liability
limits if the spill is caused by gross negligence or willful misconduct, if the
spill resulted from violation of a federal safety, construction or operating
regulation, or if a responsible party fails to report a spill or to cooperate
fully in the cleanup. Few defenses exist to the liability for oil spills imposed
by OPA. OPA also imposes other requirements on facility operators, such as the
preparation of an oil spill response plan, and a demonstration of the operator's
ability to pay for environmental cleanup and restoration costs likely to be
incurred in connection with an oil spill. Failure to comply with these OPA
requirements or inadequate cooperation in a spill event may subject a
responsible party to administrative, civil or criminal actions. While we believe
that we are in substantial compliance with the requirements of OPA, we cannot
predict future events which would have a material impact on our financial
condition or our results of operations.
NEPA may apply to certain extensions or additions to a pipeline system.
Under NEPA, if any project is to be undertaken which would significantly affect
the quality of the environment and require a permit or approval from a federal
agency, the federal agency may be required to prepare a detailed environmental
impact study before it may issue a permit or otherwise approve a project. The
issuance by a federal agency of a permit or approval to construct or extend a
pipeline system may constitute a major federal action under NEPA. The effect of
NEPA may be to delay or prevent construction of new facilities or to alter their
location, design or method of construction. Similar state laws may also be
applicable to us.
Enron received a request for information from the EPA under Section 308 of
the CWA regarding certain discharges and releases from oil pipelines owned or
operated by Enron and its affiliated companies for the time period July 1, 1998
to July 11, 2001. Enron responded to the EPA's Section 308 request in its
capacity as the operator of the pipelines actually owned by us and on our
behalf. Under the terms of the Enron Settlement Agreement dated October 8, 2002,
we would be required to indemnify EOTT Energy Corp., the General Partner, and
its affiliates, including Enron Pipeline Services Company, with regard to any
environmental remediation, except for claims of gross negligence and willful
misconduct. While we cannot predict the outcome of the EPA's Section 308
request, the EPA could seek to impose liability for environmental cleanup on us
with respect to the matters being reviewed. The outcome of the EPA's Section 308
request is not yet known, and we are unaware of any potential liability of
Enron, its affiliates, or us. It is also possible that our bankruptcy
proceedings did not relieve us from certain potential environmental liability.
Prior to the sale of our Liquids Operations discussed further in Note 8 to
our Consolidated Financial Statements, we produced MTBE at our Morgan's Point
Facility. MTBE is used as an additive in gasoline. Due to health concerns
related to MTBE, there have been lawsuits filed against companies involved in
the production of MTBE. We have not been named in any such action, nor do we
anticipate being included in any such actions. However, we can provide no
assurances that we may not be included in such actions due to our past
production of MTBE.
We may experience future releases of crude oil or other substances into the
environment or discover releases that were previously unidentified. While an
inspection program is maintained on our pipelines to prevent and detect such
releases, damages and liabilities incurred due to any future
environmental releases could affect our business. We believe that our operations
and facilities are in substantial compliance with applicable environmental laws
and regulations and that there are no outstanding potential liabilities or
claims relating to safety and environmental matters, that we are currently aware
of, the resolution of which, individually or in the aggregate, would have a
materially adverse effect on our financial position or results of operations.
Please read Item 3. "Legal Proceedings" and Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors." Our
environmental expenditures include amounts spent on permitting, compliance and
response plans, monitoring and spill cleanup and other remediation costs. In
addition, we could be required to spend
11
substantial sums to ensure the integrity of and upgrade our pipeline systems,
and in some cases, we may take pipelines out of service if we believe the cost
of upgrades will exceed the value of the pipelines.
We cannot give any assurance as to the ultimate amount or timing of future
expenditures for environmental remediation or compliance, and actual future
expenditures may be different from the amounts currently estimated. In the event
of future increases in costs, we may be unable to pass on those increases to our
customers.
REGULATION
We are subject to a variety of federal and state regulations relating to
our interstate and intrastate pipeline transportation and safety activities,
motor carrier activities, and commodities trading business, the most significant
of which are discussed below.
PIPELINE REGULATION
Interstate Regulation Generally. Our interstate common carrier pipeline
operations are subject to rate regulation by the FERC under the provisions of
the Interstate Commerce Act ("ICA"). These operations include our Hobbs Pipeline
in New Mexico and Texas, our crude oil system in Mississippi and Alabama, our
crude oil systems acquired from CITGO Pipeline Company, portions of our crude
oil systems acquired from Koch Pipeline Company, L.P. and crude oil systems
acquired from Texas-New Mexico Pipe Line Company. The ICA requires that we
maintain our tariffs on file with the FERC, which tariffs set forth the rates we
charge for providing transportation services on our interstate common carrier
pipeline as well as the rules and regulations governing these services. The ICA
also requires, among other things, that petroleum pipeline rates be just and
reasonable and non-discriminatory. The ICA permits interested parties to
challenge proposed new or changed rates and authorizes the FERC to suspend the
effectiveness of such rates for a period of up to seven months and to
investigate such rates. If, upon the completion of an investigation, the FERC
finds that the new or changed rate is unlawful, it is authorized to require the
carrier to refund the revenues collected during the pendency of the
investigation in excess of those that would have been collected under the prior
tariff. In addition, the FERC, upon complaint or on its own motion and after
investigation, may order a carrier to change its rate prospectively. Upon an
appropriate showing, a shipper may obtain reparations for damages sustained for
a period of up to two years prior to the filing of a complaint.
Energy Policy Act of 1992 and Subsequent Developments. In October 1992,
Congress passed the Energy Policy Act of 1992 (the "Energy Policy Act"). The
Energy Policy Act deemed petroleum pipeline rates that were in effect for the
365-day period ending on the date of enactment or that were in effect on the
365th day preceding enactment and had not been subject to complaint, protest, or
investigation during the 365-day period, to be just and reasonable under the ICA
(i.e., "grandfathered"). The vast majority of our FERC pipeline rates are
grandfathered under the Energy Policy Act, and therefore are deemed just and
reasonable. The Energy Policy Act provides that the FERC may change the
grandfathered rates upon complaints only under the following limited
circumstances:
- a substantial change has occurred since enactment in either the
economic circumstances or the nature of the services which were
the basis for the rate;
- the complainant was contractually barred from challenging the
rate prior to enactment of the Energy Policy Act and filed the
complaint within 30 days of the expiration of the contractual
bar; or
- a provision of the tariff is unduly discriminatory or
preferential.
The Energy Policy Act further required the FERC to issue rules establishing
a simplified and generally applicable ratemaking methodology for interstate
petroleum pipelines and to streamline procedures in petroleum pipeline
proceedings. On October 22, 1993, the FERC responded to this mandate by issuing
several orders, including Order No. 561, which adopts a new indexing rate
methodology for interstate petroleum pipelines. Under the new regulations,
effective January 1, 1995, petroleum pipelines are able to change their rates
within prescribed ceiling levels that are tied to changes in the Producer Price
Index for Finished Goods, minus one percent ("PPI-1"). Rate increases made
pursuant to the indexing methodology are subject to protest, but such protests
must show that the portion of the rate increase
12
resulting from application of the index is substantially in excess of the
pipeline's increase in costs. If the indexing methodology results in a reduced
ceiling level that is lower than a pipeline's filed rate, Order No. 561 requires
the pipeline to reduce its rate to comply with the lower ceiling. The new
indexing methodology is applicable to any existing rate, whether grandfathered
or whether established after enactment of the Energy Policy Act.
In July 2000, the FERC issued a Notice of Inquiry seeking comment on
whether to retain or to change the existing rate indexing methodology. In
December 2000, the FERC issued an order concluding that the PPI-1 index
reasonably estimated the actual cost changes in the pipeline industry and should
be continued for another five-year period, subject to review in July 2005. On
February 24, 2003, on remand of its December 2000 order from the U.S. Court of
Appeals for the District of Columbia, the FERC changed the rate indexing
methodology to the PPI for finished goods, eliminating the subtraction of one
percent as had been done previously. The FERC made the change prospective only,
but did allow oil pipelines to recalculate their maximum ceiling rates as though
the new rate indexing methodology had been in effect since July 1, 2001.
The FERC, however, has retained cost-based ratemaking, market-based rates
and settlements as alternatives to the indexing approach. A pipeline can follow
a cost-based approach when it can demonstrate that there is a substantial
divergence between the actual costs experienced by the carrier and the rates
resulting from application of the index. Under FERC's cost-based methodology,
crude oil pipeline rates are permitted to generate operating revenues, based on
projected volumes, not greater than the total of operating expenses,
depreciation and amortization, federal and state income taxes and an overall
allowed rate of return on the pipeline's rate base. In addition, a pipeline can
charge market-based rates if it first establishes that it lacks significant
market power in its origin and destination markets, and a pipeline can establish
rates pursuant to a settlement if agreed upon by all current shippers. Initial
rates for new services can be established through a cost-based filing or through
an uncontested agreement between the pipeline and at least one shipper not
affiliated with the pipeline.
Since July of 1995, we have annually amended our tariffs on all of our
regulated pipelines as provided by FERC regulations. Although no assurance can
be given that the tariffs charged by us will ultimately be upheld if challenged,
we believe that the tariffs now in effect for all of our pipelines are within
the maximum rates allowed under the current FERC guidelines.
FERC Form 6 Annual Reporting. The FERC requires annual reporting from oil
pipelines through the submission of FERC Form 6, "Annual Report of Oil Pipeline
Companies." The FERC Form 6 is designed to provide the FERC with the financial,
operational and ratemaking information it needs to regulate and monitor the oil
pipeline industry. FERC advised us, in a letter dated January 9, 2002, that FERC
had begun an industry-wide audit with respect to the annual reporting
requirements of FERC Form 6 in December 2001, and that we had been selected for
the audit. The audit covered the period from January 1, 2000 through December
31, 2001. The FERC has completed its audit and recommended that a cash
management program be implemented in accordance with the Interim Final Ruling,
Order 634. We implemented a cash management program in accordance with Order 634
in August 2003. We will timely file our FERC Form 6 for the year 2003 on March
31, 2004.
Intrastate Regulation. Some of our pipeline operations are subject to
regulation by the respective agency of the state in which the pipeline is
located. The applicable state statutes require, among other things, that
pipeline rates be non-discriminatory and provide a fair return on the aggregate
value of the pipeline property used to render services. State commissions have
generally not been aggressive in regulating common carrier pipelines and have
generally not investigated the rates or practices of petroleum pipelines in the
absence of shipper complaints. Complaints to state agencies have been infrequent
and are usually resolved informally. Although no assurance can be given that our
intrastate rates would ultimately be upheld if challenged, we believe that,
given this history, the tariffs now in effect are more likely subject to
informal reviews rather than formal challenges.
Petroleum Pipeline Safety Legislation and Regulation. Our petroleum
pipelines are subject to regulation by the United States Department of
Transportation ("DOT") under the Accountable Pipeline and Safety Partnership Act
of 1996, sometimes referred to as the Hazardous Liquid Pipeline Safety Act
("HLPSA"), the Pipeline Safety Improvement Act of 2002 and comparable state
statutes relating to the design, installation, testing, construction, operation,
13
replacement, and management of our pipeline facilities. The HLPSA covers
petroleum and petroleum products and requires any entity that owns or operates
pipeline facilities to comply with such regulations, to permit access to and
copying of records, and to prepare certain reports and provide information as
required by the Secretary of the DOT. Comparable regulation exists in some
states in which we conduct intrastate common carrier or private pipeline
operations.
We are subject to the Office of Pipeline Safety ("OPS") regulation
requiring qualification of pipeline personnel. The regulations require pipeline
operators to develop and maintain a written qualification program for
individuals performing covered tasks on pipeline facilities. The intent of these
regulations is to ensure a qualified work force and to reduce the probability
and consequence of incidents caused by human error. The regulations establish
qualification requirements for individuals performing covered tasks, and amends
certain training requirements in existing regulations. We believe we are in
compliance with these requirements through a written qualification program,
adopted by us effective January 1, 2003.
Pipeline safety issues are currently receiving significant attention in
various political and administrative arenas at both the state and federal
levels. For example, recent federal rule changes require operators of pipelines
of greater than 500 miles to: (i) develop and maintain a written qualification
program for individuals performing covered tasks on pipeline facilities, and
(ii) establish pipeline integrity management programs ("IMP"). In particular,
during 2000, the DOT adopted the OPS Integrity Management regulations requiring
operators of interstate pipelines to develop and follow an IMP that provides for
continual assessment of the integrity of all pipeline segments that could affect
so-called high consequence areas ("HCA"), including high population areas,
drinking water areas and ecological resource areas that are unusually sensitive
to environmental damage from a pipeline release, and commercially navigable
waterways. HCAs related to our pipelines were initially identified as all areas
where jurisdictional lines are located. We completed our IMP before the deadline
of March 31, 2002.
The OPS Integrity Management regulations also require us to evaluate
pipeline conditions by means of periodic internal inspection, pressure testing,
or other equally effective assessment means and to correct identified anomalies.
If, as a result of our evaluation process, we determine that there is a need to
provide further protection to the HCA, then we will be required to implement
additional prevention and mitigation risk control measures for our pipelines,
including enhanced damage prevention programs, corrosion control program
improvements, leak detection system enhancements, installation of emergency flow
restricting devices, and emergency preparedness improvements. The regulations
also require us to evaluate and, as necessary, improve our management and
analysis processes for integrating available integrity-related data relating to
our pipeline segments and to remediate potential problems found as a result of
the required assessment and evaluation process. The regulations require that
initial HCA baseline integrity assessments are conducted within seven years,
with all subsequent assessments conducted on a five-year cycle. We will evaluate
each pipeline segment's integrity by analyzing available information and develop
a range of potential impacts resulting from a release to a HCA.
In connection with extensive asset purchases in 1998 and 1999, we
instituted an IMP in 1999. This program was expanded in December of 2001 with a
pipeline integrity assurance program to comply with certain regulatory and
legislative changes. Under this program, the integrity of a pipeline is
evaluated to avoid operating a pipeline that poses significant risk of crude oil
spills. Our written Pipeline Integrity Program, which was intended to comply
with the new OPS Integrity Management regulations, was formally implemented in
January 2002, and revised in January of 2003. Anticipated operating expenses and
capital expenditures to comply with that program are budgeted annually; however,
actual future expenditures may be different from the amounts currently
anticipated.
Although we believe that our pipeline operations are in substantial
compliance with applicable HLPSA requirements, these developments reflect the
prospect of incurring significant expenses if additional safety requirements are
imposed that exceed our current pipeline control system capabilities.
14
States are largely preempted by federal law from regulating pipeline
safety, but may assume responsibility for enforcing federal intrastate pipeline
regulations and inspection of intrastate pipelines. In practice, states vary
considerably in their authority and capacity to address pipeline safety.
We are also subject to the requirements of the Federal Occupational Safety
and Health Act ("OSHA") and comparable state statutes. We believe that we are in
substantial compliance with Federal OSHA requirements and comparable state
statutes, including general industry standards, recordkeeping requirements and
monitoring of occupational exposure to hazardous substances.
TRUCKING REGULATION
Generally, we operate our fleet of trucks as a private carrier.
Additionally, we have engaged in contract carrier hauling of crude oil in
Louisiana. In Oklahoma, Texas, Alabama and Mississippi, we haul salt water,
crude oil and other fluids for others as a common carrier. Although a private or
common carrier that transports property in interstate commerce is not required
to obtain operating authority from the Surface Transportation Board of the DOT,
the carrier is subject to certain motor carrier safety regulations issued by the
DOT. The trucking regulations extend to driver operations, keeping of log books,
truck manifest preparations, safety placards on the trucks and trailer vehicles,
drug and alcohol testing, safety of operation and equipment, and many other
aspects of truck operations. We are also subject to OSHA regulations with
respect to our trucking operations. We believe that we are in substantial
compliance with applicable trucking regulation requirements.
We provide contract and common carrier services pursuant to permits issued
by the various state regulatory agencies. Accordingly, we, as a common or
contract carrier, are also subject to certain safety regulations related to
service and operations. We believe that we are in substantial compliance with
applicable state common or contract carrier regulation requirements.
COMMODITIES REGULATION
Our price risk management operations are subject to constraints imposed
under the Commodity Exchange Act. Our futures and options contracts that are
traded on the NYMEX are subject to strict regulation by the Commodity Futures
Trading Commission. Although NYMEX futures contracts include contracts on sweet
crude oil, there are many products that we purchase and sell for which no
futures contracts are available, due in part to the strict regulatory scheme for
futures contracts. In addition, trading volumes and pricing bases of futures
contracts on some products are such that our ability to use them to hedge our
price risks may be limited.
EMPLOYEES
We had 751 employees as of December 31, 2003, 543 of which are field
personnel. None of the employees are represented by any union. We consider our
relations with our employees to be satisfactory.
15
ITEM 2. PROPERTIES
As of December 31, 2003, we owned and operated approximately 7,450 miles of
active crude oil gathering and transmission pipelines. There are approximately
8.1 million barrels of active storage capacity associated with field tanks. By
state, the pipeline assets are as follows:
COMMON CARRIER PIPELINES
- ------------------------------------------------
MILES BY STATE
--------------
Alabama................. 56
Colorado................ 91
Kansas.................. 1,079
Louisiana............... 195
Mississippi............. 293
Montana................. 146
Nebraska................ 63
New Mexico.............. 1,159
North Dakota............ 435
Oklahoma................ 1,389
South Dakota............ 38
Texas................... 1,964
-----
Total............... 6,908
=====
PROPRIETARY PIPELINES
- ---------------------------------------------
MILES BY STATE
--------------
Alabama................. 38
Colorado................ -
Kansas.................. -
Louisiana............... 13
Mississippi............. 274
Montana................. -
Nebraska................ -
New Mexico.............. 157
North Dakota............ -
Oklahoma................ 31
Texas................... 29
---
Total.......... 542
===
We also operate four active barge facilities in Louisiana and one in
Alabama. Approximately 1.5 million barrels of storage capacity are associated
with these barge facilities.
ITEM 3. LEGAL PROCEEDINGS
Litigation. We are, in the ordinary course of business, a defendant in
various lawsuits, some of which are covered in whole or in part by insurance. We
believe that the ultimate resolution of litigation, individually and in the
aggregate, will not have a materially adverse impact on our financial position
or results of operations. Several litigation claims were settled during the
course of the bankruptcy proceedings or are still being negotiated post
confirmation. How each matter was or is being handled is set forth in the
summary of each case below. For matters where the parties negotiated a
settlement during our bankruptcy proceedings, the settlement amount was recorded
at December 31, 2002 as an allowed general unsecured claim in "Other Income
(Expense)" in our Consolidated Statement of Operations. In connection with our
Restructuring Plan, general unsecured creditors with allowed claims received a
pro rata share of $104 million of 9% senior unsecured notes and a pro rata share
of 11,947,820 Link LLC units. See further discussion in Notes 4 and 11 to our
Consolidated Financial Statements. Prior to and since the commencement of our
bankruptcy proceedings, various legal actions arose in the ordinary course of
business, of which the significant actions are discussed below.
John H. Roam, et al. vs. Texas-New Mexico Pipe Line Company and EOTT Energy
Pipeline Limited Partnership, Cause No. CV43296, In the District Court of
Midland County, Texas, 238th Judicial District (Kniffen Estates Suit). The
Kniffen Estates Suit was filed on March 2, 2001, by certain residents of the
Kniffen Estates, a residential subdivision located outside of Midland, Texas.
The allegations in the petition state that free crude oil products were
discovered in water wells in the Kniffen Estates area, on or about October 3,
2000. The plaintiffs claim that the crude oil products are from a 1992 release
from a pipeline then owned by the Texas-New Mexico Pipe Line Company ("Tex-New
Mex"). We purchased that pipeline from Tex-New Mex in 1999. The plaintiffs have
alleged that Tex-New Mex was negligent, grossly negligent, and malicious in
failing to accurately report and remediate the spill. With respect to us, the
plaintiffs were seeking damages arising from any contamination of the soil or
groundwater since we acquired the pipeline in question. No specific amount of
money damages was claimed in the Kniffen Estates Suit, but the plaintiffs did
file proofs of claim in our bankruptcy proceeding totaling $62 million. In
response to the Kniffen Estates Suit, we filed a cross-claim against Tex-New
Mex. In the cross-claim, we claimed that, in relation to the matters alleged by
the plaintiffs, Tex-New Mex breached the Purchase and Sale Agreement between the
parties dated May 1, 1999, by failing to disclose the 1992 release and by
failing to undertake the defense and handling of the toxic tort claims, fair
market value
16
claims, and remediation claims arising from the release. On April 5, 2002, we
filed an amended cross-claim which alleged that Tex-New Mex defrauded us as part
of Tex-New Mex's sale of the pipeline systems to us in 1999. The amended
cross-claim also alleged that various practices employed by Tex-New Mex in the
operation of its pipelines constituted gross negligence and willful misconduct
and voided our obligation to indemnify Tex-New Mex for remediation of releases
that occurred prior to May 1, 1999. In the Purchase and Sale Agreement, we
agreed to indemnify Tex-New Mex only for certain remediation obligations that
arose before May 1, 1999, unless these obligations were the result of the gross
negligence or willful misconduct of Tex-New Mex prior to May 1, 1999. EOTT
Energy Pipeline Limited Partnership ("PLP") and the plaintiffs agreed to a
settlement during our bankruptcy proceedings. The settlement provides for the
plaintiffs' release of their claims filed against PLP in this proceeding and in
the bankruptcy proceedings, in exchange for an allowed general unsecured claim
in our bankruptcy of $3,252,800 (as described above, the plaintiffs filed proofs
of claim in our bankruptcy proceedings totaling $62 million). The allowed
general unsecured claim was accrued at December 31, 2002. On April 1, 2003, we
filed a second amended cross-claim in this matter. In addition to the claims
filed in the previous cross-claims, we requested (i) injunctive relief for
Tex-New Mex's refusal to honor its indemnity obligations; (ii) injunctive relief
requiring Tex-New Mex to identify, investigate and remediate sites where the
conduct alleged in our cross-claim occurred; and (iii) restitution damages of
over $125,000,000. Tex-New Mex filed a motion to compel arbitration of these
issues. The motion to compel arbitration was denied at a hearing held on April
11, 2003. At the April 11, 2003 hearing, the court also severed into a separate
action EOTT's cross-claims against Tex-New Mex that extend beyond the crude oil
release and groundwater contamination in the Kniffen Estates subdivision
("EOTT's Over-Arching Claim"). Developments in EOTT's Over-Arching Claim are
described immediately below. Prior to the trial of the plaintiff's claims
against Tex-New Mex and EOTT's original cross-claim against Tex-New Mex arising
from the crude oil release and groundwater contamination in the Kniffen Estates
subdivision ("EOTT's Kniffen Claims"), Tex-New Mex reached a settlement with the
plaintiffs that provided for the release of the plaintiffs' claims. The trial of
EOTT's Kniffen Claims commenced on June 16, 2003, and the jury returned its
verdict on July 2, 2003. The jury found that Tex-New Mex's gross negligence and
willful misconduct caused the contamination in the Kniffen Estates. The jury
also found that Tex-New Mex committed fraud against us with respect to the
Kniffen Estates site. The jury awarded us actual damages equal to the expenses
we have incurred to date in remediating the Kniffen Estates site (approximately
$6.1 million) and punitive damages in the amount of $50 million. On November 28,
2003, the court entered an amended judgment based on the jury verdict. The final
judgment provides for the award to us of (i) actual damages in the amount of
$7,701,938, (ii) attorney's fees in the amount of $1,400,000, (iii) prejudgment
interest in the amount of $1,044,509 and (iv) punitive damages in the amount of
$18,203,876. The punitive damages were reduced from the jury's award of $50
million in accordance with Texas' statutory caps on punitive damages awards. The
final judgment also contains a finding that Tex-New Mex is obligated to
indemnify us for future remediation costs incurred at the Kniffen Estates site.
Tex-New Mex filed a motion for new trial that was overruled by operation of law
on February 11, 2004. Tex-New Mex filed a notice of appeal and posted a
supersedeas bond in the amount of $10,665,419 on February 12, 2004. The appeal
will proceed in the Eastland Court of Appeals. We cannot predict the outcome of
Tex-New Mex's appellate efforts.
EOTT Energy Operating Limited Partnership vs. Texas-New Mexico Pipeline
Company, Cause No. CV-44, 099, In the District Court of Midland County, Texas,
238th Judicial District ("EOTT's Over-Arching Claim"). As described above, the
claims in this lawsuit were severed from EOTT's Kniffen Claims on April 11,
2003. In this lawsuit, we allege that various practices employed by Tex-New Mex
in the operation of its pipelines and handling of spills constitute gross
negligence and willful misconduct, thus triggering Tex-New Mex's obligation to
indemnify us for remediation of releases where such practices ("Non-Remediation
Practices") were employed. In addition to damages, we are seeking (a) injunctive
relief requiring Tex-New Mex to honor its indemnity obligations under the
Purchase and Sale Agreement and (b) injunctive relief requiring Tex-New Mex to
identify, investigate, and remediate sites where Tex-New Mex employed the
Non-Remediation Practices. Discovery opened in EOTT's Over-Arching Claim on
December 1, 2003. The court conducted a scheduling conference for this case on
January 12, 2004, and set a trial date of September 19, 2005. On March 3, 2004,
we amended our petition to specifically list more than 200 contamination sites
where Tex-New Mex employed the Non-Remediation Practices.
Bankruptcy Issues related to Claims Made by Texas-New Mexico Pipeline
Company and its affiliates. Tex-New Mex, Shell Oil Company ("Shell") and Equilon
filed proofs of claim in our bankruptcy, each filing similar claims in the
amount of $112 million. In July of 2003, we entered into an agreement with
Shell, Tex-New Mex and Equilon whereby
17
all of their claims were either withdrawn, estimated or allowed, leaving the
value of the claims estimated for distribution purposes at $56,924.52. We are
currently working to fully resolve these claims in the bankruptcy claims
resolution process.
Jimmie T. Cooper and Betty P. Cooper vs. Texas-New Mexico Pipeline Company,
Inc., EOTT Energy Pipeline Limited Partnership, and EOTT Energy Corp., Case No.
CIV-03-0035 JB/LAM, In the United States District Court for the District of New
Mexico. This lawsuit was filed on October 1, 2002. The plaintiffs in this
lawsuit are surface interest owners of certain property located in Lea County,
New Mexico. The plaintiffs alleged that aquifers underlying their property and
water wells located on their property were contaminated as a result of spills
and leaks from a pipeline running across their property that is or was owned by
Tex-New Mex and us. The plaintiffs did not specify when the alleged spills and
leaks occurred. The plaintiffs sought payment of costs that would be incurred in
investigating and remediating the alleged crude oil releases and replacing water
supplies from aquifers that have allegedly been contaminated. The plaintiffs are
also seeking damages in an unspecified amount arising from the plaintiffs'
alleged fear of exposure to carcinogens and the alleged interference with the
plaintiffs' quiet enjoyment of their property. The plaintiffs are also seeking
an unspecified amount of punitive damages. EOTT and the plaintiffs agreed to the
terms of a settlement, whereby the plaintiffs agreed to release their claims
against us and received an allowed general unsecured claim in our bankruptcy in
the amount of $1,027,000. The allowed general unsecured claim was accrued at
December 31, 2002. The settlement documents have been finalized. On October 21,
2003, the plaintiffs filed a motion seeking our dismissal from this lawsuit.
Tex-New Mex opposed this motion, and on October 31, 2003, Tex-New Mex filed a
motion for leave to file a cross-claim against us. In the proposed cross-claim,
Tex-New Mex is seeking a declaratory judgment finding that we are contractually
obligated to indemnify Tex-New Mex for all costs Tex-New Mex has incurred or
will incur related to the defense of the plaintiffs' claims in this lawsuit. The
proposed cross-claim also alleges that we failed to assume Tex-New Mex's defense
of this lawsuit and failed to indemnify Tex-New Mex for the expenses Tex-New Mex
has incurred in this lawsuit, and that such actions by us constitute a breach of
the Purchase and Sale Agreement governing Tex-New Mex's sale of the subject
pipeline to us. On December 4, 2003, we filed a motion in our bankruptcy
proceeding seeking a determination that Tex-New Mex's proposed cross-claim had
been waived, barred, and discharged in our bankruptcy proceeding. A hearing on
that motion (the "Zero Claim Motion") was held on February 18, 2004, and the
bankruptcy court took the Zero Claim Motion under advisement. We have asked the
court to delay ruling on Tex-New Mex's motion for leave to file cross-claim
until the bankruptcy court rules on our Zero Claim Motion. At a settlement
conference held on February 27, 2004, the plaintiffs and Tex-New Mex reached a
settlement. Tex-New Mex has agreed to pay the plaintiffs $1,350,000 for a
release of the plaintiffs' claims.
In re EOTT Energy Partners, L.P., Case No. 02-21730, EOTT Energy Finance
Corp., Case No. 02-21731, EOTT Energy General Partner, L.L.C., Case No.
02-21732, EOTT Energy Operating Limited Partnership, Case No. 02-21733, EOTT
Energy Canada Limited Partnership, Case No. 02-21734, EOTT Energy Liquids, L.P.,
Case No. 02-21736, EOTT Energy Corp., Case No. 02-21788, Debtors (Jointly
Administered under Case No. 02-21730), In the United States Bankruptcy Court for
the Southern District of Texas, Corpus Christi Division. On October 8, 2002, we
and all of our subsidiaries filed voluntary petitions for relief under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court
for the Southern District of Texas (the "EOTT Bankruptcy Court") to facilitate
reorganization of our business and financial affairs for the benefit of us, our
creditors and other interested parties. Additionally, the General Partner filed
its voluntary petition for reorganization under Chapter 11 on October 21, 2002
in the EOTT Bankruptcy Court. Our Restructuring Plan was confirmed on February
18, 2003 and became effective on March 1, 2003. The provisions of the
Restructuring Plan are further described in Note 5 to our Consolidated Financial
Statements. Shell and Tex-New Mex filed a notice of appeal to our plan
confirmation on February 24, 2003. A hearing on the appeal was held in the
District Court on August 19, 2003, where the judge ruled the appeal was moot.
The ruling became final on October 24, 2003. The bankruptcy remains open while
we resolve all of the outstanding claims. We expect to close the bankruptcy in
early 2004.
EPA's Section 308 Request. In July 2001, Enron received a request for
information from the EPA under Section 308 of the CWA, requesting information
regarding certain spills and releases from oil pipelines owned or operated by
Enron and its affiliated companies for the time period July 1, 1998 to July 11,
2001. Enron responded in January of 2002 to the EPA's Section 308 request in its
capacity as the operator of the pipelines actually owned by us and on our
behalf. Under
18
the terms of the Enron Settlement Agreement dated October 8, 2002, we would be
required to indemnify EOTT Energy Corp., as the prior general partner, and its
affiliates including Enron Pipeline Services Company, with regard to any
environmental remediation, except for claims of gross negligence and willful
misconduct. While we cannot predict the outcome of the EPA's Section 308
request, the EPA could seek to impose liability for environmental cleanup on us
with respect to the matters being reviewed. The outcome of the EPA's Section 308
request is not yet known, and we are unaware of any potential liability of us,
Enron, or its affiliates. It is also possible that our bankruptcy proceedings
did not relieve us from certain potential environmental remediation liability.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our unitholders during the fourth
quarter of fiscal 2003.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON UNITS AND RELATED SECURITY HOLDER
MATTERS.
We are the successor registrant to EOTT MLP, which filed for bankruptcy on
October 8, 2002. The following table reflects the high and low closing prices
and distributions for common units of EOTT MLP for the period from January 1,
2002 through December 31, 2002. EOTT MLP's common units were traded on the New
York Stock Exchange until November 22, 2002 and on the OTC Bulletin Board for
the remainder of 2002. The LLC units began trading on the OTC Bulletin Board on
March 18, 2003.
PRICE RANGE
------------------- CASH
HIGH LOW DISTRIBUTIONS(1)
------- ------- ----------------
2003 (SUCCESSOR COMPANY)
Fourth Quarter................................ $ 18.25 $ 4.45 $ -
Third Quarter................................. 19.00 13.00 -
Second Quarter................................ 18.25 5.50 -
First Quarter (from March 18, 2003)........... 10.00 1.66 -
______________________________________________________________________________________________
2002 (PREDECESSOR COMPANY)
Fourth Quarter................................ $ 1.37 $ 0.12 $ -
Third Quarter................................. 4.56 0.50 -
Second Quarter................................ 9.75 3.30 -
First Quarter................................. 15.14 5.82 0.250
- -----------------------
(1) Distributions are shown in the quarter paid to common unitholders and are
based on the prior quarter's earnings.
On March 19, 2004, the high and low prices of our LLC units were $1.20 and
$0.85, respectively. As previously discussed, we are in advanced discussions
with a potential buyer regarding the sale of substantially all of our assets;
however, there can be no assurance that we will consummate a transaction. If we
are not successful in consummating the transaction, we will continue to pursue
other strategic alternatives, which include the sale of additional assets
(singularly or in groups) or a voluntary filing under the U.S. Bankruptcy Code.
Based on our existing level of indebtedness, it is unlikely that either a sale
or bankruptcy would yield any material residual value for our unitholders.
Holders
As of March 2, 2004, there were approximately 373 record holders of our
common units.
Distribution Policy
Our credit facilities restrict our ability to make any distributions to
unitholders during the term of the facilities. In addition, pursuant to the
terms of the indenture governing our senior notes, distributions to unitholders
are restricted due to the restrictions on our ability to make distributions
under our credit facilities.
ITEM 6. SELECTED FINANCIAL DATA (UNAUDITED)
The following table sets forth selected income, balance sheet and operating
data for the ten months ended December 31, 2003, the two months ended February
28, 2003 and the years ended December 31, 2002, 2001, 2000 and 1999. The
selected financial data presented below for the ten months ended December 31,
2003 is financial information of the Successor Company post emergence from
bankruptcy. The selected financial data for the two months ended February 28,
2003 and for the years ended December 31, 2002, 2001, 2000 and 1999 is financial
information of the Predecessor Company, pre emergence from bankruptcy. As a
result of the application of fresh start reporting under the American
20
Institute of Certified Public Accountants Statement of Position No. 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" as
of February 28, 2003, the financial statements of the Predecessor Company and
the Successor Company include two different bases of accounting.
The selected financial data as of and for the ten months ended December 31,
2003, two months ended February 28, 2003, and the years ended December 31, 2002
and 2001, has been derived from our audited Consolidated Financial Statements.
The selected financial data for all other periods has been derived from our
unaudited consolidated financial statements for the relevant periods.
(In Thousands, Except Per Unit and Operating Data)
|
SUCCESSOR COMPANY | PREDECESSOR COMPANY
----------------- |------------------------------------------------------------------
| TWO MONTHS
TEN MONTHS | ENDED YEAR ENDED DECEMBER 31,
ENDED | FEBRUARY 28, 2003 ---------------------------------------------
DECEMBER 31, 2003 | (1) (2) 2002 (2) 2001 (1) 2000 1999(1)
----------------- |----------------- ----------- ----------- ---------- --------
| (UNAUDITED) (UNAUDITED)
|
INCOME STATEMENT DATA: |
Operating revenue........................... $ 152,676 |$ 31,979 $ 182,942 $ 250,573 $ 259,525 $ 243,430
|
Cost of sales............................... 23,995 | 5,155 24,489 42,900 41,472 49,633
Operating expenses.......................... 70,102 | 13,020 94,274 97,969 97,255 93,240
Depreciation and amortization-operating .... 17,139 | 4,123 26,621 27,802 28,668 28,717
----------------- |----------------- ----------- ----------- ---------- ---------
Gross profit................................ 41,440 | 9,681 37,558 81,902 92,130 71,840
|
Selling, general and administrative expenses 45,959 | 6,846 53,480 45,051 44,279 41,908
Depreciation & amortization-corp. & other .. 22 | 519 3,267 3,083 2,511 1,751
Other (income) expense...................... (13,867)| (8) 6,710 (1,092) (244) (950)
Impairment of assets........................ - | - 1,168 - - -
----------------- |----------------- ----------- ----------- ---------- ---------
|
Operating income (loss)..................... 9,326 | 2,324 (27,067) 34,860 45,584 29,131
|
Interest and related charges, net........... (32,631)| (5,587) (45,749) (34,044) (28,780) (28,942)
Other, net.................................. 115 | 98 (44) (517) (2,626) (247)
----------------- |----------------- ----------- ----------- ---------- ---------
|
Income (loss) from continuing operations |
before reorganization items, net |
gain on discharge of debt and |
fresh start adjustments................. (23,190)| (3,165) (72,860) 299 14,178 (58)
|
Reorganization items........................ - | (7,330) 32,847 - - -
Net gain on discharge of debt and |
fresh start adjustments................. - | 74,789 - - - -
----------------- |----------------- ----------- ----------- ---------- ---------
Income (loss) from continuing operations ... (23,190)| 64,294 (40,013) 299 14,178 (58)
Loss from discontinued operations (3) ...... (30,639)| (51) (61,718) (16,605) (345) (1,128)
----------------- |----------------- ----------- ----------- ---------- ---------
|
Income (loss) before cumulative effect of |
accounting change....................... $ (53,829)|$ 64,243 $ (101,731) $ (16,306) $ 13,833 $ (1,186)
================= | ================= =========== =========== ========== =========
|
Net income (loss)........................... $ (53,829)|$ 60,267 $ (101,731) $ (15,233) $ 13,833 $ 561
================= | ================= =========== =========== ========== =========
|
Basic net income (loss) per Unit: |
LLC Unit............................... $ (4.37)|$ N/A $ N/A $ N/A $ N/A $ N/A
================= |================= =========== =========== ========== =========
Common Unit............................ $ N/A |$ 0.12 $ (0.01) $ (0.54) $ 0.49 $ (0.01)
================= |================= =========== =========== ========== =========
Subordinated Unit...................... $ N/A |$ - $ (3.24) $ (0.54) $ 0.49 $ 0.07
================= |================= =========== =========== ========== =========
Diluted net income (loss) per Unit.......... $ (4.37)|$ 0.08 $ (1.07) $ (0.54) $ 0.49 $ 0.02
================= |================= =========== =========== ========== =========
Cash distributions per Unit................. $ - |$ - $ 0.25 $ 1.90 $ 1.90 $ 1.90
================= |================= =========== =========== ========== ==========
|
BALANCE SHEET DATA (AT END OF PERIOD): |
Total assets................................ $ 738,644 | $ 873,434 $ 1,105,749 $1,494,472 $1,558,661
Total debt.................................. 239,721 | 208,912 417,500 235,000 309,055
Liabilities subject to compromise (4) ...... - | 292,827 - - -
Members'/Partners' capital (deficit) (5) ... (14,397)| (68,475) 37,968 96,364 120,117
Additional partnership interests (6)........ - | 9,318 9,318 9,318 2,547
Capital expenditures (7).................... 8,298 | 16,788 22,484 11,864 57,376
Cash distributions.......................... - | 4,712 43,163 37,586 30,380
21
| PREDECESSOR COMPANY
SUCCESSOR COMPANY | ----------------------------------------------------------------
----------------- | TWO MONTHS
TEN MONTHS | ENDED YEAR ENDED DECEMBER 31,
ENDED | FEBRUARY 28, 2003 ----------------------------------------------
DECEMBER 31, 2003 | (1) (2) 2002 (2) 2001 (1) 2000 1999(1)
----------------- | ----------------- ----------- ----------- ---------- --------
|
OPERATING DATA: |
North American Crude Oil: |
Total lease volumes (thousands bpd) ... 250.0 | 242.2 276.7 361.0 408.2 408.8
|
Pipeline Operations: |
Average volumes (thousands bpd)........ 392.5 | 387.6 407.0 511.1 561.5 513.7
- ----------------------
(1) 1999 includes the cumulative effect of adopting Emerging Issues Task Force
("EITF") Issue 98-10, "Accounting for Contracts Involved in Energy Trading
Activities." 2001 includes the cumulative effect of adopting Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and the change in the method of valuing
inventories used in our energy trading activities. 2003 includes the
cumulative effect of adopting SFAS No. 143, "Accounting for Asset
Retirement Obligations" and the rescission of EITF Issue 98-10. See
additional discussion in Notes 2 and 20 to our Consolidated Financial
Statements.
(2) In 2002 reorganization items include primarily the net effects of the Enron
Settlement Agreement ($45.5 million gain), adjustment to reflect the
allowed claim amount of the 11% senior notes (write-off of deferred
issuance costs of $5.1 million), and legal and professional fees ($7.1
million) as a result of our reorganization proceedings. The two months
ended February 28, 2003 includes a $7.3 million gain on reorganization
items, a $131.6 million gain on the discharge of debt and a $56.8 million
loss from fresh start adjustments. See additional discussion in Notes 5 and
6 to our Consolidated Financial Statements.
(3) Effective December 31, 2003, we sold our Liquids Operations and effective
October 1, 2003, we sold our natural gas liquids assets on the West Coast.
The results of operations related to these operations have been
reclassified to discontinued operations for all periods presented herein.
(4) Certain liabilities which existed at the date of our Chapter 11 filing are
subject to compromise or other treatment under the Restructuring Plan.
Liabilities Subject to Compromise include the 11% Senior Notes of $235
million, interest accrued on the 11% Senior Notes through our Chapter 11
filing date of $13.5 million, accounts payable of $34.9 million and allowed
claims for environmental settlements during our bankruptcy of $8.0 million.
See additional discussion in Note 5 to our Consolidated Financial
Statements.
(5) Partners' Capital in 1999 includes the issuance of 3,500,000 Common Units
to the public in September 1999.
(6) In February 1999, Enron contributed $21.9 million in additional partnership
interests to the EOTT MLP pursuant to its commitment made in connection
with the Support Agreement. In May 1999 and February 2000, Enron paid $2.5
million and $6.8 million, respectively, in support of EOTT MLP's first and
fourth quarter 1999 distributions to its common unitholders in exchange for
additional partnership interests.
(7) 1999 includes $38.4 million for the purchase of crude oil transportation
and storage assets in New Mexico and Texas in May 1999.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The statements in this Form 10-K that are not historical information are
forward-looking statements. You can identify forward-looking statements by words
such as "anticipate," "believe," "estimate," "expect," "intend," "plan,"
"forecast," "budget," "goal" or other words that convey the uncertainty of
future events or outcomes. Forward-looking statements are not guarantees of
future performance and involve significant risks and uncertainties, including
those described under the heading "Risk Factors" beginning on page 39. Actual
results may vary materially from those in the forward-looking statements. Each
forward-looking statement speaks only as of the date of the particular
statement, and we undertake no obligation to publicly update or revise any
forward-looking statements.
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our consolidated historical
financial statements and the notes thereto beginning on page F-1.
EXECUTIVE OVERVIEW
We emerged from bankruptcy on March 1, 2003 as a highly leveraged company
and have not been able to significantly reduce our debt to date. We will not be
able to continue as a viable business unless we reduce our debt and attract new
volumes.
Our Restructuring Plan anticipated profitable Liquids Operations and a
quick return of crude oil volume growth in 2003. After incurring an operating
loss of $31.4 million from our Liquids Operations since our emergence from
bankruptcy, we sold our Liquids Operations in December 2003 for approximately
$20 million (see Note 8 to our Consolidated Financial Statements). Our
pre-bankruptcy customers and business partners have been less willing to do
business with us than we anticipated as a result of our being highly leveraged
and having shown no substantive improvement in our financial performance.
Although our Restructuring Plan assumed that our marketing volumes would
increase to approximately 350,000 barrels per day by the end of 2003, our actual
marketing volumes were approximately 254,000 barrels per day in December 2003,
and we do not anticipate an appreciable increase in volumes for the remainder of
2004.
Our cash flow from operations is not sufficient to meet our current cash
requirements and, as a result, we have been borrowing under our Trade
Receivables Agreement in order to fund our operations and capital needs. Absent
a significant improvement in our business performance, we expect to continue to
borrow to meet our cash requirements to the extent borrowed funds are available.
At March 19, 2004, we had approximately $23.0 million in borrowing availability
under our Trade Receivables Agreement. Based on our current cash requirements,
we may exhaust our sources of available cash in the second quarter of 2004.
Our Commodity Repurchase and Trade Receivables Agreements mature June 1,
2004, although we have an option to extend the maturity to August 30, 2004,
subject to us being in compliance with our debt covenants. Our Letter of Credit
and Term Loan mature in August 2004. We may be unable to arrange future
financings on acceptable terms, which would limit our ability to refinance our
existing indebtedness, fund our current operations and fund our future capital
requirements.
We have sold substantially all of our non-strategic assets in an effort to
reduce our aggregate indebtedness, which was approximately $268 million as of
March 15, 2004. We will not be able to use funds from future asset sales, if
any, to meet our current cash needs because the proceeds from any such sales are
likely to be required to reduce our outstanding indebtedness. In addition to
asset sales, we have attempted, without success, to raise additional equity and
to convert indebtedness to equity.
We are in advanced discussions with a potential buyer regarding the sale of
substantially all of our assets; however, there can be no assurances that we can
consummate a transaction. The net proceeds of the transaction would be used to
repay all of our outstanding indebtedness, as well as to satisfy other existing
obligations. If the transaction were consummated, we would have no further
operations and would wind down over a period of time.
If we are not successful in consummating the transaction, we will continue
to pursue other strategic altnernatives, which include the sale of additional
assets (singularly or in groups) or a voluntary filing under the U.S.
Bankruptcy Code. Based on our existing level of indebtedness, it is unlikely
that either a sale or bankruptcy would yield any material residual value for the
Company's unitholders.
23
The factors discussed above raise substantial doubt about our ability to
continue as a going concern.
LIQUIDITY AND CAPITAL RESOURCES
FACTORS ADVERSELY AFFECTING OUR LIQUIDITY AND WORKING CAPITAL
Our ability to fund our liquidity and working capital requirements has been
adversely affected by various factors, including the following:
- COVENANT BREACHES UNDER EXIT CREDIT FACILITIES. During the last
four months of 2003 and in January 2004, we have breached certain
covenants under our exit credit facilities, which include the
Letter of Credit Agreement, the Term Loan, the Trade Receivables
Agreement and the Commodity Repurchase Agreement. These covenants
are discussed below. We have obtained a waiver of the 2003
violations and are currently in discussions with our lenders
regarding a waiver for January 2004. In addition, we have reduced
the lenders' maximum commitment under the Letter of Credit
Facility from $325 million to $260 million.
