We expect to fund future capital expenditures with restricted investments, funds generated from our operations, borrowings under our credit facility and the issuance of additional partnership units. If these sources are not sufficient, we may reduce our capital spending.
In May 2007, we entered into a two-month bridge loan, or the Bridge Loan, which provided for borrowings up to $100.0 million, and had terms and conditions substantially similar to those of our Credit Agreement. In conjunction with our entering into the Bridge Loan, our Credit Agreement was amended to provide for additional unsecured indebtedness, of an amount not to exceed $100.0 million, which was due and payable no later than August 9, 2007.
We used borrowings on the Bridge Loan of $88.0 million to partially fund the Southern Oklahoma acquisition. The remaining $12.0 million available for borrowing on the Bridge Loan was not utilized. We used a portion of the net proceeds of the private placement to extinguish the $88.0 million outstanding on the Bridge Loan in June 2007.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
DCP Midstream Partners GP, LLC
Denver, Colorado:
We have audited the accompanying consolidated balance sheets of DCP Midstream Partners, LP and subsidiaries (the “Company”) as of December 31, 20072008 and 2006,2007, and the related consolidated statements of operations, comprehensive income (loss) income,, changes in partners’ equity, and cash flows for each of the three years in the period ended December 31, 2007.2008. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and 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. The consolidated financial statements give retroactive effect to the acquisition of a 25% limited liability interest in DCP East Texas Holdings, LLC (formerly the East Texas Midstream Business) (“East Texas”), a 40% limited liability interest in Discovery Producer Services LLC (“Discovery”), and a nontrading derivative instrument (the “Swap”) from DCP Midstream, LLC (“Midstream”) by the Company on July 1, 2007, which has been accounted for in a manner similar to a pooling of interests as described in Note 4 to the consolidated financial statements. We did not audit the financial statements of Discovery Producer Services, LLC (“Discovery”), an investment of the Company which is accounted for by the use of the equity method. The Company’s equity in Discovery’s net assets of $161,520,000$145,054,000 and $162,040,000$161,519,000 at December 31, 20072008 and 2006,2007, respectively, and in Discovery’s net income of $13,760,000, $19,229,000, $12,033,000, and $6,909,000$12,033,000 for the years ended December 31, 2008, 2007 2006 and 2005,2006, respectively, are included in the accompanying consolidated financial statements. Discovery’s financial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to amounts included for Discovery, is based solely on the report of suchthe other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20072008 and 2006,2007, and the results of itstheir operations and itstheir cash flows for each of the three years in the period ended December 31, 2007, after giving retroactive effect to the acquisition of East Texas, Discovery, and the Swap as described in Note 4 to the consolidated financial statements,2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule when considered with the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company was formed on December 7, 2005 and began operating as a separate entity. Through December 7, 2005 the accompanying consolidated financial statements have been prepared from the separate records maintained by Midstream and may not necessarily be indicative of the conditions that would have existed or the results of operations if the Company had been operated as an unaffiliated entity. Portions of certain expenses represent allocations made from, and are applicable to, Midstream as a whole.
Also as described in Note 1 to the consolidated financial statements, through November 1, 2006, the portion of the accompanying consolidated financial statements attributable to the wholesale propane logistics business, have been prepared from the separate records maintained by DCP Midstream, LLC (“Midstream”) and may not necessarily be indicative of the conditions that would have existed or the results of operations if the wholesale propane logistics business had been operated as an unaffiliated entity. Portions of certain expenses represent allocations made from, and are applicable to Midstream as a whole.
95
Also as described in Note 1 to the consolidated financial statements through July 1, 2007, the portion of the accompanying consolidated financial statements attributable to DCP East Texas Holdings, LLC (“East Texas”) , Discovery and the Swapa nontrading derivative instrument (the “Swap”) have been prepared from the separate records maintained by Midstream and may not necessarily be indicative of the conditions that would have existed or the results of operations if East Texas, Discovery and the Swap had been operated as unaffiliated entities. Portions of certain expenses represent allocations made from, and are applicable to Midstream as a whole.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007,2008, based on the criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 7, 20084, 2009 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
Denver, Colorado
March 7, 20084, 2009
96101
DCP MIDSTREAM PARTNERS, LP
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2007 | | 2006 | | | 2008 | | 2007 | |
| | (Millions) | | | (Millions) | |
|
ASSETS | ASSETS | ASSETS |
Current assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 24.5 | | | $ | 46.2 | | | $ | 48.0 | | | $ | 24.5 | |
Short-term investments | | | 1.3 | | | | 0.6 | | | | — | | | | 1.3 | |
Accounts receivable: | | | | | | | | | | | | | | | | |
Trade, net of allowance for doubtful accounts of $1.2 million and $0.3 million, respectively | | | 81.7 | | | | 43.4 | | |
Trade, net of allowance for doubtful accounts of $0.6 million and $1.2 million, respectively | | | | 43.6 | | | | 81.7 | |
Affiliates | | | 52.1 | | | | 34.8 | | | | 36.8 | | | | 52.1 | |
Inventories | | | 37.3 | | | | 30.1 | | | | 20.9 | | | | 37.3 | |
Unrealized gains on derivative instruments | | | 3.1 | | | | 4.2 | | | | 15.4 | | | | 3.1 | |
Other | | | 18.5 | | | | 0.3 | | | | 0.5 | | | | 18.5 | |
| | | | | | | | | | |
Total current assets | | | 218.5 | | | | 159.6 | | | | 165.2 | | | | 218.5 | |
Restricted investments | | | 100.5 | | | | 102.0 | | | | 60.2 | | | | 100.5 | |
Property, plant and equipment, net | | | 500.7 | | | | 194.7 | | | | 629.3 | | | | 500.7 | |
Goodwill | | | 80.2 | | | | 29.3 | | | | 88.8 | | | | 80.2 | |
Intangible assets, net | | | 29.7 | | | | 2.8 | | | | 47.7 | | | | 29.7 | |
Equity method investments | | | 187.2 | | | | 170.2 | | | | 175.4 | | | | 187.2 | |
Unrealized gains on derivative instruments | | | 2.7 | | | | 6.5 | | | | 8.6 | | | | 2.7 | |
Other long-term assets | | | 1.2 | | | | 0.8 | | | | 4.8 | | | | 1.2 | |
| | | | | | | | | | |
Total assets | | $ | 1,120.7 | | | $ | 665.9 | | | $ | 1,180.0 | | | $ | 1,120.7 | |
| | | | | | | | | | |
| LIABILITIES AND PARTNERS’ EQUITY | Current liabilities: | | | | | | | | | | | | | | | | |
Accounts payable: | | | | | | | | | | | | | | | | |
Trade | | $ | 110.2 | | | $ | 66.9 | | | $ | 44.8 | | | $ | 110.2 | |
Affiliates | | | 55.6 | | | | 50.4 | | | | 33.6 | | | | 55.6 | |
Unrealized losses on derivative instruments | | | 30.9 | | | | 0.7 | | | | 17.7 | | | | 30.9 | |
Accrued interest payable | | | 1.6 | | | | 1.1 | | | | 1.3 | | | | 1.6 | |
Other | | | 21.3 | | | | 7.4 | | | | 27.4 | | | | 21.3 | |
| | | | | | | | | | |
Total current liabilities | | | 219.6 | | | | 126.5 | | | | 124.8 | | | | 219.6 | |
Long-term debt | | | 630.0 | | | | 268.0 | | | | 656.5 | | | | 630.0 | |
Unrealized losses on derivative instruments | | | 70.0 | | | | 2.7 | | | | 26.0 | | | | 70.0 | |
Other long-term liabilities | | | 5.8 | | | | 1.0 | | | | 8.9 | | | | 5.8 | |
| | | | | | | | | | |
Total liabilities | | | 925.4 | | | | 398.2 | | | | 816.2 | | | | 925.4 | |
| | | | | | | | | | |
Non-controlling interests | | | 26.9 | | | | — | | | | 34.7 | | | | 26.9 | |
Commitments and contingent liabilities | | | | | | | | | | | | | | | | |
Partners’ equity: | | | | | | | | | | | | | | | | |
Predecessor equity | | | — | | | | 164.3 | | |
Common unitholders (16,840,326 and 10,357,143 units issued and outstanding, respectively) | | | 308.8 | | | | 223.4 | | |
Class C unitholders (0 and 200,312 units issued and outstanding, respectively) | | | — | | | | (20.7 | ) | |
Subordinated unitholders (7,142,857 convertible units issued and outstanding at both periods) | | | (120.1 | ) | | | (101.6 | ) | |
Common unitholders (24,661,754 and 16,840,326 units issued and outstanding, respectively) | | | | 429.0 | | | | 308.8 | |
Subordinated unitholders (3,571,429 and 7,142,857 convertible units issued and outstanding, respectively) | | | | (54.6 | ) | | | (120.1 | ) |
General partner interest | | | (5.4 | ) | | | (5.0 | ) | | | (4.8 | ) | | | (5.4 | ) |
Accumulated other comprehensive (loss) income | | | (14.9 | ) | | | 7.3 | | |
Accumulated other comprehensive loss | | | | (40.5 | ) | | | (14.9 | ) |
| | | | | | | | | | |
Total partners’ equity | | | 168.4 | | | | 267.7 | | | | 329.1 | | | | 168.4 | |
| | | | | | | | | | |
Total liabilities and partners’ equity | | $ | 1,120.7 | | | $ | 665.9 | | | $ | 1,180.0 | | | $ | 1,120.7 | |
| | | | | | | | | | |
See accompanying notes to consolidated financial statements.
97102
DCP MIDSTREAM PARTNERS, LP
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | (Millions, except per unit amounts) | | | (Millions, except per unit amounts) | |
|
Operating revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Sales of natural gas, propane, NGLs and condensate | | $ | 628.1 | | | $ | 535.1 | | | $ | 1,004.6 | | | $ | 678.5 | | | $ | 628.1 | | | $ | 535.1 | |
Sales of natural gas, propane, NGLs and condensate to affiliates | | | 297.7 | | | | 232.8 | | | | 117.5 | | | | 477.8 | | | | 297.7 | | | | 232.8 | |
Transportation and processing services | | | 18.5 | | | | 15.0 | | | | 12.5 | | |
Transportation and processing services to affiliates | | | 16.6 | | | | 12.8 | | | | 10.6 | | |
Losses from derivative activity, net | | | (83.1 | ) | | | — | | | | — | | |
(Losses) gains from derivative activity, net — affiliates | | | (4.5 | ) | | | 0.1 | | | | (0.9 | ) | |
Transportation, processing and other | | | | 31.2 | | | | 18.5 | | | | 15.0 | |
Transportation, processing and other to affiliates | | | | 26.0 | | | | 16.6 | | | | 12.8 | |
Gains (losses) from commodity derivative activity, net | | | | 75.4 | | | | (83.1 | ) | | | — | |
(Losses) gains from commodity derivative activity, net — affiliates | | | | (3.1 | ) | | | (4.5 | ) | | | 0.1 | |
| | | | | | | | | | | | | | |
Total operating revenues | | | 873.3 | | | | 795.8 | | | | 1,144.3 | | | | 1,285.8 | | | | 873.3 | | | | 795.8 | |
| | | | | | | | | | | | | | |
Operating costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Purchases of natural gas, propane and NGLs | | | 647.4 | | | | 581.2 | | | | 889.5 | | | | 798.3 | | | | 647.4 | | | | 581.2 | |
Purchases of natural gas, propane and NGLs from affiliates | | | 179.3 | | | | 119.2 | | | | 157.8 | | | | 262.9 | | | | 179.3 | | | | 119.2 | |
Operating and maintenance expense | | | 32.1 | | | | 23.7 | | | | 22.4 | | | | 43.0 | | | | 32.1 | | | | 23.7 | |
Depreciation and amortization expense | | | 24.4 | | | | 12.8 | | | | 12.7 | | | | 36.5 | | | | 24.4 | | | | 12.8 | |
General and administrative expense | | | 14.1 | | | | 12.9 | | | | 5.1 | | | | 12.4 | | | | 14.1 | | | | 12.9 | |
General and administrative expense — affiliates | | | 10.0 | | | | 8.1 | | | | 9.1 | | | | 11.6 | | | | 10.0 | | | | 8.1 | |
Other | | | | (1.5 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | |
Total operating costs and expenses | | | 907.3 | | | | 757.9 | | | | 1,096.6 | | | | 1,163.2 | | | | 907.3 | | | | 757.9 | |
| | | | | | | | | | | | | | |
Operating (loss) income | | | (34.0 | ) | | | 37.9 | | | | 47.7 | | |
Operating income (loss) | | | | 122.6 | | | | (34.0 | ) | | | 37.9 | |
Interest income | | | 5.3 | | | | 6.3 | | | | 0.5 | | | | 5.6 | | | | 5.3 | | | | 6.3 | |
Interest expense | | | (25.8 | ) | | | (11.5 | ) | | | (0.8 | ) | | | (32.8 | ) | | | (25.8 | ) | | | (11.5 | ) |
Earnings from equity method investments | | | 39.3 | | | | 29.2 | | | | 25.7 | | | | 34.3 | | | | 39.3 | | | | 29.2 | |
Non-controlling interest in income | | | (0.5 | ) | | | — | | | | — | | | | (3.9 | ) | | | (0.5 | ) | | | — | |
| | | | | | | | | | | | | | |
(Loss) income before income taxes | | | (15.7 | ) | | | 61.9 | | | | 73.1 | | |
Income (loss) before income taxes | | | | 125.8 | | | | (15.7 | ) | | | 61.9 | |
Income tax expense | | | (0.1 | ) | | | — | | | | (3.3 | ) | | | (0.1 | ) | | | (0.1 | ) | | | — | |
| | | | | | | | | | | | | | |
Net (loss) income | | $ | (15.8 | ) | | $ | 61.9 | | | $ | 69.8 | | |
Net income (loss) | | | $ | 125.7 | | | $ | (15.8 | ) | | $ | 61.9 | |
Less: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income attributable to predecessor operations | | | (3.6 | ) | | | (26.6 | ) | | | (65.1 | ) | | | — | | | | (3.6 | ) | | | (26.6 | ) |
General partner interest in net income | | | (2.2 | ) | | | (0.7 | ) | | | (0.1 | ) | | | (11.9 | ) | | | (2.2 | ) | | | (0.7 | ) |
| | | | | | | | | | | | | | |
Net (loss) income allocable to limited partners | | $ | (21.6 | ) | | $ | 34.6 | | | $ | 4.6 | | |
Net income (loss) allocable to limited partners | | | $ | 113.8 | | | $ | (21.6 | ) | | $ | 34.6 | |
| | | | | | | | | | | | | | |
Net (loss) income per limited partner unit — basic and diluted | | $ | (1.05 | ) | | $ | 1.90 | | | $ | 0.20 | | |
Net income (loss) per limited partner unit — basic and diluted | | | $ | 3.25 | | | $ | (1.05 | ) | | $ | 1.90 | |
| | | | | | | | | | | | | | |
Weighted-average limited partner units outstanding — basic and diluted | | | 20.5 | | | | 17.5 | | | | 17.5 | | | | 27.4 | | | | 20.5 | | | | 17.5 | |
See accompanying notes to consolidated financial statements.
98103
DCP MIDSTREAM PARTNERS, LP
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | (Millions) | | | (Millions) | |
|
Net (loss) income | | $ | (15.8 | ) | | $ | 61.9 | | | $ | 69.8 | | |
Net income (loss) | | | $ | 125.7 | | | $ | (15.8 | ) | | $ | 61.9 | |
| | | | | | | | | | | | | | |
Other comprehensive (loss) income: | | | | | | | | | | | | | |
Other comprehensive income (loss): | | | | | | | | | | | | | |
Reclassification of cash flow hedges into earnings | | | (3.1 | ) | | | (2.7 | ) | | | — | | | | 7.5 | | | | (3.1 | ) | | | (2.7 | ) |
Net unrealized (losses) gains on cash flow hedges | | | (19.1 | ) | | | 9.6 | | | | 0.4 | | | | (33.1 | ) | | | (19.1 | ) | | | 9.6 | |
| | | | | | | | | | | | | | |
Total other comprehensive (loss) income | | | (22.2 | ) | | | 6.9 | | | | 0.4 | | | | (25.6 | ) | | | (22.2 | ) | | | 6.9 | |
| | | | | | | | | | | | | | |
Total comprehensive (loss) income | | $ | (38.0 | ) | | $ | 68.8 | | | $ | 70.2 | | |
Total comprehensive income (loss) | | | $ | 100.1 | | | $ | (38.0 | ) | | $ | 68.8 | |
| | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
99104
DCP MIDSTREAM PARTNERS, LP
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Accumulated
| | | | | | | | | | | | | | | Accumulated
| | | |
| | | | | | | | | | General
| | Other
| | Total
| | | | | | | | | | | General
| | Other
| | Total
| |
| | Predecessor
| | Common
| | Class C
| | Subordinated
| | Partner
| | Comprehensive
| | Partners’
| | | Predecessor
| | Common
| | Class C
| | Subordinated
| | Partner
| | Comprehensive
| | Partners’
| |
| | Equity | | Unitholders | | Unitholders | | Unitholders | | Interest | | (Loss) Income | | Equity | | | Equity | | Unitholders | | Unitholders | | Unitholders | | Interest | | Income (Loss) | | Equity | |
| | (Millions) | | | (Millions) | |
|
Balance, January 1, 2005 | | $ | 400.5 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 400.5 | | |
Net change in parent advances | | | (137.7 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (137.7 | ) | |
Proceeds from initial public offering of 10,350,000 common units | | | — | | | | 222.5 | | | | — | | | | — | | | | — | | | | — | | | | 222.5 | | |
Underwriters’ discount and offering expenses | | | — | | | | (9.3 | ) | | | — | | | | (6.4 | ) | | | (0.4 | ) | | | — | | | | (16.1 | ) | |
Distribution to unitholders | | | (218.7 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (218.7 | ) | |
Allocation of predecessor equity in exchange for 7,143 common units, 7,142,857 subordinated units and a 2% general partnership interest (represented by 357,143 equivalent units) | | | 110.6 | | | | (0.1 | ) | | | — | | | | (105.2 | ) | | | (5.3 | ) | | | — | | | | — | | |
Net income attributable to predecessor operations | | | 65.1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 65.1 | | |
Net income from December 7, 2005 through December 31, 2005 | | | — | | | | 2.7 | | | | — | | | | 1.9 | | | | 0.1 | | | | — | | | | 4.7 | | |
Other comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.4 | | | | 0.4 | | |
| | | | | | | | | | | | | | | | |
Balance, December 31, 2005 | | | 219.8 | | | | 215.8 | | | | — | | | | (109.7 | ) | | | (5.6 | ) | | | 0.4 | | | | 320.7 | | |
Balance, January 1, 2006 | | | $ | 219.8 | | | $ | 215.8 | | | $ | — | | | $ | (109.7 | ) | | $ | (5.6 | ) | | $ | 0.4 | | | $ | 320.7 | |
Net change in parent advances | | | (25.4 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (25.4 | ) | | | (25.4 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (25.4 | ) |
Acquisition of wholesale propane logistics business | | | (56.7 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (56.7 | ) | | | (56.7 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (56.7 | ) |
Excess purchase price over acquired assets | | | — | | | | — | | | | (26.3 | ) | | | — | | | | — | | | | — | | | | (26.3 | ) | | | — | | | | — | | | | (26.3 | ) | | | — | | | | — | | | | — | | | | (26.3 | ) |
Issuance of 200,312 Class C units | | | — | | | | — | | | | 5.6 | | | | — | | | | — | | | | — | | | | 5.6 | | | | — | | | | — | | | | 5.6 | | | | — | | | | — | | | | — | | | | 5.6 | |
Proceeds from general partner interest (represented by 4,088 equivalent units) | | | — | | | | — | | | | — | | | | — | | | | 0.1 | | | | — | | | | 0.1 | | | | — | | | | — | | | | — | | | | — | | | | 0.1 | | | | — | | | | 0.1 | |
Contributions by unitholders | | | — | | | | — | | | | — | | | | 2.8 | | | | 0.2 | | | | — | | | | 3.0 | | | | — | | | | — | | | | — | | | | 2.8 | | | | 0.2 | | | | — | | | | 3.0 | |
Distributions to unitholders | | | — | | | | (12.8 | ) | | | (0.1 | ) | | | (8.8 | ) | | | (0.4 | ) | | | — | | | | (22.1 | ) | | | — | | | | (12.8 | ) | | | (0.1 | ) | | | (8.8 | ) | | | (0.4 | ) | | | — | | | | (22.1 | ) |
Net income attributable to predecessor operations | | | 26.6 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 26.6 | | | | 26.6 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 26.6 | |
Net income | | | — | | | | 20.4 | | | | 0.1 | | | | 14.1 | | | | 0.7 | | | | — | | | | 35.3 | | | | — | | | | 20.4 | | | | 0.1 | | | | 14.1 | | | | 0.7 | | | | — | | | | 35.3 | |
Other comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 6.9 | | | | 6.9 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 6.9 | | | | 6.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2006 | | | 164.3 | | | | 223.4 | | | | (20.7 | ) | | | (101.6 | ) | | | (5.0 | ) | | | 7.3 | | | | 267.7 | | | | 164.3 | | | | 223.4 | | | | (20.7 | ) | | | (101.6 | ) | | | (5.0 | ) | | | 7.3 | | | | 267.7 | |
Net change in parent advances | | | (14.6 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (14.6 | ) | | | (14.6 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (14.6 | ) |
Acquisition of East Texas, Discovery and the Swap | | | (153.3 | ) | | | 27.0 | | | | — | | | | — | | | | 0.6 | | | | — | | | | (125.7 | ) | | | (153.3 | ) | | | 27.0 | | | | — | | | | — | | | | 0.6 | | | | — | | | | (125.7 | ) |
Excess purchase price over acquired assets | | | — | | | | (118.0 | ) | | | — | | | | — | | | | — | | | | — | | | | (118.0 | ) | | | — | | | | (118.0 | ) | | | — | | | | — | | | | — | | | | — | | | | (118.0 | ) |
Acquisition of Momentum Energy Group, Inc. | | | — | | | | 12.0 | | | | — | | | | — | | | | — | | | | — | | | | 12.0 | | | | — | | | | 12.0 | | | | — | | | | — | | | | — | | | | — | | | | 12.0 | |
Purchase of units | | | — | | | | (0.3 | ) | | | — | | | | — | | | | — | | | | — | | | | (0.3 | ) | | | — | | | | (0.3 | ) | | | — | | | | — | | | | — | | | | — | | | | (0.3 | ) |
Issuance of units | | | — | | | | 0.3 | | | | — | | | | — | | | | — | | | | — | | | | 0.3 | | | | — | | | | 0.3 | | | | — | | | | — | | | | — | | | | — | | | | 0.3 | |
Issuance of 5,386,732 common units | | | — | | | | 228.5 | | | | — | | | | — | | | | — | | | | — | | | | 228.5 | | | | — | | | | 228.5 | | | | — | | | | — | | | | — | | | | — | | | | 228.5 | |
Conversion of Class C units to common units | | | — | | | | (20.7 | ) | | | 20.7 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (20.7 | ) | | | 20.7 | | | | — | | | | — | | | | — | | | | — | |
Contributions by unitholders | | | — | | | | 0.2 | | | | — | | | | 0.6 | | | | — | | | | — | | | | 0.8 | | | | — | | | | 0.2 | | | | — | | | | 0.6 | | | | — | | | | — | | | | 0.8 | |
Distributions to unitholders | | | — | | | | (27.0 | ) | | | (0.2 | ) | | | (14.1 | ) | | | (3.2 | ) | | | — | | | | (44.5 | ) | | | — | | | | (27.0 | ) | | | (0.2 | ) | | | (14.1 | ) | | | (3.2 | ) | | | — | | | | (44.5 | ) |
Equity-based compensation | | | — | | | | 0.2 | | | | — | | | | — | | | | — | | | | — | | | | 0.2 | | | | — | | | | 0.2 | | | | — | | | | — | | | | — | | | | — | | | | 0.2 | |
Net income attributable to predecessor operations | | | 3.6 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3.6 | | | | 3.6 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3.6 | |
Net income (loss) | | | — | | | | (16.8 | ) | | | 0.2 | | | | (5.0 | ) | | | 2.2 | | | | — | | | | (19.4 | ) | | | — | | | | (16.8 | ) | | | 0.2 | | | | (5.0 | ) | | | 2.2 | | | | — | | | | (19.4 | ) |
Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (22.2 | ) | | | (22.2 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (22.2 | ) | | | (22.2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2007 | | $ | — | | | $ | 308.8 | | | $ | — | | | $ | (120.1 | ) | | $ | (5.4 | ) | | $ | (14.9 | ) | | $ | 168.4 | | | | — | | | | 308.8 | | | | — | | | | (120.1 | ) | | | (5.4 | ) | | | (14.9 | ) | | | 168.4 | |
Issuance of 4,250,000 common units | | | | — | | | | 132.1 | | | | — | | | | — | | | | — | | | | — | | | | 132.1 | |
Conversion of subordinated units to common units | | | | | | | | (66.4 | ) | | | — | | | | 66.4 | | | | — | | | | — | | | | — | |
Contributions by unitholders | | | | — | | | | 4.0 | | | | — | | | | — | | | | — | | | | — | | | | 4.0 | |
Distributions to unitholders and general partner | | | | — | | | | (53.9 | ) | | | — | | | | (10.5 | ) | | | (11.3 | ) | | | — | | | | (75.7 | ) |
Equity-based compensation | | | | — | | | | 0.2 | | | | — | | | | — | | | | — | | | | — | | | | 0.2 | |
Net income | | | | — | | | | 104.2 | | | | — | | | | 9.6 | | | | 11.9 | | | | — | | | | 125.7 | |
Other comprehensive loss | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (25.6 | ) | | | (25.6 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2008 | | | $ | — | | | $ | 429.0 | | | $ | — | | | $ | (54.6 | ) | | $ | (4.8 | ) | | $ | (40.5 | ) | | $ | 329.1 | |
| | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
100105
DCP MIDSTREAM PARTNERS, LP
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | (Millions) | | | (Millions) | |
|
OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (15.8 | ) | | $ | 61.9 | | | $ | 69.8 | | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | | | | | | | | | |
Net income (loss) | | | $ | 125.7 | | | $ | (15.8 | ) | | $ | 61.9 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | | |
Depreciation and amortization expense | | | 24.4 | | | | 12.8 | | | | 12.7 | | | | 36.5 | | | | 24.4 | | | | 12.8 | |
Earnings from equity method investments, net of distributions | | | (0.4 | ) | | | (3.3 | ) | | | 11.0 | | | | 25.6 | | | | (0.4 | ) | | | (3.3 | ) |
Non-controlling interest in income | | | 0.5 | | | | — | | | | — | | | | 3.9 | | | | 0.5 | | | | — | |
Deferred income tax benefit | | | — | | | | — | | | | (0.5 | ) | |
Other, net | | | (0.2 | ) | | | (2.4 | ) | | | 0.1 | | | | (0.4 | ) | | | (0.2 | ) | | | (2.4 | ) |
Change in operating assets and liabilities which provided (used) cash, net of effects of acquisitions: | | | | | | | | | | | | | | | | | | | | | | | | |
Accounts receivable | | | (42.2 | ) | | | 43.1 | | | | (30.7 | ) | | | 55.4 | | | | (42.2 | ) | | | 43.1 | |
Inventories | | | (7.2 | ) | | | 11.6 | | | | (21.0 | ) | | | 16.4 | | | | (7.2 | ) | | | 11.6 | |
Net unrealized losses (gains) on derivative instruments | | | 81.1 | | | | (0.1 | ) | | | 0.1 | | |
Net unrealized (gains) losses on derivative instruments | | | | (101.0 | ) | | | 81.1 | | | | (0.1 | ) |
Accounts payable | | | 38.9 | | | | (31.5 | ) | | | 74.7 | | | | (79.7 | ) | | | 38.9 | | | | (31.5 | ) |
Accrued interest | | | 0.5 | | | | 0.3 | | | | 0.8 | | | | (0.3 | ) | | | 0.5 | | | | 0.3 | |
Income tax payable | | | — | | | | — | | | | (3.2 | ) | |
Other current assets and liabilities | | | (16.4 | ) | | | 2.0 | | | | (0.7 | ) | | | 19.8 | | | | (16.4 | ) | | | 2.0 | |
Other long-term assets and liabilities | | | 2.2 | | | | 0.4 | | | | (0.1 | ) | | | (0.4 | ) | | | 2.2 | | | | 0.4 | |
| | | | | | | | | | | | | | |
Net cash provided by operating activities | | | 65.4 | | | | 94.8 | | | | 113.0 | | | | 101.5 | | | | 65.4 | | | | 94.8 | |
| | | | | | | | | | | | | | |
INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | (21.3 | ) | | | (27.2 | ) | | | (10.8 | ) | | | (41.0 | ) | | | (21.3 | ) | | | (27.2 | ) |
Acquisition of Michigan Pipeline & Processing, LLC, net of cash acquired | | | | (146.4 | ) | | | — | | | | — | |
Acquisition of subsidiaries of Momentum Energy Group, Inc., net of cash acquired | | | (142.0 | ) | | | — | | | | — | | | | (10.9 | ) | | | (142.0 | ) | | | — | |
Acquisition of assets | | | (191.3 | ) | | | — | | | | — | | | | — | | | | (191.3 | ) | | | — | |
Acquisition of equity method investments | | | (153.3 | ) | | | — | | | | — | | | | — | | | | (153.3 | ) | | | — | |
Investments in equity method investments | | | (16.3 | ) | | | (11.1 | ) | | | (20.5 | ) | | | (13.8 | ) | | | (16.3 | ) | | | (11.1 | ) |
Payment of earnest deposit | | | (9.0 | ) | | | — | | | | — | | | | — | | | | (9.0 | ) | | | — | |
Refund of earnest deposit | | | 9.0 | | | | — | | | | — | | | | — | | | | 9.0 | | | | — | |
Acquisition of wholesale propane logistics business | | | — | | | | (56.7 | ) | | | — | | | | — | | | | — | | | | (56.7 | ) |
Proceeds from sales of assets | | | 0.1 | | | | 0.3 | | | | 1.2 | | | | 2.9 | | | | 0.1 | | | | 0.3 | |
Purchases of available-for-sale securities | | | (6,921.6 | ) | | | (7,372.4 | ) | | | (731.0 | ) | | | (608.2 | ) | | | (6,921.6 | ) | | | (7,372.4 | ) |
Proceeds from sales of available-for-sale securities | | | 6,924.0 | | | | 7,373.3 | | | | 630.8 | | | | 650.5 | | | | 6,924.0 | | | | 7,373.3 | |
Other investing activities | | | — | | | | — | | | | (0.1 | ) | |
| | | | | | | | | | | | | | |
Net cash used in investing activities | | | (521.7 | ) | | | (93.8 | ) | | | (130.4 | ) | | | (166.9 | ) | | | (521.7 | ) | | | (93.8 | ) |
| | | | | | | | | | | | | | |
FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Borrowings of debt | | | 579.0 | | | | 78.0 | | | | 210.1 | | |
Repayments of debt | | | (217.0 | ) | | | (20.1 | ) | | | — | | |
Proceeds from debt | | | | 660.4 | | | | 579.0 | | | | 78.0 | |
Payments of debt | | | | (633.9 | ) | | | (217.0 | ) | | | (20.1 | ) |
Payment of deferred financing costs | | | (0.6 | ) | | | (0.2 | ) | | | (0.5 | ) | | | — | | | | (0.6 | ) | | | (0.2 | ) |
Purchase of units | | | (0.3 | ) | | | — | | | | — | | | | — | | | | (0.3 | ) | | | — | |
Proceeds from issuance of common units, net of offering costs | | | 228.5 | | | | — | | | | 206.4 | | | | 132.1 | | | | 228.5 | | | | — | |
Proceeds from issuance of equivalent units to general partner | | | — | | | | 0.1 | | | | — | | | | — | | | | — | | | | 0.1 | |
Excess purchase price over acquired assets | | | (100.3 | ) | | | (10.7 | ) | | | — | | | | — | | | | (100.3 | ) | | | (10.7 | ) |
Net change in advances from DCP Midstream, LLC | | | (14.6 | ) | | | (25.4 | ) | | | (137.7 | ) | | | — | | | | (14.6 | ) | | | (25.4 | ) |
Distributions to unitholders | | | (44.0 | ) | | | (22.1 | ) | | | (218.7 | ) | |
Distributions to unitholders and general partner | | | | (76.2 | ) | | | (44.0 | ) | | | (22.1 | ) |
Distributions to non-controlling interests | | | | (3.3 | ) | | | — | | | | — | |
Contributions from non-controlling interests | | | 3.4 | | | | — | | | | — | | | | 5.7 | | | | 3.4 | | | | — | |
Contributions from DCP Midstream, LLC | | | 0.5 | | | | 3.4 | | | | — | | | | 4.1 | | | | 0.5 | | | | 3.4 | |
| | | | | | | | | | | | | | |
Net cash provided by financing activities | | | 434.6 | | | | 3.0 | | | | 59.6 | | | | 88.9 | | | | 434.6 | | | | 3.0 | |
| | | | | | | | | | | | | | |
Net change in cash and cash equivalents | | | (21.7 | ) | | | 4.0 | | | | 42.2 | | | | 23.5 | | | | (21.7 | ) | | | 4.0 | |
Cash and cash equivalents, beginning of period | | | 46.2 | | | | 42.2 | | | | — | | | | 24.5 | | | | 46.2 | | | | 42.2 | |
| | | | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 24.5 | | | $ | 46.2 | | | $ | 42.2 | | | $ | 48.0 | | | $ | 24.5 | | | $ | 46.2 | |
| | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
101106
DCP MIDSTREAM PARTNERS, LP
Years Ended December 31, 2008, 2007 2006 and 20052006
| |
1. | Description of Business and Basis of Presentation |
DCP Midstream Partners, LP, with its consolidated subsidiaries, or us, we or our, is engaged in the business of gathering, compressing, treating, processing, transporting and selling natural gas, producing, transporting, storing and selling propane and transporting and selling NGLs and condensate.
We are a Delaware master limited partnership that was formed in August 2005. We completed our initial public offering on December 7, 2005. Our partnership includes: our Northern Louisiana system; our Southern Oklahoma system (acquired in May 2007); our limited liability company interests in DCP East Texas Holdings, LLC, or East Texas, and Discovery Producer Services LLC, or Discovery (acquired in July 2007); our Wyoming system and a 70% interest in our Colorado system (each acquired in August 2007); our Michigan systems (acquired in October 2008); our wholesale propane logistics business (acquired in November 2006); and our NGL transportation pipelines.
Our operations and activities are managed by our general partner, DCP Midstream GP, LP, which in turn is managed by its general partner, DCP Midstream GP, LLC, which we refer to as the General Partner, which is wholly-owned by DCP Midstream, LLC. DCP Midstream, LLC and its subsidiaries and affiliates, collectively referred to as DCP Midstream, LLC, is owned 50% by Spectra Energy Corp, or Spectra Energy, and 50% by ConocoPhillips. DCP Midstream, LLC directs our business operations through its ownership and control of the General Partner. DCP Midstream, LLC and its affiliates’ employees provide administrative support to us and operate our assets. DCP Midstream, LLC owns approximately 35%30% of our partnership.
The consolidated financial statements include our accounts, and prior to December 7, 2005 the assets, liabilities and operations contributed to us by DCP Midstream, LLC and its wholly-owned subsidiaries, which we refer to as DCP Midstream Partners Predecessor, upon the closing of our initial public offering, which have been combined with the historical assets, liabilities and operations of our wholesale propane logistics business which we acquired from DCP Midstream, LLC in November 2006, and our 25% limited liability company interest in East Texas, our 40% limited liability company interest in Discovery, and a non-trading derivative instrument, or the Swap, which DCP Midstream, LLC entered into in March 2007, which we acquired from DCP Midstream, LLC in July 2007. These were transactions among entities under common control. We recognize transfers of net assets between entities under common control at DCP Midstream, LLC’s basis in the net assets contributed. In addition, transfers of net assets between entities under common control are accounted for as if the transfer occurred at the beginning of the period, and prior years are retroactively adjusted to furnish comparative information similar to the pooling method; accordingly, our financial information includes the historical results of our wholesale propane logistics business, Discovery and East Texas for all periods presented. The amount of the purchase price in excess of DCP Midstream, LLC’s basis in the net assets, if any, is recognized as a reduction to partners’ equity. In addition, the results of operations of Momentum Energy Group Inc., or MEG,our Southern Oklahoma, Wyoming and Colorado systems, and our Michigan systems, have been included in the consolidated financial statements since the date of acquisition.their respective acquisition dates.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. We refer to DCP Midstream Partners Predecessor, the assets, liabilities and operations of our wholesale propane logistics business, our equity interests in East Texas and Discovery, and the Swap, prior to our acquisition from DCP Midstream, LLC, collectively as our “predecessors.” The consolidated financial statements of our predecessors have been prepared from the separate records maintained by DCP Midstream, LLC and may not necessarily be indicative of the conditions that would have existed or the results of operations if our predecessors had been operated as an unaffiliated entity. All significant intercompany balances and transactions have been eliminated. Transactions between us and other DCP Midstream, LLC operations have been identified in the consolidated financial statements as transactions between affiliates.
102107
DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
2. | Summary of Significant Accounting Policies |
Use of Estimates— Conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and notes. Although these estimates are based on management’s best available knowledge of current and expected future events, actual results could differ from those estimates.
Cash and Cash Equivalents— We consider investments in highly liquid financial instruments purchased with an original stated maturity of 90 days or less to be cash equivalents.
Short-Term and Restricted Investments— We may invest available cash balances in various financial instruments, such as commercial paper, money market instruments and tax-exempt debt securities that have stated maturities of 20 years or more. These instruments provide for a high degree of liquidity through features, which allow for the redemption of the investment at its face amount plus earned income. As we generally intend to sell these instruments within one year or less from the balance sheet date, and as they are available for use in current operations, they are classified as current assets, unless otherwise restricted.
Restricted investments are used as collateral to secure the term loan portion of our credit facility and to finance gathering and compression asset acquisitions.
We have classified all short-term and restricted investments as available-for-sale as we do not intend to hold them to maturity, nor are they bought or sold with the objective of generating profit on short-term differences in prices. These investments are recorded at fair value, with changes in fair value recorded as unrealized gains and losses in accumulated other comprehensive income (loss) income,, or AOCI. The cost, including accrued interest on investments, approximates fair value, due to the short-term, highly liquid nature of the securities held by us, and as interest rates are re-set on a daily, weekly or monthly basis.
Inventories— Inventories, which consist primarily of propane, are recorded at the lower of weighted-average cost or market value. Transportation costs are included in inventory.
Property, Plant and Equipment— Property, plant and equipment are recorded at historical cost. The cost of maintenance and repairs, which are not significant improvements, are expensed when incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The costs of maintenance and repairs, which are not significant improvements, are expensed when incurred. Expenditures to extend the useful lives of the assets are capitalized.
Asset retirement obligations associated with tangible long-lived assets are recorded at fair value in the period in which they are incurred, if a reasonable estimate of fair value can be made, and added to the carrying amount of the associated asset. This additional carrying amount is then depreciated over the life of the asset. The liability is determined using a risk free interest rate, and increases due to the passage of time based on the time value of money until the obligation is settled. We recognize a liability of a conditional asset retirement obligation as soon as the fair value of the liability can be reasonably estimated. A conditional asset retirement obligation is defined as an unconditional legal obligation to perform an asset retirement activity in which the timingand/or method of settlement are conditional on a future event that may or may not be within the control of the entity.
Goodwill and Intangible Assets— Goodwill is the cost of an acquisition less the fair value of the net assets of the acquired business. We evaluate goodwill for impairment annually in the third quarter, and whenever events or changes in circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Impairment testing of goodwill consists of a two-step process. The first step involves comparing the fair value of the reporting unit, to which goodwill has been allocated, with its carrying amount. If the carrying amount of the reporting unit exceeds its fair value, the second step of the process involves comparing the fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the fair value of that goodwill, the excess of the carrying value over the fair value is recognized as an impairment loss.
103108
DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Intangible assets consist primarily of customer contracts, including commodity purchase, transportation and processing contracts and related relationships. These intangible assets are amortized on a straight-line basis over the period of expected future benefit, ranging from approximately two to 25 years.benefit.
Long-Lived Assets— We periodically evaluate whether the carrying value of long-lived assets has been impaired when circumstances indicate the carrying value of those assets may not be recoverable. This evaluation is based on undiscounted cash flow projections. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. We consider various factors when determining if these assets should be evaluated for impairment, including but not limited to:
| | |
| • | significant adverse change in legal factors or business climate; |
|
| • | a current-period operating or cash flow loss combined with a history of operating or cash flow losses, or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset; |
|
| • | an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset; |
|
| • | significant adverse changes in the extent or manner in which an asset is used, or in its physical condition; |
|
| • | a significant adverse change in the market value of an asset; or |
|
| • | a current expectation that, more likely than not, an asset will be sold or otherwise disposed of before the end of its estimated useful life. |
If the carrying value is not recoverable, the impairment loss is measured as the excess of the asset’s carrying value over its fair value. We assess the fair value of long-lived assets using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third party comparable sales and discounted cash flow models. Significant changes in market conditions resulting from events such as the condition of an asset or a change in management’s intent to utilize the asset would generally require management to reassess the cash flows related to the long-lived assets.
Equity Method Investments— We use the equity method to account for investments in greater than 20% owned affiliates that are not variable interest entities and where we do not have the ability to exercise control, and investments in less than 20% owned affiliates where we have the ability to exercise significant influence.
We evaluate our equity method investments for impairment whenever events or changes in circumstances indicate that the carrying value of such investments may have experienced a decline in value. When evidence of loss in value has occurred, we compare the estimated fair value of the investment to the carrying value of the investment to determine whether an impairment has occurred. We assess the fair value of our equity method investments using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third party comparable sales and discounted cash flow models. If the estimated fair value is less than the carrying value, the excess of the carrying value over the estimated fair value is recognized as an impairment loss.
Unamortized Debt Expense— Expenses incurred with the issuance of long-term debt are amortized over the term of the debt using the effective interest method. These expenses are recorded on the consolidated balance sheet as other long-term assets.
Non-Controlling Interest— Non-controlling interest represents (1) the non-controlling interest holders ownership interests in the net assets of Collbran Valley Gas Gathering, a joint venture acquired in conjunction with the MEG acquisition in August 2007.2007; and (2) the non controlling interest holders’ portion of the net
109
DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
assets of Jackson Pipeline Company, a partnership we acquired with the Michigan acquisition in October 2008. For financial reporting purposes, the assets and liabilities of these
104
DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
entities are consolidated with those of our own, with any third party interest in our consolidated balance sheet amounts shown as non-controlling interest. Distributions to and contributions from non-controlling interests represent cash payments and cash contributions, respectively, from such third-party investors.
Accounting for Risk Management Activities and Financial Instruments — Effective July 1, 2007, we elected to discontinue using the hedge method of accounting for our commodity cash flow protection activities. We are using the mark-to-market method of accounting for all commodity derivative instruments beginning in July 2007. As a result, the remaining net loss deferred in AOCI will be reclassified to sales of natural gas, propane, NGLs and condensate, through December 2011, as the hedgedunderlying transactions impact earnings.
Each derivative not qualifying for the normal purchases and normal sales exception is recorded on a gross basis in the consolidated balance sheets at its fair value as unrealized gains or unrealized losses on derivative instruments. Derivative assets and liabilities remain classified in our consolidated balance sheets as unrealized gains or unrealized losses on derivative instruments at fair value until the contractual settlement period impacts earnings.