- Minimum Consolidated EBIDA. We are required to maintain a
minimum, rolling cumulative four month total of consolidated
Earnings Before Interest Depreciation and Amortization,
subject to certain adjustments, as defined ("Minimum
Consolidated EBIDA"). For the rolling four-month periods
ended September 30, 2003, October 31, 2003, November 30,
2003, December 31, 2003, and January 31, 2004, the required
Minimum Consolidated EBIDA under our exit credit facilities
and our actual consolidated EBIDA were as follows:
REQUIRED
ROLLING FOUR-MONTH MINIMUM CONSOLIDATED ACTUAL CONSOLIDATED
PERIOD ENDED EBIDA EBIDA
- ------------------------- -------------------- -------------------
September 30, 2003....... $ 6.6 million $ 2.2 million
October 31, 2003......... $ 8.7 million $ 3.4 million
November 30, 2003........ $10.4 million $(0.8) million
December 31, 2003........ $12.7 million $(1.6) million
January 31, 2004......... $16.0 million $ 1.0 million
For the rolling four-month periods ending February 29, 2004,
March 31, 2004, and April 30, 2004, we will be required to
maintain Minimum Consolidated EBIDA of $15.7 million, $16.9
million and $16.5 million, respectively. Thereafter, the
requirement continues to increase until it reaches $17.4
million for the four-month period ended August 31, 2004.
Because this covenant becomes increasingly stringent, we
expect we will not be in compliance with this covenant and
thereby will be in default under our exit credit facilities
for the foreseeable future.
- Interest Coverage. We are required to maintain a minimum
ratio of consolidated EBIDA to interest expense, subject to
certain exclusions ("Interest Coverage Ratio"), over rolling
consecutive four-month periods. For the rolling four-month
periods ended September 30, 2003, October 31, 2003, November
30, 2003, December 31, 2003, and January 31, 2004, the
required Interest Coverage Ratio under our exit credit
facilities and our actual interest coverage ratio were as
follows:
REQUIRED
ROLLING FOUR-MONTH INTEREST ACTUAL INTEREST
PERIOD ENDED COVERAGE RATIO COVERAGE RATIO
- ------------------------- -------------- ---------------
September 30, 2003....... .62 to 1.00 .24 to 1.00
October 31, 2003......... .79 to 1.00 .37 to 1.00
November 30, 2003........ .93 to 1.00 (.09) to 1.00
December 31, 2003........ 1.11 to 1.00 (.17) to 1.00
January 31, 2004......... 1.36 to 1.00 .10 to 1.00
24
For the rolling four-month periods ending February 29, 2004,
March 31, 2004, and April 30, 2004, we will be required to
maintain an Interest Coverage Ratio of 1.35 to 1.00, 1.36 to
1.00, and 1.34 to 1.00, respectively. This ratio requirement
continues to increase until it reaches 1.42 to 1.0 for the
four-month period ended August 31, 2004. Because this
covenant becomes increasingly stringent, we expect we will
not be in compliance with this covenant and thereby will be
in default under our exit credit facilities for the
foreseeable future.
- Minimum Consolidated Tangible Net Worth. At the end of each
month, from March 31, 2003 to December 31, 2003, we were
required to maintain a minimum consolidated tangible net
worth, subject to certain adjustments, as defined ("Minimum
Consolidated Tangible Net Worth"), of $8.5 million. Actual
Minimum Consolidated Tangible Net Worth at December 31, 2003
was $12.8 million. From January 31, 2004 to August 30, 2004,
we are required to maintain a Minimum Consolidated Tangible
Net Worth of $10 million. Actual Minimum Consolidated
Tangible Net Worth at January 31, 2004 was $9.9 million.
- Covenant Breach relating to Borrowing Base Calculation. We
are required to maintain asset values (the "Borrowing Base")
at all times that exceed our aggregate outstanding letters
of credit ("LC Obligations"). As of February 15, 2004,
aggregate LC Obligations exceeded the Borrowing Base by
approximately $1.9 million. This represented a payment
default of $1.9 million under our Letter of Credit Facility
which was subsequently waived. As of March 15, 2004, the
Borrowing Base exceeded LC Obligations by approximately $12
million.
- Consequences of Covenant Breaches. Any default (covenant
default or payment default, after applicable cure periods)
under any of our exit credit facilities will cause a
cross-default under all the other exit credit facilities. If
a payment default under any of the exit credit facilities or
any other debt obligation involves indebtedness of $10
million or more, or there is an acceleration of the
indebtedness of $10 million or more, then the payment
default under the exit credit facilities would be a default
under the indenture relating to the 9% Senior Notes (the "9%
Senior Notes Indenture"). A default under the 9% Senior
Notes Indenture will cause a cross-default under our exit
credit facilities.
Any breaches, unless waived, could severely limit our access
to liquidity and credit support and result in our being
required to repay all outstanding indebtedness, plus accrued
and unpaid interest, under our exit credit facilities as
well as the 9% Senior Note Indenture. Although our exit
credit facility lenders provided a waiver for our breaches
of covenants as of December 31, 2003, there can be no
assurance they will provide waivers for any subsequent
period, including January 31, 2004, or that any amendment to
our exit credit facilities required to obtain such assurance
will not adversely affect our liquidity.
- Maturities of our Exit Facilities. We extended our Trade
Receivables Agreement and Commodity Repurchase Agreement to
June 1, 2004 (although we have an option to extend the
maturity to August 30, 2004, subject to us being in
compliance with our debt covenants) and our Term Loan and
Letter of Credit Facility mature on August 30, 2004. As of
March 15, 2004, we had $53.0 million of outstanding
borrowings under our Trade Receivables Agreement, $16.9
million of outstanding borrowings under our Commodity
Repurchase Agreement, and $75 million of borrowings under
our Term Loan Agreement. Since we did not reduce Standard
Chartered's exposure below $200 million by March 1, 2004, we
paid a $2.5 million fee to Standard Chartered on March 15,
2004. We may not be able to repay the indebtedness under our
exit credit facilities at maturity. Any replacement credit
facilities, to the extent obtainable, may be at
significantly greater cost to us. There can be no
assurances, however, that replacement credit facilities can
be obtained.
25
- COVENANT BREACH UNDER ENRON NOTE. We are required to maintain at
all times a letter of credit securing a promissory note payable
to Enron Corp. (the "Enron Note") in the initial principal amount
of $6.2 million. We failed to cause such letter of credit to be
renewed at least 10 business days prior to its expiration, which
resulted in an event of default under, and the automatic
acceleration of, the Enron Note. As of December 31, 2003, $5.7
million was due and payable under the Enron Note. A replacement
letter of credit has been issued, and we have asked Enron Corp.
to waive the event of default and rescind the automatic
acceleration of the note. There can be no assurance that Enron
Corp. will provide the waiver or when such a waiver would be
provided.
GOING CONCERN
Our Consolidated Financial statements included in this report have been
prepared assuming we will continue as a going concern which contemplates the
realization of assets and settlement of liabilities in the normal course of
business. The factors discussed above raise substantial doubt about our ability
to continue as a going concern. Our Consolidated Financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
ASSET DISPOSITIONS
During the last six months of 2003, we sold various assets in order to
reduce our outstanding debt. Net proceeds of approximately $57 million from
these asset sales were used to pay down amounts outstanding under the Commodity
Repurchase Agreement. The most significant assets sales in 2003 are discussed
below (in millions):
ASSET SALES NET PROCEEDS
- ------------------------------------ ------------
Liquids Operations.................. $ 20.0
West Coast Natural Gas Liquids...... 9.4
ArkLaTex............................ 16.2
West Texas/New Mexico Linefill...... 10.0
Other ............................. 6.6
------------
$ 62.2
============
Sale of Liquids Operations
Effective December 31, 2003, we sold all of our remaining natural gas
liquids assets to a subsidiary of Valero Energy Corporation for approximately
$20 million plus inventory value. The assets included 10 million barrels of
underground salt dome storage and a 120-mile pipeline grid near Mont Belvieu,
Texas, as well as Link's processing facility at Morgan's Point near LaPorte,
Texas. An aggregate of $2 million of the purchase price was placed into escrow
pending resolutions of certain post-closing title and inventory valuation
reviews, and $15 million was used to pay down amounts outstanding under the
Commodity Repurchase Agreement. In connection with the sale, we provided
indemnifications to Valero for (1) title defects for a period of two years up to
a maximum of $2 million and (2) pre-closing environmental liabilities with an
indefinite term and no monetary limits.
Sale of West Coast Natural Gas Liquids Assets
Effective June 25, 2003, we signed a definitive agreement to sell all of
the assets comprising our natural gas gathering, processing, natural gas liquids
fractionation, storage and related trucking and distribution facilities located
on the West Coast. A sale of these assets to a third party had been one of the
options considered by us since we emerged from bankruptcy. The sales price for
the assets exclusive of inventory was $9.9 million. The closing occurred on
October 1, 2003 and $9.0 million of the net proceeds from the sale was used to
pay down amounts outstanding under the Commodity Repurchase Agreement. We
recognized a loss on the sale of these assets in discontinued operations of $0.8
million.
26
Sale of Certain Marketing and Transportation Assets
On October 1, 2003, we sold certain crude oil marketing and transportation
assets in the Arkansas, Louisiana and Texas ("ArkLaTex") area to Plains
Marketing L.P. and Plains All American Pipeline, L.P., a wholly owned subsidiary
of Plains Resources, Inc. The sales price of these assets, including linefill,
was approximately $17 million. Subsequent to closing, $16.2 million of the net
proceeds from the sale was used to pay down amounts outstanding under the
Commodity Repurchase Agreement. The gain on the sale of these assets was $11.7
million and was recorded in the fourth quarter of 2003.
In the fourth quarter of 2003, we entered into a Crude Oil Joint Marketing
Agreement with ChevronTexaco Global Trading, a division of Chevron U.S.A. Inc.
("ChevronTexaco"). The agreement was effective January 1, 2004 with a term of 10
years. Under the agreement, ChevronTexaco will market all of our lease crude oil
in West Texas and Eastern New Mexico, with us handling the transportation of the
crude oil and related administrative functions. In December 2003, we sold
approximately 370,000 barrels of linefill held in West Texas and New Mexico to
ChevronTexaco for approximately $10 million. We recognized a gain of
approximately $2.6 million related to the sale, which gain has been deferred
(included in Other Long-Term Liabilities on our Consolidated Balance Sheet), as
the agreement contains mandatory obligations for us to repurchase the linefill
from ChevronTexaco in the event that the agreement is terminated within the
first five years.
CASH FLOWS
Summarized cash flow information for the ten months ended December 31,
2003, two months ended February 28, 2003, supplemental information for the
twelve months ended December 31, 2003, and the years ended December 31, 2002
and 2001 is presented below (in thousands):
SUCCESSOR | PREDECESSOR PREDECESSOR
COMPANY | COMPANY COMPANY
----------------- | ----------------- -----------------------
TEN MONTHS | TWO MONTHS SUPPLEMENTAL YEAR ENDED DECEMBER 31,
ENDED | ENDED YEAR ENDED -----------------------
DECEMBER 31, 2003 | FEBRUARY 28, 2003 DECEMBER 31, 2003 2002 2001
----------------- | ----------------- ----------------- -------- -----------
|
Operating Activities $ (166) | $ 22,933 $ 22,767 $ 34,699 $ (41,258)
Investing Activities 46,999 | (285) 46,714 (28,848) (136,019)
Financing Activities (85,118) | 1,655 (83,463) 7,640 125,988
----------------- | ----------------- ----------------- -------- -----------
|
Increase (Decrease) in Cash $ (38,285) | $ 24,303 $ (13,982) $ 13,491 $ (51,289)
================= | ================= ================= ======== ===========
Cash Flows from Operating Activities
Net cash provided by operating activities totaled $22.8 million in 2003
compared to $34.7 million in 2002. The decline in cash from operating activities
reflects (1) a decrease in cash flows attributable to our Liquids Operations
(operating losses (excluding impairment charges) totaled $29 million in 2003 as
compared to operating income (excluding impairment charges) of $17 million
during 2002; (2) a decrease in cash flows from inventory liquidations (changes
in inventory totaled $21 million during 2003 compared to $53 million during
2002, when the crude oil market moved out of contango and into backwardation;
(3) an increase in cash flows attributable to our pipeline and marketing
operations (operating income of $41 million in 2003 as compared to $1 million in
2002); (4) an increase in cash flows of $13 million attributable to buy/sell
contracts with a single customer. The buy/sell contracts involved settlement of
the buy-side (i.e., cash outflow) in December 2002 and settlement of the
sell-side (i.e., cash inflow) in January 2003. It is unlikely that future
operating cash flows will be materially effected by buy/sell contracts whose two
components (i.e., one buy and one sale) are settled in different periods; and
(5) an increase in cash flows attributable to lower interest payments of $9.8
million in 2003 as compared to 2002. Cash flow from operating activities
increased $76.0 million in 2002 as
27
compared to 2001, primarily reflecting cash inflows from crude oil inventory
liquidations in 2002 and higher cash outflows to satisfy working capital
requirements in 2001.
Crude oil market conditions can significantly impact our cash flows from
period to period. During periods when demand for crude oil is weak (i.e., a
"contango" market), storing crude oil is favorable because it can be sold at
higher prices for future delivery. Storing crude oil will decrease current
period cash from operations. When market conditions change such that there is a
higher demand than supply for crude oil (i.e., a "backwardated" market), storing
crude oil is no longer advantageous because we can capture a higher price for
current month deliveries. The liquidation of crude oil inventory triggered by
the change in market conditions (i.e., moving from "contango" to "backwardated")
will increase current period cash from operations. This is illustrated by the
previously mentioned improvement in cash from operations in 2002. We cannot
predict when, or if, market conditions will change or the impact of such change
on future inventory levels. Our ability to benefit in future periods, as we did
in 2002 as discussed above, from significant storage activities could be
adversely affected by the amount of credit support available to us under our
credit facilities and our current cost of credit. Historically, our significant
storage activities occurring during contango market conditions have been funded
by credit support. At December 31, 2003, we had approximately $23 million of
unused credit under our credit facilities (excluding letters of credit) to fund
any additional working capital needs. Given this limited amount of credit, it is
unlikely that we would participate in any material inventory storage activities
in the near term.
We had the following crude oil inventory quantities from our North American
Crude Oil and Pipeline Operations as of the dates indicated below:
BARRELS
(IN THOUSANDS)
--------------
December 31, 2001.......................................... 3,898
December 31, 2002.......................................... 591
December 31, 2003.......................................... 267
Cash Flows From Investing Activities
Net cash provided by investing activities totaled $46.7 million for the
year ended December 31, 2003 compared to cash used in investing activities of
$28.8 million in 2002. Proceeds from sales of assets (net of restricted cash)
totaled $56.2 million during 2003 compared to $2.4 million in 2002. The 2003
amount primarily reflects amounts realized from the sales of our West Coast
natural gas liquids operations, our ArkLaTex marketing and transportation assets
and our Liquids Operations as well as the sale of linefill associated with our
West Texas operations. See "Asset Disposition" above for more information on
these asset sales. Cash additions to property, plant and equipment totaled $9.4
million for the year 2003 as compared to $31.2 million in 2002. The 2003 amount
consisted primarily of $3.2 million for a new line in Mississippi, $5.1 million
of expenditures for other pipeline, storage tank and related facilities, $0.6
million for the Morgan's Point and Mont Belvieu facilities and $0.4 million
related to the West Coast operations. Cash additions to property, plant, and
equipment in 2002 primarily includes $10.5 million for the construction of a new
pipeline in Mississippi, $5.3 million to complete a new pipeline and truck and
rail facility for the West Coast operations, $6.5 million for other pipeline,
storage tank and related facility improvements, $7.3 million related to the
Morgan's Point Facility, and $0.2 million for information systems hardware and
software. Cash used in investing activities in 2001 primarily reflects $117
million for the acquisition of the Liquids Operations in June 2001 and $36.2
million of cash additions to property, plant and equipment. The 2001 amounts
were offset by proceeds from asset sales of $17.2 million, primarily from the
sale of the West Coast crude oil gathering and marketing assets.
We estimate that capital expenditures necessary to maintain the existing
asset base at current operating levels will be approximately $11 million to $12
million during 2004. The level of additional capital expenditures by us will
vary depending upon cash from operations, availability of financing, prevailing
energy markets, general economic conditions and the current regulatory
environment.
28
Our credit facilities prohibit us from making capital expenditures outside
of our present businesses and further place monetary limitations on capital
expenditures.
Cash Flow From Financing Activities
Net cash used in financing activities during the year ended December 31,
2003 totaled $83.5 million as compared to $7.6 million provided by financing
activities during 2002. Cash used in financing activities during 2003 reflects
the use of $56.2 million of net proceeds from asset sales to reduce amounts
outstanding under our Commodity Repurchase Agreement. Additionally, amounts
outstanding under our Trade Receivables Agreement declined by $23 million and we
paid $3.8 million in fees related to the extension of our exit credit
facilities. Cash provided by financing activities in 2002 reflects an increase
in receivables financings and borrowings under term loans, partially offset by
repayment of short-term borrowings to Standard Chartered and a decrease in
amounts outstanding under our Commodity Repurchase Agreement using proceeds from
the term loan. Additionally, during 2002, we paid distributions to unitholders
of $4.7 million and incurred fees in connection with establishing the DIP Term
Loan of $0.8 million. Cash provided by financing activities in 2001 primarily
reflects an increase in repurchase agreements and short-term borrowings to
finance the acquisition of the Liquids Operations, offset in part by amounts
paid to unitholders of $43.2 million.
Contractual Obligations
The following is a summary of certain contractual obligations at December
31, 2003 (in millions):
AFTER
2004 2005 2006 2007 2008 2008 TOTAL
------ ------ ------ ------ ------ ------ ------
Operating Leases............. $ 5.3 $ 4.2 $ 3.3 $ 1.0 $ 0.3 $ 0.4 $ 14.5
Capital Leases............... 0.1 - - - - - 0.1
Total Debt:
9% Senior Notes............ - - - - - 109.2 109.2
Term Loans(1).............. 75.0 - - - - - 75.0
Commodity Repurchase
Agreement (1)............. 18.0 - - - - - 18.0
Trade Receivables
Agreement(1).............. 27.0 - - - - - 27.0
Enron Note(2).............. 1.0 4.7 - - - - 5.7
Big Warrior Note........... 0.3 0.4 0.4 1.4 - - 2.5
Ad Valorem Tax Liability... 2.8 0.9 1.0 1.1 0.8 - 6.6
Other long-term liabilities.. - - - - - 1.8 1.8
------ ------ ------ ------ ------ ------ ------
$129.5 $ 10.2 $ 4.7 $ 3.5 $ 1.1 $111.4 $260.4
====== ====== ====== ====== ====== ====== ======
(1) See previous discussion of covenant violations and cross defaults.
(2) See previous discussion regarding events of default.
We provide certain purchasers with irrevocable letters of credit to secure
our obligations to purchase crude oil or feedstocks for our crude oil marketing
activities. Liabilities with respect to these purchase obligations are recorded
in accounts payable on our balance sheet in the month the crude oil or feedstock
is purchased. These letters of credit are generally issued for up to sixty-day
periods and are cancelled upon the payment of the purchase obligation. At
December 31, 2003, we had outstanding letters of credit of approximately $250
million.
As a gatherer and marketer of crude oil, we enter into contractual
commitments to purchase and sell crude oil primarily under contracts with 30-day
renewable terms. Generally, as we purchase lease crude oil, we enter into
corresponding sale transactions involving physical deliveries of crude oil to
third-party users or corresponding sales of future contracts on the NYMEX.
Throughout the process, we seek to maintain a substantially balanced position
with respect to the price and volume of crude oil purchases and sales. Most
transactions we enter into are at market responsive prices and fluctuate with
changes in the NYMEX price of crude oil. In addition, a majority of our
transactions do not have fixed volumes. Crude oil purchases for December 2003
were approximately $400 million.
In the normal course of business, we have incurred legal obligations
associated with the retirement of certain of our tangible long-lived assets.
Effective January 1, 2003, we adopted a new accounting method (see Note 20 to
our
29
Consolidated Financial Statements), which requires entities to record the fair
value of a liability for legal obligations associated with the retirement
obligations of tangible long-lived assets in the period in which it is incurred.
Determination of the fair value of an asset retirement obligation is based on
numerous estimates and assumptions including estimated third-party costs, future
inflation rates and the future timing of settlement of the obligations.
We have estimated the fair value of asset retirement obligations where the
settlement date is reasonably determinable. We recorded a liability of $1.7
million on January 1, 2003 for asset retirement obligations with reasonably
determinable settlement dates. We cannot, however, currently make reasonable
estimates of the fair values of certain other asset retirement obligations
because the settlement dates cannot be reasonably determined. As of December 31,
2003, we estimated that the undiscounted future cash flows to settle these
unrecorded asset retirement obligations would be approximately $12 million. This
amount does not represent the fair value of the unrecorded liability, which
would discount the future cash flows to their present value based on the
expected settlement date. We will record a liability at fair value for
retirement obligations associated with these unrecorded obligations in the
period in which sufficient information exists to reasonably estimate the
settlement dates of the respective retirement obligations. After taking into
consideration the extended time period over which settlement of the unrecorded
asset retirement obligations could occur, we have concluded that the unaccrued
asset retirement obligations are not reasonably likely to have a material effect
on our future financial condition and future results of operations.
BANKRUPTCY PROCEEDINGS AND RESTRUCTURING PLAN
On October 8, 2002, EOTT Energy Partners, L.P. ("EOTT MLP") and its
subsidiaries filed pre-negotiated voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code (the "EOTT Bankruptcy"). The
filing was made in the United States Bankruptcy Court for the Southern District
of Texas, Corpus Christi Division (the "EOTT Bankruptcy Court"). Additionally,
EOTT Energy Corp. ("EOTT General Partner") filed a voluntary petition for
reorganization under Chapter 11 on October 21, 2002 in the EOTT Bankruptcy Court
in order to join in the voluntary, pre-negotiated bankruptcy proceedings filed
on October 8, 2002. On October 24, 2002, the EOTT Bankruptcy Court
administratively consolidated for distribution purposes EOTT General Partner's
bankruptcy filing with the previously filed cases. We operated as
debtors-in-possession under the Bankruptcy Code, which means we continued to
remain in possession of our assets and properties and continued our day-to-day
operations.
The EOTT Bankruptcy Court confirmed our Third Amended Joint Chapter 11 Plan
of Reorganization, as supplemented ("Restructuring Plan") on February 18, 2003,
and it became effective on March 1, 2003. We emerged from bankruptcy as a
limited liability company named EOTT Energy LLC, which became the successor
registrant to EOTT MLP. We subsequently changed our name to Link Energy LLC on
October 1, 2003.
As of February 28, 2003 (the date chosen for accounting purposes), we
adopted fresh start reporting in accordance with the American Institute of
Certified Public Accountants Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). Under fresh
start reporting, we adjusted our assets and liabilities to their fair values as
of February 28, 2003. Our reorganization value of approximately $856 million was
determined based on discounted cash flow, comparable transaction and capital
market comparison analyses. The valuation was based upon a number of estimates
and assumptions, which are inherently subject to significant uncertainties and
contingencies beyond our control. Accordingly, there can be no assurance that
the valuations will be realized, and actual results could vary significantly.
Please read Note 6 to our Consolidated Financial Statements.
As a result of the application of fresh start reporting under SOP 90-7, our
financial results for the twelve months ended December 31, 2003 include two
different bases of accounting and accordingly, the financial condition,
operating results and cash flows of the Successor Company and the Predecessor
Company have been separately disclosed. For purposes of this Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements contained elsewhere herein, references to the "Predecessor
Company" are references to us for periods through February 28, 2003 (the last
day of the calendar month in which we emerged from bankruptcy) and references to
the "Successor Company" are references to us for periods subsequent to February
28, 2003.
30
RESULTS OF OPERATIONS
The following review of our results of operations and financial condition
should be read in conjunction with our Consolidated Financial Statements and
Notes thereto appearing elsewhere in this report. As discussed above, we emerged
from bankruptcy and adopted fresh start reporting pursuant to SOP 90-7 effective
as of February 28, 2003. Accordingly, the financial statements of the Successor
Company and the Predecessor Company are not comparable in total; however,
operating revenues, gross profit and operating income (loss) (excluding changes
in depreciation and amortization where noted) and interest and financing costs
(except where noted) are comparable.
For purposes of this Management's Discussion and Analysis of Financial
Condition and Results of Operations, we have supplementally combined actual
operating results for the Successor Company for the ten months ended December
31, 2003 and for the Predecessor Company for the two months ended February 28,
2003 in order to enhance a reader's understanding of our results of operations.
Ordinarily, such comparison would not be presented under SOP 90-7. However,
since the reorganization and the adoption of fresh start reporting only impacted
our depreciation and amortization, as a result of the change in the carrying
amount of our long-lived assets, and our interest expense, primarily through the
discharge of debt related to our senior notes, comparison of our results of
operations pre- and post-reorganization is useful once a reader understands the
impact on depreciation and amortization expense and interest and financing
costs. Variations resulting from reorganization items, net gain on discharge of
debt and fresh start adjustments will be discussed separately where significant.
OVERVIEW OF RESULTS OF OPERATIONS
We reported a net loss of $53.8 million for the ten months ended December
31, 2003, which was primarily related to operating losses from our discontinued
Liquids Operations and high financing costs. The operating losses of $31.4
million from our discontinued Liquids Operations were primarily attributable to
significantly lower margins from MTBE sales in 2003 due to high feedstock
prices, a $3.0 million lower of cost or market adjustment in March 2003, a $1.7
million charge related to the inventory and accounts payable adjustments, $6.8
million of charges related to the phase out of MTBE and an $8.3 million loss on
the sale of the Liquids Operations. In addition, we reported $35.0 million of
operating income from our crude oil marketing and transportation activities due
to more favorable market conditions and lower operating expenses, which includes
a $4.6 million charge related to a downward revision of our estimate of physical
crude oil linefill in certain pipelines we operate in West Texas and New Mexico,
and $32.6 million of interest and related charges.
We reported net income of $60.3 million for the two months ended February
28, 2003. Net income for the two months ended February 28, 2003 is primarily
attributable to: (1) reorganization expenses of $7.3 million related to legal
and professional fees related to the bankruptcy proceedings; (2) a net gain on
the discharge of debt of $131.6 million in connection with the Restructuring
Plan; (3) fresh start adjustments of $56.8 million resulting from adjusting
assets and liabilities to fair value in accordance with SOP 90-7; (4) operating
income of $6.4 million from our crude oil marketing and transportation
activities; and (5) interest and related charges of $5.6 million.
SEGMENT RESULTS
Through our affiliated limited partnerships, Link Energy Limited
Partnership, Link Energy Canada Limited Partnership, Link Energy Pipeline
Limited Partnership, and EOTT Energy Liquids, L.P., we are engaged in the
purchasing, gathering, transporting, trading, storage and resale of crude oil
and related activities. Prior to their disposition in 2003, we were also engaged
in the operation of a hydrocarbon processing plant, a natural gas liquids
storage facility and natural gas liquids assets on the West Coast. See Note 8 to
our Consolidated Financial Statements for information regarding the disposition
of these assets. The results of operations related to these assets have been
reclassified to discontinued operations for all periods presented herein. Our
remaining principal business segments are our North American Crude Oil gathering
and marketing operations and our Pipeline Operations. Our gathering and
marketing operations are characterized by large volume and narrow profit margins
on purchase and sale transactions and the absolute price levels for crude oil do
not necessarily bear a relationship to gross profit.
31
The following table contains selected financial data for our business for
the ten months ended December 31, 2003, two months ended February 28, 2003,
supplemental information for the twelve months ended December 31, 2003 and the
twelve months ended December 31, 2002 and 2001 (in millions):
SUCCESSOR COMPANY | PREDECESSOR COMPANY PREDECESSOR COMPANY
----------------- | ------------------- ------------------------
| SUPPLEMENTAL YEAR ENDED DECEMBER 31,
TEN MONTHS ENDED | TWO MONTHS ENDED YEAR ENDED ------------------------
DECEMBER 31, 2003 | FEBRUARY 28, 2003 DECEMBER 31, 2003 (1) 2002 2001
----------------- | ----------------- --------------------- ---------- ----------
|
Operating Revenues: |
|
N. A. Crude Oil....................... $ 118.1 | $ 25.9 $ 144.0 $ 143.3 $ 210.9
Pipeline Operations................... 88.5 | 16.1 104.6 107.3 127.5
Intersegment Eliminations/Other....... (53.9)| (10.0) (63.9) (67.7) (87.8)
----------------- | ----------------- --------------------- ---------- ----------
Total............................... $ 152.7 | $ 32.0 $ 184.7 $ 182.9 $ 250.6
================= | ================= ===================== ========== ==========
|
Gross Profit: |
|
N. A. Crude Oil (2)................... $ 12.7 | $ 4.3 $ 17.0 $ 3.4 $ 25.2
Pipeline Operations................... 28.7 | 5.4 34.1 34.2 56.7
Corporate and Other................... - | - - - -
----------------- | ----------------- --------------------- ---------- ----------
Total............................... $ 41.4 | $ 9.7 $ 51.1 $ 37.6 $ 81.9
================= | ================= ===================== ========== ==========
|
Operating Income (Loss): |
|
N. A. Crude Oil....................... $ 4.5 | $ 2.9 $ 7.4 $ (13.9) $ 9.8
Pipeline Operations................... 30.5 | 3.5 34.0 15.3 50.0
Corporate and Other................... (25.6)| (4.1) (29.7) (28.5) (24.9)
----------------- | ----------------- --------------------- ---------- ----------
Total............................... $ 9.4 | $ 2.3 $ 11.7 $ (27.1) $ 34.9
================= | ================= ===================== ========== ==========
|
Interest and Financing Costs, net........ $ 32.6 | $ 5.6 $ 38.2 $ 45.7 $ 34.0
================= | ================= ===================== ========== ==========
Reorganization Items, Net Gain on |
Discharge of Debt and Fresh Start |
Adjustments........................... $ - | $ 67.5 $ 67.5 $ 32.8 $ -
================= | ================= ===================== ========== ==========
|
Income (Loss) from Discontinued |
Operations............................ $ (30.6)| $ (0.1) $ (30.7) $ (61.7) $ (16.6)
================= | ================= ===================== ========== ==========
Cumulative Effect of Accounting |
Changes............................... $ - | $ (4.0) $ (4.0) $ - $ 1.1
================= | ================= ===================== ========== ==========
- ---------------
(1) We have combined actual operating results for the Successor Company for the
ten months ended December 31, 2003 and for the Predecessor Company for the
two months ended February 28, 2003 in order to facilitate a comparative
analysis to the prior fiscal period.
(2) Includes intersegment transportation costs from our Pipeline Operations
segment for the transport of crude oil at published pipeline tariffs and
purchases of crude oil inventory from our Pipeline Operations segment.
Intersegment transportation costs and net purchases of crude oil inventory
from our Pipeline Operations segment were $83.4 million, $79.0 million and
$103.5 million for the twelve months ended December 31, 2003, 2002 and
2001, respectively.
TWELVE MONTHS ENDED DECEMBER 31, 2003 (SUPPLEMENTAL) COMPARED WITH TWELVE MONTHS
ENDED DECEMBER 31, 2002
North American Crude Oil
Operating income from our North American Crude Oil business segment was
$7.4 million in 2003 compared to an operating loss of $13.9 million in 2002. The
primary factors that affected gross profit and operating income in this segment
for 2003 and 2002 were:
- P+ averaged $4.07 per barrel in 2003 compared to $3.26 per barrel
in 2002. P+ is the forward price spread between field postings
and liquid market locations. At the end of 2003, gross profit on
approximately 15% of our purchases of lease crude oil were
impacted by P+. The price differential between West Texas
Intermediate and West Texas Sour crude oil (the "WTI/WTS
differential") was $2.68 per barrel in 2003, versus $1.39 per
barrel in 2002. The larger the WTI/WTS differential, the higher
our gross profit. At the
32
end of 2003, approximately 6% of our purchases of lease crude oil
were impacted by the WTI/WTS differential.
- Crude oil lease volumes averaged 249,000 barrels per day ("bpd")
in 2003 compared to 277,000 bpd in 2002. Total sales volumes
averaged 476,000 bpd in 2003 compared to 520,000 bpd in 2002. The
reduction in marketing activities and lease volumes purchased
reflects the loss of certain lease and spot barrels as a result
of increased requests for credit from our suppliers and other
factors resulting from Enron's bankruptcy and our bankruptcy as
well as the overall credit environment in the energy industry.
- Gross profit per lease barrel was $0.19 per barrel in 2003
compared to $0.03 per barrel in 2002 due to more favorable market
conditions, low margin per barrel contracts renegotiated or
terminated during 2002 and 2003 as a part of our Restructuring
Plan initiatives and lower operating expenses.
- In the second quarter of 2003, we received contaminated crude oil
from one of our suppliers. We incurred a $1.2 million loss on the
sale of the contaminated crude and incurred approximately $0.4
million of costs.
- Total expenses decreased approximately $13.1 million in 2003 due
to lower employee related expenses of $6.9 million, lower
operating expenses of $0.1 million, lower safety and
environmental expenses of $1.1 million, lower depreciation of
$2.8 million, lower severance costs of $0.5 million and an
impairment charge of $1.2 million recorded in 2002 related to a
marine facility. The decrease in depreciation is attributable to
the reduction in carrying value of assets resulting from fresh
start reporting.
- Other income increased $2.9 million in 2003 primarily due to a
gain on the sale of the ArkLaTex marketing and transportation
assets in 2003.
Pipeline Operations
Operating income from our Pipeline Operations was $34.0 million in 2003
compared to operating income of $15.3 million in 2002. The primary factors that
affected this business in 2003 and 2002 were:
- Revenues from our Pipeline Operations decreased $2.7 million in
2003 compared to 2002 reflecting reduced lease volumes
transported by our North American Crude Oil business segment
offset by our ability to enhance revenues by effectively managing
the different qualities of crude oil in our pipelines. Average
volumes transported in 2003 were 392,000 bpd compared to 407,000
bpd in 2002. Revenue per barrel was $0.73 per barrel in 2003 and
$0.72 per barrel in 2002.
- Total expenses for our Pipeline Operations decreased
approximately $2.2 million in 2003 compared to 2002. The primary
factors affecting total expenses are:
-- Lower employee expenses of $3.2 million, lower depreciation
of $2.6 million, and lower safety and environmental costs of
$3.5 million offset by higher operating costs of $1.1
million (which is primarily attributable to repair and
maintenance costs). The decrease in depreciation is
attributable to the reduction in carrying value of assets
resulting from fresh start reporting.
-- Higher cost of sales of $5.5 million primarily due to the
$4.6 million charge related to the downward revision of our
estimate of physical crude oil linefill volumes in certain
pipelines we operate in West Texas and New Mexico. See
further discussion regarding the change in linefill
estimates in Note 9 to our Consolidated Financial
Statements.
- Other income was $10.1 million in 2003 compared to other expenses
of $9.1 million in 2002. 2003 includes a $9.2 million gain on the
sale of the ArkLaTex transportation assets. 2002 includes charges
of $8.0 million
33
related to the settlement of various environmental matters and
claims made with respect to environmental contingencies during
our bankruptcy process.
Corporate and Other
Corporate and other costs increased approximately $1.2 million, which
principally reflects higher professional fees of $1.1 million, higher legal
costs of $0.7 million primarily related to the Kniffen Estates litigation,
non-cash compensation expense of $2.3 million related to restricted units
granted in October 2003, recovery from the settlement of an insurance claim for
$1.1 million in 2002 and a gain on the sale of NYMEX seats for $1.3 million in
2002. These amounts were partially offset by lower employee costs of $1.8
million, lower severance costs of $0.7 million and lower depreciation of $2.7
million. The decrease in depreciation is attributable to the reduction in
carrying value of assets resulting from fresh start reporting.
Reorganization Items, Net Gain on Discharge of Debt and Fresh Start Adjustments
Reorganization items were $7.3 million in 2003 as compared to $32.8 million
in 2002. The 2003 amount is primarily comprised of legal and professional fees
related to the bankruptcy proceedings. The 2002 amount reflects net amounts
forgiven in connection with our settlement agreement with Enron ($45.5 million)
and interest income incurred on amounts advanced to us under the DIP Financing
agreement. These amounts were partially offset by legal and professional fees
incurred related to the bankruptcy filing ($7.1 million), retention charges
($0.7 million) and the adjustment to reflect the allowed claim amount of the
senior notes (write-off of deferred issuance costs of $5.1 million). The net
gain on the discharge of debt of $131.6 million in 2003 was recorded net of the
9% senior notes and limited liability company units issued to the creditors upon
emergence from bankruptcy. The fresh start adjustments of $56.8 million in 2003
result from adjusting assets and liabilities to fair value.
Interest and Financing Costs, Net
The primary factors that affected interest and financing costs for 2003 and
2002 were:
- Facility and extension fees on the credit facilities and term
loan with Standard Chartered, SCTS and Lehman were $2.2 million
lower during 2003 compared to 2002. The decrease is primarily
attributable to facility fees being incurred for pre-bankruptcy
credit facilities as well as DIP credit facilities and term loans
during 2002.
- Interest on working capital loans was $1.5 million lower in 2003
compared to 2002 as a result of lower average debt outstanding.
Amounts outstanding under financing facilities were $45 million
and $125 million at December 31, 2003 and 2002, respectively.
Borrowing rates ranged from LIBOR plus 75 basis points to LIBOR
plus 250 basis points (prior to the bankruptcy) to LIBOR plus 300
basis points (through August 29, 2003) and LIBOR plus 700 basis
points (effective August 30, 2003) under the exit facilities.
- Letter of credit costs were $8.7 million in 2003 under the credit
facilities with Standard Chartered compared to $6.3 million for
2002. Higher letter of credit usage resulted from our bankruptcy
and higher crude oil prices. Letter of credit fees averaged 3.0%.
- Interest on the Term Loan totaled $8.6 million in 2003 compared
to $3.2 million in 2002. The Term Loan was entered into in
connection with our DIP facilities in October 2002 and refinanced
under the exit credit facilities in February 2003.
- Interest on the 9% senior notes issued March 1, 2003 was $9.3
million for the period from March 1, 2003 to December 31, 2003
compared to interest of $19.9 million recognized on the 11%
senior notes during 2002. The decrease in interest expense is a
result of the discharge of debt related to our $235 million of
11% senior notes in connection with our bankruptcy.
34
Discontinued Operations
Our discontinued operations had an operating loss of $30.7 million in 2003
compared to a $61.7 million loss in 2002. The lower operating loss in 2003 is
primarily attributable to $76.1 million of impairment charges recorded in 2002
related to our Morgan's Point Facility ($20.2 million), Mont Belvieu Facility
($33.0 million), and our West Coast natural gas liquids assets ($22.9 million),
to reflect these assets at their estimated fair values at December 31, 2002.
This change was offset by (1) significantly lower margins from MTBE sales in
2003 due to high feedstock prices; (2) a $3.0 million lower of cost or market
adjustment in the first quarter of 2003; (3) a $1.7 million charge related to
the inventory and accounts payable reconciliation adjustments; (4) $6.8 million
of charges related to the phase out of MTBE including severance ($1.9 million),
impairment of long-lived assets ($2.7 million), and write-down of materials and
supplies ($2.3 million); and (5) an $8.3 million loss on the sale of the Liquids
Operations.
Cumulative Effect of Accounting Changes
The EITF reached a consensus in EITF Issue 02-03 to rescind EITF 98-10
effective January 1, 2003. The cumulative effect of the accounting change on
January 1, 2003, was a loss of $2.4 million. See further discussion in Note 20
to our Consolidated Financial Statements. In addition, we adopted SFAS No. 143,
"Accounting for Asset Retirement Obligations," on January 1, 2003. In connection
with the adoption of SFAS 143, we recorded a $1.6 million loss as a cumulative
effect of an accounting change. See further discussion in Note 20 to our
Consolidated Financial Statements.
TWELVE MONTHS ENDED DECEMBER 31, 2002 COMPARED WITH TWELVE MONTHS ENDED DECEMBER
31, 2001
North American Crude Oil
The operating loss from our North American Crude Oil business segment was
$13.9 million in 2002 compared to operating income of $9.8 million in 2001. The
primary factors that affected gross profit and operating income in this segment
for 2002 and 2001 were:
- P+ averaged $3.26 per barrel in 2002 compared to $3.22 per barrel
in 2001. The WTI/WTS differential was $1.39 per barrel in 2002,
versus $2.91 per barrel in 2001.
- Crude oil lease volumes averaged 277,000 bpd in 2002 compared to
361,000 bpd in 2001. Total sales volumes averaged 520,000 bpd in
2002 compared to 888,000 bpd in 2001. The reduction in marketing
activities and lease volumes purchased reflects the elimination
of certain low margin crude oil lease volumes in the first nine
months of 2001 and the loss of certain lease barrels as a result
of increased requests for credit from our suppliers starting in
late 2001 as a result of Enron's bankruptcy and our bankruptcy
filing in October 2002.
- Gross profit per lease barrel was $0.03 per barrel in 2002
compared to $0.19 per barrel in 2001 due to more favorable market
conditions in 2001.
- Total expenses decreased approximately $5.6 million in 2002 due
to lower employee related expenses of $6.0 million, offset by
higher severance costs of $0.7 million recorded in the third
quarter of 2002 in connection with realignment initiatives.
Pipeline Operations
Operating income from our Pipeline Operations was $15.3 million in 2002
compared to operating income of $50.0 million in 2001. The primary factors that
affected this business in 2002 and 2001 were:
- Revenues from our Pipeline Operations decreased $20.2 million
reflecting reduced lease volumes transported by our North
American Crude Oil business segment. Average volumes transported
in 2002
35
were 407,000 bpd compared to 511,000 bpd in 2001. Revenue per
barrel was $0.72 per barrel in 2002 and $0.68 per barrel in 2001.
- Total expenses for our Pipeline Operations increased
approximately $5.3 million in 2002 compared to 2001. The primary
factors affecting total expenses are:
-- Higher employee expenses of $3.3 million, higher safety and
environmental costs of $1.7 million and higher severance
costs of $0.3 million offset by lower operating costs of
$0.6 million and lower depreciation and amortization of $0.9
million.
-- Higher cost of sales of $0.8 million primarily due to higher
losses for unaccounted for crude oil volumes.
- Other expenses were $9.2 million which includes charges of $8.0
million related to the settlement of various matters and claims
made with respect to environmental contingencies during our
bankruptcy process.
Corporate and Other
Corporate and other costs increased approximately $3.6 million. The
increase is due primarily to increased costs related to Enron's bankruptcy and
restructuring costs (incurred prior to October 2002) related to our Chapter 11
filing. These costs include restructuring costs of $2.6 million for the first
nine months of 2002, severance costs of $0.7 million, accounting costs of $0.5
million and insurance costs of $2.4 million. These amounts were partially offset
by recovery from the settlement of an insurance claim for $1.1 million and a
gain on the sale of NYMEX seats for $1.3 million in 2002.
Reorganization Items, Net Gain on Discharge of Debt and Fresh Start Adjustments
Reorganization items of $32.8 million are primarily comprised of a net gain
on the Enron Settlement of $45.5 million (see further discussion in Note 17 to
our Consolidated Financial Statements), legal and professional fees related to
the bankruptcy proceedings of $7.1 million, retention charges of $0.7 million
and the write-off of deferred issuance costs of $5.1 million to reflect the
allowed claim amount of the senior notes.
Interest and Financing Costs, Net
The primary factors that affected interest and financing costs for 2002 and
2001 were:
- Facility fees on the credit facilities and term loan with
Standard Chartered, SCTS and Lehman were $8.4 million higher
during 2002 compared to 2001.
- Interest on working capital loans was $1.8 million higher in 2002
compared to 2001 as a result of higher average debt outstanding
and the increase in borrowing rates. Amounts outstanding under
financing facilities were $200.0 million and $182.5 million at
December 31, 2002 and 2001, respectively. Borrowing rates ranged
from LIBOR plus 75 basis points to LIBOR plus 250 basis points
(prior to the bankruptcy) to LIBOR plus 300 basis points.
- Letter of credit costs were $6.3 million in 2002 under the credit
facilities with Standard Chartered compared to $0.8 million for
2001. Letters of credit outstanding at December 31, 2002 and 2001
were $274.0 million and $196.1 million respectively. Higher
letter of credit usage resulted from our bankruptcy. Letter of
credit fees averaged 3.0% during 2002 and ranged from 0.375%
under the Enron Credit Facility to up to 3% under the Credit
Facility in late 2001.
- Interest on the DIP Term Loan totaled $1.5 million in 2002 and
$3.2 million in 2001. The DIP Term Loan was entered into in
connection with our DIP facilities in October 2002.
36
- Interest on the 11% senior notes was $5.9 million lower in 2002
due to the cessation of interest accruals effective with our
bankruptcy filing on October 8, 2002.
Discontinued Operations
Our discontinued operations had an operating loss of $61.7 million in 2002
compared to an operating loss of $16.6 million in 2001. The 2002 loss includes
impairment charges of $76.1 million previously discussed. The 2001 loss includes
impairment charges of $29.1 million as a result of Enron Gas Liquids, Inc.'s
nonperformance under the Toll Conversion and Storage Agreements. See further
discussion in Note 8 to our Consolidated Financial Statements. Excluding the
impairment charges, discontinued operations had operating income of $14.4
million in 2002 compared to operating income of $12.4 million in 2001.
Cumulative Effect of Accounting Changes
We adopted SFAS 133, effective January 1, 2001. The cumulative effect of
the accounting change on January 1, 2001, was income of $1.3 million. See
further discussion in Note 20 to our Consolidated Financial Statements. In
addition, in the first quarter of 2001, we changed our method of accounting for
inventories used in our energy trading activities. The cumulative effect of the
accounting change on January 1, 2001 was income of $0.2 million. See further
discussion in Note 20 to our Consolidated Financial Statements.
NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In December 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003), "Consolidation of Variable Interest Entities - an Interpretation
of ARB No. 51" (FIN 46R replaces FIN 46 which we implemented effective with the
adoption of fresh start reporting on March 1, 2003). See Note 20 to our
Consolidated Financial Statements for discussion regarding the adoption of FIN
46. FIN 46R is required to be implemented by the end of the first reporting
period beginning after December 15, 2003. We plan to adopt FIN 46R effective
January 1, 2004. Adoption of FIN 46R will not have an impact on our financial
statements.
CERTAIN LITIGATION AND ENVIRONMENTAL MATTERS
Please read Item 3. Legal Proceedings.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP") requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of actual revenues
and expenses during the reporting period. Although we believe these estimates
are reasonable, actual results could differ from those estimates. Our
significant accounting policies are summarized in Note 2 to our Consolidated
Financial Statements included elsewhere in this report.
REVENUE AND EXPENSES
We routinely make accruals for both revenues and expenses due to the timing
of receiving information from third parties, reconciling our records with those
of third parties, claims that have been incurred but not processed and costs
that accrue over time under benefit and incentive plans. Prior to the adoption
of EITF 02-03, substantially all of our gathering, marketing and trading
activities were accounted for on a fair value basis under EITF 98-10 or SFAS 133
with changes in fair value included in earnings. EITF 02-03 precludes mark to
market accounting for energy trading contracts that are not derivative
instruments pursuant to SFAS 133. See further discussion in Note 20 to our
Consolidated Financial Statements regarding the impact of adopting EITF 02-03.
Certain estimates were made in determining the fair value of contracts. We have
determined these estimates using available market data and valuation
37
methodologies. We believe our estimates for these items are reasonable, but
there is no assurance that actual amounts will not vary from estimated amounts.
DEPRECIATION AND AMORTIZATION
We calculate our depreciation and amortization based on estimated useful
lives and salvage values of our assets. When assets are put into service, we
make estimates with respect to useful lives that we believe are reasonable.
However, factors such as competition, regulation or environmental matters could
cause us to change our estimates, thus impacting the future calculation of
depreciation and amortization. When any asset is tested for recoverability, we
also review the remaining useful life of the asset. Any changes to the estimated
useful life resulting from that review are made prospectively.
IMPAIRMENT OF ASSETS
We evaluate impairment of our long-lived assets in accordance with SFAS No.
144, and would recognize an impairment when estimated undiscounted future cash
flows associated with an asset or group of assets are less than the asset
carrying amount. If an asset is impaired, the asset is written down to fair
value. Long-lived assets are subject to factors which could affect future cash
flows. These factors include competition, our financial condition and cost of
credit which impacts our ability to maintain or increase our crude oil volumes,
regulation, environmental matters, consolidation in the industry, refinery
demand for specific grades of crude oil, area market price structures and
continued development drilling in certain areas of the United States. We
continuously monitor these factors and pursue alternative strategies to maintain
or enhance cash flows associated with these assets; however, no assurances can
be given that we can mitigate the effects, if any, on future cash flows related
to any changes in these factors. See further discussion of asset impairments
recorded in Note 8 to our Consolidated Financial Statements.
CONTINGENCIES
We accrue reserves for contingent liabilities, which include environmental
remediation and potential legal claims. A loss contingency is accrued when our
assessment indicates that it is probable that a liability has been incurred and
the amount of the liability can be reasonably estimated. Our estimates are based
upon currently available facts, prior experience in remediation of spills,
existing technology and presently enacted laws and regulations. These estimated
liabilities are subject to revision in future periods based on actual costs or
new information.
FRESH START REPORTING
We adopted fresh start reporting required by SOP 90-7 as of February 28,
2003 (the date chosen for accounting purposes). In accordance with the
principles of fresh start reporting, we have adjusted our assets and liabilities
to their fair values. We used independent third-party financial advisors and
valuation specialists to assist in the determination of our enterprise value,
the allocation of our reorganization value to our tangible and identifiable
intangible assets and the fair value of our long-term liabilities. The
valuations were based on a number of estimates and assumptions such as annual
volumes and cash flows, terminal values and discount rates, which are inherently
subject to significant uncertainties and contingencies beyond our control.
Accordingly, there can be no assurance that the valuations will be realized and
actual results could vary significantly. See further discussion in Note 6 to our
Consolidated Financial Statements.
CRUDE OIL LINEFILL ESTIMATES
Measuring the physical volumes of crude oil linefill in certain of the
pipelines we operate in the West Texas and New Mexico area is inherently
difficult. Because these pipelines are operated under very little pressure,
unlike the vast majority of our other pipelines, we cannot use traditional
engineering based methods to estimate the physical volumes in the system but
instead have utilized certain operational assumptions and topographical
information which take into consideration the measurement limitations. See
further discussion in Note 9 to our Consolidated Financial Statements.
38
RISK FACTORS
RISK FACTORS RELATING TO OUR BUSINESS
Our ability to continue as a going concern is uncertain.
We are highly leveraged and have shown no substantive improvement in our
financial performance since emerging from bankruptcy in March 2003. Our
pre-bankruptcy customers and business partners have been less willing to do
business with us than we anticipated and our marketing volumes have not improved
as originally assumed in our Restructuring Plan. Due to these and other factors,
we recently breached various covenants under our credit facilities with respect
to the last four months of 2003 and in January 2004. Although these breaches
have been waived as of December 31, 2003, we expect to be in default under our
credit facilities for the foreseeable future. There can be no assurance that our
lenders will waive any future breaches, including January 31, 2004, under our
credit facilities. For more information, please read Note 3 to our Consolidated
Financial Statements included elsewhere herein.
Our ability to obtain letters of credit to support our purchases of crude
oil is fundamental to our crude oil gathering and marketing activities. The
amount of letters of credit is primarily based on volume and crude oil prices.
If volumes remain constant and crude oil prices increase, the dollar amount of
letters of credit will increase. We can give no assurance that we will not be
required to further reduce or restrict our gathering and marketing activities
because of continuing limitations on our ability to obtain credit support and
financing for our working capital needs, as well as the high cost of such
support. Any significant decrease in our financial strength, regardless of the
reason for such decrease, may also increase the number of transactions requiring
letters of credit or other financial support, may make it more difficult for us
to obtain such letters of credit and/or may increase the cost of obtaining them.
This could in turn adversely affect our ability to maintain our level of
purchasing and marketing activities or otherwise adversely affect our
profitability.
Our cash flow from operations is not sufficient to meet our current cash
requirement and, as a result, we have been borrowing under our Trade Receivables
Agreement in order to fund our operations and capital needs. Absent a
significant improvement in our business performance, we expect to continue to
borrow to meet our cash requirements to the extent borrowed funds are available.
Based on our current cash requirements, we may exhaust our sources of available
cash in the second quarter of 2004.
Our Commodity Repurchase and Trade Receivables Agreements mature June 1,
2004, although we have an option to extend the maturity to August 30, 2004,
subject to us being in compliance with our debt covenants. Our Letter of Credit
Facility and Term Loan mature in August 2004. We may be unable to arrange future
financings on acceptable terms, which would limit our ability to refinance our
existing indebtedness, fund our current operations and fund our future capital
requirements.
We have sold substantially all of our non-strategic assets in an effort to
reduce our aggregate indebtedness. In addition to asset sales, we have attempted
to raise additional equity without success and to convert indebtedness to
equity. We are in advanced discussions with a potential buyer regarding the sale
of substantially all of our assets; however, there can be no assurances that we
can consummate a transaction. If we are not successful in consummating a
transaction, we will continue to pursue other strategic alternatives, which
include the sale of additional assets (singularly or in groups) and a voluntary
filing under the U.S. Bankruptcy Code.
Our Consolidated Financial Statements included in this report have been
prepared assuming we will continue as a going concern, which contemplates the
realization of assets and settlement of liabilities in the normal course of
business. The factors discussed above raise substantial doubt about our ability
to continue as a going concern. Our Consolidated Financial Statements do not
include any adjustments that might result from the outcome of this uncertainty.
39
Our marketing volumes have not returned to previously expected levels.
Our pre-bankruptcy customers and business partners have been less willing
to do business with us than we anticipated as a result of our being highly
leveraged and having shown no substantive improvement in our financial
performance. Although we assumed that our marketing volumes would increase to
approximately 350,000 barrels per day by the end of 2003, our marketing volumes
were approximately 254,000 barrels per day in December 2003. We do not
anticipate an appreciable increase in volumes for the remainder of 2004. The
anticipated quick return of volume growth in 2003 contemplated by our
Restructuring Plan has not occurred given the heightened sensitivity to credit
risk in the energy industry and our high credit cost.
Economic and industry factors beyond our control can adversely affect our gross
profits.
Historically, our business has been very competitive with thin and volatile
profit margins. The ability to generate margins in the crude oil marketing
business is not tied to the absolute price of crude oil but is generated by the
difference between the price at which crude oil is sold and the price paid and
other costs incurred in the purchase and transportation of the crude oil.
Pipeline tariff revenues are dependent on volumes primarily from our marketing
business. Additionally, gross profits could be affected by the change in fair
value of positions taken, if any. Our gross profits are also affected by factors
beyond our control, including, without limitation:
- the performance of the U.S. and world economies;
- volumes of crude oil produced in the areas we serve;
- demand for oil by refineries and other customers;
- prices for crude oil at various lease locations;
- prices for crude oil futures contracts on the NYMEX;
- the competitive position of alternative energy sources; and
- the availability of pipeline and other transportation facilities
that may make crude oil production from other producing areas
competitive with crude oil production that we purchase at the
lease.
Our ability to maintain our volumes of crude oil purchased at the lease may be
adversely affected because of reduced drilling and production activity.
Our profitability depends in part on our ability to offset volumes lost
because of natural declines in crude oil production from depleting wells or
volumes lost to competitors. This is particularly difficult in the current
environment of reduced drilling activity and discontinued production operations.
The amount of drilling and production will depend in large part on crude oil
prices. To the extent that low crude oil prices result in lower volumes of lease
crude oil available for purchase, we may experience lower per barrel margins, as
competition for available lease crude oil on the basis of price intensifies. It
is possible that domestic crude oil producers may further reduce or discontinue
drilling and production operations. In addition, a sustained depression in crude
oil prices could result in the bankruptcy of some producers.
Our ability to maintain or increase our gross profits is dependent on the
success of our price risk management strategies.
Price risk management strategies, including those involving price hedges
using NYMEX futures contracts, are very important in maintaining or increasing
our gross profits. Hedging techniques require significant resources dedicated to
the management of futures positions and physical inventories. We cannot assure
you that our price risk management strategies will be successful in protecting
us from risks or in maintaining our gross profits at desirable levels.
Furthermore, we have certain basis risks (the risk that price relationships
between delivery points, grades of crude oil or delivery periods will change)
that cannot be completely hedged, and from time to time we enter into
transactions providing for purchases and sales in future periods in which the
volumes of crude oil are balanced, but where either the
40
purchase or the sale prices are not fixed at the time the transactions are
entered into. In these cases, we are subject to the risk that prices may change
or that price changes will not occur as anticipated.
Our performance depends on our ability to minimize bad debts and legal liability
when extending credit to operators and customers.
When we purchase crude oil at the lease, we often make payment to an
operator who is responsible for the correct payment and distribution of the
proceeds to other parties. If the operator does not have sufficient resources to
indemnify and defend us in case of a protest, action or complaint by those other
parties, our costs could rise. In addition, because we may extend credit to some
customers in large amounts, it is important that our credit review, evaluation
and control mechanisms work properly. Even if our mechanisms work properly, we
cannot assure you that our customers will not experience losses in dealings with
other parties, in which case we could be adversely affected.
Environmental and other regulatory costs and liabilities could affect our cash
flow.
Our business is heavily regulated by federal, state and local agencies with
respect to environmental, safety and other matters. This regulation increases
our cost of doing business. We may be subject to substantial penalties if we
fail to comply with any regulation. We cannot assure you that changes enacted by
regulatory agencies that have jurisdiction over us will not increase our cost of
conducting business or otherwise negatively impact our profitability, cash flow
and financial condition. If an accidental leak or spill occurs from one of our
pipelines, at a storage facility or from one of our operating units, we may have
to pay a significant amount to clean up the leak or spill. The resulting costs
and liabilities, net of insurance recovery, if any, could negatively affect the
level of cash available to pay amounts due on our debt. Although we believe we
are in compliance in all material respects with all applicable environmental
laws and regulations, we could be adversely affected by environmental costs and
liabilities that may be incurred or increased costs resulting from failure to
obtain all required regulatory consents and approvals. As to all of our
properties, we cannot assure you that past operating practices, including those
that were state of the art at the time employed, will not result in significant
future environmental liabilities. In particular, we could be significantly
adversely impacted by additional repair or remediation costs related to the
pipeline assets we acquired from Tex-New Mex if the need for any additional
repairs or remediation arises and we do not obtain reimbursement for any such
costs as a result of the pending litigation concerning those assets. See Item 1.
"Business - Environmental Matters" and "Regulation" and Item 3. "Legal
Proceedings."
The uncertainty and risk of future terrorist activity may impact our
results of operations and financial condition in unpredictable ways. These
developments have resulted in adverse changes in the insurance markets and
insurance premiums could be increased further or coverages may be unavailable in
the future.
Difficulty in attracting qualified drivers could adversely affect our
profitability and our ability to transport our products to market.
We rely on qualified drivers to operate our fleet of trucks to transport
our products to market. Periodically, we experience substantial difficulty in
attracting and retaining qualified drivers to transport our products. If we are
unable to attract qualified drivers, our ability to utilize our truck fleet to
transport our products to market may be severely hindered, which could adversely
affect our growth and profitability. We anticipate that the competition for
qualified drivers will continue to be high and we cannot predict whether we will
experience shortages of qualified drivers in the future.
RISK FACTORS RELATING TO OUR LIMITED LIABILITY COMPANY STRUCTURE
Our units may be subject to restraints on liquidity.
Although we are a public company required to file public reports under the
Securities Exchange Act of 1934, we are not currently listed on any stock
exchange or automated quotation system. Our LLC Units are being traded
over-the-counter and are listed in the Pink Sheets. It is not our current
intention to become listed on a national stock exchange or the NASDAQ quotation
system in the near future, but we may elect to do so at an appropriate time,
assuming we meet any applicable listing requirements. Consequently, and because
of the nature of over-the-counter trading, trading in our
41
units may be limited, the price of our units could be volatile, and as a result
holders of units may not be able to sell significant quantities of units at
prices posted in the Pink Sheets or in the quantities desired.
We could be treated as a corporation for United States income tax purposes.
In order for us to be classified as a partnership for federal income tax
purposes, at least 90% of our gross income for every taxable year must consist
of "qualifying income" within the meaning of the Internal Revenue Code. We may
not find it possible, regardless of our efforts, to meet this income requirement
or may inadvertently fail to meet this income requirement. Current law may
change to cause us to be treated as a corporation for United States income tax
purposes without regard to our sources of income or otherwise subject us to
entity-level taxation.
In 2002 and 2003, we recognized income from our settlement with Enron and
discharge of indebtedness in excess of 10% of our gross income for each of those
years. Based on discussions in late 2002 with our outside advisors, and as
disclosed in more detail in our Third Amended Joint Chapter 11 Plan and
Disclosure Statement, which is incorporated by reference into our Annual Report
on Form 10-K for the year ended December 31, 2002, we concluded that income from
our settlement with Enron and our debt discharge income constituted "qualifying
income," although the matter was not free from doubt. In January 2004, we
requested a private letter ruling from the Internal Revenue Service to determine
either that the income from our settlement with Enron and the debt discharge
income is qualifying income or that the recognition of such income should be
disregarded for purposes of the qualifying income test because it was an
inadvertent result of our bankruptcy. We are unable to predict how or when the
Internal Revenue Service will rule. If we are unable to obtain a favorable
ruling and are unsuccessful in litigating the matter should we choose to do so,
we will be taxable as a corporation for the year in which we failed to meet the
qualifying income test and every year thereafter.
If we were to be treated as a corporation for United States income tax
purposes, we would pay United States income tax on our income at the corporate
tax rate, which is currently a maximum of 35%, and would pay state income taxes
at varying rates. Distributions to unitholders would generally be taxed as a
corporate dividend. Because a tax would be imposed upon us as a corporation, the
cash available for distribution to a unitholder would be substantially reduced.
Any classification of us as a corporation could result in a material reduction
in the value of our units.
The LLC structure is relatively new and could be challenged.
Because most LLC statutes were only recently enacted, there is little or no
judicial guidance as to their interpretation. This could create uncertainty
regarding the rights and obligations of and among our unitholders, directors and
officers. Also, some doubt as to liability under state law of LLC members in
certain states, combined with absence of case law on the point, creates some
uncertainty as to the possibility of such liability to our unitholders in such
states.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We enter into forwards, futures and other contracts primarily for the
purpose of hedging the impact of market fluctuations on assets, liabilities or
other contractual commitments. The use of financial instruments may expose us to
market and credit risks resulting from adverse changes in commodity prices,
interest rates and foreign exchange rates. The major market risks are discussed
below.
Commodity Price Risk. Commodity price risk is a consequence of gathering
crude oil at the lease and marketing the crude oil to refineries or other trade
partners. We may use forwards, futures, swaps and options, as needed, to
mitigate price exposure and manage this risk on a portfolio basis.
Interest Rate Risk. Interest rate risk is the result of having variable
rate debt obligations, as changing interest rates impact the discounted value of
future cash flows and having fixed rate debt obligations which impact the change
in fair value.
42
COMMODITY PRICE RISK
We have performed a value at risk analysis of our financial derivative
commodity instruments. Value at risk incorporates numerous variables that could
impact the fair value of our investments, including commodity prices, as well as
correlation within and across these variables. We estimate value at risk
commodity exposures using a parametric model, which captures the exposure
related to open futures contracts. The value at risk method utilizes a one-day
holding period and a 95% confidence level.
Our value at risk for commodity price risk was $0.2 million at December 31,
2003 and less than $0.1 million at December 31, 2002. The value at risk amount
represents financial derivative commodity instruments, primarily commodity
futures contracts, entered into to hedge future physical crude oil purchase and
sale commitments. The commitments to purchase and sell physical crude oil have
not been included in the value at risk computation. At December 31, 2003, we had
crude oil futures contracts to purchase 0.2 million barrels of crude oil and to
sell 0.4 million barrels of crude oil, with the majority of these contracts
maturing in the first quarter of 2004. At December 31, 2002, we had crude oil
future contracts to purchase 0.6 million barrels of crude oil and to sell 0.6
million barrels of crude oil, with the majority of these contracts maturing in
the first quarter of 2003.
INTEREST RATE RISK
Our exposure to changes in interest rates primarily results from our
short-term debt with floating interest rates. As of December 31, 2003,
short-term debt of $45 million with floating interest rates was outstanding
under our exit credit facility.
ACCOUNTING POLICIES
Our accounting policies for price risk management and hedging activities
are described in Note 2 to our Consolidated Financial Statements.
COMMODITY DERIVATIVE TRANSACTIONS ACCOUNTED FOR AT FAIR VALUE
Generally, as we purchase crude oil, we enter into corresponding sales
transactions involving physical delivery of crude oil to third-party users or
corresponding sales transactions on the NYMEX. This process enables us to
minimize our exposure to price risk until we take physical delivery of the crude
oil. In 2002, substantially all of our crude oil and refined products marketing
and trading operations were accounted for on a fair value basis pursuant to SFAS
No. 133 or EITF Issue 98-10. Effective January 1, 2003, energy trading contracts
that are not derivative instruments pursuant to SFAS No. 133 are no longer
accounted for at fair value. Prior to the rescission of EITF 98-10, we accounted
for inventories used in our energy trading activities at fair value.
The following table indicates fair values and changes in fair value of our
commodity derivative transactions (in thousands):
SUCCESSOR COMPANY | PREDECESSOR COMPANY
----------------- | -------------------------------------
TEN MONTHS ENDED | TWO MONTHS ENDED YEAR ENDED
DECEMBER 31, 2003 | FEBRUARY 28, 2003 DECEMBER 31, 2002
----------------- | ----------------- -----------------
|
Fair value of contracts at beginning of period $ 1,254 | $ (844) $ (5,597)
Cumulative effect of accounting change - | (2,389) -
Change in realized and unrealized value (2,401) | 4,114 3,814
Fair value of new contracts entered into during year 1,673 | 373 939
--------- | --------- ---------
Fair value of contracts at end of period $ 526 | $ 1,254 $ (844)
========= | ========= =========
43
FAIR VALUE OF COMMODITY DERIVATIVE INSTRUMENTS AT DECEMBER 31, 2003
MATURITY GREATER
MATURITY OF 90 THAN 90 DAYS BUT LESS
SOURCE OF FAIR VALUE DAYS OR LESS THAN ONE YEAR TOTAL FAIR VALUE
- ------------------------ -------------- --------------------- ----------------
Prices Actively Quoted $ 677 $ (162) $ 515
Prices Provided by Other
External Source(1) 13 (2) 11
------- -------- -------
Total $ 690 $ (164) $ 526
======= ======== =======
(1) In determining the fair value of certain contracts, adjustments may be made
to published posting data, for location differentials and quality basis
adjustments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required hereunder is included in this report as set forth
in the "Index to Financial Statements" on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES NOT APPLICABLE.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act), as of the end of the period covered by this
report. Based on such evaluation and except as described below, our Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of such period, our disclosure controls and procedures were effective in
recording, processing, summarizing and reporting, on a timely basis, information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Except as described below, there have not been any changes in our internal
control over financial reporting (as such term is defined in Rules 13-15(f) and
15d-15(f) under the Exchange Act) during the period to which this report relates
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
During the second half of 2003, we discovered that inventory
reconciliations for certain of our pipelines were not being completed in a
timely manner and that reconciling items were not being appropriately resolved.
Upon discovery of this control deficiency, we undertook a review of our
inventory reconciliation controls for all our Pipeline and Liquids operations.
This expanded review identified additional control deficiencies with inventory
and accounts payable reconciliation procedures in our Liquids operations.
Management has disclosed the foregoing deficiencies in our internal control
over financial reporting to the Audit Committee and to our auditors. We have
implemented changes to our internal control over financial reporting to address
these issues. We have also performed additional procedures designed to provide
reasonable assurance that these control deficiencies did not lead to a material
misstatement in our consolidated financial statements.
44
Specifically in response to these issues, we implemented the following
corrective actions:
- established monitoring controls over inventory and accounts
payable reconciliations requiring quarterly supervisory review
and approval of all reconciliations and the disposition of
reconciling items;
- evaluated skills of accounting personnel, which resulted in
realignment and changes in personnel; and
- initiated an internal peer-auditing process of our inventory
reconciliations in our pipeline and liquids accounting group.
We continue to evaluate methods to improve our internal control over financial
reporting.
45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our Board of Directors consists of seven members and is currently composed
of Mr. J. Robert Chambers, Ms. Julie H. Edwards, Mr. Thomas M. Matthews, Mr.
Robert E. Ogle, Mr. James M. Tidwell, Mr. S. Wil VanLoh, Jr., and Mr. Daniel J.
Zaloudek. Messrs. Chambers, Ogle, Tidwell, VanLoh, Zaloudek and Ms. Edwards were
elected by former noteholders of EOTT MLP on March 7, 2003 pursuant to the terms
of our Restructuring Agreement.
The Board of Directors held four regularly scheduled meetings during the
year ended December 31, 2003. Each director attended at least sixty-seven
percent of the total number of meetings of the Board of Directors and the
committees on which the director served.
The Board of Directors has established an Audit Committee consisting of
three individuals who were neither officers nor employees of Link or any
affiliate of Link ("Independent Directors"). The Audit Committee has the
authority to review, at the request of Link, specific matters as to which Link
believes there might be a conflict of interest in order to determine if the
resolution of such conflict is fair and reasonable to Link. In addition, the
Audit Committee has the authority and responsibility for selecting our
independent public accountants, reviewing our annual audit and resolving
accounting policy questions. The audit committee met nine times during the year
ended December 31, 2003, and is currently composed of Mr. Robert E. Ogle, Mr.
James M. Tidwell and Mr. S. Wil VanLoh, Jr. The Board of Directors has
determined that Mr. Tidwell, the Chairperson of the Audit Committee, is an audit
committee financial expert within the meaning of the regulations of the SEC.
The Board of Directors has established a Compensation Committee consisting
of three individuals who were neither officers nor employees of Link or any
affiliate of Link ("Independent Directors"). The Compensation Committee is
responsible for administration of compensation arrangements of executive
management. The Compensation Committee met four times during the year ended
December 31, 2003, and is currently composed of Mr. J. Robert Chambers, Ms.
Julie H. Edwards and Mr. Daniel J. Zaloudek. None of these directors had a
relationship requiring disclosure under "Compensation Committee Interlocks and
Insider Participation".
We have adopted a Code of Ethics for all employees, a copy of which has
been posted on our website. Included in this policy is a special section for the
Chief Executive Officer, Chief Financial Officer and Accounting personnel.
Changes in or Waivers of our Code of Ethics for our Chief Executive Officer and
Senior Financial Officers will be posted on our Internet website within five
business days and maintained for at least twelve months or reported on Item 10
of a Form 8-K. Our website address is www.linkenergy.com.
INFORMATION REGARDING DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information concerning the directors and
executive officers of Link Energy LLC as of March 15, 2004:
NAME AGE POSITION
- ---------------- --- -----------------------------------------------------------
Thomas M. Matthews 60 Director, Chairman of the Board and Chief Executive Officer
J. Robert Chambers 37 Director
Julie H. Edwards 45 Director
Robert E. Ogle 54 Director
James M. Tidwell 57 Director
S. Wil VanLoh, Jr. 33 Director
Daniel J. Zaloudek 58 Director
James R. Allred 40 Vice President and Treasurer
Mary Ellen Coombe 53 Vice President, Human Resources and Administration
Dana R. Gibbs 44 President and Chief Commercial Officer
H. Keith Kaelber 55 Executive Vice President and Chief Financial Officer
Lori L. Maddox 39 Vice President and Controller
Molly M. Sample 48 Vice President and General Counsel
Randall G. Schorre 49 Vice President, Pipeline and Fleet Transportation Services
46
Mr. Thomas M. Matthews was appointed as the Chairman of the Link Energy LLC
Board and Chief Executive Officer on March 7, 2003. Prior to this appointment,
Mr. Matthews served on the Board of EOTT Energy Corp. as Chairman of the Board
and Chairman of the Restructuring Committee, beginning in April 2002. Mr.
Matthews served as the Chief Executive Officer of Avista Corp. from July 1998 to
January 2001. Mr. Matthews served as President of NGC Corporation from November
1996 to June 1998.
Mr. J. Robert Chambers was appointed as a Director of the Link Energy LLC
Board and Chairman of the Link Energy LLC Compensation Committee on March 7,
2003. Mr. Chambers is currently a Managing Director at Lehman Brothers Inc.,
where he manages the Lehman Energy Fund portfolio. From 1994 to 2002, Mr.
Chambers was a fixed income analyst in Lehman's High Yield Department, covering
the energy sector.
Ms. Julie H. Edwards was appointed as a Director of the Link Energy LLC
Board and a member of the Compensation Committee on March 7, 2003. Ms. Edwards
has been Executive Vice President - Finance & Administration for Frontier Oil
Corporation since April 2000. At Frontier Oil Corporation, Ms. Edwards also
served as Senior Vice President - Finance and Chief Financial Officer from
August 1994 to April 2000 and as Vice President - Secretary & Treasurer from
March 1991 through August 1994. Ms. Edwards was elected to serve on the Board of
Directors for ONEOK, Inc., a diversified energy company in January 2004.
Mr. Robert E. Ogle was appointed as a Director of the Link Energy LLC Board
and member of the Audit Committee on March 7, 2003. Mr. Ogle is a Director in
the Corporate Advisory Services practice for Huron Consulting Group, focusing on
corporate restructuring. Mr. Ogle joined Arthur Andersen in 1985 and was a
partner with Andersen from November 1990 until July 2002.
Mr. James M. Tidwell was appointed as a Director of Link Energy LLC Board
and Chairman of the Audit Committee on March 7, 2003. Prior to this appointment
with Link Energy LLC, Mr. Tidwell served on the Board of EOTT Energy Corp. and
as Chairman of the Audit Committee, beginning in April 2002. Mr. Tidwell has
served as Vice President, Finance and Chief Financial Officer of WEDGE Group
Incorporated since January 2000. Mr. Tidwell served as President of Daniel
Measurement & Control from June 1999 to January 2000, and as Executive Vice
President and Chief Financial Officer of Daniel Industries, Inc. from August
1996 to June 1999, before its acquisition by Emerson Electric. In addition, Mr.
Tidwell currently serves on the boards of Pioneer Drilling Company, T3 Energy
Services and Tidelands Geophysical. He is a member of the Audit Committee for
each of the three companies. Mr. Tidwell holds a B.S. degree in Business and a
Masters degree in Accounting from the University of Kansas. He is also a
Certified Public Accountant.
Mr. S. Wil VanLoh, Jr. was appointed to the Link Energy LLC Board and
member of the Audit Committee on March 7, 2003. Mr. VanLoh serves as President
and is a co-founder and Managing Partner of Quantum Energy Partners. Mr. VanLoh
currently serves as Director/Manager of a number of Quantum portfolio companies
including Saxet Energy Ltd., Meritage Energy Partners, LLC, EnSight Energy
Partners, LP, Tri-C Energy, LP, Rockford Energy Partners, LLC, Sago Energy LLC,
Linn Energy LLC, Denali Oil & Gas Partners, LP, Northpoint Energy Ltd., Crown II
Oil Partners LP, Chalker Energy Partners, LP, Celero Energy LP, and TriPoint
Energy Ltd. He is a former Director/Manager of Texoil, Inc., Crown Oil Partners,
LP, Parks & Luttrell Energy Partners, LP, Pointwest Energy Inc., and Cougar
Hydrocarbons Inc. Prior to co-founding Quantum in 1998, Mr. VanLoh co-founded
Windrock Capital, Ltd., an energy investment banking firm specializing in
raising private equity and providing merger, acquisition and divestiture advice
for energy companies. He also serves as Treasurer of the Houston Producers'
Forum and is a member of the IPAA Finance Committee.
Mr. Daniel J. Zaloudek was appointed as a Director to the Link Energy LLC
Board and member of the Compensation Committee on March 7, 2003. Mr. Zaloudek
founded and manages IMEDIA, Inc., an international multimedia content company,
and has done business consulting since 1995. Mr. Zaloudek has provided mediation
services for both small and large firms in the Tulsa area since October 2001. At
Koch Industries in Wichita, Kansas, from 1978 to 1995, Mr. Zaloudek held several
key executive positions with responsibility for all aspects of Koch's
international oil and gas business. Mr. Zaloudek served on the Board of
Directors for the Avista Corporation located in Spokane, Washington, from
November 1998 to May 2002.
47
Mr. James R. Allred was appointed Vice President and Treasurer for Link
Energy LLC in July 2003. Mr. Allred is responsible for Financial Analysis,
Banking Relations, Insurance, Credit and Cash Management. Prior to joining Link
Energy, Mr. Allred headed up the oil and gas financial services practice based
in Houston for ScotiaCapital Energy Finance Group of The Bank of Nova Scotia, NA
from 2002 to 2003. Mr. Allred held various positions with Bank of America
Corporation from 1987 to 2002, with his last assignment of managing the oil and
gas exploration and production industry segment within the energy and power
practice in Houston.
Ms. Mary Ellen Coombe was appointed as Vice President, Human Resources and
Administration of Link Energy LLC in November 2002. Previously, Ms. Coombe
served as Vice President, Human Resources and Administration of the Predecessor
Company from December 1992 to November 2002. Ms. Coombe is responsible for Human
Resources, Payroll, Real Estate, Facility Management, Office Services, Public
Relations, Record Management and Investor Relations.
Mr. Dana R. Gibbs was appointed President and Chief Commercial Officer for
Link Energy LLC in November 2002. Previously, Mr. Gibbs served as Chief
Executive Officer, President and Chief Operating Officer of the Predecessor
Company. Mr. Gibbs served as the Executive Vice President, Commercial for the
Predecessor Company from March 1999 to late 2000. Mr. Gibbs served as Vice
President of Enron North America Corp. from 1992 to 1999.
Mr. H. Keith Kaelber was appointed as Executive Vice President and Chief
Financial Officer of Link Energy LLC in January 2003. Prior to joining Link
Energy, Mr. Kaelber served in various capacities in the non-profit sector and
founded INDWELL, a nonprofit charitable corporation, in 1999. Mr. Kaelber served
as President, Financial Services, Senior Vice President and Chief Financial
Officer to NGC Corporation, a natural gas gathering, processing and marketing
company from 1990 to 1997.
Ms. Lori L. Maddox was appointed as Vice President and Controller of Link
Energy LLC in November 2002. Previously, Ms. Maddox served as Vice President
since February 2001 and Controller and Chief Accounting Officer since October
1996 for the Predecessor Company. Ms. Maddox oversees Accounting, Accounts
Payable, Division Order, Royalty Payments, Tax, Financial Reporting and Audit.
Prior to joining Link Energy LLC, Ms. Maddox was associated with Arthur Andersen
and served in the Energy Group for ten years.
Ms. Molly M. Sample was appointed as Vice President and General Counsel of
Link Energy LLC in November 2002. Ms. Sample oversees Legal and Litigation
Activities, Commercial Contract Administration and Corporate Secretary duties.
Previously, Ms. Sample served as Vice President and General Counsel beginning in
February 2001 for the Predecessor Company. Prior to that, Ms. Sample served as
General Counsel from September 2000 to January 2001 for the Predecessor Company.
Mr. Randall G. Schorre was appointed as Vice President, Pipeline and Fleet
Transportation Services of Link Energy LLC in November 2002. Previously, Mr.
Schorre served as Vice President, Pipeline and Fleet Transportation Services of
the Predecessor Company beginning in August 2002. Prior to joining Link Energy,
Mr. Schorre was Vice President and Chief Commercial Officer/Chief Operating
Officer at Pipeline Power Partners in Houston where he was responsible for all
business development and commercial operations in developing, constructing and
commissioning electric compression systems for natural gas pipeline and storage
companies from 1997 to 2002.
SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 (a) of the Securities Exchange Act of 1934 requires Link Energy
LLC's directors, executive officers and persons holding more than ten percent of
a registered class of Link Energy LLC's equity securities to file with the SEC
initial reports of ownership, reports of changes in ownership and annual reports
of ownership of LLC Units and other equity securities of Link Energy LLC. Such
directors, officers and ten percent unitholders are also required to furnish us
with copies of all such filed reports.
To our knowledge, based solely upon a review of the copies of such reports
furnished to us and written representations that no other reports were required
during 2003, we believe that all of our executive officers, directors and ten
percent unitholders have complied with all applicable Section 16(a) reporting
requirements during 2003, except that one Form 4 was not timely filed by Mr.
James R. Allred for one transaction.
48
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Directors of Link Energy LLC who are employees of Link or its affiliates
did not receive additional compensation for serving on the Board of Directors or
any of its committees. Prior to March 1, 2003, each director who was not an
employee of Link or its affiliates received an annual retainer of $25,000 for
serving as a director for twelve consecutive months. Non-employee directors were
paid a fee of $2,000 for each director's meeting attended and $1,000 for each
committee meeting attended. Each committee chairperson was paid a fee of $4,000
annually. Effective March 1, 2003, each director who was not an employee of Link
or its affiliates received an annual retainer of $40,000 for serving as a
director for twelve consecutive months. Non-employee directors were paid a fee
of $1,000 for each director's meeting attended and $1,000 for each committee
meeting attended. Each committee chairperson was paid a fee of $4,000 annually.
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation paid or accrued by Link during each of the last three financial
years to the Chief Executive Officer and each of Link's four other most highly
compensated executed officers (the "Named Executive Officers") whose
compensation exceeded $100,000 during the year ended December 31, 2003.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------- --------------------------------------------
OTHER
ANNUAL RESTRICTED ALL OTHER
COMPEN- STOCK UNDERLYING LTIP COMPEN-
SATION AWARDS OPTIONS/ PAYOUTS SATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) (1) ($)(2) SARS (#) ($) (3) ($) (4)
- ----------------------------- ---- ---------- --------- ------- ---------- ---------- ------- ---------
Thomas M. Matthews 2003 293,300 - - 945,000 - - 4,200
Chief Executive 2002 - - - - - - -
Officer 2001 - - - - - - -
Dana R. Gibbs 2003 265,000 - - 573,750 - - 2,559
President and Chief 2002 265,000 150,000 - - - 237,714 5,500
Commercial Officer 2001 265,000 125,000 54,605 - 6,441 - 101,054
H. Keith Kaelber 2003 227,400 - - 506,250 - - 4,200
Executive Vice President 2002 - - - - - - -
and Chief Financial Officer 2001 - - - - - - -
Lori L. Maddox 2003 180,000 - - 270,000 - - 2,559
Vice President and 2002 166,000 100,000 - - - 154,142 5,432
Controller 2001 160,000 55,000 - - 535 - 288
Randall G. Schorre 2003 185,000 - - 303,750 - - 3,885
Vice President, Pipeline and 2002 70,100 40,000 - - - - -
Fleet Transportation Services 2001 - - - - - - -
(1) In 2003, no Named Executive Officers received perquisites and other
personal benefits with a value greater than the lessor of $50,000 or 10% of
reported salary and bonus. Prior to 2003, Enron maintained three deferral
plans for key employees under which payment of base salary, annual bonus
and long-term incentive awards may be deferred to a later specified date.
Mr. Gibbs was a participant in the 1994 Deferral Plan. Beginning January of
1996, the 1994 Deferral Plan credits interest based on fund elections
chosen by participants. During 2001, Mr. Gibbs elected a distribution of
his deferred compensation subject to a 10% penalty. Administrative expenses
in the amount of $4,998 under Mr. Gibbs' deferred compensation distribution
are not included.
(2) The restricted unit award values are based on the December 31, 2003 Link
Energy LLC unit price of $6.75.
(3) Prior to 2003, the amounts shown include payouts under the EOTT Energy Long
Term Incentive Plan, which was terminated on February 28, 2003 in
connection with the Restructuring Plan.
(4) In 2003, the amount shown includes the company match contribution to the
Link Energy Savings Plan. In 2002, the amounts shown include the matching
cash contribution made in lieu of Enron common stock. In 2001, the amounts
shown include the value at year end of Enron common stock allocated during
those years to employees' special subaccounts under the Enron Corp.
Employee Stock Ownership Plan.
49
REPORT FROM THE COMPENSATION COMMITTEE REGARDING EXECUTIVE COMPENSATION
COMPENSATION POLICY
Compensation for Link's executive officers is administered by the
Compensation Committee of the Board of Directors (the "Committee"), which is
composed of Independent Directors. The Committee has responsibility for
developing and administering Link's executive compensation policy, including the
establishment of base salaries, annual incentive awards and long-term incentive
awards for executive officers. The Committee then makes recommendations to the
Board of Directors with respect to the annual base and bonus compensation for
Link's executive officers. The Committee also administers Link's employee
benefit plans. No recommendation or committee action was materially modified or
rejected by the Board during 2003.
The Committee seeks to establish a strong relationship between the success
of Link and the compensation of its executive officers. The basic philosophy
behind Link's executive compensation policy is to attract and retain executive
officers who have the ability to lead Link in achieving its business objectives.
This philosophy is embedded in each aspect of an executive officer's total
compensation package. Additionally, the philosophy is designed to promote
teamwork by tying a significant portion of compensation to Link's performance.
Base salaries, annual incentive awards and long-term incentive awards are
reviewed periodically to ensure consistency with Link's total compensation
philosophy. All decisions regarding executive compensation are made based upon
individual and company performance, as measured against objectives and
competitive practices, by comparing competitive compensation information.
Competitive compensation information is developed using published and private
compensation survey sources for companies of comparable size with annual revenue
under one billion dollars in the crude oil sector of the energy industry as
appropriate. The Committee has established a practice of paying base salaries
targeted to be near the fiftieth percentile of the competitive market, and
establishing bonuses and equity incentives to provide additional compensation if
Link's financial targets as established annually by the Board of Directors are
met. Financial measurements focus on Earnings Before Interest Depreciation and
Amortization (EBIDA) and net income as measured against the annual plan.
Currently, the Compensation Committee does not intend to award levels of
compensation that would result in a limitation on the deductibility of a portion
of such compensation for federal income tax purposes pursuant to Section 162(m)
of the Internal Revenue Code of 1986, as amended; however, the Compensation
Committee may authorize compensation that results in such limitations in the
future if it determines that such compensation is in the best interest of Link.
COMPONENTS OF COMPENSATION
Link's executive compensation policy contains three primary components:
- base salary,
- short-term incentive compensation in the form of annual cash bonuses
based on Link's financial performance, and
- long-term incentive compensation in the form of restricted unit
awards.
The Compensation Committee evaluates each element of compensation
separately and in relation to the other elements of an executive's total
compensation package.
BASE SALARIES. The Compensation Committee reviews base salaries of all
executive officers annually. Base salaries for all positions are targeted to be
near the median of peer group companies. To determine base salaries paid by such
peer group companies, the Compensation Committee analyzed published industry
survey data and proxy and annual report information among companies of similar
size in the crude oil sector of the energy industry. In addition, base pay and
other compensation components reflect individual performance. During 2003, the
Compensation Committee evaluated
50
the base salary compensation for executive officers and no adjustments were
recommended to the Board of Directors.
ANNUAL INCENTIVE AWARDS. The primary objective of the annual incentive
awards is to promote overall Company performance. Key performance criteria are
considered in order to establish compensation based on certain fiscal targets
affecting short and long-term performance. Financial measurements used as
performance criteria include earnings before interest, depreciation and
amortization, earnings before depreciation, and net income. These criteria are
measured against the annual financial plan as approved by the Board of
Directors. The Committee may at its discretion recommend bonus funding based on
extraordinary events and competitive factors. The performance goals were not met
in 2003. Accordingly, no Executive Officer received a 2003 annual incentive
award.
LONG-TERM INCENTIVE AWARDS. The Compensation Committee recommended to the
Board of Directors the adoption of the Link Energy Equity Incentive Plan
("Incentive Plan") effective June 2003. Under the Incentive Plan, the Committee
is authorized to grant awards of 1.2 million restricted units to executive
officers and other key employees. The Incentive Plan has a ten-year term and
restricted unit awards granted thereunder typically vest over a three-year
period. The Incentive Plan is designed to promote individual performance by
relating executive compensation directly to the creation of unitholders wealth.
To the extent we are successful and create unitholder value, this compensation
component will become a larger portion of the total compensation for executive
officers. On October 1, 2003, Link granted 875,000 restricted unit awards of
which an aggregate of 505,000 unit awards were granted to our executive
officers.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
Mr. Matthews joined Link as Chief Executive Officer in March 2003. His
compensation included an annual base salary of $360,000. In July 2003, Link and
Mr. Matthews entered in an employment agreement with a three-year term. Under
the provisions of the employment agreement, Mr. Matthews was granted 140,000
restricted unit awards in October 2003. The awards vest over a three-year period
with 50% vesting on the first anniversary date and 25% on each of the following
two anniversary dates. Upon involuntary termination, Mr. Matthews would receive
two years' base salary upon execution of a waiver and release in which Mr.
Matthews would agree to certain confidentiality and non-compete obligations for
a period of one year. Any payment following an involuntary termination would be
made in two equal installments, the first within 30 days of the termination date
and the second a year following termination date. Involuntary termination would
be deemed to have occurred under the agreement upon a substantial and/or
material reduction in nature and scope of duties; a reduction in base salary or
exclusion from a benefit plan other than for general employee group; or a change
of primary work location of more than 100 miles not agreed upon by the employee.
A change in control provision under the agreement provides for involuntary
termination treatment if Mr. Matthews's employment is terminated within one year
of change in control and accelerated vesting of any unvested restricted unit
awards would occur. Notification of intent to cancel is required sixty (60) days
prior to expiration date. Mr. Matthews' 2003 compensation was based on
historical data of former Chief Executive Officers incumbents of Link's
predecessor and compensation information from available proxy data on peer
competitors.
Mr. J. Robert Chambers (Chairperson)
Ms. Julie H. Edwards
Mr. Daniel J. Zaloudek
STOCK OPTION/SAR GRANTS DURING 2003
Link Energy LLC has not adopted a plan that provides for unit options.
Accordingly, no unit options or appreciation rights ("SAR") units were granted
during 2003, and none are outstanding.
AGGREGATED OPTIONS/SAR EXERCISES DURING 2003 AND OPTION/SAR VALUES AT DECEMBER
31, 2003
Under the Restructuring Plan, the EOTT Energy Corp. Unit Option Plan was
terminated on February 28, 2003. There were no options outstanding as of the
termination date of February 28, 2003.
51
Link Energy LLC has not adopted a plan that provides for unit options. No
unit options were exercised under the previously reported EOTT Energy Unit
Option Plan.
EQUITY INCENTIVE PLAN AWARDS IN 2003
Link adopted the Link Energy Equity Incentive Plan effective June 2003. The
Equity Incentive Plan is intended to provide key employees with restricted unit
awards. The Equity Incentive Plan has a ten-year term. The restricted unit
awards received in 2003 have a vesting schedule of 50% vesting on June 1, 2004;
25% vesting on June 1, 2005 and 25% vesting on June 1, 2006. Named Executive
Officers receiving an award in 2003 are as follows: Mr. Matthews-140,000 units;
Mr. Gibbs-85,000 units; Mr. Kaelber-75,000 units; Ms. Maddox-40,000 units; and
Mr. Schorre-45,000 units. Link granted 875,000 restricted unit awards in 2003 of
which an aggregate of 505,000 were granted to its executive officers.
Under the Restructuring Plan, the EOTT Energy Corp. Long Term Incentive
Plan was terminated on February 28, 2003. There was no value for any phantom
appreciation rights outstanding as of the termination date of February 28, 2003.
BENEFIT PLANS
Like other employees of Link Energy, the Named Executive Officers were
entitled to receive medical, dental, vision, life and accidental death and
dismemberment insurance, and short and long-term disability benefits,
401(k)-plan participation and vacation benefits.