All derivative activity reflected in the consolidated financial statements for our predecessors was transacted by us or by DCP Midstream, LLC and its subsidiaries, and transferredand/or allocated to us. All derivative activity reflected in the consolidated financial statements, which is not related to our predecessors, has been and will be transacted by us. Prior to July 1, 2007, we designated each energy commodity derivative as either trading or non-trading. Certain non-trading derivatives were further designated as either a hedge of a forecasted transaction or future cash flow (cash flow hedge), a hedge of a recognized asset, liability or firm commitment (fair value hedge), or normal purchases or normal sales, while certain non-trading derivatives, which are related to asset-based activities, are designated as non-trading derivative activity. For the periods presented, we did not have any trading derivative activity, however, we did have cash flow and fair value hedge activity, normal purchases and normal sales activity, and non-trading derivative activity included in the consolidated financial statements. For each derivative, the accounting method and presentation of gains and losses or revenue and expense in the consolidated statements of operations are as follows:
| | | | |
Classification of Contract | | Accounting Method | | Presentation of Gains & Losses or Revenue & Expense |
|
Non-Trading Derivative Activity | | Mark-to-market method(b) | | Net basis in gains and losses from derivative activity |
Cash Flow Hedge(a) | | Hedge method(c) | | Gross basis in the same consolidated statements of operations category as the related hedged item |
Fair Value Hedge(a) | | Hedge method(c) | | Gross basis in the same consolidated statements of operations category as the related hedged item |
Normal Purchases or Normal Sales | | Accrual method(d) | | Gross basis upon settlement in the corresponding consolidated statements of operations category based on purchase or sale |
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(a) | | Effective July 1, 2007, all commodity cash flow hedges are classified as non-trading derivative activity. Our interest rate swaps continue to be accounted for as cash flow hedges. As of December 31, 2007 we no longer use fair value hedges. |
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(b) | | Mark-to-market — An accounting method whereby the change in the fair value of the asset or liability is recognized in the consolidated statements of operations in gains and losses from derivative activity during the current period. |
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(c) | | Hedge method — An accounting method whereby the change in the fair value of the asset or liability is recorded in the consolidated balance sheets as unrealized gains or unrealized losses on derivative instruments. For cash flow hedges, there is no recognition in the consolidated statements of operations for the |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
| | effective portion until the service is provided or the associated delivery period impacts earnings. For fair value hedges, the change in the fair value of the asset or liability, as well as the offsetting changes in value of the hedged item, are recognized in the consolidated statements of operations in the same category as the related hedged item. |
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(d) | | Accrual method — An accounting method whereby there is no recognition in the consolidated balance sheets or consolidated statements of operations for changes in fair value of a contract until the service is provided or the associated delivery period impacts earnings. |
Cash Flow and Fair Value Hedges — For derivatives designated as a cash flow hedge or a fair value hedge, we maintain formal documentation of the hedge. In addition, we formally assess both at the inception of the hedging relationship and on an ongoing basis, whether the hedge contract is highly effective in offsetting changes in cash flows or fair values of hedged items. All components of each derivative gain or loss are included in the assessment of hedge effectiveness, unless otherwise noted.
The fair value of a derivative designated as a cash flow hedge is recorded in the consolidated balance sheets as unrealized gains or unrealized losses on derivative instruments. The effective portion of the change in fair value of a derivative designated as a cash flow hedge is recorded in partners’ equity as AOCI, and the ineffective portion is recorded in the consolidated statements of operations. During the period in which the hedged transaction impacts earnings, amounts in AOCI associated with the hedged transaction are reclassified to the consolidated statements of operations in the same accounts as the item being hedged. Hedge accounting is discontinued prospectively when it is determined that the derivative no longer qualifies as an effective hedge, or when it is probable that the hedged transaction will not occur. When hedge accounting is discontinued because the derivative no longer qualifies as an effective hedge, the derivative is subject to the mark-to-market accounting method prospectively. The derivative continues to be carried on the consolidated balance sheets at its fair value; however, subsequent changes in its fair value are recognized in current period earnings. Gains and losses related to discontinued hedges that were previously accumulated in AOCI will remain in AOCI until the hedged transaction impacts earnings, unless it is probable that the hedged transaction will not occur, in which case, the gains and losses that were previously deferred in AOCI will be immediately recognized in current period earnings.
The fair value of a derivative designated as a fair value hedge is recorded for balance sheet purposes as unrealized gains or unrealized losses on derivative instruments. We recognize the gain or loss on the derivative instrument, as well as the offsetting loss or gain on the hedged item in earnings in the current period. All derivatives designated and accounted for as fair value hedges are classified in the same category as the item being hedged in the results of operations.
Valuation — When available, quoted market prices or prices obtained through external sources are used to determine a contract’s fair value. For contracts with a delivery location or duration for which quoted market prices are not available, fair value is determined based on pricing models developed primarily from historical and expected correlations with quoted market prices.
Values are adjusted to reflect the credit risk inherent in the transaction as well as the potential impact of liquidating open positions in an orderly manner over a reasonable time period under current conditions. Changes in market prices and management estimates directly affect the estimated fair value of these contracts. Accordingly, it is reasonably possible that such estimates may change in the near term.
Revenue Recognition— We generate the majority of our revenues from gathering, processing, compressing, transporting, and fractionating natural gas and NGLs, and from trading and marketing of natural gas and NGLs. We realize revenues either by selling the residue natural gas and NGLs, or by receiving fees from the producers.
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We obtain access to commodities and provide our midstream services principally under contracts that contain a combination of one or more of the following arrangements:
| | |
| • | Fee-based arrangements —Under fee-based arrangements, we receive a fee or fees for one or more of the following services: gathering, compressing, treating, processing or transporting natural gas; and transporting NGLs. Our fee-based arrangements include natural gas purchase arrangements pursuant to which we purchase natural gas at the wellhead or other receipt points, at an index related price at the delivery point less a specified amount, generally the same as the transportation fees we would otherwise charge for transportation of natural gas from the wellhead location to the delivery point. The revenues we earn are directly related to the volume of natural gas or NGLs that flows through our systems and are not directly dependent on commodity prices. However, to the extent a sustained decline in commodity prices results in a decline in volumes, our revenues from these arrangements would be reduced. |
|
| • | Percentage-of-proceeds/indexPercent-of-proceeds arrangements— Under percentage-of-proceeds/indexpercent-of-proceeds arrangements, we generally purchase natural gas from producers at the wellhead, or other receipt points, gather the wellhead natural gas through our gathering system, treat and process the natural gas, and then sell the resulting residue natural gas and NGLs based on index prices from published index market prices. We remit to the producers either anagreed-upon percentage of the actual proceeds that we receive from our sales of the residue natural gas and NGLs, or anagreed-upon percentage of the proceeds based on index related prices for the natural gas and the NGLs, regardless of the actual amount of the sales proceeds we receive. Certain of these arrangements may also result in our returning all or a portion of the residue natural gasand/or the NGLs to the producer, in lieu of returning sales proceeds. Our revenues under percentage-of-proceeds/indexpercent-of-proceeds arrangements correlate directly with the price of natural gasand/or NGLs. |
|
| • | Propane sales arrangements— Under propane sales arrangements, we generally purchase propane from natural gas processing plants and fractionation facilities, and crude oil refineries. We sell propane on a wholesale basis to retail propane distributors, who in turn resell to their retail customers. Our sales of propane are not contingent upon the resale of propane by propane distributors to their retail customers. |
Our marketing of natural gas and NGLs consists of physical purchases and sales, as well as positions in derivative instruments.
We recognize revenues for sales and services under the four revenue recognition criteria, as follows:
| | |
| • | Persuasive evidence of an arrangement exists— Our customary practice is to enter into a written contract, executed by both us and the customer. |
|
| • | Delivery— Delivery is deemed to have occurred at the time custody is transferred, or in the case of fee-based arrangements, when the services are rendered. To the extent we retain product as inventory, delivery occurs when the inventory is subsequently sold and custody is transferred to the third party purchaser. |
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| • | The fee is fixed or determinable— We negotiate the fee for our services at the outset of our fee-based arrangements. In these arrangements, the fees are nonrefundable. For other arrangements, the amount of revenue, based on contractual terms, is determinable when the sale of the applicable product has been completed upon delivery and transfer of custody. |
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| • | Collectibility is probable— Collectibility is evaluated on acustomer-by-customer basis. New and existing customers are subject to a credit review process, which evaluates the customers’ financial position (for example, cash positioncredit metrics, liquidity and credit rating) and their ability to pay. If collectibility is not considered probable at the outset of an arrangement in accordance with our credit review process, revenue is not recognized until the feecash is collected. |
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We generally report revenues gross in the consolidated statements of operations, as we typically act as the principal in these transactions, take custody to the product, and incur the risks and rewards of ownership. Effective April 1, 2006, any new or amended contracts for certain sales and purchases of inventory with the same counterparty, when entered into in contemplation of one another, are reported net as one transaction. We recognize revenues for non-trading commodity derivative activity net in the consolidated statements of operations as gains and losses from commodity derivative activity. These activities include mark-to-market gains and losses on energy trading contracts and the settlement of financial or physical settlement of energy trading contracts.
Quantities of natural gas or NGLs over-delivered or under-delivered related to imbalance agreements with customers, producers or pipelines are recorded monthly as other receivables or other payables using current market prices or the weighted-average prices of natural gas or NGLs at the plant or system. These balances are settled with deliveries of natural gas or NGLs, or with cash. Included in the consolidated balance sheets as accounts receivable — trade and accounts receivable — affiliates were imbalances of $1.6$3.8 million and $0.1$1.6 million at December 31, 20072008 and 2006,2007, respectively. Included in the consolidated balance sheets as accounts payable — trade were imbalances of $1.1$1.4 million and $0.9$1.1 million at December 31, 20072008 and 2006,2007, respectively.
Significant Customer— There were no third party customers that accounted for more than 10% of total operating revenues for the years ended December 31, 2008, 2007 and 2006. We had oneIn addition, there were no third party customercustomers that accounted for 17%more than 10% of total operating revenues for the yearyears ended December 31, 2005. Revenues from this customer are reported2008, 2007 and 2006 in the NGL Logistics Segment.any of our business segments. We also had significant transactions with affiliates, and with suppliers of natural gas and propane (see “Item 1. Business — Natural Gas Services Segment” and “— Wholesale Propane Logistics Segment,” respectively)propane.
Environmental Expenditures— Environmental expenditures are expensed or capitalized as appropriate, depending upon the future economic benefit. Expenditures that relate to an existing condition caused by past operations and that do not generate current or future revenue are expensed. Liabilities for these expenditures are recorded on an undiscounted basis when environmental assessmentsand/orclean-ups are probable and the costs can be reasonably estimated. Environmental liabilities as of December 31, 2008 and 2007, included in the consolidated balance sheets as other current liabilities amounted to $1.3 million and $0.7 million, respectively, and as other long-term liabilities amounted to $0.6 million and $1.0 million. Environmental liabilities as of December 31, 2006 were not significant.million, respectively.
Equity-Based Compensation— Equity classified stock-based compensation cost is measured at fair value, based on the closing common unit price at grant date, and is recognized as expense over the vesting period. Liability classified stock-based compensation cost is remeasured at each reporting date at fair value, based on the closing common unit price, and is recognized as expense over the requisite service period. Compensation expense for awards with graded vesting provisions is recognized on a straight-line basis over the requisite service period of each separately vesting portion of the award. Awards granted to non-employees for acquiring, or in conjunction with selling, goods and services, are measured at the estimated fair value of the goods or services, or the fair value of the award, whichever is more reliably measured.
Income Taxes— We are structured as a master limited partnership which is a pass-through entity for federal income tax purposes. Our wholesale propane logistics business changed its tax structure, effective December 7, 2005, such that it became a pass-through entity. Prior to December 7, 2005, our wholesale propane logistics business was considered taxable for United States income tax purposes. Our wholesale propane logistics business followedexpense includes certain jurisdictions, including state, local, franchise and margin taxes of the master limited partnership and subsidiaries. We follow the asset and liability method of accounting for income taxes, wherebytaxes. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of the assets and liabilities. Subsequent to December 7, 2005, ourOur taxable income or loss, which may vary substantially from the net income or loss reported in the consolidated statements of operations, is includableincluded in the federal returns of each partner.
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Comprehensive (Loss) Income or Loss— Comprehensive (loss) income or loss consists of net income or loss and other comprehensive income or loss, which includes unrealized gains and losses on the effective portion of derivative instruments classified as cash flow hedges.
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net Income or Loss per Limited Partner Unit— Basic and diluted net income or loss per limited partner unit is calculated by dividing limited partners’ interest in net income or loss, less pro forma general partner incentive distributions, by the weighted-average number of outstanding limited partner units during the period.
| |
3. | Recent Accounting Pronouncements |
Statement of Financial Accounting Standards, or SFAS, No. 162 “The Hierarchy of Generally Accepted Accounting Principles,”or SFAS 162— In May 2008, the Financial Accounting Standards Board, or FASB, issued SFAS 162, which is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for nongovernmental entities. SFAS 162 is effective 60 days following the Securities and Exchange Commission, or SEC, approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We have assessed the impact of the adoption of SFAS 162, and believe that there will be no impact on our consolidated results of operations, cash flows or financial position.
FASB Staff Position, or FSP,No. SFAS 142-3 “Determination of the Useful Life of Intangible Assets,”orFSP 142-3— In April 2008, the FASB issuedFSP 142-3, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible.FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We are in the process of assessing the impact ofFSP 142-3, but do not expect a material impact on our consolidated results of operations, cash flows and financial position as a result of adoption.
SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133,” or SFAS 161— In March 2008, the FASB issued SFAS 161, which requires disclosures of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for us on January 1, 2009. We are in the process of assessing the impact of SFAS 161 on our disclosures, and will make the required disclosures in our March 31, 2009 consolidated financial statements.
SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51,” or SFAS 160 —In December 2007, the Financial Accounting Standards Board, or FASB issued SFAS 160, which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The StatementSFAS 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 iswas effective for us on January 1, 2009. Due to the recency of this pronouncement, we2009, and did not have not assessed thea significant impact of SFAS 160 on our consolidated results of operations, cash flows or financial position. As a result of adoption effective January 1, 2009, we will reclassify non-controlling interests in the consolidated balance sheets to partners’ equity.
SFAS No. 141(R) “Business Combinations (revised 2007),” or SFAS 141(R) — In December 2007, the FASB issued SFAS 141(R), which requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS 141(R) is effective for us on January 1, 2009. As this standard will be applied prospectively upon adoption, we will account for all transactions with closing dates subsequent to the adoption date in accordance with the provisions of the standard.
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
SFAS No. 159, The“The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FAS 115,” or SFAS 159— In February 2007, the FASB issued SFAS 159, which allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. SFAS 159 also establishes presentation and disclosure requirements designed to draw comparison between entities that elect different measurement attributes for similar assets and liabilities. The provisions of SFAS 159 werebecame effective for us on January 1, 2008. We have not elected the fair value option relative to any of our financial assets and liabilities which are not otherwise required to be measured at fair value by other accounting standards. Therefore, there is no effect of adoption reflected in our consolidated results of operations, cash flows or financial position.
SFAS No. 157, Fair“Fair Value Measurements,” or SFAS 157— In September 2006, the FASB issued SFAS 157, which provides guidancewas effective for using fair value to measure assets and liabilities. The standard establishes a framework for measuring fair value and expands the disclosure requirements surrounding assumptions made in the measurement of fair value.us on January 1, 2008. SFAS 157:
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| • | defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; |
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| • | establishes a framework for measuring fair value; |
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| • | establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date; |
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| • | nullifies the guidance in Emerging Issues Task Force, or EITF,02-3,Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Involved in Energy Trading and Risk Management Activities, which required the deferral of profit at inception of a transaction involving a derivative financial instrument in the absence of observable data supporting the valuation technique; and |
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| • | significantly expands the disclosure requirements around instruments measured at fair value. |
The
Upon the adoption of this standard will result in us making slight changes to our valuation methodologies to incorporatewe incorporated the marketplace participant view as prescribed by SFAS 157. Such changes will include,included, but willwere not be limited to, changes in valuation policies to reflect an exit price methodology, the effect of considering our own non-performance risk on the valuation of liabilities, and the effect of any change in our credit rating
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
or standing. As a result of adopting SFAS 157, we estimaterecorded a cumulative effect transition adjustment of approximately $5.8 million as an after-tax increase to partners’ equity ofearnings and approximately $7.3 million. This transition adjustment will directly affect$1.3 million as an increase to AOCI during the beginning balance of partners’ equity.three months ended March 31, 2008. All changes in our valuation methodology have been incorporated into our fair value calculations subsequent to adoption.
Pursuant to FASB Financial Staff Position157-2, the FASB issued a partial deferral, ending on December 31, 2008, of the implementation of SFAS 157 as it relates to all non-financial assets and liabilities where fair value is the required measurement attribute by other accounting standards. While we have adopted SFAS 157 for all financial assets and liabilities effective January 1, 2008, we have not assessedare in the impact thatprocess of assessing the adoption ofimpact SFAS 157 will have on our non-financial assets and liabilities.
FASB Interpretation Number, or FIN, No. 48, Accounting for Uncertainty in Income Taxes —An Interpretation of FASB Statement 109,or FIN 48— In July 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109,Accounting for Income Taxes.FIN 48 prescribesliabilities, but do not expect a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 were effective for us on January 1, 2007, and the adoption of FIN 48 did not have a significantmaterial impact on our consolidated results of operations, cash flows or financial position.position upon adoption.
FSPNo. 157-3 “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active,”orFSP 157-3— In October 2008, the FASB issuedFSP 157-3, which provides guidance in situations where a) observable inputs do not exist, b) observable inputs exist but only in an inactive market and c) how market quotes should be considered when assessing the relevance of observable and unobservable inputs to determine fair value.FSP 157-3 was effective upon issuance, including prior periods for which financial statements have not been issued. We believe that the financial assets that are reflected in our financial statements are transacted within active markets, and therefore, there is no effect on our consolidated results of operations, cash flows or financial positions as a result of the adoption of this FSP.
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FSP of Financial Interpretation, or FIN,39-1, “Amendment of FASB Interpretation No. 39,”or FSPFIN 39-1— In April 2007, the FASB issued FSPFIN 39-1, which permits, but does not require, a reporting entity to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against the fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting arrangement. FSPFIN 39-1 became effective for us beginning on January 1, 2008; however, we have elected to continue our policy of reflecting our derivative asset and liability positions, as well as any cash collateral, on a gross basis in our consolidated balance sheets.
EITF 08-06 “Equity Method Investment Accounting Considerations,” orEITF 08-06 —In November 2008, the EITF issued ETIF08-06. Although the issuance of FAS 141(R) and FAS 160 were not intended to reconsider the accounting for equity method investments, the application of the equity method is affected by the issuance of these standards. This issue addresses a) how the initial carrying value of an equity method investment should be determined; b) how an impairment assessment of an underlying indefinite-lived intangible asset of an equity method investment should be performed; c) how an equity method investee’s issuance of shares should be accounted for and d) how to account for a change in an investment from the equity method to the cost method. This issue is effective for us on January 1, 2009, and although we do not expect any changes to the manner in which we apply equity method accounting, this guidance will be considered on a prospective basis to transactions with equity method investees.
EITF 07-04 “Application of the Two — Class Method under FASB Statement No. 128 to Master Limited Partnerships”orEITF 07-04 —In March 2008, the EITF issued ETIF07-04. This issue seeks to improve the comparability of earnings per unit, or EPU, calculations for master limited partnerships with incentive distribution rights in accordance with FASB Statement No. 128 and its related interpretations. This issue is effective for us on January 1, 2009 and will be incorporated into our EPU calculations beginning with the quarter ending March 31, 2009. We are in the process of assessing the impact ofEITF 07-04 on our EPU calculations, and will make any required changes to our calculation methodology for the quarter ending March 31, 2009.
Gathering and Compression Assets
On October 1, 2008, we acquired Michigan Pipeline & Processing, LLC, or MPP, a privately held company engaged in natural gas gathering and treating services for natural gas produced from the Antrim Shale of northern Michigan and natural gas transportation within Michigan. The results of MPP’s operations have been included in the consolidated financial statements since that date. Under the terms of the acquisition, we paid a purchase price of $145.0 million, plus net working capital and other adjustments of $3.4 million, subject to additional customary purchase price adjustments. We may pay up to an additional $15.0 million to the sellers depending on the earnings of the assets after a three-year period. We financed the acquisition through utilization of our credit facility. In addition, we entered into a separate agreement that provides the seller with available treating capacity on certain Michigan assets. The seller agreed to pay up to $1.5 million annually for up to nine years if they do not meet certain criteria, including providing additional volumes for treatment. These payments would reduce goodwill as a return of purchase price. This agreement may be terminated earlier if certain performance criteria of Michigan assets are satisfied. Certain of these performance criteria were satisfied, and as a result, the amount was reduced to approximately $0.8 million per year as of December 31, 2008. We initially held a $25.0 million letter of credit to secure the seller’s performance under this agreement and to secure the seller’s indemnification obligation under the acquisition agreement; however as a result of the satisfaction of certain performance conditions, this amount was reduced to approximately $22.5 million as of December 31, 2008. The fees under the Omnibus Agreement increased $0.4 million per year effective October 1, 2008, in connection with the acquisition.
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Under the purchase method of accounting, the assets and liabilities of MPP were recorded at their respective fair values as of the date of the acquisition, and we recorded goodwill of approximately $6.7 million. The goodwill amount recognized relates primarily to projected growth from new customers. The values of certain assets and liabilities are preliminary, and are subject to adjustment as additional information is obtained, which when finalized may result in material adjustments. The purchase price allocation is as follows:
| | | | |
| | (Millions) | |
|
Cash | | $ | 1.7 | |
Accounts receivable | | | 2.1 | |
Other assets | | | 0.1 | |
Other long term assets | | | 3.8 | |
Property, plant and equipment | | | 116.1 | |
Goodwill | | | 6.7 | |
Intangible assets | | | 20.0 | |
Other liabilities | | | (0.5 | ) |
Non-controlling interest in joint venture | | | (1.6 | ) |
| | | | |
Total purchase price allocation | | $ | 148.4 | |
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In August 2007, we acquired certain subsidiaries of Momentum Energy Group, Inc., or MEG, from DCP Midstream, LLC for approximately $165.8 million. As a result of the acquisition, we expanded our operations into the Piceance and Powder River producing basins, thus diversifying our business into new operating areas. The consideration consisted of approximately $153.8 million of cash and the issuance of 275,735 common units to an affiliate of DCP Midstream, LLC that were valued at approximately $12.0 million. We have incurred post-closing purchase price adjustments to date that include a liability of $9.0totaling $10.9 million for net working capital and general and administrative charges. We financed this transaction with $120.0 million of revolver and term loan borrowings under our amended credit agreement, along with the issuance of common units through a private placement with certain institutional investors and cash on hand. In August 2007, we issued 2,380,952 common limited partner units in a private placement, pursuant to a common unit purchase agreement with private owners of MEG or affiliates of such owners, at $42.00 per unit, or approximately $100.0 million in the aggregate. The proceeds from this private placement were used to purchase high-grade securities to fully secure our term loan borrowings. These units were registered with the Securities and Exchange Commission, or SEC in January 2008.
The transfer of the MEG subsidiaries between DCP Midstream, LLC and us represents a transfer between entities under common control. Transfers between entities under common control are accounted for at DCP Midstream, LLC’s carrying value, similar to the pooling method. DCP Midstream, LLC recorded its acquisition of the MEG subsidiaries under the purchase method of accounting, whereby the assets and liabilities were recorded at their respective fair values as of the date of the acquisition, includingand we recorded goodwill of approximately $50.9 million.$52.8 million, including purchase price adjustments of $1.9 million during the first quarter of
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2008. The goodwill amount recognized relates primarily to projected growth in the Piceance basin due to significant natural gas reserves and high levels of drilling activity. We expect all of the goodwill to be tax deductible. The values of certain assets and liabilities are preliminary, and are subject to
110
DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
adjustment as additional information is obtained. When finalized, material adjustments to goodwill may result. The purchase price allocation is as follows:
| | | | | | | | |
| | (Millions) | | | (Millions) | |
|
Cash consideration | | $ | 153.8 | | | $ | 153.8 | |
Payable to DCP Midstream, LLC | | | 9.0 | | | | 10.9 | |
Common limited partner units | | | 12.0 | | | | 12.0 | |
| | | | | | |
Aggregate consideration | | $ | 174.8 | | | $ | 176.7 | |
| | | | | | |
The purchase price allocation is as follows: | | | | | | | | |
Cash | | $ | 11.8 | | | $ | 11.8 | |
Accounts receivable | | | 14.1 | | | | 14.1 | |
Other assets | | | 1.5 | | | | 1.5 | |
Property, plant and equipment | | | 123.5 | | | | 127.8 | |
Goodwill | | | 50.9 | | | | 52.8 | |
Intangible assets | | | 15.5 | | | | 15.5 | |
Accounts payable | | | (11.1 | ) | | | (11.1 | ) |
Other liabilities | | | (8.6 | ) | | | (12.9 | ) |
Non-controlling interest in joint venture | | | (22.8 | ) | | | (22.8 | ) |
| | | | | | |
Total purchase price allocation | | $ | 174.8 | | | $ | 176.7 | |
| | | | | | |
On July 1, 2007, we acquired a 25% limited liability company interest in East Texas, a 40% limited liability company interest in Discovery and the Swap from DCP Midstream, LLC, in a transaction among entities under common control, for aggregate consideration of approximately $271.3 million, consisting of approximately $243.7 million in cash, including net working capital of $1.3 million and other adjustments, the issuance of 620,404 common units to DCP Midstream, LLC valued at $27.0 million and the issuance of 12,661 general partner equivalent units valued at $0.6 million. We financed the cash portion of this transaction with borrowings of $245.9 million under our amended credit facility. The $118.0 million excess purchase price over the historical basis of the net acquired assets was recorded as a reduction to partners’ equity, and the $27.6 million of common and general partner equivalent units issued as partial consideration for this transaction was recorded as an increase to partners’ equity. The transfer of assets between DCP Midstream, LLC and us represents a transfer of assets between entities under common control. Transfers of net assets or exchanges of shares between entities under common control are accounted for as if the transfer occurred at the beginning of the period, and prior years are retroactively adjusted to furnish comparative information similar to the pooling method.
In May 2007, we acquired certain gathering and compression assets located in southern Oklahoma, or the Southern Oklahoma system, as well as related commodity purchase contracts, from Anadarko Petroleum Corporation for approximately $181.1 million.
In April 2007, we acquired certain gathering and compression assets located in northern Louisiana from Laser Gathering Company, LP for approximately $10.2 million.
The results of operations for theMPP, MEG, subsidiaries, and the Southern Oklahoma and northern Louisiana acquired assets, have been included prospectively, from the dates of acquisition, as part of the Natural Gas Services segment.
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Wholesale Propane Logistics Business
On November 1, 2006, we acquired our wholesale propane logistics business from DCP Midstream, LLC, in a transaction among entities under common control, for aggregate consideration of approximately $82.9 million, which consisted of $77.3 million in cash ($9.9 million of which was paid in January 2007), and the issuance of 200,312 Class C units valued at approximately $5.6 million. Included in the aggregate consideration was $10.5 million of costs incurred through October 31, 2006, which were associated with the construction of a new pipeline terminal. The $26.3 million excess purchase price over the historical basis of
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the net acquired assets was recorded as a reduction to partners’ equity, and the $5.6 million of common and general partner equivalent units issued as partial consideration for this transaction was recorded as an increase to partners’ equity.
Combined Financial Information
The following table presents the impact to the consolidated balance sheet, adjustedpro forma information for the acquisition of East Texas and Discovery, from DCP Midstream, LLC. The Swap was entered into by DCP Midstream, LLC in March 2007, and therefore it is not included below.
As of December 31, 2006
| | | | | | | | | | | | |
| | | | | | | | Combined
| |
| | DCP
| | | East Texas
| | | DCP
| |
| | Midstream
| | | and
| | | Midstream
| |
| | Partners, LP | | | Discovery | | | Partners, LP | |
|
ASSETS |
Current assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 46.2 | | | $ | — | | | $ | 46.2 | |
Accounts receivable | | | 78.2 | | | | — | | | | 78.2 | |
Inventories | | | 30.1 | | | | — | | | | 30.1 | |
Other | | | 5.1 | | | | — | | | | 5.1 | |
| | | | | | | | | | | | |
Total current assets | | | 159.6 | | | | — | | | | 159.6 | |
Restricted investments | | | 102.0 | | | | — | | | | 102.0 | |
Property, plant and equipment, net | | | 194.7 | | | | — | | | | 194.7 | |
Goodwill and intangible assets, net | | | 32.1 | | | | — | | | | 32.1 | |
Other non-current assets | | | 13.2 | | | | 164.3 | | | | 177.5 | |
| | | | | | | | | | | | |
Total assets | | $ | 501.6 | | | $ | 164.3 | | | $ | 665.9 | |
| | | | | | | | | | | | |
|
LIABILITIES AND PARTNERS’ EQUITY |
Accounts payable and other current liabilities | | $ | 126.5 | | | $ | — | | | $ | 126.5 | |
Long-term debt | | | 268.0 | | | | — | | | | 268.0 | |
Other long-term liabilities | | | 3.7 | | | | — | | | | 3.7 | |
| | | | | | | | | | | | |
Total liabilities | | | 398.2 | | | | — | | | | 398.2 | |
| | | | | | | | | | | | |
Commitments and contingent liabilities | | | | | | | | | | | | |
Partners’ equity: | | | | | | | | | | | | |
Net equity | | | 96.1 | | | | 164.3 | | | | 260.4 | |
Accumulated other comprehensive income | | | 7.3 | | | | — | | | | 7.3 | |
| | | | | | | | | | | | |
Total partners’ equity | | | 103.4 | | | | 164.3 | | | | 267.7 | |
| | | | | | | | | | | | |
Total liabilities and partners’ equity | | $ | 501.6 | | | $ | 164.3 | | | $ | 665.9 | |
| | | | | | | | | | | | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables present the impact to the consolidated statements of operations adjusted for the years ended 2008 and 2007, as if the acquisition of our wholesale propane logistics business, andMPP had occurred at the beginning of each year presented. There is no impact shown for the MEG acquisition because there were no predecessor operations of East Texas and Discovery fromMEG at DCP Midstream, LLC, for the periods indicated. The Swap was entered into by DCP Midstream, LLC in March 2007, and therefore it is not included below.LLC.
Year Ended December 31, 2006
| | | | | | | | | | | | |
| | DCP
| | | | | | Combined
| |
| | Midstream
| | | East
| | | DCP
| |
| | Partners, LP and
| | | Texas and
| | | Midstream
| |
| | Predecessor | | | Discovery | | | Partners, LP | |
|
Operating revenues: | | | | | | | | | | | | |
Sales of natural gas, propane, NGLs and condensate | | $ | 767.9 | | | $ | — | | | $ | 767.9 | |
Transportation and other | | | 27.9 | | | | — | | | | 27.9 | |
| | | | | | | | | | | | |
Total operating revenues | | | 795.8 | | | | — | | | | 795.8 | |
| | | | | | | | | | | | |
Operating costs and expenses: | | | | | | | | | | | | |
Purchases of natural gas, propane and NGLs | | | 700.4 | | | | — | | | | 700.4 | |
Operating and maintenance expense | | | 23.7 | | | | — | | | | 23.7 | |
Depreciation and amortization expense | | | 12.8 | | | | — | | | | 12.8 | |
General and administrative expense | | | 21.0 | | | | — | | | | 21.0 | |
| | | | | | | | | | | | |
Total operating costs and expenses | | | 757.9 | | | | — | | | | 757.9 | |
| | | | | | | | | | | | |
Operating income | | | 37.9 | | | | — | | | | 37.9 | |
Interest expense, net | | | (5.2 | ) | | | — | | | | (5.2 | ) |
Earnings from equity method investments | | | 0.3 | | | | 28.9 | | | | 29.2 | |
Income tax expense | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
Net income | | $ | 33.0 | | | $ | 28.9 | | | $ | 61.9 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2008 | | | 2007 | |
| | | | | | | | DCP
| | | | | | | | | DCP
| |
| | DCP
| | | | | | Midstream
| | | DCP
| | | | | | Midstream
| |
| | Midstream
| | | Acquisition
| | | Partners, LP
| | | Midstream
| | | Acquisition
| | | Partners, LP
| |
| | Partners, LP | | | of MPP | | | Pro Forma | | | Partners, LP | | | of MPP | | | Pro Forma | |
| | (Millions, except per unit amounts) | |
|
Total operating revenues | | $ | 1,285.8 | | | $ | 14.8 | | | $ | 1,300.6 | | | $ | 873.3 | | | $ | 20.9 | | | $ | 894.2 | |
Net income (loss) | | $ | 125.7 | | | $ | 2.2 | | | $ | 127.9 | | | $ | (15.8 | ) | | $ | 1.2 | | | $ | (14.6 | ) |
Less: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income attributable to predecessor operations | | | — | | | | — | | | | — | | | | (3.6 | ) | | | — | | | | (3.6 | ) |
General partner interest in net income | | | (11.9 | ) | | | — | | | | (11.9 | ) | | | (2.2 | ) | | | (0.1 | ) | | | (2.3 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) allocable to limited partners | | $ | 113.8 | | | $ | 2.2 | | | $ | 116.0 | | | $ | (21.6 | ) | | $ | 1.1 | | | $ | (20.5 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) per limited partner unit — basic and diluted | | $ | 3.25 | | | $ | 0.04 | | | $ | 3.29 | | | $ | (1.05 | ) | | $ | 0.05 | | | $ | (1.00 | ) |
Year Ended December 31, 2005
| | | | | | | | | | | | | | | | |
| | DCP
| | | Wholesale
| | | | | | Combined
| |
| | Midstream
| | | Propane
| | | East
| | | DCP
| |
| | Partners, LP and
| | | Logistics
| | | Texas and
| | | Midstream
| |
| | Predecessor | | | Business | | | Discovery | | | Partners, LP | |
|
Operating revenues: | | | | | | | | | | | | | | | | |
Sales of natural gas, propane, NGLs and condensate | | $ | 762.3 | | | $ | 359.8 | | | $ | — | | | $ | 1,122.1 | |
Transportation and other | | | 22.2 | | | | — | | | | — | | | | 22.2 | |
| | | | | | | | | | | | | | | | |
Total operating revenues | | | 784.5 | | | | 359.8 | | | | — | | | | 1,144.3 | |
| | | | | | | | | | | | | | | | |
Operating costs and expenses: | | | | | | | | | | | | | | | | |
Purchases of natural gas, propane and NGLs | | | 709.3 | | | | 338.0 | | | | — | | | | 1,047.3 | |
Operating and maintenance expense | | | 14.2 | | | | 8.2 | | | | — | | | | 22.4 | |
Depreciation and amortization expense | | | 11.7 | | | | 1.0 | | | | — | | | | 12.7 | |
General and administrative expense | | | 11.4 | | | | 2.8 | | | | — | | | | 14.2 | |
| | | | | | | | | | | | | | | | |
Total operating costs and expenses | | | 746.6 | | | | 350.0 | | | | — | | | | 1,096.6 | |
| | | | | | | | | | | | | | | | |
Operating income | | | 37.9 | | | | 9.8 | | | | — | | | | 47.7 | |
Interest expense, net | | | (0.3 | ) | | | — | | | | — | | | | (0.3 | ) |
Earnings from equity method investments | | | 0.4 | | | | — | | | | 25.3 | | | | 25.7 | |
Income tax expense | | | — | | | | (3.3 | ) | | | — | | | | (3.3 | ) |
| | | | | | | | | | | | | | | | |
Net income | | $ | 38.0 | | | $ | 6.5 | | | $ | 25.3 | | | $ | 69.8 | |
| | | | | | | | | | | | | | | | |
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The pro forma information is not intended to reflect actual results that would have occurred if the companies had been combined during the periods presented, nor is it intended to be indicative of the results of operations that may be achieved by us in the future.
| |
5. | Agreements and Transactions with Affiliates |
DCP Midstream, LLC
DCP Midstream, LLC provided centralized corporate functions on behalf of our predecessor operations, including legal, accounting, cash management, insurance administration and claims processing, risk management, health, safety and environmental, information technology, human resources, credit, payroll, internal audit, taxes and engineering. The predecessor’s share of those costs was allocated based on the predecessor’s proportionate net investment (consisting of property, plant and equipment, net, equity method investments, and intangible assets, net) as compared to DCP Midstream, LLC’s net investment. In management’s estimation, the allocation methodologies used were reasonable and resulted in an allocation to the predecessors of their respective costs of doing business, which were borne by DCP Midstream, LLC.
Omnibus Agreement
We have entered into an omnibus agreement, as amended, or the Omnibus Agreement, with DCP Midstream, LLC. Under the Omnibus Agreement, we are required to reimburse DCP Midstream, LLC for salaries of operating personnel and employee benefits as well as capital expenditures, maintenance and repair
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
costs, taxes and other direct costs incurred by DCP Midstream, LLC on our behalf. We also pay DCP Midstream, LLC an annual fee for centralized corporate functions performed by DCP Midstream, LLC on our behalf, including legal, accounting, cash management, insurance administration and claims processing, risk management, health, safety and environmental, information technology, human resources, credit, payroll, taxes and engineering. Under the Omnibus Agreement, DCP Midstream, LLC provided parental guarantees, totaling $43.0 million at December 31, 2008, to certain counterparties to our commodity derivative instruments.
All of the fees under the Omnibus Agreement are subject to adjustment annually for changes in the Consumer Price Index.
The Omnibus Agreement also addresses the following matters:
| | |
| • | DCP Midstream, LLC’s obligation to indemnify us for certain liabilities and our obligation to indemnify DCP Midstream, LLC for certain liabilities; |
|
| • | DCP Midstream, LLC’s obligation to continue to maintain its credit support, including without limitation guarantees and letters of credit, for our obligations related to derivative financial instruments, such as commodity price hedging contracts, to the extent that such credit support arrangements were in effect as of the closing of our initial public offering in December 2005, until the earlier to occur of the fifth anniversary of the closing of our initial public offering or such time as we obtain an investment grade credit rating from either Moody’s Investor Services, Inc. or Standard & Poor’s Ratings Group with respect to any of our unsecured indebtedness; and |
|
| • | DCP Midstream, LLC’s obligation to continue to maintain its credit support, including without limitation guarantees and letters of credit, for our obligations related to commercial contracts with respect to its business or operations that were in effect at the closing of our initial public offering until the expiration of such contracts. |
Any or all of the provisions of the Omnibus Agreement, other than the indemnification provisions, will be terminable by DCP Midstream, LLC at its option if the general partner is removed without cause and units held by the general partner and its affiliates are not voted in favor of that removal. The Omnibus Agreement will also terminate in the event of a change of control of us, the general partner (DCP Midstream GP, LP) or the General Partner (DCP Midstream GP, LLC).
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Following is a summary of the fees we incurred in 2007 under the Omnibus Agreement and the effective date for these fees, as well as other fees paid to DCP Midstream, LLC:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, | | | | | Year Ended December 31, | |
Terms | | Effective Date | | 2007 | | 2006 | | 2005 | | | Effective Date | | 2008 | | 2007 | | 2006 | |
| | | | | | (Millions) | | | | | | | (Millions) | |
|
Annual fee | | 2006 | | $ | 5.0 | | | $ | 4.8 | | | $ | 0.3 | | | 2006 | | $ | 5.1 | | | $ | 5.0 | | | $ | 4.8 | |
Wholesale propane logistics business | | November 2006 | | | 2.0 | | | | 0.3 | | | | — | | | November 2006 | | | 2.0 | | | | 2.0 | | | | 0.3 | |
Southern Oklahoma | | May 2007 | | | 0.1 | | | | — | | | | — | | | May 2007 | | | 0.2 | | | | 0.1 | | | | — | |
Discovery | | July 2007 | | | 0.1 | | | | — | | | | — | | | July 2007 | | | 0.2 | | | | 0.1 | | | | — | |
Additional services | | August 2007 | | | 0.2 | | | | — | | | | — | | | August 2007 | | | 0.6 | | | | 0.2 | | | | — | |
MEG | | August 2007 | | | 0.5 | | | | — | | | | — | | |
Momentum Energy Group, Inc. | | | August 2007 | | | 1.6 | | | | 0.5 | | | | — | |
Michigan Pipeline & Processing, LLC | | | October 2008 | | | 0.1 | | | | — | | | | — | |
| | | | | | | | | | | | | | |
Total Omnibus Agreement | | | | | 7.9 | | | | 5.1 | | | | 0.3 | | | | | | 9.8 | | | | 7.9 | | | | 5.1 | |
Other fees | | | | | 2.1 | | | | 3.0 | | | | 8.8 | | | | | | 1.8 | | | | 2.1 | | | | 3.0 | |
| | | | | | | | | | | | | | |
Total | | | | $ | 10.0 | | | $ | 8.1 | | | $ | 9.1 | | | | | $ | 11.6 | | | $ | 10.0 | | | $ | 8.1 | |
| | | | | | | | | | | | | | |
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Competition
None of DCP Midstream, LLC, nor any of its affiliates, including Spectra Energy and ConocoPhillips, is restricted, under either the partnership agreement or the Omnibus Agreement, from competing with us. DCP Midstream, LLC and any of its affiliates, including Spectra Energy and ConocoPhillips, may acquire, construct or dispose of additional midstream energy or other assets in the future without any obligation to offer us the opportunity to purchase or construct those assets.
Indemnification
UnderThe Black Lake pipeline has experienced increased operating costs due to pipeline integrity testing that commenced in 2005 and was completed during the Omnibus Agreement,second quarter of 2008. Testing revealed irregularities, the more severe of which were repaired in October 2008 and the less severe of which are scheduled for repair in 2009. DCP Midstream, LLC will indemnify us until December 7, 2008 against certain potential environmental claims, losses and expenses associated with the operation of the assets and occurring before the closing date of our initial public offering. DCP Midstream, LLC’s maximum liability for this indemnification obligation does not exceed $15.0 million and DCP Midstream, LLC does not have any obligation under this indemnification until our aggregate losses exceed $250,000. DCP Midstream, LLC has no indemnification obligations with respect to environmental claims made as a result of additions to or modifications of environmental laws promulgated after the closing date of our initial public offering. We have agreed to indemnify DCP Midstream, LLC against environmental liabilities related to our assets to the extent DCP Midstream, LLC is not required to indemnify us.
Additionally, DCP Midstream, LLC will indemnify us for losses attributable to title defects, retained assets and liabilities (including pre-closing litigation relating to contributed assets) and income taxes attributable to pre-closing operations. We will indemnify DCP Midstream, LLC for all losses attributable to the post-closing operations of the assets contributed to us, to the extent not subject to DCP Midstream, LLC’s indemnification obligations. In addition, DCP Midstream, LLC has agreed to indemnify us for up to $5.3 million of our pro rata share of any capital contributions required to be made by us to Black Lake Pipe Line Company, or Black Lake, associated with any repairs torepairing the Black Lake pipeline that are determined to be necessary as a result of the currently ongoing pipeline integrity testing occurringtesting. We anticipate repairs of approximately $0.8 million on the pipeline, which will be funded directly from 2005 through June 2008. DCP Midstream, LLC has also agreedBlack Lake. We will not make contributions to indemnify us for upBlack Lake to $4.0 million of the costs associated with any repairs to the Seabreeze pipeline that were determined to be necessary as a result of pipeline integrity testing that occurred in 2006. Pipeline integrity testing and repairs are our responsibility and are recognized as operating and maintenance expense. Reimbursements ofcover these expenses from DCP Midstream, LLC were not significant and were recognized by us as capital contributions.
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)expenses.
In connection with our acquisition of our wholesale propane logistics business, DCP Midstream, LLC will indemnify us until October 31, 2008 for any breach of the representations and warranties made under the acquisition agreement (except certain corporate related matters that survive indefinitely) and certain litigation, environmental matters, title defects and tax matters associated with these assets that were identified at the time of closing and that were attributable to periods prior to the closing date. In addition, DCP Midstream, LLC agreed to indemnify us until October 31, 2008 for the overpayment or underpayment of trade payables or receivables that pertain to periods prior to closing, agreed to indemnify us until October 31, 2009 for any claims for fines or penalties of any governmental authority for periods prior to the closing, agreed to indemnify us until October 31, 2010 if certain contractual matters result in a claim, and agreed to indemnify us indefinitely for breaches of the agreement. The indemnity obligation for breach of the representations and warranties is not effective until claims exceed in the aggregate $680,000 and is subject to a maximum liability of $6.8 million. This indemnity obligation for all other claims other than a breach of the representations and warranties does not become effective until an individual claim or series of related claims exceed $50,000.
In connection with our acquisitions of East Texas and Discovery from DCP Midstream, LLC, DCP Midstream, LLC will indemnify us until July 1, 2008 for the breach of the representations and warranties made under the acquisition agreement (except certain corporate related matters that survive indefinitely) and certain litigation, environmental matters, title defects and tax matters associated with these assets that were identified at the time of closing and that were attributable to periods prior to the closing date. In addition, the same affiliate of DCP Midstream, LLC agreed to indemnify us until July 1, 2008 for the overpayment or underpayment of trade payables or receivables that pertain to periods prior to closing, agreed to indemnify us until July 1, 2009 for any claims for fines or penalties of any governmental authority for periods prior to the closing and that are associated with certain East Texas assets that were formerly owned by Gulf South and UP Fuels, and agreed to indemnify us indefinitely for breaches of the agreement and certain existing claims. The indemnity obligation for breach of the representations and warranties is not effective until claims exceed in the aggregate $2.7 million and is subject to a maximum liability of $27.0 million. This indemnity obligation for all other claims other than a breach of the representations and warranties does not become effective until an individual claim or series of related claims exceed $50,000.
In connection with our acquisition of certain subsidiaries of MEG, DCP Midstream, will indemnify us following the closing on August 29, 2007 for any breach of the representations and warranties made under the acquisition agreement and certain other matters associated with these assets. DCP MidstreamLLC agreed to indemnify us until August 29, 2008 for any breach of the representations and warranties (except certain corporate related matters that survive indefinitely), and indefinitely for breaches of the agreement.
We have not pursued indemnification under these agreements.
Other Agreements and Transactions with DCP Midstream, LLC
DCP Midstream, LLC owns certain assets and is party to certain contractual relationships around our Pelico system that are periodically used for the benefit of Pelico. DCP Midstream, LLC is able to source natural gas upstream of Pelico and deliver it to the inlet of the Pelico system, and is able to take natural gas from the outlet of the Pelico system and market it downstream of Pelico. Because of DCP Midstream, LLC’s
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ability to move natural gas around Pelico, there are certain contractual relationships around Pelico that define how natural gas is bought and sold between us and DCP Midstream, LLC. The agreement is described below:
| | |
| • | DCP Midstream, LLC will supply Pelico’s system requirements that exceed its on-system supply. Accordingly, DCP Midstream, LLC purchases natural gas and transports it to our Pelico system, where we buy the gas from DCP Midstream, LLC at the actual acquisition cost plus transportation service charges incurred. We generally report purchases associated with these activities gross in the consolidated statements of operations as purchases of natural gas, propane and NGLs from affiliates. |
|
| • | If our Pelico system has volumes in excess of the on-system demand, DCP Midstream, LLC will purchase the excess natural gas from us and transport it to sales points at an index-based price, less a |
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
| | contractually agreed-to marketing fee. We generally report revenues associated with these activities gross in the consolidated statements of operations as sales of natural gas, propane and NGLs to affiliates. |
| | |
| • | In addition, DCP Midstream, LLC may purchase other excess natural gas volumes at certain Pelico outlets for a price that equals the original Pelico purchase price from DCP Midstream, LLC, plus a portion of the index differential between upstream sources to certain downstream indices with a maximum differential and a minimum differential, plus a fixed fuel charge and other related adjustments. We generally report revenues and purchases associated with these activities net in the consolidated statements of operations as transportation, processing and processingother services to affiliates. |
In addition, we sell NGLs and condensate fromprocessed at our Minden and Ada processing plants, and sell condensate removed from the gas gathering systems that deliver to the Minden and Ada plants, and from our Pelico system to a subsidiary of DCP Midstream, LLC equal to that subsidiary’s net weighted-average sales price, adjusted for transportation, processing and other charges from the tailgate of the respective asset, which is recorded in the consolidated statements of operations as sales of natural gas, propane, NGLs and condensate to affiliates. We also sell propane to a subsidiary of DCP Midstream, LLC.
We also have a contractual arrangement with a subsidiary of DCP Midstream, LLC that provides that DCP Midstream, LLC will pay us to transport NGLs over our Seabreeze pipeline, pursuant to a fee-based rate that will be applied to the volumes transported. DCP Midstream, LLC is the sole shipper on the Seabreeze pipeline under a transportation agreement. We generally report revenues associated with these activities in the consolidated statements of operations as transportation, processing and processingother services to affiliates.
In December 2006, we completed construction of our Wilbreeze pipeline, which connects a DCP Midstream, LLC gas processing plant to our Seabreeze pipeline. The project is supported by an NGL product dedication agreement with DCP Midstream, LLC. We generally report revenues, which are earned pursuant to a fee-based rate applied to the volumes transported on this pipeline, in the consolidated statements of operations as transportation, processing and processingother services to affiliates.
We anticipate continuing to purchase commodities from and sell commodities to DCP Midstream, LLC in the ordinary course of business.
In the second quarter of 2006, we entered into a letter agreement with DCP Midstream, LLC whereby DCP Midstream, LLC will make capital contributions to us as reimbursement for capital projects, which were forecasted to be completed prior to our initial public offering, but were not completed by that date. Pursuant to the letter agreement, DCP Midstream, LLC made capital contributions to us of $3.4 million during 2006 and $0.3 million during 2007, to reimburse us for the capital costs we incurred, primarily for growth capital projects.
In conjunction with our acquisition of a 40% limited liability company interest in Discovery from DCP Midstream, LLC in July 2007, we entered into a letter agreement with DCP Midstream, LLC whereby DCP Midstream, LLC will make capital contributions to us as reimbursement for certain Discovery capital projects, which were forecasted to be completed prior to our acquisition of a 40% limited liability company interest in Discovery. Pursuant to the letter agreement, DCP Midstream, LLC made capital contributions to us of $3.8 million and $0.3 million during 2008 and 2007, respectively to reimburse us for these capital projects, which were substantially completed in 2008.
In the second quarter of 2006, we entered into a letter agreement with DCP Midstream, LLC whereby DCP Midstream, LLC will make capital contributions to us as reimbursement for capital projects, which were
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
forecasted to be completed prior to our initial public offering, but were not completed by that date. Pursuant to the letter agreement, DCP Midstream, LLC made capital contributions to us of $3.4 million during 2006 and $0.3 million during 2007, to reimburse us for thesethe capital costs we incurred, primarily for growth capital projects. As
In July 2008, DCP Midstream, LLC issued additional parental guarantees outside of the Omnibus Agreement, totaling $200.0 million, to certain counterparties to our commodity derivative instruments to mitigate a portion of our collateral requirements with those counterparties. These guarantees were reduced to $65.0 million as of December 31, 2007, $0.1 million2008 to correspond with lower commodity prices and collateral requirements. We pay DCP Midstream, LLC interest of the capital contributions are included in accounts receivable — affiliates in the consolidated balance sheets.
We had an operating lease with an affiliate during the year ended December 31, 2005. Operating lease expense related to this lease was $0.7 million for the year ended December 31, 2005.0.5% per annum on these outstanding guarantees.
DCP Midstream, LLC was a significant customer during the years ended December 31, 2008, 2007 2006 and 2005.
117
DCP MIDSTREAM PARTNERS, LP2006.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Duke Energy
Prior to December 31, 2006, we charged transportation fees, sold a portion of our residue gas to, and purchased raw natural gas from Duke Energy and its affiliates.
Spectra Energy
We purchase a portion of our propane from and market propane on behalf of Spectra Energy. We anticipate continuing to purchase propane from and market propane on behalf of Spectra Energy in the ordinary course of business.
During the second quarter of 2008, we entered into a propane supply agreement with Spectra Energy. This agreement, effective May 1, 2008 and terminating April 30, 2014, provides us propane supply at our marine terminal, which is included in our Wholesale Propane Logistics segment, for up to approximately 120 million gallons of propane annually. This contract replaces the supply provided under a contract with a third party that was terminated for non-performance during the first quarter of 2008.
ConocoPhillips
We have multiple agreements whereby we provide a variety of services to ConocoPhillips and its affiliates. The agreements include fee-based and percentage-of-proceedspercent-of-proceeds gathering and processing arrangements, gas purchase and gas sales agreements. We anticipate continuing to purchase from and sell these commodities to ConocoPhillips and its affiliates in the ordinary course of business. In addition, we may be reimbursed by ConocoPhillips for certain capital projects where the work is performed by us. We received $1.9 million, $2.9 million $3.9 million and $0.2$3.9 million of capital reimbursements during the years ended December 31, 2008, 2007 and 2006, and 2005, respectively.
123
DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the transactions with affiliates:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | (Millions) | | | (Millions) | |
|
DCP Midstream, LLC: | | | | | | | | | | | | | | | | | | | | | | | | |
Sales of natural gas, propane, NGLs and condensate | | $ | 290.0 | | | $ | 231.7 | | | $ | 108.8 | | | $ | 475.7 | | | $ | 290.0 | | | $ | 231.7 | |
Transportation and processing services | | $ | 6.0 | | | $ | 4.8 | | | $ | 0.3 | | |
Transportation, processing and other | | | $ | 15.4 | | | $ | 6.0 | | | $ | 4.8 | |
Purchases of natural gas, propane and NGLs | | $ | 150.1 | | | $ | 102.9 | | | $ | 134.4 | | | $ | 175.3 | | | $ | 150.1 | | | $ | 102.9 | |
(Losses) gains from derivative activity, net | | $ | (4.5 | ) | | $ | 0.1 | | | $ | (0.9 | ) | | $ | (3.1 | ) | | $ | (4.5 | ) | | $ | 0.1 | |
Operating and maintenance expense | | $ | 0.4 | | | $ | 0.2 | | | $ | — | | | $ | — | | | $ | 0.4 | | | $ | 0.2 | |
General and administrative expense | | $ | 10.0 | | | $ | 8.1 | | | $ | 9.1 | | | $ | 11.6 | | | $ | 10.0 | | | $ | 8.1 | |
Interest expense | | | $ | 0.4 | | | $ | — | | | $ | — | |
Spectra Energy: | | | | | | | | | | | | | | | | | | | | | | | | |
Sales of natural gas, propane, NGLs and condensate | | $ | 1.1 | | | $ | — | | | $ | — | | | $ | 0.3 | | | $ | 1.1 | | | $ | — | |
Transportation, processing and other | | | $ | 0.2 | | | $ | — | | | $ | — | |
Purchases of natural gas, propane and NGLs | | | $ | 51.0 | | | $ | — | | | $ | — | |
Duke Energy: | | | | | | | | | | | | | | | | | | | | | | | | |
Sales of natural gas, propane, NGLs and condensate | | $ | — | | | $ | — | | | $ | 1.4 | | |
Transportation and processing services | | $ | — | | | $ | — | | | $ | 0.3 | | |
Purchases of natural gas, propane and NGLs | | $ | — | | | $ | 3.4 | | | $ | 4.7 | | | $ | — | | | $ | — | | | $ | 3.4 | |
ConocoPhillips: | | | | | | | | | | | | | | | | | | | | | | | | |
Sales of natural gas, propane, NGLs and condensate | | $ | 6.6 | | | $ | 1.1 | | | $ | 7.3 | | | $ | 1.8 | | | $ | 6.6 | | | $ | 1.1 | |
Transportation and processing services | | $ | 10.6 | | | $ | 8.0 | | | $ | 10.0 | | |
Transportation, processing and other | | | $ | 10.4 | | | $ | 10.6 | | | $ | 8.0 | |
Purchases of natural gas, propane and NGLs | | $ | 29.2 | | | $ | 12.9 | | | $ | 18.7 | | | $ | 36.6 | | | $ | 29.2 | | | $ | 12.9 | |
118
DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We had accounts receivable and accounts payable with affiliates as follows:
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2007 | | 2006 | | | 2008 | | 2007 | |
| | (Millions) | | | (Millions) | |
|
DCP Midstream, LLC: | | | | | | | | | | | | | | | | |
Accounts receivable | | $ | 47.3 | | | $ | 30.0 | | | $ | 30.3 | | | $ | 47.3 | |
Accounts payable | | $ | 53.3 | | | $ | 46.6 | | | $ | 27.9 | | | $ | 53.3 | |
Spectra Energy: | | | | | | | | | | | | | | | | |
Accounts receivable | | $ | 1.5 | | | $ | — | | | $ | 4.0 | | | $ | 1.5 | |
Duke Energy: | | | | | | | | | |
Accounts receivable | | $ | — | | | $ | 0.2 | | |
Accounts payable | | $ | — | | | $ | 1.8 | | | $ | 5.3 | | | $ | — | |
ConocoPhillips: | | | | | | | | | | | | | | | | |
Accounts receivable | | $ | 3.3 | | | $ | 4.6 | | | $ | 2.5 | | | $ | 3.3 | |
Accounts payable | | $ | 2.3 | | | $ | 2.0 | | | $ | 0.4 | | | $ | 2.3 | |
The following summarizes the unrealized gains and unrealized losses on derivative instruments with affiliates:
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2007 | | 2006 | | | 2008 | | 2007 | |
| | (Millions) | | | (Millions) | |
|
DCP Midstream, LLC: | | | | | | | | | | | | | | | | |
Unrealized gains — current | | $ | — | | | $ | 0.3 | | |
Unrealized losses — current | | $ | (2.7 | ) | | $ | (0.2 | ) | | $ | (1.2 | ) | | $ | (2.7 | ) |
124
DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
6. | Property, Plant and Equipment |
A summary of property, plant and equipment by classification is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Depreciable
| | December 31, | | | Depreciable
| | December 31, | |
| | Life | | 2007 | | 2006 | | | Life | | 2008 | | 2007 | |
| | | | (Millions) | | | | | (Millions) | |
|
Gathering systems | | | 15 — 30 Years | | | $ | 371.3 | | | $ | 107.3 | | | | 15 — 30 Years | | | $ | 405.0 | | | $ | 371.3 | |
Processing plants | | | 25 — 30 Years | | | | 91.4 | | | | 53.2 | | | | 25 — 30 Years | | | | 163.4 | | | | 91.4 | |
Terminals | | | 25 — 30 Years | | | | 24.2 | | | | 8.2 | | | | 25 — 30 Years | | | | 28.5 | | | | 24.2 | |
Transportation | | | 25 — 30 Years | | | | 141.0 | | | | 139.6 | | | | 25 — 30 Years | | | | 174.0 | | | | 141.0 | |
General plant | | | 3 — 5 Years | | | | 4.0 | | | | 3.6 | | | | 3 — 5 Years | | | | 6.0 | | | | 4.0 | |
Construction work in progress | | | | | | | 25.5 | | | | 16.2 | | | | | | | | 43.5 | | | | 25.5 | |
| | | | | | | | | | |
Property, plant and equipment | | | | | | | 657.4 | | | | 328.1 | | | | | | | | 820.4 | | | | 657.4 | |
Accumulated depreciation | | | | | | | (156.7 | ) | | | (133.4 | ) | | | | | | | (191.1 | ) | | | (156.7 | ) |
| | | | | | | | | | |
Property, plant and equipment, net | | | | | | $ | 500.7 | | | $ | 194.7 | | | | | | | $ | 629.3 | | | $ | 500.7 | |
| | | | | | | | | | |
The above amounts include accrued capital expenditures of $8.4$12.3 million and $1.9$8.4 million as of December 31, 20072008 and 2006,2007, respectively, which are included in other current liabilities in the consolidated balance sheets.
Depreciation expense was $34.4 million, $23.3 million $12.4 million and $12.0$12.4 million for the years ended December 31, 2008, 2007 and 2006, and 2005, respectively.
119
We lease one of our Michigan transmission pipelines to a third party under a long-term contract. The carrying value of the pipeline is approximately $23.0 million, with accumulated depreciation of $0.2 million. Minimum future non-cancelable rental payments are as follows:
DCP MIDSTREAM PARTNERS, LP
| | | | |
Rental Payments | |
(Millions) | |
|
2009 | | $ | 3.0 | |
2010 | | | 2.9 | |
2011 | | | 2.9 | |
2012 | | | 2.8 | |
2013 | | | 2.3 | |
Thereafter | | | 20.7 | |
| | | | |
Total | | $ | 34.6 | |
| | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Asset Retirement Obligations— Our asset retirement obligations relate primarily to the retirement of various gathering pipelines and processing facilities, obligations related to right-of-way easement agreements, and contractual leases for land use. We adjust our asset retirement obligation each quarter for any liabilities incurred or settled during the period, accretion expense and any revisions made to the estimated cash flows. The asset retirement obligation, included in other long-term liabilities in the consolidated balance sheets, was $3.1$7.9 million and $0.5$3.1 million at December 31, 20072008 and 2006,2007, respectively. The asset retirement obligation increased in 2008 and 2007, respectively, as a result of the MPP and MEG acquisition.acquisitions. Accretion expense for the years ended December 31, 2008 and 2007 was $0.4 million and $0.1 million, respectively, and for the year ended December 31, 2007 was $0.1 million and for the years ended December 31, 2006 and 2005 was not significant.
We identified various assets as having an indeterminate life, for which there is no requirement to establish a fair value for future retirement obligations associated with such assets. These assets include certain pipelines,
125
DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
gathering systems and processing facilities. A liability for these asset retirement obligations will be recorded only if and when a future retirement obligation with a determinable life is identified. These assets have an indeterminate life because they are owned and will operate for an indeterminate future period when properly maintained. Additionally, if the portion of an owned plant containing asbestos were to be modified or dismantled, we would be legally required to remove the asbestos. We currently have no plans to take actions that would require the removal of the asbestos in these assets. Accordingly, the fair value of the asset retirement obligation related to this asbestos cannot be estimated and no obligation has been recorded.
| |
7. | Goodwill and Intangible Assets |
The change in the carrying amount of goodwill is as follows:
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2007 | | 2006 | | | 2008 | | 2007 | |
| | (Millions) | | | (Millions) | |
|
Beginning of period | | $ | 29.3 | | | $ | 29.3 | | | $ | 80.2 | | | $ | 29.3 | |
Acquisitions | | | 50.9 | | | | — | | | | 8.6 | | | | 50.9 | |
| | | | | | | | | | |
End of period | | $ | 80.2 | | | $ | 29.3 | | | $ | 88.8 | | | $ | 80.2 | |
| | | | | | | | | | |
Goodwill increased during 2008 by $6.7 million as a result of $29.3the MPP acquisition, and by $1.9 million representsfor the amount that was recognized byfinal purchase price allocation for the MEG subsidiaries acquired from DCP Midstream, LLC when it acquired certain assets which are now included in our Wholesale Propane Logistics segment, and was allocated based on fair value to the wholesale propane logistics business in order to present historical information about the assets we acquired in November 2006.LLC. The increase in goodwill during 2007 of $50.9 million represents the amount that we recognized in connection with our acquisition of the MEG subsidiaries from DCP Midstream, LLC.
We perform an annual goodwill impairment test, and update the test during interim periods if events or circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We use a discounted cash flow analysis supported by market valuation multiples to perform the assessment. Key assumptions in the analysis include the use of an appropriate discount rate, estimated future cash flows and an estimated run rate of general and administrative costs. In estimating cash flows, we incorporate current market information, as well as historical and other factors, into our forecasted commodity prices. Our annual goodwill impairment tests indicated that our reporting unit’s fair value exceeded its carrying or book value;value.
During the fourth quarter of 2008, as a result of the decline in the general equity market indices and in our unit price on the New York Stock exchange, we updated our fair value analysis using current marketplace assumptions and concluded that the carrying value of goodwill is recoverable; therefore, we did not record any impairment charges during the years ended December 31, 2008, 2007 2006 and 2005.
120
DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)2006. However, given the current volatility in the equity market, as well as volatile commodity prices, we will continue to monitor the recoverability of such amounts. Continued volatility and marketplace activity may alter our conclusion in the future, and could result in the recognition of an impairment charge.
Intangible assets consist primarily of customer contracts, including commodity purchase, transportation and processing contracts, and related relationships. The gross carrying amount and accumulated amortization of these intangible assets are included in the accompanying consolidated balance sheets as intangible assets, net, and are as follows:
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2007 | | 2006 | | | 2008 | | 2007 | |
| | (Millions) | | | (Millions) | |
|
Gross carrying amount | | $ | 32.4 | | | $ | 4.4 | | | $ | 52.5 | | | $ | 32.4 | |
Accumulated amortization | | | (2.7 | ) | | | (1.6 | ) | | | (4.8 | ) | | | (2.7 | ) |
| | | | | | | | | | |
Intangible assets, net | | $ | 29.7 | | | $ | 2.8 | | | $ | 47.7 | | | $ | 29.7 | |
| | | | | | | | | | |
126
DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Intangible assets increased in 2008 as a result of the Southern Oklahoma and MEG acquisitions, through which $12.5 million and $15.5 million, respectively, of intangible assets were acquired.
One customer has notified us that they intend to exercise their early termination right prior to the end of the contract term. Accordingly, we are not amortizing the estimated termination fee of $0.5 million, which is included in intangible assets in the above table as of December 31, 2007 and 2006.MPP acquisition.
For the years ended December 31, 2008, 2007 2006 and 2005,2006, we recorded amortization expense of $2.1 million, $1.1 million $0.4 million and $0.7$0.4 million, respectively. As of December 31, 2007,2008, the remaining amortization periods range from approximately less than one year to 25 years, with a weighted-average remaining period of approximately 2021 years.
Estimated future amortization for these intangible assets is as follows:
| | | | | | | | |
| | Estimated Future
| | | Estimated Future
| |
| | Amortization | | | Amortization | |
| | (Millions) | | | (Millions) | |
|
2008 | | $ | 1.8 | | |
2009 | | | 1.6 | | | $ | 2.6 | |
2010 | | | 1.5 | | | | 2.6 | |
2011 | | | 1.5 | | | | 2.3 | |
2012 | | | 1.5 | | | | 2.3 | |
2013 | | | | 2.3 | |
Thereafter | | | 21.3 | | | | 35.6 | |
| | | | | | |
Total | | $ | 29.2 | | | $ | 47.7 | |
| | | | | | |
| |
8. | Equity Method Investments |
The following table summarizes our equity method investments:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Percentage of
| | | | | | | Percentage of
| | | | | |
| | Ownership as of
| | Carrying Value as of
| | | Ownership as of
| | Carrying Value as of
| |
| | December 31,
| | December 31, | | | December 31,
| | December 31, | |
| | 2007 and 2006 | | 2007 | | 2006 | | | 2008 and 2007 | | 2008 | | 2007 | |
| | | | (Millions) | | | | | (Millions) | |
|
Discovery Producer Services LLC | | | 40 | % | | $ | 117.9 | | | $ | 113.4 | | | | 40 | % | | $ | 105.0 | | | $ | 117.9 | |
DCP East Texas Holdings, LLC | | | 25 | % | | | 62.9 | | | | 50.9 | | | | 25 | % | | | 63.9 | | | | 62.9 | |
Black Lake Pipe Line Company | | | 45 | % | | | 6.2 | | | | 5.7 | | | | 45 | % | | | 6.3 | | | | 6.2 | |
Other | | | 50 | % | | | 0.2 | | | | 0.2 | | | | 50 | % | | | 0.2 | | | | 0.2 | |
| | | | | | | | | | |
Total equity method investments | | | | | | $ | 187.2 | | | $ | 170.2 | | | | | | | $ | 175.4 | | | $ | 187.2 | |
| | | | | | | | | | |
121
DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Discovery operates a600 MMcf/d cryogenic natural gas processing plant near Larose, Louisiana, a natural gas liquids fractionator plant near Paradis, Louisiana, a natural gas pipeline from offshore deep water in the Gulf of Mexico that transports gas to its processing plant in Larose, Louisiana with a design capacity of600 MMcf/d and approximately 280 miles of pipe, and several laterals in the Gulf of Mexico. There was a deficit between the carrying amount of the investment and the underlying equity of Discovery of $43.7$39.7 million and $48.6$43.7 million at December 31, 20072008 and 2006,2007, respectively, which is associated with, and is being accreted over, the life of the underlying long-lived assets of Discovery.
East Texas is engaged in the business of gathering, transporting, treating, compressing, processing, and fractionating natural gas and NGLs. Its operations, located near Carthage, Texas, include a natural gas processing complex with a total capacity of780 MMcf/d and a natural gas liquids fractionator. The facility is connected to an approximately845-mile900-mile gathering system, as well as third party gathering systems. The complex includes and is adjacent to the Carthage Hub, which delivers residue gas to interstate and intrastate pipelines. The Carthage Hub, with an aggregate delivery capacity of 1.5 Bcf/d, acts as a key exchange point for the purchase and sale of residue gas.
127
DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Black Lake owns a317-mile NGL pipeline, with a throughput capacity of approximately 40 MBbls/d. The pipeline receives NGLs from a number of gas plants in Louisiana and Texas. There was a deficit between the carrying amount of the investment and the underlying equity of Black Lake of $6.4$6.0 million and $6.7$6.4 million at December 31, 20072008 and 2006,2007, respectively, which is associated with, and is being accreted over, the life of the underlying long-lived assets of Black Lake.
Prior to December 7, 2005, DCP Midstream Partners Predecessor held a 50% interest in Black Lake. Upon completion of our initial public offering, DCP Midstream, LLC retained a 5% interest in Black Lake.
Earnings from equity method investments were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | (Millions) | | | (Millions) | |
|
Discovery Producer Services LLC | | $ | 24.1 | | | $ | 16.9 | | | $ | 10.8 | | | $ | 17.4 | | | $ | 24.1 | | | $ | 16.9 | |
DCP East Texas Holdings, LLC | | | 14.6 | | | | 12.0 | | | | 14.5 | | | | 16.1 | | | | 14.6 | | | | 12.0 | |
Black Lake Pipe Line Company and other | | | 0.6 | | | | 0.3 | | | | 0.4 | | | | 0.8 | | | | 0.6 | | | | 0.3 | |
| | | | | | | | | | | | | | |
Total earnings from equity method investments | | $ | 39.3 | | | $ | 29.2 | | | $ | 25.7 | | | $ | 34.3 | | | $ | 39.3 | | | $ | 29.2 | |
| | | | | | | | | | | | | | |
Distributions from equity method investments | | $ | 38.9 | | | $ | 25.9 | | | $ | 36.7 | | | $ | 59.9 | | | $ | 38.9 | | | $ | 25.9 | |
| | | | | | | | | | | | | | |
Earnings from equity method investments, net of distributions | | $ | 0.4 | | | $ | 3.3 | | | $ | (11.0 | ) | | $ | (25.6 | ) | | $ | 0.4 | | | $ | 3.3 | |
| | | | | | | | | | | | | | |
The following summarizes financial information of our equity method investments:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | (Millions) | | | (Millions) | |
|
Statements of operations: | | | | | | | | | | | | | | | | | | | | | | | | |
Operating revenue | | $ | 739.6 | | | $ | 686.9 | | | $ | 672.1 | | | $ | 792.7 | | | $ | 739.6 | | | $ | 686.9 | |
Operating expenses | | $ | 634.6 | | | $ | 612.2 | | | $ | 594.8 | | | $ | (696.9 | ) | | $ | 634.6 | | | $ | 612.2 | |
Net income | | $ | 106.8 | | | $ | 77.4 | | | $ | 77.9 | | | $ | 99.8 | | | $ | 106.8 | | | $ | 77.4 | |
122
DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2007 | | 2006 | | | 2008 | | 2007 | |
| | (Millions) | | | (Millions) | |
|
Balance sheet: | | | | | | | | | | | | | | | | |
Current assets | | $ | 168.8 | | | $ | 108.9 | | | $ | 104.3 | | | $ | 168.8 | |
Long-term assets | | | 630.3 | | | | 630.7 | | | | 646.3 | | | | 630.3 | |
Current liabilities | | | 100.9 | | | | 94.8 | | | | (84.4 | ) | | | (100.9 | ) |
Long-term liabilities | | | 14.9 | | | | 6.0 | | | | (22.4 | ) | | | (14.9 | ) |
| | | | | | | | | | |
Net assets | | $ | 683.3 | | | $ | 638.8 | | | $ | 643.8 | | | $ | 683.3 | |
| | | | | | | | | | |
Determination of Fair Value
Below is a general description of our valuation methodologies for derivative financial assets and liabilities, as well as short-term and restricted investments, which are measured at fair value. Fair values are generally based upon quoted market prices, where available. In the event that listed market prices or quotes are not available, we determine fair value based upon a market quote, adjusted by other market-based or independently sourced market data such as historical commodity volatilities, crude oil future yield curves,and/or counterparty specific considerations. These adjustments result in a fair value for each asset or liability under an “exit price” methodology, in line with how we believe a marketplace participant would value that
128
DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
asset or liability. These adjustments may include amounts to reflect counterparty credit quality, the effect of our own creditworthiness, the time value of moneyand/or the liquidity of the market.
| | |
| • | Counterparty credit valuation adjustments are necessary when the market price of an instrument is not indicative of the fair value as a result of the credit quality of the counterparty. Generally, market quotes assume that all counterparties have near zero, or low, default rates and have equal credit quality. Therefore, an adjustment may be necessary to reflect the credit quality of a specific counterparty to determine the fair value of the instrument. We record counterparty credit valuation adjustments on all derivatives that are in a net asset position as of the measurement date in accordance with our established counterparty credit policy, which takes into account any collateral margin that a counterparty may have posted with us. |
|
| • | Entity valuation adjustments are necessary to reflect the effect of our own credit quality on the fair value of our net liability position with each counterparty. This adjustment takes into account any credit enhancements, such as collateral margin we may have posted with a counterparty, as well as any letters of credit that we have provided. The methodology to determine this adjustment is consistent with how we evaluate counterparty credit risk, taking into account our own credit rating, current credit spreads, as well as any change in such spreads since the last measurement date. |
|
| • | Liquidity valuation adjustments are necessary when we are not able to observe a recent market price for financial instruments that trade in less active markets for the fair value to reflect the cost of exiting the position. Exchange traded contracts are valued at market value without making any additional valuation adjustments and, therefore, no liquidity reserve is applied. For contracts other than exchange traded instruments, we mark our positions to the midpoint of the bid/ask spread, and record a liquidity reserve based upon our total net position. We believe that such practice results in the most reliable fair value measurement as viewed by a market participant. |
We manage our derivative instruments on a portfolio basis and the valuation adjustments described above are calculated on this basis. We believe that the portfolio level approach represents the highest and best use for these assets as there are benefits inherent in naturally offsetting positions within the portfolio at any given time, and this approach is consistent with how a market participant would view and value the assets. Although we take a portfolio approach to managing these assets/liabilities, in order to reflect the fair value of any one individual contract within the portfolio, we allocate all valuation adjustments down to the contract level, to the extent deemed necessary, based upon either the notional contract volume, or the contract value, whichever is more applicable.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While we believe that our valuation methods are appropriate and consistent with other marketplace participants, we recognize that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. We review our fair value policies on a regular basis taking into consideration changes in the marketplace and, if necessary, will adjust our policies accordingly. See Note 13 Risk Management Activities Credit Risk and Financial Instruments.
Valuation Hierarchy
Our fair value measurements are grouped into a three-level valuation hierarchy. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows.
| | |
| • | Level 1 — inputs are unadjusted quoted prices foridenticalassets or liabilities in active markets. |
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| | |
| • | Level 2 — inputs include quoted prices forsimilarassets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
|
| • | Level 3 — inputs are unobservable and considered significant to the fair value measurement. |
A financial instrument’s categorization within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Following is a description of the valuation methodologies used as well as the general classification of such instruments pursuant to the hierarchy.
Commodity Derivative Assets and Liabilities
We enter into a variety of derivative financial instruments, which may include over the counter, or OTC, instruments, such as natural gas, crude oil or NGL contracts.
Within our Natural Gas Services segment we typically use OTC derivative contracts in order to mitigate a portion of our exposure to natural gas, NGL and condensate price changes. These instruments are generally classified as Level 2. Depending upon market conditions and our strategy, we may enter into OTC derivative positions with a significant time horizon to maturity, and market prices for these OTC derivatives may only be readily observable for a portion of the duration of the instrument. In order to calculate the fair value of these instruments, readily observable market information is utilized to the extent that it is available; however, in the event that readily observable market data is not available, we may interpolate or extrapolate based upon observable data. In instances where we utilize an interpolated or extrapolated value, and it is considered significant to the valuation of the contract as a whole, we would classify the instrument within Level 3.
Within our Wholesale Propane Logistics segment, we may enter into a variety of financial instruments to either secure sales or purchase prices, or capture a variety of market opportunities. Since financial instruments for NGLs tend to be counterparty and location specific, we primarily use the OTC derivative instrument markets, which are not as active and liquid as exchange traded instruments. Market quotes for such contracts may only be available for short dated positions (up to six months), and a market itself may not exist beyond such time horizon. Contracts entered into with a relatively short time horizon for which prices are readily observable in the OTC market are generally classified within Level 2. Contracts with a longer time horizon, for which we internally generate a forward curve to value such instruments, are generally classified within Level 3. The internally generated curve may utilize a variety of assumptions including, but not limited to, historical and future expected correlation of NGL prices to crude oil prices, the knowledge of expected supply sources coming on line, expected weather trends within certain regions of the United States, and the future expected demand for NGLs.
Each instrument is assigned to a level within the hierarchy at the end of each financial quarter depending upon the extent to which the valuation inputs are observable. Generally, an instrument will move toward a level within the hierarchy that requires a lower degree of judgment as the time to maturity approaches, and as the markets in which the asset trades will likely become more liquid and prices more readily available in the market, thus reducing the need to rely upon our internally developed assumptions. However, the level of a given instrument may change, in either direction, depending upon market conditions and the availability of market observable data.
Interest Rate Derivative Assets and Liabilities
We have interest rate swap agreements as part of our overall capital strategy. These instruments effectively exchange a portion of our floating rate debt for fixed rate debt, and are held with major financial institutions, which are expected to fully perform under the terms of our agreements. The swaps are generally priced based upon a United States Treasury instrument with similar duration, adjusted by the credit spread between our company and the United States Treasury instrument. Given that a significant portion of the swap
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value is derived from the credit spread, which may be observed by comparing similar assets in the market, these instruments are classified within Level 2. Default risk on either side of the swap transaction is also considered in the valuation. We record counterparty credit, our entity valuation, as well as liquidity reserves in the valuation of our interest rate swaps; however, these reserves are not considered to be a significant input to the overall valuation.
Short-Term and Restricted Investments
We are required to post collateral to secure the term loan portion of our credit facility, and may elect to invest a portion of our available cash balances in various financial instruments such as commercial paper, money market instruments and highly rated tax-exempt debt securities that have stated maturities of 20 years or more, which are categorized as available-for-sale securities. The money market instruments are generally priced at acquisition cost, plus accreted interest at the stated rate, which approximates fair value, without any additional adjustments. Given that there is no observable exchange traded market for identical money market securities, we have classified these instruments within Level 2. Investments in commercial paper and highly rated tax-exempt debt securities are priced using a yield curve for similarly rated instruments, and are classified within Level 2. As of December 31, 2008, nearly all of our short-term and restricted investments were held in the form of money market securities. By virtue of our balances in these funds on September 19, 2008, all of these investments are eligible for, and the funds are participating in, the U.S. Treasury Department’s Temporary Guarantee Program for Money Market Funds.
The following table presents the financial instruments carried at fair value as of December 31, 2008, by consolidated balance sheet caption and by valuation hierarchy, as described above:
| | | | | | | | | | | | | | | | |
| | | | | Internal Models
| | | Internal Models
| | | | |
| | Quoted Market
| | | with Significant
| | | with Significant
| | | | |
| | Prices in
| | | Observable
| | | Unobservable
| | | | |
| | Active Markets
| | | Market Inputs
| | | Market Inputs
| | | Total Carrying
| |
| | (Level 1) | | | (Level 2) | | | (Level 3) | | | Value | |
| | (Millions) | |
|
Current assets: | | | | | | | | | | | | | | | | |
Commodity derivative instruments(a) | | $ | — | | | $ | 15.1 | | | $ | 0.3 | | | $ | 15.4 | |
Long-term assets: | | | | | | | | | | | | | | | | |
Restricted investments | | $ | — | | | $ | 60.2 | | | $ | — | | | $ | 60.2 | |
Commodity derivative instruments(b) | | $ | — | | | $ | 6.9 | | | $ | 1.7 | | | $ | 8.6 | |
Interest rate instruments(b) | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Current liabilities(c): | | | | | | | | | | | | | | | | |
Commodity derivative instruments | | $ | — | | | $ | (1.2 | ) | | $ | — | | | $ | (1.2 | ) |
Interest rate instruments | | $ | — | | | $ | (16.5 | ) | | $ | — | | | $ | (16.5 | ) |
Long-term liabilities(d): | | | | | | | | | | | | | | | | |
Commodity derivative instruments | | $ | — | | | $ | (3.2 | ) | | $ | — | | | $ | (3.2 | ) |
Interest rate instruments | | $ | — | | | $ | (22.8 | ) | | $ | — | | | $ | (22.8 | ) |
| | |
(a) | | Included in current unrealized gains on derivative instruments in our consolidated balance sheets. |
|
(b) | | Included in long-term unrealized gains on derivative instruments in our consolidated balance sheets. |
|
(c) | | Included in current unrealized losses on derivative instruments in our consolidated balance sheets. |
|
(d) | | Included in long-term unrealized losses on derivative instruments in our consolidated balance sheets. |
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Changes in Level 3 Fair Value Measurements
The table below illustrates a rollforward of the amounts included in our consolidated balance sheets for derivative financial instruments that we have classified within Level 3. The determination to classify a financial instrument within Level 3 is based upon the significance of the unobservable factors used in determining the overall fair value of the instrument. Since financial instruments classified as Level 3 typically include a combination of observable components (that is, components that are actively quoted and can be validated to external sources) and unobservable components, the gains and losses in the table below may include changes in fair value due in part to observable market factors, or changes to our assumptions on the unobservable components. Depending upon the information readily observable in the market,and/or the use of unobservable inputs, which are significant to the overall valuation, the classification of any individual financial instrument may differ from one measurement date to the next. In the event that there is a movement to/from the classification of an instrument as Level 3, we have reflected such items in the table below within the “Transfers In/Out of Level 3” caption.
We manage our overall risk at the portfolio level, and in the execution of our strategy, we may use a combination of financial instruments, which may be classified within any level. Since Level 1 and Level 2 risk management instruments are not included in the rollforward below, the gains or losses in the table do not reflect the effect of our total risk management activities.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Net Realized
| | | | | | | | | | | | | |
| | | | | and Unrealized
| | | | | | | | | | | | Net Unrealized
| |
| | Balance at
| | | Gains Included
| | | Transfers In/
| | | Purchases,
| | | Balance at
| | | Gains (Losses)
| |
| | December 31,
| | | in (Losses)
| | | Out of
| | | Issuances and
| | | December 31,
| | | Still Held Included
| |
| | 2007 | | | Earnings | | | Level 3(a) | | | Settlements, Net | | | 2008 | | | in Earnings(b) | |
| | (Millions) | |
|
Commodity derivative instruments: | | | | | | | | | | | | | | | | | | | | | | | | |
Current assets | | $ | 0.2 | | | $ | 0.8 | | | $ | — | | | $ | (0.7 | ) | | $ | 0.3 | | | $ | 0.3 | |
Long-term assets | | $ | 1.5 | | | $ | 1.0 | | | $ | (0.8 | ) | | $ | — | | | $ | 1.7 | | | $ | 1.0 | |
Current liabilities | | $ | (1.6 | ) | | $ | (0.2 | ) | | $ | — | | | $ | 1.8 | | | $ | — | | | $ | — | |
Long-term liabilities | | $ | (0.2 | ) | | $ | 0.2 | | | $ | — | | | $ | — | | | $ | — | | | $ | 0.2 | |
| | |
(a) | | Amounts transferred in are reflected at fair value as of the end of the period and amounts transferred out are reflected at fair value at the beginning of the period. |
|
(b) | | Represents the amount of total gains or losses for the period, included in gains or losses from commodity derivative activity, net, attributable to change in unrealized gains (losses) relating to assets and liabilities classified as Level 3 that are still held at December 31, 2008. |
| |
10. | Estimated Fair Value of Financial Instruments |
We have determined the following fair value amounts using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptionsand/or estimation methods may have a material effect on the estimated fair value amounts. The following summarizes the estimated fair value of financial instruments:
| | | | | | | | | | | | | | | | |
| | December 31, 2007 | | | December 31, 2006 | |
| | Carrying
| | | Estimated Fair
| | | Carrying
| | | Estimated Fair
| |
| | Amount | | | Value | | | Amount | | | Value | |
| | (Millions) | |
|
Restricted investments | | $ | 100.5 | | | $ | 100.5 | | | $ | 102.0 | | | $ | 102.0 | |
Accounts receivable | | $ | 133.8 | | | $ | 133.8 | | | $ | 78.2 | | | $ | 78.2 | |
Accounts payable | | $ | 165.8 | | | $ | 165.8 | | | $ | 117.3 | | | $ | 117.3 | |
Net unrealized (losses) gains on derivative instruments | | $ | (95.1 | ) | | $ | (95.1 | ) | | $ | 7.3 | | | $ | 7.3 | |
Long-term debt | | $ | 630.0 | | | $ | 630.0 | | | $ | 268.0 | | | $ | 268.0 | |
The fair value of restricted investments, accounts receivable and accounts payable are not materially different from their carrying amounts because of the short term nature of these instruments or the stated rates approximating market rates. Unrealized gains and unrealized losses on derivative instruments are carried at fair value.
The carrying value of long-term debt approximates fair value, as the interest rate is variable and reflects current market conditions.
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Long-term debt was as follows:
| | | | | | | | |
| | Principal Amount | |
| | 2007 | | | 2006 | |
| | (Millions) | |
|
Revolving credit facility, weighed-average interest rate of 5.47% and 5.86%, respectively, due June 21, 2012 | | $ | 530.0 | | | $ | 168.0 | |
Term loan facility, interest rate of 5.05% and 5.47%, respectively, due June 21, 2012 | | | 100.0 | | | | 100.0 | |
| | | | | | | | |
Total long-term debt | | $ | 630.0 | | | $ | 268.0 | |
| | | | | | | | |
| | | | | | | | |
| | Principal Amount | |
| | 2008 | | | 2007 | |
| | (Millions) | |
|
Revolving credit facility, weighed-average interest rate of 2.08% and 5.47%, respectively, due June 21, 2012(a) | | $ | 596.5 | | | $ | 530.0 | |
Term loan facility, interest rate 1.54% and 5.05%, respectively, due June 21, 2012(b) | | | 60.0 | | | | 100.0 | |
| | | | | | | | |
Total long-term debt | | $ | 656.5 | | | $ | 630.0 | |
| | | | | | | | |
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| | |
(a) | | $575.0 million of debt has been swapped to a fixed rate obligation with effective fixed rates ranging from 2.26% to 5.19%, for a net effective rate of 4.48% on the $596.5 million of outstanding debt under our revolving credit facility as of December 31, 2008. |
|
(b) | | The term loan facility is fully secured by restricted investments. |
Credit AgreementsAgreement
OnWe have an $824.6 million5-year credit agreement that matures June 21, 2007, we entered into the Amended and Restated Credit Agreement, or the Amended Credit Agreement, that replaced our existing credit agreement,2012, or the Credit Agreement, which consists of:
| | |
| • | a $600.0$764.6 million revolving credit facility; and |
|
| • | a $250.0$60.0 million term loan facility. |
At December 31, 20072008 and 2006,2007, we had $0.3 million and $0.2 million of letters of credit outstanding.issued under the credit agreement outstanding, respectively. Outstanding balances under the term loan facility are fully collateralized by investments in high-grade securities, which are classified as restricted investments in the accompanying consolidated balance sheet as of December 31, 20072008 and 2006.2007. As of December 31, 2008, the available capacity under the revolving credit facility was $171.5 million, which is net of approximately $21.7 million non-participation by Lehman Brothers Commercial Bank, or Lehman Brothers, as discussed below. We have incurred $0.6 million of debt issuance costs during 2007 associated with the Amended Credit Agreement. These expenses are deferred as other long-term assets in the consolidated balance sheet and will be amortized over the term of the Amended Credit Agreement.