SEVERANCE PLAN
The Company maintains a Severance Plan that provides benefits to employees
who are terminated for failing to meet performance objectives or standards, or
who are terminated due to reorganization or economic factors. The amount of
benefits payable for performance related terminations is two weeks of base pay
in the event such employee signs a waiver and release of claims agreement. For
those terminated as the result of reorganization or economic circumstances, the
benefit is based on length of service with two week's pay per each full year or
partial year of service up to an amount of a maximum payment of twenty-six weeks
of base pay, if the employee signs a waiver and release of claims agreement.
EMPLOYMENT AGREEMENTS/CHANGE IN CONTROL AGREEMENTS
In July 2003, Mr. Matthews, Mr. Gibbs and Mr. Kaelber entered into
employment agreements with Link Energy LLC, for a term of three years. The
agreements provide for an annual base salary of not less than $360,000 for Mr.
Matthews, $265,000 for Mr. Gibbs and $240,000 for Mr. Kaelber and an annual
incentive plan target of 50% of base salary for each of Mr. Matthews, Mr. Gibbs
and Mr. Kaelber. In addition, the agreements provide for restricted unit awards
pursuant to the Link Energy Equity Incentive Plan in the amounts of 140,000
units for Mr. Matthews, 85,000 units for Mr. Gibbs and 75,000 units for Mr.
Kaelber with a vesting schedule over a three year period with 50% vesting on
June 1, 2004; 25% vesting on June 1, 2005 and 25% vesting on June 1, 2006.
Severance arrangements for Mr. Matthews, Mr. Gibbs and Mr. Kaelber include an
involuntary termination provision providing a payment equal to two years' base
salary. An involuntary termination includes (a) termination without cause; and
(b) a termination within 90 days after the happening of one of the following
events without the approval of the executive officer:
- a substantial and/or material reduction in the nature or scope of the
executive officer's duties and/or responsibilities, which results in
the executive officer no longer having an officer status and results
in an overall material and substantial reduction from the duties and
stature of the officer position he presently holds, which reduction
remains in place and uncorrected for 30 days following written notice
of such breach to Link by the executive officer;
- a reduction in the executive officer's base pay or an exclusion from a
benefit plan or program (except the executive officer may be subject
to exclusion from a benefit plan or program as part of a general
cutback for all employees or officers); or
52
- a change in the location for the primary performance of the executive
officer's services under the agreement to a city which is more than
100 miles away from such location.
The agreements also provide for severance payments of two years of base
salary in the event of Change of Control. The "confidential information"
provision continues beyond one-year of the term of the agreement following such
termination and the "non-compete" provision will continue for a period of one
year following such termination.
Mr. Schorre entered into an employment agreement with the Company on August
15, 2002 for a three-year term. The agreement provides an annual base salary of
not less than $185,000 and provides for a bonus opportunity of 50% of Mr.
Schorre's base salary and a guaranteed 2002 bonus of $40,000 that was paid in
the first quarter of 2003. Mr. Schorre's agreement provides for severance
benefits of one-year base salary in the event of involuntary termination and
includes confidentiality and non-compete provisions for a period of one year
following such termination. Severance arrangements for Mr. Schorre include an
involuntary termination provision pursuant to the executive officers' employment
agreement. An involuntary termination includes (a) termination without cause;
and (b) a termination within 90 days after the happening of one of the following
events without the approval of the executive officer:
- a substantial and/or material reduction in the nature or scope of the
executive officers' duties and/or responsibilities, which results in
the executive officer no longer having an officer status and results
in an overall material and substantial reduction from the duties and
stature of the officer position he presently holds, which reduction
remains in place and uncorrected for 30 days following written notice
of such breach to the Company by the executive officer;
- a reduction in the executive officer's base pay or an exclusion from a
benefit plan of program (except the executive officer may be subject
to exclusion from a benefit plan or program as part of a general
cutback for all employees or officers); or
- a change in the location for the primary performance of the executive
officers' services under the agreement to a city which is more than
100 miles away from such location.
The "confidential information" provision continues beyond the term of the
agreement following such termination and the "non-compete" provision will
continue for a period of one-year following such termination.
All other Named Executive Officers entered into change in control
agreements on January 1, 2004 for a term of two years. The agreements provide
for severance benefits of one years' base salary in the event of involuntary
termination within one year of Change in Control. An involuntary termination
includes (a) termination without cause and (b) a termination within 90 days
after the happening of one of the following events without the approval of the
executive officer:
- a substantial and/or material reduction in the nature or scope of the
executive officer's duties and/or responsibilities, which results in
the executive officer no longer having an officer status and results
in an overall material and substantial reduction from the duties and
stature of the officer position he/she presently holds, which
reduction remains in place and uncorrected for 30 days following
written notice of such breach to the Company by the executive officer;
- a reduction in the executive officer's base pay or an exclusion from a
benefit plan or program (except the executive officer may be subject
to exclusion from a benefit plan or program as part of a general
cutback for all employees or officers); or
- a change in the location for the primary performance of the executive
officer's services under the agreement to a city which is more than
100 miles away from such location.
The "confidential information" provision continues beyond the term of the
agreement following such termination
53
and the "non-compete" provision will continue for a period of six months
following such termination.
PERFORMANCE GRAPH
The following table and graph sets forth cumulative total unitholder
returns or the units of Link Energy LLC and the common units of its predecessor,
EOTT MLP, the S&P SmallCap 600 Index (the "Broad Market Index") and S&P MidCap
Refining & Marketing & Transportation Index (the "Industry Group Index") for the
five years ended December 31, 2003 as prescribed by SEC rules. The total return
on an investment for each of the periods assumes that $100 was invested on
December 31, 1998 and that all distributions were reinvested as received. The
information contained in this graph is not necessarily indicative of future
performance by Link or the comparative indices.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURNS AMONG THE
COMPANY, BROAD MARKET INDEX AND INDUSTRY GROUP INDEX
(Unaudited)
CUMULATIVE TOTAL RETURNS FOR
BASE YEARS ENDING DECEMBER 31,
PERIOD -------------------------------------
COMPANY / INDEX 1998 1999 2000 2001 2002 2003
------ -------------------------------------
Link Energy LLC...................................................... 100 92.6 133.6 137.0 1.3 1.3
S&P SmallCap 600 Index............................................... 100 112.4 125.7 133.8 114.3 158.6
S&P MidCap Oil & Gas Refining & Marketing & Transportation Index .... 100 90.7 140.0 179.0 183.0 245.0
[PERFORMANCE GRAPH]
54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED UNITHOLDER MATTERS
The following table sets forth information regarding the beneficial
ownership of our LLC units by:
- each person or group of affiliated person known by us to beneficially
own more than 5% of our LLC units
- all of our current directors
- our Named Executive Officers and
- all of our directors and executive officers as a group
Under the rules of the SEC, beneficial ownership includes any LLC units
over which an individual has sole or shared voting power or investment power,
and also any LLC units that the individual has the right to acquire within 60
days through the exercise of any option or other right. The information in the
following table is based on the information provided to us by the persons and
entities described below.
NAME AND ADDRESS PERCENT
OF BENEFICIAL OWNER UNITS BENEFICIALLY OWNED OF CLASS (1)
- ------------------- ------------------------ ------------
Farallon Capital Management, L.L.C.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111 2,778,698(2) 21.1%
American Express Financial
50592 AXP Financial Center
Minneapolis, MN 55474 2,717,667 20.6%
Lehman Brothers Holding, Inc. (3)
745 Seventh Avenue
New York, NY 10019 2,529,439 19.2%
The Dreyfus Corporation (4)
200 Park Avenue, 55th Floor
New York, NY 10166 828,113 6.3%
Thomas M. Matthews 140,000(5) 1.0%
J. Robert Chambers - *
Julie H. Edwards - *
Robert E. Ogle - *
James M. Tidwell - *
S. Wil VanLoh, Jr. - *
Daniel J. Zaloudek - *
Dana R. Gibbs 85,160(5) *
H. Keith Kaelber 75,000(5) *
Lori L. Maddox 40,000(5) *
Randall G. Schorre 45,000(5) *
Directors and Executive
Officers as a Group
(14 in number) 505,180 3.8%
* Less than 1 percent
55
(1) The percentage amounts are calculated based on the 13,182,889 common units
outstanding as of December 31, 2003.
(2) This information is as of February 6, 2004 and is based on a Schedule 13D/A
filed with the SEC on February 17, 2004 (the "Farallon Schedule 13D") by
Farallon Capital Management, L.L.C. (the "Management Company"), on behalf
of itself, Farallon Offshore Special Holdings LLC ("FOSH"), Farallon
Institutional Special Holdings LLC ("FISH"), Farallon Capital Partners,
L.P. ("Farallon Capital"), Tinicum Partners, L.P. ("Tinicum"), Farallon
Partners, L.L.C. (the "General Partner"), David I. Cohen, Chun R. Ding,
Joseph F. Downes, William F. Duhamel, Charles E. Ellwein, Richard B. Fried,
Monica R. Landry, William F. Mellin, Stephen L. Millham, Rajiv A. Patel,
Derek C. Schrier, Thomas S. Stever and Mark C. Wehrly (the individuals
listed are referred to collectively as the ("Individual Reporting
Persons")). Includes 1,398,317 units beneficially owned by FOSH and 762,784
units beneficially owned by FISH. The Management Company has the power to
direct the affairs of each FOSH and FISH, including the power to direct the
disposition of the proceeds of the sale of the units held by such entities,
and accordingly, may be deemed to be the beneficial owner of all units held
by such entities. Also, includes 589,101 units beneficially owned by
Farallon Capital and 28,496 units beneficially owned by Tinicum. The
General Partner has the power to direct the affairs of each of Farallon
Capital and Tinicum, including the power to direct the disposition of the
proceeds of the sale of the units held by such entities, and accordingly,
may be deemed to be the beneficial owner of all units held by such
entities. The Individual Reporting Persons are managing members of the
Management Company and the General Partner and accordingly, may be deemed
to be the beneficial owner of all units held by FOSH, FISH, Farallon
Capital and Tinicum. The Management Company, the General Partner and each
of the Individual Reporting Persons disclaim beneficial ownership of the
units held by Farallon Capital and Tinicum.
(3) This information is as of December 31, 2003 and is based on a Schedule
13G/A filed with the SEC on February 13, 2004 by Lehman Brothers Holdings
Inc. and its wholly owned subsidiary, Lehman Brothers Inc.
(4) The Dreyfus Corporation is acting as investment advisor for the Dreyfus
High Yield Strategies Fund, the Dreyfus/Laurel Funds Trust: Dreyfus Premier
Limited Term High Yield Fund, Dreyfus Fixed Income Securities: Dreyfus High
Yield Shares, Dreyfus Variable Investment Fund: Limited Term High Income
Portfolio and accordingly, may be deemed to be the beneficial owner of all
units held by such entities.
(5) Includes restricted units, the following number of which may be voted or
sold only upon passage of time: Mr. Matthews- 140,000; Mr. Gibbs- 85,000;
Mr. Kaelber- 75,000; Ms. Maddox- 40,000 and Mr. Schorre- 45,000.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information about the Company's LLC units
that may be issued under its existing compensation plans as of December 31,
2003.
(a) (b) (c)
----------------------- -------------------- -------------------
NUMBER OF UNITS
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
UNDER EQUITY
NUMBER OF UNITS TO BE WEIGHTED AVERAGE COMPENSATION PLANS
ISSUED UPON EXERCISE OF EXERCISE PRICE OF (EXCLUDING UNITS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REFLECTED IN COLUMN
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS (a))
- ----------------------------------------- ----------------------- -------------------- -------------------
Equity compensation plans approved by
unitholders.............................. N/A N/A N/A
Equity compensation plans not
approved by unitholders:
Link Energy Equity Incentive Plan........ 830,000 N/A(1) 370,000
------- ------- --------
Total.................................... 830,000 N/A 370,000
======= ======= ========
(1) The restricted units awarded under the Incentive Plan vest over time and do
not have an exercise price. Accordingly, no price information is provided.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Since January 1, 2002, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which we were or are to be
a party in which the amount involved exceeds $60,000 and in which any
56
current director, executive officer or holder of more than 5% of our equity
units had or will have a direct or indirect interest other than (1) compensation
arrangements with the Named Executive Officers, which are described where
required under Item 11. "Executive Compensation" and (2) the transactions
described below.
CERTAIN BUSINESS RELATIONSHIPS
As a result of our Restructuring Plan, six of our seven directors were
selected by our former senior noteholders who signed the Restructuring
Agreement. One of our new directors chosen as a result of this process is J.
Robert Chambers, who is currently a Managing Director of Lehman Brothers Inc.
Lehman Brothers Inc. was a party to the Restructuring Agreement described
herein, as well as a party to the Term Loan Agreement. Lehman Brothers Inc. held
the principal amount of $41.5 million, or approximately 18%, of our 11% senior
unsecured notes prior to our emergence from bankruptcy. As a former senior
unsecured noteholder, Lehman Brothers Inc. received its pro rata share of the
$104 million of 9% senior unsecured notes and its pro rata share of 11,947,820
limited liability company units of EOTT LLC.
Additionally, in connection with the settlement in bankruptcy of several
lawsuits against us, Lehman Brothers Inc. agreed to purchase the allowed claims
of certain of these unsecured creditors at a discount. The amount of these
allowed claims was approximately $4.8 million.
We have several previous and current business relationships with Lehman
Brothers Inc. and its affiliate, Lehman Commercial Paper Inc. Lehman is
presently engaged by the Company to perform financial advisory services and
expects to receive approximately $3 million in calendar year 2004 in banking
fees if we consummate a transaction. Lehman Brothers Inc. served as the agent
for our $75 million DIP term loan, and presently serves as the agent for our $75
million term loan that is part of our exit credit facilities. Further, Lehman
Brothers Inc. may receive compensation for future business conducted with Link,
and Mr. Chambers may indirectly share in such compensation through payments he
may receive for managing a fund that currently does and may from time to time
hold investment interests in Link. During 2002 and 2003, we have paid Lehman and
Lehman Commercial in the aggregate approximately $1.6 million and $7.8 million
respectively, which is primarily related to interest and facility fees on the
DIP term loans and the new term loans.
Julie H. Edwards, also one of our directors, is the Executive Vice
President - Finance & Administration for Frontier Oil Corporation, one of our
customers. In 2003 and 2002, Frontier paid us approximately $5 million for crude
oil purchases. This amount is less than 5% of our gross consolidated revenues
and less than 5% of Frontier's gross consolidated revenues.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
FEES PAID TO AUDITORS
The table set forth below indicates the aggregate fees for professional
services rendered to the Company by PricewaterhouseCoopers LLP ("PwC") for the
years ended December 31, 2003 and 2002.
YEAR ENDED DECEMBER 31,
------------------------
2003 2002
---------- ----------
Audit Fees (1) ........ $1,111,000 $ 742,000
Audit-Related Fees..... - -
Tax Fees (2) .......... 1,035,280 599,000
All Other Fees (3)..... 1,590 1,600
(1) In 2003, the amount includes fees associated with our annual audit, interim
reviews and includes the review of the adoption of fresh start reporting on
March 1, 2003. In 2002, the amount includes fees associated with our annual
audit and interim reviews.
57
(2) In 2003 and 2002, the amount includes the preparation of K-1's for our
unitholders, preparation of the federal and state returns for Link Energy
LLC and its subsidiary partnerships and consultation regarding property tax
valuations and filings.
(3) In 2003 and 2002, the amount includes a license fee and subscription fee
billed by PwC Product Sales LLC for the use of a PwC Company product.
AUDIT COMMITTEE'S PRE-APPROVAL POLICY AND PROCEDURES
The Audit Committee's policy is to pre-approve all audit and permissible
non-audit services provided by the independent auditors. These services may
include audit services, audit-related services, tax services and other services.
Pre-approval is detailed as to the particular service or category of service and
is subject to a specific engagement authorization.
During the year, circumstances may arise when it may become necessary to
engage the independent auditors for additional services not contemplated in the
original pre-approval. In those instances, the Audit Committee requires specific
pre-approval before engaging the independent auditors. The Audit Committee has
delegated pre-approval authority to the Chairman of the Audit Committee for
those instances when pre-approval is needed prior to a scheduled Audit Committee
meeting. The Chairman of the Audit Committee must report on such approvals at
the next scheduled Audit Committee meeting.
All fiscal year 2003 and 2002 audit and non-audit services provided by the
independent auditors were pre-approved.
58
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a)(1) AND (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
See "Index to Financial Statements" set forth on page F-1.
(a)(3) EXHIBITS
2.1(a) Third Amended Joint Chapter 11 Plan of the Debtors
(incorporated by reference to Exhibit 2.1 to current report on
Form 8-K/A for EOTT Energy Partners, L.P. dated December 17,
2002)
2.1(b) Supplement/Amendment to Third Amended Joint Chapter 11 Plan of
the Debtors and Glossary of Defined Terms (incorporated by
reference to Exhibit 2.2 to current report on Form 8-K for
EOTT Energy Partners, L.P. dated March 4, 2003)
2.2 Third Amended Disclosure Statement Under 11 U.S.C. Section
1125 In Support of the Joint Chapter 11 Plan of the Debtors
(incorporated by reference to Exhibit 2.2 to current report on
Form 8-K/A for EOTT Energy Partners, L.P. dated December 17,
2002)
3.1(a) Certificate of Formation of EOTT Energy L.L.C., dated as of
November 13, 2002 (incorporated by reference to Exhibit 3.1 to
Annual Report on Form 10-K for EOTT Energy L.L.C. for the year
ended December 31, 2002)
3.1(b) Amended and Restated Limited Liability Company Agreement of
EOTT Energy L.L.C., dated as of March 1, 2003 (incorporated by
reference to Exhibit 3.2 to Annual Report on Form 10-K for
EOTT Energy L.L.C. for the year ended December 31, 2002)
3.1(c) Amendment No. 1 to Amended and Restated Limited Liability
Company Agreement of EOTT Energy L.L.C. effective as of
October 1, 2003 (incorporated by reference to Exhibit 3.4 to
Quarterly Report on Form 10-Q for EOTT Energy L.L.C. for the
quarterly period ended September 30, 2003)
3.1(d) Certificate of Amendment to Certificate of Formation of EOTT
Energy L.L.C. effective as of October 1, 2003 (incorporated by
reference to Exhibit 3.3 to Quarterly Report on Form 10-Q for
EOTT Energy L.L.C. for the quarterly period ended September
30, 2003)
3.2 Certificate of Merger of EOTT Energy Partners, L.P. into EOTT
Energy Operating Limited Partnership, filed on March 4, 2003
(incorporated by reference to Exhibit 3.3 to Annual Report on
Form 10-K for EOTT Energy L.L.C. for the year ended December
31, 2002)
3.3(a) Form of Amended and Restated Agreement of Limited Partnership
of EOTT Energy Operating Limited Partnership (incorporated by
reference to Exhibit 10.11 to Registration Statement for EOTT
Energy Partners, L.P., File No. 33-73984)
3.3(b) Amendment No. 1 dated as of September 1, 1999 to Amended and
Restated Agreement of Limited Partnership of EOTT Energy
Operating Limited Partnership (incorporated by reference to
Exhibit 3.2 to current report on Form 8-K for EOTT Energy
Partners, L.P. dated September 29, 1999)
3.3(c) Amendment No. 2 dated as of August 29, 2001 to Amended and
Restated Agreement of Limited Partnership of EOTT Energy
Operating Limited Partnership (incorporated by reference to
Exhibit 3.10 to Current Report on Form 8-K/A for EOTT Energy
Partners, L.P. dated August 30, 2001)
59
3.3(d) Amendment No. 3 to Amended and Restated Agreement of Limited
Partnership of EOTT Energy Operating Limited Partnership
effective as of October 1, 2003 (incorporated by reference to
Exhibit 3.8 to Quarterly Report on Form 10-Q for EOTT Energy
L.L.C. for the quarterly period ended September 30, 2003)
3.3(e) Certificate of Amendment to Certificate of Limited Partnership
of EOTT Energy Operating Limited Partnership effective as of
October 1, 2003 (incorporated by reference to Exhibit 3.7 to
Quarterly Report on Form 10-Q for EOTT Energy L.L.C. for the
quarterly period ended September 30, 2003)
3.4(a) Form of Amended and Restated Agreement of Limited Partnership
of EOTT Energy Pipeline Limited Partnership (incorporated by
reference to Exhibit 3.8 to Registration Statement for EOTT
Energy Partners, L.P., File No. 33-82269)
3.4(b) Amendment No. 1 dated as of September 1, 1999, to Amended and
Restated Agreement of Limited Partnership of EOTT Energy
Pipeline Limited Partnership (incorporated by reference to
Exhibit 3.3 to current report on Form 8-K dated September 29,
1999)
3.4(c) Amendment No. 2 dated as of August 29, 2001 to Amended and
Restated Agreement of Limited Partnership of EOTT Energy
Pipeline Limited Partnership (incorporated by reference to
Exhibit 3.11 to Current Report on Form 8-K/A for EOTT Energy
Partners, L.P. dated August 30, 2001)
3.4(d) Amendment No. 3 to Amended and Restated Agreement of Limited
Partnership of EOTT Energy Pipeline Limited Partnership
effective as of October 1, 2003 (incorporated by reference to
Exhibit 3.12 to Quarterly Report on Form 10-Q for EOTT Energy
L.L.C. for the quarterly period ended September 30, 2003)
3.4(e) Certificate of Amendment to Certificate of Limited Partnership
of EOTT Energy Pipeline Limited Partnership effective as of
October 1, 2003 (incorporated by reference to Exhibit 3.11 to
Quarterly Report on Form 10-Q for EOTT Energy L.L.C. for the
quarterly period ended September 30, 2003)
3.5(a) Amended and Restated Agreement of Limited Partnership of EOTT
Energy Canada Limited Partnership (incorporated by reference
to Exhibit 3.9 to Registration Statement for EOTT Energy
Partners, L.P., File No. 33-82269)
3.5(b) Amendment No. 1 dated as of September 1, 1999, to Amended and
Restated Agreement of Limited Partnership of EOTT Energy
Canada Limited Partnership (incorporated by reference to
Exhibit 3.2 to current report on Form 8-K for EOTT Energy
Partners, L.P. dated September 29, 1999)
3.5(c) Amendment No. 2 dated as of August 29, 2001 to Amended and
Restated Agreement of Limited Partnership of EOTT Energy
Canada Limited Partnership (incorporated by reference to
Exhibit 3.12 to Current Report on Form 8-K/A for EOTT Energy
Partners, L.P. dated August 30, 2001)
3.5(d) Amendment No. 3 to Amended and Restated Agreement of Limited
Partnership of EOTT Energy Canada Limited Partnership
effective as of October 1, 2003 (incorporated by reference to
Exhibit 3.10 to Quarterly Report on Form 10-Q for EOTT Energy
L.L.C. for the quarterly period ended September 30, 2003)
3.5(e) Certificate of Amendment to Certificate of Limited Partnership
of EOTT Energy Canada Limited Partnership effective as of
October 1, 2003 (incorporated by reference to Exhibit 3.9 to
Quarterly Report on Form 10-Q for EOTT Energy L.L.C. for the
quarterly period ended September 30, 2003)
3.6 Agreement of Limited Partnership dated as of June 28, 2001 of
EOTT Energy Liquids, L.P. (incorporated by reference to
Exhibit 3.13 to Quarterly Report on Form 10-Q for
60
EOTT Energy Partners, L.P. for the quarterly period ended
September 30, 2001)
3.7(a) Limited Liability Company Agreement dated as of June 27, 2001
of EOTT Energy General Partner, L.L.C. (incorporated by
reference to Exhibit 3.14 to Quarterly Report on Form 10-Q for
EOTT Energy Partners, L.P. for the quarterly period ended
September 30, 2001)
3.7(b) Amendment No. 1 to Limited Liability Company Agreement of EOTT
Energy General Partner, L.L.C. effective as of August 29, 2001
(incorporated by reference to Exhibit 3.15 to Quarterly Report
on Form 10-Q for EOTT Energy Partners, L.P. for the quarterly
period ended September 30, 2001)
3.7(c) Amendment No. 2 to Limited Liability Company Agreement of EOTT
Energy General Partner, L.L.C. effective as of October 1, 2003
(incorporated by reference to Exhibit 3.6 to Quarterly Report
on Form 10-Q for EOTT Energy L.L.C. for the quarterly period
ended September 30, 2003)
3.8 Certificate of Amendment to Certificate of Formation of EOTT
Energy General Partner, L.L.C. effective as of October 1, 2003
(incorporated by reference to Exhibit 3.5 to Quarterly Report
on Form 10-Q for EOTT Energy L.L.C. for the quarterly period
ended September 30, 2003)
3.9(a) Certificate of Incorporation of EOTT Energy Finance Corp.
dated July 1, 1999 (incorporated by reference to Exhibit 3.10
to Registration Statement for EOTT Energy Partners, L.P., File
No. 33-82269)
3.9(b) Certificate of Amendment to Certificate of Incorporation of
EOTT Energy Finance Corp. effective as of October 1, 2003
(incorporated by reference to Exhibit 3.13 to Quarterly Report
on Form 10-Q for EOTT Energy L.L.C. for the quarterly period
ended September 30, 2003)
4.1 Indenture among EOTT Energy L.L.C., EOTT Energy Finance Corp.,
the Subsidiary Guarantors and the Bank of New York, as
trustee, for 9% Senior Notes due 2010, dated March 1, 2003
(incorporated by reference to Exhibit T3C to Amendment No. 1
to EOTT Energy LLC's Application for Qualification of
Indenture on Form T-3 dated April 4, 2003)
4.2 Form of Warrant Agreement dated as of March 1, 2003
(incorporated by reference to Exhibit 4.2 to Annual Report on
Form 10-K for EOTT Energy L.L.C. for the year ended December
31, 2002)
4.3 Form of Registration Rights Agreement, by and between EOTT
Energy LLC and Unitholders dated as of March 1, 2003
(incorporated by reference to Exhibit 4.3 to Annual Report on
Form 10-K for EOTT Energy L.L.C. for the year ended December
31, 2002)
***10.1(a) Crude Oil Supply and Terminalling Agreement dated as of
December 1, 1998 between Koch Oil Company and EOTT Energy
Operating Limited Partnership (incorporated by reference to
Exhibit 10.23 to Annual Report on Form 10-K for EOTT Energy
Partners, L.P. for the year ended December 31, 1998)
***10.1(b) Amendment dated December 1, 1998 to the Crude Oil Supply and
Terminalling Agreement dated as of December 1, 1998 between
Koch Oil Company and EOTT Energy Operating Limited Partnership
(incorporated by reference to Exhibit 10.28 to Annual Report
on Form 10-K for EOTT Energy Partners, L.P. for the year ended
December 31, 1998)
***10.1(c) Letter Agreement dated September 14, 2000 amending Crude Oil
Supply and Terminalling Agreement (incorporated by reference
to Exhibit 10.34 to Quarterly Report on Form 10-Q for EOTT
Energy Partners, L.P. for the quarterly period ended September
61
30, 2000)
***10.1(d) Letter Agreement dated February 6, 2001 amending Crude Oil
Supply and Terminalling Agreement dated December 1, 1998
(incorporated by reference to Exhibit 10.37 to Annual Report
on Form 10-K for EOTT Energy Partners, L.P. for the year ended
December 31, 2000)
****10.1(e) Letter Agreement dated June 27, 2001 amending Crude Oil
Supply and Terminalling Agreement dated December 1, 1998
(incorporated by reference to Exhibit 10.24 to Annual Report
on Form 10-K for EOTT Energy Partners, L.P. for the year ended
December 31, 2001)
****10.1(f) Letter Agreement dated August 23, 2001 amending Crude Oil
Supply and Terminalling Agreement dated December 1, 1998
(incorporated by reference to Exhibit 10.25 to Annual Report
on Form 10-K for EOTT Energy Partners, L.P. for the year ended
December 31, 2001)
10.1(g) Letter Agreement dated December 18, 2001 amending Crude Oil
Supply and Terminalling Agreement dated December 1, 1998
(incorporated by reference to Exhibit 10.26 to Annual Report
on Form 10-K for EOTT Energy Partners, L.P. for the year ended
December 31, 2001)
****10.1(h) Letter Agreement dated January 9, 2002 amending Crude Oil
Supply and Terminalling Agreement dated December 1, 1998
(incorporated by reference to Exhibit 10.27 to Annual Report
on Form 10-K for EOTT Energy Partners, L.P. for the year ended
December 31, 2001)
10.1(i) Letter Agreement dated May 17, 2002 amending Crude Oil Supply
and Terminalling Agreement dated December 1, 1998
(incorporated by reference to Exhibit 10.16 to Annual Report
on Form 10-K for EOTT Energy L.L.C. for the year ended
December 31, 2002)
10.1(j) Letter Agreement dated May 17, 2002 amending Crude Oil Supply
and Terminalling Agreement dated December 1, 1998
(incorporated by reference to Exhibit 10.17 to Annual Report
on Form 10-K for EOTT Energy L.L.C. for the year ended
December 31, 2002)
10.1(k) Letter Agreement dated June 26, 2002 amending Crude Oil Supply
and Terminalling Agreement dated December 1, 1998
(incorporated by reference to Exhibit 10.18 to Annual Report
on Form 10-K for EOTT Energy L.L.C. for the year ended
December 31, 2002)
10.1(l) Letter Agreement dated October 3, 2002 amending Crude Oil
Supply and Terminalling Agreement dated December 1, 1998
(incorporated by reference to Exhibit 10.19 to Annual Report
on Form 10-K for EOTT Energy L.L.C. for the year ended
December 31, 2002)
****10.1(m) Letter Agreement dated June 20, 2003 amending Crude Oil Supply
and Terminalling Agreement dated December 1, 1998
(incorporated by reference to Exhibit 10.1 to Quarterly Report
on Form 10-Q for EOTT Energy L.L.C. for the quarterly period
ended June 30, 2003)
10.2 Settlement Agreement by and among EOTT Energy Partners, L.P.
and certain of its subsidiaries and Enron Corp. and certain of
its affiliates, dated as of October 8, 2002 (incorporated by
reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for
EOTT Energy Partners, L.P. for the quarterly period ended
September 30, 2002)
10.3 Restructuring Agreement by and among EOTT Energy Partners,
L.P. and certain of its subsidiaries and Enron Corp. and
certain of its affiliates, Standard Chartered Bank PLC,
62
Standard Chartered Trade Services Corporation, Lehman
Commercial Paper, Inc., and Certain Holders of the Company's
11% Senior Notes Due 2009, dated as of October 7, 2002
(incorporated by reference to Exhibit 10.3 to Quarterly Report
on Form 10-Q for EOTT Energy Partners, L.P. for the quarterly
period ended September 30, 2002)
10.4(a) Letter of Credit Agreement among EOTT Energy Operating Limited
Partnership, EOTT Energy Canada Limited Partnership, EOTT
Energy Liquids, L.P., and EOTT Energy Pipeline Limited
Partnership, as joint and several Borrowers, EOTT Energy LLC
and EOTT Energy General Partner, L.L.C., as Guarantors,
Standard Chartered Bank, as LC Agent, LC Issuer, and
Collateral Agent and the LC Participants hereto, dated as of
February 11, 2003 (incorporated by reference to Exhibit 10.42
to Annual Report on Form 10-K for EOTT Energy L.L.C. for the
year ended December 31, 2002)
10.4(b) Amendment No. 1 dated September 29, 2003 to the Letter of
Credit Agreement among EOTT Energy Operating Limited
Partnership, EOTT Energy Canada Limited Partnership, EOTT
Energy Liquids, L.P., and EOTT Energy Pipeline Limited
Partnership, as joint and several Borrowers, EOTT Energy LLC
and EOTT Energy General Partner, L.L.C., as Guarantors,
Standard Chartered Bank, as LC Agent, LC Issuer, and
Collateral Agent and the LC Participants hereto, dated as of
February 11, 2003 (incorporated by reference to Exhibit 10.5
to Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2003)
*10.4(c) Amendment No. 2 dated November 14, 2003 to the Letter of
Credit Agreement among Link Energy Limited Partnership, Link
Energy Canada Limited Partnership, EOTT Energy Liquids, L.P.,
and Link Energy Pipeline Limited Partnership, as joint and
several Borrowers, Link Energy LLC, Link Energy General
Partners LLC, as Guarantors, Standard Chartered Bank, as LC
Agent, LC Issuer, and Collateral Agent, and the LC
Participants thereto, dated as of February 11, 2003.
*10.4(d) Amendment No. 3 dated November 20, 2003 to the Letter of
Credit Agreement among Link Energy Limited Partnership, Link
Energy Canada Limited Partnership, EOTT Energy Liquids, L.P.,
and Link Energy Pipeline Limited Partnership, as joint and
several Borrowers, Link Energy LLC, Link Energy General
Partners LLC, as Guarantors, Standard Chartered Bank, as LC
Agent, LC Issuer, and Collateral Agent, and the LC
Participants thereto, dated as of February 11, 2003.
*10.4(e) Amendment No. 4 dated March 9, 2004 to the Letter of Credit
Agreement among Link Energy Limited Partnership, Link Energy
Canada Limited Partnership, EOTT Energy Liquids, L.P., and
Link Energy Pipeline Limited Partnership, as joint and several
Borrowers, Link Energy LLC, Link Energy General Partners LLC,
as Guarantors, Standard Chartered Bank, as LC Agent, LC
Issuer, and Collateral Agent, and the LC Participants thereto,
dated as of February 11, 2003.
*10.4(f) Limited Waiver to Letter of Credit Agreement, Second Amended
and Restated Commodities Repurchase Agreement and Second
Amended and Restated Receivables Purchase Agreement dated as
of November 14, 2003, by and among Link Energy Limited
Partnership, Link Energy Canada Limited Partnership, EOTT
Energy Liquids, L.P., and Link Energy Pipeline Limited
Partnership, as joint and several Borrowers, Link
63
Energy LLC, Link Energy General Partners LLC, as Guarantors,
Standard Chartered Bank, as LC Agent, LC Issuer, and
Collateral Agent, and the LC Participants thereto, dated as of
February 11, 2003.
*10.4(g) Limited Waiver to Letter of Credit Agreement, Second Amended
and Restated Commodities Repurchase Agreement and Second
Amended and Restated Receivables Purchase Agreement dated as
of November 18, 2003, by and among Link Energy Limited
Partnership, Link Energy Canada Limited Partnership, EOTT
Energy Liquids, L.P., and Link Energy Pipeline Limited
Partnership, as joint and several Borrowers, Link Energy LLC,
Link Energy General Partners LLC, as Guarantors, Standard
Chartered Bank, as LC Agent, LC Issuer, and Collateral Agent,
and the LC Participants thereto, dated as of February 11,
2003.
*10.4(h) Limited Waiver to Letter of Credit Agreement, Second Amended
and Restated Commodities Repurchase Agreement and Second
Amended and Restated Receivables Purchase Agreement dated as
of January 15, 2004, by and among Link Energy Limited
Partnership, Link Energy Canada Limited Partnership, EOTT
Energy Liquids, L.P., and Link Energy Pipeline Limited
Partnership, as joint and several Borrowers, Link Energy LLC,
Link Energy General Partners LLC, as Guarantors, Standard
Chartered Bank, as LC Agent, LC Issuer, and Collateral Agent,
and the LC Participants thereto, dated as of February 11,
2003.
*10.4(i) Limited Waiver to Letter of Credit Agreement, Second Amended
and Restated Commodities Repurchase Agreement and Second
Amended and Restated Receivables Purchase Agreement dated as
of March 9, 2004, by and among Link Energy Limited
Partnership, Link Energy Canada Limited Partnership, EOTT
Energy Liquids, L.P., and Link Energy Pipeline Limited
Partnership, as joint and several Borrowers, Link Energy LLC,
Link Energy General Partners LLC, as Guarantors, Standard
Chartered Bank, as LC Agent, LC Issuer, and Collateral Agent,
and the LC Participants thereto, dated as of February 11,
2003.
10.5(a) Term Loan Agreement among EOTT Energy Operating Limited
Partnership, EOTT Energy Canada Limited Partnership, EOTT
Energy Liquids, L.P. and EOTT Energy Pipeline Limited
Partnership, as joint and several Borrowers, EOTT Energy LLC
and EOTT Energy General Partner, L.L.C., as Guarantors, Lehman
Brothers Inc., as Term Lender Agent and the Term Lenders
hereto, dated as of February 11, 2003 (incorporated by
reference to Exhibit 10.43 to Annual Report on Form 10-K for
EOTT Energy L.L.C. for the year ended December 31, 2002)
*10.5(b) Limited Waiver to Term Loan Agreement dated as of November 14,
2003, by and among Link Energy Limited Partnership, Link
Energy Canada Limited Partnership, EOTT Energy Liquids, L.P.,
and Link Energy Pipeline Limited Partnership, as joint and
several Borrowers, Link Energy LLC, Link Energy General
Partners LLC, as Guarantors, Lehman Brothers Inc., as Term
Lender Agent and the Term Lenders hereto, dated as of February
11, 2003.
*10.5(c) Limited Waiver to Lehman Credit Agreement dated as of November
18, 2003, by and among Link Energy Limited Partnership, Link
Energy Canada Limited Partnership, EOTT Energy Liquids, L.P.,
and Link Energy Pipeline Limited Partnership, as joint and
several Borrowers, Link Energy LLC, Link Energy General
Partners LLC, as Guarantors, Lehman Brothers Inc., as Term
Lender Agent and the Term Lenders hereto, dated as of February
11, 2003.
*10.5(d) Limited Waiver to Lehman Credit Agreement dated as of January
15, 2004, by and among Link Energy Limited Partnership, Link
Energy Canada Limited Partnership, EOTT Energy Liquids, L.P.,
and Link Energy Pipeline Limited Partnership, as joint and
several Borrowers, Link Energy LLC, Link Energy General
Partners LLC, as Guarantors, Lehman Brothers Inc., as Term
Lender Agent and the Term Lenders hereto, dated as of February
11, 2003.
10.6(a) Second Amended and Restated Commodities Repurchase Agreement,
by and among EOTT Energy Operating Limited Partnership,
Standard Chartered Trade Services Corporation, Standard
Chartered Bank, as collateral agent, dated as of February 11,
2003 (incorporated by reference to Exhibit 10.44 to Annual
Report on Form 10-K for EOTT Energy L.L.C. for the year ended
December 31, 2002)
64
10.6(b) Amendment No. 1 dated August 29, 2003 to the Second Amended
and Restated Commodities Repurchase Agreement, by and among
EOTT Energy Operating Limited Partnership, Standard Chartered
Trade Services Corporation, Standard Chartered Bank, as
collateral agent, dated as of February 11, 2003 (incorporated
by reference to Exhibit 10.7 to Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2003)
*10.6(c) Amendment No. 2 dated November 20, 2003 to the Second Amended
and Restated Commodities Repurchase Agreement, by and among
Link Energy Limited Partnership, Standard Chartered Trade
Services Corporation, Standard Chartered Bank, as collateral
agent, dated as of February 11, 2003
*10.6(d) Amendment No. 3 dated February 24, 2004 to the Second Amended
and Restated Commodities Repurchase Agreement, by and among
Link Energy Limited Partnership, Standard Chartered Trade
Services Corporation, Standard Chartered Bank, as collateral
agent, dated as of February 11, 2003
10.7(a) Second Amended and Restated Receivables Purchase Agreement, by
and among EOTT Energy Operating Limited Partnership, Standard
Chartered Trade Services Corporation, Standard Chartered Bank,
as collateral agent, dated as of February 11, 2003
(incorporated by reference to Exhibit 10.45 to Annual Report
on Form 10-K for EOTT Energy L.L.C. for the year ended
December 31, 2002)
10.7(b) Amendment No. 1 dated August 29, 2003 to the Second Amended
and Restated Receivables Repurchase Agreement, by and among
EOTT Energy Operating Limited Partnership, Standard Chartered
Trade Services, Standard Chartered, as collateral agent, dated
as of February 11, 2003 (incorporated by reference to Exhibit
10.8 to Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2003)
*10.7(c) Amendment No. 2 dated February 24, 2004 to the Second Amended
and Restated Receivables Repurchase Agreement, by and among
Link Energy Limited Partnership, Standard Chartered Trade
Services, Standard Chartered, as collateral agent, dated as of
February 11, 2003.
10.8 Intercreditor and Security Agreement among EOTT Energy
Operating Limited Partnership, EOTT Energy Canada Limited
Partnership, EOTT Energy Liquids, L.P., and EOTT Energy
Pipeline Limited Partnership, as joint and several Borrowers,
and EOTT Energy LLC and EOTT Energy General Partner, L.L.C.,
as joint and several Guarantors, and Standard Chartered Bank,
Lehman Brothers, Inc., and Standard Chartered Trade Services
Corporation and various other Secured Parties and Standard
Chartered Bank, as collateral agent, dated as of March 1, 2003
(incorporated by reference to Exhibit 10.46 to Annual Report
on Form 10-K for EOTT Energy L.L.C. for the year ended
December 31, 2002)
*10.9 Extension Letter Agreement dated February 24, 2004 by and
between Link Energy Limited Partnership and Standard Chartered
Trade Services Corporation
10.10 Form of Administrative Services Agreement by and between EOTT
Energy LLC and EOTT Energy General Partner, L.L.C., effective
January 1, 2003 (incorporated by reference to Exhibit 10.1 to
Quarterly Report on Form 10-Q for EOTT Energy LLC for the
quarterly period ended March 31, 2003)
+10.11 Executive Employment Agreement between EOTT Energy LLC and
Thomas M. Matthews, effective as of July 1, 2003 (incorporated
by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2003)
+10.12 Executive Employment Agreement between EOTT Energy LLC and H.
Keith Kaelber, effective as of July 1, 2003 (incorporated by
reference to Exhibit 10.3 to Quarterly
65
Report on Form 10-Q for the quarterly period ended June 30,
2003)
+10.13 Executive Employment Agreement between EOTT Energy LLC and
Dana R. Gibbs, effective as of July 1, 2003 (incorporated by
reference to Exhibit 10.4 to Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2003)
+10.14 Letter of Offering from EOTT Energy LLC to James R. Allred
dated June 10, 2003 (incorporated by reference to Exhibit 10.5
to Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2003)
+10.15 EOTT Energy LLC Equity Incentive Plan (incorporated by
reference to Exhibit 10.9 to Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2003)
*+10.16 Form of Employee Change in Control Agreement, effective
January 1, 2004
**10.17 Crude Oil Joint Marketing Agreement dated November 20, 2003,
effective January 1, 2004, between Chevron Texaco Global
Trading and Link Energy Limited Partnership.
*21.1 Subsidiaries of the Registrant
*31.1 Section 302 Certification of Thomas M. Matthews
*31.2 Section 302 Certification of H. Keith Kaelber
*32.1 Section 906 Certification of Thomas M. Matthews and H. Keith
Kaelber
* Filed herewith.
** Filed herewith, but confidential treatment has been requested with
respect to certain portions of this exhibit.
*** Certain portions of this exhibit have been treated confidentially.
**** Confidential treatment has been requested with respect to certain
portions of this exhibit.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K by Item 601(b)(10)(iii) of
Regulation S-K.
(b) REPORTS ON FORM 8-K
On November 17, 2003, we filed a Current Report on Form 8-K to furnish
information under Item 9 regarding control deficiencies with inventory and
accounts payable reconciliation procedures in our pipelines and liquids
operations.
On March 16, 2004, we filed a Current Report on Form 8-K to furnish
information under Item 5 regarding the late filing of our Annual Report on Form
10-K for the year ended December 31, 2003 and an update on business
developments.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized on the 30th day of
March, 2004.
LINK ENERGY LLC
(A Delaware Limited Liability Company)
By: /s/ THOMAS M. MATTHEWS
___________________________________
Thomas M. Matthews
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/ THOMAS M. MATTHEWS Chairman of the Board and
- -------------------------------------------- Chief Executive Officer March 30, 2004
Thomas M. Matthews
/s/ J. ROBERT CHAMBERS Director
- -------------------------------------------- March 30, 2004
J. Robert Chambers
/s/ JULIE H. EDWARDS Director
- -------------------------------------------- March 30, 2004
Julie H. Edwards
/s/ ROBERT E. OGLE Director
- -------------------------------------------- March 30, 2004
Robert E. Ogle
/s/ JAMES M. TIDWELL Director
- -------------------------------------------- March 30, 2004
James M. Tidwell
/s/ S. WIL VANLOH, JR. Director
- -------------------------------------------- March 30, 2004
S. Wil VanLoh, Jr.
/s/ DANIEL J. ZALOUDEK Director
- -------------------------------------------- March 30, 2004
Daniel J. Zaloudek
/s/ H. KEITH KAELBER Executive Vice President
- -------------------------------------------- and Chief Financial Officer March 30, 2004
H. Keith Kaelber
/s/ LORI L. MADDOX Vice President and
- -------------------------------------------- Controller March 30, 2004
Lori L. Maddox
67
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
INDEX TO FINANCIAL STATEMENTS
Page
----
Financial Statements
Report of Independent Auditors (Successor Company)....................................... F-2
Report of Independent Auditors (Predecessor Company)..................................... F-3
Consolidated Statements of Operations -
Ten Months Ended December 31, 2003 (Successor Company)
Two Months Ended February 28, 2003 (Predecessor Company) and
Years Ended December 31, 2002 and 2001 (Predecessor Company)......................... F-4
Consolidated Balance Sheets - December 31, 2003 (Successor Company)
and 2002 (Predecessor Company)....................................................... F-5
Consolidated Statements of Cash Flows -
Ten Months Ended December 31, 2003 (Successor Company)
Two Months Ended February 28, 2003 (Predecessor Company) and
Years Ended December 31, 2002 and 2001 (Predecessor Company)......................... F-6
Consolidated Statements of Members'/Partners' Capital -
Ten Months Ended December 31, 2003 (Successor Company)
Two Months Ended February 28, 2003 (Predecessor Company) and
Years Ended December 31, 2002 and 2001 (Predecessor Company)......................... F-7
Notes to Consolidated Financial Statements............................................... F-8
Supplemental Schedule
Schedule II - Valuation and Qualifying Accounts and Reserves............................. S-1
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Unitholders of Link Energy LLC:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, members' capital and cash flows present
fairly, in all material respects, the financial position of Link Energy LLC and
its subsidiaries (Successor Company) at December 31, 2003 and the results of
their operations and their cash flows for the period from March 1, 2003 to
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and the financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audit. We conducted our
audit of these 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 audit provides a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the United
States Bankruptcy Court for the Southern District of Texas confirmed the
Company's voluntary petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code (the "plan") on February 18, 2003, to be effective March 1,
2003. In connection with its emergence from bankruptcy, the Company adopted
fresh start accounting as of February 28, 2003.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 3. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 30, 2004
F-2
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Unitholders of Link Energy LLC:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, partners' capital and cash flows present
fairly, in all material respects, the financial position of EOTT Energy
Partners, L.P. and its subsidiaries (Predecessor Company) at December 31, 2002
and the results of their operations and their cash flows for the period from
January 1, 2003 to February 28, 2003, and for each of the two years in the
period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and the financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these 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.