Under the Amended Credit Agreement, indebtedness under the revolving credit facility bears interest at either: (1) the higher of Wachovia Bank’s prime rate or the Federal Funds rate plus 0.50%; or (2) LIBOR plus an applicable margin, which ranges from 0.23% to 0.575% dependent upon our leverage level or credit rating. The revolving credit facility incurs an annual facility fee of 0.07% to 0.175% depending on our applicable leverage level or debt rating. This fee is paid on drawn and undrawn portions of the revolving credit facility. The term loan facility bears interest at a rate equal to either: (1) LIBOR plus 0.10%; or (2) the higher of Wachovia Bank’s prime rate or the Federal Funds rate plus 0.50%.
The Amended Credit Agreement requires us to maintain a leverage ratio (the ratio of our consolidated indebtedness to our consolidated EBITDA, in each case as is defined by the Amended Credit Agreement) of not more than 5.0 to 1.0, and on a temporary basis for not more than three consecutive quarters (including the quarter in which such acquisition is consummated) following the consummation of asset acquisitions in the midstream energy business of not more than 5.505.5 to 1.0. The Amended Credit Agreement also requires us to maintain an interest coverage ratio (the ratio of our consolidated EBITDA to our consolidated interest expense, in each case as is defined by the Amended Credit Agreement) of equal or greater than 2.5 to 1.0 determined as of the last day of each quarter for the four-quarter period ending on the date of determination.
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Lehman Brothers is a lender in our Credit Agreement. Lehman Brothers has not funded its portion of our borrowing requests since its bankruptcy, and it is uncertain whether it will participate in future borrowing requests. Accordingly, the availability of new borrowings under the Credit Agreement has been reduced by approximately $25.4 million as of December 31, 2008. Our borrowing capacity may be further limited by the Credit Agreement’s financial covenant requirements. Except in the case of a default, amounts borrowed under our credit facility will not mature prior to the June 21, 2012 maturity date.
Bridge Loan
In May 2007, we entered into a two-month bridge loan, or the Bridge Loan, which provided for borrowings up to $100.0 million, and had terms and conditions substantially similar to those of our Credit Agreement. In conjunction with our entering into the Bridge Loan, our Credit Agreement was amended to provide for additional unsecured indebtedness, of an amount not to exceed $100.0 million, which was due and payable no later than August 9, 2007.
We used borrowings on the Bridge Loan of $88.0 million to partially fund the Southern Oklahoma acquisition. The remaining $12.0 million available for borrowing on the Bridge Loan was not utilized. We used a portion of the net proceeds of a private placement of limited partner units to extinguish the $88.0 million outstanding on the Bridge Loan in June 2007.
Other Agreements
As of December 31, 2008, we had an outstanding letter of credit with a counterparty to our commodity derivative instruments of $10.0 million, which reduces the amount of cash we may be required to post as collateral. This letter of credit was issued directly by a financial institution and does not reduce the available capacity under our credit facility.
| |
11.12. | Partnership Equity and Distributions |
General— Our partnership agreement requires that, within 45 days after the end of each quarter, we distribute all of our Available Cash (defined below) to unitholders of record on the applicable record date, as determined by our general partner.
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In November 2007, our universal shelf registration statement onForm S-3 was declared effective by the SEC. The universal shelf registration statement has a maximum aggregate offering price of $1.5 billion, which will allow us to register and issue additional partnership units and debt obligations.
In June 2007, we entered into a private placement agreement with a group of institutional investors for $130.0 million, representing 3,005,780 common limited partner units at a price of $43.25 per unit, and received proceeds of $128.5 million, net of offering costs.
In July 2007, we issued 620,404 common units to DCP Midstream, LLC as partial consideration for the purchase of Discovery, East Texas and the Swap. In August 2007, we issued 275,735 common units to DCP Midstream, LLC as partial consideration for the purchase of certain subsidiaries of MEG.
In August 2007, we issued 2,380,952 common units in a private placement, pursuant to a common unit purchase agreement with private owners of MEG or affiliates of such owners, at $42.00 per unit, or approximately $100.0 million in the aggregate.
In January 2008, our registration statement onForm S-3 to register the 3,005,780 common limited partner units represented in the June 2007 private placement agreement and the 2,380,952 common limited partner units represented in the August 2007 private placement agreement was declared effective by the SEC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In March 2008, we issued 4,250,000 common limited partner units at $32.44 per unit, and received proceeds of $132.1 million, net of offering costs.
Definition of Available Cash— Available Cash, for any quarter, consists of all cash and cash equivalents on hand at the end of that quarter:
| | |
| • | less the amount of cash reserves established by the general partner to: |
| | |
| • | provide for the proper conduct of our business; |
|
| • | comply with applicable law, any of our debt instruments or other agreements; or |
|
| • | provide funds for distributions to the unitholders and to our general partner for any one or more of the next four quarters; |
| | |
| • | plus, if our general partner so determines, all or a portion of cash and cash equivalents on hand on the date of determination of Available Cash for the quarter. |
General Partner Interest and Incentive Distribution Rights— Prior to June 2007, the general partner was entitled to 2% of all quarterly distributions that we make prior to our liquidation. The general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us to maintain its current general partner interest. The general partner didhas not participateparticipated in certain issuances of common units during 2007.units. Therefore, the general partner’s 2% interest was reducedhas been diluted to 1.5%.approximately 1% as of December 31, 2008.
The incentive distribution rights held by the general partner entitle it to receive an increasing share of Available Cash when pre-defined distribution targets are achieved. Currently, our distribution to our general partner related to its incentive distribution rights is at the highest level. The general partner’s incentive distribution rights were not reduced as a result of these private placement agreements, and will not be reduced if we issue additional units in the future and the general partner does not contribute a proportionate amount of capital to us to maintain its current general partner interest. Please read theDistributions of Available Cash during the Subordination PeriodandDistributions of Available Cash after the Subordination Periodsections below for more details about the distribution targets and their impact on the general partner’s incentive distribution rights.
Class C Units— On July 2, 2007, the Class C units were converted to common units.
Subordinated Units —All of the subordinated units are held by DCP Midstream, LLC. Our partnership agreement provides that, during the subordination period, the common units will have the right to receive distributions of Available Cash each quarter in an amount equal to $0.35 per common unit, or the Minimum Quarterly Distribution, plus any arrearages in the payment of the Minimum Quarterly Distribution on the
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
common units from prior quarters, before any distributions of Available Cash may be made on the subordinated units. These units are deemed “subordinated” because for a period of time, referred to as the subordination period, the subordinated units will not be entitled to receive any distributions until the common units have received the Minimum Quarterly Distribution plus any arrearages from prior quarters. Furthermore, no arrearages will be paid on the subordinated units. The practical effect of the subordinated units is to increase the likelihood that during the subordination period there will be Available Cash to be distributed on the common units. The subordination period will end, and the subordinated units will convert to common units, on a one for one basis, when certain distribution requirements, as defined in the partnership agreement, have been met. The subordination period has an early termination provision that permits 50% of the subordinated units to convert to common units on the second business day following the first quarter distribution in 2008 and the other 50% of the subordinated units to convert to common units on the second business day following the first quarter distribution in 2009, provided the tests for ending the subordination period contained in the partnership agreement are satisfied. WeIn 2008, we determined that the criteria set forth in the partnership agreement for early termination of the subordination period occurred in February 2008 and,
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therefore, 50% of the subordinated units, or 3,571,428 units, converted into common units. We determined that the criteria set forth in the partnership agreement for early termination of the subordination period occurred in February 2009 and, therefore, the remaining 3,571,429 units, converted into common units. Our board of directors and the conflicts committee of the board certified that all conditions for early conversion were satisfied. The rights of the subordinated unitholders, other than the distribution rights described above, are substantially the same as the rights of the common unitholders.
Distributions of Available Cash during the Subordination Period— Our partnership agreement, after adjustment for the general partner’s relative ownership level, currently 1.5%approximately 1%, requires that we make distributions of Available Cash for any quarter during the subordination period in the following manner:
| | |
| • | first,to the common unitholders and the general partner, in accordance with their pro rata interest, until we distribute for each outstanding common unit an amount equal to the Minimum Quarterly Distribution for that quarter; |
|
| • | second,to the common unitholders and the general partner, in accordance with their pro rata interest, until we distribute for each outstanding common unit an amount equal to any arrearages in payment of the Minimum Quarterly Distribution on the common units for any prior quarters during the subordination period; |
|
| • | third,to the subordinated unitholders and the general partner, in accordance with their pro rata interest, until we distribute for each subordinated unit an amount equal to the Minimum Quarterly Distribution for that quarter; |
|
| • | fourth,to all unitholders and the general partner, in accordance with their pro rata interest, until each unitholder receives a total of $0.4025 per unit for that quarter (the First Target Distribution); |
|
| • | fifth,13% to the general partner, plus the general partner’s pro rata interest, and the remainder to all unitholders pro rata until each unitholder receives a total of $0.4375 per unit for that quarter (the Second Target Distribution); |
|
| • | sixth,23% to the general partner, plus the general partner’s pro rata interest, and the remainder to all unitholders pro rata until each unitholder receives a total of $0.525 per unit for that quarter (the Third Target Distribution); and |
|
| • | thereafter,48% to the general partner, plus the general partner’s pro rata interest, and the remainder to all unitholders (the Fourth Target Distribution). |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Distributions of Available Cash after the Subordination Period— Our partnership agreement, after adjustment for the general partner’s relative ownership level, requires that we make distributions of Available Cash from operating surplus for any quarter after the subordination period in the following manner:
| | |
| • | first,to all unitholders and the general partner, in accordance with their pro rata interest, until each unitholder receives a total of $0.4025 per unit for that quarter; |
|
| • | second,13% to the general partner, plus the general partner’s pro rata interest, and the remainder to all unitholders pro rata until each unitholder receives a total of $0.4375 per unit for that quarter; |
|
| • | third,23% to the general partner, plus the general partner’s pro rata interest, and the remainder to all unitholders pro rata until each unitholder receives a total of $0.525 per unit for that quarter; and |
|
| • | thereafter,48% to the general partner, plus the general partner’s pro rata interest, and the remainder to all unitholders. |
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents our cash distributions paid in 2008, 2007 and 2006:
| | | | | | | | | | | | | | | | |
| | Per Unit
| | Total Cash
| | | Per Unit
| | Total Cash
| |
Payment Date | | Distribution | | Distribution | | | Distribution | | Distribution | |
| | | | (Millions) | | | | | (Millions) | |
|
November 14, 2008 | | | $ | 0.600 | | | $ | 20.1 | |
August 14, 2008 | | | | 0.600 | | | | 20.1 | |
May 15, 2008 | | | | 0.590 | | | | 19.6 | |
February 14, 2008 | | | | 0.570 | | | | 15.7 | |
November 14, 2007 | | $ | 0.550 | | | $ | 14.7 | | | | 0.550 | | | | 14.7 | |
August 14, 2007 | | | 0.530 | | | | 12.4 | | | | 0.530 | | | | 12.4 | |
May 15, 2007 | | | 0.465 | | | | 8.6 | | | | 0.465 | | | | 8.6 | |
February 14, 2007 | | | 0.430 | | | | 7.8 | | | | 0.430 | | | | 7.8 | |
November 14, 2006 | | | 0.405 | | | | 7.4 | | | | 0.405 | | | | 7.4 | |
August 14, 2006 | | | 0.380 | | | | 6.7 | | | | 0.380 | | | | 6.7 | |
May 15, 2006 | | | 0.350 | | | | 6.3 | | | | 0.350 | | | | 6.3 | |
February 13, 2006(a) | | | 0.095 | | | | 1.7 | | | | 0.095 | | | | 1.7 | |
| | |
(a) | | Represents the pro rata portion of our Minimum Quarterly distribution of $0.35 per unit for the period December 7, 2005, the closing of our initial public offering, through December 31, 2005. |
| |
12.13. | Risk Management Activities, Credit Risk and Financial Instruments |
The impact of our derivative activity on our results of operations and financial position is summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | (Millions) | | | (Millions) | |
|
Commodity cash flow hedges: | | | | | | | | | | | | | | | | | | | | | | | | |
Losses due to ineffectiveness | | $ | — | | | $ | (0.3 | ) | | $ | 0.3 | | | $ | — | | | $ | — | | | $ | (0.3 | ) |
Gains reclassified into earnings | | $ | 2.4 | | | $ | 2.6 | | | $ | — | | |
(Losses) gains reclassified into earnings | | | $ | (0.8 | ) | | $ | 2.4 | | | $ | 2.6 | |
Commodity derivative activity: | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized (losses) gains from derivative activity | | $ | (81.7 | ) | | $ | 0.3 | | | $ | (0.4 | ) | |
Unrealized gains (losses) from derivative activity | | | $ | 102.4 | | | $ | (81.7 | ) | | $ | 0.3 | |
Realized losses from derivative activity | | $ | (5.9 | ) | | $ | (0.2 | ) | | $ | (0.5 | ) | | $ | (30.1 | ) | | $ | (5.9 | ) | | $ | (0.2 | ) |
Interest rate cash flow hedges: | | | | | | | | | | | | | | | | | | | | | | | | |
Gains reclassified into earnings | | $ | 0.7 | | | $ | 0.1 | | | $ | — | | |
(Losses) gains reclassified into earnings | | | $ | (6.7 | ) | | $ | 0.7 | | | $ | 0.1 | |
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2007 | | 2006 | | | 2008 | | 2007 | |
| | (Millions) | | | (Millions) | |
|
Commodity cash flow hedges: | | | | | | | | | | | | | | | | |
Net deferred (losses) gains in AOCI | | $ | (2.6 | ) | | $ | 6.9 | | |
Net deferred losses in AOCI | | | $ | (1.8 | ) | | $ | (2.6 | ) |
Interest rate cash flow hedges: | | | | | | | | | | | | | | | | |
Net deferred (losses) gains in AOCI | | $ | (12.3 | ) | | $ | 0.4 | | |
Net deferred losses in AOCI | | | $ | (38.7 | ) | | $ | (12.3 | ) |
For the years ended December 31, 2008, 2007 2006 and 2005,2006, no derivative gains or losses were reclassified from AOCI to current period earnings as a result of the discontinuance of cash flow hedges related to certain forecasted transactions that are not probable of occurring.
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We are exposed to market risks, including changes in commodity prices and interest rates. We may use financial instruments such as forward contracts, swaps and futures to mitigate the effects of the identified risks. In general, we attempt to mitigate risks related to the variability of future cash flows resulting from changes in applicable commodity prices or interest rates so that we can maintain cash flows sufficient to meet debt service, required capital expenditures, distribution objectives and similar requirements. We have established a comprehensive risk management policy, or the Risk Management Policy, and a risk management committee, to monitor and manage market risks associated with commodity prices and interest rates. Our Risk Management Policy prohibits the use of derivative instruments for speculative purposes.
As of December 31, 2007, we posted collateral with certain counterparties to our commodity derivative instruments of approximately $18.2 million, which is included in other current assets on the consolidated balance sheet. As of December 31, 2008, we had an outstanding letter of credit with a counterparty to our commodity derivative instruments of $10.0 million. This letter of credit reduces the amount of cash we may be required to post as collateral. As of December 31, 2008, we had no cash collateral posted with counterparties to our commodity derivative instruments.
Commodity Price Risk— Our operations of gathering, processing, and transporting natural gas, and the accompanying operations of transporting and marketing of NGLs create commodity price risk due to market fluctuations in commodity prices, primarily with respect to the prices of NGLs, natural gas and crude oil. As an owner and operator of natural gas processing and other midstream assets, we have an inherent exposure to market variables and commodity price risk. The amount and type of price risk is dependent on the underlying natural gas contracts to purchase and process raw natural gas. Risk is also dependent on the types and mechanisms for sales of natural gas and NGLs, and related products produced, processed, transported or stored.
Our wholesale propane logistics business is generally designed to establish stable margins by entering into supply arrangements that specify prices based on established floating price indices and by entering into sales agreements that provide for floating prices that are tied to our variable supply costs plus a margin. To the extent that we carry propane inventories or our sales and supply arrangements are not aligned, we are exposed to market variables and commodity price risk. The amount and type of price risk is dependent on the mechanisms and locations for purchases, sales, transportation and storage of propane.
We manage our commodity derivative activities in accordance with our Risk Management Policy, which limits exposure to market risk and requires regular reporting to management of potential financial exposure.
Interest Rate Risk— Interest rates on credit facility balances and debt offerings could be higher than current levels, causing our financing costs to increase accordingly. Although this could limit our ability to raise funds in the debt capital markets, we expect to remain competitive with respect to acquisitions and capital projects, as our competitors would face similar circumstances.
Credit Risk— In the Natural Gas Services segment, we sell natural gas to marketing affiliates of natural gas pipelines, marketing affiliates of integrated oil companies, marketing affiliates of DCP Midstream, LLC, national wholesale marketers, industrial end-users and gas-fired power plants. In the Wholesale Propane Logistics segment, we sell primarily to retail propane distributors. In the NGL Logistics segment, our principal
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
customers include an affiliate of DCP Midstream, LLC, producers and marketing companies. Concentration of credit risk may affect our overall credit risk, in that these customers may be similarly affected by changes in economic, regulatory or other factors. Where exposed to credit risk, we analyze the counterparties’ financial condition prior to entering into an agreement, establish credit limits, and monitor the appropriateness of these limits on an ongoing basis. We operate under DCP Midstream, LLC’s corporate credit policy. DCP Midstream, LLC’s corporate credit policy, as well as the standard terms and conditions of our agreements, prescribe the use of financial responsibility and reasonable grounds for adequate assurances. These provisions allow our credit department to request that a counterparty remedy credit limit violations by posting cash or letters of credit for exposure in excess of an established credit line. The credit line represents an open credit limit,
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
determined in accordance with DCP Midstream, LLC’s credit policy and guidelines. The agreements also provide that the inability of a counterparty to post collateral is sufficient cause to terminate a contract and liquidate all positions. The adequate assurance provisions also allow us to suspend deliveries, cancel agreements or continue deliveries to the buyer after the buyer provides security for payment to us in a satisfactory form.
Commodity Cash Flow Protection Activities— We used NGL, natural gas and crude oil swaps to mitigate the risk of market fluctuations in the price of NGLs, natural gas and condensate. Prior to July 1, 2007, the effective portion of the change in fair value of a derivative designated as a cash flow hedge was accumulated in AOCI. During the period in which the hedged transaction impacted earnings, amounts in AOCI associated with the hedged transaction were reclassified to the consolidated statements of operations in the same accounts as the item being hedged.
Effective July 1, 2007, we elected to discontinue using the hedge method of accounting for our commodity cash flow hedges. Therefore, we are using the mark-to-market method of accounting for all commodity derivative instruments. As a result, the remaining net loss deferred in AOCI will be reclassified to sales of natural gas, propane, NGLs and condensate, through December 2011, as the hedgedunderlying transactions impact earnings. DeferredAs of December 31, 2008, deferred net losses of $0.8$0.9 million are expected to be reclassified during the next 12 months. Subsequent to July 1, 2007, the changes in fair value of financial derivatives are included in gains and losses from derivative activity in the consolidated statements of operations. The agreements are with major financial institutions, which management expects to fully perform under the terms of the agreements.
As of December 31, 2007,2008, we have mitigated a significant portion of our expected natural gas, NGL and condensate commodity price risk associated with the equity volumes from our gathering and processing operations through 2013 with natural gas, NGLs and crude oil derivatives.
Other Asset-Based Activity— To the extent possible, we match the pricing of our supply portfolio to our sales portfolio in order to lock in value and reduce our overall commodity price risk. We manage the commodity price risk of our supply portfolio and sales portfolio with both physical and financial transactions. We occasionally will enter into financial derivatives to lock in price variability across the Pelico system to maximize the value of pipeline capacity. These financial derivatives are accounted for using mark-to-market accounting with changes in fair value recognized in current period earnings.
Our wholesale propane logistics business is generally designed to establish stable margins by entering into supply arrangements that specify prices based on established floating price indices and by entering into sales agreements that provide for floating prices that are tied to our variable supply costs plus a margin. Occasionally, we may enter into fixed price sales agreements in the event that a retail propane distributor desires to purchase propane from us on a fixed price basis. We manage this risk with both physical and financial transactions, sometimes using non-trading derivative instruments, which generally allow us to swap our fixed price risk to market index prices that are matched to our market index supply costs. In addition, we may on occasion use financial derivatives to manage the value of our propane inventories. These financial derivatives are accounted for using mark-to-market accounting with changes in fair value recognized in current period earnings.
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Commodity Fair Value Hedges— Historically, we used fair value hedges to mitigate risk to changes in the fair value of an asset or a liability (or an identified portion thereof) that is attributable to fixed price risk. We may hedge producer price locks (fixed price gas purchases) to reduce our cash flow exposure to fixed price risk by swapping the fixed price risk for a floating price position (New York Mercantile Exchange or index-based).
Normal Purchases and Normal Sales— If a contract qualifies and is designated as a normal purchase or normal sale, no recognition of the contract’s fair value in the consolidated financial statements is required until
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the associated delivery period impacts earnings. We have applied this accounting election for contracts involving the purchase or sale of physical natural gas, propane or NGLscommodities in future periods.periods as well as select operating expense contracts.
Interest Rate Cash Flow Hedges— We mitigate a portion of our interest rate risk with interest rate swaps, which reduce our exposure to market rate fluctuations by converting variable interest rates to fixed interest rates. These interest rate swap agreements convert the interest rate associated with an aggregate of $425.0$575.0 million of the indebtedness outstanding under our revolving credit facility to a fixed rate obligation, thereby reducing the exposure to market rate fluctuations. All interest rate swap agreements have been designated as cash flow hedges, and effectiveness is determined by matching the principal balance and terms with that of the specified obligation. The effective portions of changes in fair value are recognized in AOCI in the consolidated balance sheets. As of December 31, 2007, $3.02008, $16.0 million of deferred net losses on derivative instruments in AOCI are expected to be reclassified into earnings during the next 12 months as the hedged transactions impact earnings however,earnings. However, due to the volatility of the interest rate markets, the corresponding value in AOCI is subject to change prior to its reclassification into earnings. Ineffective portions of changes in fair value are recognized in earnings. The$425.0 million of the agreements reprice prospectively approximately every 90 days and the remaining $150.0 million of the agreements reprice prospectively approximately every 30 days. Under the terms of the interest rate swap agreements, we pay fixed rates ranging from 3.97%2.26% to 5.19%, and receive interest payments based on the three-month LIBOR. The differences to be paid or received under the interest rate swap agreements are recognized as an adjustment to interest expense. The agreements are with major financial institutions, which are expected to fully perform under the terms of the agreements.
| |
13.14. | Equity-Based Compensation |
Total compensation (credit) cost for equity-based arrangements was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | (Millions) | | | (Millions) | |
|
Performance Units | | $ | 1.1 | | | $ | 0.2 | | | $ | — | | | $ | (0.7 | ) | | $ | 1.1 | | | $ | 0.2 | |
Phantom Units | | | 0.6 | | | | 0.4 | | | | — | | | | (0.4 | ) | | | 0.6 | | | | 0.4 | |
Restricted Phantom Units | | | | 0.1 | | | | — | | | | — | |
| | | | | | | | | | | | | | |
Total compensation cost | | $ | 1.7 | | | $ | 0.6 | | | $ | — | | |
Total compensation (credit) cost | | | $ | (1.0 | ) | | $ | 1.7 | | | $ | 0.6 | |
| | | | | | | | | | | | | | |
On November 28, 2005, the board of directors of our General Partner adopted a long-term incentive plan, or LTIP, for employees, consultants and directors of our General Partner and its affiliates who perform services for us, effective as of December 7, 2005. Under the LTIP, equity-based instruments may be granted to our key employees. The LTIP provides for the grant of limited partner units, or LPUs, phantom units, unit options and substitute awards, and, with respect to unit options and phantom units, the grant of dividend equivalent rights, or DERs. Subject to adjustment for certain events, an aggregate of 850,000 LPUs may be delivered pursuant to awards under the LTIP. Awards that are canceled or forfeited, or are withheld to satisfy the General Partner’s tax withholding obligations, are available for delivery pursuant to other awards. The LTIP is administered by the compensation committee of the General Partner’s board of directors. All awards are subject to cliff vesting, with the exception of the Phantom Units issued to directors in conjunction with our initial public offering, which are subject to graded vesting provisions.
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Awards granted to directors are accounted for as equity-based awards and all otherAll awards are accounted for as liability awards.
Performance Units— We have awarded phantom LPUs, or Performance Units, pursuant to the LTIP to certain employees. Performance Units generally vest in their entirety at the end of a three year performance period. The number of Performance Units that will ultimately vest range from 0% to 150%200% of the outstanding Performance Units, depending on the achievement of specified performance targets over three year
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
performance periods. The final performance payout is determined by the compensation committee of the board of directors of our General Partner. The DERs will be paid in cash at the end of the performance period. Of the remaining Performance Units outstanding at December 31, 2007, 28,3502008, 21,705 units vested in January 2009, 15,101 units are expected to vest on December 31, 20082009, and 27,1508,544 units are expected to vest on December 31, 2009.2010.
At December 31, 2007,2008, there was approximately $1.4$0.3 million of unrecognized compensation expense related to the Performance Units that is expected to be recognized over a weighted-average period of 1.50.7 years. The following table presents information related to the Performance Units:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Grant Date
| | | | | | | Grant Date
| | | |
| | | | Weighted-
| | Measurement
| | | | | Weighted-
| | Measurement
| |
| | | | Average Price
| | Date Price
| | | | | Average Price
| | Date Price
| |
| | Units | | per Unit | | per Unit | | | Units | | per Unit | | per Unit | |
|
Outstanding at December 31, 2005 | | | — | | | $ | — | | | | | | |
Outstanding at January 1, 2006 | | | | — | | | $ | — | | | | | |
Granted | | | 40,560 | | | $ | 26.96 | | | | | | | | 40,560 | | | $ | 26.96 | | | | | |
Forfeited | | | (17,470 | ) | | $ | 26.96 | | | | | | | | (17,470 | ) | | $ | 26.96 | | | | | |
| | | | | | |
Outstanding at December 31, 2006 | | | 23,090 | | | $ | 26.96 | | | | | | | | 23,090 | | | $ | 26.96 | | | | | |
Granted | | | 29,610 | | | $ | 37.29 | | | | | | | | 29,610 | | | $ | 37.29 | | | | | |
Forfeited | | | (5,740 | ) | | $ | 31.39 | | | | | | | | (5,740 | ) | | $ | 31.39 | | | | | |
| | | | | | |
Outstanding at December 31, 2007 | | | 46,960 | | | $ | 32.93 | | | $ | 45.95 | | | | 46,960 | | | $ | 32.93 | | | | | |
Granted | | | | 17,085 | | | $ | 33.85 | | | | | |
Forfeited | | | | (12,025 | ) | | $ | 32.42 | | | | | |
| | | | |
Outstanding at December 31, 2008 | | | | 52,020 | | | $ | 33.35 | | | $ | 9.40 | |
| | | | | | |
Expected to vest(a) | | | 55,500 | | | $ | 32.93 | | | $ | 45.95 | | | | 45,350 | | | $ | 31.70 | | | $ | 9.40 | |
| | |
(a) | | Based on our December 31, 20072008 estimated achievement of specified performance targets, the number of performance target for units granted in 2008 is 100%, for units granted in 2007 is 102%, and for units granted in 2006 that will ultimately vest is 140.4%. The estimated at 143% of the targetedforfeiture rate for units granted.granted in 2008 and 2007 is 50%, and for units granted in 2006 is 0%. |
The estimate of Performance Units that are expected to vest is based on highly subjective assumptions that could potentially change over time, including the expected forfeiture rate and achievement of performance targets. Therefore, the amount of unrecognized compensation expense noted above does not necessarily represent the value that will ultimately be realized in our consolidated statements of operations.
Phantom Units— In conjunction with our initial public offering, in January 2006 our General Partner’s board of directors awarded phantom LPUs, or Phantom Units, to key employees, and to directors who are not officers or employees of affiliates of the General Partner. Of theThe remaining Phantom Units outstanding at December 31, 2007, 2,001 units are expected to vest on January 3, 2008 and 17,698 units are expected to vestvested on January 3, 2009.
In 2007, we granted 4,500 Phantom Units, pursuant to the LTIP, to directors who are not officers or employees of affiliates of the General Partner as part of their annual director fees for 2007. Of these Phantom Units,units, 4,000 units vested during 2007 and 500 units vested in February 2008.
In 2008, we granted 4,000 Phantom Units, pursuant to the LTIP, to directors who are expected to vest on February 7,not officers or employees of affiliates of the General Partner as part of their annual director fees for 2008. All of these units vested during 2008.
The DERs are paid quarterly in arrears.
131141
DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2007, there was approximately $0.3 million of unrecognized compensation expense related to the Phantom Units that is expected to be recognized over a weighted-average period of 1.0 year. The following table presents information related to the Phantom Units:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Grant Date
| | | | | | | Grant Date
| | | |
| | | | Weighted-
| | Measurement
| | | | | Weighted-
| | Measurement
| |
| | | | Average Price
| | Date Price
| | | | | Average Price
| | Date Price
| |
| | Units | | per Unit | | per Unit | | | Units | | per Unit | | per Unit | |
|
Outstanding at December 31, 2005 | | | — | | | $ | — | | | | | | |
Outstanding at January 1, 2006 | | | | — | | | $ | — | | | | | |
Granted | | | 35,900 | | | $ | 24.05 | | | | | | | | 35,900 | | | $ | 24.05 | | | | | |
Forfeited | | | (11,200 | ) | | $ | 24.05 | | | | | | | | (11,200 | ) | | $ | 24.05 | | | | | |
| | | | | | |
Outstanding at December 31, 2006 | | | 24,700 | | | $ | 24.05 | | | | | | | | 24,700 | | | $ | 24.05 | | | | | |
Granted | | | 4,500 | | | $ | 42.90 | | | | | | | | 4,500 | | | $ | 42.90 | | | | | |
Forfeited | | | (2,333 | ) | | $ | 24.05 | | | | | | | | (2,333 | ) | | $ | 24.05 | | | | | |
Vested | | | (6,668 | ) | | $ | 35.23 | | | | | | | | (6,668 | ) | | $ | 35.23 | | | | | |
| | | | | | |
Outstanding at December 31, 2007 | | | 20,199 | | | $ | 24.56 | | | $ | 45.95 | | | | 20,199 | | | $ | 24.56 | | | | | |
Granted | | | | 4,000 | | | $ | 35.88 | | | | | |
Forfeited | | | | (4,000 | ) | | $ | 24.05 | | | | | |
Vested | | | | (6,501 | ) | | $ | 32.91 | | | | | |
| | | | |
Outstanding at December 31, 2008 | | | | 13,698 | | | $ | 24.05 | | | $ | 9.40 | |
| | | | | | |
Expected to vest | | | 20,199 | | | $ | 24.56 | | | $ | 45.95 | | | | 13,698 | | | $ | 24.05 | | | $ | 9.40 | |
The estimate of Phantom Units that are expected to vest is based on highly subjective assumptions that could potentially change over time, including the expected forfeiture rate.
Restricted Phantom Units— Our General Partner’s board of directors awarded restricted phantom LPUs, or RPUs, to key employees under the LTIP. The RPUs outstanding at December 31, 2008 are expected to vest on December 31, 2011. The DERs are paid quarterly in arrears.
At December 31, 2008, there was approximately $0.2 million of unrecognized compensation expense related to the RPUs that is expected to be recognized over a weighted-average period of 2.0 years. The following table presents information related to the RPUs:
| | | | | | | | | | | | |
| | | | | Grant Date
| | | | |
| | | | | Weighted-
| | | Measurement
| |
| | | | | Average Price
| | | Date Price
| |
| | Units | | | per Unit | | | per Unit | |
|
Outstanding at January 1, 2008 | | | — | | | $ | — | | | $ | — | |
Granted | | | 17,085 | | | $ | 33.85 | | | | | |
Forfeited | | | (2,395 | ) | | $ | 35.88 | | | | | |
Vested | | | — | | | $ | — | | | | | |
| | | | | | | | | | | | |
Outstanding at December 31, 2008 | | | 14,690 | | | $ | 33.52 | | | $ | 9.40 | |
| | | | | | | | | | | | |
Expected to vest | | | 8,544 | | | $ | 33.85 | | | $ | 9.40 | |
The estimate of RPUs that are expected to vest is based on highly subjective assumptions that could potentially change over time, including the expected forfeiture rate, which was estimated at 50% as of December 31, 2008. Therefore, the amount of unrecognized compensation expense noted above does not necessarily represent the value that will ultimately be realized in our consolidated statements of operations.
We intend to settle thecertain awards issued under the LTIP in cash upon vesting, with the exception of the units granted to directors.vesting. Compensation expense on these awards is recognized ratably over each vesting period, and will be remeasured quarterlyeach reporting period for
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
all awards outstanding until the units are vested. The fair value of all awards is determined based on the closing price of our common units at each measurement date. During the year ended December 31, 2007, 2,668 units vested and were settled in cash for $0.1 million, and 4,000 units were settled with the issuance of limited partner units.
We are structured as a master limited partnership, which is a pass-through entity for federal income tax purposes. The 2005 income tax expense reflected on our consolidated statements of operations is applicable to our wholesale propane logistics business. On December 7, 2005, our wholesale propane logistics business changed its tax structure, which resulted in its activities changing from taxable to non-taxable for federal income tax purposes. The change in tax structure resulted in the reversal of the net deferred tax liabilities in the year ended December 31, 2005. Accordingly, we had no deferred tax balances as of December 31, 2008, 2007 and 2006, and no federal income tax expense for the years ended December 31, 2008, 2007 and 2006.
In May 2006, the stateThe State of Texas enactedimposes a margin-based franchisemargin tax into law that replaced the existing franchise tax, commonly referred to as the Texas margin tax. The Texas margin tax is assessed at 1% of taxable margin apportioned to Texas. As a result of the change in Texas franchise law, our status in the state of Texas changed from non-taxable to taxable. The Texas margin tax becomes effective for franchise tax reports due on or after January 1, 2008. The 2008 tax will be based on revenues earned during the 2007 fiscal year. Accordingly, we have recorded current tax expense for the Texas margin tax beginning in 2007. During 2008 we acquired properties in Michigan. Michigan imposes a business tax of 0.8% on gross receipts, and 4.95% of Michigan taxable income. The deferredsum of the gross receipts and currentincome tax liabilities associated with the Texas marginis subject to a tax were insignificant.surcharge of 21.99%. Michigan provides tax credits that may reduce our final tax liability.
Income tax expense for the yearyears ended December 31, 2008 and 2007, consisted of current expense of $0.1 million for both periods, related primarily to the Texas margin tax. We did not have income tax expense in 2006. Income tax expense for the year ended December 31, 2005, consisted of current expense of $3.8 million and deferred benefit of
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$0.5 million. Our effective tax rate differs from statutory rates, primarily due to being structured as a limited partnership, which is a pass-through entity for United States income tax purposes, while being treated as a taxable entity in certain states, and having a taxable subsidiary in 2005.states.
| |
15.16. | Net Income or Loss per Limited Partner Unit |
Our net income or loss is allocated to the general partner and the limited partners, including the holders of the subordinated units, in accordance with their respective ownership percentages, after giving effect to income or loss allocated to predecessor operations and incentive distributions paid to the general partner.
Securities that meet the definition of a participating security are required to be considered for inclusion in the computation of basic earnings per unit using the two-class method. Under the two-class method, earnings per unit is calculated as if all of the earnings for the period were distributed under the terms of the partnership agreement, regardless of whether the general partner has discretion over the amount of distributions to be made in any particular period, whether those earnings would actually be distributed during a particular period from an economic or practical perspective, or whether the general partner has other legal or contractual limitations on its ability to pay distributions that would prevent it from distributing all of the earnings for a particular period.
These required disclosures do not impact our overall net income or loss or other financial results; however, in periods in which aggregate net income exceeds the First Target Distribution Level, it will have the impact of reducing net income per LPU. This result occurs as a larger portion of our aggregate earnings, as if distributed, is allocated to the incentive distribution rights of the general partner, even though we make distributions on the basis of Available Cash and not earnings. In periods in which our aggregate net income does not exceed the First Target Distribution Level, there is no impact on our calculation of earnings per LPU. During the year ended December 31, 2008, our aggregate net income per limited partner unit exceeded the Fourth Target Distribution level, and as a result we allocated an additional $24.8 million in additional earnings to the general partner. During the year ended December 31, 2007, no additional earnings were allocated to the general partner. During the year ended December 31, 2006, our aggregate net income per limited partner unit exceeded the Second Target Distribution level, and as a result we allocated $1.3 million in additional earnings to the general partner.
Basic and diluted net income or loss per LPU is calculated by dividing limited partners’ interest in net income or loss, less pro forma general partner incentive distributions as described above, by the weighted-average number of outstanding LPUs during the period.
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table illustrates our calculation of net income per LPU:
| | | | | | | | |
| | Year Ended December 31, | |
| | 2007 | | | 2006 | |
| | (Millions) | |
|
Net (loss) income | | $ | (15.8 | ) | | $ | 61.9 | |
Less: | | | | | | | | |
Net income attributable to predecessor operations | | | (3.6 | ) | | | (26.6 | ) |
| | | | | | | | |
Net (loss) income attributable to the partnership | | | (19.4 | ) | | | 35.3 | |
Less: General partner interest in net income | | | (2.2 | ) | | | (0.7 | ) |
| | | | | | | | |
Limited partners’ interest in net (loss) income | | | (21.6 | ) | | | 34.6 | |
Less: Additional earnings allocation to general partner | | | — | | | | (1.3 | ) |
| | | | | | | | |
Net (loss) income available to limited partners | | $ | (21.6 | ) | | $ | 33.3 | |
| | | | | | | | |
Net (loss) income per LPU — basic and diluted | | $ | (1.05 | ) | | $ | 1.90 | |
| | | | | | | | |
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2008 | | | 2007 | | | 2006 | |
| | (Millions) | |
|
Net income (loss) | | $ | 125.7 | | | $ | (15.8 | ) | | $ | 61.9 | |
Less: | | | | | | | | | | | | |
Net income attributable to predecessor operations | | | — | | | | (3.6 | ) | | | (26.6 | ) |
| | | | | | | | | | | | |
Net income (loss) attributable to the partnership | | | 125.7 | | | | (19.4 | ) | | | 35.3 | |
Less: General partner interest in net income | | | (11.9 | ) | | | (2.2 | ) | | | (0.7 | ) |
| | | | | | | | | | | | |
Limited partners’ interest in net income or net loss | | | 113.8 | | | | (21.6 | ) | | | 34.6 | |
Less: Additional earnings allocation to general partner | | | (24.8 | ) | | | — | | | | (1.3 | ) |
| | | | | | | | | | | | |
Net income (loss) available to limited partners | | $ | 89.0 | | | $ | (21.6 | ) | | $ | 33.3 | |
| | | | | | | | | | | | |
Net income (loss) per LPU — basic and diluted | | $ | 3.25 | | | $ | (1.05 | ) | | $ | 1.90 | |
| | | | | | | | | | | | |
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
16.17. | Commitments and Contingent Liabilities |
Litigation
Driver — In August 2007, Driver Pipeline Company, Inc., or Driver, filed a lawsuit against DCP Midstream, LP, an affiliate of the owner of our general partner, in District Court, Jackson County, Texas. The litigation stems from an ongoing commercial dispute involving the construction of our Wilbreeze pipeline, which was completed in December 2006. Driver was the primary contractor for construction of the pipeline and the construction process was managed for us by DCP Midstream, LP. Driver claims damages in the amount of $2.4 million for breach of contract. We believe Driver’s position in this litigation is without merit and we intend to vigorously defend ourselves against this claim. It is not possible to predict whether we will incur any liability or to estimate the damages, if any, we might incur in connection with this matter. Management does not believe the ultimate resolution of this issue will have a material adverse effect on our consolidated results of operations, financial position or cash flows.
El Paso — In December 2006,On February 27, 2009, a jury in the District Count, Harris County, Texas rendered a verdict in favor of El Paso E&P Company, L.P., or El Paso, filed a lawsuit and against one of our subsidiaries and DCP Assets Holding, LP and an affiliate of our general partner, DCP Midstream GP, LP,Midstream. As previously disclosed, the lawsuit, filed in District Court, Harris County, Texas. The litigationDecember 2006, stems from an ongoing commercial dispute involving our Minden processing plant that dates back to August 2000, which isincludes periods of time prior to our ownership of this asset. El Paso claims damages, including interest, inOur responsibility for this judgment will be limited to the amount of $5.7 million in the litigation, the bulk of which stems from audit claims under our commercial contract for historical periods prior to our ownership of this asset. We will only be responsible for potential payments, if any, for claims that involve periods of time period after the date we acquired thisthe asset from DCP Midstream LLC in December 2005. ItWe intend to appeal this decision and will continue to defend ourselves vigorously against this claim. Nevertheless, as a result of the jury verdict we have reserved a contingent liability of $2.5 million for this matter, which is not possible to predict whether we will incur any liability or to estimate the damages, if any, we might incurincluded in connection with this matter. Management does not believe the ultimate resolution of this issue will have a material adverse effect on our consolidated results of operations, financial position or cash flows.statements for the year ended December 31, 2008.
Other— We are not a party to any other significant legal proceedings, but are a party to various administrative and regulatory proceedings and commercial disputes that have arisen in the ordinary course of our business. Management currently believes that the ultimate resolution of the foregoing matters, taken as a whole, and after consideration of amounts accrued, insurance coverage or other indemnification arrangements, will not have a material adverse effect on our consolidated results of operations, financial position, or cash flows.
Insurance— We contract with a third party insurer for our primary general liability insurance covering third party exposures, and for our property insurance, which covers the replacement value of all real and personal property and includes business interruption/extra expense.exposures. DCP Midstream, LLC provides our remaining insurance coverage through third party insurers for: (1) statutory workers’ compensation insurance; (2) automobile liability insurance for all owned,
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
non-owned and hired vehicles; (3) excess liability insurance above the established primary limits for general liability and automobile liability insurance; and (4) property insurance, which covers replacement value of all real and personal property and includes business interruption/ extra expense and (5) directors and officers insurance covering our directors and officers for acts related to our business activities. All coverage is subject to certain limits and deductibles, the terms and conditions of which are common for companies with similar types of operations.
Environmental— The operation of pipelines, plants and other facilities for gathering, transporting, processing, treating, or storing natural gas, NGLs and other products is subject to stringent and complex laws and regulations pertaining to health, safety and the environment. As an owner or operator of these facilities, we must comply with United States laws and regulations at the federal, state and local levels that relate to air and water quality, hazardous and solid waste management and disposal, and other environmental matters. The cost of planning, designing, constructing and operating pipelines, plants, and other facilities must incorporate compliance with environmental laws and regulations and safety standards. Failure to comply with these laws and regulations may trigger a variety of administrative, civil and potentially criminal enforcement measures,
134
DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
including citizen suits, which can include the assessment of monetary penalties, the imposition of remedial requirements, and the issuance of injunctions or restrictions on operation. Management believes that, based on currently known information, compliance with these laws and regulations will not have a material adverse effect on our consolidated results of operations, financial position or cash flows.
Indemnification— DCP Midstream, LLC has indemnified us for certain potential environmental claims, losses and expenses associated with the operation of the assets of certain of our predecessors. See the “Indemnification” section of Note 5 for additional details.
Other Commitments and Contingencies— We utilize assets under operating leases in several areas of operation. Consolidated rental expense, including leases with no continuing commitment, amounted tototaled $12.9 million, $11.4 million $11.2 million and $10.3$11.2 million for the years ended December 31, 2008, 2007 2006 and 2005,2006, respectively. Rental expense for leases with escalation clauses is recognized on a straight line basis over the initial lease term.
Minimum rental payments under our various operating leases in the year indicated are as follows at December 31, 2007:2008:
| | | | | | | | |
| | (Millions) | | | (Millions) | |
|
2008 | | $ | 9.7 | | |
2009 | | | 7.9 | | | $ | 12.4 | |
2010 | | | 7.1 | | | | 9.0 | |
2011 | | | 6.2 | | | | 7.9 | |
2012 | | | 5.8 | | | | 7.0 | |
2013 | | | | 5.8 | |
Thereafter | | | 7.0 | | | | 2.6 | |
| | | | | | |
Total minimum rental payments | | $ | 43.7 | | | $ | 44.7 | |
| | | | | | |
Our operations are located in the United States and are organized into three reporting segments: (1) Natural Gas Services; (2) Wholesale Propane Logistics; and (3) NGL Logistics.
Natural Gas Services— The Natural Gas Services segment consists of (1) theour Northern Louisiana natural gas gathering, processing and transportation system; (2) theour Southern Oklahoma system, that was acquired in May 2007; (3) our 25% limited liability company interest in East Texas, our 40% limited liability company interest in Discovery, and the losses associated with the Swap, acquired in July 2007; (4) our Colorado and (4) the assets of the MEG subsidiaries that wereWyoming systems, acquired in August 2007.2007; and (5) our Michigan systems, acquired in October 2008.
145
DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Wholesale Propane Logistics— The Wholesale Propane Logistics segment consists of six owned rail terminals, one of which is currently idle,was idled in 2007 to consolidate our operations, one leased marine terminal, one pipeline terminal and access to several open access pipeline terminals.
NGL Logistics— The NGL Logistics segment consists of the Seabreeze and Wilbreeze NGL transportation pipelines, and a non-operated 45% equity interest in the Black Lake interstate NGL pipeline. Prior to December 7, 2005, our equity interest was 50%. DCP Midstream, LLC owns a 5% interest in Black Lake, effective with the date of our initial public offering, and an affiliate of BP PLC owns the remaining interest and is the operator of Black Lake. The Wilbreeze transportation pipeline began operations in December 2006.
These segments are monitored separately by management for performance against our internal forecast and are consistent with internal financial reporting. These segments have been identified based on the differing products and services, regulatory environment and the expertise required for these operations. Gross margin is a performance measure utilized by management to monitor the business of each segment.
135
DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables set forth our segment information:
Year Ended December 31, 2008:
| | | | | | | | | | | | | | | | | | | | |
| | | | | Wholesale
| | | | | | | | | | |
| | Natural Gas
| | | Propane
| | | NGL
| | | | | | | |
| | Services | | | Logistics | | | Logistics | | | Other(c) | | | Total | |
| | (Millions) | |
|
Total operating revenue | | $ | 791.5 | | | $ | 483.0 | | | $ | 11.3 | | | $ | — | | | $ | 1,285.8 | |
| | | | | | | | | | | | | | | | | | | | |
Gross margin(a) | | $ | 206.5 | | | $ | 11.0 | | | $ | 7.1 | | | $ | — | | | $ | 224.6 | |
Operating and maintenance expense | | | (32.1 | ) | | | (9.9 | ) | | | (1.0 | ) | | | — | | | | (43.0 | ) |
Depreciation and amortization expense | | | (33.8 | ) | | | (1.3 | ) | | | (1.4 | ) | | | — | | | | (36.5 | ) |
General and administrative expense | | | — | | | | — | | | | — | | | | (24.0 | ) | | | (24.0 | ) |
Other | | | — | | | | 1.5 | | | | — | | | | — | | | | 1.5 | |
Earnings from equity method investments | | | 33.5 | | | | — | | | | 0.8 | | | | — | | | | 34.3 | |
Interest income | | | — | | | | — | | | | — | | | | 5.6 | | | | 5.6 | |
Interest expense | | | — | | | | — | | | | — | | | | (32.8 | ) | | | (32.8 | ) |
Income tax expense(b) | | | — | | | | — | | | | — | | | | (0.1 | ) | | | (0.1 | ) |
Non-controlling interest in income | | | (3.9 | ) | | | — | | | | — | | | | — | | | | (3.9 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 170.2 | | | $ | 1.3 | | | $ | 5.5 | | | $ | (51.3 | ) | | $ | 125.7 | |
| | | | | | | | | | | | | | | | | | | | |
Non-cash derivative mark-to-market(d) | | $ | 99.2 | | | $ | 2.4 | | | $ | — | | | $ | (0.6 | ) | | $ | 101.0 | |
| | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | $ | 36.6 | | | $ | 3.3 | | | $ | 0.4 | | | $ | 0.7 | | | $ | 41.0 | |
| | | | | | | | | | | | | | | | | | | | |
146
DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Year Ended December 31, 2007:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Wholesale
| | | | | | | | | | | Wholesale
| | | | | | | |
| | Natural Gas
| | Propane
| | NGL
| | | | | | | Natural Gas
| | Propane
| | NGL
| | | | | |
| | Services | | Logistics | | Logistics | | Other(c) | | Total | | | Services | | Logistics | | Logistics | | Other(c) | | Total | |
| | (Millions) | | | (Millions) | |
|
Total operating revenue | | $ | 404.1 | | | $ | 459.6 | | | $ | 9.6 | | | $ | — | | | $ | 873.3 | | | $ | 404.1 | | | $ | 459.6 | | | $ | 9.6 | | | $ | — | | | $ | 873.3 | |
| | | | | | | | | | | | | | | | | | | | | | |
Gross margin(a) | | $ | 16.2 | | | $ | 25.5 | | | $ | 4.9 | | | $ | — | | | $ | 46.6 | | | $ | 16.2 | | | $ | 25.5 | | | $ | 4.9 | | | $ | — | | | $ | 46.6 | |
Operating and maintenance expense | | | (20.9 | ) | | | (10.4 | ) | | | (0.8 | ) | | | — | | | | (32.1 | ) | | | (20.9 | ) | | | (10.4 | ) | | | (0.8 | ) | | | — | | | | (32.1 | ) |
Depreciation and amortization expense | | | (21.9 | ) | | | (1.1 | ) | | | (1.4 | ) | | | — | | | | (24.4 | ) | | | (21.9 | ) | | | (1.1 | ) | | | (1.4 | ) | | | — | | | | (24.4 | ) |
General and administrative expense | | | — | | | | — | | | | — | | | | (24.1 | ) | | | (24.1 | ) | | | — | | | | — | | | | — | | | | (24.1 | ) | | | (24.1 | ) |
Earnings from equity method investments | | | 38.7 | | | | — | | | | 0.6 | | | | — | | | | 39.3 | | | | 38.7 | | | | — | | | | 0.6 | | | | — | | | | 39.3 | |
Interest income | | | — | | | | — | | | | — | | | | 5.3 | | | | 5.3 | | | | — | | | | — | | | | — | | | | 5.3 | | | | 5.3 | |
Interest expense | | | — | | | | — | | | | — | | | | (25.8 | ) | | | (25.8 | ) | | | — | | | | — | | | | — | | | | (25.8 | ) | | | (25.8 | ) |
Income tax expense(b) | | | — | | | | — | | | | — | | | | (0.1 | ) | | | (0.1 | ) | | | — | | | | — | | | | — | | | | (0.1 | ) | | | (0.1 | ) |
Non-controlling interest in income | | | (0.5 | ) | | | — | | | | — | | | | — | | | | (0.5 | ) | | | (0.5 | ) | | | — | | | | — | | | | — | | | | (0.5 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 11.6 | | | $ | 14.0 | | | $ | 3.3 | | | $ | (44.7 | ) | | $ | (15.8 | ) | | $ | 11.6 | | | $ | 14.0 | | | $ | 3.3 | | | $ | (44.7 | ) | | $ | (15.8 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Non-cash derivative mark-to-market(d) | | | $ | (78.3 | ) | | $ | (2.8 | ) | | $ | — | | | $ | — | | | $ | (81.1 | ) |
| | | | | | | | | | | | |
Capital expenditures | | $ | 16.2 | | | $ | 3.9 | | | $ | 1.2 | | | $ | — | | | $ | 21.3 | | | $ | 16.2 | | | $ | 3.9 | | | $ | 1.2 | | | $ | — | | | $ | 21.3 | |
| | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2006:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Wholesale
| | | | | | | | | | | Wholesale
| | | | | | | |
| | Natural Gas
| | Propane
| | NGL
| | | | | | | Natural Gas
| | Propane
| | NGL
| | | | | |
| | Services | | Logistics | | Logistics | | Other(c) | | Total | | | Services | | Logistics | | Logistics | | Other(c) | | Total | |
| | (Millions) | | | (Millions) | |
|
Total operating revenue | | $ | 415.3 | | | $ | 375.2 | | | $ | 5.3 | | | $ | — | | | $ | 795.8 | | | $ | 415.3 | | | $ | 375.2 | | | $ | 5.3 | | | $ | — | | | $ | 795.8 | |
| | | | | | | | | | | | | | | | | | | | | | |
Gross margin(a) | | $ | 75.3 | | | $ | 16.0 | | | $ | 4.1 | | | $ | — | | | $ | 95.4 | | | $ | 75.3 | | | $ | 16.0 | | | $ | 4.1 | | | $ | — | | | $ | 95.4 | |
Operating and maintenance expense | | | (13.5 | ) | | | (8.6 | ) | | | (1.6 | ) | | | — | | | | (23.7 | ) | | | (13.5 | ) | | | (8.6 | ) | | | (1.6 | ) | | | — | | | | (23.7 | ) |
Depreciation and amortization expense | | | (11.1 | ) | | | (0.8 | ) | | | (0.9 | ) | | | — | | | | (12.8 | ) | | | (11.1 | ) | | | (0.8 | ) | | | (0.9 | ) | | | — | | | | (12.8 | ) |
General and administrative expense | | | — | | | | — | | | | — | | | | (21.0 | ) | | | (21.0 | ) | | | — | | | | — | | | | — | | | | (21.0 | ) | | | (21.0 | ) |
Earnings from equity method investments | | | 28.9 | | | | — | | | | 0.3 | | | | — | | | | 29.2 | | | | 28.9 | | | | — | | | | 0.3 | | | | — | | | | 29.2 | |
Interest income | | | — | | | | — | | | | — | | | | 6.3 | | | | 6.3 | | | | — | | | | — | | | | — | | | | 6.3 | | | | 6.3 | |
Interest expense | | | — | | | | — | | | | — | | | | (11.5 | ) | | | (11.5 | ) | | | — | | | | — | | | | — | | | | (11.5 | ) | | | (11.5 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 79.6 | | | $ | 6.6 | | | $ | 1.9 | | | $ | (26.2 | ) | | $ | 61.9 | | | $ | 79.6 | | | $ | 6.6 | | | $ | 1.9 | | | $ | (26.2 | ) | | $ | 61.9 | |
| | | | | | | | | | | | | | | | | | | | | | |
Non-cash derivative mark-to-market(d) | | | $ | 0.1 | | | $ | — | | | $ | — | | | $ | — | | | $ | 0.1 | |
| | | | | | | | | | | | |
Capital expenditures | | $ | 6.5 | | | $ | 9.4 | | | $ | 11.3 | | | $ | — | | | $ | 27.2 | | | $ | 6.5 | | | $ | 9.4 | | | $ | 11.3 | | | $ | — | | | $ | 27.2 | |
| | | | | | | | | | | | | | | | | | | | | | |
136147
DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Year Ended December 31, 2005:
| | | | | | | | | | | | | | | | | | | | |
| | | | | Wholesale
| | | | �� | | | | | | |
| | Natural Gas
| | | Propane
| | | NGL
| | | | | | | |
| | Services | | | Logistics | | | Logistics | | | Other(c) | | | Total | |
| | (Millions) | |
|
Total operating revenues | | $ | 592.8 | | | $ | 359.8 | | | $ | 191.7 | | | $ | — | | | $ | 1,144.3 | |
| | | | | | | | | | | | | | | | | | | | |
Gross margin(a) | | $ | 71.4 | | | $ | 21.8 | | | $ | 3.8 | | | $ | — | | | $ | 97.0 | |
Operating and maintenance expense | | | (14.0 | ) | | | (8.2 | ) | | | (0.2 | ) | | | — | | | | (22.4 | ) |
Depreciation and amortization expense | | | (10.8 | ) | | | (1.0 | ) | | | (0.9 | ) | | | — | | | | (12.7 | ) |
General and administrative expense | | | — | | | | — | | | | — | | | | (14.2 | ) | | | (14.2 | ) |
Earnings from equity method investments | | | 25.3 | | | | — | | | | 0.4 | | | | — | | | | 25.7 | |
Interest income | | | — | | | | — | | | | — | | | | 0.5 | | | | 0.5 | |
Interest expense | | | — | | | | — | | | | — | | | | (0.8 | ) | | | (0.8 | ) |
Income tax expense(b) | | | — | | | | — | | | | — | | | | (3.3 | ) | | | (3.3 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 71.9 | | | $ | 12.6 | | | $ | 3.1 | | | $ | (17.8 | ) | | $ | 69.8 | |
| | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | $ | 7.9 | | | $ | 2.9 | | | $ | — | | | $ | — | | | $ | 10.8 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2007 | | 2006 | | | 2008 | | 2007 | |
| | (Millions) | | | (Millions) | |
|
Segment long-term assets: | | | | | | | | | | | | | | | | |
Natural Gas Services(d)(e) | | $ | 710.7 | | | $ | 311.7 | | | $ | 856.4 | | | $ | 710.7 | |
Wholesale Propane Logistics | | | 52.6 | | | | 50.2 | | | | 54.3 | | | | 52.6 | |
NGL Logistics | | | 34.8 | | | | 35.1 | | | | 33.8 | | | | 34.8 | |
Other(e)(f) | | | 104.1 | | | | 109.3 | | | | 70.3 | | | | 104.1 | |
| | | | | | | | | | |
Total long-term assets | | | 902.2 | | | | 506.3 | | | | 1,014.8 | | | | 902.2 | |
Current assets | | | 218.5 | | | | 159.6 | | | | 165.2 | | | | 218.5 | |
| | | | | | | | | | |
Total assets | | $ | 1,120.7 | | | $ | 665.9 | | | $ | 1,180.0 | | | $ | 1,120.7 | |
| | | | | | | | | | |
| | |
(a) | | Gross margin consists of total operating revenues, including commodity derivative activity, less purchases of natural gas, propane and NGLs. Gross margin is viewed as a non-GAAP measure under the rules of the SEC, but is included as a supplemental disclosure because it is a primary performance measure used by management as it represents the results of product sales versus product purchases. As an indicator of our operating performance, gross margin should not be considered an alternative to, or more meaningful than, net income or cash flow as determined in accordance with GAAP. Our gross margin may not be comparable to a similarly titled measure of another company because other entities may not calculate gross margin in the same manner. |
|
(b) | | Income tax expense in 2008 and 2007 relates primarily to the Texas margin tax, and in 2005 relates to our wholesale propane logistics business, which changed its tax status in December 2005.tax. |
|
(c) | | Other consists of general and administrative expense, interest income, interest expense and income tax expense. |
|
(d) | | Non-cash derivative mark-to-market is included in segment gross margin, along with cash settlements for our derivative contracts. |
|
(e) | | Long-term assets for our Natural Gas Services segment increased in 2008 as a result of our acquisition of MPP in October 2008, and in 2007 as a result of our Southern Oklahoma acquisition in May 2007, and our acquisition of certain MEG subsidiaries in August 2007. Long-term assets for our Natural Gas Services segment include the effects of our 25% equity interest in |
137
DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
| | East Texas, our 40% equity interest in Discovery and the Swap acquired in July 2007, for all periods presented. |
|
(e)(f) | | Other long-term assets not allocable to segments consist of restricted investments, unrealized gains on derivative instruments, corporate leasehold improvements and other long-term assets. |
148
| |
18. | Supplemental Cash Flow Information |
DCP MIDSTREAM PARTNERS, LP
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2007 | | | 2006 | | | 2005 | |
| | (Millions) | |
|
Cash paid for interest and income taxes: | | | | | | | | | | | | |
Cash paid for interest, net of amounts capitalized | | $ | 26.5 | | | $ | 11.1 | | | $ | — | |
Cash paid for income taxes | | $ | — | | | $ | — | | | $ | 2.6 | |
Non-cash investing and financing activities: | | | | | | | | | | | | |
Non-cash additions of property, plant and equipment | | $ | 5.9 | | | $ | 1.4 | | | $ | 1.1 | |
Accounts payable related to acquisitions | | $ | 9.0 | | | $ | 9.9 | | | $ | — | |
Accrued distributions to DCP Midstream, LLC related to reimbursements | | $ | 0.5 | | | $ | — | | | $ | — | |
Accrued contributions from DCP Midstream, LLC related to reimbursements | | $ | 0.3 | | | $ | — | | | $ | — | |
Accrued equity-based compensation | | $ | 0.2 | | | $ | — | | | $ | — | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
19. | Supplemental Cash Flow Information |
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2008 | | | 2007 | | | 2006 | |
| | (Millions) | |
|
Cash paid for interest: | | | | | | | | | | | | |
Cash paid for interest, net of amounts capitalized | | $ | 26.3 | | | $ | 26.5 | | | $ | 11.1 | |
Non-cash investing and financing activities: | | | | | | | | | | | | |
Non-cash additions of property, plant and equipment | | $ | 1.5 | | | $ | 5.9 | | | $ | 1.4 | |
Accounts payable related to acquisitions | | $ | — | | | $ | 9.0 | | | $ | 9.9 | |
Accrued distributions to DCP Midstream, LLC related to reimbursements | | $ | — | | | $ | 0.5 | | | $ | — | |
Accrued contributions from DCP Midstream, LLC related to reimbursements | | $ | — | | | $ | 0.3 | | | $ | — | |
Accrued equity-based compensation | | $ | 0.2 | | | $ | 0.2 | | | $ | — | |
| |
20. | Quarterly Financial Data (Unaudited) |
In July 2007, we acquired our 25% limited liability company interest in East Texas, our 40% limited liability company interest in Discovery and the Swap. Accordingly, the results of operations by quarter have been retroactively adjusted to include the results of East Texas, Discovery and the Swap, for all periods presented.
Our consolidated results of operations by quarter, as previously reported, were as follows (millions, except per unit amounts):
| | | | | | | | | | | | |
| | | | | | | | Six Months
| |
| | | | | | | | Ended
| |
| | | | | | | | June 30,
| |
2007 | | First | | | Second | | | 2007 | |
|
Total operating revenues | | $ | 240.1 | | | $ | 186.9 | | | $ | 427.0 | |
Operating income | | $ | 14.4 | | | $ | 4.0 | | | $ | 18.4 | |
Net income | | $ | 12.5 | | | $ | 0.5 | | | $ | 13.0 | |
Limited partners’ interest in net income(a) | | $ | 12.2 | | | $ | 0.2 | | | $ | 12.4 | |
Basic net income per limited partner unit(a) | | $ | 0.58 | | | $ | 0.01 | | | $ | 0.60 | |
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Year Ended
| |
| | | | | | | | | | | | | | December 31,
| |
2006 | | First | | | Second | | | Third | | | Fourth | | | 2006 | |
|
Total operating revenues | | $ | 265.4 | | | $ | 160.1 | | | $ | 162.8 | | | $ | 207.5 | | | $ | 795.8 | |
Operating income | | $ | 9.1 | | | $ | 9.3 | | | $ | 7.3 | | | $ | 12.2 | | | $ | 37.9 | |
Net income | | $ | 8.0 | | | $ | 8.3 | | | $ | 6.1 | | | $ | 10.6 | | | $ | 33.0 | |
Limited partners’ interest in net income(a)(b) | | $ | 5.3 | | | $ | 8.6 | | | $ | 9.5 | | | $ | 11.1 | | | $ | 34.6 | |
Basic net income per limited partner unit(a)(b) | | $ | 0.30 | | | $ | 0.47 | | | $ | 0.51 | | | $ | 0.55 | | | $ | 1.90 | |
Our combined results of operations by quarter for our 25% limited liability company interest in East Texas, our 40% limited liability company interest in Discovery and the Swap for the six months ended June 30, 2007 and the years ended December 31, 2006 and 2005 were as follows (millions):
| | | | | | | | | | | | |
| | | | | | | | Six Months
| |
| | | | | | | | Ended
| |
| | | | | | | | June 30,
| |
2007 | | First | | | Second | | | 2007 | |
|
Total operating revenues | | $ | (2.9 | ) | | $ | (5.8 | ) | | $ | (8.7 | ) |
Operating loss | | $ | (2.9 | ) | | $ | (5.8 | ) | | $ | (8.7 | ) |
Net income | | $ | 3.3 | | | $ | 0.3 | | | $ | 3.6 | |
Limited partners’ interest in net income | | | N/A | | | | N/A | | | | N/A | |
Basic net income per limited partner unit | | | N/A | | | | N/A | | | | N/A | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Year Ended
| |
| | | | | | | | | | | | | | December 31,
| |
2006 | | First | | | Second | | | Third | | | Fourth | | | 2006 | |
|
Total operating revenues | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
Operating income | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
Net income | | $ | 8.3 | | | $ | 7.4 | | | $ | 8.2 | | | $ | 5.0 | | | $ | 28.9 | |
Limited partners’ interest in net income | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
Basic net income per limited partner unit | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
Our consolidated results of operations by quarter for the years ended December 31, 2008, 2007 2006 and 20052006 were as follows (millions, except per unit amounts):
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Year Ended
| |
| | | | | | | | | | | | | | December 31, | |
2008 | | First | | | Second | | | Third | | | Fourth | | | 2008 | |
|
Total operating revenues | | $ | 337.7 | | | $ | 145.9 | | | $ | 426.8 | | | $ | 375.4 | | | $ | 1,285.8 | |
Operating (loss) income | | $ | (16.6 | ) | | $ | (165.7 | ) | | $ | 152.4 | | | $ | 152.5 | | | $ | 122.6 | |
Net (loss) income | | $ | (6.5 | ) | | $ | (159.3 | ) | | $ | 152.7 | | | $ | 138.8 | | | $ | 125.7 | |
Limited partners’ interest in net (loss) income | | $ | (8.2 | ) | | $ | (159.8 | ) | | $ | 147.8 | | | $ | 134.0 | | | $ | 113.8 | |
Basic net (loss) income per limited partner unit | | $ | (0.33 | ) | | $ | (5.66 | ) | | $ | 2.97 | | | $ | 2.72 | | | $ | 3.25 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Year Ended
| |
| | | | | | | | | | | | | | December 31, | |
2007 | | First | | | Second | | | Third | | | Fourth | | | 2007 | |
|
Total operating revenues | | $ | 237.2 | | | $ | 181.1 | | | $ | 188.6 | | | $ | 266.4 | | | $ | 873.3 | |
Operating income (loss) | | $ | 11.5 | | | $ | (1.8 | ) | | $ | 3.9 | | | $ | (47.6 | ) | | $ | (34.0 | ) |
Net income (loss) | | $ | 15.8 | | | $ | 0.8 | | | $ | 7.5 | | | $ | (39.9 | ) | | $ | (15.8 | ) |
Limited partners’ interest in net income (loss)(a) | | $ | 12.2 | | | $ | 0.2 | | | $ | 6.6 | | | $ | (40.6 | ) | | $ | (21.6 | ) |
Basic net income (loss) per limited partner unit(a) | | $ | 0.58 | | | $ | 0.01 | | | $ | 0.29 | | | $ | (1.69 | ) | | $ | (1.05 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Year Ended
| |
| | | | | | | | | | | | | | December 31, | |
2006 | | First | | | Second | | | Third | | | Fourth | | | 2006 | |
|
Total operating revenues | | $ | 265.4 | | | $ | 160.1 | | | $ | 162.8 | | | $ | 207.5 | | | $ | 795.8 | |
Operating income | | $ | 9.1 | | | $ | 9.3 | | | $ | 7.3 | | | $ | 12.2 | | | $ | 37.9 | |
Net income | | $ | 16.3 | | | $ | 15.7 | | | $ | 14.3 | | | $ | 15.6 | | | $ | 61.9 | |
Limited partners’ interest in net income(a)(b) | | $ | 5.3 | | | $ | 8.6 | | | $ | 9.5 | | | $ | 11.1 | | | $ | 34.6 | |
Basic net income per limited partner unit(a)(b) | | $ | 0.30 | | | $ | 0.47 | | | $ | 0.51 | | | $ | 0.55 | | | $ | 1.90 | |
139
149
DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Year Ended
| |
| | | | | | | | | | | | | | December 31,
| |
2006 | | First | | | Second | | | Third | | | Fourth | | | 2006 | |
|
Total operating revenues | | $ | 265.4 | | | $ | 160.1 | | | $ | 162.8 | | | $ | 207.5 | | | $ | 795.8 | |
Operating income | | $ | 9.1 | | | $ | 9.3 | | | $ | 7.3 | | | $ | 12.2 | | | $ | 37.9 | |
Net income | | $ | 16.3 | | | $ | 15.7 | | | $ | 14.3 | | | $ | 15.6 | | | $ | 61.9 | |
Limited partners’ interest in net income(a)(b) | | $ | 5.3 | | | $ | 8.6 | | | $ | 9.5 | | | $ | 11.1 | | | $ | 34.6 | |
Basic net income per limited partner unit(a)(b) | | $ | 0.30 | | | $ | 0.47 | | | $ | 0.51 | | | $ | 0.55 | | | $ | 1.90 | |
| | |
(a) | | Total limited partners’ interest in net income and basic income per limited partner unit excludes the results from our interest in East Texas, Discovery and the Swap for the period January 1, 20052006 through June 30, 2007. |
|
(b) | | Total limited partners’ interest in net income and basic income per limited partner unit excludes the results from our wholesale propane logistics business for the period January 1, 2006 through October 31, 2006. |
|
(c) | | Total limited partners’ interest in net income and basic income per limited partner unit is calculated using net income earned by us from December 7, 2005 through December 31, 2005, excluding the results from our wholesale propane logistics business. |
On February 27, 2009, a jury in the District Count, Harris County, Texas rendered a verdict in favor of El Paso E&P Company, L.P. and against one of our subsidiaries and DCP Midstream. As previously disclosed, the lawsuit, filed in December 2006, stems from an ongoing commercial dispute involving our Minden processing plant that dates back to August 2000, which includes periods of time prior to our ownership of this asset. Our responsibility for this judgment will be limited to the time period after we acquired the asset from DCP Midstream in December 2005. We intend to appeal this decision and will continue to defend ourselves vigorously against this claim. Nevertheless, as a result of the jury verdict we have reserved a contingent liability of $2.5 million for this matter, which is included in our consolidated financial statements for the year ended December 31, 2008.
On February 25, 2009, we entered into a Contribution Agreement with DCP Midstream, LLC, whereby DCP Midstream, LLC will contribute an additional 25.1% interest in East Texas to us in exchange for 3.5 million Class D units, providing us with a 50.1% interest in East Texas following the expected closing of the transaction in April 2009. This closing date is subject to extension for up to 45 days to allow for repairs or replacement to our reasonable satisfaction any assets destroyed or damaged by certain casualty losses and time to enable the plant to process all available inlet volumes as defined in the Contribution Agreement. The Class D units will automatically convert into common units in August 2009 and will not be eligible to receive a distribution until the second quarter distribution payable in August 2009. DCP Midstream, LLC has agreed to provide a fixed-price NGL derivative by NGL component for the period of April 2009 to March 2010 for the acquired interest. Subsequent to this transaction, we will consolidate East Texas in our consolidated financial statements.
On February 11, 2009, we announced, along with DCP Midstream, LLC, that our East Texas natural gas processing complex and residue natural gas delivery system known as the Carthage Hub, have been temporarily shut in following a fire that was caused by a third party underground pipeline outside of our property line that ruptured. No employees or contractors were injured in the incident. There was no significant damage to the natural gas processing complex. As of February 25, 2009, the complex began processing through one of the five plants, and it is expected that full processing capacities will be restored for the entire complex over the next 30 days. Residue gas will be redelivered into limited available pipeline interconnects while the Carthage Hub undergoes inspection and repairs.
On February 17, 2009, the remaining 3,571,429 DCP Partners subordinated units were converted to common units following the completion of the subordination period and satisfactory completion of all subordination period tests contained in the DCP Partners’ partnership agreement.
In February 2009, we entered into interest rate swap agreements to convert $275.0 million of the indebtedness on our revolving credit facility to a fixed rate obligation, thereby reducing the exposure to interest rate fluctuations. These interest rate swaps commence in December 2010 and expire in June 2012
On January 24, 2008,27, 2009, the board of directors of the General Partner declared a quarterly distribution of $0.57$0.60 per unit, that was paidpayable on February 14, 2008,13, 2009 to unitholders of record on February 7, 2008. This distribution of $0.57 per unit exceeds the highest target distribution level (see Note 11 for discussion of distributions of available cash).
In January 2008, we received a distribution from Discovery of $11.2 million for the fourth quarter of 2007, and we contributed $1.6 million to Discovery to fund our share of a capital expansion project.
Subsequent to December 31, 2007, we executed a series of derivative instruments to mitigate a portion of our anticipated commodity exposure. We entered into natural gas swap contracts for 2,000 MMBtu/d at $7.80/MMBtu, for a term from July through December 2008, and we entered into crude oil swap contracts, each for 225 Bbls/d at an average of $87.93/Bbl, for terms ranging from July 2008 through December 2012.
In February 2008, we satisfied the financial tests contained in our partnership agreement for the early conversion of 50% of the outstanding subordinated units held by DCP Midstream, LLC into common units. Prior to the conversion, DCP Midstream, LLC held 7,142,857 subordinated units, and after the conversion, DCP Midstream, LLC holds 3,571,429 subordinated units, which may convert into common units in the first quarter of 2009 if we satisfy certain additional financial tests contained in our partnership agreement.
In February 2008, one of our three primary propane suppliers terminated its supply contract with us. We are actively seeking alternative sources of supply and believe such supply sources are available on commercially acceptable terms.
As of March 3, 2008, we posted collateral with certain counterparties to our commodity derivative instruments of approximately $47.9 million. On March 4, 2008, we entered into an agreement with a counterparty to certain of our swap contracts, whereby our collateral threshold was increased by $20.0 million, resulting in a corresponding reduction of our posted collateral.
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DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In February 2008, we borrowed $35.0 million under our revolving credit facility, $10.0 million of which has since been repaid. In March 2008, we borrowed $30.0 million under our revolving credit facility and retired $30.0 million of outstanding indebtedness under our term loan facility. As a result, we liquidated $30.0 million of restricted investments securing the term loan portion of our credit facility, the proceeds of which were used for working capital purposes. As a result of the above activity, the borrowing capacity under our revolving credit facility was increased to $630.0 million. We had $585.0 million outstanding under our revolving credit facility as of March 6, 2008.2009.
141150
| |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
There were no changes in or disagreements with accountants on accounting and financial disclosures during the year ended December 31, 2007.2008.
| |
Item 9A. | Controls and Procedures |
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms, and that information is accumulated and communicated to the management of our general partner, including our general partner’s principal executive and principal financial officers (whom we refer to as the Certifying Officers), as appropriate to allow timely decisions regarding required disclosure. The management of our general partner evaluated, with the participation of the Certifying Officers, the effectiveness of our disclosure controls and procedures as of December 31, 2007,2008, pursuant toRule 13a-15(b) under the Exchange Act. Based upon that evaluation, the Certifying Officers concluded that, as of December 31, 2007,2008, our disclosure controls and procedures were effective. There were no significant changes in internal control over financial reporting (as defined inRule 13a-15(f) under the Exchange Act) that occurred during the fourth quarter of 20072008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report On Internal Control Over Financial Reporting
Our general partner is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as such term is defined in Exchange ActRules 13a-15(f) and15d-15(f). Our internal control system was designed to provide reasonable assurance to our management and board of directors of our general partner regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.
Our management, including our Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20072008 based on the framework in “Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.” Based on that evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2007.2008.
Deloitte & Touche, LLP, an independent registered public accounting firm, has issued their report, included immediately following, regarding our internal control over financial reporting.
March 4, 2009
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March 7, 2008
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
DCP Midstream Partners GP, LLC
Denver, Colorado:Colorado
We have audited the internal control over financial reporting of DCP Midstream Partners, LP and subsidiaries (the “Company”) as of December 31, 2007,2008, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report On Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
152
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007,2008, based on the criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.
143
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 20072008 of the Company and our report dated March 7, 20084, 2009 expressed an unqualified opinion (including explanatory paragraphs referring to (1) the preparation of the portion of the DCP Midstream Partners, LP consolidated financial statements attributable to operations prior to December 7, 2005 from the separate records of DCP Midstream, LLC, and (2) the preparation of the portion of the DCP Midstream Partners, LP consolidated financial statements attributable to the wholesale propane logistics business from the separate records maintained by DCP Midstream, LLC and (3)(2) the preparation of the portion of the DCP Midstream Partners, LP consolidated financial statements attributable to the DCP East Texas Holdings, LLC, Discovery Producer Services, LLC, and a nontrading derivative instrument from the separate records maintained by DCP Midstream, LLC) on those financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Denver, Colorado
March 7, 20084, 2009
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| |
Item 9B. | Other Information |
Item 9B. Other Information
No information was required to be disclosed in a report onForm 8-K, but not so reported, for the quarter ended December 31, 2007.2008.
PART III
| |
Item 10. | Directors, Executive Officers and Corporate Governance |
Management of DCP Midstream Partners, LP
We do not have directors or officers, which is commonly the case with publicly traded partnerships. Our operations and activities are managed by our general partner, DCP Midstream GP, LP, which in turn is managed by its general partner, DCP Midstream GP, LLC, which we refer to as our General Partner. Our General Partner is wholly-owned by DCP Midstream, LLC. The officers and directors of our General Partner are responsible for managing us. All of the directors of our General Partner are elected annually by DCP Midstream, LLC and all of the officers of our General Partner serve at the discretion of the directors. Unitholders are not entitled to participate, directly or indirectly, in our management or operations.
Board of Directors and Officers
The board of directors of our General Partner that oversees our operations currently has nine members, four of whom are independent as defined under the independence standards established by the New York Stock Exchange. The New York Stock Exchange does not require a listed limited partnership like us to have a majority of independent directors on its general partner’s board of directors or to establish a compensation committee or a nominating committee. However, the board of directors of our General Partner has established an audit committee consisting of four independent members of the board, a compensation committee and a special committee to address conflict situations.
Our General Partner’s board of directors annually reviews the independence of directors and affirmatively makes a determination that each director expected to be independent has no material relationship with our General Partner, either directly or indirectly as a partner, unitholder or officer of an organization that has a relationship with our General Partner.
The executive officers of our General Partner manage the day-to-day affairs of our business and devote all of their time to our business and affairs, except Mark A. Borer, our CEO and President, who devotes more than 90% of his time to our business and affairs. We also utilize employees of DCP Midstream, LLC to operate our business and provide us with general and administrative services.
Meeting Attendance and Preparation
Members of our board of directors attended at least 75% of regular board meetings and meetings of the committees on which they serve, either in person or telephonically, during 2007.2008. In addition, directors are expected to be prepared for each meeting of the board by reviewing materials distributed in advance.
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Directors and Executive Officers
The following table shows information regarding the current directors and the executive officers of DCP Midstream GP, LLC. Directors are elected for one-year terms.
| | | | | | |
Name | | Age | | Position with DCP Midstream GP, LLC |
|
Fred J. FowlerThomas C. O’Connor | | | 6253 | | | Chairman of the Board and Director |
Mark A. Borer | | | 5354 | | | President, Chief Executive Officer and Director |
Thomas E. LongAngela A. Minas | | | 5144 | | | Vice President and Chief Financial Officer |
Michael S. Richards | | | 4849 | | | Vice President, General Counsel and Secretary |
Greg K. SmithDon Baldridge | | | 4139 | | | Vice President, Business Development |
Willie C.W. Chiang | | | 47 | | | Director |
Sigmund L. Cornelius | | | 53 | | | Director |
Paul F. Ferguson, Jr. | | | 5859 | | | Director |
Gregory J. Goff | | | 52 | | | Director |
Alan N. Harris | | | 55 | | | Director |
John E. Lowe | | | 50 | | | Director |
Frank A. McPherson | | | 7475 | | | Director |
Thomas C. Morris | | | 67 | | | Director |
Thomas C. O’Connor | | | 5268 | | | Director |
Stephen R. Springer | | | 6062 | | | Director |
Our directors hold office for one year or until the earlier of their death, resignation, removal or disqualification or until their successors have been elected and qualified. Officers serve at the discretion of the board of directors. There are no family relationships among any of our directors or executive officers.
Fred J. FowlerThomas C. O’Connorwas elected Chairman of the Board of DCP Midstream GP, LLC in AprilSeptember 2008, and has been a director of DCP Midstream GP, LLC since December 2007. Mr. Fowler is president and chief executive officer of SpectraO’Connor has over 20 years experience in the natural gas industry with Duke Energy Corp, which has a 50 percent ownership inprior to joining DCP Midstream, LLC. Prior to Spectra Energy’s separation fromLLC in November 2007 as Chairman of the board, President and CEO. Mr. O’Connor joined Duke Energy Mr. Fowlerin 1987 where he served as group executivein a variety of positions in the company’s natural gas and presidentpipeline operations units. After serving in a number of leadership positions with Duke Energy, he was named President and Chief Executive Officer of Duke Energy Gas whereTransmission in 2002 and he was president and CEOnamed Group Vice President of the company’s gas businesses. Mr. Fowler joinedcorporate strategy at Duke Energy in 19852005. In 2006 he became Group Executive and held various roles within marketingChief Operating Officer of U.S. Franchised Electric and gas transmission for Trunkline Gas Co., Panhandle Eastern Pipe Line Co. and Texas Eastern Transmission Corp., prior to being named group vice president for PanEnergy Corp.later in 1996. He became group president of energy transmission for Duke Energy in 1997. He was appointed president and chief operating officer in November 2002 and2006 was named group executiveGroup Executive and presidentPresident of Commercial Businesses at Duke Energy Gas in April 2006. Mr. Fowler has served in this position since January 2007.Energy.
Mark A. Borerwas elected President and Chief Executive Officer, and director of DCP Midstream GP, LLC in November 2006. Mr. Borer was previously Group Vice President, Marketing and Corporate Development of DCP Midstream, LLC since July 2004. He previously served as Executive Vice President of Marketing and Corporate Development of DCP Midstream, LLC from May 2002 through July 2004. Mr. Borer served as Senior Vice President, Southern Division of DCP Midstream, LLC from April 1999 through May 2002. Prior to that time, Mr. Borer was Vice President of Natural Gas Marketing for Union Pacific Fuels, Inc.
Thomas E. LongAngela A. Minaswas elected Vice President and Chief Financial Officer of DCP Midstream GP, LLC in September 2005. Mr. Long2008. Ms. Minas was previously Chief Financial Officer, Chief Accounting Officer and Treasurer for Constellation Energy Partners from September 2006 through March 2008. She also served as Managing Director of the Commodities Group at Constellation Energy Group, Inc. from September 2006 through March 2008. Prior to that, Ms. Minas was Senior Vice President, of National Methanol Company, Duke Energy’s international chemical joint venture, since December 2004. From April 2002 until DecemberGlobal Consulting from 2004 Mr. Long served asto 2006 for SAIC and Vice President, and Treasurer of DCP Midstream, LLC. From April 1, 2000 until AprilUS Consulting from 2002 Mr. Long served as Vice President, Investor Relations of DCP Midstream, LLC. Mr. Long joined Duke Energy in 1979 and served into 2003 for SAIC. Prior to that, Ms. Minas was a variety of positions in accounting, finance, tax, investor relations and business development. Mr. Long is a Certified Public Accountant licensed in the state of Texas.partner with Arthur Andersen LLP from 1997 through 2002.
Michael S. Richardswas elected Vice President, General Counsel and Secretary of DCP Midstream GP, LLC in September 2005. Mr. Richards was previously Assistant General Counsel and Assistant Secretary of DCP Midstream, LLC since February 2000. He was previously Assistant General Counsel and Assistant Secretary at KN Energy, Inc. from December 1997 until he joined DCP Midstream, LLC. Prior to that, he was Senior Counsel and Risk Manager at Total Petroleum (North America) Ltd. from 1994 through 1997. Mr. Richards was previously in private practice where he focused on securities and corporate finance.
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Greg K. SmithDon Baldridgewas elected Vice President, Business Development of DCP Midstream GP, LLC in September 2005.January 2009. Mr. SmithBaldridge was previously Vice President, Corporate Development of DCP Midstream, LLC since June 2002. From July 1996 until June 2002, Mr. Smith held severalAugust 2008. Prior to that, he served as senior director, corporate development and other management positions atwith DCP Midstream, LLC including Commercial Director and Senior Attorney.since April 2005. Mr. Smith was previously an attorney with El Paso Natural Gas from 1992 until July 1996.
Willie C.W. Chiangwas elected as a director of DCP Midstream GP, LLC in December 2007. Mr. Chiang currently serves as Senior Vice President, Commercial of ConocoPhillips. Mr. ChiangBaldridge has more than 2616 years experience in the energy industry. He served in a variety of management positions in refining with Chevron, Powerine Oil Company, Unocal, Toscoindustry, including commercial, trading and Phillips Petroleum prior to the merger of Phillips and Conoco in 2002. Mr. Chiang was named President, Downstream Strategy, Integration and Specialty Businesses of ConocoPhillips in 2003 and in 2005 he was named President, Americas Supply and Trading. He was named to his current position of Senior Vice President, Commercial of ConocoPhillips in 2007.business development activities.
Sigmund L. CorneliusPaul F. Ferguson, Jr.was elected as a director of DCP Midstream GP, LLC in November 2007. Mr. Cornelius currently serves as Senior Vice President, Planning, Strategy and Corporate Affairs of ConocoPhillips. Mr. Cornelius has over 27 years experience in the energy industry with ConocoPhillips. He began his career at Conoco in 1980, where he served in a variety of positions in the company’s natural gas and gas products unit. After serving in a number of management positions with Conoco, he was named President and General Manager of Conoco Canada Limited in 1994 and President of Conoco affiliate Dubai Petroleum Company in 1997. In 1999 he was named Assistant Treasurer and General Manager for Mergers, Acquisitions and Structured Finance for Conoco. In 2001, Mr. Cornelius was named Treasurer of Conoco and later named Vice President and Treasurer. Following the merger with Phillips Petroleum in 2002, Mr. Cornelius became Vice President of Upstream Business Development, and in 2003 he became President, Lower 48, Latin America & Midstream. In 2004 he became President, Global Gas, and he was named President, Exploration and Production — Lower 48 in 2006. He was named to his current position in 2007.
Paul F. Ferguson, Jr. was elected as a director of DCP Midstream GP, LLC in November 2005. Mr. Ferguson was a director of the general partner of TEPPCO Partners, L.P. from October 2004 until his resignation in 2005. Mr. Ferguson was a member of the Compensation, Audit and special committees of the general partner of TEPPCO Partners, L.P. Mr. Ferguson was elected Chairman of the audit committee in October 2004. He served as Senior Vice President and Treasurer of Duke Energy from June 1997 to June 1998, when he retired. Mr. Ferguson served as Senior Vice President and Chief Financial Officer of PanEnergy Corp. from September 1995 to June 1997. He held various other financial positions with PanEnergy Corp. from 1989 to 1995 and served as Treasurer of Texas Eastern Corporation from 1988 to 1989. Mr. Ferguson was a director of the general partner of TEPPCO Partners, L.P. from October 2004 until his resignation in 2005.