As discussed in Note 1 to the consolidated financial statements, the
Company filed a petition on October 8, 2002 with the United States Bankruptcy
Court for the Southern District of Texas for reorganization under the provisions
of Chapter 11 of the U.S. Bankruptcy Code. The Company's reorganization plan was
confirmed on February 18, 2003, to be effective on March 1, 2003. In connection
with its emergence from bankruptcy, the Company adopted fresh start accounting
as of February 28, 2003.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
3 to the consolidated financial statements, the Company has suffered recurring
losses from operations and has a net capital deficiency that raises substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 3. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
As discussed in Note 20 to the consolidated financial statements, the
Company adopted the provisions of Emerging Issues Task Force Issue 02-03,
"Issues involved in Accounting for Derivative Contracts Held for Trading
Purposes and Contracts Involved in Energy Trading and Risk Management
Activities," related to the rescission of Emerging Issues Task Force Issue
98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management
Activities," as of January 1, 2003. As discussed in Note 20 to the consolidated
financial statements, the Company changed its method of accounting for asset
retirement obligations as of January 1, 2003.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 30, 2004
F-3
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Unit Amounts)
SUCCESSOR COMPANY | PREDECESSOR COMPANY
----------------- | ---------------------------------------------
TEN MONTHS | TWO MONTHS YEAR ENDED DECEMBER 31,
ENDED | ENDED -------------------------
DECEMBER 31, 2003 | FEBRUARY 28, 2003 2002 2001
----------------- | ----------------- --------- ---------
|
Operating Revenue ............................... $ 152,676 | $ 31,979 $ 182,942 $ 250,573
|
Cost of Sales ................................... 23,995 | 5,155 24,489 42,900
Operating Expenses .............................. 70,102 | 13,020 94,274 97,969
Depreciation and Amortization-operating ......... 17,139 | 4,123 26,621 27,802
--------- | --------- --------- ---------
|
Gross Profit .................................... 41,440 | 9,681 37,558 81,902
|
Selling, General and Administrative Expenses .... 45,959 | 6,846 53,480 45,051
Depreciation and Amortization-corporate & other . 22 | 519 3,267 3,083
Other (Income) Expense .......................... (13,867) | (8) 6,710 (1,092)
Impairment of Assets ............................ - | - 1,168 -
--------- | --------- --------- ---------
|
Operating Income (Loss) ......................... 9,326 | 2,324 (27,067) 34,860
|
Interest Expense and Related Charges ............ (32,708) | (5,645) (45,876) (35,363)
Interest Income ................................. 77 | 58 127 1,319
Other, net ...................................... 115 | 98 (44) (517)
--------- | --------- --------- ---------
|
Income (Loss) from Continuing Operations Before |
Reorganization Items, Net Gain on Discharge |
of Debt and Fresh Start Adjustments ......... (23,190) | (3,165) (72,860) 299
|
Reorganization Items ............................ - | (7,330) 32,847 -
Net Gain on Discharge of Debt (Note 5) .......... - | 131,560 - -
Fresh Start Adjustments (Note 6) ................ - | (56,771) - -
--------- | --------- --------- ---------
|
Income (Loss) from Continuing Operations ........ (23,190) | 64,294 (40,013) 299
|
Loss from Discontinued Operations (Note 8) ...... (30,639) | (51) (61,718) (16,605)
--------- | --------- --------- ---------
|
Income (Loss) Before Cumulative Effect of |
Accounting Change ........................... (53,829) | 64,243 (101,731) (16,306)
Cumulative Effect of Accounting Change |
(Notes 2 & 20) .............................. - | (3,976) - 1,073
--------- | --------- --------- ---------
|
Net Income (Loss) ............................... $ (53,829) | $ 60,267 $(101,731) $ (15,233)
========= | ========= ========= =========
|
Basic Net Income (Loss) Per Unit (Note 12) |
LLC Unit .................................. $ (4.37) | $ N/A $ N/A $ N/A
========= | ========= ========= =========
Common Unit ............................... $ N/A | $ 0.12 $ (0.01) $ (0.54)
========= | ========= ========= =========
Subordinated Unit ......................... $ N/A | $ - $ (3.24) $ (0.54)
========= | ========= ========= =========
Diluted Net Income (Loss) Per Unit (Note 12) .... $ (4.37) | $ 0.08 $ (1.07) $ (0.54)
========= | ========= ========= =========
Distributions Per Unit ..................... $ - | $ - $ 0.25 $ 1.90
========= | ========= ========= =========
|
Average Units Outstanding for Diluted Computation 12,331 | 27,476 27,476 27,476
========= | ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
CONSOLIDATED BALANCE SHEETS
(In Thousands)
SUCCESSOR COMPANY | PREDECESSOR COMPANY
----------------- | -------------------
DECEMBER 31, 2003 | DECEMBER 31, 2002
----------------- | -----------------
|
ASSETS |
Current Assets |
Cash and cash equivalents ............................. $ 2,450 | $ 16,432
Restricted cash (Note 8) .............................. 6,045 | -
Trade and other receivables, net of allowance for |
doubtful accounts of $1,210 and $1,210, respectively 446,030 | 407,096
Inventories of continuing operations .................. 7,636 | 16,168
Inventories of discontinued operations ................ - | 17,386
Other ................................................. 6,283 | 23,888
--------- | ---------
Total current assets ............................... 468,444 | 480,970
--------- | ---------
|
Property, Plant and Equipment ............................. 278,724 | 546,410
Less: Accumulated depreciation ....................... 16,214 | 205,351
--------- | ---------
Net property, plant and equipment .................. 262,510 | 341,059
--------- | ---------
|
Long-lived assets of discontinued operations .............. 838 | 39,899
Goodwill .................................................. - | 7,436
Other Assets .............................................. 6,852 | 4,070
--------- | ---------
|
Total Assets .............................................. $ 738,644 | $ 873,434
========= | =========
|
LIABILITIES AND MEMBERS'/PARTNERS' CAPITAL |
|
Current Liabilities |
Trade and other accounts payable ...................... $ 476,509 | $ 389,346
Accrued taxes payable ................................. 6,700 | 11,327
Term loans (Note 4) ................................... 75,000 | 75,000
Commodity repurchase agreement (Note 4) ............... 18,000 | 75,000
Receivable financing (Note 4) ......................... 27,000 | 50,000
Other ................................................. 27,982 | 23,274
--------- | ---------
Total current liabilities .......................... 631,191 | 623,947
--------- | ---------
|
Long -Term Liabilities |
Senior notes (Note 4) ................................. 104,451 | -
Other ................................................. 17,399 | 15,817
--------- | ---------
Total long-term liabilities ........................ 121,850 | 15,817
--------- | ---------
|
Liabilities Subject to Compromise (Note 5) ................ - | 292,827
--------- | ---------
|
Commitments and Contingencies (Note 15) |
|
Additional Partnership Interests (Note 18) ................ - | 9,318
--------- | ---------
|
Members'/Partners' Capital (Deficit) |
Partners' Capital (Deficit) ........................... - | (68,475)
Members' Capital (Deficit) ............................ (14,392) | -
Accumulated Other Comprehensive Income (Loss) ......... (5) | -
--------- | ---------
Total ................................................. (14,397) | (68,475)
--------- | ---------
Total Liabilities and Members'/Partners' Capital .......... $ 738,644 | $ 873,434
========= | =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
SUCCESSOR COMPANY | PREDECESSOR COMPANY
----------------- | -------------------------------------------
TEN MONTHS ENDED | TWO MONTHS ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, 2003 | FEBRUARY 28, 2003 2002 2001
----------------- | ----------------- --------- ---------
|
CASH FLOWS FROM OPERATING ACTIVITIES |
Reconciliation of net income (loss) to net cash |
provided by (used in) operating activities |
Net income (loss) ................................... $ (53,829) | $ 60,267 $(101,731) $ (15,233)
Depreciation ........................................ 19,242 | 5,560 35,535 33,469
Amortization of goodwill and other .................. - | - 2,015 2,609
Impairment of assets ................................ 2,751 | - 77,268 29,057
Write-down of liquids operations inventories ........ 4,003 | - - -
Net unrealized change in crude oil trading activities 822 | (2,120) (1,755) 2,053
(Gains) losses on disposal of assets ................ (2,727) | - 984 229
Non-cash compensation expense ....................... 2,306 | - - -
Non-cash net gain for reorganization items and |
discharge of debt ................................... - | (127,185) (37,802) -
Fresh start adjustments ............................. - | 56,771 - -
Changes in components of working capital-- |
Receivables ....................................... (6,475) | (32,177) 94,089 421,680
Inventories ....................................... 13,097 | 7,617 53,133 1,548
Other current assets .............................. 3,192 | 2,428 7,411 (1,780)
Trade accounts payable ............................ 9,613 | 47,845 (97,513) (537,198)
Accrued taxes payable ............................. 1,962 | 1,717 2,481 (1,909)
Other current liabilities ......................... 14,500 | (320) (98) 19,249
Other assets and liabilities ........................ (8,623) | 2,530 682 4,968
--------- | --------- --------- ---------
Net Cash Provided by (Used in) Operating Activities ... (166) | 22,933 34,699 (41,258)
--------- | --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES |
Proceeds from sale of assets .......................... 62,197 | - 2,390 17,209
Increase in restricted cash ........................... (6,045) | - - -
Acquisitions .......................................... - | - - (117,000)
Additions to property, plant and equipment ............ (9,153) | (285) (31,238) (36,228)
--------- | --------- --------- ---------
Net Cash Provided by (Used in) Investing Activities ... 46,999 | (285) (28,848) (136,019)
--------- | --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES |
Increase (decrease) in receivable financing ........... (23,000) | - 7,500 42,500
Increase (decrease) in short-term borrowings .......... - | - (40,000) 40,000
Increase in term loans ................................ - | - 75,000 -
Increase (decrease) in repurchase agreements .......... (57,000) | - (25,000) 100,000
Debt issuance cost .................................... (3,758) | - (750) -
Distributions to unitholders .......................... - | - (4,712) (43,163)
Exercise of warrants .................................. 444 | - - -
Other ................................................. (1,804) | 1,655 (4,398) (13,349)
--------- | --------- --------- ---------
Net Cash Provided by (Used in) Financing Activities ... (85,118) | 1,655 7,640 125,988
--------- | --------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents .......... (38,285) | 24,303 13,491 (51,289)
Cash and Cash Equivalents Beginning of Period ............. 40,735 | 16,432 2,941 54,230
--------- | --------- --------- ---------
Cash and Cash Equivalents End of Period ................... $ 2,450 | $ 40,735 $ 16,432 $ 2,941
========= | ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
Cash Paid for Interest ................................ $ 19,558 | $ 5,599 $ 34,931 $ 33,041
========= | ========= ========= =========
Cash Paid for Reorganization Items .................... $ 6,271 | $ 2,867 $ 4,955 $ -
========= | ========= ========= =========
SUPPLEMENTAL NON CASH INVESTING AND FINANCING INFORMATION |
Discharge of 11% Senior Notes, including accrued |
interest .............................................. $ - | $ 248,481 $ - $ -
========= | ========= ========= =========
Cancellation of additional partnership interests ...... $ - | $ 9,318 $ - $ -
========= | ========= ========= =========
Issuance of 9% Senior Notes and payment of interest in |
kind .................................................. $ 5,200 | $ 104,000 $ - $ -
========= | ========= ========= =========
Issuance of new equity of Successor Company ........... $ - | $ 36,687 $ - $ -
========= | ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF MEMBERS'/PARTNERS' CAPITAL
(In Thousands)
PARTNERS CAPITAL
------------------------------------
ACCUMULATED
OTHER
COMMON SUBORDINATED GENERAL MEMBERS' COMPREHENSIVE
UNITHOLDERS UNITHOLDERS PARTNER CAPITAL INCOME (LOSS) TOTAL
----------- ----------- ------- ------- ------------- -----
Partners' Capital (Deficit) at December 31, 2000
(Unaudited) ....................................... $ 47,832 $ 41,247 $ 7,285 $ - $ - $ 96,364
Net loss ........................................ (10,042) (4,892) (299) - - (15,233)
Cash distribution ............................... (35,105) (7,200) (858) - - (43,163)
--------- --------- --------- --------- --------- ---------
Partners' Capital (Deficit) at December 31, 2001 ....... 2,685 29,155 6,128 - - 37,968
Net loss ........................................ (201) (29,155) (72,375) - - (101,731)
Cash distribution ............................... (4,619) - (93) - - (4,712)
--------- --------- --------- --------- --------- ---------
Partners' Capital (Deficit) at December 31, 2002 ....... (2,135) - (66,340) - - (68,475)
Loss before reorganization items, net gain on
discharge of debt and fresh start adjustments.. - - (7,192) - - (7,192)
Reorganization items and net gain on
discharge of debt.............................. 15,700 36,705 80,033 36,687 - 169,125
Fresh start adjustments ......................... (13,565) (36,705) (6,501) - - (56,771)
--------- --------- --------- --------- --------- ---------
Members' Capital at February 28, 2003
(Successor Company)............................ $ - $ - $ - $ 36,687 $ - $ 36,687
========= ========= ========= ========= ========= =========
___________________________________________________________________________________________________________________________________
Members' Capital at March 1, 2003
(Successor Company)............................ $ - $ - $ - $ 36,687 $ - $ 36,687
Net loss ........................................ - - - (53,829) - (53,829)
Unrealized net losses on derivative instruments
arising during the period ..................... - - - - (160)
Less reclassification adjustment for net realized
losses on derivative instruments
included in net loss ............................ - - - - 155 (5)
---------
Comprehensive loss .............................. (53,834)
---------
Exercise of warrants ............................ - - - 444 - 444
Issuance of restricted units .................... - - - 12,450 - 12,450
Less unearned compensation expense .............. - - - (10,144) - (10,144)
--------- --------- --------- --------- --------- ---------
Members' Capital at December 31, 2003
(Successor Company) ............................. $ - $ - $ - $ (14,392) $ (5) $ (14,397)
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements
F-7
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Name Change and Organization
Effective October 1, 2003, EOTT Energy LLC ("EOTT LLC") changed its name to
Link Energy LLC ("Link LLC"). In connection with our name change, we also
changed the names of several of our subsidiaries as listed in the table below.
NEW NAME FORMER NAME
Link Energy Limited Partnership EOTT Energy Operating Limited Partnership
Link Energy Pipeline Limited Partnership EOTT Energy Pipeline Limited Partnership
Link Energy Canada Limited Partnership EOTT Energy Canada Limited Partnership
Link Energy Finance Corp. EOTT Energy Finance Corp.
Link Energy General Partner LLC EOTT Energy General Partner, L.L.C.
Link Energy Canada, Ltd. EOTT Energy Canada Management Ltd.
Link LLC is a Delaware limited liability company that was formed on
November 14, 2002 in anticipation of assuming and continuing the business
formerly directly owned by EOTT Energy Partners, L.P. (the "MLP"), which, as
described in Note 5 below, filed for Chapter 11 reorganization with its wholly
owned subsidiaries on October 8, 2002. The MLP emerged from bankruptcy and
merged into EOTT Energy Operating Limited Partnership resulting in EOTT LLC
becoming the successor registrant to the MLP on March 1, 2003, the effective
date of the Third Amended Joint Chapter 11 Plan of Reorganization, as
supplemented ("Restructuring Plan"). We operate principally through four
affiliated operating limited partnerships, Link Energy Limited Partnership, Link
Energy Canada Limited Partnership, Link Energy Pipeline Limited Partnership, and
EOTT Energy Liquids, L.P. (see Note 8 for information regarding the disposition
of our Liquids operations), each of which is a Delaware limited partnership.
Link Energy Finance Corp. was formed in order to facilitate certain investors'
ability to purchase our senior notes. Link Energy General Partner, LLC serves as
the general partner for our four affiliated operating limited partnerships.
Until the MLP emerged from bankruptcy, EOTT Energy Corp. (the "General
Partner"), a Delaware corporation and a wholly owned subsidiary of Enron Corp.
("Enron"), served as the general partner of the MLP and owned an approximate
1.98% general partner interest in the MLP. The General Partner filed for
bankruptcy on October 21, 2002. Unless the context otherwise requires, the terms
"we," "our," "us," and "Link" refer to Link Energy LLC and its four affiliated
operating limited partnerships, Link Energy Finance Corp., and Link Energy
General Partner, LLC (the "Subsidiary Entities"), and for periods prior to our
emergence from bankruptcy in March 2003, such terms and "EOTT" refer to EOTT
Energy Partners, L.P. and its sole general partner, EOTT Energy Corp., as well
as the Subsidiary Entities.
Fresh Start Reporting
As a result of the application of fresh start reporting under the American
Institute of Certified Public Accountants Statement of Position No. 90-7 ("SOP
90-7"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code," as of February 28, 2003 (the date chosen for accounting purposes), Link's
financial results for the ten months ended December 31, 2003 and the two months
ended February 28, 2003 include two different bases of accounting and
accordingly, the financial condition, operating results and cash flows of the
Successor Company and the Predecessor Company have been separately disclosed.
For a further discussion of fresh start reporting, see Note 6. For purposes of
these financial statements, references to the "Predecessor Company" are
references to us for periods through February 28, 2003 (the last day of the
calendar month in which we emerged from bankruptcy) and references to the
"Successor Company" are references to Link for periods subsequent to February
28, 2003. The Successor Company's financial statements are not comparable to the
Predecessor Company's financial statements. See further discussion in Note 6.
F-8
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Partnership Status
As a limited liability company, we are generally treated like a partnership
for federal income tax purposes and like a corporation with limited liability
for state law and other non-tax purposes. In other words, for federal income tax
purposes, we do not pay tax on our income or gain, nor are we entitled to a
deduction for our losses, but such gains or losses are allocated to each member
in accordance with the member's interest in us and the member will be
responsible for paying the income tax applicable to such membership interest.
Our taxable income or loss, which may vary substantially from the net income or
net loss we report in our consolidated statement of operations, is includable in
the federal income tax returns of our members. The aggregate difference in the
basis of our net assets for financial and tax reporting purposes cannot be
readily determined as we do not have access to information about each member's
tax attributes in Link.
In order for us to continue to be classified as a partnership for federal
income tax purposes, at least 90% of our gross income for every taxable year
must consist of "qualifying income" within the meaning of the Internal Revenue
Code. In 2002 and 2003, we recognized income from our settlement with Enron and
discharge of indebtedness in excess of 10% of our gross income for each of those
years. As disclosed in more detail in our Third Amended Joint Chapter 11 Plan
which is incorporated by reference into our Annual Report on Form 10-K for the
year ended December 31, 2002, we concluded that income from our settlement with
Enron and our debt discharge income constituted "qualifying income," although
the matter was not free from doubt. In January 2004, we requested a private
letter ruling from the Internal Revenue Service to determine either that the
income from our settlement with Enron and the debt discharge income is
qualifying income or that the recognition of such income should be disregarded
for purposes of the qualifying income test because it was an inadvertent result
of our bankruptcy.
We are unable to predict how or when the Internal Revenue Service will
rule. If the ruling is favorable, we will continue to be treated as a
partnership for federal income tax purposes for so long as we satisfy the
qualifying income test. If we are unable to obtain a favorable ruling and are
unsuccessful in litigating the matter should we choose to do so, we will be
taxable as a corporation for the year in which we failed to meet the qualifying
income test and every year thereafter. Any classification of us as a corporation
could result in a material reduction in the value of our units.
LLC Agreement
Under our Limited Liability Company Agreement (the "LLC Agreement"), our
Board may, but is not required, to make distributions to each interest holder,
and in any event, our exit credit facilities do not permit us to make any cash
distributions so long as we have any indebtedness or other obligations
outstanding under the exit credit facilities. Similar to a corporation, members
do not share our liability. Under our LLC Agreement, members are also entitled
to certain information about us and to vote for directors and on certain other
matters. The holders of the majority of outstanding units have the right to vote
on mergers and the election or removal of directors. The holders of two-thirds
of the units have the right to approve additional issuances of equity and
certain amendments to the LLC Agreement. Members are not entitled to participate
in our management directly, but participate indirectly through the election of
our directors.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform
with the current period presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. We own and operate our assets through our
operating limited partnerships. The accompanying financial statements reflect
the consolidated accounts of Link Energy LLC and the operating limited
partnerships after elimination of intercompany transactions.
F-9
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nature of Operations. Through our affiliated limited partnerships, Link
Energy Limited Partnership, Link Energy Canada Limited Partnership, Link Energy
Pipeline Limited Partnership, and EOTT Energy Liquids, L.P., we are engaged in
the purchasing, gathering, transporting, trading, storage and resale of crude
oil and related activities. Prior to their disposition in 2003, we were also
engaged in the operation of a hydrocarbon processing plant (the "Morgan's Point
Facility"), a natural gas liquids storage facility (the "Mont Belvieu Facility")
and natural gas liquids assets on the West Coast. See Note 8 for information
regarding the disposition of our Morgan's Point Facility, Mont Belvieu Facility
and natural gas liquids assets on the West Coast. The results of operations
related to these assets have been reclassified to discontinued operations for
all periods presented herein. Our remaining principal business segments are our
North American Crude Oil gathering and marketing operations and our Pipeline
Operations.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash Equivalents. We record as cash equivalents all highly liquid
short-term investments having original maturities of three months or less.
Restricted Cash. Restricted cash represents cash which is not available for
general corporate purposes. At December 31, 2003, restricted cash is comprised
of amounts to be used for the settlement of certain obligations related to our
Liquids Operations, which were sold on December 31, 2003. See further discussion
in Note 8.
Inventory. Inventory includes crude oil inventory in our North American
Crude Oil gathering and marketing operations and our Pipeline Operations.
Inventory is stated at average cost for all periods presented.
Property, Plant and Equipment. Property, plant and equipment is stated at
historical cost for the Predecessor Company and has been adjusted to reflect the
adoption of fresh start reporting for the Successor Company. See Note 7. Normal
maintenance and repairs are charged to expense as incurred while significant
improvements which extend the life of the asset are capitalized. Upon retirement
or sale of an asset, the asset and the related accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in the
results of operations.
Impairment of Assets. We evaluate impairment of our long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," and would
recognize an impairment when estimated undiscounted future cash flows associated
with an asset or group of assets are less than the asset carrying amount.
Long-lived assets are subject to factors which could affect future cash flows.
These factors include competition, our financial condition and cost of credit
which impacts our ability to maintain or increase our crude oil volumes,
regulation, environmental matters, consolidation in the industry, refinery
demand for specific grades of crude oil, area market price structures and
continued developmental drilling in certain areas of the United States. We
continuously monitor these factors and pursue alternative strategies to maintain
or enhance cash flows associated with these assets; however, no assurances can
be given that we can mitigate the effects, if any, on future cash flows related
to any changes in these factors. See Note 8 for further discussion of asset
impairments.
Depreciation. Depreciation is provided by applying the straight-line method
to the basis of property, plant, and equipment over the estimated useful lives
of the assets. Asset lives are 10 to 20 years for barging, terminalling,
gathering and pipeline facilities, 5 to 10 years for transportation equipment,
and 3 to 20 years for other buildings and equipment.
Goodwill. Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 requires entities to discontinue the
amortization of goodwill, allocate all existing goodwill among its reporting
segments based on criteria set by SFAS No. 142 and perform initial impairment
tests by applying a fair value-based analysis on the goodwill in each reporting
segment. Goodwill is to be tested for impairment annually or more frequently if
circumstances indicate a possible impairment. Goodwill was allocated to the
North American Crude Oil segment and in 2002 no
F-10
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
impairment of goodwill was required. Our reported income from continuing
operations of $0.3 million ($0.01 per diluted unit) in 2001 included
amortization of goodwill of $1.0 million ($0.4 per diluted unit). Our income
from continuing operations in 2001, excluding the amortization of goodwill,
would have been $1.3 million ($0.05 per diluted unit). In connection with the
adoption of fresh start reporting (see Note 6), all remaining goodwill at
February 28, 2003 was eliminated.
Pipeline Linefill. Pipeline linefill, which consists of minimum operating
requirements is recorded at cost for the Predecessor Company and was adjusted to
fair value in connection with the adoption of fresh start reporting for the
Successor Company (See Note 6). Total minimum operating linefill requirements
held in third party pipelines and our pipelines at December 31, 2003 and 2002
were 2.1 million barrels valued at $39.7 million and 2.9 million barrels valued
at $50.2 million, respectively. Minimum linefill requirements held in third
party pipelines at December 31, 2003 and 2002 were valued at $6.3 million and
$8.8 million, respectively, and classified as Other Assets and Other Current
Assets, respectively, on the balance sheet. Minimum linefill requirements held
in our pipelines at December 31, 2003 and 2002, were valued at $33.4 million and
$41.4 million, respectively, and classified as Property, Plant and Equipment on
the balance sheet. See Note 8 for information regarding the sale of certain
linefill.
Derivative and Hedging Activities. We utilize derivative instruments to
minimize our exposure to commodity price fluctuations. Generally, as we purchase
lease crude oil at prevailing market prices, we enter into corresponding sales
transactions involving either physical deliveries of crude oil to third parties
or a sale of futures contracts on the NYMEX. Price risk management strategies,
including those involving price hedges using NYMEX futures contracts, are very
important in managing our commodity price risk. Such hedging techniques require
resources for managing both future positions and physical inventories. We effect
transactions both in the futures and physical markets in order to deliver the
crude oil to its highest value location or otherwise to maximize the value of
the crude oil we control. Throughout the process, we seek to maintain a
substantially balanced risk position at all times. We do have certain risks that
cannot be completely hedged such as basis risks (the risk that price
relationships between delivery points, grades of crude oil or delivery periods
will change) and the risk that transportation costs will change.
Effective January 1, 1999, we began reporting energy trading contracts (as
defined) at fair value in the balance sheet with changes in fair value included
in earnings in accordance with Emerging Issues Task Force ("EITF") Issue 98-10,
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities."
Effective January 1, 2001, we began reporting derivative activities in
accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. SFAS No. 133 requires that derivative instruments be
recorded in the balance sheet as either assets or liabilities measured at fair
value. Under SFAS No. 133, we are required to "mark-to-fair value" all of our
derivative instruments at the end of each reporting period. At the date of
initial adoption of SFAS No. 133, the difference between the fair value of
derivative instruments and the previous carrying amount of those derivatives was
recorded as the cumulative effect of a change in accounting principle. The
cumulative effect of adopting SFAS No. 133 effective January 1, 2001 was a $1.3
million ($0.05 per diluted unit) increase in income. SFAS No. 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Qualifying criteria include,
among other requirements, that we formally designate, document, and assess the
effectiveness of the hedging instruments as they are established and at the end
of each reporting period. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results from the hedged item in
the income statement. Changes in the fair value of derivatives designated as
cash flow hedges are deferred to Other Comprehensive Income (Loss) ("OCI"), a
component of Members' Capital, and reclassified into earnings when the
associated hedged transaction affects earnings. Deferral of derivative gains and
losses through OCI is limited to the portion of the change in fair value of the
derivative instrument which effectively hedges the associated hedged
transaction; ineffective portions are recognized currently in earnings.
Beginning in the second quarter of 2003, we designated certain of our derivative
instruments as cash flow hedges of forecasted transactions. These hedges were
for a maximum of two-months and had no material effect on our OCI or earnings
for the ten months ended December 31, 2003. The ineffective portions of our
hedged transactions were not material to our earnings for the ten
F-11
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
months ended December 31, 2003. SFAS No. 133 requires that any cash flow hedges,
for which it is probable that the original forecasted transactions will not
occur by the end of the originally specified time period, be discontinued and
reclassified into earnings, and that such reclassifications be recorded and
separately disclosed. We had no such reclassifications for the ten months ended
December 31, 2003. All unrealized derivative gains and losses included in
accumulated other comprehensive income (loss) at December 31, 2003 are expected
to be reclassified to net income (loss) within the next twelve months. Realized
derivative gains and losses are included in Operating Revenue in our Statement
of Operations.
Changes in the market value of transactions designated as energy trading
activities in accordance with EITF Issue 98-10 (prior to the rescission of EITF
Issue 98-10) and derivative instruments accounted for under SFAS No. 133, are
recorded in revenues every period as unrealized gains or losses. The related
price risk management assets and liabilities are recorded in other current or
non-current assets and liabilities, as applicable, on the balance sheet. The
fair value of transactions is determined primarily based on forward prices of
the commodity, adjusted for certain transaction costs associated with the
transactions. For the ten months ended December 31, 2003, we had net unrealized
losses of $0.8 million, for the two months ended February 28, 2003, we had net
unrealized gains of $4.5 million and for the years ended December 31, 2002 and
2001, we had net unrealized gains of $1.8 million and net unrealized losses of
$2.5 million, respectively.
In the first quarter of 2001, we changed our method of accounting for
inventories used in our energy trading activities from the average cost method
to the fair value method. The cumulative effect of the change in accounting for
inventories as of January 1, 2001 was $0.2 million ($0.01 per diluted unit) and
is reported as a decrease in net income for 2001. The change in accounting for
inventories increased reported net income in 2001 by approximately $2.6 million.
The consensus to rescind EITF Issue 98-10 eliminated EOTT's basis for
recognizing physical inventories at fair value. With the rescission of EITF
Issue 98-10, inventories purchased after October 25, 2002 were valued at average
cost.
In October 2002, the EITF reached a consensus in EITF Issue 02-03 "Issues
Involved in Accounting for Derivative Contracts Held for Trading Purposes and
Contracts Involved in Energy Trading and Risk Management Activities." The EITF
reached a consensus to rescind EITF Issue 98-10, and related interpretive
guidance, and preclude mark to market accounting for energy trading contracts
that are not derivative instruments pursuant to SFAS No. 133. See Note 20 for
discussion of the cumulative effect of the change in accounting principle. The
consensus requires that gains and losses (realized and unrealized) on all
derivative instruments held for trading purposes be shown net in the income
statement, whether or not the instrument is settled physically.
Revenue Recognition. Prior to the rescission of EITF Issue 98-10 in the
fourth quarter of 2002, substantially all of our current gathering, marketing
and trading activities were accounted for on a fair value basis with changes in
fair value included in earnings. Qualifying derivative instruments are accounted
for pursuant to SFAS No. 133 and energy trading activities were accounted for
pursuant to EITF Issue 98-10. We recognize revenue on the accrual method, for
non trading activities and non-derivative instruments, based on the right to
receive payment for goods and services delivered to third parties.
Certain estimates were made in determining the fair value of contracts. We
have determined these estimates using available market data and valuation
methodologies. Judgment is required in interpreting market data, and the use of
different market assumptions or estimation methodologies may affect the
estimated fair value amounts.
Cost of Sales and Operating Expenses. Cost of sales includes the cost of
purchasing crude oil and associated transportation costs. Operating expenses
consist of field and pipeline expenses, including payroll and benefits,
utilities, telecommunications, fuel and power, environmental expenses and
property taxes.
Receivable Financing. SFAS No. 140 "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities - A Restatement of FASB
Statement No. 125" was effective March 31, 2001. Under SFAS No. 140, transfers
of accounts receivable under our receivables agreement, discussed further in
Note 4, are
F-12
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accounted for as financings. Costs associated with the transfers are classified
as "Interest Expense and Related Charges" on the Consolidated Income Statement.
Foreign Currency Transactions. Canadian operations represent all of our
foreign activities. The U.S. dollar is the functional currency. Foreign currency
transactions are initially translated into U.S. dollars. The resulting gains and
losses are included in the determination of net income (loss) in the period in
which the exchange rate changes. The gain (loss) on foreign currency
transactions, included in "Other, net" on the Consolidated Income Statement was
a gain of $0.1 million for the ten months ended December 31, 2003 and a gain of
$0.1 million for the two months ended February 28, 2003. No gain or loss was
recognized for the year ended December 31, 2002 and a $0.3 million loss was
recognized for the year ended December 31, 2001.
Environmental. Expenditures for ongoing compliance with environmental
regulations that relate to current operations are expensed or capitalized as
appropriate. Estimated liabilities are recorded when environmental assessments
indicate that remedial efforts are probable and the costs can be reasonably
estimated. Estimates of the liability and insurance recovery, if any, are based
upon currently available facts, existing technology and presently enacted laws
and regulations and are included in the balance sheet on an undiscounted basis.
Unit Based Compensation Plans. We account for unit-based compensation using
the intrinsic value recognition provisions of APB No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. If we had elected to
recognize compensation cost based on the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock Based Compensation", net income (loss) and
net income (loss) per unit would be unchanged for the ten months ended December
31, 2003, the two months ended February 28, 2003 and for the years ended
December 31, 2002 and 2001.
3. LIQUIDITY/GOING CONCERN
GENERAL
We emerged from bankruptcy on March 1, 2003 as a highly leveraged company
and have not been able to significantly reduce our debt to date. We will not be
able to continue as a viable business unless we reduce our debt and attract new
volumes.
Our Restructuring Plan anticipated profitable Liquids Operations and a
quick return of crude oil volume growth in 2003. After incurring an operating
loss of $31.4 million from our Liquids Operations since our emergence from
bankruptcy, we sold our Liquids Operations in December 2003 for approximately
$20 million (see Note 8). Our pre-bankruptcy customers and business partners
have been less willing to do business with us than we anticipated as a result of
our being highly leveraged and having shown no substantive improvement in our
financial performance. Although our Restructuring Plan assumed that our
marketing volumes would increase to approximately 350,000 barrels per day by the
end of 2003, our actual marketing volumes were approximately 254,000 barrels per
day in December 2003, and we do not anticipate an appreciable increase in
volumes for the remainder of 2004.
Furthermore, as a result of our bankruptcy, we incurred higher costs in
obtaining credit than we had in the past. Our trade creditors were less willing
to extend credit to us on an unsecured basis and the amount of letters of credit
we have been required to post for our marketing activities increased
significantly. Our letters of credit outstanding at December 31, 2003 were $250
million with a maximum commitment available of $260 million.
Our cash flow from operations is not sufficient to meet our current cash
requirements and, as a result, we have been borrowing under our Trade
Receivables Agreement in order to fund our operations and capital needs. Absent
a significant improvement in our business performance, we expect to continue to
borrow to meet our cash requirements to the extent borrowed funds are available.
At March 19, 2004, we have approximately $23.0 million in borrowing
F-13
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
availability under our Trade Receivables Agreement. Based on our current cash
requirements, we may exhaust our sources of available cash in the second quarter
of 2004.
We have sold substantially all of our non-strategic assets in an effort to
reduce our aggregate indebtedness, which was approximately $268 million as of
March 15, 2004. We will not be able to use funds from future asset sales, if
any, to meet our current cash needs because the proceeds from any such sales are
likely to be required to reduce our outstanding indebtedness. In addition to
asset sales, we have attempted, without success, to raise additional equity and
to convert indebtedness to equity.
We are in advanced discussions with a potential buyer regarding the sale of
substantially all of our assets; however, there can be no assurances that we can
consummate a transaction. The net proceeds of the transaction would be used to
repay all of our outstanding indebtedness, as well as to satisfy other existing
obligations. If the transaction were consummated, we would have no further
operations and would wind down over a period of time. If we are not successful
in consummating the transaction, we will continue to pursue other strategic
alternatives, which include the sale of additional assets (singularly or in
groups) or a voluntary filing under the U.S. Bankruptcy Code. Based on our
existing level of indebtedness, it is unlikely that either a sale or bankruptcy
would yield any material residual value for the Company's unitholders.
FACTORS ADVERSELY AFFECTING OUR LIQUIDITY AND WORKING CAPITAL
Our ability to fund our liquidity and working capital requirements has been
adversely affected by various factors, including the following:
- COVENANT BREACHES UNDER EXIT CREDIT FACILITIES. During the
last four months of 2003 and in January 2004, we have breached
certain covenants under our exit credit facilities, which
include the Letter of Credit Agreement, the Term Loan, the
Trade Receivables Agreement and the Commodity Repurchase
Agreement. These covenants are discussed below. We have
obtained a waiver of these 2003 violations and are currently
in discussions with our lenders regarding a waiver for January
2004. In addition, we have reduced the lenders' maximum
commitment under the Letter of Credit Facility from $325
million to $260 million.
- Minimum Consolidated EBIDA. We are required to
maintain a minimum, rolling cumulative four month
total of consolidated Earnings Before Interest
Depreciation and Amortization, subject to certain
adjustments, as defined ("Minimum Consolidated
EBIDA"). For the rolling four-month periods ended
September 30, 2003, October 31, 2003, November 30,
2003, December 31, 2003 and January 31, 2004, the
required Minimum Consolidated EBIDA under our exit
credit facilities and our actual consolidated EBIDA
were as follows:
REQUIRED
ROLLING FOUR-MONTH MINIMUM CONSOLIDATED ACTUAL CONSOLIDATED
PERIOD ENDED EBIDA EBIDA
- -------------------------- -------------------- -------------------
September 30, 2003........ $ 6.6 million $ 2.2 million
October 31, 2003.......... $ 8.7 million $ 3.4 million
November 30, 2003......... $10.4 million $(0.8) million
December 31, 2003......... $12.7 million $(1.6) million
January 31, 2004.......... $16.0 million $ 1.0 million
For the rolling four-month periods ending February
29, 2004, March 31, 2004 and April 30, 2004, we will
be required to maintain Minimum Consolidated EBIDA of
$15.7 million, $16.9 million and $16.5 million,
respectively. Thereafter, the requirement continues
to increase until it reaches $17.4 million for the
four-month period ended August 31, 2004. Because this
F-14
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
covenant becomes increasingly stringent, we expect we
will not be in compliance with this covenant and
thereby will be in default under our exit credit
facilities for the foreseeable future.
- Interest Coverage. We are required to maintain a
minimum ratio of consolidated EBIDA to interest
expense, subject to certain exclusions ("Interest
Coverage Ratio"), over rolling consecutive four month
periods. For the rolling four-month periods ended
September 30, 2003, October 31, 2003, November 30,
2003, December 31, 2003 and January 31, 2004, the
required Interest Coverage Ratio under our exit
credit facilities and our actual interest coverage
ratio were as follows:
REQUIRED
ROLLING FOUR-MONTH INTEREST ACTUAL INTEREST
PERIOD ENDED COVERAGE RATIO COVERAGE RATIO
- -------------------------- -------------- ---------------
September 30, 2003........ .62 to 1.00 .24 to 1.00
October 31, 2003.......... .79 to 1.00 .37 to 1.00
November 30, 2003......... .93 to 1.00 (.09) to 1.00
December 31, 2003......... 1.11 to 1.00 (.17) to 1.00
January 31, 2004.......... 1.36 to 1.00 .10 to 1.00
For the rolling four-month periods ending February
29, 2004, March 31, 2004 and April 30, 2004, we will
be required to maintain an Interest Coverage Ratio of
1.35 to 1.00, 1.36 to 1.00 and 1.34 to 1.00,
respectively. This ratio requirement continues to
increase until it reaches 1.42 to 1.0 for the
four-month period ended August 31, 2004. Because this
covenant becomes increasingly stringent, we expect we
will not be in compliance with this covenant and
thereby will be in default under our exit credit
facilities for the foreseeable future.
- Minimum Consolidated Tangible Net Worth. At the end
of each month, from March 31, 2003 to December 31,
2003, we were required to maintain a minimum
consolidated tangible net worth, subject to certain
adjustments, as defined ("Minimum Consolidated
Tangible Net Worth"), of $8.5 million. Actual Minimum
Consolidated Tangible Net Worth at December 31, 2003
was $12.8 million. From January 31, 2004 to August
30, 2004, we are required to maintain a Minimum
Consolidated Tangible Net Worth of $10 million.
Actual Minimum Consolidated Tangible Net Worth at
January 31, 2004 was $9.9 million.
- Covenant Breach relating to Borrowing Base
Calculation. We are required to maintain asset values
(the "Borrowing Base") at all times that exceed our
aggregate outstanding letters of credit ("LC
Obligations"). As of February 15, 2004, aggregate LC
Obligations exceeded the Borrowing Base by
approximately $1.9 million. This represented a
payment default of $1.9 million under our Letter of
Credit Facility which was subsequently waived. As of
March 15, 2004, the Borrowing Base exceeded LC
Obligations by approximately $12 million.
- Consequences of Covenant Breaches. Any default
(covenant default or payment default, after
applicable cure periods) under any of our exit credit
facilities will cause a cross-default under all the
other exit credit facilities. If a payment default
under any of the exit credit facilities or any other
debt obligation involves indebtedness of $10 million
or more, or there is an acceleration of the
indebtedness of $10 million or more, then the payment
default under the exit credit facilities would be a
default under the indenture relating to the 9% Senior
Notes (the "9% Senior Notes Indenture"). A default
under the 9% Senior Notes Indenture will cause a
cross-default under our exit credit facilities.
F-15
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Any breaches, unless waived, could severely limit our
access to liquidity and credit support and result in
our being required to repay all outstanding
indebtedness, plus accrued and unpaid interest, under
our exit credit facilities as well as the 9% Senior
Note Indenture. Although our exit credit facility
lenders provided a waiver for our breaches of
covenants as of December 31, 2003, there can be no
assurance they will provide waivers for any
subsequent period, including January 31, 2004, or
that any amendment to our exit credit facilities
required to obtain such assurance will not adversely
affect our liquidity.
- Maturities of our Exit Facilities. In addition, we
extended our Trade Receivables Agreement and
Commodity Repurchase Agreement to June 1, 2004
(although we have an option to extend the maturity to
August 30, 2004, subject to us being in compliance
with our debt covenants) and our Term Loan and Letter
of Credit Facility mature on August 30, 2004. As of
March 15, 2004, we had $53.0 million of outstanding
borrowings under our Trade Receivables Agreement,
$16.9 million of outstanding borrowings under our
Commodity Repurchase Agreement, and $75 million of
borrowings under our Term Loan Agreement. Since we
did not reduce Standard Chartered's exposure below
$200 million by March 1, 2004, we paid a $2.5 million
fee to Standard Chartered on March 15, 2004. We may
not be able to repay the indebtedness under our exit
credit facilities at maturity. Any replacement credit
facilities, to the extent obtainable, may be at
significantly greater cost to us. There can be no
assurances, however, that replacement credit
facilities can be obtained.
- COVENANT BREACH UNDER ENRON NOTE. We are required to maintain
at all times a letter of credit securing a promissory note
payable to Enron Corp. (the "Enron Note") in the initial
principal amount of $6.2 million. We failed to cause such
letter of credit to be renewed at least 10 business days prior
to its expiration, which resulted in an event of default
under, and the automatic acceleration of, the Enron Note. As
of December 31, 2003, $5.7 million was due and payable under
the Enron Note. A replacement letter of credit has been
issued, and we have asked Enron Corp. to waive the event of
default and rescind the automatic acceleration of the note.
There can be no assurance that Enron Corp. will provide the
waiver or when such a waiver will be provided.
GOING CONCERN
Our Consolidated Financial statements have been prepared assuming we will
continue as a going concern which contemplates the realization of assets and
settlement of liabilities in the normal course of business. The factors
discussed above raise substantial doubt about our ability to continue as a going
concern. Our Consolidated Financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
4. CREDIT RESOURCES
SUMMARY OF DEBTOR IN POSSESSION ("DIP") FINANCING
On October 18, 2002, we entered into agreements with Standard Chartered,
SCTS, Lehman and other lending institutions for $575 million in DIP financing
facilities. The DIP facilities provided (i) $500 million of credit and financing
facilities through Standard Chartered and SCTS, which included up to $325
million for letters of credit through Standard Chartered and $175 million of
inventory repurchase/accounts receivable financing through SCTS, and (ii) $75
million of term loans through Lehman and other lending institutions. The credit
facilities were subject to a borrowing base and were secured by a first-priority
lien on all, or substantially all, of our real and personal property. At
December 31, 2002 we had amounts outstanding under the repurchase agreement and
accounts receivable financing agreement of $75 million and $50 million,
respectively, at weighted average interest rates of 4.4% and 4.7%, respectively.
As of February 28, 2003, we had outstanding approximately $313 million of
letters of credit, $125 million of inventory
F-16
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
repurchase/accounts receivable financing, and $75 million of term loans. The DIP
financing facilities contained certain restrictive covenants that, among other
things, limited distributions, other debt, and certain asset sales. On February
28, 2003, as we emerged from bankruptcy, the DIP financing facilities were
refinanced by the same institutions. The following discussion provides an
overview of our post-bankruptcy debt.
SUMMARY OF EXIT CREDIT FACILITIES, SENIOR NOTES, AND OTHER DEBT
Our emergence from bankruptcy, as of March 1, 2003, was financed through a
combination of exit credit facilities, senior notes and other debt associated
with settlement of claims during our bankruptcy proceedings. The table below
provides a summary of these financing arrangements as of December 31, 2003.
SUMMARY OF FINANCING ARRANGEMENTS
(IN MILLIONS)
COMMITMENT/ AMOUNT
FACE AMOUNT OUTSTANDING MATURITY
----------- ----------- ----------------------
Exit Credit Facilities:
Letter of Credit Facility................ $ 260.0 $ 250.1 August 30, 2004
Trade Receivables Agreement.............. 100.0(1) 27.0 March 1, 2004(2)
Commodity Repurchase Agreement........... 18.0 18.0 March 1, 2004(2)
Term Loans............................... 75.0 75.0 August 30, 2004
Senior Notes................................... 109.2 104.5 March 1, 2010(3)(4)
Other Debt:
Enron Note............................... 5.7 6.4 October 1, 2005(3)(5)
Big Warrior Note......................... 2.5 2.3 March 1, 2007(3)
Ad Valorem Tax Liability................. 6.6 6.6 March 1, 2009
(1) $50 million of this commitment is unavailable ten days each month.