Gregory J. Goff, was elected a director of DCP Midstream GP, LLC in October 2008, and is currently Senior Vice President, Commercial for ConocoPhillips. Previously, Mr. Goff served as President, Specialty Businesses and Business Development. From 2004 to 2006, Mr. Goff served as president of ConocoPhillips’ US Lower 48 and Latin American exploration and production business. From 2002 to 2004 Mr. Goff served as president of Europe and Asia Pacific Downstream Activities for ConocoPhillips. From 2000 to 2002 Mr. Goff served as Chairman and Managing Director of Conoco Limited in the United Kingdom. From 1998 to 2000 Mr. Goff served as managing Director and Chief Executive Officer of Conoco JET Nordic in Stockholm, Sweden.
Alan N. Harriswas appointed as a director of DCP Midstream GP, LLC in December 2008, effective January 1, 2009; at that time he was not appointed to any committee of the board of Directors. In January 2009, the board of directors appointed Mr. Harris as Chairman to the compensation committee of the board of directors. Mr. Harris currently serves as chief development and operations officer of Spectra Energy. Prior to Spectra Energy’s spin-off from Duke Energy in 2007, Mr. Harris served as group vice president and chief financial officer of Duke Energy Gas Transmission, or DEGT, from February 2004 and was named executive vice president of DEGT in December 2002. Mr. Harris, who joined the corporation in 1982, has served in a number of other senior management positions since that time. Mr. Harris has been in the energy industry for over 30 years.
John E. Lowe, was elected a director of DCP Midstream GP, LLC in October 2008, and is currently Assistant to the Chief Executive Officer for ConocoPhillips, representing the company in external relationships and assisting on special projects. Mr. Lowe was previously Executive Vice President, Exploration and Production. Mr. Lowe has also served ConocoPhillips as Executive Vice President of Planning, Strategy and Corporate Affairs. Senior Vice President of Corporate Strategy and Development and was responsible for the forward strategy, development opportunities and public relations functions of Phillips Petroleum Company. From 1999 to 2000, Mr. Lowe served as Vice President of Planning and Strategic Transactions for ConocoPhillips.
Frank A. McPhersonwas elected as a director of DCP Midstream GP, LLC in December 2005. Mr. McPherson retired as Chairman and Chief Executive Officer from Kerr McGee Corporation in 1997 after a40-year career with the company. Mr. McPherson was Chairman and Chief Executive Officer of Kerr McGee from 1983 to 1997. Prior to that he served in various capacities in management of Kerr McGee. Mr. McPherson joined Kerr McGee in 1957. Mr. McPherson servespreviously served on the boards of Integris Health, Tri Continental Corporation, Seligman Group of Mutual Funds, and several non-profit organizations in Oklahoma. He previously served on the boards of ConocoPhillips, Kimberly Clark Corporation, MAPCO Inc., Bank of Oklahoma, the Federal Reserve Bank of Kansas City, the Oklahoma State University Foundation Board of Trustees, and the American Petroleum Institute.Institute, and several non-profit organizations in Oklahoma.
Thomas C. Morriswas elected as a director of DCP Midstream GP, LLC in December 2005. Mr. Morris is currently retired, having served 34 years with Phillips Petroleum Company. Mr. Morris served in various capacities with Phillips, including Vice President and Treasurer and subsequently Senior Vice President and
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Chief Financial Officer from 1994 until his retirement in 2001. Mr. Morris served as Vice Chairman of the board of OK Mozart, is a former member of the executive board of the American Petroleum Institute finance committee and a former member of the Business Development Council of Texas A&M University.
Thomas C. O’Connorwas elected as a director of DCP Midstream GP, LLC in December 2007. Mr. O’Connor has over 20 years experience in the natural gas industry with Duke Energy prior to joining DCP Midstream, LLC in November 2007 as Chairman of the board, President and CEO. Mr. O’Connor joined Duke
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Energy in 1987 where he served in a variety of positions in the company’s natural gas and pipeline operations units. After serving in a number of leadership positions with Duke Energy, he was named President and Chief Executive Officer of Duke Energy Gas Transmission in 2002 and he was named Group Vice President of corporate strategy at Duke Energy in 2005. In 2006 he became Group Executive and Chief Operating Officer of U.S. Franchised Electric and Gas and later in 2006 was named Group Executive and President of Commercial Businesses at Duke Energy.
Stephen R. Springerwas elected as a director of DCP Midstream GP, LLC in July 2007. Mr. Springer has over thirty years experience in the energy industry. He began his career at Texas Gas Transmission Corporation, where he served in a variety of executive management positions within gas acquisitions and gas marketing. After serving as President of Transco Gas Marketing Company, he served as Vice President of Business Development at Williams Field Services Company and then Senior Vice President and General Manager of Williams Midstream Division, the position he held until his retirement in 2002. Mr. Springer has served on the board of directors of Atmos Energy Corporation since 2005.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires DCP Midstream GP, LLC’s directors and executive officers, and persons who own more than 10% of any class of our equity securities to file with the Securities and Exchange Commission, or SEC, and the New York Stock Exchange initial reports of ownership and reports of changes in ownership of our common units and our other equity securities. Specific due dates for those reports have been established, and we are required to report herein any failure to file reports by those due dates. Directors, executive officers and greater than 10% unitholders are also required by SEC regulations to furnish us with copies of all Section 16(a) reports they file. To our knowledge, based solely on a review of the copies of reports furnished to us and written representations that no other reports were required during the fiscal year ended December 31, 2007,2008, all Section 16(a) filing requirements applicable to such reporting persons were complied with, except that a late Form 34 was filed 14 days late for Mr. Fowler upon his appointment toMs. Minas in January 2009 reflecting the Board, and DCP Midstream, LLC and DCP LP Holdings, LLC filed a joint Form 5 ingranted phantom units dated October 1, 2008, reflecting late Form 4s forfollowing her employment by the conversion of certain Class C units owned by DCP LP Holdings, LLC and the acquisition of common units as partial consideration associated with our acquisitions from DCP Midstream, LLC of certain assets in July and August, 2007.Partnership.
Audit Committee
The board of directors of our General Partner has a standing audit committee. The audit committee is composed of four nonmanagement directors, Paul F. Ferguson, Jr. (chairman), Frank A. McPherson, Thomas C. Morris and Stephen R. Springer, each of whom is able to understand fundamental financial statements and at least one of whom has past experience in accounting or related financial management experience. The board has determined that each member of the audit committee is independent under Section 303A.02 of the New York Stock Exchange listing standards and Section 10A(m)(3) of the Securities Exchange Act of 1934, as amended. In making the independence determination, the board considered the requirements of the New York Stock Exchange and our Code of Business Ethics. Among other factors, the board considered current or previous employment with us, our auditors or their affiliates by the director or his immediate family members, ownership of our voting securities, and other material relationships with us. The audit committee has adopted a charter, which has been ratified and approved by the board of directors.
With respect to material relationships, the following relationships are not considered to be material for purposes of assessing independence: service as an officer, director, employee or trustee of, or greater than five percent beneficial ownership in (a) a supplier to the partnership if the annual sales to the partnership are less than one percent of the sales of the supplier; (b) a lender to the partnership if the total amount of the partnership’s indebtedness is less than one percent of the total consolidated assets of the lender; or (c) a charitable organization if the total amount of the partnership’s annual charitable contributions to the organization are less than three percent of that organization’s annual charitable receipts.
Mr. Ferguson has been designated by the board as the audit committee’s financial expert meeting the requirements promulgated by the SEC and set forth in Item 407(d) ofRegulation S-K of the Securities
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Exchange Act of 1934 based upon his education and employment experience as more fully detailed in Mr. Ferguson’s biography set forth above.
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Special Committee
The board of directors of our General Partner has a standing special committee, which is comprised of four nonmanagement directors, Stephen R. Springer (chairman), Paul F. Ferguson, Jr., Frank A. McPherson and Thomas C. Morris. The special committee will review specific matters that the board believes may involve conflicts of interest. The special committee will determine if the resolution of the conflict of interest is fair and reasonable to us. The special committee meets at each quarterly meeting of the Board of Directors. The members of the special committee may not be officers or employees of our General Partner or directors, officers or employees of its affiliates. Each of the members of the special committee meet the independence and experience standards established by the New York Stock Exchange and the Securities Exchange Act of 1934, as amended. Any matters approved by the special committee will be conclusively deemed to be fair and reasonable to us, approved by all of our partners, and not a breach by our General Partner of any duties it may owe us or our unitholders.
Compensation Committee
The board of directors of our General Partner has a standing compensation committee, which is composed of four directors, FredAlan N. Harris (chairman), Gregory J. Fowler (chairman), Willie C.W. Chiang,Goff, Thomas C. O’Connor and Frank A. McPherson and Thomas C. O’Connor.McPherson. The compensation committee oversees compensation decisions for the officers of our general partner and administers the long-term incentive plan, selecting individuals to be granted equity-based awards from among those eligible to participate. The compensation committee has adopted a charter, which has been ratified and approved by the board of directors.
Corporate Governance Guidelines and Code of Business Ethics
Our board of directors has adopted Corporate Governance Guidelines that outline the important policies and practices regarding our governance.
We have adopted a Code of Business Ethics applicable to the persons serving as our directors, officers (including without limitation, the chief executive officer, chief financial officer and principal accounting officer) and employees, which includes the prompt disclosure to the SEC of a current report onForm 8-K of any waiver of the code for executive officers or directors approved by the board of directors.
Copies of our Corporate Governance Guidelines, our Code of Business Ethics, our Audit Committee Charter and our Compensation Committee Charter are available on our website atwww.dcppartners.com. Copies of these items are also available free of charge in print to any unitholder who sends a request to the office of the Secretary of DCP Midstream Partners, LP at 370 17th Street, Suite 2775, Denver, Colorado 80202.
Meeting of Non-Management Directors and Communications with Directors
At each quarterly meeting of the special committee, the committee, which consists of all of our non-management directors, meets in an executive session without management participation or participation by non-independent directors. The chairman of the special committee presides over these executive sessions.
Unitholders or interested parties may communicate with any and all members of our board, including our nonmanagement directors, or any committee of our board, by transmitting correspondence by mail or facsimile addressed to one or more directors by name or to the chairman of the board or any committee of the board at the following address and fax number; Name of the Director(s),c/o Secretary, DCP Midstream Partners, LP, 370 17th17th Street, Suite 2775, Denver, Colorado 80202,(303) 633-2921.
New York Stock Exchange, or NYSE, Annual Certification
On January 25, 2007,March 26, 2008, Mark A. Borer, our Chief Executive Officer, certified to the NYSE, as required by NYSE rules, that as of January 25, 2007,March 26, 2008, he was not aware of any violation by us of the NYSE’s Corporate Governance Listing Standards.
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In the event an award recipient’s employment is terminated after the first anniversary of the grant date for reasons of death, disability, early or normal retirement, or if the recipient is terminated by the General Partner for reasons other than cause, the recipient (or his estate)recipient’s (i) performance units will be entitled tocontingently vest on a pro rata amount ofpro-rata basis for time worked over the award based uponPerformance Period and final performance, measured at the percentageend of the Performance Period, will determine the recipient was employedpayout and our performance.(ii) time vested units will become fully vested and payable. Termination of employment for any other reason will result in the forfeiture of any unvested units.
Other Compensation — In addition, our executives are eligible to participate in other compensation programs, which include but are not limited to:
Phantom IPO Phantom Units — In conjunction with our initial public offering, in January 2006 our General Partner’s board of directors granted phantom LPUs,limited partnership units, or phantomPhantom IPO LPUs,Units, to key employees, including the executive officers, which vestofficers. These Phantom IPO Units vested in their entirety three years following the grant date. Upon vesting, the phantom LPUs will beJanuary 2009 and were paid in common units or, at the discretion of the compensation committee, cash based on the fair market value of our common units on the payment date.units. There iswas no performance condition associated with these phantom LPUs.Phantom IPO Units. Award recipients also receivereceived DERs based on the number of common units awarded, which arewere paid in cash on a quarterly basis from the date of the initial grant. These phantom LPUsIPO units were granted to reward those key employees and executive officers that made significant contributions to our successful initial public offering. The amounts of awards granted to our executive officers are set forth in the “Grants of Plan-Based Awards” table below.
In the event that any person other than DCP Midstream, LLCand/or an affiliate thereof becomes the beneficial owner of more than 50% of the combined voting power of the General Partner’s equity interests priorCompany Matching and Retirement Contributions to the completion of the vesting period, all the phantom IPO LPUs will become fully vested upon such change of control, and will be paid in common units, or in the compensation committee’s sole discretion, cash. If cash is paid, the amount will be determined based upon the closing price of our common units on the New York Stock Exchange upon such change of control. In the event an award recipient’s employment is terminated for reasons of death, disability, early or normal retirement, or if the recipient is terminated by the General Partner for reasons other than cause, the phantom IPO LPUs will immediately vest and the recipient (or his estate) will be entitled to the full amount of the award. Termination of employment for any other reason will result in the forfeiture of any unvested units.
Company Retirement ContributionsDefined Contribution Plans — Employees may elect to participate in the DCP Midstream, LP 401(k) and Retirement Plan. Under the plan, employees may elect to defer up to 75% of their eligible compensation, or up to the limits specified by the Internal Revenue Service. We match the first 6% of eligible compensation contributed by the employee to the plan. In addition, we make retirement contributions ranging from 4% to 7% of the eligible compensation of qualifying participants to the plan, based on years of service, up to the limits specified by the Internal Revenue Service. We have no defined benefit plans.
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Miscellaneous Compensation — Our executive officers are eligible to participate in a nonqualified deferred compensation program. Executive officers are allowed to defer up to 75% of their base salary, and up to 100% of their STI, LTIP or other compensation. Executive officers elect either to receive amounts contributed during specific plan years as a lump sum at a specific date, subject to Internal Revenue Service rules, or in a lump sum or annual annuity (over three to 20 years) at termination.
Executive officers and other eligible employees may participate in a noncontributory,nonqualified, defined benefitcontribution retirement plan. Benefits earned under this plan are attributable to compensation in excess of the annual compensation limits under section 401(k) of the Internal Revenue Code. Under this plan, we make a contribution of up to 10%13% of eligible compensation, as defined by this plan, to the nonqualified deferred compensation program.
In addition, we provide our employees, including the executive officers, with a variety of health and welfare benefit programs. The health and welfare programs are intended to protect employees against catastrophic loss and promote well being. These programs include medical, wellness, pharmacy, dental, vision, life insurance premiums, and accidental death and disability. In addition, we pay certain perquisites to our executives, which include items such as financial planning, club dues and an allowance towards annual medicalphysical exam expenses. Finally, we provide all our employees with a monthly parking pass or a pass to be used on available public transportation systems.
NoneWe are a partnership and not a corporation for U.S. federal income tax purposes, and therefore, are not subject to the executive compensation tax deductible limitations of Internal Revenue Code § 162(m). Accordingly, none of the compensation paid to our named executive officers or other employees had non-performance based compensation paid in excess ofis subject to the $1.0 million tax deduction limit contained in Internal Revenue Code Section 162(m).limitation.
Other
Unit Ownership Guidelines — To underscore the importance of linking executive and unitholder interests, the board of directors of our General Partner has adopted unit ownership guidelines for executive officers and key employees who are eligible to receive long-term incentive awards. To that extent, the board has established target equity ownership obligations for the various levels of executives, which have a five-year build term that commenced in 2006.from
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the date the executive officer commences employment with us. Ownership is reported annually to the compensation committee. As of December 31, 2007,2008, the unit ownership guidelines for the executive officers were as follows:
| | | | |
| | Number of
| |
| | Units | |
|
CEO | | | 28,000 | |
CFO | | | 10,000 | |
Vice Presidents | | | 10,000 | |
Report of the Compensation Committee
The compensation committee has reviewed and discussed with management the “Compensation Discussion and Analysis” presented above. Members of management with whom the compensation committee had discussions are the Chief Executive Officer of the General Partner and the Group Vice President Human Resourcesand Chief Administrative Officer of DCP Midstream, LLC. In addition, the compensation committee engaged the services of BDO Seidman, LLP, and a compensation consultant, to conduct a study to assist us in establishing overall compensation packages for our executives. Based on this review and discussion, we recommended to the board of directors of the General Partner that the “Compensation Discussion and Analysis” referred to above be included in this annual report onForm 10-K for the year ended December 31, 2007.2008.
Compensation Committee
Fred
Alan N. Harris (Chairman)
Gregory J. Fowler (Chairman)
Willie C.W. Chiang
Goff
Frank A. McPherson
Thomas C. O’Connor
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Executive Compensation
The following table discloses the compensation of the General Partner’s principal executive officers, principal financial officer and named executive officers, or collectively, the “executive officers”:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Summary Compensation | | |
| | | | | | | | | | Change in
| | | | |
| | | | | | | | | | Nonqualified
| | | | |
| | | | | | | | Non-Equity
| | Deferred
| | | | |
| | | | | | LPU
| | Incentive Plan
| | Compensation
| | All Other
| | |
Name and Principal Position | | Year | | Salary | | Awards(b) | | Compensation | | Earnings(c) | | Compensation(d) | | Total |
|
Mark A. Borer(a) | | | 2007 | | | $ | 341,000 | | | $ | 151,763 | | | $ | 331,043 | | | $ | 36,518 | | | $ | 80,908 | | | $ | 941,232 | |
President and Chief Executive Officer | | | 2006 | | | $ | 47,215 | | | $ | — | | | $ | 46,655 | | | $ | 45 | | | $ | 2,052 | | | $ | 95,967 | |
Thomas E. Long | | | 2007 | | | $ | 199,212 | | | $ | 247,605 | | | $ | 145,605 | | | $ | 1,584 | | | $ | 54,268 | | | $ | 648,274 | |
Vice President and Chief Financial Officer | | | 2006 | | | $ | 180,000 | | | $ | 92,191 | | | $ | 133,650 | | | $ | — | | | $ | 33,182 | | | $ | 439,023 | |
Michael S. Richards | | | 2007 | | | $ | 172,615 | | | $ | 229,360 | | | $ | 125,903 | | | $ | 48 | | | $ | 46,431 | | | $ | 574,357 | |
Vice President, General Counsel and Secretary | | | 2006 | | | $ | 165,000 | | | $ | 88,390 | | | $ | 122,048 | | | $ | — | | | $ | 32,717 | | | $ | 408,155 | |
Greg K. Smith | | | 2007 | | | $ | 179,644 | | | $ | 234,724 | | | $ | 131,080 | | | $ | 866 | | | $ | 51,185 | | | $ | 597,499 | |
Vice President, Business Development | | | 2006 | | | $ | 170,000 | | | $ | 89,600 | | | $ | 121,444 | | | $ | 480 | | | $ | 36,044 | | | $ | 417,568 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Change in
| | | | |
| | | | | | | | | | Nonqualified
| | | | |
| | | | | | | | Non-Equity
| | Deferred
| | | | |
| | | | | | | | Incentive Plan
| | Compensation
| | All Other
| | |
Name and Principal Position | | Year | | Salary | | LTIP Awards(e) | | Compensation | | Earnings(f) | | Compensation(g) | | Total |
|
Mark A. Borer(a) | | | 2008 | | | $ | 358,538 | | | $ | (34,138 | ) | | $ | 80,671 | | | $ | 56,236 | | | $ | 126,851 | | | $ | 588,158 | |
President and Chief | | | 2007 | | | $ | 341,000 | | | $ | 151,763 | | | $ | 331,043 | | | $ | 36,518 | | | $ | 80,908 | | | $ | 941,232 | |
Executive Officer | | | 2006 | | | $ | 47,215 | | | $ | — | | | $ | 46,655 | | | $ | 45 | | | $ | 2,052 | | | $ | 95,967 | |
Angela A. Minas(b) | | | 2008 | | | $ | 61,923 | | | $ | 3,541 | | | $ | 18,252 | | | $ | — | | | $ | 49,199 | | | $ | 132,915 | |
Vice President and Chief Financial Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Thomas E. Long(c) | | | 2008 | | | $ | 76,168 | | | $ | (396,593 | ) | | $ | — | | | $ | (61,564 | ) | | $ | 31,955 | | | $ | (350,034 | ) |
Vice President and | | | 2007 | | | $ | 199,212 | | | $ | 304,402 | | | $ | 145,605 | | | $ | 1,584 | | | $ | 54,268 | | | $ | 705,071 | |
Chief Financial Officer | | | 2006 | | | $ | 180,000 | | | $ | 92,191 | | | $ | 133,650 | | | $ | — | | | $ | 33,182 | | | $ | 439,023 | |
Michael S. Richards | | | 2008 | | | $ | 181,748 | | | $ | (232,166 | ) | | $ | 52,343 | | | $ | (6,765 | ) | | $ | 65,136 | | | $ | 60,296 | |
Vice President, General | | | 2007 | | | $ | 172,615 | | | $ | 282,729 | | | $ | 125,903 | | | $ | 48 | | | $ | 46,431 | | | $ | 627,726 | |
Counsel and Secretary | | | 2006 | | | $ | 165,000 | | | $ | 88,390 | | | $ | 122,048 | | | $ | — | | | $ | 32,717 | | | $ | 408,155 | |
Greg K. Smith(d) | | | 2008 | | | $ | 190,970 | | | $ | (236,289 | ) | | $ | 32,226 | | | $ | (4,248 | ) | | $ | 69,620 | | | $ | 52,279 | |
Vice President, Business | | | 2007 | | | $ | 179,644 | | | $ | 289,184 | | | $ | 131,080 | | | $ | 866 | | | $ | 51,185 | | | $ | 651,959 | |
Development | | | 2006 | | | $ | 170,000 | | | $ | 89,600 | | | $ | 121,444 | | | $ | 480 | | | $ | 36,044 | | | $ | 417,568 | |
| | |
(a) | | Mr. Borer’s employment with the General Partner commenced effective November 10, 2006. |
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| | |
(b) | | Ms. Minas’ employment with the General Partner commenced effective September 8, 2008. |
|
(b)(c) | | Mr. Long’s employment with the General Partner terminated effective April 30, 2008. |
|
(d) | | Mr. Smith’s employment with the General Partner terminated effective January 5, 2009, and he commenced employment with DCP Midstream, LLC. Mr. Smith has been replaced by Don Baldridge, formerly employed by DCP Midstream, LLC. |
|
(e) | | The amounts in this column reflect the dollar amount recognized for financial statement reporting purposes in accordance with the provisions of Statement of Financial StandardsAccounting Standard No. 123,123(R), Share-Based Payment,, as revised, or SFAS 123R, which incorporates re-measurement of awards for changes in the underlying assumptions used in prior periods, such as the unit price at the measurement date and the performance measure percentage. These amounts reflect our accounting expense and may not necessarily correspond to the actual value that will be realized by the named executives. The amounts exclude the impact of an estimated forfeiture rate under SFAS 123R, but do include the impact of forfeited awards if any of the named executives fail to perform the requisite service. Accordingly, the amounts frommay be negative due to these factors. This column reflects awards granted in January 2006 related to our initial public offering, and awards granted in conjunction with our LTIP during 2007 and 2006.LTIP. See Note 1314 of the Notes to Consolidated Financial Statements in Item 8.8, “Financial Statements and Supplementary Data.” |
|
(c)(f) | | Amounts in this column are also included in the “Nonqualified Deferred Compensation” table below. |
|
(d)(g) | | Includes DERs, company retirement and nonqualified deferred compensation program contributions by the Partnership, the value of life insurance premiums paid by the Partnership on behalf of an executive and other deminimus compensation. |
Mark A. Borer, President and CEO
The annual base salary for Mr. Borer was $365,000 for 2008 and $341,000 for both 2007 and 2006, of which he deferred $125,488, $120,391 and $8,944 in 2008, 2007 and 2006, respectively. The LPULTIP awards are comprised of phantom LPUsPPUs and RPUs pursuant to the LTIP. Under both the 2008, 2007 and 2006 STI, Mr. Borer’s target opportunity was 60% of his annual base salary, with the possibility of earning from 0 to 120% of his annual base salary in 2008, and 0% to 109% of his annual base salary in 2007 and 2006, depending on the level of performance in each of the STI objectives, which was pro rated in 2006 based upon his service period during 2006. While an employee at DCP Midstream, LLC during 2006, he received various equity grants and other compensation which are not reflected as part of the compensation attributable to his service with the Partnership.
“All Other Compensation” includes the following:
| | | | | | | | | | | | |
| | 2008 | | | 2007 | | | 2006 | |
|
Company retirement contributions to defined contribution plans | | $ | 29,900 | | | $ | 29,950 | | | $ | — | |
Nonqualified deferred compensation program contributions | | $ | 50,160 | | | $ | 32,063 | | | $ | 1,945 | |
DERs | | $ | 44,947 | | | $ | 18,370 | | | $ | — | |
Life insurance premiums(a) | | $ | 1,844 | | | $ | 1,225 | | | $ | 107 | |
| | |
(a) | • | Company retirement contributions of $29,250 and $0 for 2007 and 2006, respectively; |
|
| • | Nonqualified deferred compensation program contributions of $32,063 and $1,945 for 2007 and 2006, respectively; |
|
| • | DERs of $18,370 and $0 for 2007 and 2006, respectively; |
|
| • | Life insurance premiums of $1,225 and $107 for 2007 and 2006, respectively, paidPaid by the Partnership on behalf of Mr. Borer. |
Angela A. Minas, Vice President and CFO
The annual base salary for Ms. Minas was $230,000 for 2008, of which she deferred $0 in 2008. The LTIP awards are comprised of PPUs and RPUs pursuant to the LTIP. Under the 2008 STI, Ms. Minas’ target opportunity was 45% of her annual base salary, with the possibility of earning from 0% to 90% of her annual base salary, depending on the level of performance in each of the STI objectives, which was pro rated in 2008 based upon her service period in 2008.
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“All Other Compensation” includes the following:
| | | | |
| | 2008 | |
|
Relocation expenses | | $ | 41,901 | |
Company retirement contributions to defined contribution plans | | $ | 5,131 | |
DERs | | $ | 2,034 | |
Life insurance premiums(a) | | $ | 133 | |
| | |
(a) | | Paid by the Partnership on behalf of Ms. Minas. |
Thomas E. Long, former Vice President and CFO
The annual base salary for Mr. Long was $215,000, $199,980 and $180,000 for 2008, 2007 and 2006, respectively, of which he deferred $131,070, $89,645 and $0 in 2008, 2007 and 2006, respectively. The LPULTIP awards are comprised of phantomPhantom IPO LPUsUnits, PPUs and phantom LPUsRPUs pursuant to the LTIP. Under both the 2008, 2007 and 2006 STI, Mr. Long’s target opportunity was 45% of his annual base salary, with the possibility of earning from 0% to 90% of his annual base salary in 2008, and 0% to 82% of his annual base salary in 2007 and 2006, depending on the level of performance in each of the STI objectives.
“All Other Compensation” includes the following:
| | | | | | | | | | | | |
| | 2008 | | | 2007 | | | 2006 | |
|
Company retirement contributions to defined contribution plans | | $ | 11,795 | | | $ | 28,476 | | | $ | 21,553 | |
Nonqualified deferred compensation program contributions | | $ | 14,796 | | | $ | — | | | $ | — | |
DERs | | $ | 5,324 | | | $ | 25,075 | | | $ | 10,981 | |
Life insurance premiums(a) | | $ | 40 | | | $ | 717 | | | $ | 648 | |
| | |
(a) | • | Company retirement contributions of $28,476 and $21,553 for 2007 and 2006, respectively; |
|
| • | DERs of $25,075 and $10,981 for 2007 and 2006, respectively; and |
|
| • | Life insurance premiums of $717 and $648 for 2007 and 2006, respectively, paidPaid by the Partnership on behalf of Mr. Long. |
Michael S. Richards, Vice President, General Counsel and Secretary
The annual base salary for Mr. Richards was $185,000, $172,920 and $165,000 for 2008, 2007 and 2006, respectively, of which he deferred $15,397, $3,452 and $0 in 2008, 2007 and 2006, respectively. The LPULTIP awards are comprised of phantomPhantom IPO LPUsUnits, PPUs and phantom LPUsRPUs pursuant to the LTIP. Under both the 20072008 and 20062007 STI, Mr. Richards’ target opportunity was 45% of his annual base salary, with the possibility of earning from 0% to 90% of his annual base salary in 2008, and 0% to 82% of his annual base salary in 2007 and 2006, depending on the level of performance in each of the STI objectives.
“All Other Compensation” includes the following:
| | | | | | | | | | | | |
| | 2008 | | | 2007 | | | 2006 | |
|
Company retirement contributions to defined contribution plans | | $ | 23,000 | | | $ | 22,500 | | | $ | 20,891 | |
Nonqualified deferred compensation program contributions | | $ | 6,550 | | | $ | — | | | $ | — | |
DERs | | $ | 35,020 | | | $ | 23,309 | | | $ | 10,482 | |
Life insurance premiums(a) | | $ | 566 | | | $ | 622 | | | $ | 594 | |
Deminimus bonus | | $ | — | | | $ | — | | | $ | 750 | |
| | |
(a) | • | Company retirement contributions of $22,500 and $20,891 for 2007 and 2006, respectively; |
|
| • | DERs of $23,309 and $10,482 for 2007 and 2006, respectively; |
|
| • | Life insurance premiums of $622 and $594 for 2007 and 2006, respectively, paidPaid by the Partnership on behalf of Mr. Richards; and |
|
| • | A deminimus bonus of $0 and $750 for 2007 and 2006, respectively.Richards. |
Greg K. Smith, former Vice President, Business Development
The annual base salary for Mr. Smith was $195,000, $180,030 and $170,000 for 2008, 2007 and 2006, respectively, of which he deferred $7,638, $7,186 and $6,800 in 2008, 2007 and 2006, respectively. The LPULTIP awards are comprised of phantomPhantom IPO LPUsUnits, PPUs and phantom LPUsRPUs pursuant to the LTIP. Under both the 2008, 2007 and 2006 STI, Mr. Smith’s target opportunity was 45% of his annual base salary, with the possibility of earning
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from 0% to 90% of his annual base salary in 2008, and 0% to 82% of his annual base salary in 2007 and 2006, depending on the level of performance in each of the STI objectives.
“All Other Compensation” includes the following:
| | | | | | | | | | | | |
| | 2008 | | | 2007 | | | 2006 | |
|
Company retirement contributions to defined contribution plans | | $ | 23,926 | | | $ | 23,855 | | | $ | 21,928 | |
Nonqualified deferred compensation program contributions | | $ | 9,265 | | | $ | 2,864 | | | $ | 2,864 | |
DERs | | $ | 36,030 | | | $ | 23,818 | | | $ | 10,640 | |
Life insurance premiums(a) | | $ | 399 | | | $ | 648 | | | $ | 612 | |
| | |
(a) | • | Company retirement contributions of $23,855 and $21,928 for 2007 and 2006, respectively; |
|
| • | DERs of $23,818 and $10,640 for 2007 and 2006, respectively; |
|
| • | Nonqualified deferred compensation program contributions of $2,864 for both 2007 and 2006; and |
|
| • | Life insurance premiums of $648 and $612 for 2007 and 2006, respectively, paidPaid by the Partnership on behalf of Mr. Smith. |
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Grants of Plan-Based Awards
Following are the grants of plan-based awards during the year ended December 31, 2008 for the General Partner’s executive officers:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Grant Date
| | | | | | | | | | | | | | | | Grant Date
| |
| | | | Estimated Future Payouts under
| | Estimated Future Payouts under
| | Fair Value
| | | | | | | | | | | | | | | | Fair Value
| |
| | | | Non-Equity Incentive Plan Awards(a) | | Equity Incentive Plan Awards | | of LPU
| | | | Estimated Future Payouts under Non-Equity Incentive Plan Awards (a) | | Estimated Future Payouts under Equity Incentive Plan Awards | | of LTIP
| |
| | | | Minimum
| | Target
| | Maximum
| | Minimum
| | Target
| | Maximum
| | Awards
| | | | Minimum
| | Target
| | Maximum
| | Minimum
| | Target
| | Maximum
| | Awards
| |
Name | | Grant Date | | ($) | | ($) | | ($) | | (#) | | (#) | | (#) | | ($) | | Grant Date | | ($) | | ($) | | ($) | | (#) | | (#) | | (#) | | ($) | |
|
Mark A. Borer | | NA | | $ | 115,088 | | | $ | 204,600 | | | $ | 370,838 | | | | — | | | | — | | | | — | | | | — | | | NA | | $ | 109,500 | | | $ | 219,000 | | | $ | 438,000 | | | | — | | | | — | | | | — | | | $ | — | |
| | 2/26/2007(b) | | $ | — | | | $ | — | | | $ | — | | | | 5,945 | | | | 11,890 | | | | 17,835 | | | $ | 443,378 | | |
Thomas E. Long | | NA | | $ | 50,620 | | | $ | 89,991 | | | $ | 163,109 | | | | — | | | | — | | | | — | | | | — | | |
| | 2/26/2007(b) | | $ | — | | | $ | — | | | $ | — | | | | 2,145 | | | | 4,290 | | | | 6,435 | | | $ | 159,974 | | |
PPUs | | | 2/25/2008(b) | | $ | — | | | $ | — | | | $ | — | | | | 3,305 | | | | 6,610 | | | | 9,915 | | | $ | 237,167 | |
RPUs | | | 2/25/2008(c) | | $ | — | | | $ | — | | | $ | — | | | | 6,610 | | | | 6,610 | | | | 6,610 | | | $ | 237,167 | |
Angela A. Minas | | | NA | | $ | 51,750 | | | $ | 103,500 | | | $ | 207,000 | | | | — | | | | — | | | | — | | | $ | — | |
PPUs | | | 2/25/2008(b) | | $ | — | | | $ | — | | | $ | — | | | | 848 | | | | 1,695 | | | | 2,543 | | | $ | 28,273 | |
RPUs | | | 2/25/2008(c) | | $ | — | | | $ | — | | | $ | — | | | | 1,695 | | | | 1,695 | | | | 1,695 | | | $ | 28,273 | |
Michael S. Richards | | NA | | $ | 43,770 | | | $ | 77,814 | | | $ | 141,038 | | | | — | | | | — | | | | — | | | | — | | | NA | | $ | 41,625 | | | $ | 83,250 | | | $ | 166,500 | | | | — | | | | — | | | | — | | | $ | — | |
| | 2/26/2007(b) | | $ | — | | | $ | — | | | $ | — | | | | 1,855 | | | | 3,710 | | | | 5,565 | | | $ | 138,346 | | |
PPUs | | | 2/25/2008(b) | | $ | — | | | $ | — | | | $ | — | | | | 1,030 | | | | 2,060 | | | | 3,090 | | | $ | 73,913 | |
RPUs | | | 2/25/2008(c) | | $ | — | | | $ | — | | | $ | — | | | | 2,060 | | | | 2,060 | | | | 2,060 | | | $ | 73,913 | |
Greg K. Smith | | NA | | $ | 45,570 | | | $ | 81,014 | | | $ | 146,837 | | | | — | | | | — | | | | — | | | | — | | | NA | | $ | 43,875 | | | $ | 87,750 | | | $ | 175,500 | | | | — | | | | — | | | | — | | | $ | — | |
| | 2/26/2007(b) | | $ | — | | | $ | — | | | $ | — | | | | 1,930 | | | | 3,860 | | | | 5,790 | | | $ | 143,939 | | |
PPUs | | | 2/25/2008(b) | | $ | — | | | $ | — | | | $ | — | | | | 1,088 | | | | 2,175 | | | | 3,263 | | | $ | 78,039 | |
RPUs | | | 2/25/2008(c) | | $ | — | | | $ | — | | | $ | — | | | | 2,175 | | | | 2,175 | | | | 2,175 | | | $ | 78,039 | |
| | |
(a) | | Amounts shown represent amounts under the STI. If minimum levels of performance are not met, then the payout for one or more of the components of the STI may be zero. |
|
(b) | | The number of units shown on the line with the grant date of 2/26/2007 represents units awarded under the LTIP. If minimum levels of performance are not met, then the payout may be zero. |
|
(c) | | The number of units shown represents units awarded under the LTIP and these units vest at the end of the Vesting Period provided the individual is still employed by the Partnership. |
The phantom LPUs pursuant to the LTIP werePPUs awarded on February 26, 2007, and25, 2008 will vest in their entirety on December 31, 20092010 if the specified performance conditions are satisfied.satisfied and the RPUs awarded on February 25, 2008 will vest in their entirety on December 31, 2010 if the executive is still employed by the Partnership.
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Outstanding Equity Awards at Fiscal Year-End
Following are the outstanding equity awards for the General Partner’s executive officers as of December 31, 2007:2008:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Outstanding LTIP Awards | |
| | Outstanding LPU Awards | | | | | | | | | Equity Incentive
| |
| | | | | | Equity Incentive
| | Equity Incentive
| | | | | | | Equity Incentive
| | Plan Awards:
| |
| | | | | | Plan Awards:
| | Plan Awards:
| | | | | | | Plan Awards:
| | Market Value of
| |
| | | | Market Value of
| | Unearned Units
| | Market Value of
| | | | | Market Value of
| | Unearned Units
| | Unearned Units
| |
| | Units That Have
| | Units That Have Not
| | That Have Not
| | Unearned Units That
| | | Units That Have
| | Units That Have Not
| | That Have Not
| | That Have Not
| |
Name | | Not Vested(a) | | Vested(b) | | Vested(c) | | Have Not Vested(b) | | | Not Vested(a) | | Vested(b) | | Vested(c) | | Vested(b) | |
|
Mark A. Borer | | | — | | | $ | — | | | | 11,890 | | | $ | 546,346 | | | | — | | | $ | — | | | | 25,110 | | | $ | 238,269 | |
Thomas E. Long | | | 4,000 | | | $ | 183,800 | | | | 9,630 | | | $ | 548,009 | | |
Angela A. Minas | | | | — | | | $ | — | | | | 3,390 | | | $ | 31,866 | |
Michael S. Richards | | | 4,000 | | | $ | 183,800 | | | | 8,610 | | | $ | 492,446 | | | | 4,000 | | | $ | 37,600 | | | | 12,730 | | | $ | 138,968 | |
Greg K. Smith | | | 4,000 | | | $ | 183,800 | | | | 8,900 | | | $ | 508,538 | | | | 4,000 | | | $ | 37,600 | | | | 13,250 | | | $ | 144,416 | |
| | |
(a) | | Phantom IPO LPUsUnits awarded 1/3/2006; units vest in their entirety on 1/3/2009. For additional information, see “Compensation Discussion and Analysis — Other Compensation — Phantom IPO Phantom Units.” |
|
(b) | | Value calculated based on the closing price of our common units at December 31, 2007.2008. |
|
(c) | | Phantom LPUs pursuant to the LTIPPPUs and RPUs awarded 5/5/2006, 2/26/2007 and 2/26/2007;25/2008; units vest in their entirety over a range of 0% to 150% on 12/31/2008, 12/31/2009 and 12/31/2009,2010, respectively, if the specified performance conditions are satisfied;satisfied, except that the RPUs vest in their entirety on 12/31/2010; to determine the market value, the calculation of the number of units that are expected to vest for units granted in 2008 is based on assumed performance at 100%, for units granted in 2007 is based on assumed performance at “target” performance levels,102%, and for units granted in 2006 is based on assumedactual performance at 143%140.4%. |
Options Exercises and Stock Vested
There were no options exercised and no limited partnership units held by our executive officers that vested during the year ended December 31, 2007.2008.
159
Nonqualified Deferred Compensation
Following is the nonqualified deferred compensation for the General Partner’s executive officers for the year ended December 31, 2007:2008:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Executive
| | Registrant
| | Aggregate
| | | | Aggregate
| | | Executive
| | Registrant
| | Aggregate Earnings
| | | | Aggregate
| |
| | Contributions
| | Contributions
| | Earnings in
| | Aggregate
| | Balance at
| | | Contributions in
| | Contributions in
| | (Losses) in
| | Aggregate
| | Balance at
| |
| | in Last Fiscal
| | in Last Fiscal
| | Last Fiscal
| | Withdrawals/
| | December 31,
| | | Last Fiscal
| | Last Fiscal
| | Last Fiscal
| | Withdrawals/
| | December 31,
| |
Name | | Year (a) | | Year(b) | | Year(c) | | Distributions | | 2007 | | | Year(a) | | Year(b) | | Year(c) | | Distributions | | 2008 | |
|
Mark A. Borer | | $ | 120,391 | | | $ | 32,063 | | | $ | 36,518 | | | $ | — | | | $ | 669,361 | | | $ | 125,488 | | | $ | 50,160 | | | $ | 56,236 | | | $ | — | | | $ | 901,245 | |
Thomas E. Long | | $ | 89,645 | | | $ | — | | | $ | 1,584 | | | $ | — | | | $ | 91,374 | | | $ | 131,070 | | | $ | 14,796 | | | $ | (61,564 | ) | | $ | (27,339 | ) | | $ | 148,337 | |
Angela A. Minas | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Michael S. Richards | | $ | 3,452 | | | $ | — | | | $ | 48 | | | $ | — | | | $ | 3,526 | | | $ | 15,397 | | | $ | 6,550 | | | $ | (6,765 | ) | | $ | — | | | $ | 18,708 | |
Greg K. Smith | | $ | 7,186 | | | $ | 2,864 | | | $ | 866 | | | $ | — | | | $ | 31,650 | | | $ | 7,638 | | | $ | 9,265 | | | $ | (4,248 | ) | | $ | — | | | $ | 44,305 | |
| | |
(a) | | These amounts were included in the gross salary reported in the “Salary” column of the “Summary Compensation” table. |
|
(b) | | These amounts are included in the “Summary Compensation” table within “All Other Compensation.” |
|
(c) | | These amounts are included in the “Summary Compensation” table as “Change in Nonqualified Deferred Compensation Earnings.” |
Executive officers are allowed to defer up to 75% of their base salary, and up to 100% of their STI, LTIP or other compensation. Executive officers elect either to receive amounts contributed during specific plan years as a lump sum at a specific date, subject to Internal Revenue Service rules, or in a lump sum or annual annuity (over three to 20 years) at termination.
Potential Payments Upon Termination or Change in Control
As noted above, the General Partner has not entered into any employment agreements with any of our executive officers. There are no formal severance plans in place for any employees in the event of termination
170
of employment, or a change in control of the Partnership. When an employee terminates employment with the Partnership, they are entitled to a cash payment for the amount of unused vacation hours at the date of their termination.
Compensation of Directors
General — OnEffective February 19, 2008,17, 2009, the board of directors of the General Partner approved a compensation package for directors who are not officers or employees of affiliates of the General Partner, or Non-Employee Directors. Members of the board who are also officers or employees of affiliates of the General Partner do not receive additional compensation for serving on the board. The board approved the payment to each Non-Employee Director of an annual compensation package containing the following: (1) a $40,000 retainer; (2) a board meeting fee of $1,250 for each board meeting attended; (3) a telephonic board meeting fee of $500 for each telephonic meeting attended; and (4) an annual grant of 1,000 phantom LPUsPhantom Units that approximate $40,000 of value, awarded pursuant to the LTIP, that have a six month vesting period. The directors also receive DERs, based on the number of units awarded, which are paid in cash on a quarterly basis. The phantom LPUsPhantom Units will be paid in units upon vesting.
Our directors will also be reimbursed for out-of-pocket expenses in connection with attending meetings of the board of directors and committees. Each director will be fully indemnified by us for his actions associated with being a director to the fullest extent permitted under Delaware law.
Committees — The chairman of the audit committee of the board will receive an annual retainer of $20,000 and the members of the audit committee will receive $1,500 for each audit committee meeting attended. The chairman of the special committee of the board will likewise receive an annual retainer of $20,000 and the members of the special committee will receive $1,250 for each special committee meeting attended. Finally, the Non-Employee Director members of the compensation committee will receive $1,250 for each compensation committee meeting attended.
160
Following is the compensation of the General Partner’s Non-Employee Directors for the year ended December 31, 2007:2008:
| | | | | | | | | | | | | | | | | |
| | Fees Earned
| | | | | | | | | | | | | | | | | | | | | | | |
| | or Paid in
| | LPU
| | | | | | | | | LTIP
| | | | | |
Name | | Cash | | Awards(e) | | DERs | | Total | | | Fees Earned | | Awards(a) | | DERs | | Total | |
|
Milton Carroll(a) | | $ | 20,000 | | | $ | — | | | $ | — | | | $ | 20,000 | | |
Derrill Cody(b) | | $ | 42,500 | | | $ | 41,450 | | | $ | 4,178 | | | $ | 88,128 | | |
Paul F. Ferguson, Jr. | | $ | 84,500 | | | $ | 66,975 | | | $ | 4,178 | | | $ | 155,653 | | | $ | 90,000 | | | $ | 5,479 | | | $ | 2,762 | | | $ | 98,241 | |
Frank A. McPherson | | $ | 85,000 | | | $ | 66,975 | | | $ | 4,178 | | | $ | 156,153 | | | $ | 72,500 | | | $ | 5,479 | | | $ | 2,762 | | | $ | 80,741 | |
Jim W. Mogg(c) | | $ | 40,000 | | | $ | — | | | $ | — | | | $ | 40,000 | | |
Thomas C. Morris | | $ | 63,000 | | | $ | 66,975 | | | $ | 4,178 | | | $ | 134,153 | | | $ | 69,000 | | | $ | 5,479 | | | $ | 2,762 | | | $ | 77,241 | |
Stephen R. Springer(d) | | $ | 28,000 | | | $ | 19,146 | | | $ | 540 | | | $ | 47,686 | | |
Stephen R. Springer | | | $ | 89,500 | | | $ | 24,774 | | | $ | 1,475 | | | $ | 115,749 | |
| | |
(a) | | Mr. Carroll resigned from the board of directors of the General Partner effective December 20, 2006. The $20,000 represents the remaining amount owed for service to our board of directors in 2006 that was paid in 2007. |
|
(b) | | Mr. Cody resigned from the board of directors of the General Partner effective November 12, 2007. |
|
(c) | | Mr. Mogg resigned as Chairman of the board of directors of the General Partner effective April 30, 2007. |
|
(d) | | Mr. Springer was appointed to the board of directors of the General Partner effective July 11, 2007. |
|
(e) | | The amounts in this column reflect the dollar amount recognized for financial statement reporting purposes, in accordance with the provisions of SFAS 123R, and include amounts from awards granted in conjunction with our LTIP during 2007 and 2006.LTIP. See Note 1314 of the Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data.” |
On November 29, 2006, the board of directors of the General Partner approved a compensation package for Jim W. Mogg, the former chairman of the board of directors. Mr. Mogg, who retired from Duke Energy Corporation in September 2006, received an annual retainer of $120,000, which was prorated for 2007 and 2006. Mr. Mogg was not eligible for additional compensation for attending board meetings or committee meetings that our other Non-Employee Directors are eligible to receive. Mr. Mogg was also the compensation committee chair. He received no additional compensation for serving in that capacity during 2007 and 2006. Mr. Mogg retired from the board of directors of the General Partner effective April 30, 2007, at which time Mr. Fred J. Fowler assumed the responsibilities of the Chairman of the board of directors and the compensation committee.
Mr. Cody was a member of the compensation committee. The value of Mr. Cody’s phantom LPU awards, calculated in accordance with the provisions of SFAS 123R, was $22,331, as of the date of his resignation.
Mr. Ferguson is the audit committee chair and a member of the special committee.
Mr. McPherson was the special committee chair until February 2008, and is a member of the audit committee and the compensation committee.
Mr. Morris is a member of the audit committee and the special committee.
Mr. Springer is the special committee chair, and is a member of the audit committee and the special committee.
The total aggregate grant date fair value of phantom LPULTIP awards for the Non-Employee Directors for 20072008 was $194,515.$143,520. At December 31, 2007,2008, Messrs. Ferguson, McPherson and Morris each had 1,333 phantom666 Phantom IPO LPUsUnits outstanding, which vested on January 3, 2009 and Mr. Springer had 500 phantom LPUs outstanding, related to awards grantedwere paid in 2007 and 2006.common units.
161171
| |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters |
The following table sets forth the beneficial ownership of our units and the related transactions held by:
| | |
| • | each person who beneficially owns 5% or more of our outstanding units as of March 3, 2008;February 23, 2009; |
|
| • | all of the directors of DCP Midstream GP, LLC; |
|
| • | each Named Executive Officer of DCP Midstream GP, LLC; and |
|
| • | all directors and executive officers of DCP Midstream GP, LLC as a group. |
Percentage of total common and subordinated units beneficially owned is based on 20,411,75428,233,183 common units and 3,571,429 subordinated units outstanding.
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Percentage of
| | | | | | | | | |
| | | | Percentage of
| | | | Percentage of
| | Total Common and
| | | | | Percentage of
| |
| | Common
| | Common
| | Subordinated
| | Subordinated
| | Subordinated
| | | Common
| | Common
| |
| | Units
| | Units
| | Units
| | Units
| | Units
| | | Units
| | Units
| |
| | Beneficially
| | Beneficially
| | Beneficially
| | Beneficially
| | Beneficially
| | | Beneficially
| | Beneficially
| |
Name of Beneficial Owner(a) | | Owned | | Owned | | Owned | | Owned | | Owned | | | Owned | | Owned | |
|
DCP LP Holdings, LP(b)(1) | | | 4,675,022 | | | | 22.9 | % | | | 3,571,429 | | | | 100 | % | | | 34.4 | % | | | 8,246,451 | | | | 29.2 | % |
Fiduciary Asset Management, L.L.C.(c) | | | 1,028,030 | | | | 5.0 | % | | | — | | | | — | | | | 4.3 | % | |
Lehman Brothers Holdings Inc.(d) | | | 1,660,548 | | | | 8.1 | % | | | — | | | | — | | | | 6.9 | % | |
Kayne Anderson Capital Advisors, L.P.(c) | | | | 1,778,335 | | | | 6.3 | % |
Barclays PLC(d) | | | | 1,666,334 | | | | 5.9 | % |
Mark A. Borer | | | 33,001 | | | | | * | | | — | | | | — | | | | | * | | | 38,001 | | | | | * |
Thomas E. Long | | | 23,401 | | | | | * | | | — | | | | — | | | | | * | |
Angela A. Minas | | | | 15,000 | | | | | * |
Michael S. Richards | | | 3,501 | | | | | * | | | — | | | | — | | | | | * | | | 12,101 | | | | | * |
Greg K. Smith | | | 6,101 | | | | | * | | | — | | | | — | | | | | * | |
Fred J. Fowler | | | 1,000 | | | | | * | | | — | | | | — | | | | | * | |
Don Baldridge | | | | 6,101 | | | | | * |
Alan N. Harris | | | | 9,842 | | | | | * |
Paul F. Ferguson, Jr. | | | 2,668 | | | | | * | | | — | | | | — | | | | | * | | | 6,334 | | | | | * |
John E. Lowe | | | | 40,001 | | | | | * |
Frank A. McPherson | | | 9,668 | | | | | * | | | — | | | | — | | | | | * | | | 15,666 | | | | | * |
Thomas C. Morris | | | 6,668 | | | | | * | | | — | | | | — | | | | | * | | | 20,667 | | | | | * |
Thomas C. O’Connor | | | | 8,000 | | | | | * |
Stephen R. Springer | | | 500 | | | | | * | | | — | | | | — | | | | | * | | | 1,500 | | | | | * |
All directors and executive officers as a group (9 persons) | | | 86,508 | | | | | * | | | — | | | | — | | | | | * | |
All directors and executive officers as a group (11 persons) | | | | 173,213 | | | | | * |
| | |
* | | Less than 1%. |
|
(a) | | Unless otherwise indicated, the address for all beneficial owners in this table is 370 17th Street, Suite 2775, Denver, Colorado 80202. |
|
(b) | | DCP Midstream, LLC is the ultimate parent company of DCP LP Holdings, LP and may, therefore, be deemed to beneficially own the units held by DCP LP Holdings, LP. DCP Midstream, LLC disclaims beneficial ownership of all of the units owned by DCP LP Holdings, LP. The address of DCP LP Holdings, LP and DCP Midstream, LLC is 370 17th Street, Suite 2500, Denver, Colorado 80202. |
|
(c) | | As set forth in a Schedule 13G filed on September 19, 2007.February 17, 2009. The address of Fiduciary Asset Management, L.L.C.Kayne Anderson Capital Advisors, L.P. is 8112 Maryland1800 Avenue Suite 400, St. Louis, MO 63105. Fiduciary Asset Management, L.L.C. acts as an investment sub-advisor to certain closed-end investment companies, as well as to private individuals, some of whom may be deemed to be beneficial owners.the Stars, Second Floor, Los Angeles, CA 90067. |
|
(d) | | As set forth in a Schedule 13G filed on February 13,September 22, 2008. Lehman Brothers MLP Opportunity Fund LP, or LB MLP Fund, is the actual owner of the units, however, as Lehman Brothers MLP Opportunity Associates LP is the general partner of LB MLP Fund and is wholly-owned by Lehman Brothers MLP Opportunity Associates LLC, which is wholly-owned by Lehman Brothers Holdings Inc., these entities may be deemed to beneficially own the units held by LB MLP Fund. The address of these entitiesBarclays PLC is 745 Seventh Avenue, New York, NY.1 Churchill Place, London, E14 5HP, England. |
162172
Equity Compensation Plan Information
The following table summarizes information about our equity compensation plan as of December 31, 2007.2008.
| | | | | | | | | | | | |
| | Number of
| | | Weighted-
| | | Number of Securities
| |
| | Securities to be
| | | Average
| | | Remaining Available for
| |
| | Issued upon
| | | Exercise PriceWeighted-Average
| | | Future Issuance Under
| |
| | Exercise of
| | | Exercise Price of Outstanding
| | | Equity Compensation
| |
| | Outstanding
| | | Options,Outstanding
| | | Plans (Excluding
| |
| | Options, Warrants
| | | Options, Warrants and
| | | Securities Reflected in
| |
| | and Rightsrights (1)
| | | and Rights
| | | Column (a))
| |
| | (a) | | | (b) | | | (c) | |
|
Equity compensation plans approved by unitholders | | | — | | | $ | — | | | | — | |
Equity compensation plans not approved by unitholders | | | — | | | | — | | | | 782,841769,592 | |
| | | | | | | | | | | | |
Total | | | — | | | $ | — | | | | 782,841769,592 | |
| | | | | | | | | | | | |
| | |
(1) | | The long-term incentive plan currently permits the grant of awards covering an aggregate of 850,000 units. For more information on our long-term incentive plan, which did not require approval by our limited partners, refer to Item 11. “Executive Compensation — Components of Compensation.” |
| |
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Distributions and Payments to our General Partner and its Affiliates
The following table summarizes the distributions and payments to be made by us to our General Partner and its affiliates in connection with our formation, ongoing operation, and liquidation. These distributions and payments are determined by and among affiliated entities and, consequently, are not the result of arm’s-length negations.
| | | |
Operational Stage: | | | |
Distributions of Available Cash to our General Partner and its affiliates | | | We will generally make cash distributions to the unitholders and to our General Partner, in accordance with their pro rata interest. In addition, if distributions exceed the minimum quarterly distribution and other higher target levels, our General Partner will be entitled to increasing percentages of the distributions, up to 48% of the distributions above the highest target level. Our currentCurrently, our distribution level exceedsto our general partner related to its incentive distribution rights is at the highest incentive distribution level. |
Payments to our General Partner and its affiliates | | | We reimburse DCP Midstream, LLC and its affiliates $9.7$10.1 million per year, adjusted annually by changes in the Consumer Price Index, for the provision of various general and administrative services for our benefit. For further information regarding the reimbursement, please see the “Omnibus Agreement” section below. |
Withdrawal or removal of our General Partner | | | If our General Partner withdraws or is removed, its general partner interest and its incentive distribution rights will either be sold to the new general partner for cash or converted into common units, in each case for an amount equal to the fair market value of those interests. |
Liquidation Stage: | | | |
Liquidation | | | Upon our liquidation, the partners, including our General Partner, will be entitled to receive liquidating distributions according to their respective capital account balances. |
| | | |
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Omnibus Agreement
The employees supporting our operations are employees of DCP Midstream, LLC. We have entered into an omnibus agreement, as amended, or the Omnibus Agreement, with DCP Midstream, LLC. Under the Omnibus Agreement, we are required to reimburse DCP Midstream, LLC for salaries of operating personnel and employee benefits as well as capital expenditures, maintenance and repair costs, taxes and other direct costs incurred by DCP Midstream, LLC on our behalf. The fees under the Omnibus Agreement increased $0.4 million per year effective October 1, 2008, in connection with the acquisition of Michigan Pipeline & Processing, LLC, or MPP. We also pay DCP Midstream, LLC an annual fee for centralized corporate functions performed by DCP Midstream, LLC on our behalf, including legal, accounting, cash management, insurance administration and claims processing, risk management, health, safety and environmental, information technology, human resources, credit, payroll, taxes and engineering.
Following is a summary of the fees we anticipate incurring in 20082009 under the Omnibus Agreement and the effective date for these fees:
| | | | | | | | | | | | |
Terms | | Effective Date | | Fee | | | Effective Date | | Fee | |
| | | | (Millions) | | | | | (Millions) | |
|
Annual fee | | 2006 | | $ | 5.1 | | | 2006 | | $ | 5.1 | |
Wholesale propane logistics business | | November 2006 | | | 2.0 | | | November 2006 | | | 2.0 | |
Southern Oklahoma | | May 2007 | | | 0.2 | | | May 2007 | | | 0.2 | |
Discovery | | July 2007 | | | 0.2 | | | July 2007 | | | 0.2 | |
Additional services | | August 2007 | | | 0.6 | | | August 2007 | | | 0.6 | |
MEG | | August 2007 | | | 1.6 | | |
Momentum Energy Group, Inc. | | | August 2007 | | | 1.6 | |
Michigan Pipeline & Processing, LLC | | | October 2008 | | | 0.4 | |
| | | | | | |
Total | | | | $ | 9.7 | | | | | $ | 10.1 | |
| | | | | | |
All of the fees under the Omnibus Agreement are subject to adjustment annually for changes in the Consumer Price Index.
The Omnibus Agreement also addresses the following matters:
| | |
| • | DCP Midstream, LLC’s obligation to indemnify us for certain liabilities and our obligation to indemnify DCP Midstream, LLC for certain liabilities; |
|
| • | DCP Midstream, LLC’s obligation to continue to maintain its credit support, including without limitation guarantees and letters of credit, for our obligations related to derivative financial instruments, such as commodity price hedgingderivative contracts, to the extent that such credit support arrangements were in effect as of December 7, 2005 until the earlier of December 7, 2010 or when we obtain an investment grade credit rating from either Moody’s Investor Services, Inc. or Standard & Poor’s Ratings Group with respect to any of our unsecured indebtedness; and |
|
| • | DCP Midstream, LLC’s obligation to continue to maintain its credit support, including without limitation guarantees and letters of credit, for our obligations related to commercial contracts with respect to its business or operations that were in effect at the closing of our initial public offering until the expiration of such contractscontracts. |
Our General Partner and its affiliates will also receive payments from us pursuant to the contractual arrangements described below under the caption “Contracts with Affiliates.”
Any or all of the provisions of the Omnibus Agreement, other than the indemnification provisions described below, will be terminable by DCP Midstream, LLC at its option if our general partner is removed without cause and units held by our general partner and its affiliates are not voted in favor of that removal. The Omnibus Agreement will also terminate in the event of a change of control of us, our general partner (DCP Midstream GP, LP) or our General Partner (DCP Midstream GP, LLC).
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Competition
None of DCP Midstream, LLC nor any of its affiliates, including Spectra Energy and ConocoPhillips, is restricted, under either our partnership agreement or the Omnibus Agreement, from competing with us. DCP
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Midstream, LLC and any of its affiliates, including Spectra Energy and ConocoPhillips, may acquire, construct or dispose of additional midstream energy or other assets in the future without any obligation to offer us the opportunity to purchase or construct those assets.
Indemnification
Under the Omnibus Agreement, DCP Midstream, LLC will indemnify us until December 7, 2008 against certain potential environmental claims, losses and expenses associated with the operation of the assets and occurring before the closing date of our initial public offering. DCP Midstream, LLC’s maximum liability for this indemnification obligation does not exceed $15.0 million and DCP Midstream, LLC does not have any obligation under this indemnification until our aggregate losses exceed $250,000. DCP Midstream, LLC has no indemnification obligations with respect to environmental claims made as a result of additions to or modifications of environmental laws promulgated after the closing date of our initial public offering. We have agreed to indemnify DCP Midstream, LLC against environmental liabilities related to our assets to the extent DCP Midstream, LLC is not required to indemnify us.
Additionally, DCP Midstream, LLC will indemnify us for losses attributable to title defects, retained assets and liabilities (including pre-closing litigation relating to contributed assets) and income taxes attributable to pre-closing operations. We will indemnify DCP Midstream, LLC for all losses attributable to the post-closing operations of the assets contributed to us, to the extent not subject to DCP Midstream, LLC’s indemnification obligations. In addition, DCP Midstream, LLC has agreed to indemnify us for up to $5.3 million of our pro rata share of any capital contributions required to be made by us to Black Lake Pipe Line Company, or Black Lake, associated with any repairs torepairing the Black Lake pipeline that are determined to be necessary as a result of the currently ongoing pipeline integrity testing occurringtesting. We anticipate repairs of approximately $0.8 million on the pipeline, which will be funded directly from 2005 through June 2008. DCP Midstream, LLC has also agreedBlack Lake. We will not make contributions to indemnify us for upBlack Lake to $4.0 million of the costs associated with any repairs to the Seabreeze pipeline that were determined to be necessary as a result of pipeline integrity testing that occurred in 2006. Pipeline integrity testing and repairs are our responsibility and are recognized as operating and maintenance expense. Reimbursements ofcover these expenses from DCP Midstream, LLC were not significant and were recognized by us as capital contributions.expenses.
In connection with our acquisition of our wholesale propane logistics business, DCP Midstream, LLC will indemnify us until October 31, 2008 for any breach of the representations and warranties made under the acquisition agreement (except certain corporate related matters that survive indefinitely) and certain litigation, environmental matters, title defects and tax matters associated with these assets that were identified at the time of closing and that were attributable to periods prior to the closing date. In addition, DCP Midstream, LLC agreed to indemnify us until October 31, 2008 for the overpayment or underpayment of trade payables or receivables that pertain to periods prior to closing, agreed to indemnify us until October 31, 2009 for any claims for fines or penalties of any governmental authority for periods prior to the closing, agreed to indemnify us until October 31, 2010 if certain contractual matters result in a claim, and agreed to indemnify us indefinitely for breaches of the agreement. The indemnity obligation for breach of the representations and warranties is not effective until claims exceed in the aggregate $680,000 and is subject to a maximum liability of $6.8 million. This indemnity obligation for all other claims other than a breach of the representations and warranties does not become effective until an individual claim or series of related claims exceed $50,000.
In connection with our acquisitions of East Texas and Discovery from DCP Midstream, LLC, DCP Midstream, LLC will indemnify us until July 1, 2008 for the breach of the representations and warranties made under the acquisition agreement (except certain corporate related matters that survive indefinitely) and certain litigation, environmental matters, title defects and tax matters associated with these assets that were identified at the time of closing and that were attributable to periods prior to the closing date. In addition, the same affiliate of DCP Midstream, LLC agreed to indemnify us until July 1, 2008 for the overpayment or underpayment of trade payables or receivables that pertain to periods prior to closing, agreed to indemnify us until July 1, 2009 for any claims for fines or penalties of any governmental authority for periods prior to the closing and that are associated with certain East Texas assets that were formerly owned by Gulf South and UP Fuels, and agreed to indemnify us indefinitely for breaches of the agreement and certain existing claims. The indemnity obligation for breach of the representations and warranties is not effective until claims exceed in the
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aggregate $2.7 million and is subject to a maximum liability of $27.0 million. This indemnity obligation for all other claims other than a breach of the representations and warranties does not become effective until an individual claim or series of related claims exceed $50,000.
In connection with our acquisition of certain subsidiaries of MEG, DCP Midstream will indemnify us following the closing on August 29, 2007 for any breach of the representations and warranties made under the acquisition agreement and certain other matters associated with these assets. DCP Midstream agreed to indemnify us until August 29, 2008 for any breach of the representations and warranties (except certain corporate related matters that survive indefinitely), and indefinitely for breaches of the agreement.
We have not pursued indemnification under these agreements.
Contracts with Affiliates
We charge transportation fees, sell a portion of our residue gas and NGLs to, and purchase raw natural gas and NGLs from, DCP Midstream, LLC, ConocoPhillips, and their respective affiliates. We also purchase a portion of our propane from and market propane on behalf of Spectra Energy. Management anticipates continuing to purchase and sell these commodities to DCP Midstream, LLC, ConocoPhillips and their respective affiliates, and Spectra Energy in the ordinary course of business.
Natural Gas Gathering and Processing Arrangements
We have a fee-based contractual relationship with ConocoPhillips, which includes multiple contracts, pursuant to which ConocoPhillips has dedicated all of its natural gas production within an area of mutual interest to our Ada, Minden and Pelico systems under multiple agreements that have terms of up to five years and are market based. These agreements provide for the gathering, processing and transportation services at our Ada and Minden gathering and processing systems and the Pelico system. At our Ada gathering and processing system, we collect fees from ConocoPhillips for gathering and compressing the natural gas from the wellhead or receipt point and processing the natural gas at the Ada processing plant. At our Minden gathering and processing system, we purchase natural gas from ConocoPhillips at the wellhead or receipt
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point, transport the wellhead natural gas through our gathering system, treat and process the natural gas, and then sell the resulting residue natural gas and NGLs at index prices based on published index market prices. At our Pelico system, we collect fees for compression and transportation services. Please read Item 1. “Business — Natural Gas Services Segment — Customers and Contracts” and Note 5 of the Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data.” One of these arrangements is set forth in a natural gas gathering agreement dated June 1, 1987, as amended, between DCP Assets Holding, LP (successor to the interest of Cornerstone Natural Gas Company) and ConocoPhillips (successor to interest of Phillips Petroleum Company). We succeeded to the rights and obligations of DCP Assets Holding, LP under this agreement upon the closing of our initial public offering. Pursuant to this agreement, we receive gathering and compression fees from ConocoPhillips with respect to natural gas produced by ConocoPhillips that we gather and compress in our Ada gathering system from wells located in a designated area of mutual interest located in northern Louisiana covering approximately 54 square miles. The fees we receive are based on market rates for these types of services. To date, ConocoPhillips has drilled and connected approximately 145180 wells to our Ada gathering system pursuant to this contract. This agreement expires in 2011. Please read Note 5 of the Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data.”
Merchant Arrangements
Under our merchant arrangements, we use a subsidiary of DCP Midstream, LLC (DCP Midstream Marketing, LP) as our agent to purchase natural gas from third parties at pipeline interconnect points, as well as residue gas from our Minden and Ada processing plants, and then resell the aggregated natural gas primarily to third parties. In the case of certain industrial end-user customers, from time to time we may sell aggregated natural gas to a subsidiary of DCP Midstream, LLC, which in turn would resell natural gas to these customers. Under these arrangements, we expect that this subsidiary of DCP Midstream, LLC would make a profit on these sales. We have also entered into a contractual arrangement with a subsidiary of DCP Midstream, LLC that requires DCP Midstream, LLC to supply Pelico’s system requirements that exceed its on-system supply. Accordingly, DCP Midstream, LLC purchases natural gas and transports it to our Pelico
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system, where we buy the gas from DCP Midstream, LLC at the actual acquisition cost plus transportation service charges incurred. If our Pelico system has volumes in excess of the on-system demand, DCP Midstream, LLC will purchase the excess natural gas from us and transport it to sales points at an index-based price less a contractually agreed to marketing fee. In addition, DCP Midstream, LLC may purchase other excess natural gas volumes at certain Pelico outlets for a price that equals the original Pelico purchase price from DCP Midstream, LLC plus a portion of the index differential between upstream sources to certain downstream indices with a maximum differential and a minimum differential plus a fixed fuel charge and other related adjustments. We also sell our NGLs at the Minden processing plant to a subsidiary of DCP Midstream, LLC (DCP NGL Services, LP) who then transports the NGLs on the Black Lake pipeline. Please read Note 5 of the Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data.”
Propane Supply Arrangements
During the second quarter of 2008, we entered into a propane supply agreement with Spectra Energy. This agreement, effective May 1, 2008 and terminating April 30, 2014, provides us propane supply at our marine terminal, which is included in our Wholesale Propane Logistics segment, for up to approximately 120 million gallons of propane annually. This contract replaces the supply provided under a contract with a third party that was terminated for non-performance during the first quarter of 2008.
Transportation Arrangements
Effective December 2005, we entered into a long-term, fee-based contractual arrangement with a subsidiary of DCP Midstream, LLC (DCP NGL Services, LP) that provided that the DCP Midstream, LLC subsidiary will pay us to transport NGLs on our Seabreeze pipeline pursuant to a fee-based rate that will be applied to the volumes transported. Under this agreement, we are required to reserve sufficient capacity in the Seabreeze pipeline to ensure our ability to accept up to 38,000 Bbls/d of NGLs tendered by the DCP Midstream, LLC subsidiary each day prior to utilizing the excess capacity for our own use or for that of any
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third parties, and the DCP Midstream, LLC subsidiary is required to tender all NGLs processed at certain plants that it owns, controls or otherwise has an obligation to market for others. DCP Midstream, LLC historically is also the largest shipper on the Black Lake pipeline, primarily due to the NGLs delivered to it from our Minden processing plant. Please read Note 5 of the Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data.”
Derivative Arrangements
We have entered into long-term natural gas and crude oil swap contracts whereby we receive a fixed price for natural gas and crude oil and we pay a floating price. DCP Midstream, LLC has issued guarantees to our counterparties in those transactions that were in effect at the time of our initial public offering. With this credit support, we have more favorable collateral terms than we would have otherwise received. For more information regarding our derivative activities and credit support provided by DCP Midstream, LLC, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures about Market Risk — Commodity Price Risk — Commodity Cash Flow Protection Activities” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”
Other Agreements and Transactions with DCP Midstream, LLC
In December 2006, we completed construction of our Wilbreeze pipeline, which connects a DCP Midstream, LLC gas processing plant to our Seabreeze pipeline. The project is supported by an NGL product dedication agreement with DCP Midstream, LLC.
In the second quarter of 2006, we entered into a letter agreement with DCP Midstream, LLC whereby DCP Midstream, LLC will make capital contributions to us as reimbursement for capital projects, which were forecasted to be completed prior to our initial public offering, but were not completed by that date. Pursuant to the letter agreement, DCP Midstream, LLC made capital contributions to us of $3.4 million during 2006 and $0.3 million during 2007, to reimburse us for the capital costs we incurred, primarily for growth capital projects.
In conjunction with our acquisition of a 40% limited liability company interest in Discovery from DCP Midstream, LLC in July 2007, we entered into a letter agreement with DCP Midstream, LLC whereby DCP Midstream, LLC will make capital contributions to us as reimbursement for certain Discovery capital projects, which were forecasted to be completed prior to our acquisition of a 40% limited liability company interest in
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Discovery. Pursuant to the letter agreement, DCP Midstream, LLC made capital contributions to us of $3.8 million and $0.3 million during 2008 and 2007, respectively, to reimburse us for these capital projects.projects, which were substantially completed in 2008.
Review, Approval or Ratification of Transactions with Related Persons
Our partnership agreement contains specific provisions that address potential conflicts of interest between the owner of our general partner and its affiliates, including DCP Midstream, on one hand, and us and our subsidiaries, on the other hand. Whenever such a conflict of interest arises, our general partner will resolve the conflict. Our general partner may, but is not required to, seek the approval of such resolution from the special committee of the board of directors of our general partner, which is comprised of independent directors and acts as our conflicts committee. The partnership agreement provides that our general partner will not be in breach of its obligations under the partnership agreement or its duties to us or to our unitholders if the resolution of the conflict is:
| | |
| • | approved by the conflicts committee; |
|
| • | approved by the vote of a majority of the outstanding common units, excluding any common units owned by our general partner or any of its affiliates; |
|
| • | on terms no less favorable to us than those generally being provided to or available from unrelated third parties; or |
|
| • | fair and reasonable to us, taking into account the totality of the relationships between the parties involved, including other transactions that may be particularly favorable or advantageous to us. |
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If our general partner does not seek approval from the special committee and the board of directors of our general partner determines that the resolution or course of action taken with respect to the conflict of interest satisfies either of the standards set forth in the third and fourth bullet points above, then it will be presumed that, in making its decision, the board of directors acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Unless the resolution of a conflict is specifically provided for in our partnership agreement, our general partner or the conflicts committee may consider any factors it determines in good faith to consider when resolving a conflict. When our partnership agreement requires someone to act in good faith, it requires that person to reasonably believe that he is acting in the best interests of the partnership, unless the context otherwise requires.
In addition, our code of business ethics requires that all employees, including employees of affiliates of DCP Midstream who perform services for us and our general partner, avoid or disclose any activity that may interfere, or have the appearance of interfering, with their responsibilities to us.
Director Independence
Please see Item 10. “Directors, Executive Officers and Corporate Governance” for information about the independence of our general partner’s board of directors and its committees, which information is incorporated herein by reference in its entirety.
| |
Item 14. | Principal Accounting Fees and Services |
The following table presents fees for professional services rendered by Deloitte & Touche LLP, or Deloitte, our principal accountant, for the audit of our financial statements, and the fees billed for other services rendered by Deloitte:
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
Type of Fees | | 2007 | | 2006 | | | 2008 | | 2007 | |
| | (Millions) | | | (Millions) | |
|
Audit Fees(a) | | $ | 1.9 | | | $ | 2.5 | | | $ | 1.6 | | | $ | 1.9 | |
| | | | | | | | | | |
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| | |
(a) | | Audit Fees are fees billed by Deloitte for professional services for the audit of our consolidated financial statements included in our annual report onForm 10-K and review of financial statements included in our quarterly reports onForm 10-Q, services that are normally provided by Deloitte in connection with statutory and regulatory filings or engagements or any other service performed by Deloitte to comply with generally accepted auditing standards and include comfort and consent letters in connection with Securities and Exchange Commission filings and financing transactions. |
For the last two fiscal years, Deloitte has not billed us for assurance and related services, unless such services were reasonably related to the performance of the audit or review of our financial statements, and are included in the table above. Deloitte has not provided any services to us over the last two fiscal years related to tax compliance, tax services and tax planning.
Audit Committee Pre-Approval Policy
The audit committee pre-approves all audit and permissible non-audit services provided by the independent auditors on acase-by-case basis. These services may include audit services, audit-related services, tax services and other services. The audit committee does not delegate its responsibilities to pre-approve services performed by the independent auditor to management or to an individual member of the audit committee. The audit committee has, however, pre-approved audit related services that do not impair the independence of the independent auditors for up to $50,000 per engagement, and up to an aggregate of $200,000 annually, provided the audit committee is notified of such audit-related services in a timely manner. The audit committee may, however, from time to time delegate its authority to any audit committee member, who will report on the independent auditor services that were approved at the next audit committee meeting.
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PART IV
| |
Item 15. | Exhibits and Financial Statement Schedules |
Consolidated Financial Statements and Financial Statements Schedules included in this Item 15:
| | |
| (a) | Schedule II — Consolidated Valuation and Qualifying Accounts and Reserves |
| | |
| (b) | Consolidated Financial Statements of Discovery Producer Services LLC and Financial Statements of DCP East Texas Holdings, LLC |
| |
(a) | Financial Statement Schedules |
DCP MIDSTREAM PARTNERS, LP
SCHEDULE II — CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Charged to
| | | | | | Credit to
| | | | | | | Charged to
| | | | | | Credit to
| | | |
| | Balance at
| | Consolidated
| | Charged to
| | | | Consolidated
| | Balance at
| | | Balance at
| | Consolidated
| | Charged to
| | | | Consolidated
| | Balance at
| |
| | Beginning of
| | Statements of
| | Other
| | Deductions/
| | Statements of
| | End of
| | | Beginning of
| | Statements of
| | Other
| | Deductions/
| | Statements of
| | End of
| |
| | | Period | | Operations | | Accounts(a) | | Other | | Operations | | Period | |
| | | (Millions) | |
| |
December 31, 2008 | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | | $ | 1.2 | | | $ | (0.5 | ) | | $ | — | | | $ | (0.1 | ) | | $ | — | | | $ | 0.6 | |
Environmental | | | | 1.7 | | | | 0.5 | | | | — | | | | (0.3 | ) | | | — | | | | 1.9 | |
Other(b) | | | | — | | | | 2.6 | | | | — | | | | — | | | | — | | | | 2.6 | |
| | Period | | Operations | | Accounts(a) | | Other | | Operations | | Period | | | | | | | | | | | | | | |
| | (Millions) | | | $ | 2.9 | | | $ | 2.6 | | | $ | — | | | $ | (0.4 | ) | | $ | — | | | $ | 5.1 | |
| | | | | | | | | | | | | |
December 31, 2007 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 0.3 | | | $ | 0.8 | | | $ | 0.2 | | | $ | (0.1 | ) | | $ | — | | | $ | 1.2 | | | $ | 0.3 | | | $ | 0.8 | | | $ | 0.2 | | | $ | (0.1 | ) | | $ | — | | | $ | 1.2 | |
Environmental | | | 0.1 | | | | 0.1 | | | | 1.6 | | | | (0.1 | ) | | | — | | | | 1.7 | | | | 0.1 | | | | 0.1 | | | | 1.6 | | | | (0.1 | ) | | | — | | | | 1.7 | |
Other(b) | | | 0.3 | | | | — | | | | — | | | | (0.3 | ) | | | — | | | | — | | | | 0.3 | | | | — | | | | — | | | | (0.3 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 0.7 | | | $ | 0.9 | | | $ | 1.8 | | | $ | (0.5 | ) | | $ | — | | | $ | 2.9 | | | $ | 0.7 | | | $ | 0.9 | | | $ | 1.8 | | | $ | (0.5 | ) | | $ | — | | | $ | 2.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2006 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 0.3 | | | $ | 0.3 | | | $ | — | | | $ | (0.3 | ) | | $ | — | | | $ | 0.3 | | | $ | 0.3 | | | $ | 0.3 | | | $ | — | | | $ | (0.3 | ) | | $ | — | | | $ | 0.3 | |
Environmental | | | 0.1 | | | | — | | | | — | | | | — | | | | — | | | | 0.1 | | | | 0.1 | | | | — | | | | — | | | | — | | | | — | | | | 0.1 | |
Other(b) | | | — | | | | 0.3 | | | | — | | | | — | | | | — | | | | 0.3 | | | | — | | | | 0.3 | | | | — | | | | — | | | | — | | | | 0.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 0.4 | | | $ | 0.6 | | | $ | — | | | $ | (0.3 | ) | | $ | — | | | $ | 0.7 | | | $ | 0.4 | | | $ | 0.6 | | | $ | — | | | $ | (0.3 | ) | | $ | — | | | $ | 0.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2005 | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 0.3 | | | $ | 0.1 | | | $ | — | | | $ | — | | | $ | (0.1 | ) | | $ | 0.3 | | |
Environmental | | | — | | | | 0.2 | | | | — | | | | (0.1 | ) | | | — | | | | 0.1 | | |
Other(b) | | | 1.3 | | | | — | | | | — | | | | (1.3 | ) | | | — | | | | — | | |
| | | | | | | | | | | | | | |
| | $ | 1.6 | | | $ | 0.3 | | | $ | — | | | $ | (1.4 | ) | | $ | (0.1 | ) | | $ | 0.4 | | |
| | | | | | | | | | | | | | |
| | |
(a) | | Related to acquisition of certain subsidiaries of Momentum Energy Group, Inc. |
|
(b) | | Principally consists of other contingency liabilities, which are included in other current liabilities. |
170179
Discovery Producer Services LLC
Consolidated Financial Statements
For the Years Ended December 31, 2008, 2007 2006 and 20052006
171180
Report of Independent Registered Public Accounting Firm
To the Management Committee of
Discovery Producer Services LLC
We have audited the accompanying consolidated balance sheets of Discovery Producer Services LLC as of December 31, 20072008 and 2006,2007, and the related consolidated statements of income, members’ capital, and cash flows for each of the three years in the period ended December 31, 2007.2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Discovery Producer Services LLC at December 31, 20072008 and 2006,2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007,2008, in conformity with U.S. generally accepted accounting principles.
As described in Note 4, effective December 31, 2005, Discovery Producer Services LLC adopted Financial Accounting Standards Board Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations.
/s/ Ernst & Young&Young LLP
Tulsa, Oklahoma
February 25, 200823, 2009
172181
DISCOVERY PRODUCER SERVICES LLC
CONSOLIDATED BALANCE SHEETS
| | | | | | | | |
| | December 31, | |
| | 2008 | | | 2007 | |
| | (In thousands) | |
|
ASSETS |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 42,052 | | | $ | 38,509 | |
Trade accounts receivable: | | | | | | | | |
Affiliate | | | 202 | | | | 22,467 | |
Other | | | 1,899 | | | | 5,847 | |
Insurance receivable | | | 3,373 | | | | 5,692 | |
Inventory | | | 519 | | | | 483 | |
Other current assets | | | 2,933 | | | | 5,037 | |
| | | | | | | | |
Total current assets | | | 50,978 | | | | 78,035 | |
Restricted cash | | | 3,470 | | | | 6,222 | |
Property, plant, and equipment, net | | | 370,482 | | | | 368,228 | |
| | | | | | | | |
Total assets | | $ | 424,930 | | | $ | 452,485 | |
| | | | | | | | |
|
LIABILITIES AND MEMBERS’ CAPITAL |
Current liabilities: | | | | | | | | |
Accounts payable: | | | | | | | | |
Affiliate | | $ | 3,125 | | | $ | 8,106 | |
Other | | | 34,779 | | | | 17,617 | |
Accrued liabilities | | | 5,714 | | | | 6,439 | |
Other current liabilities | | | 1,616 | | | | 1,658 | |
| | | | | | | | |
Total current liabilities | | | 45,234 | | | | 33,820 | |
Noncurrent accrued liabilities | | | 19,771 | | | | 12,216 | |
Members’ capital | | | 359,925 | | | | 406,449 | |
| | | | | | | | |
Total liabilities and members’ capital | | $ | 424,930 | | | $ | 452,485 | |
| | | | | | | | |
See accompanying notes to consolidated financial statements.