(2) On March 1, 2004, we extended these arrangements for 3 months until June 1,
2004 and paid an extension fee of $0.4 million. We have an option to extend
these arrangements until August 30, 2004 subject to the payment of
extension fees of $0.4 million and us being in compliance with our debt
convenants.
(3) These notes were adjusted to fair value pursuant to the adoption of fresh
start reporting required by SOP 90-7.
(4) On September 1, 2003 and March 1, 2004, we issued an additional senior note
in the amount of $5.2 million and $5.5 million, respectively, in lieu of
the first and second semi-annual payment of interest on our senior notes.
(5) See discussion below regarding event of default.
F-17
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of our scheduled debt maturities at December 31, 2003
(in millions):
After
2004 2005 2006 2007 2008 2008 Total
-------- -------- -------- -------- -------- -------- --------
Senior Notes ................. $ - $ - $ - $ - $ - $ 109.2 $ 109.2
Term Loans(1) ................ 75.0 - - - - - 75.0
Commodity Repurchase
Agreement(1) .............. 18.0 - - - - - 18.0
Trade Receivables
Agreement(1) .............. 27.0 - - - - - 27.0
Enron Note(2) ................ 1.0 4.7 - - - - 5.7
Big Warrior Note ............. 0.3 0.4 0.4 1.4 - - 2.5
Ad Valorem Tax Liability ..... 2.8 0.9 1.0 1.1 0.8 - 6.6
-------- -------- -------- -------- -------- -------- --------
$ 124.1 $ 6.0 $ 1.4 $ 2.5 $ 0.8 $ 109.2 $ 244.0
======== ======== ======== ======== ======== ======== ========
(1) See previous discussion of covenant violations and cross defaults.
(2) See discussion below regarding event of default.
Exit Credit Facilities
On February 11, 2003, we entered into our exit credit facilities with the
same lenders and under substantially the same terms in the DIP financing
facilities. These new facilities were effective March 1, 2003 and $2.9 million
of facility and extension fees were paid in connection with these new
facilities. Such fees are being amortized as interest expense over the terms of
the facilities.
Letter of Credit Facility
The Letter of Credit Facility, as amended, with Standard Chartered provides
$260 million of financing until August 30, 2004 and is subject to defined
borrowing base limitations. The borrowing base is (as of the date of
determination) the sum of cash equivalents, specified percentages of eligible
receivables, deliveries, fixed assets, inventory, margin deposits and undrawn
product purchase letters of credit, minus (i) first purchase crude payables,
other priority claims, aggregate net amounts payable by the borrowers under
certain hedging contracts and certain eligible receivables arising from future
crude oil obligations, (ii) the principal amount of loans outstanding and any
accrued and unpaid fees and expenses under the Term Loans, and (iii) all
outstanding amounts under the Amended and Restated Commodity Repurchase
Agreement and the Amended and Restated Receivables Purchase Agreement ("SCTS
Purchase Agreements"). Pursuant to a scheduled advance rate reduction, effective
July 1, 2003, the specified percentages of eligible receivables and fixed assets
in the borrowing base were reduced. As of February 15, 2004, our aggregate
letter of credit obligation exceeded the borrowing base by approximately $1.9
million. We have obtained a waiver of this violation from our lenders. As of
March 15, 2004, the Borrowing Base exceeded LC Obligations by approximately $12
million.
The Letter of Credit Facility required an upfront facility fee of $1.25
million that was paid at closing. Since we did not reduce Standard Chartered's
exposure below $200 million by March 1, 2004, we paid a $2.5 million fee to
Standard Chartered. Letter of credit fees range from 2.25% to 2.75% per annum
depending on usage. The commitment fee is 0.5% per annum of the unused portion
of the Letter of Credit Facility. Additionally, we agreed to a fronting fee,
which is the greater of 0.25% per annum times the face amount of the letter of
credit or $250. An annual arrangement fee of 1% per annum times the average
daily maximum commitment amount, as defined in the Letter of Credit Facility, is
payable on a monthly basis.
The exit credit facilities include various financial covenants that we must
adhere to on a monthly basis as discussed in Note 3 and set forth below.
F-18
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- Current Ratio. We must maintain a ratio of consolidated
current assets, subject to certain adjustments to consolidated
current liabilities less funded debt, as defined, of 0.90 to
1.00 for the term of the exit credit facilities. The actual
Current Ratio at December 31, 2003 was 1.00 to 1.00.
For purposes of determining the financial information used in the financial
covenants set forth above and in Note 3, we are required to exclude all items
directly attributable to our Liquids Operations and the West Coast natural gas
liquids assets ("Designated Assets") for the first five months ended May 31,
2003, and to make "permitted adjustments" (changes due to fresh start reporting,
income and expenses attributable to the Designated Assets during the first five
months ended May 31, 2003, changes due to the cumulative affect of changes in
GAAP, which are approved by the bank, gains or losses from the sales of assets
or Designated Assets and any write-downs on Designated Assets), as defined.
In connection with the sale of assets in 2003 discussed in Note 8, the
Letter of Credit Facility was amended to allow the net proceeds from these asset
sales to be used to repay amounts outstanding under the Commodity Repurchase
Agreement.
In addition, there are certain restrictive covenants that, among other
things, limit other debt, certain asset sales, mergers and change in control
transactions. Additionally, the exit credit facilities prohibit us from making
any distributions, or purchases, acquisitions, redemptions or retirement of our
LLC units so long as we have any indebtedness, liabilities or other obligations
outstanding to Standard Chartered, SCTS, Lehman, or any other lenders under
these facilities.
SCTS Purchase Agreements
We have an agreement with SCTS similar to our pre-bankruptcy inventory
repurchase agreement, which provides for the financing of purchases of crude oil
inventory utilizing a forward commodity repurchase agreement ("Commodity
Repurchase Agreement"). The maximum commitment under the Commodity Repurchase
Agreement was $75 million. It required an upfront facility fee of approximately
$378,000 and carried an interest rate of LIBOR plus 3%. During the fourth
quarter of 2003, net proceeds of $57 million from the disposition of assets were
used to repay amounts outstanding under the Commodity Repurchase Agreement and
the maximum commitment amount was reduced to $18 million. The Commodity
Repurchase Agreement had an initial term of six months to August 30, 2003, at
which time we had the option to extend for an additional twelve months. In
August 2003, we amended the Commodity Repurchase Agreement to provide us the
option to (1) extend the maturity date to March 1, 2004 and (2) prior to March
1, 2004, extend the maturity date to August 30, 2004. The election of each
option will require the payment of an extension fee of $375,000. We elected to
extend the maturity date to March 1, 2004, which required the payment of the
extension fee of $375,000 and increased the interest rate to LIBOR plus 7%. We
subsequently elected to extend the Commodity Repurchase Agreement to June 1,
2004, although we have an option to extend the maturity to August 30, 2004,
subject to us being in compliance with our debt convenants. The election of the
option required the payment of an extension fee of $0.2 million. At December 31,
2003, we had outstanding repurchase agreements of $18 million with an interest
rate of 8.2%.
In addition, we also have an agreement with SCTS similar to our
pre-bankruptcy trade receivables agreement, which provides for the financing of
up to an aggregate amount of $100 million of certain trade receivables ("Trade
Receivables Agreement") outstanding at any one time. The discount fee is LIBOR
plus 3% and an upfront facility fee of approximately $504,000 was paid. The
Trade Receivables Agreement had an initial term of six months to August 30,
2003, at which time we had the option to extend for an additional twelve months.
In August 2003, we amended the Trade Receivables Agreement to provide us the
option to (1) extend the maturity date to March 1, 2004 and (2) prior to March
1, 2004, extend the maturity date to August 30, 2004. The election of each
option will require the payment of an extension fee of $0.5 million. We elected
to extend the maturity date to March 1, 2004, which required the payment of an
extension fee of $0.5 million and increased the interest rate to LIBOR plus 7%.
We subsequently elected to extend the Trade Receivables Agreement to June 1,
2004, although we have an option to extend the maturity to August 30, 2004. The
election of the option required the payment of an extension fee of $250,000.
Receivables financed at December 31, 2003 totaled $27 million at a weighted
average interest rate of 8.1%.
F-19
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Term Loan Agreement
We entered into an agreement with Lehman, as Term Lender Agent, and other
lenders (collectively, "Term Lenders"), which provides for term loans in the
aggregate amount of $75 million (the "Term Loans"). The Term Loans mature on
August 30, 2004.
The financing included two term notes. The Tier-A Term Note is for $50
million with a 9% per annum interest rate. The Tier-B Term Note is for $25
million with a 10% per annum interest rate. Interest is payable monthly on both
notes. An upfront fee of $750,000 was paid and we agreed to pay a deferred
financing fee in the aggregate amount of $2 million on the maturity date of the
Term Loans. This latter fee was fully accrued as of February 28, 2003.
The Term Loans are collateralized and have certain repayment priorities
with respect to collateral proceeds pursuant to the Intercreditor and Security
Agreement that is discussed below. Under the Term Loan Agreement, term loan debt
outstanding is subject to a borrowing base as defined in the Letter of Credit
Agreement. Further, the Term Loan Agreement contains financial covenants that
mirror those outlined above in the discussion of the Letter of Credit Facility.
Intercreditor and Security Agreement
In connection with the Letter of Credit Facility, the Term Loans and the
SCTS Purchase Agreements, we entered into the Intercreditor and Security
Agreement ("Intercreditor Agreement") with Standard Chartered, Lehman, SCTS and
various other secured parties ("Secured Parties"). This agreement provides for
the sharing of collateral among the Secured Parties and prioritizes the
application of collateral proceeds which provides for repayment of the Tier-A
Term Note and the Standard Chartered letter of credit exposure above $300
million prior to other secured obligations.
In addition, to the extent that drawings are made on any letters of credit,
Standard Chartered, as Collateral Agent, may distribute funds from our debt
service payment account to itself (as letter of credit issuer ("LC Issuer") on
behalf of the letter of credit participants) as needed to allow Link LLC to
reimburse Standard Chartered, as letter of credit issuer, for such drawings.
Senior Notes
On October 1, 1999, we issued to the public $235 million of 11% senior
notes. The senior notes were due October 1, 2009, and interest was paid
semiannually on April 1 and October 1. The senior notes were fully and
unconditionally guaranteed by all of our operating limited partnerships but were
otherwise unsecured. On October 1, 2002, we did not make the interest payment of
$12.9 million on our 11% senior notes. These notes were cancelled effective
March 1, 2003 as a result of our Restructuring Plan and the holders of these
notes, along with our general unsecured creditors with allowed claims, received
a pro rata share of $104 million of 9% senior unsecured notes, plus a pro rata
share of 11,947,820 Link LLC units.
Link LLC Senior Notes 2010
In February 2003, we issued $104 million of 9% senior unsecured notes to
the Bank of New York, as depositary agent, which was subsequently allocated by
the depositary agent to former holders of the 11% senior notes described above
and our general unsecured creditors with allowed claims. The senior notes are
due in March 2010, and interest will be paid semiannually on September 1 and
March 1, with the first payment made on September 1, 2003. Under the terms of
the indenture governing our senior notes, we are allowed to pay interest
payments in kind by issuing additional senior notes on the first two interest
payment dates. If we make payments in kind, we must make the payments as if
interest were being charged at 10% per annum instead of 9% per annum. On
September 1, 2003, we issued an additional senior note in the aggregate
principal amount of $5.2 million to the Bank of New York in lieu of the first
interest payment. On March 1, 2004,
F-20
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
we issued an additional senior note in the aggregate principal amount of $5.5
million to the Bank of New York in lieu of the second interest payment. We may
not optionally redeem the notes. The notes are subject to mandatory redemption
or sinking fund payments if we sell assets and use the money for certain
purposes or if we have a change of control. Provisions of the indenture could
limit additional borrowings, sale and lease back transactions, affiliate
transactions, purchases of our own equity, payments on debt subordinated to the
senior notes, distributions to members, certain merger, consolidation or change
in control transactions, or sale of assets if certain financial performance
ratios are not met.
Other Debt
In connection with our settlement with Enron as part of the Restructuring
Plan, we executed a $6.2 million note payable to Enron ("Enron Note") that is
guaranteed by our subsidiaries. The Enron Note is secured by an irrevocable
letter of credit and bears interest at 10% per annum. Interest is paid
semiannually on April 1 and October 1, beginning on April 1, 2003 and we are
allowed to pay interest payments in kind on the first two interest payment
dates. Principal payments of $1 million are payable in October 2003 and October
2004, with the remaining principal balance due in October 2005. On October 1,
2003, we paid our first principal payment of $1.0 million and elected to pay our
interest payment of $0.3 million in kind. We failed to cause the letter of
credit to be renewed at least 10 business days prior to its expiration, which
resulted in an event of default under, and the automatic acceleration of, the
Enron Note. A replacement letter of credit has been issued and we have requested
Enron to waive the event of default and rescind the automatic acceleration of
the note. There can be no assurance that Enron will provide the waiver, and
therefore, the Enron Note is recorded in Other Current Liabilities on the
Consolidated Balance Sheet at December 31, 2003.
In connection with a settlement with Big Warrior Corporation ("Big
Warrior") during our bankruptcy, we executed a $2.7 million note payable to Big
Warrior, which is secured by a second lien position in one of our Mississippi
pipelines. The four-year note is payable in quarterly installments which began
June 1, 2003 based on a seven-year amortization schedule, at an interest rate of
6% per annum. A final balloon payment is due March 1, 2007. Effective July 31,
2003, Farallon Capital Partners, L.P. ("Farallon") and Tinicum Partners, L.P.
("Tinicum"), both of which are Term Lenders, purchased this note from Big
Warrior.
In conjunction with our Restructuring Plan, we agreed to pay accrued but
unpaid ad valorem taxes over six years from the effective date of our
Restructuring Plan. This debt bears interest at 6% with principal and interest
payments due quarterly. The first payment was made on June 1, 2003. Unpaid ad
valorem taxes of $2 million associated with the Liquids Operations sold on
December 31, 2003 (see Note 8) were paid in January 2004.
5. BANKRUPTCY PROCEEDINGS AND RESTRUCTURING PLAN
On October 8, 2002, the MLP and the Subsidiary Entities filed
pre-negotiated voluntary petitions for reorganization under Chapter 11 of the
United States Bankruptcy Code (the "EOTT Bankruptcy"). The filing was made in
the United States Bankruptcy Court for the Southern District of Texas, Corpus
Christi Division (the "EOTT Bankruptcy Court"). Additionally, the General
Partner filed a voluntary petition for reorganization under Chapter 11 on
October 21, 2002 in the EOTT Bankruptcy Court in order to join in the voluntary,
pre-negotiated Restructuring Plan. On October 24, 2002, the EOTT Bankruptcy
Court administratively consolidated, for distribution purposes, the General
Partner's bankruptcy filing with the previously filed cases. We operated as
debtors-in-possession under the Bankruptcy Code, which means we continued to
remain in possession of our assets and properties and continued our day-to-day
operations. The EOTT Bankruptcy Court confirmed our Restructuring Plan on
February 18, 2003, and it became effective March 1, 2003.
We entered into an agreement, dated October 7, 2002, with Enron, Standard
Chartered Bank ("Standard Chartered"), Standard Chartered Trade Services
Corporation ("SCTS"), Lehman Commercial Paper Inc. ("Lehman Commercial") and
holders of approximately 66% of the outstanding principal amount of our 11%
senior notes (the "Restructuring Agreement"). Under this Restructuring
Agreement, Enron, Standard Chartered, SCTS, Lehman Commercial and
F-21
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
approximately 66% of our 11% senior note holders agreed to vote in favor of the
Restructuring Plan, and to refrain from taking actions not in support of the
Restructuring Plan.
The Restructuring Plan, however, was subject to the approval of the EOTT
Bankruptcy Court, and the Settlement Agreement with Enron ("Enron Settlement
Agreement") was subject to the additional approval of the United States
Bankruptcy Court for the Southern District of New York (the "Enron Bankruptcy
Court"), where Enron and certain of its affiliates filed for Chapter 11
bankruptcy protection. The EOTT Bankruptcy Court approved the Enron Settlement
Agreement on November 22, 2002, and the Enron Bankruptcy Court approved the
Enron Settlement Agreement on December 5, 2002. The major provisions of the
Restructuring Plan, which became effective March 1, 2003, are as follows:
- Enron has no further affiliation with us. The General Partner will be
liquidated as soon as reasonably possible with no material effect to
us.
- We consummated the Settlement Agreement with Enron effective December
31, 2002. In the fourth quarter of 2002, we recognized a gain of $45.5
million related to the Settlement Agreement with Enron.
- We converted to a limited liability company structure and EOTT LLC
(subsequently renamed Link Energy LLC) became the successor registrant
to the MLP. The MLP was merged into EOTT Energy Operating Limited
Partnership.
- We are now managed by a seven-member Board of Directors. One of the
directors is the chief executive officer of Link LLC, and the
remaining six directors were selected by the former senior note
holders who signed the Restructuring Agreement.
- We cancelled our outstanding $235 million of 11% senior unsecured
notes. Our former senior unsecured note holders and holders of allowed
general unsecured claims received a pro rata share of $104 million of
9% senior unsecured notes and a pro rata share of 11,947,820 limited
liability company units of EOTT LLC representing 97% of the newly
issued units.
- We cancelled the MLP's publicly traded common units, and the former
holders of the MLP's common units received 369,520 limited liability
company units of EOTT LLC, representing 3% of newly issued units, and
957,981 warrants to purchase an additional 7% of the new units. We
cancelled the MLP's subordinated units and additional partnership
interests. See Note 18.
- We were authorized to develop, and the board has subsequently
approved, a management incentive plan. The incentive plan reserves 1.2
million of EOTT LLC's authorized units for issuance to certain key
employees and directors. See Note 19.
- We closed exit credit facilities with Standard Chartered, SCTS,
Lehman, and other lenders on February 28, 2003. See further discussion
in Note 4.
F-22
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of the confirmation of our Restructuring Plan, the following
liabilities that were deemed subject to compromise were either discharged by the
EOTT Bankruptcy Court or retained as ongoing obligations of the Successor
Company. Estimated liabilities subject to compromise at December 31, 2002 were
as follows (in thousands):
11% Senior Notes ................................................... $235,000
Interest payable - 11% Senior Notes ................................ 13,481
Accounts payable and suspense payable .............................. 34,876
Allowed claims for environmental settlements and contingencies ..... 7,970
Other .............................................................. 1,500
--------
Total ......................................................... $292,827
========
The following reorganization items and net gain on discharge of debt, which
were specifically related to the EOTT Bankruptcy, were recorded during the two
months ended February 28, 2003, (in thousands):
Reorganization items - legal and professional fees ............ $ (7,330)
Net gain on discharge of 11% senior notes,
related accrued interest and other debt (1) ............... $ 131,560
(1) The gain on discharge of debt was recorded net of the 9% senior notes
and limited liability company units issued to the creditors upon
emergence from bankruptcy.
6. FRESH START REPORTING
As previously discussed, our Consolidated Financial Statements reflect the
adoption of fresh start reporting required by SOP 90-7 for periods subsequent to
our emergence from bankruptcy. In accordance with the principles of fresh start
reporting, we have adjusted our assets and liabilities to their fair values as
of February 28, 2003. The net effect of the fresh start reporting adjustments
was a loss of $56.8 million, which is reflected in the results of operations of
the Predecessor Company for the two months ended February 28, 2003.
The enterprise value of Link on the effective date of the Restructuring
Plan was determined to be approximately $363 million. The enterprise value was
determined with the assistance of a third party financial advisor using
discounted cash flow, comparable transaction and capital market comparison
analyses, adjusted for the actual working capital as of the effective date of
the Restructuring Plan. The discounted cash flow analyses were based upon five
year projected financial results, including an assumption for terminal values
using cash flow multiples, discounted at our estimated post-restructuring
weighted-average cost of capital.
Pursuant to SOP 90-7, the reorganization value of Link on the effective
date of the Restructuring Plan was determined to be approximately $856 million,
which represented the enterprise value plus the fair value of current
liabilities exclusive of funded debt on February 28, 2003. We have allocated the
reorganization value as of February 28, 2003 to tangible and identifiable
intangible assets in conformity with SFAS No. 141, "Business Combinations",
using discounted cash flow and replacement cost valuation analyses, and
liabilities, including debt, were recorded at their net present values.
Independent third-party valuation specialists were used to determine the
allocation of the reorganization value to our tangible and identifiable
intangible assets and to determine the fair value of our long-term liabilities.
The valuations were based on a number of estimates and assumptions, which
are inherently subject to significant uncertainties and contingencies beyond our
control. Accordingly, there can be no assurance that the valuations will be
realized, and actual results could vary significantly.
F-23
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effects of the reorganization pursuant to the Restructuring Plan and
the application of fresh start reporting on the Predecessor Company's
consolidated balance sheet as of February 28, 2003 are as follows (in
thousands):
DEBT DISCHARGE
PREDECESSOR COMPANY AND RECLASS FRESH START SUCCESSOR COMPANY
FEBRUARY 28, 2003 ADJUSTMENTS ADJUSTMENTS FEBRUARY 28, 2003
------------------- -------------- ---------------- -----------------
Assets
Current Assets
Cash and cash equivalents.............. $ 40,735 $ - $ - $ 40,735
Trade and other receivables............ 439,361 - - 439,361
Inventories............................ 25,860 - 750(g) 26,610
Other.................................. 12,911 - (2,021)(h) 10,890
-------------- ----------- ------------ --------------
Total current assets............. 518,867 - (1,271) 517,596
-------------- ----------- ------------ --------------
Property, Plant and Equipment, at cost. 598,633 - (267,654)(i) 330,979
Less: Accumulated depreciation......... 223,188 - (223,188)(i) -
-------------- ----------- ------------ --------------
Net property, plant and equipment. 375,445 - (44,466) 330,979
-------------- ----------- ------------ --------------
Goodwill .............................. 7,436 - (7,436)(j) -
-------------- ----------- ------------ --------------
Other Assets........................... 10,762 - (2,880)(h) 7,882
-------------- ----------- ------------ --------------
Total Assets...................... $ 912,510 $ - $ (56,053) $ 856,457
============== =========== ============ ==============
Liabilities and Members'/Partners'
Capital
Current Liabilities
Trade and other accounts payable....... $ 451,294 $ 17,406(a) $ - $ 468,700
Accrued taxes payable.................. 13,045 (8,307)(b) - 4,738
Term loans............................. 75,000 (75,000)(c) - -
Repurchase agreement................... 75,000 (75,000)(c) - -
Receivable financing................... 50,000 - - 50,000
Other.................................. 19,226 2,815(a)(b) 318(k) 22,359
-------------- ----------- ------------ --------------
Total current liabilities......... 683,565 (138,086) 318 545,797
-------------- ----------- ------------ --------------
Long-Term Liabilities
9% Senior Notes........................ - 98,800(d) - 98,800
Term loans............................. - 75,000(c) - 75,000
Repurchase agreement................... - 75,000(c) - 75,000
Ad valorem tax liability............... - 6,992(b) - 6,992
Other.................................. 17,781 - 400(k) 18,181
-------------- ----------- ------------ --------------
Total long-term liabilities....... 17,781 255,792 400 273,973
-------------- ----------- ------------ --------------
Liabilities Subject to Compromise...... 284,843 (284,843)(a) - -
Additional Partnership Interests....... 9,318 (9,318)(e) - -
Members'/Partners' Capital (Deficit) .. (82,997) 176,455 (f) (56,771) 36,687
-------------- ----------- ------------ --------------
Total Liabilities and
Members'/Partners' Capital........ $ 912,510 $ - $ (56,053) $ 856,457
============== =========== ============ ==============
Notes:
(a) Liabilities subject to compromise have been adjusted to reflect the
settlement of the claims and discharge of the 11% senior notes and
related accrued interest in connection with the Restructuring Plan.
See further discussion in Note 5.
(b) To reclassify current and long-term amounts due to taxing
authorities for accrued but unpaid ad valorem taxes in connection with
the Restructuring Plan.
(c) To reflect the refinancing on a long-term basis of amounts outstanding
under the Debtor-in-Possession Financing Facilities.
(d) To reflect the issuance of 9% senior unsecured notes (face amount of
$104 million) to all former senior note holders and general unsecured
creditors with allowed claims in connection with the Restructuring
Plan, recorded at fair value.
(e) To reflect the cancellation of the additional partnership interests in
connection with the Restructuring Plan.
(f) To reflect the issuance of limited liability company units pursuant to
the Restructuring Plan and the net gain on extinguishment of debt.
F-24
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(g) To adjust inventory to fair value.
(h) To reflect the elimination of deferred turnaround costs, which are
included in the fair value of property, plant and equipment of the
Successor Company.
(i) To adjust property, plant, and equipment to fair value.
(j) To reflect the elimination of goodwill resulting from the fair value
allocation.
(k) To reflect the Enron and Big Warrior notes at fair value.
7. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows (in
thousands):
SUCCESSOR COMPANY | PREDECESSOR COMPANY
DECEMBER 31, 2003 | DECEMBER 31, 2002
----------------- | -------------------
|
Operating PP&E, including pipelines, storage tanks, etc.......... $ 268,866 | $ 477,834
|
Office PP&E buildings and leasehold improvements................. 1,717 | 52,621
|
Tractors and trailers and other vehicles......................... 1,248 | 10,739
|
Land............................................................. 6,893 | 5,216
--------------- | ---------------
|
Property, Plant & Equipment...................................... 278,724 | 546,410
|
Less: Accumulated depreciation.................................. (16,214) | (205,351)
--------------- | ---------------
|
Net Property, Plant & Equipment.................................. $ 262,510 | $ 341,059
=============== | ===============
8. DISPOSITIONS OF ASSETS
Discontinued Operations - West Coast Assets
Effective June 25, 2003, we signed a definitive agreement to sell all of
the assets comprising our natural gas gathering, processing, natural gas liquids
fractionation, storage and related trucking and distribution facilities located
on the West Coast. A sale of these assets to a third party had been one of the
options considered by us since we emerged from bankruptcy. The sales price for
the assets exclusive of inventory was $9.9 million. The proceeds from the sale
of the West Coast natural gas liquids assets could be increased by up to $1.4
million depending on the operating results of the West Coast natural gas liquids
assets during the twelve month period following closing. The closing occurred on
October 1, 2003, and $9.0 million of the net proceeds from the sale were used to
pay down amounts outstanding under the Commodity Repurchase Agreement.
Effective June 1, 2002, we sold our West Coast refined products marketing
operations to Trammo Petroleum Inc. The sales price was not significant.
Effective June 30, 2001, we sold our West Coast crude oil gathering and
blending operations to Pacific Marketing and Transportation LLC ("Pacific") for
$14.3 million. We could have been required to repay up to $1.5 million of the
sale price, subject to a two-year look-back provision regarding average
operating results during the period July 1, 2001 through June 30, 2003. Such
amount is reflected in Liabilities Subject to Compromise in the Consolidated
Balance Sheet at December 31, 2002. In addition, we also provided customary
indemnifications to Pacific with a maximum aggregate exposure of $3.7 million,
whose terms were due to expire between June 2002 through June 2006. In the third
quarter of 2003, we negotiated a settlement and release with Pacific of all
remaining obligations related to the sale for a payment of $0.2 million.
Revenues and results of operations for the West Coast operating segment for
the ten months ended December 31, 2003, the two months ended February 28, 2003,
and the years ended December 31, 2002 and 2001 are shown below (in
F-25
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
thousands). We did not allocate any interest expense to the West Coast
discontinued operations for any of the periods presented below.
SUCCESSOR COMPANY | PREDECESSOR COMPANY
------------------ | ---------------------------------------------------------
TEN MONTHS | TWO MONTHS YEAR YEAR
ENDED | ENDED ENDED ENDED
DECEMBER 31, 2003 | FEBRUARY 28, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- | ----------------- ----------------- -----------------
|
Revenues....................... $ 20,639 | $ 5,571 $ 68,467 $ 491,091
======== | =========== ========== ==========
Income (loss) from discontinued |
operations.................. $ 752 | $ 395 $ (25,246) $ (4,679)
======== | =========== ========== ==========
The income (loss) from the West Coast discontinued operations includes a
loss on disposal of $0.8 million for the ten months ended December 31, 2003, no
gain or loss recognized for the two months ended February 28, 2003, a gain on
disposal of $0.2 million and a loss on disposal of $1.3 million for the years
ended December 31, 2002 and 2001, respectively. At December 31, 2002, we
recorded an impairment charge of $22.9 million to reflect these assets at their
estimated fair values at December 31, 2002.
Discontinued Operations - Liquids Operations
Effective December 31, 2003, we sold all of our remaining natural gas
liquids assets to a subsidiary of Valero Energy Corporation ("Valero") for
approximately $20 million, plus inventory value. The assets included our
underground salt dome storage facility and related pipeline grid near Mont
Belvieu, Texas as well as our processing facility and former methyl tertiary
butyl ether ("MTBE") plant at Morgan's Point, near La Porte, Texas. Net proceeds
of approximately $15 million from the sale were used to pay down amounts
outstanding under the Commodity Repurchase Agreement.
Net proceeds from the sale of approximately $6 million were placed in
escrow for ad valorem tax liabilities associated with the assets sold,
reimbursement of any costs associated with potential title defects and
adjustments associated with the verification of actual inventory balances sold.
In connection with the sale, we provided indemnifications to Valero for (1)
title defects for a period of two years up to a maximum amount of $2 million and
(2) preclosing environmental liabilities with an indefinite term and no monetary
limits. We recorded a $1.1 million liability at December 31, 2003, reflecting
the estimated fair value of these obligations.
Revenues and results of operations for the Liquids Operations for the ten
months ended December 31, 2003, the two months ended February 28, 2003 and the
years ended December 31, 2002 and 2001 are shown below (in thousands). We did
not allocate any interest expense to the Liquids discontinued operations for any
periods presented below.
SUCCESSOR COMPANY | PREDECESSOR COMPANY
----------------- | ---------------------------------------------------------
TEN MONTHS | TWO MONTHS YEAR YEAR
ENDED | ENDED ENDED ENDED
DECEMBER 31, 2003 | FEBRUARY 28, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- | ----------------- ----------------- -----------------
|
Revenues....................... $ 128,684 | $ 40,337 $ 212,670 $ 48,701
=========== | ========= ============ ============
|
Income (loss) from discontinued |
operations.................. $ (31,391) | $ (446) $ (36,472) $ (11,926)
=========== | ========= ============ ============
F-26
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income (loss) from the Liquids discontinued operations for the ten months
ended December 31, 2003 includes a loss on disposal of $8.4 million. At December
31, 2002, we recorded impairments of $33.0 million and $20.2 million related to
our Mont Belvieu and Morgan's Point facilities, respectively, to reflect these
assets at their estimated fair values at December 31, 2002.
During the fourth quarter of 2003, pursuant to a previously announced plan
to reduce our Liquids Operations, we began to phase out our MTBE production at
the Morgan's Point Facility. The decision to cease production of MTBE and end
our financial exposure to the MTBE market was made after earlier attempts to
sell the Liquids Operations terminated unsuccessfully. In connection with the
phase out of MTBE production, we recorded charges in September 2003 for
severance costs of $1.8 million, asset impairments of $2.8 million and the
write-down of our materials and supplies inventory of $2.3 million. The
severance costs were accrued pursuant to our pre-existing severance plan in
accordance with SFAS No. 112, "Employers' Accounting for Post Employment
Benefits - an Amendment of FASB Statements No. 5 and 43". The impairment charges
reflect adjustments to the carrying values of long-lived assets used in the MTBE
manufacturing operations to reflect their fair values. The charge for materials
and supplies represents an adjustment to the carrying values of inventory items
to reflect their net realizable values. The market for surplus MTBE related
materials and supplies has been severely impacted by recent plant shut downs.
Our Liquids Operations were originally acquired effective June 30, 2001. We
paid $117 million in cash to Enron and State Street Bank and Trust Company of
Connecticut, National Association, Trustee.
Concurrently with the acquisition of the Liquids Operations, we entered
into a ten-year tolling agreement for the conversion of feedstocks into
products, on a take-or-pay basis ("Toll Conversion Agreement"), and a ten-year
storage and transportation agreement for the use of a significant portion of the
Mont Belvieu Facility and pipeline grid system, on a take-or-pay basis ("Storage
Agreement"). Both agreements were with Enron Gas Liquids, Inc. ("EGLI"), a
wholly-owned subsidiary of Enron, which is now in bankruptcy. Under these
agreements EGLI retained all existing third party commodity, transportation and
storage contracts associated with these facilities. These agreements were the
principle basis for determining the desirability of the transaction and the
purchase price of the Liquids assets.
As more fully explained in Note 18, on December 3, 2001, EGLI was included
in Enron's bankruptcy filing. Due to the non-performance by EGLI under the Toll
Conversion Agreement in late November 2001, we began to operate the Morgan's
Point Facility as a merchant operation in the spot market. We were unable to
enter into third party spot or term contracts for storage until the Storage
Agreement was rejected by EGLI. On April 2, 2002, the Bankruptcy Court entered a
stipulation and agreed order rejecting the Toll Conversion and Storage
Agreements (the "Stipulation"), which order became final and non-appealable on
April 12, 2002. Rejection of the Storage Agreement with EGLI resulted in the
loss of the buyer of the fixed throughput and storage capacity at the Mont
Belvieu Facility. However, the rejection allowed us to directly seek new
customers and pursue long-term contracts for the Mont Belvieu Facility to
replace the long-term and continuous stream of revenue we expected under the
Storage Agreement with EGLI. As a result of EGLI's non-performance under these
contracts, we recorded a $29.1 million impairment in the fourth quarter of 2001.
Sales of Other Assets
On October 1, 2003, we sold certain crude oil marketing and transportation
assets in the Arkansas, Louisiana and Texas ("ArkLaTex") area to Plains
Marketing L.P. and Plains All American Pipeline, L.P., a wholly owned subsidiary
of Plains Resources, Inc. The sales price for these assets, including linefill,
was approximately $17 million. Subsequent to closing, $16.2 million of the net
proceeds from the sale were used to pay down amounts outstanding under the
Commodity Repurchase Agreement. The gain on the sale of these assets was $11.7
million. The long-lived assets disposed of were historically presented in the
North American Crude Oil and Pipeline Operations operating segments.
In the fourth quarter of 2003, we entered into a Crude Oil Joint Marketing
Agreement with ChevronTexaco Global Trading, a division of Chevron U.S.A. Inc.
("ChevronTexaco"). The agreement was effective January 1, 2004 with a
F-27
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
term of 10 years. Under the agreement, ChevronTexaco will market all of the
Company's lease crude oil in West Texas and Eastern New Mexico, with the Company
handling the transportation of the crude oil and related administrative
functions. The agreement contains various performance factors which must be met
in order for the agreement to remain in effect for the full term of the
agreement and if ChevronTexaco does not achieve certain performance targets
during the first year of the agreement, we have agreed to economic adjustments
not to exceed $1 million. In addition, if this agreement is terminated prior to
January, 2006, as a result of us (1) divesting all or substantially all of our
assets within the West Texas and New Mexico area or (2) seeking the protection
of bankruptcy and are no longer able to perform our obligations under this
agreement, then we will owe ChevronTexaco a $1 million termination payment. No
assets were sold pursuant to this agreement, with the exception of linefill. In
December 2003, the Company sold approximately 370,000 barrels of linefill held
in West Texas and New Mexico to ChevronTexaco for approximately $10 million. The
Company recognized a gain of approximately $2.6 million related to the sale,
which gain has been deferred (included in Other Long-Term Liabilities on the
Consolidated Balance Sheet), as the agreement contains mandatory obligations for
the Company to repurchase the linefill from ChevronTexaco in the event that the
agreement is terminated within the first five years.
9. CHANGE IN ESTIMATE OF CRUDE OIL LINEFILL
Measuring the physical volumes of crude oil linefill in certain of the
pipelines we operate in the West Texas and New Mexico area is inherently
difficult. Because these pipelines are operated under very little pressure,
unlike the vast majority of our other pipelines, we cannot use traditional
engineering based methods to estimate the physical volumes in the system but
instead have utilized certain operational assumptions and topographical
information which take into consideration the measurement limitations.
As a part of our pipeline integrity management program, we are in the
process of removing from service various pipelines we operate in this area, some
of which were acquired from Texas-New Mexico Pipe Line Company in 1999. The
actual physical volume of crude oil linefill we removed from the line we took
out of service during the third quarter of 2003 was less than our estimate of
linefill volume for the applicable pipeline. Following this discovery, we
initiated a thorough review of our estimates for all of our pipelines which are
operated under very little pressure. We also engaged the services of a third
party consultant to review our methodology of estimating linefill volumes. After
completing this review, we revised downward our estimates of the physical volume
of crude oil linefill in certain of our pipelines by approximately 170,000
barrels. As a result, we recorded a charge of $4.6 million to reflect our change
in estimate of physical linefill volumes based on September 30, 2003 market
prices. The charge was recorded in cost of sales in the Consolidated Statements
of Operations.
We currently estimate that we will complete the program to remove these
pipelines from service in the first half of 2004. The amount of crude oil
linefill we ultimately remove from the affected pipelines could differ
materially from our current estimates. Therefore, additional charges could be
required in the near term.
10. INVENTORY AND ACCOUNTS PAYABLE RECONCILIATIONS
During the third quarter of 2003, we identified control deficiencies with
inventory and accounts payable reconciliation procedures in our pipelines and
liquids operations. In order to address these issues, we designed and
implemented additional procedures to provide reasonable assurance that these
control deficiencies did not lead to a material misstatement in our consolidated
financial statements. Related to this matter, we recorded charges in the third
and fourth quarter of 2003 of $1.8 million and $0.9 million, respectively (the
impact to prior period financial statements was not material). The adjustments,
properly recorded in the respective periods, would have decreased income from
continuing operations by $1.6 million, none and $0.4 million for the years ended
December 31, 2002, 2001 and 2000.
F-28
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. CAPITAL
As part of the Restructuring Plan, EOTT's common units, subordinated units
and additional partnership interests were canceled and 14,475,321 new limited
liability company units ("LLC units") were authorized. Holders of common units
received 369,520 LLC units and 957,981 warrants to purchase additional LLC
units. The warrants have a five-year term, a strike price of $12.50, are
exercisable after June 30, 2003 and had an estimated fair value of $0.01 per
warrant as of the effective date of the Restructuring Plan. Holders of EOTT's
former 11% senior notes and general unsecured creditors with allowed claims
received a pro rata allocation of 11,947,820 LLC units. The Bank of New York,
the depositary agent, distributed approximately 90% of the LLC units in August
2003 and the final allocation of units was completed in December 2003.
Additionally, 1.2 million LLC units were reserved for a management incentive
plan for issuance to certain key employees and directors. See further discussion
in Note 19.
The following is a rollforward of LLC units and warrants outstanding:
Common Subordinated LLC
Units Units Units Warrants
----------- ---------- ---------- --------
Units Outstanding at December 31, 2002................. 18,476,011 9,000,000 - -
Units Cancelled in Connection with Restructuring Plan.. (18,476,011) (9,000,000) - -
Issuance of New LLC Units and Warrants................. - - 12,317,340 957,981
----------- ---------- ---------- --------
LLC Units and Warrants Outstanding as of February 28,
2003................................................. - - 12,317,340 957,981
----------- ---------- ---------- --------
Exercise of Warrants................................... - - 35,549 (35,549)
Restricted Units Outstanding........................... - - 830,000 -
----------- ---------- ---------- --------
LLC Units and Warrants Outstanding at December 31, 2003 - - 13,182,889 922,432
=========== ========== ========== ========
The LLC units and the warrants were issued pursuant to an exemption from
the registration requirements of the Securities Act of 1933, as amended and
applicable state law, pursuant to the exemptions afforded under Section 1145,
Title 11 of the U.S. Bankruptcy Code. The LLC units and the warrants have been
registered pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act") pursuant to Section 12(g) and we are therefore a reporting
company under the Exchange Act. Neither the LLC units nor the warrants are
traded on any national exchange or pursuant to an automated quotation system
administered by the National Association of Securities Dealers, Inc. ("NASD").
The LLC units issued pursuant to the Restructuring Plan are subject to the
terms of a Registration Rights Agreement effective March 1, 2003 (the
"Registration Rights Agreement"). Following completion of the audit of our
financial statements for the year ending December 31, 2003, any holders of 10%
or more of the securities eligible for registration under the terms of the
Registration Rights Agreement will be entitled to demand registration of their
LLC units, subject to certain conditions. The Registration Rights Agreement also
provides for customary piggyback registration rights entitling holders of LLC
units to include their units in any registration in which we may engage, subject
to certain conditions. We will be required to pay all registration expenses in
connection with any such registrations.
The LLC units are subject to the terms of an LLC Agreement, which
currently, among other things, restricts the issuance of additional equity
interests in Link without the approval of holders of at least two-thirds of the
outstanding units.
F-29
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. EARNINGS PER UNIT
Basic earnings per unit include the weighted average impact of outstanding
units (i.e., it excludes unit equivalents). Diluted earnings per unit consider
the impact of all potentially dilutive securities.
Successor Company
Basic and diluted net loss per unit for the Successor Company were $4.37
for the ten months ended December 31, 2003. Outstanding stock warrants and
contingently issuable restricted units were determined to be antidilutive and
are not included in the computation of fully diluted earnings per unit. Basic
and diluted net loss per unit from continuing operations were $1.88 for the ten
months ended December 31, 2003. Basic and diluted net loss per unit from
discontinued operations were $2.49 for the ten months ended December 31, 2003.
Predecessor Company
Total and per unit information related to income (loss) from continuing
operations, discontinued operations, the cumulative effect of an accounting
change and net income (loss) for the Predecessor Company is shown in the tables
below. All amounts exclude amounts allocated to the General Partner (in
thousands, except per unit amounts):
Two Months Ended February 28, 2003
---------------------------------------------------------------------------
Basic (1)
-----------------------------------------------
Common Subordinated Diluted (2)
--------------------- ---------------------- -------------------------
Income Per Income Per Income Per
(Loss) Unit (Loss) Unit (Loss) Unit
-------- -------- --------- --------- ----------- ----------
Income (Loss) from Continuing Operations.... $ 2,951 $ 0.16 $ - $ - $ 2,951 $ 0.11
Income (Loss) from Discontinued Operations(3) (816) (0.04) - - (816) (0.03)
Cumulative Effect of Accounting Changes(4).. - - - - - -
-------- -------- --------- --------- ----------- ----------
Net Income (Loss)........................... $ 2,135 $ 0.12 $ - $ - $ 2,135 $ 0.08
======== ======== ========= ========= =========== ==========
Weighted Average Units Outstanding.......... 18,476 9,000 27,476
======== ========= ==========
Year Ended December 31, 2002
---------------------------------------------------------------------------
Basic (1)
-----------------------------------------------
Common Subordinated Diluted (2)
--------------------- ---------------------- -------------------------
Income Per Income Per Income Per
(Loss) Unit (Loss) Unit (Loss) Unit
-------- -------- --------- --------- ----------- ----------
Income (Loss) from Continuing Operations.... $ (1,017) $ (0.05) $ (29,155) $ (3.24) $ (30,172) $ (1.10)
Income (Loss) from Discontinued
Operations(3)............................. 816 0.04 - - 816 0.03
-------- -------- --------- --------- ----------- ----------
Net Income (Loss)........................... $ (201) $ (0.01) $ (29,155) $ (3.24) $ (29,356) $ (1.07)
======== ======== ========= ========= =========== ==========
Weighted Average Units Outstanding.......... 18,476 9,000 27,476
======== ========= ==========
F-30
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 2001
---------------------------------------------------------------------------
Basic (1)
-----------------------------------------------
Common Subordinated Diluted (2)
--------------------- ---------------------- -------------------------
Income Per Income Per Income Per
(Loss) Unit (Loss) Unit (Loss) Unit
-------- -------- --------- --------- ----------- ----------
Income (Loss) from Continuing Operations.... $ 196 $ 0.01 $ 95 $ 0.01 $ 291 $ 0.01
Income (Loss) from Discontinued Operations (3) (10,945) (0.59) (5,331) (0.59) (16,276) (0.59)
Cumulative Effect of Accounting Changes..... 707 0.04 344 0.04 1,051 0.04
-------- -------- --------- --------- ----------- ----------
Net Income (Loss)........................... $(10,042) $ (0.54) $ (4,892) $ (0.54) $ (14,934) $ (0.54)
======== ======== ========= ========= =========== ==========
Weighted Average Units Outstanding.......... 18,476 9,000 27,476
======== ========== ==========
(1) Net income (loss), excluding the approximate two percent General
Partner interest, has been apportioned to each class of unitholder
based on the ownership of total units outstanding in accordance with
the MLP's Partnership Agreement. Net losses are not allocated to the
common and subordinated unitholders to the extent that such
allocations would cause a deficit capital account balance or increase
any existing deficit capital account balance. Any remaining losses are
allocated to the General Partner as a result of the balances in the
capital accounts of the common and subordinated unitholders. Effective
with the third quarter of 2002, all losses were being allocated to the
General Partner. The disproportionate allocation of 2002 net losses
among the unitholders and the General Partner was recouped during the
two months ended February 28, 2003.
(2) The diluted earnings (loss) per unit calculation assumes the
conversion of subordinated units into common units.
(3) Earnings (loss) per unit from discontinued operations has been
determined based on the difference between the amount of net income
(loss) allocated to each class of unitholder and the amount of income
(loss) from continuing operations allocated to each class of
unitholder. Earnings (loss) per unit for the two months ended February
28, 2003, have been impacted by the disproportionate allocation of
income and loss discussed above.
(4) The cumulative effect of accounting changes was allocated to the
General Partner and subsequently recouped by the General Partner
during the two months ended February 28, 2003.
13. OPERATING REVENUES
In connection with adopting EITF Issue 02-03, revenues and cost of sales
related to our crude oil marketing and trading activities have been presented on
a net basis. Gross revenues and purchase costs that have been netted are as
follows (in thousands):
SUCCESSOR COMPANY | PREDECESSOR COMPANY
----------------- | ------------------------------------------------
TEN MONTHS | TWO MONTHS YEAR ENDED DECEMBER 31,
ENDED | ENDED ----------------------------
DECEMBER 31, 2003 | FEBRUARY 28, 2003 2002 2001
----------------- | ----------------- ------------- -------------
|
Gross revenue............................... $4,260,719 | $ 831,187 $ 4,541,591 $ 8,081,536
|
Purchase costs reclassified................. 4,124,930 | 803,495 4,386,983 7,854,972
---------- | --------------- ------------- -------------
Operating revenues for marketing |
and trading operations, net............. 135,789 | 27,692 154,608 226,564
|
Gross revenue from other operations......... 16,887 | 4,287 28,334 24,009
---------- | --------------- ------------- -------------
|
Operating revenue........................... $ 152,676 | $ 31,979 $ 182,942 $ 250,573
========== | =============== ============= =============
Consistent with standard crude oil industry practice, we utilize "buy/sell"
contracts to facilitate our delivery obligations and to limit our overall risk.
We utilize buy/sell contracts to price the relative values of crude oil that we
seek to exchange between locations. The economic objective is to exchange one
barrel of crude oil for another barrel of crude oil that has a different
attribute such as, but not limited to, quality, location or delivery period. The
primary objective of pricing both sides of a buy/sell contract at prices
reflective of the crude oil's relative values is to allow for volume
F-31
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
variances which occur between the estimated scheduled volumes and actual
deliveries. If all volumes on these crude oil purchase contracts were exactly as
forecast each month, such contracts could be handled by exchange contracts, with
simply a location and quality differential. However, volumes are frequently
(almost always in the case of lease production) different than scheduled. Both
parties to the transaction are protected against volume variances by using the
current month's market price for each grade, location or delivery period
associated with the different barrels of crude oil.
The following amounts have been recorded for buy/sell contracts in
Operating Revenue in the Consolidated Statements of Operations (in millions):
SUCCESSOR COMPANY | PREDECESSOR COMPANY
----------------- | --------------------------------------------------
TEN MONTHS | TWO MONTHS YEAR ENDED DECEMBER 31,
ENDED | ENDED ------------------------------
DECEMBER 31, 2003 | FEBRUARY 28, 2003 2002 2001
----------------- | ----------------- ------------ -----------
|
Gross revenues................................ $ 2,735 | $ 502 $ 2,568 $ 5,075
Purchase costs................................ 2,625 | 481 2,474 5,013
--------------- | -------------- ------------ -----------
Net operating revenue......................... $ 110 | $ 21 $ 94 $ 62
=============== | ============== ============ ===========
14. OTHER (INCOME) EXPENSE.
The components of other (income) expense are as follows (in thousands):
SUCCESSOR COMPANY | PREDECESSOR COMPANY
----------------- | -------------------------------------------------
TEN MONTHS | TWO MONTHS YEAR ENDED DECEMBER 31,
ENDED | ENDED -----------------------------
DECEMBER 31, 2003 | FEBRUARY 28, 2003 2002 2001
------------------ | ----------------- ------------ ----------
|
(Gain) loss on disposal of fixed assets..... $ (11,885) | $ - $ 1,184 $ (1,108)
Litigation settlements and provisions....... (1,171) | - 7,970 528
Gain on sale of NYMEX seats................. - | - (1,297) -
Other income................................ (811) | (8) (1,147) (512)
---------------- | --------------- ------------ ----------
Total................................... $ (13,867) | $ (8) $ 6,710 $ (1,092)
================ | =============== ============ ==========
15. COMMITMENTS AND CONTINGENCIES
Operating Leases. We lease certain real property, equipment, and operating
facilities under various operating leases. Future non-cancelable commitments
related to these items at December 31, 2003, are as follows (in millions): years
ending December 31, 2004 - $5.3; 2005 - $4.2; 2006 - $3.3; 2007 - $1.0; 2008 -
$0.3; thereafter - $0.4.
Total lease expense incurred was $5.9 million for the ten months ended
December 31, 2003, $1.2 million for the two months ended February 28, 2003 and
$7.7 million and $8.3 million for the years ended December 31, 2002 and 2001,
respectively.
Indemnities. In November 2002, the Financial Accounting Standards Board
("FASB") issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45"). FIN 45 requires disclosures to be made by a guarantor in its
financial statements about its obligations under certain guarantees it has
issued and that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation under the guarantee. We are a
party to various contracts entered into in the ordinary course of business that
contain indemnity provisions. Our obligations under the indemnities are
contingent upon the occurrence of events or circumstances specified in the
contracts. No such events or circumstances have occurred to date and we do not
consider our liability under the indemnities to be material to our financial
position or results of operations.
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LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Litigation. We are, in the ordinary course of business, a defendant in
various lawsuits, some of which are covered in whole or in part by insurance. We
believe that the ultimate resolution of litigation, individually and in the
aggregate, will not have a materially adverse impact on our financial position
or results of operations. Several litigation claims were settled during the
course of the bankruptcy proceedings or are still being negotiated post
confirmation. How each matter was or is being handled is set forth in the
summary of each case below. For matters where the parties negotiated a
settlement during our bankruptcy proceedings, the settlement amount was recorded
at December 31, 2002 as an allowed general unsecured claim in "Other Income
(Expense)" in our Consolidated Statement of Operations. In connection with our
Restructuring Plan, general unsecured creditors with allowed claims received a
pro rata share of $104 million of 9% senior unsecured notes and a pro rata share
of 11,947,820 Link LLC units. See further discussion in Notes 4 and 11. Prior to
and since the commencement of our bankruptcy proceedings, various legal actions
arose in the ordinary course of business, of which the significant actions are
discussed below.
John H. Roam, et al. vs. Texas-New Mexico Pipe Line Company and EOTT Energy
Pipeline Limited Partnership, Cause No. CV43296, In the District Court of
Midland County, Texas, 238th Judicial District (Kniffen Estates Suit). The
Kniffen Estates Suit was filed on March 2, 2001, by certain residents of the
Kniffen Estates, a residential subdivision located outside of Midland, Texas.
The allegations in the petition state that free crude oil products were
discovered in water wells in the Kniffen Estates area, on or about October 3,
2000. The plaintiffs claim that the crude oil products are from a 1992 release
from a pipeline then owned by the Texas-New Mexico Pipe Line Company ("Tex-New
Mex"). We purchased that pipeline from Tex-New Mex in 1999. The plaintiffs have
alleged that Tex-New Mex was negligent, grossly negligent, and malicious in
failing to accurately report and remediate the spill. With respect to us, the
plaintiffs were seeking damages arising from any contamination of the soil or
groundwater since we acquired the pipeline in question. No specific amount of
money damages was claimed in the Kniffen Estates Suit, but the plaintiffs did
file proofs of claim in our bankruptcy proceeding totaling $62 million. In
response to the Kniffen Estates Suit, we filed a cross-claim against Tex-New
Mex. In the cross-claim, we claimed that, in relation to the matters alleged by
the plaintiffs, Tex-New Mex breached the Purchase and Sale Agreement between the
parties dated May 1, 1999, by failing to disclose the 1992 release and by
failing to undertake the defense and handling of the toxic tort claims, fair
market value claims, and remediation claims arising from the release. On April
5, 2002, we filed an amended cross-claim which alleged that Tex-New Mex
defrauded us as part of Tex-New Mex's sale of the pipeline systems to us in
1999. The amended cross-claim also alleged that various practices employed by
Tex-New Mex in the operation of its pipelines constituted gross negligence and
willful misconduct and voided our obligation to indemnify Tex-New Mex for
remediation of releases that occurred prior to May 1, 1999. In the Purchase and
Sale Agreement, we agreed to indemnify Tex-New Mex only for certain remediation
obligations that arose before May 1, 1999, unless these obligations were the
result of the gross negligence or willful misconduct of Tex-New Mex prior to May
1, 1999. EOTT Energy Pipeline Limited Partnership ("PLP") and the plaintiffs
agreed to a settlement during our bankruptcy proceedings. The settlement
provides for the plaintiffs' release of their claims filed against PLP in this
proceeding and in the bankruptcy proceedings, in exchange for an allowed general
unsecured claim in our bankruptcy of $3,252,800 (as described above, the
plaintiffs filed proofs of claim in our bankruptcy proceedings totaling $62
million). The allowed general unsecured claim was accrued at December 31, 2002.
On April 1, 2003, we filed a second amended cross-claim in this matter. In
addition to the claims filed in the previous cross-claims, we requested (i)
injunctive relief for Tex-New Mex's refusal to honor its indemnity obligations;
(ii) injunctive relief requiring Tex-New Mex to identify, investigate and
remediate sites where the conduct alleged in our cross-claim occurred; and (iii)
restitution damages of over $125,000,000. Tex-New Mex filed a motion to compel
arbitration of these issues. The motion to compel arbitration was denied at a
hearing held on April 11, 2003. At the April 11, 2003 hearing, the court also
severed into a separate action EOTT's cross-claims against Tex-New Mex that
extend beyond the crude oil release and groundwater contamination in the Kniffen
Estates subdivision ("EOTT's Over-Arching Claim"). Developments in EOTT's
Over-Arching Claim are described immediately below. Prior to the trial of the
plaintiff's claims against Tex-New Mex and EOTT's original cross-claim against
Tex-New Mex arising from the crude oil release and groundwater contamination in
the Kniffen Estates subdivision ("EOTT's Kniffen Claims"), Tex-New Mex reached a
settlement with the plaintiffs that provided for the release of the plaintiffs'
claims. The trial of EOTT's Kniffen Claims commenced on June 16, 2003, and the
jury returned its verdict on July 2, 2003. The
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LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
jury found that Tex-New Mex's gross negligence and willful misconduct caused the
contamination in the Kniffen Estates. The jury also found that Tex-New Mex
committed fraud against us with respect to the Kniffen Estates site. The jury
awarded us actual damages equal to the expenses we have incurred to date in
remediating the Kniffen Estates site (approximately $6.1 million) and punitive
damages in the amount of $50 million. On November 28, 2003, the court entered an
amended judgment based on the jury verdict. The final judgment provides for the
award to us of (i) actual damages in the amount of $7,701,938, (ii) attorney's
fees in the amount of $1,400,000, (iii) prejudgment interest in the amount of
$1,044,509 and (iv) punitive damages in the amount of $18,203,876. The punitive
damages were reduced from the jury's award of $50 million in accordance with
Texas' statutory caps on punitive damages awards. The final judgment also
contains a finding that Tex-New Mex is obligated to indemnify us for future
remediation costs incurred at the Kniffen Estates site. Tex-New Mex filed a
motion for new trial that was overruled by operation of law on February 11,
2004. Tex-New Mex has indicated its intent to appeal the amended judgment by
posting a supersedeas bond in the amount of $10,665,419 on February 12, 2004. We
cannot predict the outcome of Tex-New Mex's appellate efforts.
EOTT Energy Operating Limited Partnership vs. Texas-New Mexico Pipeline
Company, Cause No. CV-44, 099, In the District Court of Midland County, Texas,
238th Judicial District ("EOTT's Over-Arching Claim"). As described above, the
claims in this lawsuit were severed from EOTT's Kniffen Claims on April 11,
2003. In this lawsuit, we allege that various practices employed by Tex-New Mex
in the operation of its pipelines and handling of spills constitute gross
negligence and willful misconduct, thus triggering Tex-New Mex's obligation to
indemnify us for remediation of releases where such practices ("Non-Remediation
Practices") were employed. In addition to damages, we are seeking (a) injunctive
relief requiring Tex-New Mex to honor its indemnity obligations under the
Purchase and Sale Agreement and (b) injunctive relief requiring Tex-New Mex to
identify, investigate, and remediate sites where Tex-New Mex employed the
Non-Remediation Practices. Discovery opened in EOTT's Over-Arching Claim on
December 1, 2003. The court conducted a scheduling conference for this case on
January 12, 2004, and set a trial date of September 19, 2005. On March 3, 2004,
we amended our petition to specifically list more than 200 contamination sites
where Tex-New Mex employed the Non-Remediation Practices.
Bankruptcy Issues related to Claims Made by Texas-New Mexico Pipeline
Company and its affiliates. Tex-New Mex, Shell Oil Company ("Shell") and Equilon
filed proofs of claim in our bankruptcy, each filing similar claims in the
amount of $112 million. In July of 2003, we entered into an agreement with
Shell, Tex-New Mex and Equilon whereby all of their claims were either
withdrawn, estimated or allowed, leaving the value of the claims estimated for
distribution purposes at $56,924.52. We are currently working to fully resolve
these claims in the bankruptcy claims resolution process.
Jimmie T. Cooper and Betty P. Cooper vs. Texas-New Mexico Pipeline Company,
Inc., EOTT Energy Pipeline Limited Partnership, and EOTT Energy Corp., Case No.
CIV-03-0035 JB/LAM, In the United States District Court for the District of New
Mexico. This lawsuit was filed on October 1, 2002. The plaintiffs in this
lawsuit are surface interest owners of certain property located in Lea County,
New Mexico. The plaintiffs alleged that aquifers underlying their property and
water wells located on their property were contaminated as a result of spills
and leaks from a pipeline running across their property that is or was owned by
Tex-New Mex and us. The plaintiffs did not specify when the alleged spills and
leaks occurred. The plaintiffs are seeking payment of costs that would be
incurred in investigating and remediating the alleged crude oil releases and
replacing water supplies from aquifers that had allegedly been contaminated. The
plaintiffs sought damages in an unspecified amount arising from the plaintiffs'
alleged fear of exposure to carcinogens and the alleged interference with the
plaintiffs' quiet enjoyment of their property. The plaintiffs are also seeking
an unspecified amount of punitive damages. EOTT and the plaintiffs agreed to the
terms of a settlement, whereby the plaintiffs agreed to release their claims
against us and received an allowed general unsecured claim in our bankruptcy in
the amount of $1,027,000. The allowed general unsecured claim was accrued at
December 31, 2002. The settlement documents have been finalized. On October 21,
2003, the plaintiffs filed a motion seeking our dismissal from this lawsuit.
Tex-New Mex opposed this motion, and on October 31, 2003, Tex-New Mex filed a
motion for leave to file a cross-claim against us. In the proposed cross-claim,
Tex-New Mex is seeking a declaratory judgment finding that we are contractually
obligated to indemnify Tex-New Mex for all costs Tex-New Mex has incurred or
will incur related to
F-34
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the defense of the plaintiffs' claims in this lawsuit. The proposed cross-claim
also alleges that we failed to assume Tex-New Mex's defense of this lawsuit and
failed to indemnify Tex-New Mex for the expenses Tex-New Mex has incurred in
this lawsuit, and that such actions by us constitute a breach of the Purchase
and Sale Agreement governing Tex-New Mex's sale of the subject pipeline to us.
On December 4, 2003, we filed a motion in our bankruptcy proceeding seeking a
determination that Tex-New Mex's proposed cross-claim had been waived, barred,
and discharged in our bankruptcy proceeding. A hearing on that motion (the "Zero
Claim Motion") was held on February 18, 2004 and the bankruptcy court took the
Zero Claim Motion under advisement. We have asked the court to delay ruling on
Tex-New Mex's motion for leave to file cross-claim until the bankruptcy court
rules on our Zero Claim Motion. At the settlement conference held on February
27, 2004, the plaintiffs and Tex-New Mex reached a settlement. Tex-New Mex has
agreed to pay the plaintiffs $1,350,000 for a release of the plaintiffs' claims.
In re EOTT Energy Partners, L.P., Case No. 02-21730, EOTT Energy Finance
Corp., Case No. 02-21731, EOTT Energy General Partner, L.L.C., Case No.
02-21732, EOTT Energy Operating Limited Partnership, Case No. 02-21733, EOTT
Energy Canada Limited Partnership, Case No. 02-21734, EOTT Energy Liquids, L.P.,
Case No. 02-21736, EOTT Energy Corp., Case No. 02-21788, Debtors (Jointly
Administered under Case No. 02-21730), In the United States Bankruptcy Court for
the Southern District of Texas, Corpus Christi Division. On October 8, 2002, we
and all of our subsidiaries filed voluntary petitions for relief under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court
for the Southern District of Texas (the "EOTT Bankruptcy Court") to facilitate
reorganization of our business and financial affairs for the benefit of us, our
creditors and other interested parties. Additionally, the General Partner filed
its voluntary petition for reorganization under Chapter 11 on October 21, 2002
in the EOTT Bankruptcy Court. Our Restructuring Plan was confirmed on February
18, 2003 and became effective on March 1, 2003. The provisions of the
Restructuring Plan are further described in Note 5. Shell and Tex-New Mex filed
a notice of appeal to our plan confirmation on February 24, 2003. A hearing on
the appeal was held in the District Court on August 19, 2003, where the judge
ruled the appeal was moot. The ruling became final on October 24, 2003. The
bankruptcy remains open while we resolve all of the outstanding claims. We
expect to close the bankruptcy in early 2004.
EPA Section 308 Request. In July 2001, Enron received a request for
information from the Environmental Protection Agency ("EPA") under Section 308
of the Clean Water Act, requesting information regarding certain spills and
releases from oil pipelines owned or operated by Enron and its affiliated
companies for the time period July 1, 1998 to July 11, 2001. Enron responded in
January of 2002 to the EPA's Section 308 request in its capacity as the operator
of the pipelines actually owned by us and on our behalf. Under the terms of the
Enron Settlement Agreement dated October 8, 2002, we would be required to
indemnify EOTT Energy Corp., as the prior general partner, and its affiliates
including Enron Pipeline Services Company, with regard to any environmental
remediation, except for claims of gross negligence and willful misconduct. While
we cannot predict the outcome of the EPA's Section 308 request, the EPA could
seek to impose liability for environmental cleanup on us with respect to the
matters being reviewed. The outcome of the EPA Section 308 request is not yet
known, and we are unaware of any potential liability of Enron, its affiliates,
or us. It is possible that our bankruptcy proceedings did not relieve us from
certain potential environmental remediation liability.
Environmental. We are subject to extensive federal, state and local laws
and regulations covering the discharge of materials into the environment, or
otherwise relating to the protection of the environment, and which require
expenditures for remediation at various operating facilities and waste disposal
sites, as well as expenditures in connection with the construction of new
facilities. At the federal level, such laws include, among others, the Clean Air
Act, the Clean Water Act, the Oil Pollution Act, the Resource Conservation and
Recovery Act, the Comprehensive Environmental Response, Compensation and
Liability Act, and the National Environmental Policy Act, as each may be amended
from time to time. Failure to comply with these laws and regulations may result
in the assessment of administrative, civil, and criminal penalties or the
imposition of injunctive relief.
Prior to the sale of our Liquids Operations discussed further in Note 8, we
produced MTBE at our Morgan's Point Facility. MTBE is used as an additive in
gasoline. Due to health concerns around MTBE, there have been lawsuits filed
against companies involved in the production of MTBE. We have not been named in
any such actions, nor do we
F-35
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
anticipate being included in any such actions. However, we can provide no
assurances that we may not be included in such actions due to our past
production of MTBE.
In 2001, expenses incurred for spill clean up and remediation costs related
to the assets purchased from Tex-New Mex increased significantly. Based on our
experience with these assets, we filed an amended cross-claim against Tex-New
Mex alleging contingent claims for potential remediation issues not yet known to
us. We allege that Tex-New Mex failed to report spills, underreported spills,
failed to properly respond to leaks in the pipeline and engaged in other
activities with regard to the pipeline that may result in future remediation
liabilities. We obtained $20 million in insurance coverage in connection with
the acquisition from Tex-New Mex believing that amount would be sufficient to
cover our remediation requirements along the pipeline for a ten-year period.
However, after four years into the term of the insurance policy, we have made
claims in excess of the amount of insurance coverage.
In addition to costs associated with the assets acquired from Tex-New Mex,
we have also incurred spill clean up and remediation costs in connection with
other properties we own in various locations throughout the United States. We
also have insurance covering clean up and remediation costs that may be incurred
in connection with properties not acquired from Tex-New Mex. However, no
assurance can be given that the insurance will be adequate to cover any such
cleanup and remediation costs.
The following are summaries of environmental remediation expense, estimated
environmental liabilities, and amounts receivable under insurance policies for
the indicated periods (in thousands):
SUCCESSOR COMPANY | PREDECESSOR COMPANY
----------------- | -----------------------------------------------------------
TEN MONTHS | TWO MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED | ENDED ENDED ENDED
DECEMBER 31, 2003 | FEBRUARY 28, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- | ----------------- ----------------- -------------------
|
Remediation expense.............. $ 9,107 | $ 1,979 $ 14,819 $ 25,372
Estimated insurance recoveries... (1,325)| (79) (1,316) (13,576)
------------------ | ------------------ ------------------ ------------------
Net remediation expense.......... $ 7,782 | $ 1,900 $ 13,503 $ 11,796
================== | ================== ================= ==================
SUCCESSOR COMPANY | PREDECESSOR COMPANY
----------------- | ------------------------------------------
TEN MONTHS | TWO MONTHS YEAR
ENDED | ENDED ENDED
DECEMBER 31, 2003 | FEBRUARY 28, 2003 DECEMBER 31, 2002
----------------- | ----------------- -------------------
|
Environmental liability at beginning of period..... $ 13,440 | $ 13,440 $ 12,075
Remediation expense................................ 9,107 | 1,979 14,819
Cash expenditures.................................. (10,331) | (1,979) (13,454)
----------------- | ---------------- ---------------------
Environmental liability at end of period........... $ 12,216 | $ 13,440 $ 13,440
================= | ================ =====================
SUCCESSOR COMPANY | PREDECESSOR COMPANY
----------------- | ------------------------------------------
TEN MONTHS | TWO MONTHS YEAR
ENDED | ENDED ENDED
DECEMBER 31, 2003 | FEBRUARY 28, 2003 DECEMBER 31, 2002
----------------- | ----------------- --------------------
|
Environmental insurance receivable at |
beginning of period........................... $ 8,837 | $ 8,803 $ 14,344
Estimated recoveries............................... 1,325 | 79 1,316
Cash receipts...................................... (7,073)| (45) (6,857)
------------------- | ----------------- ---------------------
Environmental insurance receivable at end of period $ 3,089 | $ 8,837 $ 8,803
=================== | ================= =====================
F-36
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The environmental liability was classified in Other Current ($6.4 million)
and Other Long-Term Liabilities ($5.8 million) and the insurance receivable was
classified in Trade and Other Receivables ($2.5 million) and Other Assets ($0.5
million) at December 31, 2003.
We may experience future releases of crude oil into the environment or
discover releases that were previously unidentified. While an inspection program
is maintained on our pipelines to prevent and detect such releases, and
operational safeguards and contingency plans are in place for the operation of
our processing facilities, damages and liabilities incurred due to any future
environmental releases could affect our business. We believe that our operations
and facilities are in substantial compliance with applicable environmental laws
and regulations and that there are no outstanding potential liabilities or
claims relating to safety and environmental matters of which we are currently
aware, the resolution of which, individually or in the aggregate, would have a
materially adverse effect on our financial position or results of operations.
However, we could be significantly adversely impacted by additional repair or
remediation costs related to the pipeline assets we acquired from Tex-New Mex if
the need for any additional repairs or remediation arises and we do not obtain
reimbursement for any such costs as a result of the pending litigation
concerning those assets. Our environmental expenditures include amounts spent on
permitting, compliance and response plans, monitoring and spill cleanup and
other remediation costs. In addition, we could be required to spend substantial
sums to ensure the integrity of our pipeline systems, and in some cases, we may
take pipelines out of service if we believe the costs of upgrades will exceed
the value of the pipelines.
No assurance can be given as to the amount or timing of future expenditures
for environmental remediation or compliance, and actual future expenditures may
be different from the amounts currently estimated. In the event of future
increases in costs, we may be unable to pass on those increases to our
customers.
Tax Status
For information regarding our continued qualification as a partnership for
federal income tax purposes, see Note 1.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair Value. Fair value represents the amount at which a financial
instrument could be exchanged in a current transaction between willing parties.
We have determined the estimated fair value amounts using available market data
and valuation methodologies. Judgment is required in interpreting market data
and the use of different market assumptions or estimation methodologies may
affect the estimated fair value amounts.
As of December 31, 2003 and 2002, the carrying amounts of items comprising
current assets and current liabilities approximate fair value due to the
short-term maturities of these instruments. The carrying amounts of the variable
rate instruments in our credit facilities approximate fair value because the
interest rates fluctuate with prevailing market rates. The carrying amount of
our derivative instruments and energy trading activities approximate fair value
as these contracts are recorded on the balance sheet at their fair value.
F-37
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying amount and fair values of our financial instruments are as
follows (in millions):
SUCCESSOR COMPANY | PREDECESSOR COMPANY
----------------- | -------------------
DECEMBER 31, 2003 | DECEMBER 31, 2002
----------------- | -----------------
Carrying Fair | Carrying Fair
Amount Value | Amount Value
------ ----- | ------ -----
|
NYMEX futures................ $ - $ - | $ 0.2 $ 0.2
Forward contracts............ $ 0.5 $ 0.5 | $ (1.0) $ (1.0)
Short-term debt.............. $ 45.0 $ 45.0 | $ 125.0 $ 125.0
Term loans................... $ 75.0 $ 75.0 | $ 75.0 $ 75.0
Enron Note................... $ 6.4 $ 6.5 | $ 6.2 $ 7.2
Long-term |
9% Notes.................. $ 104.5 $ 101.4 | $ - $ -
11% Notes.................. $ - $ - | $ 235.0 $ N/A
Long-term debt - other....... $ 2.3 $ 2.4 | $ 2.7 $ 2.4
As of December 31, 2002, it was not practicable to determine the fair value
of our 11% senior unsecured notes since we were not yet able to determine the
fair value of the consideration the senior unsecured noteholders would receive
under the Restructuring Plan. Under the terms of our Restructuring Plan, we
cancelled our 11% senior notes and the former senior unsecured noteholders and
holders of allowed general unsecured claims received a pro rata share of $104
million of 9% senior unsecured notes and a pro rata share of 11,947,820 Link LLC
units. Excluding amounts included in Liabilities Subject to Compromise at
December 31, 2002, we believe that the carrying amounts of other financial
instruments are a reasonable estimate of their fair value, unless otherwise
noted.
Generally, as we purchase crude oil, we enter into corresponding sales
transactions involving physical delivery of crude oil to third party users or
corresponding sales transactions on the NYMEX. This process enables us to
minimize our exposure to price risk until we take physical delivery of the crude
oil. In 2002, substantially all of our crude oil marketing and trading
operations are accounted for on a fair value basis pursuant to SFAS No. 133 or
EITF Issue 98-10. Effective January 1, 2003, energy trading contracts that are
not derivative instruments pursuant to SFAS No. 133 are no longer accounted for
at fair value. See further discussion of our accounting policies in Note 2.
The following table indicates fair values and changes in fair value of our
energy trading and derivative transactions (in thousands):
SUCCESSOR COMPANY | PREDECESSOR COMPANY
----------------- | ---------------------------------------
TEN MONTHS ENDED | TWO MONTHS ENDED YEAR ENDED
DECEMBER 31, 2003 | FEBRUARY 28, 2003 DECEMBER 31, 2002
----------------- | ----------------- -----------------
|
Fair value of contracts at beginning of period....... $ 1,254 | $ (844) $ (5,597)
Cumulative effect of accounting change............... - | (2,389) -
Change in realized and unrealized value.............. (2,401) | 4,114 3,814
Fair value of new contracts entered into during year. 1,673 | 373 939
----------------- | --------------- ------------------
Fair value of contracts at end of period............. $ 526 | $ 1,254 $ (844)
================= | =============== ==================
F-38
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Contracts at December 31, 2003
MATURITY GREATER
MATURITY OF 90 THAN 90 DAYS BUT
SOURCE OF FAIR VALUE DAYS OR LESS LESS THAN ONE YEAR TOTAL FAIR VALUE
-------------------- ------------ ------------------ ----------------
Prices Actively Quoted............... $ 677 $ (162) $ 515
*Prices Provided by Other
External Source................... 13 (2) 11
-------- -------- -------
Total............................. $ 690 $ (164) $ 526
======== ======== =======
*In determining the fair value of certain contracts, adjustments may be
made to published posting data, for location differentials and quality basis
adjustments.
Credit Risk. In the normal course of business, we extend credit to various
companies in the energy industry. Within this industry, certain elements of
credit risk exist and may, to varying degrees, exceed amounts recognized in the
accompanying consolidated financial statements, which may be affected by changes
in economic or other external conditions and may accordingly impact our overall
exposure to credit risk. Our exposure to credit loss in the event of
nonperformance is limited to the book value of the trade commitments included in
the accompanying Consolidated Balance Sheets. We manage our exposure to credit
risk through credit analysis, credit approvals, credit limits and monitoring
procedures. Further, we believe that our portfolio of receivables is well
diversified and that the allowance for doubtful accounts is adequate to absorb
any potential losses. We require collateral in the form of letters of credit for
certain of our receivables.
During the ten months ended December 31, 2003, the two months ended
February 28, 2003 and the years ended December 31, 2002, and 2001 sales to Koch
Supply & Trading L.P. accounted for approximately 19%, 19%, 17%, and 12% of our
consolidated gross revenues, respectively.
Market Risk. Our trading and non-trading transactions give rise to market
risk, which represents the potential loss that can be caused by a change in the
market value of a particular commitment. We closely monitor and manage our
exposure to market risk to ensure compliance with our stated risk management
policies which are regularly assessed to ensure their appropriateness given our
objectives, strategies and current market conditions.
We enter into forward, futures and other contracts to hedge the impact of
market fluctuations on assets, lease crude oil purchases or other contractual
commitments. Changes in the market value of transactions designated as energy
trading activities (prior to the rescission of EITF Issue 98-10) or derivatives
under SFAS 133 are recorded every period as mark-to-market gains or losses.
17. SUMMARY OF OUR SETTLEMENT AGREEMENT WITH ENRON
The General Partner and EOTT entered into a settlement agreement dated
October 8, 2002 (the "Enron Settlement Agreement") with Enron, Enron North
America Corp., Enron Energy Services, Inc., Enron Pipeline Services Company
("EPSC"), EGP Fuels Company ("EGP Fuels") and Enron Gas Liquids, Inc. ("EGLI")
(collectively, the "Enron Parties"). As part of the Settlement Agreement, Enron
consented to the filing of our bankruptcy in the Southern District of Texas, and
Enron waived its rights of first refusal with respect to the sale of the
Morgan's Point Facility, Mont Belvieu Facility and other assets we purchased
pursuant to the Purchase and Sale Agreement dated June 29, 2001 between Enron
and us. The EOTT Bankruptcy Court approved the Enron Settlement Agreement on
November 22, 2002, and the Enron Bankruptcy Court approved the Enron Settlement
Agreement on December 5, 2002. The Enron Settlement Agreement was consummated on
December 31, 2002. The following is a summary of the significant terms of the
settlement:
F-39
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- We entered into an Employee Transition Agreement with EPSC, which
provided for the transfer to us of certain employees of subsidiaries
of Enron which performed pipeline operations services for us,
effective January 1, 2003.
- The Enron Parties and us entered into a Termination Agreement on
October 8, 2002, which provided for the termination of various
agreements among the parties.
- At December 31, 2002, we executed a promissory note payable to Enron
in the initial principal amount of $6.2 million that is guaranteed by
our subsidiaries. The Enron Note is secured by an irrevocable letter
of credit and bears interest at 10% per annum.
- As additional consideration and as a compromise of certain claims, we
paid Enron $1,250,000 (the "Cash Payment") on the effective date of
our Restructuring Plan.
- We agreed, among other things, to assume obligations in our bankruptcy
cases and cure defaults under the Operation and Service Agreement with
EPSC whereby EPSC provided certain pipeline operation services to us.
We also agreed to indemnify EPSC against claims arising from the
General Partner's failure to perform its duties under the Operation
and Services Agreement or the General Partner's refusal to approve
EPSC recommended items or modifications in the budgets.
- We and the Enron Parties also mutually released each other for any and
all claims except those expressly reserved in the Enron Settlement
Agreement.
The following is a summary of the net Enron Settlement amount recorded in
Reorganization Items in the Consolidated Statement of Operations (in millions)
as discussed in Note 5:
Forgiveness of payable to Enron and affiliates............. $ 38.5
Forgiveness of performance collateral from Enron.......... 15.8
Note issued to Enron....................................... (6.2)
Cash Payment to Enron for certain claims................... (1.2)
Final contribution to Enron Cash Balance Plan.............. (1.4)
------
Total................................................... $ 45.5
======
18. IMPACT OF ENRON BANKRUPTCY AND TRANSACTIONS WITH ENRON AND RELATED PARTIES
IMPACT OF ENRON BANKRUPTCY
Beginning on December 2, 2001, Enron, along with certain of its
subsidiaries, filed bankruptcy proceedings under Chapter 11 of the Federal
Bankruptcy Code. Because of our contractual relationships with Enron and certain
of its subsidiaries, the bankruptcy significantly impacted us in various ways.
In connection with the Enron Settlement Agreement discussed above, the following
claims were released:
Rejection of Agreements; Claims Against Enron's Bankruptcy Estate. We were
adversely impacted as a result of the inclusion of EGLI in Enron's bankruptcy.
We had in place ten-year Toll Conversion and Storage Agreements with EGLI. As a
result of EGLI's non-performance under these agreements, we recorded a $29.1
million non-cash impairment, which was our remaining investment in these
long-term contracts, at December 31, 2001. We had a monetary damage claim
against EGLI and Enron as a result of the rejection of the agreements under the
Stipulation. Accordingly, we filed claims against EGLI in the Enron Bankruptcy
Court on May 12, 2002, resulting from EGLI's rejection of the Toll Conversion
and Storage Agreements, in the amount of $540.5 million. In addition, Enron
guaranteed EGLI's performance under the EGLI agreements; however, its guarantee
was limited to $50 million under the
F-40
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Toll Conversion Agreement and $25 million under the Storage Agreement.
Accordingly, we filed a claim against Enron in the Enron Bankruptcy Court
resulting from EGLI's rejection of the agreements in the amount of $75 million.
We filed additional claims against numerous Enron affiliates on October 15, 2002
totaling $213.5 million. Under the terms of the Enron Settlement Agreement, we
withdrew all claims filed by us in the Enron Bankruptcy Court upon the effective
date of our Restructuring Plan.
Performance Collateral from Enron. As discussed above, Enron guaranteed
payments under the Toll Conversion and Storage Agreements. In addition, EGLI
owed us approximately $9 million under the Toll Conversion and Storage
Agreements prior to filing for bankruptcy. Pursuant to the Toll Conversion and
Storage Agreements, if Enron's credit rating dropped below certain defined
levels specified in these agreements, we could request within five days of this
occurrence for EGLI to post letters of credit. The letters of credit could be
drawn upon if EGLI failed to pay any amount owed to us under these agreements.
The Toll Conversion Agreement provided that the letter of credit would be in an
amount reasonably requested by us, not to exceed $25 million. The Storage
Agreement provided that the letter of credit would be in an amount as reasonably
requested, but no amount is specified. In late November 2001, Enron's credit
rating fell below the ratings specified in these agreements. Accordingly, on
November 27, 2001, we requested that EGLI post two $25 million letters of
credit. In lieu of posting letters of credit, we received a $25 million
deposit/performance collateral from EGLI/Enron, against which we recouped the $9
million of outstanding invoices. We applied the remaining sum, approximately $16
million, to recoup or offset a portion of our damages as a result of EGLI's
rejection of the Toll Conversion and Storage Agreements. Our Restructuring Plan
resulted in a release by Enron of any claim to the $25 million
deposit/performance collateral.
Tax and Environmental Indemnities. We also had indemnities from Enron for
certain ad valorem taxes, possible environmental expenditures and title defects
relating to the Morgan's Point Facility and the Mont Belvieu Facility. The total
indemnity amount provided for under the Purchase Agreement was $25 million and
we had made no claims under the indemnities through December 31, 2002. Under the
terms of the Enron Settlement Agreement, we released Enron from these
indemnities.
Pension Plan Underfunding Issues. The Enron Settlement Agreement provided
that we withdraw from the defined benefit pension plan known as the Enron Corp.
Cash Balance Plan (the "Cash Balance Plan") on December 31, 2002. The PBGC filed
proofs of claim in our bankruptcy proceedings to address concerns about the Cash
Balance Plan, and also an objection to our Restructuring Plan ("PBGC Claim").
To address the issues raised by the PBGC, as well as the objections we
filed to the PBGC's proofs of claim, a Stipulation and Order Regarding EOTT
Chapter 11 Proceedings and Settlement Among the Enron Parties, us and the PBGC
(the "PBGC Stipulation") was executed and entered by the Enron Bankruptcy Court
on February 27, 2003.
The PBGC Stipulation set forth that Enron will continue to hold, subject to
the terms of the PBGC Stipulation, the Enron Note, the letter of credit securing
the Enron Note, any payments thereunder, and the Cash Payment (collectively, the
"Settlement Proceeds") on behalf of the Enron Parties. Any claim of the PBGC
against us for liabilities (if any) arising from the Cash Balance Plan will
attach to the Settlement Proceeds with the same effect (if any) that such claim
(if any) now has as against us and such claim will be subject to the claims and
defenses of the Enron Parties and the Enron Creditors' Committee with respect
thereto. The PBGC's rights regarding the Settlement Proceeds will constitute the
sole basis for the PBGC to seek to enforce its claims (if any) against us for
the PBGC Claims.
TRANSACTIONS WITH ENRON AND RELATED PARTIES
At December 31, 2002, we had current payables to Enron of $3.6 million,
which was primarily comprised of certain amounts owed to Enron under the Enron
Settlement Agreement. In addition, we had $5.2 million of long-term liabilities
F-41
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
owed to Enron at December 31, 2002, which is the long-term portion of the note
issued in connection with the Enron Settlement Agreement.
The agreements described below were terminated and the amounts due under
these agreements were forgiven effective December 31, 2002 under the terms of
the Enron Settlement Agreement. See further discussion in Note 17.
Operations and General and Administrative Services. As is commonly the case
with publicly traded partnerships, we did not directly employ any persons
responsible for managing or operating EOTT or for providing services relating to
day-to-day business affairs prior to January 1, 2003. The General Partner
provided such services or obtained such services from third parties and we were
responsible for reimbursing the General Partner for substantially all of its
direct and indirect costs and expenses. The General Partner, through the MLP
Partnership Agreement, provided services to us under a Corporate Services
Agreement which included liability and casualty insurance and certain data
processing services and employee benefits. Those costs were $1.9 million, and
$2.5 million, for the years ended December 31, 2002 and 2001, respectively.
Operation and Services Agreement with EPSC. EPSC agreed to provide certain
operating and administrative services to the General Partner, effective October
1, 2000 and the agreement provided that the General Partner would reimburse EPSC
for its costs and expenses in rendering the services. The General Partner would
in turn be reimbursed by us. EOTT LLC took over these services effective January
1, 2003. The costs incurred related to these services for the years ended
December 31, 2002 and 2001 were $24.6 million, and $56.7 million respectively.
Transition Services Agreement with EGP Fuels. The General Partner entered
into an agreement for EGP Fuels to provide transition services through December
31, 2001 for the processing of invoices and payments to third parties related to
the Morgan's Point Facility and Mont Belvieu Facility. The agreement provided
that the General Partner would reimburse EGP Fuels for these direct costs and we
would reimburse the General Partner. Costs related to these services were $12.3
million for the six months ended December 31, 2001.
Credit Facility. We had a credit facility with Enron to provide credit
support in the form of guarantees, letters of credit and working capital loans
through December 31, 2001.
Purchase and Sale Agreement. We acquired certain liquids processing,
storage and transportation assets in June 2001 from Enron. See further
discussion in Note 8.
Additional Partnership Interests. On May 14, 1999 and February 14, 2000,
Enron paid $2.5 million and $6.8 million, respectively, in support of our first
and fourth quarter 1999 distributions to our common unitholders and received
APIs. APIs have no voting rights and do not receive distributions. In connection
with the Restructuring Plan, the API's were cancelled.
19. EMPLOYEE BENEFIT AND RETIREMENT PLANS
Successor Company
We adopted welfare benefit plans providing medical, dental, life,
accidental death and dismemberment and long-term disability coverage to
employees, with all related premiums and costs not offset by employee
contributions being incurred by us. Link Energy implemented a Savings Plan in
March 2003 for all employees. Total benefit costs for the ten months ended
December 31, 2003 were $4.6 million, including $4.3 million in costs
attributable to health and welfare benefit plans.
In 2003, we adopted the Link Energy Annual Incentive Plan, a variable pay
plan, based on our earnings before depreciation adjusted for restructuring
costs. No bonuses were paid out under this plan for 2003.
F-42
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We provide no postretirement medical, life insurance and dental benefits to
employees who retire. The Company provides unemployment, severance and
disability-related benefits or continuation of benefits such as health care and
life insurance and other postemployment benefits. SFAS No. 112 requires the cost
of those benefits to be accrued over the service lives of the employees expected
to receive such benefits. At December 31, 2003, the liability accrued was $0.9
million.
The Compensation Committee recommended to the Board of Directors the
adoption of the Link Energy Equity Incentive Plan ("Incentive Plan") effective
June 2003. The Incentive Plan is designed to promote individual performance by
relating executive compensation directly to the creation of unitholder wealth.
Under the Incentive Plan, the Committee is authorized to grant awards of
restricted units to executive officers and other key employees. In June 2003,
1.2 million restricted stock units were authorized to be issued to certain key
employees and directors. The Incentive Plan has a ten-year term and restricted
unit awards granted thereunder typically vest over a three-year period.
Outstanding awards have a vesting schedule of 50% vested on June 1, 2004; 25%
vested on June 1, 2005 and 25% vested on June 1, 2006. We have recorded
compensation expense of $2.3 million for the ten months ended December 31, 2003.
The following table sets forth the Equity Incentive Plan activity for the
ten months ended December 31, 2003:
Number
of Restricted Units
-------------------
Outstanding at March 1, 2003 -
Granted 875,000
Forfeited (45,000)
-------
Outstanding at December 31, 2003 830,000
=======
Available for grant at December 31, 2003 370,000
=======
Predecessor Company
We adopted welfare benefit plans providing medical, dental, life,
accidental death and dismemberment and long-term disability coverage to
employees, with all related premiums and costs not offset by employee
contributions being incurred by us. Total benefit costs for the two months ended
February 28, 2003 were $1.3 million, including $1.1 million in costs
attributable to health and welfare benefit plans. Total benefit costs for 2002
were $8.9 million, including $6.3 million in costs attributable to health and
welfare benefit plans. Total benefit costs for 2001 were $6.7 million, including
$4.6 million in cost attributable to health and welfare benefit plans. Through
December 31, 2002, employees of the Company were covered by various retirement,
stock purchase and other benefit plans of Enron.
In 2002, we accrued $2.1 million in connection with guaranteed bonuses and
retention payments. In 2001, the Company maintained a variable pay plan based on
our earnings before interest and depreciation and amortization pursuant to which
$3.6 million was recorded.
As discussed in Note 18, we were a participating employer in the Cash
Balance Plan until the consummation of the Enron Settlement Agreement on
December 31, 2002. See Note 18 for further discussion regarding issues raised by
the PBGC concerning this plan and an agreed stipulation executed between the
PBGC, the Enron Parties and us.
Prior to December 31, 2002, we provided certain postretirement medical,
life insurance and dental benefits to eligible employees who retired after
January 1, 1994. Benefits were provided under the provisions of contributory
defined dollar benefit plans for eligible employees and their dependents. We
terminated our participation in this plan effective December 31, 2002. These
postretirement benefit costs were accrued over the service lives of employees
expected to be eligible to receive such benefits. Enron retained liability for
former employees of the Company who
F-43
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
retired prior to January 1, 1994. In connection with the termination,
curtailment and settlement gains of $1.5 million were recorded in 2002.
The following table sets forth information related to changes in the
benefit obligations, changes in plan assets, and components of the expense
recognized related to postretirement benefits provided by the Company (in
thousands):
2002
----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1............................ $ 1,103
Service cost............................................... 144
Interest cost.............................................. 137
Plan participants' contributions........................... 76
Plan amendments............................................ 7
Actuarial loss (gain)...................................... 895
Effect of curtailments..................................... (1,815)
Effect of settlements...................................... (380)
Benefits paid.............................................. (167)
----------
Benefit obligation at December 31.......................... $ -
==========
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1..................... $ -
Company contributions...................................... 91
Plan participants' contributions........................... 76
Benefits paid.............................................. (167)
----------
Fair value of plan assets at December 31................... $ -
==========
2002 2001
---- ----
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost............................... $ 144 $ 99
Interest cost.............................. 137 73
Amortization of prior service cost......... 24 24
Recognized net actuarial gain.............. 5 (29)
------------ ------------
Net periodic postretirement benefit cost... 310 167
Effect of curtailments..................... (1,160) -
Effect of settlements...................... (380) -
------------ ------------
Total benefit cost (credit)............ $ (1,230) $ 167
============ ============
We provided unemployment, severance and disability-related benefits or
continuation of benefits such as health care and life insurance and other
postemployment benefits. SFAS No. 112 requires the cost of those benefits to be
accrued over the service lives of the employees expected to receive such
benefits. At December 31, 2002, the liability accrued was $1.2 million.
EOTT Energy Corp. Unit Option Plan. In February 1994, the Board of
Directors adopted the 1994 EOTT Energy Corp. Unit Option Plan (the "Unit Option
Plan"), which was a variable compensatory plan. To date, no compensation expense
has been recognized under the Unit Option Plan. Under the Unit Option Plan,
selected employees were granted options to purchase subordinate units at a price
of $15.00 per unit as determined by the Compensation Committee of the Board of
Directors. Options granted under the Unit Option Plan vested to the employees
over a five-year period and expired on the tenth anniversary of the date of
grant. Under the Restructuring Plan, the Unit Option Plan was terminated on
February 28, 2003.
Unit Option Plan activity for the years ended December 31, 2001 and 2002,
and the two months ended February 28, 2003, consisted of forfeitures of 5,000
shares, 240,000 shares and 215,000 shares, respectively. No shares were
outstanding or available for grant at February 28, 2003.
F-44
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EOTT Energy Corp. Long-Term Incentive Plan. In October 1997, the Board of
Directors adopted the EOTT Energy Corp. Long-Term Incentive Plan ("Plan"), which
was a variable compensatory plan. Under the Plan, selected key employees were
awarded Phantom Appreciation Rights ("PAR"). Each PAR was a right to receive
cash based on our performance prior to the time the PAR was redeemed. Our
performance was measured primarily by calculating the change in the average of
Earnings Before Interest on Debt related to acquisitions, Depreciation and
Amortization ("EBIDA"), for each of the three consecutive fiscal years
immediately preceding the grant date of the PAR and the exercise date of the
PAR. The Plan had a five-year term beginning January 1, 1997, and PAR awards
vested in 25% increments in the four-year period following the grant year. Under
the Restructuring Plan, the Long-Term Incentive Plan was terminated on February
28, 2003.
The following table sets forth the Long-Term Incentive Plan activity for
the two months ended February 28, 2003 and the years ended December 31, 2002 and
2001:
NUMBER OF PARS
------------------------------------------------
TWO MONTHS YEAR ENDED DECEMBER 31,
ENDED -------------------------
FEBRUARY 28, 2003 2002 2001
----------------- ---- ----
Outstanding beginning of period................. 274,394 1,067,375 939,975
Granted.................................... - - 332,000
Exercised.................................. - 684,831 106,250
Forfeited.................................. 274,394 108,150 98,350
------- ------- ---------
Outstanding at end of period.................... - 274,394 1,067,375
======= ========= =========
Available for grant at end of period............ - - -
======= ========= =========
Note: PARs were not available for grant after December 31, 2001 as the term
of the plan expired December 31, 2001.
20. NEW ACCOUNTING STANDARDS
Accounting Standards Adopted
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement requires entities to record the fair
value of a liability for legal obligations associated with the retirement
obligations of tangible long-lived assets in the period in which it is incurred.
When the liability is initially recorded, a corresponding increase in the
carrying value of the related long-lived asset would be recorded. Over time,
accretion of the liability is recognized each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss on settlement. We adopted the accounting principle
required by the new statement effective January 1, 2003. Determination of the
fair value of the retirement obligation is based on numerous estimates and
assumptions including estimated future third-party costs, future inflation rates
and the future timing of settlement of the obligations.
At the time of adoption of the new standard, our long-lived assets
consisted primarily of our crude oil gathering and transmission pipelines and
associated field storage tanks, our liquids processing and handling facilities
at Morgan's Point, our underground storage facility and associated pipeline grid
system, and transportation facilities at Mont Belvieu and our gas processing and
fractionation plant and related storage and distribution facilities on the West
Coast. Since our initial adoption of this standard, a number of these assets
have been sold.
We identified asset retirement obligations that are within the scope of the
new statement, including contractual obligations included in certain
right-of-way agreements, easements and surface leases associated with our crude
oil
F-45
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
gathering, transportation and storage assets and obligations pertaining to
closure and/or removal of facilities and other assets associated with our
Morgan's Point, Mont Belvieu and West Coast facilities. We have estimated the
fair value of asset retirement obligations based on contractual requirements
where the settlement date is reasonably determinable. We could not make
reasonable estimates of the fair values of certain retirement obligations,
principally those associated with certain right-of-way agreements and easements
for our pipelines, our Morgan's Point, Mont Belvieu and West Coast facilities,
because the settlement dates for the retirement obligations cannot be reasonably
determined. We will record retirement obligations associated with these assets
in the period in which sufficient information exists to reasonably estimate the
settlement dates of the respective retirement obligations.
As a result of the adoption of SFAS 143 on January 1, 2003, we recorded a
liability of $1.7 million, property, plant and equipment, net of accumulated
depreciation of $0.1 million and a cumulative effect of a change in accounting
principle of $1.6 million. The effect of adoption of the new accounting
principle was not material to the results of operations for the two months ended
February 28, 2003, nor would it have had a material impact on our net income for
the years ended December 31, 2002 or 2001. The asset retirement obligation as of
January 1, 2002 was not material.
In September 2003, we recorded additional asset retirement obligations
resulting from the planned reduction in our operations at the Morgan's Point
Facility to phase out the production of MTBE. Such obligations have been settled
at December 31, 2003. The following is a roll-forward of our asset retirement
obligations for the two months ended February 28, 2003 and for the ten months
ended December 31,2003:
SUCCESSOR COMPANY | PREDECESSOR COMPANY
----------------- | -------------------
TEN MONTHS | TWO MONTHS
ENDED | ENDED
DECEMBER 31, 2003 | FEBRUARY 28, 2003
----------------- | -----------------
|
Balance at beginning of period........................... $ 1,678 | $ -
Additions to liability................................... 1,525 | 1,675
Accretion expense........................................ 13 | 3
Liabilities settled...................................... (1,403) | -
Revisions to estimates................................... - | -
------------- | -------------
Balance at end of period................................. $ 1,813 | $ 1,678
============= | =============
In October 2002, the EITF reached a consensus in EITF Issue 02-03 to
rescind Issue EITF 98-10, and related interpretive guidance, and preclude mark
to market accounting for energy trading contracts that are not derivative
instruments pursuant to SFAS 133. The consensus requires that gains and losses
(realized and unrealized) on all derivative instruments held for trading
purposes be shown net in the income statement, whether or not the instrument is
settled physically. The consensus to rescind EITF Issue 98-10 eliminated our
basis for recognizing physical inventories at fair value. The consensus to
rescind EITF Issue 98-10 was effective for all new contracts entered into (and
physical inventory purchased) after October 25, 2002. For energy trading
contracts and physical inventories that existed on or before October 25, 2002,
that remained at December 31, 2002, the consensus was effective January 1, 2003
and was reported as a cumulative effect of a change in accounting principle. The
cumulative effect of the accounting change on January 1, 2003 was a loss of $2.4
million. With the rescission of EITF Issue 98-10, inventories purchased after
October 25, 2002 have been valued at average cost.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities - an Interpretation of ARB No. 51" ("FIN 46"). FIN
46 is an interpretation of Accounting Research Bulletin 51, "Consolidated
Financial Statements", and addresses consolidation by business enterprises of
variable interest entities ("VIE"). FIN 46 requires an enterprise to consolidate
a VIE if that enterprise has a variable interest that will absorb a majority of
the entity's expected losses if they occur, receive a majority of the entity's
expected residual returns if they occur, or both. This
F-46
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
guidance applies immediately to VIE's created after January 31, 2003, and to
VIE's in which an enterprise obtains an interest after that date. We implemented
FIN 46 effective with the adoption of fresh start reporting on March 1, 2003.
This statement did not have any impact on our financial statements.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instrument and Hedging Activities." The statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. The new statement is effective for contracts entered into or modified after
June 30, 2003 (with certain exceptions) and for hedging relationships designated
after June 30, 2003. The accounting guidance in the new statement is to be
applied prospectively. We implemented SFAS 149 effective with the adoption of
fresh start reporting on March 1, 2003. This statement did not have any impact
on our financial statements.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This statement
establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The statement will be implemented by
reporting the cumulative effect of a change in accounting principle for
financial instruments created before the issuance date of the statement and
still existing at the beginning of the period of adoption. We implemented SFAS
150 effective with the adoption of fresh start reporting on March 1, 2003. The
adoption of this statement did not have any impact on our financial statements.
Accounting Standards Not Yet Adopted
In December 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003), "Consolidation of Variable Interest Entities - an Interpretation
of ARB No.51" ("FIN 46R"). FIN 46R replaces FIN 46 (discussed above) which we
implemented effective with the adoption of fresh start reporting on March 1,
2003. FIN 46R is required to be implemented by the end of the first reporting
period beginning after December 15, 2003. We plan to adopt FIN 46R effective
January 1, 2004. Adoption of FIN 46R will not have an impact on our financial
statements.
21. BUSINESS SEGMENT INFORMATION
We have two reportable segments, which management reviews in order to make
decisions about resources to be allocated and assess performance: North American
Crude Oil and Pipeline Operations. The North American Crude Oil segment
primarily purchases, gathers, transports and markets crude oil. The Pipeline
Operations segment operates approximately 6,900 miles of active common carrier
pipelines in 12 states. Effective December 31, 2003, we sold our Liquids
Operations and therefore the results of operations related to these assets have
been reclassified to discontinued operations for all periods presented herein.
Effective June 30, 2001, we sold our West Coast crude oil gathering and
marketing operations. Effective June 1, 2002, we sold our West Coast refined
products marketing operations. Effective June 25, 2003, we signed a definitive
agreement to sell all of our natural gas liquids assets on the West Coast, which
subsequently closed on October 1, 2003. The results of operations related to
these assets previously included in the West Coast Operations segment have been
reclassified to discontinued operations for all periods presented herein.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies as discussed in Note 2. We
evaluate performance based on operating income (loss).
We account for intersegment revenue for our North American Crude Oil
Operations as if the sales were to third parties, that is, at current market
prices. Intersegment revenues for Pipeline Operations are based on published
pipeline tariffs.
F-47
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL INFORMATION BY BUSINESS SEGMENT
(IN THOUSANDS)
NORTH CORPORATE
AMERICAN PIPELINE AND
CRUDE OIL OPERATIONS OTHER (a) CONSOLIDATED
--------- ---------- --------- ------------
TEN MONTHS ENDED DECEMBER 31, 2003
(SUCCESSOR COMPANY)
Revenue from external customers............. $ 135,789 $ 16,887 $ - $ 152,676
Intersegment revenue (b).................... (17,731) 71,605 (53,874) -
----------- ----------- ------------ ------------
Total operating revenue (c)............... 118,058 88,492 (53,874) 152,676
----------- ----------- ------------ ------------
Gross profit (loss)......................... 12,752 28,688 - 41,440
----------- ----------- ------------ ------------
Operating income (loss)..................... 4,522 30,494 (25,690) 9,326
Other expenses, net ........................ - - (32,516) (32,516)
----------- ----------- ------------ ------------
Income (loss) from continuing operations.... 4,522 30,494 (58,206) (23,190)
----------- ----------- ------------ ------------
Long-lived assets of continuing operations.. 62,530 199,719 261 262,510
----------- ----------- ------------ ------------
Total assets................................ 516,849 206,773 15,022 738,644
----------- ----------- ------------ ------------
Additions to long-lived assets-continuing
operations.................................. 858 7,265 175 8,298
----------- ----------- ------------ ------------
Depreciation and amortization............... 2,150 14,989 22 17,161
----------- ----------- ------------ ------------
________________________________________________________________________________
NORTH CORPORATE
AMERICAN PIPELINE AND
CRUDE OIL OPERATIONS OTHER (a) CONSOLIDATED
--------- ----------- ------------ ------------
TWO MONTHS ENDED FEBRUARY 28, 2003
(PREDECESSOR COMPANY)
Revenue from external customers............. $ 27,692 $ 4,287 $ - $ 31,979
Intersegment revenue (b).................... (1,768) 11,828 (10,060) -
----------- ----------- ------------ ------------
Total operating revenue (c)............... 25,924 16,115 (10,060) 31,979
----------- ----------- ------------ ------------
Gross profit (loss) ........................ 4,231 5,450 - 9,681
----------- ----------- ------------ ------------
Operating income (loss)..................... 2,844 3,492 (4,012) 2,324
Other income, net .......................... - - (5,489) (5,489)
Reorganization items, net gain on
discharge of debt and fresh start
adjustments (d)........................... - - 67,459 67,459
----------- ----------- ------------ ------------
Income (loss) from continuing operations.... 2,844 3,492 57,958 64,294
----------- ----------- ------------ ------------
Long-lived assets of continuing operations.. 75,046 209,476 476 284,998
----------- ----------- ------------ ------------
Total assets................................ 506,444 226,656 123,357 856,457
----------- ----------- ------------ ------------
Additions to long-lived assets-continuing
operations.................................. 8 108 - 116
----------- ----------- ------------ ------------
Depreciation and amortization............... 837 3,286 519 4,642
----------- ----------- ------------ ------------
F-48
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH CORPORATE
AMERICAN PIPELINE AND
CRUDE OIL OPERATIONS OTHER (a) CONSOLIDATED
--------- ---------- --------- ------------
YEAR ENDED DECEMBER 31, 2002
(PREDECESSOR COMPANY)
Revenue from external customers............. $ 154,608 $ 28,334 $ - $ 182,942
Intersegment revenue (b).................... (11,320) 79,008 (67,688) -
----------- ----------- -------------- ------------
Total operating revenue (c).............. 143,288 107,342 (67,688) 182,942
----------- ----------- -------------- ------------
Gross profits............................... 3,396 34,162 - 37,558
----------- ----------- -------------- ------------
Operating income (loss)..................... (13,861) 15,325 (28,531) (27,067)
Other expense............................... - - (45,793) (45,793)
Reorganization items (d).................... - - 32,847 32,847
----------- ----------- -------------- ------------
Income (loss) from continuing operations
before cumulative effect of accounting
changes (d)............................... (13,861) 15,325 (41,477) (40,013)
----------- ----------- -------------- ------------
Long-lived assets of continuing operations.. 71,282 261,975 7,802 341,059
----------- ----------- -------------- ------------
Total assets................................ 475,889 286,769 110,776 873,434
----------- ----------- -------------- ------------
Additions to long-lived assets -
continuing operations....................... 1,158 15,494 136 16,788
----------- ----------- -------------- ------------
Depreciation and amortization............... 5,740 20,881 3,267 29,888
----------- ----------- -------------- ------------
NORTH CORPORATE
AMERICAN PIPELINE AND
CRUDE OIL OPERATIONS OTHER (a) CONSOLIDATED
--------- ---------- --------- ------------
YEAR ENDED DECEMBER 31, 2001
(PREDECESSOR COMPANY)
Revenue from external customers............. $ 226,564 $ 24,009 $ - $ 250,573
Intersegment revenue (b).................... (15,673) 103,515 (87,842) -
----------- ----------- ------------ ------------
Total operating revenue (c).............. 210,891 127,524 (87,842) 250,573
----------- ----------- ------------ ------------
Gross profits............................... 25,213 56,689 - 81,902
----------- ----------- ------------ ------------
Operating income (loss)..................... 9,742 49,966 (24,848) 34,860
Other expense............................... - - (34,561) (34,561)
----------- ----------- ------------ ------------
Income (loss) from continuing operations
before cumulative effect of accounting
changes (d).............................. 9,742 49,966 (59,409) 299
----------- ----------- ------------ ------------
Long-lived assets of continuing operations.. 75,703 266,806 11,544 354,053
----------- ----------- ------------ ------------
Total assets................................ 629,199 296,044 180,506 1,105,749
----------- ----------- ------------ ------------
Additions to long-lived assets-continuing
operations.................................. 3,844 16,500 2,140 22,484
----------- ----------- ------------ ------------
Depreciation and amortization............... 6,010 21,792 3,083 30,885
----------- ----------- ------------ ------------
(a) Corporate and Other also includes intersegment eliminations.
(b) Intersegment sales for North American Crude Oil are made at prices
comparable to those received from external customers. Intersegment
sales for Pipeline Operations are based on published pipeline tariffs.
(c) In connection with the adoption of EITF Issue 02-03, we have presented
all purchase and sale transactions related to our crude oil marketing
and trading activities on a net basis.
(d) The two months ended February 28, 2003 include a gain from
reorganization items of $7.3 million, a gain on discharge of debt of
$131.6 million and a loss related to fresh start adjustments of $56.8
million. See Notes 5 and 6. 2002 includes a net gain from
reorganization items of $32.8 million.
F-49
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
(In Thousands, Except Per Unit Amounts)
FIRST SECOND THIRD FOURTH
SUCCESSOR COMPANY QUARTER(1) QUARTER QUARTER QUARTER TOTAL
----------------- ---------- --------- --------- --------- ----------
2003
Operating revenue............................. $ 17,315 $ 43,956 $ 45,341 $ 46,064 $ 152,676
Gross profit.................................. 8,077 15,732 7,792 9,839 41,440
Operating income (loss)....................... 4,329 2,900 (4,133) 6,230 9,326
Net income (loss) from continuing operations.. 1,052 (6,776) (13,687) (3,779) (23,190)
Basic net income (loss) per Unit.............. 0.09 (0.55) (1.11) (0.31) (1.88)
Diluted net income (loss) per Unit............ 0.09 (0.55) (1.11) (0.31) (1.88)
Cash distributions per Unit................... - - - - -
________________________________________________________________________________
FIRST SECOND THIRD FOURTH
PREDECESSOR COMPANY QUARTER(2) QUARTER QUARTER QUARTER TOTAL
------------------- ---------- --------- --------- --------- ----------
2003
Operating revenue............................. $ 31,979 $ - $ - $ - $ 31,979
Gross profit.................................. 9,681 - - - 9,681
Operating income.............................. 2,324 - - - 2,324
Net income (loss) from continuing
operations(3)................................ 64,294 - - - 64,294
Basic net income (loss) per Unit (4)..........
Common..................................... 0.16 - - - 0.16
Subordinated............................... - - - - -
Diluted net income (loss) per Unit............ 0.11 - - - 0.11
Cash distributions per Common Unit............ - - - - -
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
2002
Operating revenue........................... $ 54,960 $ 47,630 $ 42,814 $ 37,538 $ 182,942
Gross profit................................ 17,131 12,484 3,579 4,364 37,558
Operating income (loss)..................... 5,431 (1,381) (13,069) (18,048) (27,067)
Net income (loss) from continuing
operations (3)............................. (5,718) (13,610) (26,114) 5,429 (40,013)
Basic net income (loss) per Unit (4)
Common................................... (0.05) - - - (0.05)
Subordinated............................. (0.49) (1.43) (1.32) - (3.24)
Diluted net income (loss) per Unit.......... (0.20) (0.46) (0.44) - (1.10)
Cash distributions per Common Unit (5)...... 0.25 - - - 0.25
(1) For the period March 1, 2003 through March 31, 2003.
(2) For the period January 1, 2003 through February 28, 2003.
(3) The two months ended February 28, 2003 include a $7.3 million gain on
reorganization items, a $131.6 million gain on the discharge of debt and a
$56.8 million loss from fresh start adjustments. Fourth quarter 2002
amounts include a net gain on reorganization items of $32.8 million.
(4) See Note 12 for discussion regarding the allocation of net income (loss) to
unitholders.
(5) Cash distributions are shown in the quarter paid and are based on the
prior quarter's earnings.
F-50
LINK ENERGY LLC
(A LIMITED LIABILITY COMPANY)
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE TEN MONTHS ENDED DECEMBER 31, 2003, TWO MONTHS ENDED
FEBRUARY 28, 2003, AND
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
(In Thousands)
Balance at Charges to Balance at
Beginning Costs and Deductions End
of Period Expenses and Other of Period
--------- --------- --------- ---------
Successor Company
Ten Months Ended December 31, 2003
Allowance for Doubtful Accounts........ $ 1,210 $ - $ - $ 1,210
Litigation Provisions.................. $ 1,605 $ - $ (1,146) $ 459
Safety and Environmental............... $ 13,440 $ 9,107 $ (10,331) $ 12,216
_______________________________________________________________________________________________
Predecessor Company
Two Months Ended February 28, 2003
Allowance for Doubtful Accounts........ $ 1,210 $ - $ - $ 1,210
Litigation Provisions.................. $ 8,376 $ - $ (6,771) $ 1,605
Safety and Environmental............... $ 13,440 $ 1,979 $ (1,979) $ 13,440
Year ended December 31, 2002
Allowance for Doubtful Accounts........ $ 1,225 $ - $ (15) $ 1,210
Litigation Provisions.................. $ 315 $ 8,163 $ (102) $ 8,376
Safety and Environmental............... $ 12,075 $ 14,819 $ (13,454) $ 13,440
Year ended December 31, 2001
Allowance for Doubtful Accounts........ $ 1,827 $ - $ (602) $ 1,225
Litigation Provisions.................. $ 1,000 $ 315 $ (1,000) $ 315
Safety and Environmental............... $ 6,412 $ 25,372 $ (19,709) $ 12,075
S-1
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
2.1(a) Third Amended Joint Chapter 11 Plan of the Debtors
(incorporated by reference to Exhibit 2.1 to current report on
Form 8-K/A for EOTT Energy Partners, L.P. dated December 17,
2002)
2.1(b) Supplement/Amendment to Third Amended Joint Chapter 11 Plan of
the Debtors and Glossary of Defined Terms (incorporated by
reference to Exhibit 2.2 to current report on Form 8-K for
EOTT Energy Partners, L.P. dated March 4, 2003)
2.2 Third Amended Disclosure Statement Under 11 U.S.C. Section
1125 In Support of the Joint Chapter 11 Plan of the Debtors
(incorporated by reference to Exhibit 2.2 to current report on
Form 8-K/A for EOTT Energy Partners, L.P. dated December 17,
2002)
3.1(a) Certificate of Formation of EOTT Energy L.L.C., dated as of
November 13, 2002 (incorporated by reference to Exhibit 3.1 to
Annual Report on Form 10-K for EOTT Energy L.L.C. for the year
ended December 31, 2002)
3.1(b) Amended and Restated Limited Liability Company Agreement of
EOTT Energy L.L.C., dated as of March 1, 2003 (incorporated by
reference to Exhibit 3.2 to Annual Report on Form 10-K for
EOTT Energy L.L.C. for the year ended December 31, 2002)
3.1(c) Amendment No. 1 to Amended and Restated Limited Liability
Company Agreement of EOTT Energy L.L.C. effective as of
October 1, 2003 (incorporated by reference to Exhibit 3.4 to
Quarterly Report on Form 10-Q for EOTT Energy L.L.C. for the
quarterly period ended September 30, 2003)
3.1(d) Certificate of Amendment to Certificate of Formation of EOTT
Energy L.L.C. effective as of October 1, 2003 (incorporated by
reference to Exhibit 3.3 to Quarterly Report on Form 10-Q for
EOTT Energy L.L.C. for the quarterly period ended September
30, 2003)
3.2 Certificate of Merger of EOTT Energy Partners, L.P. into EOTT
Energy Operating Limited Partnership, filed on March 4, 2003
(incorporated by reference to Exhibit 3.3 to Annual Report on
Form 10-K for EOTT Energy L.L.C. for the year ended December
31, 2002)
3.3(a) Form of Amended and Restated Agreement of Limited Partnership
of EOTT Energy Operating Limited Partnership (incorporated by
reference to Exhibit 10.11 to Registration Statement for EOTT
Energy Partners, L.P., File No. 33-73984)
3.3(b) Amendment No. 1 dated as of September 1, 1999 to Amended and
Restated Agreement of Limited Partnership of EOTT Energy
Operating Limited Partnership (incorporated by reference to
Exhibit 3.2 to current report on Form 8-K for EOTT Energy
Partners, L.P. dated September 29, 1999)
3.3(c) Amendment No. 2 dated as of August 29, 2001 to Amended and
Restated Agreement of Limited Partnership of EOTT Energy
Operating Limited Partnership (incorporated by reference to
Exhibit 3.10 to Current Report on Form 8-K/A for EOTT Energy
Partners, L.P. dated August 30, 2001)
3.3(d) Amendment No. 3 to Amended and Restated Agreement of Limited
Partnership of EOTT Energy Operating Limited Partnership
effective as of October 1, 2003 (incorporated by reference to
Exhibit 3.8 to Quarterly Report on Form 10-Q for EOTT Energy
L.L.C. for the quarterly period ended September 30, 2003)
3.3(e) Certificate of Amendment to Certificate of Limited Partnership
of EOTT Energy Operating Limited Partnership effective as of
October 1, 2003 (incorporated by reference to Exhibit 3.7 to
Quarterly Report on Form 10-Q for EOTT Energy L.L.C. for the
quarterly period ended September 30, 2003)
3.4(a) Form of Amended and Restated Agreement of Limited Partnership
of EOTT Energy Pipeline Limited Partnership (incorporated by
reference to Exhibit 3.8 to Registration Statement for EOTT
Energy Partners, L.P., File No. 33-82269)
3.4(b) Amendment No. 1 dated as of September 1, 1999, to Amended and
Restated Agreement of Limited Partnership of EOTT Energy
Pipeline Limited Partnership (incorporated by reference to
Exhibit 3.3 to current report on Form 8-K dated September 29,
1999)
3.4(c) Amendment No. 2 dated as of August 29, 2001 to Amended and
Restated Agreement of Limited Partnership of EOTT Energy
Pipeline Limited Partnership (incorporated by reference to
Exhibit 3.11 to Current Report on Form 8-K/A for EOTT Energy
Partners, L.P. dated August 30, 2001)
3.4(d) Amendment No. 3 to Amended and Restated Agreement of Limited
Partnership of EOTT Energy Pipeline Limited Partnership
effective as of October 1, 2003 (incorporated by reference to
Exhibit 3.12 to Quarterly Report on Form 10-Q for EOTT Energy
L.L.C. for the quarterly period ended September 30, 2003)
3.4(e) Certificate of Amendment to Certificate of Limited Partnership
of EOTT Energy Pipeline Limited Partnership effective as of
October 1, 2003 (incorporated by reference to Exhibit 3.11 to
Quarterly Report on Form 10-Q for EOTT Energy L.L.C. for the
quarterly period ended September 30, 2003)
3.5(a) Amended and Restated Agreement of Limited Partnership of EOTT
Energy Canada Limited Partnership (incorporated by reference
to Exhibit 3.9 to Registration Statement for EOTT Energy
Partners, L.P., File No. 33-82269)
3.5(b) Amendment No. 1 dated as of September 1, 1999, to Amended and
Restated Agreement of Limited Partnership of EOTT Energy
Canada Limited Partnership (incorporated by reference to
Exhibit 3.2 to current report on Form 8-K for EOTT Energy
Partners, L.P. dated September 29, 1999)
3.5(c) Amendment No. 2 dated as of August 29, 2001 to Amended and
Restated Agreement of Limited Partnership of EOTT Energy
Canada Limited Partnership (incorporated by reference to
Exhibit 3.12 to Current Report on Form 8-K/A for EOTT Energy
Partners, L.P. dated August 30, 2001)
3.5(d) Amendment No. 3 to Amended and Restated Agreement of Limited
Partnership of EOTT Energy Canada Limited Partnership
effective as of October 1, 2003 (incorporated by reference to
Exhibit 3.10 to Quarterly Report on Form 10-Q for EOTT Energy
L.L.C. for the quarterly period ended September 30, 2003)
3.5(e) Certificate of Amendment to Certificate of Limited Partnership
of EOTT Energy Canada Limited Partnership effective as of
October 1, 2003 (incorporated by reference to Exhibit 3.9 to
Quarterly Report on Form 10-Q for EOTT Energy L.L.C. for the
quarterly period ended September 30, 2003)
3.6 Agreement of Limited Partnership dated as of June 28, 2001 of
EOTT Energy Liquids, L.P. (incorporated by reference to
Exhibit 3.13 to Quarterly Report on Form 10-Q for EOTT Energy
Partners, L.P. for the quarterly period ended September 30,
2001)
3.7(a) Limited Liability Company Agreement dated as of June 27, 2001
of EOTT Energy General Partner, L.L.C. (incorporated by
reference to Exhibit 3.14 to Quarterly Report on Form 10-Q for
EOTT Energy Partners, L.P. for the quarterly period ended
September 30, 2001)
3.7(b) Amendment No. 1 to Limited Liability Company Agreement of EOTT
Energy General Partner, L.L.C. effective as of August 29, 2001
(incorporated by reference to Exhibit 3.15 to Quarterly Report
on Form 10-Q for EOTT Energy Partners, L.P. for the quarterly
period ended September 30, 2001)
3.7(c) Amendment No. 2 to Limited Liability Company Agreement of EOTT
Energy General Partner, L.L.C. effective as of October 1, 2003
(incorporated by reference to Exhibit 3.6 to Quarterly Report
on Form 10-Q for EOTT Energy L.L.C. for the quarterly period
ended September 30, 2003)
3.8 Certificate of Amendment to Certificate of Formation of EOTT
Energy General Partner, L.L.C. effective as of October 1, 2003
(incorporated by reference to Exhibit 3.5 to Quarterly Report
on Form 10-Q for EOTT Energy L.L.C. for the quarterly period
ended September 30, 2003)
3.9(a) Certificate of Incorporation of EOTT Energy Finance Corp.
dated July 1, 1999 (incorporated by reference to Exhibit 3.10
to Registration Statement for EOTT Energy Partners, L.P., File
No. 33-82269)
3.9(b) Certificate of Amendment to Certificate of Incorporation of
EOTT Energy Finance Corp. effective as of October 1, 2003
(incorporated by reference to Exhibit 3.13 to Quarterly Report
on Form 10-Q for EOTT Energy L.L.C. for the quarterly period
ended September 30, 2003)
4.1 Indenture among EOTT Energy L.L.C., EOTT Energy Finance Corp.,
the Subsidiary Guarantors and the Bank of New York, as
trustee, for 9% Senior Notes due 2010, dated March 1, 2003
(incorporated by reference to Exhibit T3C to Amendment No. 1
to EOTT Energy LLC's Application for Qualification of
Indenture on Form T-3 dated April 4, 2003)
4.2 Form of Warrant Agreement dated as of March 1, 2003
(incorporated by reference to Exhibit 4.2 to Annual Report on
Form 10-K for EOTT Energy L.L.C. for the year ended December
31, 2002)
4.3 Form of Registration Rights Agreement, by and between EOTT
Energy LLC and Unitholders dated as of March 1, 2003
(incorporated by reference to Exhibit 4.3 to Annual Report on
Form 10-K for EOTT Energy L.L.C. for the year ended December
31, 2002)
***10.1(a) Crude Oil Supply and Terminalling Agreement dated as of
December 1, 1998 between Koch Oil Company and EOTT Energy
Operating Limited Partnership (incorporated by reference to
Exhibit 10.23 to Annual Report on Form 10-K for EOTT Energy
Partners, L.P. for the year ended December 31, 1998)
***10.1(b) Amendment dated December 1, 1998 to the Crude Oil Supply and
Terminalling Agreement dated as of December 1, 1998 between
Koch Oil Company and EOTT Energy Operating Limited Partnership
(incorporated by reference to Exhibit 10.28 to Annual Report
on Form 10-K for EOTT Energy Partners, L.P. for the year ended
December 31, 1998)
***10.1(c) Letter Agreement dated September 14, 2000 amending Crude Oil
Supply and Terminalling Agreement (incorporated by reference
to Exhibit 10.34 to Quarterly Report on Form 10-Q for EOTT
Energy Partners, L.P. for the quarterly period ended September
30, 2000)
***10.1(d) Letter Agreement dated February 6, 2001 amending Crude Oil
Supply and Terminalling Agreement dated December 1, 1998
(incorporated by reference to Exhibit 10.37 to Annual Report
on Form 10-K for EOTT Energy Partners, L.P. for the year ended
December 31, 2000)
****10.1(e) Letter Agreement dated June 27, 2001 amending Crude Oil Supply
and Terminalling Agreement dated December 1, 1998
(incorporated by reference to Exhibit 10.24 to Annual Report
on Form 10-K for EOTT Energy Partners, L.P. for the year ended
December 31, 2001)
****10.1(f) Letter Agreement dated August 23, 2001 amending Crude Oil
Supply and Terminalling Agreement dated December 1, 1998
(incorporated by reference to Exhibit 10.25 to Annual Report
on Form 10-K for EOTT Energy Partners, L.P. for the year ended
December 31, 2001)
10.1(g) Letter Agreement dated December 18, 2001 amending Crude Oil
Supply and Terminalling Agreement dated December 1, 1998
(incorporated by reference to Exhibit 10.26 to Annual Report
on Form 10-K for EOTT Energy Partners, L.P. for the year ended
December 31, 2001)
****10.1(h) Letter Agreement dated January 9, 2002 amending Crude Oil
Supply and Terminalling Agreement dated December 1, 1998
(incorporated by reference to Exhibit 10.27 to Annual Report
on Form 10-K for EOTT Energy Partners, L.P. for the year ended
December 31, 2001)
10.1(i) Letter Agreement dated May 17, 2002 amending Crude Oil Supply
and Terminalling Agreement dated December 1, 1998
(incorporated by reference to Exhibit 10.16 to Annual Report
on Form 10-K for EOTT Energy L.L.C. for the year ended
December 31, 2002)
10.1(j) Letter Agreement dated May 17, 2002 amending Crude Oil Supply
and Terminalling Agreement dated December 1, 1998
(incorporated by reference to Exhibit 10.17 to Annual Report
on Form 10-K for EOTT Energy L.L.C. for the year ended
December 31, 2002)
10.1(k) Letter Agreement dated June 26, 2002 amending Crude Oil Supply
and Terminalling Agreement dated December 1, 1998
(incorporated by reference to Exhibit 10.18 to Annual Report
on Form 10-K for EOTT Energy L.L.C. for the year ended
December 31, 2002)
10.1(l) Letter Agreement dated October 3, 2002 amending Crude Oil
Supply and Terminalling Agreement dated December 1, 1998
(incorporated by reference to Exhibit 10.19 to Annual Report
on Form 10-K for EOTT Energy L.L.C. for the year ended
December 31, 2002)
****10.1(m) Letter Agreement dated June 20, 2003 amending Crude Oil Supply
and Terminalling Agreement dated December 1, 1998
(incorporated by reference to Exhibit 10.1 to Quarterly Report
on Form 10-Q for EOTT Energy L.L.C. for the quarterly period
ended June 30, 2003)
10.2 Settlement Agreement by and among EOTT Energy Partners, L.P.
and certain of its subsidiaries and Enron Corp. and certain of
its affiliates, dated as of October 8, 2002 (incorporated by
reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for
EOTT Energy Partners, L.P. for the quarterly period ended
September 30, 2002)
10.3 Restructuring Agreement by and among EOTT Energy Partners,
L.P. and certain of its subsidiaries and Enron Corp. and
certain of its affiliates, Standard Chartered Bank PLC,
Standard Chartered Trade Services Corporation, Lehman
Commercial Paper, Inc., and Certain Holders of the Company's
11% Senior Notes Due 2009, dated as of October 7, 2002
(incorporated by reference to Exhibit 10.3 to Quarterly Report
on Form 10-Q for EOTT Energy Partners, L.P. for the quarterly
period ended September 30, 2002)
10.4(a) Letter of Credit Agreement among EOTT Energy Operating Limited
Partnership, EOTT Energy Canada Limited Partnership, EOTT
Energy Liquids, L.P., and EOTT Energy Pipeline Limited
Partnership, as joint and several Borrowers, EOTT Energy LLC
and EOTT Energy General Partner, L.L.C., as Guarantors,
Standard Chartered Bank, as LC Agent, LC Issuer, and
Collateral Agent and the LC Participants hereto, dated as of
February 11, 2003 (incorporated by reference to Exhibit 10.42
to Annual Report on Form 10-K for EOTT Energy L.L.C. for the
year ended December 31, 2002)
10.4(b) Amendment No. 1 dated September 29, 2003 to the Letter of
Credit Agreement among EOTT Energy Operating Limited
Partnership, EOTT Energy Canada Limited Partnership, EOTT
Energy Liquids, L.P., and EOTT Energy Pipeline Limited
Partnership, as joint and several Borrowers, EOTT Energy LLC
and EOTT Energy General Partner, L.L.C., as Guarantors,
Standard Chartered Bank, as LC Agent, LC Issuer, and
Collateral Agent and the LC Participants hereto, dated as of
February 11, 2003 (incorporated by reference to Exhibit 10.5
to Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2003)
*10.4(c) Amendment No. 2 dated November 14, 2003 to the Letter of
Credit Agreement among Link Energy Limited Partnership, Link
Energy Canada Limited Partnership, EOTT Energy Liquids, L.P.,
and Link Energy Pipeline Limited Partnership, as joint and
several Borrowers, Link Energy LLC, Link Energy General
Partners LLC, as Guarantors, Standard Chartered Bank, as LC
Agent, LC Issuer, and Collateral Agent, and the LC
Participants thereto, dated as of February 11, 2003.
*10.4(d) Amendment No. 3 dated November 20, 2003 to the Letter of
Credit Agreement among Link Energy Limited Partnership, Link
Energy Canada Limited Partnership, EOTT Energy Liquids, L.P.,
and Link Energy Pipeline Limited Partnership, as joint and
several Borrowers, Link Energy LLC, Link Energy General
Partners LLC, as Guarantors, Standard Chartered Bank, as LC
Agent, LC Issuer, and Collateral Agent, and the LC
Participants thereto, dated as of February 11, 2003.
*10.4(e) Amendment No. 4 dated March 9, 2004 to the Letter of Credit
Agreement among Link Energy Limited Partnership, Link Energy
Canada Limited Partnership, EOTT Energy Liquids, L.P., and
Link Energy Pipeline Limited Partnership, as joint and several
Borrowers, Link Energy LLC, Link Energy General Partners LLC,
as Guarantors, Standard Chartered Bank, as LC Agent, LC
Issuer, and Collateral Agent, and the LC Participants thereto,
dated as of February 11, 2003.
*10.4(f) Limited Waiver to Letter of Credit Agreement, Second Amended
and Restated Commodities Repurchase Agreement and Second
Amended and Restated Receivables Purchase Agreement dated as
of November 14, 2003, by and among Link Energy Limited
Partnership, Link Energy Canada Limited Partnership, EOTT
Energy Liquids, L.P., and Link Energy Pipeline Limited
Partnership, as joint and several Borrowers, Link Energy LLC,
Link Energy General Partners LLC, as Guarantors, Standard
Chartered Bank, as LC Agent, LC Issuer, and Collateral Agent,
and the LC Participants thereto, dated as of February 11,
2003.
*10.4(g) Limited Waiver to Letter of Credit Agreement, Second Amended
and Restated Commodities Repurchase Agreement and Second
Amended and Restated Receivables Purchase Agreement dated as
of November 18, 2003, by and among Link Energy Limited
Partnership, Link Energy Canada Limited Partnership, EOTT
Energy Liquids, L.P., and Link Energy Pipeline Limited
Partnership, as joint and several Borrowers, Link Energy LLC,
Link Energy General Partners LLC, as Guarantors, Standard
Chartered Bank, as LC Agent, LC Issuer, and Collateral Agent,
and the LC Participants thereto, dated as of February 11,
2003.
*10.4(h) Limited Waiver to Letter of Credit Agreement, Second Amended
and Restated Commodities Repurchase Agreement and Second
Amended and Restated Receivables Purchase Agreement dated as
of January 15, 2004, by and among Link Energy Limited
Partnership, Link Energy Canada Limited Partnership, EOTT
Energy Liquids, L.P., and Link Energy Pipeline Limited
Partnership, as joint and several Borrowers, Link Energy LLC,
Link Energy General Partners LLC, as Guarantors, Standard
Chartered Bank, as LC Agent, LC Issuer, and Collateral Agent,
and the LC Participants thereto, dated as of February 11,
2003.
*10.4(i) Limited Waiver to Letter of Credit Agreement, Second Amended
and Restated
Commodities Repurchase Agreement and Second Amended and
Restated Receivables Purchase Agreement dated as of March 9,
2004, by and among Link Energy Limited Partnership, Link
Energy Canada Limited Partnership, EOTT Energy Liquids, L.P.,
and Link Energy Pipeline Limited Partnership, as joint and
several Borrowers, Link Energy LLC, Link Energy General
Partners LLC, as Guarantors, Standard Chartered Bank, as LC
Agent, LC Issuer, and Collateral Agent, and the LC
Participants thereto, dated as of February 11, 2003.
10.5(a) Term Loan Agreement among EOTT Energy Operating Limited
Partnership, EOTT Energy Canada Limited Partnership, EOTT
Energy Liquids, L.P. and EOTT Energy Pipeline Limited
Partnership, as joint and several Borrowers, EOTT Energy LLC
and EOTT Energy General Partner, L.L.C., as Guarantors, Lehman
Brothers Inc., as Term Lender Agent and the Term Lenders
hereto, dated as of February 11, 2003 (incorporated by
reference to Exhibit 10.43 to Annual Report on Form 10-K for
EOTT Energy L.L.C. for the year ended December 31, 2002)
*10.5(b) Limited Waiver to Term Loan Agreement dated as of November 14,
2003, by and among Link Energy Limited Partnership, Link
Energy Canada Limited Partnership, EOTT Energy Liquids, L.P.,
and Link Energy Pipeline Limited Partnership, as joint and
several Borrowers, Link Energy LLC, Link Energy General
Partners LLC, as Guarantors, Lehman Brothers Inc., as Term
Lender Agent and the Term Lenders hereto, dated as of February
11, 2003.
*10.5(c) Limited Waiver to Lehman Credit Agreement dated as of November
18, 2003, by and among Link Energy Limited Partnership, Link
Energy Canada Limited Partnership, EOTT Energy Liquids, L.P.,
and Link Energy Pipeline Limited Partnership, as joint and
several Borrowers, Link Energy LLC, Link Energy General
Partners LLC, as Guarantors, Lehman Brothers Inc., as Term
Lender Agent and the Term Lenders hereto, dated as of February
11, 2003
*10.5(d) Limited Waiver to Lehman Credit Agreement dated as of January
15, 2004, by and among Link Energy Limited Partnership, Link
Energy Canada Limited Partnership, EOTT Energy Liquids, L.P.,
and Link Energy Pipeline Limited Partnership, as joint and
several Borrowers, Link Energy LLC, Link Energy General
Partners LLC, as Guarantors, Lehman Brothers Inc., as Term
Lender Agent and the Term Lenders hereto, dated as of February
11, 2003
10.6(a) Second Amended and Restated Commodities Repurchase Agreement,
by and among EOTT Energy Operating Limited Partnership,
Standard Chartered Trade Services Corporation, Standard
Chartered Bank, as collateral agent, dated as of February 11,
2003 (incorporated by reference to Exhibit 10.44 to Annual
Report on Form 10-K for EOTT Energy L.L.C. for the year ended
December 31, 2002)
10.6(b) Amendment No. 1 dated August 29, 2003 to the Second Amended
and Restated Commodities Repurchase Agreement, by and among
EOTT Energy Operating Limited Partnership, Standard Chartered
Trade Services Corporation, Standard Chartered Bank, as
collateral agent, dated as of February 11, 2003 (incorporated
by reference to Exhibit 10.7 to Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2003)
*10.6(c) Amendment No. 2 dated November 20, 2003 to the Second Amended
and Restated Commodities Repurchase Agreement, by and among
Link Energy Limited Partnership, Standard Chartered Trade
Services Corporation, Standard Chartered Bank, as collateral
agent, dated as of February 11, 2003
*10.6(d) Amendment No. 3 dated February 24, 2004 to the Second Amended
and Restated Commodities Repurchase Agreement, by and among
Link Energy Limited Partnership, Standard Chartered Trade
Services Corporation, Standard Chartered Bank, as collateral
agent, dated as of February 11, 2003
10.7(a) Second Amended and Restated Receivables Purchase Agreement, by
and among EOTT Energy Operating Limited Partnership, Standard
Chartered Trade Services Corporation, Standard Chartered Bank,
as collateral agent, dated as of February 11, 2003
(incorporated by reference to Exhibit 10.45 to Annual Report
on Form 10-K for EOTT Energy L.L.C. for the year ended
December 31, 2002)
10.7(b) Amendment No. 1 dated August 29, 2003 to the Second Amended
and Restated Receivables Repurchase Agreement, by and among
EOTT Energy Operating Limited Partnership, Standard Chartered
Trade Services, Standard Chartered, as collateral agent, dated
as of February 11, 2003 (incorporated by reference to Exhibit
10.8 to Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2003)
*10.7(c) Amendment No. 2 dated February 24, 2004 to the Second Amended
and Restated Receivables Repurchase Agreement, by and among
Link Energy Limited Partnership, Standard Chartered Trade
Services, Standard Chartered, as collateral agent, dated as of
February 11, 2003.
10.8 Intercreditor and Security Agreement among EOTT Energy
Operating Limited Partnership, EOTT Energy Canada Limited
Partnership, EOTT Energy Liquids, L.P., and EOTT Energy
Pipeline Limited Partnership, as joint and several Borrowers,
and EOTT Energy LLC and EOTT Energy General Partner, L.L.C.,
as joint and several Guarantors, and Standard Chartered Bank,
Lehman Brothers, Inc., and Standard Chartered Trade Services
Corporation and various other Secured Parties and Standard
Chartered Bank, as collateral agent, dated as of March 1, 2003
(incorporated by reference to Exhibit 10.46 to Annual Report
on Form 10-K for EOTT Energy L.L.C. for the year ended
December 31, 2002)
*10.9 Extension Letter Agreement dated February 24, 2004 by and
between Link Energy Limited Partnership and Standard Chartered
Trade Services Corporation
10.10 Form of Administrative Services Agreement by and between EOTT
Energy LLC and EOTT Energy General Partner, L.L.C., effective
January 1, 2003 (incorporated by reference to Exhibit 10.1 to
Quarterly Report on Form 10-Q for EOTT Energy LLC for the
quarterly period ended March 31, 2003)
+10.11 Executive Employment Agreement between EOTT Energy LLC and
Thomas M. Matthews, effective as of July 1, 2003 (incorporated
by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2003)
+10.12 Executive Employment Agreement between EOTT Energy LLC and H.
Keith Kaelber, effective as of July 1, 2003 (incorporated by
reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2003)
+10.13 Executive Employment Agreement between EOTT Energy LLC and
Dana R. Gibbs, effective as of July 1, 2003 (incorporated by
reference to Exhibit 10.4 to Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2003)
+10.14 Letter of Offering from EOTT Energy LLC to James R. Allred
dated June 10, 2003 (incorporated by reference to Exhibit 10.5
to Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2003)
+10.15 EOTT Energy LLC Equity Incentive Plan (incorporated by
reference to Exhibit 10.9 to Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2003)
*+10.16 Form of Employee Change in Control Agreement, effective
January 1, 2004
**10.17 Crude Oil Joint Marketing Agreement dated November 20, 2003,
effective January 1, 2004, between Chevron Texaco Global
Trading and Link Energy Limited Partnership.
*21.1 Subsidiaries of the Registrant
*31.1 Section 302 Certification of Thomas M. Matthews
*31.2 Section 302 Certification of H. Keith Kaelber
*32.1 Section 906 Certification of Thomas M. Matthews and H. Keith
Kaelber
* Filed herewith.
** Filed herewith, but confidential treatment has been requested with
respect to certain portions of this exhibit.
*** Certain portions of this exhibit have been treated confidentially.
**** Confidential treatment has been requested with respect to certain
portions of this exhibit.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K by Item 601(b)(10)(iii) of
Regulation S-K.
(b) Reports on Form 8-K