182
DISCOVERY PRODUCER SERVICES LLC
CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | | Years Ended December 31, | |
| | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | | | (In thousands) | | | | | (In thousands) | |
|
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Product sales: | | | | | | | | | | | | | | | | | | | | | | | | |
Affiliate | | $ | 216,889 | | | $ | 148,385 | | | $ | 70,848 | | | $ | 207,706 | | | $ | 216,889 | | | $ | 148,385 | |
Third-party | | | 5,251 | | | | — | | | | 4,271 | | | | 1,324 | | | | 5,251 | | | | — | |
Gas and condensate transportation services: | | | | | | | | | | | | | | | | | | | | | | | | |
Affiliate | | | 979 | | | | 3,835 | | | | 2,104 | | | | 782 | | | | 979 | | | | 3,835 | |
Third-party | | | 15,553 | | | | 14,668 | | | | 13,302 | | | | 13,308 | | | | 15,553 | | | | 14,668 | |
Gathering and processing services: | | | | | | | | | | | | | | | | | | | | | | | | |
Affiliate | | | 3,092 | | | | 8,605 | | | | 3,912 | | | | 1,506 | | | | 3,092 | | | | 8,605 | |
Third-party | | | 17,767 | | | | 19,473 | | | | 25,806 | | | | 12,709 | | | | 17,767 | | | | 19,473 | |
Other revenues | | | 1,141 | | | | 2,347 | | | | 2,502 | | | | 3,913 | | | | 1,141 | | | | 2,347 | |
| | | | | | | | | | | | | | |
Total revenues | | | 260,672 | | | | 197,313 | | | | 122,745 | | | | 241,248 | | | | 260,672 | | | | 197,313 | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Product cost and shrink replacement: | | | | | | | | | | | | | | | | | | | | | | | | |
Affiliate | | | 93,722 | | | | 66,890 | | | | 19,103 | | | | 83,576 | | | | 93,722 | | | | 66,890 | |
Third-party | | | 61,982 | | | | 52,662 | | | | 45,364 | | | | 63,422 | | | | 61,982 | | | | 52,662 | |
Operating and maintenance expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Affiliate | | | 5,579 | | | | 5,276 | | | | 3,739 | | | | 8,836 | | | | 5,579 | | | | 5,276 | |
Third-party | | | 23,409 | | | | 17,773 | | | | 6,426 | | | | 27,834 | | | | 23,409 | | | | 17,773 | |
Depreciation and accretion | | | 25,952 | | | | 25,562 | | | | 24,794 | | | | 21,324 | | | | 25,952 | | | | 25,562 | |
Taxes other than income | | | 1,330 | | | | 1,114 | | | | 1,151 | | | | 1,439 | | | | 1,330 | | | | 1,114 | |
General and administrative expenses — affiliate | | | 2,280 | | | | 2,150 | | | | 2,053 | | | | 4,500 | | | | 2,280 | | | | 2,150 | |
Other (income) expense, net | | | 534 | | | | 283 | | | | (33 | ) | | | (3,511 | ) | | | 534 | | | | 283 | |
| | | | | | | | | | | | | | |
Total costs and expenses | | | 214,788 | | | | 171,710 | | | | 102,597 | | | | 207,420 | | | | 214,788 | | | | 171,710 | |
| | | | | | | | | | | | | | |
Operating income | | | 45,884 | | | | 25,603 | | | | 20,148 | | | | 33,828 | | | | 45,884 | | | | 25,603 | |
Interest income | | | (1,799 | ) | | | (2,404 | ) | | | (1,685 | ) | | | (650 | ) | | | (1,799 | ) | | | (2,404 | ) |
Foreign exchange (gain) loss | | | (388 | ) | | | (2,076 | ) | | | 1,005 | | | | 78 | | | | (388 | ) | | | (2,076 | ) |
| | | | | | | | | | | | | | |
Income before cumulative effect of change in accounting principle | | | 48,071 | | | | 30,083 | | | | 20,828 | | |
Cumulative effect of change in accounting principle | | | — | | | | — | | | | (176 | ) | |
| | | | | | | | |
Net income | | $ | 48,071 | | | $ | 30,083 | | | $ | 20,652 | | | $ | 34,400 | | | $ | 48,071 | | | $ | 30,083 | |
| | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
173183
DISCOVERY PRODUCER SERVICES LLC
CONSOLIDATED BALANCE SHEETSSTATEMENT OF MEMBERS’ CAPITAL
| | | | | | | | |
| | December 31, | |
| | 2007 | | | 2006 | |
| | (In thousands) | |
|
ASSETS |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 38,509 | | | $ | 37,583 | |
Trade accounts receivable: | | | | | | | | |
Affiliate | | | 22,467 | | | | 11,986 | |
Other | | | 5,847 | | | | 6,838 | |
Insurance receivable | | | 5,692 | | | | 12,623 | |
Inventory | | | 483 | | | | 576 | |
Other current assets | | | 5,037 | | | | 4,235 | |
| | | | | | | | |
Total current assets | | | 78,035 | | | | 73,841 | |
Restricted cash | | | 6,222 | | | | 28,773 | |
Property, plant, and equipment, net | | | 368,228 | | | | 355,304 | |
| | | | | | | | |
Total assets | | $ | 452,485 | | | $ | 457,918 | |
| | | | | | | | |
LIABILITIES AND MEMBERS’ CAPITAL |
Current liabilities: | | | | | | | | |
Accounts payable: | | | | | | | | |
Affiliate | | $ | 8,106 | | | $ | 7,017 | |
Other | | | 17,617 | | | | 23,619 | |
Accrued liabilities | | | 6,439 | | | | 5,119 | |
Deposit held for construction | | | — | | | | 3,322 | |
Other current liabilities | | | 1,658 | | | | 1,483 | |
| | | | | | | | |
Total current liabilities | | | 33,820 | | | | 40,560 | |
Noncurrent accrued liabilities | | | 12,216 | | | | 3,728 | |
Commitments and contingent liabilities (Note 7) | | | | | | | | |
Members’ capital | | | 406,449 | | | | 413,630 | |
| | | | | | | | |
Total liabilities and members’ capital | | $ | 452,485 | | | $ | 457,918 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | Williams
| | | | | | | | | | |
| | Williams
| | | Partners
| | | DCP Assets
| | | | | | | |
| | Energy,
| | | Operating
| | | Holding,
| | | | | | | |
| | L.L.C. | | | LLC | | | LP | | | Total | | | | |
|
Balance, December 31, 2005 | | $ | 87,806 | | | $ | 170,532 | | | $ | 155,298 | | | $ | 413,636 | | | | | |
Contributions | | | 800 | | | | 1,600 | | | | 11,109 | | | | 13,509 | | | | | |
Distributions | | | (10,798 | ) | | | (16,400 | ) | | | (16,400 | ) | | | (43,598 | ) | | | | |
Net income | | | 6,017 | | | | 12,033 | | | | 12,033 | | | | 30,083 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2006 | | | 83,825 | | | | 167,765 | | | | 162,040 | | | | 413,630 | | | | | |
Contributions | | | — | | | | — | | | | 3,920 | | | | 3,920 | | | | | |
Distributions | | | (7,233 | ) | | | (28,270 | ) | | | (23,669 | ) | | | (59,172 | ) | | | | |
Net income | | | 2,602 | | | | 26,241 | | | | 19,228 | | | | 48,071 | | | | | |
Sale of Williams Energy, L.L.C.’s 20% interest to Williams Partners Operating LLC | | | (79,194 | ) | | | 79,194 | | | | — | | | | — | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2007 | | | — | | | | 244,930 | | | | 161,519 | | | | 406,449 | | | | | |
Contributions | | | — | | | | 5,700 | | | | 7,376 | | | | 13,076 | | | | | |
Distributions | | | — | | | | (56,400 | ) | | | (37,600 | ) | | | (94,000 | ) | | | | |
Net income | | | — | | | | 20,641 | | | | 13,759 | | | | 34,400 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2008 | | $ | — | | | $ | 214,871 | | | $ | 145,054 | | | $ | 359,925 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
174184
DISCOVERY PRODUCER SERVICES LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | | Years Ended December 31, | |
| | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | (In thousands) | | | (In thousands) | |
|
OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 48,071 | | | $ | 30,083 | | | $ | 20,652 | | | $ | 34,400 | | | $ | 48,071 | | | $ | 30,083 | |
Cumulative effect of change in accounting principle | | | — | | | | — | | | | 176 | | |
Adjustments to reconcile to cash provided by operations: | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and accretion | | | 25,952 | | | | 25,562 | | | | 24,794 | | | | 21,324 | | | | 25,952 | | | | 25,562 | |
Net Loss on disposal of equipment | | | 603 | | | | — | | | | — | | |
Net loss on disposal of equipment | | | | 175 | | | | 603 | | | | — | |
Cash provided (used) by changes in assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Trade accounts receivable | | | (9,389 | ) | | | 26,599 | | | | (35,263 | ) | | | 26,213 | | | | (9,389 | ) | | | 26,599 | |
Insurance receivable | | | 6,931 | | | | (12,147 | ) | | | (476 | ) | | | 2,319 | | | | 6,931 | | | | (12,147 | ) |
Inventory | | | 93 | | | | 348 | | | | (84 | ) | | | (36 | ) | | | 93 | | | | 348 | |
Other current assets | | | (802 | ) | | | (1,911 | ) | | | (1,012 | ) | | | 2,104 | | | | (802 | ) | | | (1,911 | ) |
Accounts payable | | | (7,540 | ) | | | (6,062 | ) | | | 29,355 | | | | 5,932 | | | | (7,540 | ) | | | (6,062 | ) |
Accrued liabilities | | | 1,320 | | | | (1,086 | ) | | | (7,992 | ) | | | (725 | ) | | | 1,320 | | | | (1,086 | ) |
Other current liabilities | | | (3,147 | ) | | | 2,070 | | | | 664 | | | | (52 | ) | | | (3,147 | ) | | | 2,070 | |
| | | | | | | | | | | | | | |
Net cash provided by operating activities | | | 62,092 | | | | 63,456 | | | | 30,814 | | | | 91,654 | | | | 62,092 | | | | 63,456 | |
INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Decrease (increase) in restricted cash | | | 22,551 | | | | 15,786 | | | | (44,559 | ) | |
Decrease in restricted cash | | | | 2,752 | | | | 22,551 | | | | 15,786 | |
Property, plant, and equipment: | | | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | (31,739 | ) | | | (33,516 | ) | | | (12,906 | ) | | | (16,188 | ) | | | (31,739 | ) | | | (33,516 | ) |
Proceeds from sale of property, plant and equipment | | | 649 | | | | — | | | | — | | | | — | | | | 649 | | | | — | |
Change in accounts payable — capital expenditures | | | 2,625 | | | | 568 | | | | (8,532 | ) | | | 6,249 | | | | 2,625 | | | | 568 | |
| | | | | | | | | | | | | | |
Net cash used by investing activities | | | (5,914 | ) | | | (17,162 | ) | | | (65,997 | ) | | | (7,187 | ) | | | (5,914 | ) | | | (17,162 | ) |
FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Distributions to members | | | (59,172 | ) | | | (43,598 | ) | | | (46,964 | ) | | | (94,000 | ) | | | (59,172 | ) | | | (43,598 | ) |
Capital contributions | | | 3,920 | | | | 13,509 | | | | 48,303 | | | | 13,076 | | | | 3,920 | | | | 13,509 | |
| | | | | | | | | | | | | | |
Net cash (used) provided by financing activities | | | (55,252 | ) | | | (30,089 | ) | | | 1,339 | | |
Net cash used by financing activities | | | | (80,924 | ) | | | (55,252 | ) | | | (30,089 | ) |
| | | | | | | | | | | | | | |
Increase (decrease) in cash and cash equivalents | | | 926 | | | | 16,205 | | | | (33,844 | ) | |
Increase in cash and cash equivalents | | | | 3,543 | | | | 926 | | | | 16,205 | |
Cash and cash equivalents at beginning of period | | | 37,583 | | | | 21,378 | | | | 55,222 | | | | 38,509 | | | | 37,583 | | | | 21,378 | |
| | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 38,509 | | | $ | 37,583 | | | $ | 21,378 | | | $ | 42,052 | | | $ | 38,509 | | | $ | 37,583 | |
| | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
175
DISCOVERY PRODUCER SERVICES LLC
CONSOLIDATED STATEMENT OF MEMBERS’ CAPITAL
| | | | | | | | | | | | | | | | | | | | |
| | | | | Williams
| | | | | | | | | | |
| | Williams
| | | Partners
| | | DCP Assets
| | | Eni BB
| | | | |
| | Energy,
| | | Operating
| | | Holding,
| | | Pipelines
| | | | |
| | L.L.C. | | | LLC | | | LP | | | LLC | | | Total | |
| | (In thousands) | |
|
Balance at December 31, 2004 | | $ | 195,822 | | | $ | — | | | $ | 130,540 | | | $ | 65,283 | | | $ | 391,645 | |
Contributions | | | 16,269 | | | | 24,400 | | | | 7,634 | | | | — | | | | 48,303 | |
Distributions | | | (30,030 | ) | | | (1,280 | ) | | | (15,654 | ) | | | — | | | | (46,964 | ) |
Net income | | | 8,063 | | | | 4,651 | | | | 6,909 | | | | 1,029 | | | | 20,652 | |
Sale of Eni 16.67% interest to Williams Energy L.L.C. | | | 66,312 | | | | — | | | | — | | | | (66,312 | ) | | | — | |
Sale of Williams Energy, L.L.C.’s 40% interest to Williams Partners Operating LLC | | | (142,761 | ) | | | 142,761 | | | | — | | | | — | | | | — | |
Sale of Williams Energy, L.L.C.’s 6.67% interest to DCP Assets Holding, LP | | | (25,869 | ) | | | — | | | | 25,869 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2005 | | | 87,806 | | | | 170,532 | | | | 155,298 | | | | — | | | | 413,636 | |
Contributions | | | 800 | | | | 1,600 | | | | 11,109 | | | | — | | | | 13,509 | |
Distributions | | | (10,798 | ) | | | (16,400 | ) | | | (16,400 | ) | | | — | | | | (43,598 | ) |
Net income | | | 6,017 | | | | 12,033 | | | | 12,033 | | | | — | | | | 30,083 | |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2006 | | | 83,825 | | | | 167,765 | | | | 162,040 | | | | — | | | | 413,630 | |
Contributions | | | — | | | | — | | | | 3,920 | | | | — | | | | 3,920 | |
Distributions | | | (7,233 | ) | | | (28,270 | ) | | | (23,669 | ) | | | — | | | | (59,172 | ) |
Net income | | | 2,602 | | | | 26,241 | | | | 19,228 | | | | — | | | | 48,071 | |
Sale of Williams Energy, L.L.C.’s 20% interest to Williams Partners Operating LLC | | | (79,194 | ) | | | 79,194 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2007 | | $ | — | | | $ | 244,930 | | | $ | 161,519 | | | $ | — | | | $ | 406,449 | |
| | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
176185
DISCOVERY PRODUCER SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
Note 1. | Organization and Description of Business |
Our company consists of Discovery Producer Services LLC or DPS,(DPS) a Delaware limited liability company formed on June 24, 1996, and its wholly owned subsidiary, Discovery Gas Transmission LLC or DGT,(DGT) a Delaware limited liability company also formed on June 24, 1996. DPS was formed for the purpose of constructing and operating a 600 million cubic feet per day(MMcf/d) cryogenic natural gas processing plant near Larose, Louisiana and a 32,000 barrel per day (bpd) natural gas liquids fractionator plant near Paradis, Louisiana. DGT was formed for the purpose of constructing and operating a natural gas pipeline from offshore deep water in the Gulf of Mexico to DPS’s gas processing plant in Larose, Louisiana. The pipelinemainline has a design capacity of600 MMcf/d and consists of approximately 173105 miles of pipe. DPS has since connected several laterals to the DGT pipeline to expand its presence in the Gulf. Herein, DPS and DGT are collectively referred to in the first person as “we,” “us” or “our” and sometimes as “the Company”.
Until April 14, 2005,At the beginning of the periods presented, we were owned 50%20% by Williams Energy, L.L.C. (a wholly owned subsidiary of The Williams Companies, Inc.), 33.33%40% by DCP Assets, LP (DCP) formerly Duke Energy Field Services,and 40% by Williams Partners Operating LLC and 16.67% by Eni BB Pipeline, LLC (Eni)(a wholly owned subsidiary of Williams Partners L.P) (WPZ). Williams Energy, L.L.C. is our operator. Herein, The Williams Companies, Inc. and its subsidiaries are collectively referred to as “Williams.”
On April 14, 2005, Williams acquired the 16.67% ownership interest in us, which was previously held by Eni. As a result, we became 66.67% owned by Williams and 33.33% owned by DCP.
On August 23, 2005, Williams Partners Operating LLC (a wholly owned subsidiary of Williams Partners L.P. (WPZ) acquired a 40% interest in us, which was previously held by Williams. In connection with this acquisition, Williams, DCP and WPZ amended our limited liability company agreement including provisions for (1) quarterly distributions of available cash, as defined in the amended agreement and (2) pursuit of capital projects for the benefit of one or more of our members when there is not unanimous consent. On December 22, 2005, DCP acquired a 6.67% interest in us, which was previously held by Williams. On June 28, 2007, WPZ acquired an additionalthe 20% interest in us from Williams. Atpreviously held by Williams Energy, L.L.C. Hence, at December 31, 2007, we are owned 60% by WPZ and 40% by DCP.
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Note 2. | Summary of Significant Accounting Policies |
Basis of Presentation. The consolidated financial statements have been prepared based upon accounting principles generally accepted in the United States and include the accounts of DPS and its wholly owned subsidiary, DGT. Intercompany accounts and transactions have been eliminated.
Reclassifications. Certain prior year amounts have been reclassified to conform with the current year presentation.
Use of Estimates. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Estimates and assumptions used in the calculation of asset retirement obligations are, in the opinion of management, significant to the underlying amounts included in the consolidated financial statements. It is reasonably possible that future events or information could change those estimates.
Cash and Cash Equivalents. CashThe cash and cash equivalents include demandequivalent balance is primarily invested in funds with high-quality, short term securities and time deposits, certificates of deposit and other marketableinstruments that are issued or guaranteed by the U.S. government. These securities withhave maturities of three months or less when acquired.
Trade Accounts Receivable. Trade accounts receivable are carried on a gross basis, with no discounting, less an allowance for doubtful accounts. NoWe do not recognize an allowance for doubtful accounts is recognized at the time the revenue that generates the accounts receivable is recognized. We estimate the allowance for doubtful accounts
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
based on existing economic conditions, the financial condition of the customers, and the amount and age of past due accounts. Receivables are considered past due if full payment is not received by the contractual due date. Past due accounts are generally written off against the allowance for doubtful accounts only after all collection attempts have been exhausted. There was no allowance for doubtful accounts at December 31, 20072008 and 2006.2007.
Insurance Receivable. Hurricane Katrina damaged our pipeline and onshore facilities in 2005, and Hurricane Ike damaged the 30” mainline and 18” lateral in 2008. Expenditures incurred for the repair of the pipeline and onshore facilities damaged by Hurricane Katrina in 2005 and damage to the Tahiti steel catenary riser (SCR),these damages which are probable offor recovery when incurred are recorded as insurance receivable. ExpendituresWe expense
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DISCOVERY PRODUCER SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
expenditures up to the insurance deductible ($6.4 million in 2008), amounts not covered by insurance ($2.0 million in 2008) and amounts subsequently determined not to be recoverable are expensed.recoverable.
Gas Imbalances. In the course of providing transportation services to customers, DGT may receive different quantities of gas from shippers than the quantities delivered on behalf of those shippers. This results in gas transportation imbalance receivables and payables which are recovered or repaid in cash, based on market-based prices, or through the receipt or delivery of gas in the future. Imbalance receivables and payables are included in Other current assets and Other current liabilities in the Consolidated Balance Sheets. Imbalance receivables are valued based on the lower of the current market prices or currentweighted average cost of natural gas in the system. Imbalance payables are valued at current market prices. Settlement of imbalances requires agreement between the pipelines and shippers as to allocations of volumes to specific transportation contracts and the timing of delivery of gas based on operational conditions. In accordancePursuant to a settlement with its tariff, DGTour shippers issued by the Federal Energy Regulatory Commission on February 5, 2008, if a cash-out refund is requireddue and payable to account for this imbalance (cash-out) liability/receivable and refund or invoice the excess or deficiency when the cumulative amount exceeds $400,000. To the extent that this difference, ata shipper during any year end, is less than $400,000, suchpursuant to Transporter’s FERC Gas Tariff, shipper will be deemed to have immediately assigned its right to the refund amount would carry forward and be included in the cumulative computation of the difference evaluated at the following year end.to us.
Inventory. Inventory includes fractionated products at our Paradis facility and is carried at the lower of cost or market. Cost is determined based on the weighted average natural gas shrink replacement cost.
Restricted Cash. Restricted cash within non-current assets relates to escrow funds contributed by our members for the construction of the Tahiti pipeline lateral expansion. The restricted cash is classified as non-current because the funds will be used to construct a long-term asset. The restricted cash is primarily invested in short-term money market accounts with financial institutions.
Property, Plant and Equipment. Property, plant and equipment are carriedis recorded at cost. We base the carrying value of these assets on estimates, assumptions and judgments relative to capitalized costs, useful lives and salvage values. The natural gas and natural gas liquids maintained in the pipeline facilities necessary for their operation (line fill) are included in property, plant and equipment.
Depreciation of DPS’s facilitiesproperty, plant and equipment is computed primarily usingprovided on a straight-line basis over the straight-line method with25-year lives. Depreciationestimated useful lives of DGT’s facilities25 to 35 years. Expenditures for maintenance and repairs are expensed as incurred. Expenditures that extend the useful lives of the assets or increase their functionality are capitalized. The cost of property, plant and equipment sold or retired and the related accumulated depreciation is computed usingremoved from the straight-line method with15-year lives.accounts in the period of sale or disposition. Gains and losses on the disposal of property, plant and equipment are recorded in the Statements of Income.
We record an asset and a liability equal to the present value of each expected future asset retirement obligation (ARO). The ARO asset is depreciated in a manner consistent with the depreciation of the underlying physical asset. We measure changes in the liability due to passage of time by applying an interest method of allocation. This amount is recognized as an increase in the carrying amount of the liability and as a corresponding accretion expense included in operating income.
Revenue Recognition. Revenue for sales of products areis recognized in the period of delivery, and revenues from the gathering, transportation and processing of gas are recognized in the period the service is provided based on contractual terms and the related natural gas and liquid volumes. DGT is subject to Federal Energy Regulatory Commission (FERC) regulations, and accordingly, certain revenues collected may be subject to possible refunds upon final orders in pending cases. DGT records rate refund liabilities considering
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
regulatory proceedings by DGT its and other third parties regulatory proceedings, advice of counsel, and estimated total exposure as discounted and risk weighted, as well asand collection and other risks. There were no rate refund liabilities accrued at December 31, 20072008 or 2006.2007.
Impairment of Long-Lived Assets. We evaluate long-lived assets for impairment on an individual asset or asset group basis when events or changes in circumstances indicate that, in our management’s judgment, the carrying value of such assets may not be recoverable. When such a determination has been made, we compare our management’s estimate of undiscounted future cash flows attributable to the assets to the carrying
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
value of the assets to determine whether the carrying value is recoverable. If the carrying value is not recoverable, we determine the amount of the impairment recognized in the financial statements by estimating the fair value of the assets and recording a loss for the amount that the carrying value exceeds the estimated fair value.
Accounting for Repair and Maintenance Costs. We expense the cost of maintenance and repairs as incurred. Expenditures that enhance the functionality or extend the useful lives of the assets are capitalized and depreciated over the remaining useful life of the asset.
Income Taxes. For federal tax purposes, we have elected to be treated as a partnership with each member being separately taxed on its ratable share of our taxable income. This election, to be treated as a pass-through entity, also applies to our wholly owned subsidiary, DGT. Therefore, no income taxes or deferred income taxes are reflected in the consolidated financial statements.
Foreign Currency Transactions. Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains or losses which are reflected in the Consolidated Statements of Income.
Recent Accounting Standards. In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements”. This Statement establishes a framework for fair value measurements in the financial statements by providing a definition of fair value, provides guidance on the methods used to estimate fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. In December 2007, the FASB issued proposed FASB Staff Position No. FAS 157-b deferring the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). SFAS No. 157 requires two distinct transition approaches; (i) cumulative-effect adjustment to beginning retained earnings for certain financial instrument transactions and (ii) prospectively as of the date of adoption through earnings or other comprehensive income, as applicable. On January 1, 2008, we adopted SFAS No. 157 with no impact to our Consolidated Financial Statements. SFAS No. 157 expands disclosures about assets and liabilities measured at fair value on a recurring basis effective beginning with the first quarter 2008 reporting.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115”. SFAS No. 159 establishes a fair value option permitting entities to elect to measure eligible financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The fair value option may be applied on aninstrument-by-instrument basis, is irrevocable and is applied only to the entire instrument. SFAS No. 159 is effective as of the beginning of the first fiscal year beginning after November 15, 2007, and should not be applied retrospectively to fiscal years beginning prior to the effective date. On the adoption date, an entity may elect the fair value option for eligible items existing at that date and the adjustment for the initial remeasurement of those items to fair value should be reported as a cumulative effect adjustment to the opening balance of retained earnings. Subsequent to
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
January 1, 2008, the fair value option can only be elected when a financial instrument or certain other item is entered into. On January 1, 2008, we adopted SFAS No. 159 but did not elect the fair value option for any existing eligible financial instruments or other items.
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Note 3. | Related Party Transactions |
We have various business transactions with our members and subsidiaries and affiliates of our members. Revenues include the following:
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| • | sales to Williams of NGLs to which we take title and excess gas at current market prices for the products and |
|
| • | processing and sales of natural gas liquids and transportation of gas and condensate for DCP’s affiliates, Texas Eastern Corporation and ConocoPhillips Company, |
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| • | and processing and transportation of gas and condensate for Eni.Company. |
The following table summarizes these related-party revenues during 2008, 2007 2006 and 2005.2006.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | | Years Ended December 31, | |
| | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | (In thousands) | | | (In thousands) | |
|
Williams | | $ | 217,012 | | | $ | 148,543 | | | $ | 70,848 | | | $ | 207,782 | | | $ | 217,012 | | | $ | 148,543 | |
Texas Eastern Corporation | | | 3,912 | | | | 12,282 | | | | 2,663 | | | | 1,953 | | | | 3,912 | | | | 12,282 | |
Eni* | | | — | | | | — | | | | 2,830 | | |
ConocoPhillips | | | 36 | | | | — | | | | 523 | | | | 259 | | | | 36 | | | | — | |
| | | | | | | | | | | | | | |
Total | | $ | 220,960 | | | $ | 160,825 | | | $ | 76,864 | | | $ | 209,994 | | | $ | 220,960 | | | $ | 160,825 | |
| | | | | | | | | | | | | | |
We have no employees. Pipeline and plant operations are performed under operation and maintenance agreements with Williams. Most costs for materials, services and other charges are third-party charges and are invoiced directly to us. Operating and maintenance expenses— affiliate includes the following:
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| • | direct payroll and employee benefit costs incurred on our behalf by Williams, and |
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| • | and rental expense resulting fromunder a10-year leasing agreement for pipeline capacity through 2015 from Texas Eastern Transmission, LP (an affiliate of DCP), as part of our market expansion project which began in June 2005. |
Product costs and shrink replacement— affiliate includes natural gas purchases from Williams for fuel and shrink requirements made at market rates at the time of purchase.
General and administrative expenses — affiliate includes a monthly operation and management fee paid to Williams to cover the cost of accounting services, computer systems and management services provided to us.
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DISCOVERY PRODUCER SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We also pay Williams a project management fee to cover the cost of managing capital projects. This fee is determined on a project by project basis and is capitalized as part of the construction costs. A summary of the payroll costs and project fees charged to us by Williams and capitalized are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | | Years Ended December 31, | |
| | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | (In thousands) | | | (In thousands) | |
|
Capitalized labor | | $ | 222 | | | $ | 373 | | | $ | 115 | | | $ | 317 | | | $ | 222 | | | $ | 373 | |
Capitalized project fee | | | 651 | | | | 538 | | | | 351 | | | | 375 | | | | 651 | | | | 538 | |
| | | | | | | | | | | | | | |
| | $ | 873 | | | $ | 911 | | | $ | 466 | | | $ | 692 | | | $ | 873 | | | $ | 911 | |
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Note 4. | Property, Plant, and Equipment |
Property, plant, and equipment consisted of the following at December 31, 20072008 and 2006:2007:
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | Estimated
| |
| | Years Ended December 31, | | | Years Ended December 31, | | Depreciable
| |
| | 2007 | | 2006 | | | 2008 | | 2007 | | Lives | |
| | (In thousands) | | | (In thousands) | |
|
Property, plant, and equipment: | | | | | | | | | | | | | | | | | | | | |
Construction work in progress | | $ | 66,550 | | | $ | 37,259 | | | $ | 76,302 | | | $ | 66,550 | | | | | |
Buildings | | | 4,950 | | | | 4,434 | | | | 5,054 | | | | 4,950 | | | | 25 — 35 years | |
Land and land rights | | | 2,491 | | | | 2,491 | | | | 5,575 | | | | 2,491 | | | | 0 — 35 years | |
Transportation lines | | | 311,368 | | | | 303,283 | | | | 305,172 | | | | 311,368 | | | | 25 — 35 years | |
Plant and other equipment | | | 200,722 | | | | 200,990 | | | | 216,189 | | | | 200,722 | | | | 25 — 35 years | |
| | | | | | | | | | |
Total property, plant, and equipment | | | 586,081 | | | | 548,457 | | | | 608,292 | | | | 586,081 | | | | | |
Less accumulated depreciation | | | 217,853 | | | | 193,153 | | | | 237,810 | | | | 217,853 | | | | | |
| | | | | | | | | | |
Net property, plant, and equipment | | $ | 368,228 | | | $ | 355,304 | | | $ | 370,482 | | | $ | 368,228 | | | | | |
| | | | | | | | | | |
Effective July 1, 2008, we revised our estimate of the useful lives of the Larose processing plant and the regulated pipeline and gathering system. The annual depreciation expense will decrease $13 million.
Commitments for construction and acquisition of property, plant, and equipment for the Tahiti pipeline lateral expansion are approximately $9$1.5 million at December 31, 2007.
Effective December 31, 2005, we adopted Financial Accounting Standards Board Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations.” This Interpretation clarifies that an entity is required to recognize a liability for the fair value of a conditional ARO when incurred if the liability’s fair value can be reasonably estimated. The Interpretation clarifies when an entity would have sufficient information to reasonably estimate the fair value of an ARO. As required by the new standard, we reassessed the estimated remaining life of all our assets with a conditional ARO. We recorded additional liabilities totaling $327,000 equal to the present value of expected future asset retirement obligations at December 31, 2005. The liabilities are slightly offset by a $151,000 increase in property, plant, and equipment, net of accumulated depreciation, recorded as if the provisions of the Interpretation had been in effect at the date the obligation was incurred. The net $176,000 reduction to earnings is reflected as a cumulative effect of a change in accounting principle for the year ended 2005.2008.
Our asset retirement obligations relate primarily to our offshore platform and pipelines and our onshore processing and fractionation facilities. At the end of the useful life of each respective asset, we are legally or contractually obligated to dismantle the offshore platform, properly abandon the offshore pipelines, remove the onshore facilities and related surface equipment and restore the surface of the property.
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DISCOVERY PRODUCER SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A rollforward of our asset retirement obligation for 20072008 and 20062007 is presented below.
| | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | | Years Ended December 31, | |
| | 2007 | | 2006 | | | 2008 | | 2007 | |
| | (In thousands) | | | (In thousands) | |
|
Balance at January 1 | | $ | 3,728 | | | $ | 1,121 | | | $ | 12,118 | | | $ | 3,728 | |
Accretion expense | | | 422 | | | | 135 | | | | 1,082 | | | | 422 | |
Estimate revisions | | | 7,554 | | | | 2,472 | | | | 3,327 | | | | 7,554 | |
Liabilities incurred | | | 414 | | | | — | | | | 3,157 | | | | 414 | |
| | | | | | | | | | |
Balance at December 31 | | $ | 12,118 | | | $ | 3,728 | | | $ | 19,684 | | | $ | 12,118 | |
| | | | | | | | | | |
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Note 5. | Leasing Activities |
We lease the land on which the Paradis fractionator plant and the Larose processing plant are located. The initial term of each lease is 20 years with renewal options for an additional 30 years. We entered intoalso have a ten-year leasing agreement for pipeline capacity from Texas Eastern Transmission, LP as part of our market expansion project which began in June 2005. The leasethat includes renewal options and options to increase capacity which would also increase rentals. On September 12, 2008, we filed an amendment to the capacity lease agreement increasing the leased capacity and resulting in a lease payment increase of $380,000 annually. The future minimum annual rentals under these non-cancelable leases as of December 31, 20072008 are payable as follows:
| | | | | | | | |
| | (In thousands) | | | (In thousands) | |
|
2008 | | $ | 858 | | |
2009 | | | 858 | | | $ | 1,241 | |
2010 | | | 858 | | | | 1,241 | |
2011 | | | 858 | | | | 1,241 | |
2012 | | | 858 | | | | 1,241 | |
2013 | | | | 1,241 | |
Thereafter | | | 2,388 | | | | 2,105 | |
| | | | | | |
| | $ | 6,678 | | | $ | 8,310 | |
| | | | | | |
Total rent expense for 2008, 2007 2006 and 2005,2006, including a cancelable platform space lease and month-to-month leases, was $1.4$1.6 million, $1.4 million and $1.1$1.4 million, respectively.
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Note 6. | Financial Instruments and Concentrations of Credit Risk |
Financial Instruments Fair Value
We used the following methods and assumptions to estimate the fair value of financial instruments:
Cash and cash equivalents. The carrying amounts reported in the consolidated balance sheets approximate fair value due to the short-term maturity of these instruments.
Restricted cash. The carrying amounts reported in the consolidated balance sheets approximate fair value as these instruments have interest rates approximating market.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2007 | | 2006 | | | 2008 | | 2007 | |
| | Carrying
| | Fair
| | Carrying
| | Fair
| | | Carrying
| | Fair
| | Carrying
| | Fair
| |
| | Amount | | Value | | Amount | | Value | | | Amount | | Value | | Amount | | Value | |
| | (In thousands) | | | (In thousands) | |
|
Cash and cash equivalents | | $ | 38,509 | | | $ | 38,509 | | | $ | 37,583 | | | $ | 37,583 | | | $ | 42,052 | | | $ | 42,052 | | | $ | 38,509 | | | $ | 38,509 | |
Restricted cash | | | 6,222 | | | | 6,222 | | | | 28,773 | | | | 28,773 | | | | 3,470 | | | | 3,470 | | | | 6,222 | | | | 6,222 | |
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DISCOVERY PRODUCER SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Concentrations of Credit Risk
Our cash equivalentsequivalent balance is primarily invested in funds with high-quality, short-term securities and restricted cash consist of high-quality securities placed with various major financial institutions with credit ratings atinstruments that are issued or above AAguaranteed by Standard & Poor’s or Aa by Moody’s Investor’s Service.the U.S. government.
At December 31, 2007 and 2006,2008, substantially all of our customer accounts receivable result from gas transmission services provided for and natural gas liquids sales to our two largest three customers. This concentration of customers may impact our overall credit risk either positively or negatively, in that these entities may be similarly affected by industry-wide changes in economic or other conditions. As a general policy, collateral is not required for receivables, but customers’ financial condition and credit worthiness are evaluated regularly. Our credit policy and the relatively short duration of receivables mitigate the risk of uncollected receivables. We did not incur any credit losses on receivables during 20072008 and 2006.2007.
Major Customers. Williams accounted for approximately $208.0 million (86%), $217.0 million (83%), $149.0$149.8 million (75%), $70.8 million (58%) respectively, of our total revenues in 2008, 2007 2006 and 2005.2006. These revenues were for the sale of NGLs received as compensation under processing contracts with third-party producers.
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Note 7. | Rate and Regulatory Matters and Contingent Liabilities |
Note 7. Rate and Regulatory Matters
Rate and Regulatory Matters. Annually, DGT files a request with the FERC for alost-and-unaccounted-for gas percentage to be allocated to shippers for the upcoming fiscal year beginning July 1. On May 31, 2007,30, 2008, DGT filed to maintain alost-and-unaccounted-for percentage of zero percent for the perioduntil July 1, 2007 to June 30, 20082009 and to retain the 20062007 net system gains of $1.8$2.3 million that are unrelated to thelost-and-unaccounted-for gas over recovered from its shippers. By Order dated June 28, 200726, 2008 the filing was approved. The approval was subject to a 30 day30-day protest period, which passed without protest. As of December 31, 2007,2008, and 2006,2007, DGT has deferred amounts of $5.8$5.5 million and $4.4$5.8 million, respectively, included in current accrued liabilities in the accompanying Consolidated Balance Sheets representingSheets. The December 31, 2008 balance includes 2008 unrecognized net system gains. The December 31, 2007 balance represents amounts collected from customers pursuant to prior years’ lost and unaccounted for gas percentage and unrecognized net system gains.
On November 25, 2003,October 16, 2008, the FERC issued Order No. 2004 promulgating new717, implementing standards of conduct applicable to natural gas pipelines. On August 10, 2004, the FERC granted DGT a partial exemption allowing the continuation of DGT’s current ownership structurefor interstate pipelines and management subject to compliance with manymarketing function employees of the other standardsinterstate pipeline or of conduct. On November 17, 2006, the United States Court of Appeals for the District of Columbia Circuit vacated and remanded Order No. 2004 as applied to interstate natural gas pipelines and theirpipeline’s affiliates. On January 9, 2007, the FERC issued an Interim Rule. The Interim Rule re-promulgates, on an interim basis, the standards of conduct preclude an interstate pipeline from any actions that were not challenged before the Court.might provide any of its or its affiliate’s marketing function employees with an unfair market advantage. The Interim Rule applies to the relationship between interstate natural gas pipelines and their marketing and brokering affiliates, but not necessarily to their other affiliates, such as gatherers, processors or exploration and production companies. On March 21, 2007 the FERC issued an Order on Clarification and Rehearing of the Interim Rule. The FERC clarified that the interim standards of conduct only apply to natural gas transmission providers that are affiliated with a marketing or brokering entity that conducts transportation transactions on such natural gas transmission provider’s pipeline. Currently DGT’s marketing or brokering affiliates do not conduct transmission transactions on DGT. On January 18, 2007, the FERC issued a Notice of Proposed Rulemaking to propose permanent regulations regardingDGT’s pipeline; therefore, the standards of conduct. Comments were due April 4, 2007. The FERC may enact a final rule at any time. At this stage, it cannot be determined how a final rule may or mayconduct are not affect us (or DGT).currently applicable to DGT.
On November 16, 2007, DGT filed a petition for approval of a settlement in lieu of a general rate change filing with FERC. FERC issued a Notice of DGT’s filing setting a deadline for comments on November 27, 2007. One shipper, ExxonMobil Gas & Power Marketing Company, filed a protest. On December 3, DGT filed a response to ExxonMobil’s protest. On December 18, ExxonMobil filed a Motion for Leave to Answer and Answer and DGT responded
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DISCOVERY PRODUCER SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
on December 20. On February 5, 2008, the FERC issued an order approving the settlement as to all parties except the protesting ExxonMobil Gas & Power Marketing Company. The settlement allowed Discovery to recognize the amounts collected from customers pursuant to prior years lost and unaccounted for gas of $3.5 million. The order is subject to rehearing until March 6, 2008. The settlement is not final until the order isnow final and no longer subject to rehearing.
Pogo Producing Company. On January 16, 2006, DPS and DGT received notice of a claim by Pogo Producing Company (Pogo) relating to the results of a Pogo audit performed first in April 2004 and then continued through August 2005. Pogo claimed that DPS and DGT overcharged Pogo and its working interest owners approximately $600,000 relating to condensate transportation and handling during 2000 – 2005. The underlying agreements limit audit claims to a two-year period from the date of the audit. DPS and DGT disputed the validity of the claim. On November 2, 2007, the claim was settled for $300,000. In connection withimplemented the settlement Pogo assigned production module equipment to us,rates and we assumed the associated asset retirement obligation. No gain or loss was recognized.surcharges effective January 1, 2008.
Environmental Matters. We are subject to extensive federal, state, and local environmental laws and regulations which affect our operations related to the construction and operation of our facilities. Appropriate governmental authorities may enforce these laws and regulations with a variety of civil and criminal enforcement measures, including monetary penalties, assessment and remediation requirements and injunctions as to future compliance. We have not been notified and are not currently aware of any material noncompliance under the various environmental laws and regulations.
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DISCOVERY PRODUCER SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other. We are party to various other claims, legal actions and complaints arising in the ordinary course of business. Litigation, arbitration and environmental matters are subject to inherent uncertainties. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the results of operations in the period in which the ruling occurs. Management, including internal counsel, currently believes that the ultimate resolution of the foregoing matters, taken as a whole, and after consideration of amounts accrued, insurance coverage or other indemnification arrangements, will not have a material adverse effect upon our future financial position.
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Note 8. | Subsequent Events |
On January 30, 2008, we made quarterly cash distributions totaling $28.0 million to our members.
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DCP East Texas Holdings, LLC
Consolidated Financial Statements
For the Years Ended
December 31, 2008, 2007 2006 and 20052006
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| | Deloitte & Touche LLP Suite 3600 555 Seventeenth Street Denver, CO80202-3942 USA |
| | |
| | Tel: +1 303 292 5400 Fax: +1 303 312 4000 www.deloitte.com |
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors of
DCP Midstream, LLC
Denver, Colorado
We have audited the accompanying consolidated balance sheets of DCP East Texas Holding,Holdings, LLC (formerly the East Texas Midstream Business) (the “Company”), as of December 31, 20072008 and 2006,2007, and the related consolidated statements of operations, changes in partners’ equity, and cash flows for each of the three years in the period ended December 31, 2007.2008. Our audits also included the financial statement schedule listed in the indexIndex at Item 15. These financial statements and 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 in accordance with auditing standards generally accepted in the United States of America. Those standards 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20072008 and 2006,2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007,2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered within relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
TheAs described in Note 1 to the consolidated financial statements, through July 1, 2007, the accompanying consolidated financial statements have been prepared from the separate records maintained by DCP Midstream, LLC and may not necessarily be indicative of the conditions that would have existed or the results of operations if the Company had been operated as an unaffiliated entity. Portions of certain expenses represent allocations made from, and are applicable to, DCP Midstream, LLC as a whole.
/s/ Deloitte & Touche LLP
Denver, Colorado
March 7, 20084, 2009
186194
DCP EAST TEXAS HOLDINGS, LLC
CONSOLIDATED BALANCE SHEETS
($ in millions)(millions)
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2007 | | 2006 | | | 2008 | | 2007 | |
|
ASSETS | ASSETS | ASSETS |
Current assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 4.8 | | | $ | — | | | $ | 13.9 | | | $ | 4.8 | |
Accounts receivable: | | | | | | | | | | | | | | | | |
Trade, net of allowance for doubtful accounts of $0.5 million and $0.2 million, respectively | | | 16.0 | | | | 30.1 | | |
Trade, net of allowance for doubtful accounts of $0.4 million and $0.5 million, respectively | | | | 14.1 | | | | 16.0 | |
Affiliates | | | 64.5 | | | | 0.1 | | | | 20.7 | | | | 64.5 | |
Other | | | 0.8 | | | | 0.8 | | | | 1.1 | | | | 0.8 | |
Other | | | 0.4 | | | | 0.1 | | | | 0.4 | | | | 0.4 | |
| | | | | | | | | | |
Total current assets | | | 86.5 | | | | 31.1 | | | | 50.2 | | | | 86.5 | |
Property, plant and equipment, net | | | 236.5 | | | | 228.3 | | | | 253.4 | | | | 236.5 | |
| | | | | | | | | | |
Total assets | | $ | 323.0 | | | $ | 259.4 | | | $ | 303.6 | | | $ | 323.0 | |
| | | | | | | | | | |
| LIABILITIES AND PARTNERS’ EQUITY | LIABILITIES AND PARTNERS’ EQUITY | LIABILITIES AND PARTNERS’ EQUITY |
Current liabilities: | | | | | | | | | | | | | | | | |
Accounts payable: | | | | | | | | | | | | | | | | |
Trade | | $ | 53.6 | | | $ | 44.4 | | | $ | 25.8 | | | $ | 53.6 | |
Affiliates | | | 1.5 | | | | 0.6 | | | | 2.4 | | | | 1.5 | |
Other | | | 2.9 | | | | 2.6 | | | | 0.9 | | | | 2.9 | |
Operating accrual | | | | 1.8 | | | | 1.3 | |
Capital spending accrual | | | | 5.1 | | | | 2.7 | |
Other | | | 7.7 | | | | 5.8 | | | | 2.4 | | | | 3.7 | |
| | | | | | | | | | |
Total current liabilities | | | 65.7 | | | | 53.4 | | | | 38.4 | | | | 65.7 | |
Deferred income taxes | | | 1.7 | | | | 1.8 | | | | 1.7 | | | | 1.7 | |
Other long-term liabilities | | | 0.5 | | | | 0.5 | | | | 0.6 | | | | 0.5 | |
| | | | | | | | | | |
Total liabilities | | | 67.9 | | | | 55.7 | | | | 40.7 | | | | 67.9 | |
Commitments and contingent liabilities Partners’ equity | | | 255.1 | | | | 203.7 | | |
Commitments and contingent liabilities | | | | | | | | | |
Partners’ equity | | | | 262.9 | | | | 255.1 | |
| | | | | | | | | | |
Total liabilities and partners’ equity | | $ | 323.0 | | | $ | 259.4 | | | $ | 303.6 | | | $ | 323.0 | |
| | | | | | | | | | |
See accompanying notesNotes to consolidated financial statements.Consolidated Financial Statements.
187195
DCP EAST TEXAS HOLDINGS, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in millions)(millions)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | | Years Ended December 31, | |
| | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
|
Operating revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Sales of natural gas, NGLs and condensate | | $ | 179.8 | | | $ | 177.7 | | | $ | 164.7 | | | $ | 202.8 | | | $ | 179.8 | | | $ | 177.7 | |
Sales of natural gas, NGLs and condensate to affiliates | | | 270.9 | | | | 286.6 | | | | 365.6 | | | | 313.7 | | | | 270.9 | | | | 286.6 | |
Transportation and processing services | | | 22.2 | | | | 21.9 | | | | 17.1 | | | | 28.7 | | | | 22.2 | | | | 21.9 | |
Transportation and processing services to affiliates | | | 0.1 | | | | 0.3 | | | | 0.3 | | | | 0.2 | | | | 0.1 | | | | 0.3 | |
Losses from non-trading derivative activity — affiliates | | | (0.1 | ) | | | (1.1 | ) | | | (1.7 | ) | | | (0.6 | ) | | | (0.1 | ) | | | (1.1 | ) |
| | | | | | | | | | | | | | |
Total operating revenues | | | 472.9 | | | | 485.4 | | | | 546.0 | | | | 544.8 | | | | 472.9 | | | | 485.4 | |
| | | | | | | | | | | | | | |
Operating costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Purchases of natural gas and NGLs | | | 357.8 | | | | 376.0 | | | | 418.8 | | | | 419.7 | | | | 357.8 | | | | 376.0 | |
Purchases of natural gas and NGLs from affiliates | | | 1.1 | | | | 9.3 | | | | 25.3 | | | | 0.1 | | | | 1.1 | | | | 9.3 | |
Operating and maintenance expense | | | 27.2 | | | | 24.4 | | | | 20.2 | | | | 34.5 | | | | 27.2 | | | | 24.4 | |
Depreciation expense | | | 15.8 | | | | 14.6 | | | | 14.0 | | | | 16.7 | | | | 15.8 | | | | 14.6 | |
General and administrative expense | | | 1.8 | | | | 0.2 | | | | 0.1 | | | | 0.7 | | | | 1.8 | | | | 0.2 | |
General and administrative expense — affiliate | | | 10.3 | | | | 11.3 | | | | 9.8 | | | | 8.5 | | | | 10.3 | | | | 11.3 | |
| | | | | | | | | | | | | | |
Total operating costs and expenses | | | 414.0 | | | | 435.8 | | | | 488.2 | | | | 480.2 | | | | 414.0 | | | | 435.8 | |
| | | | | | | | | | | | | | |
Operating income | | | 58.9 | | | | 49.6 | | | | 57.8 | | | | 64.6 | | | | 58.9 | | | | 49.6 | |
Interest income | | | 0.3 | | | | — | | | | — | | | | 0.4 | | | | 0.3 | | | | — | |
| | | | | | | | | | | | | | |
Income before income taxes | | | 59.2 | | | | 49.6 | | | | 57.8 | | | | 65.0 | | | | 59.2 | | | | 49.6 | |
Income tax expense | | | 0.7 | | | | 1.8 | | | | — | | | | 0.5 | | | | 0.7 | | | | 1.8 | |
| | | | | | | | | | | | | | |
Net income | | $ | 58.5 | | | $ | 47.8 | | | $ | 57.8 | | | $ | 64.5 | | | $ | 58.5 | | | $ | 47.8 | |
| | | | | | | | | | | | | | |
See accompanying notesNotes to consolidated financial statements.Consolidated Financial Statements.
188196
DCP EAST TEXAS HOLDINGS, LLC
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ EQUITY
($ in millions)(millions)
| | | | | | | | |
Balance, January 1, 2005 | | $ | 220.0 | | |
Net change in parent advances | | | (83.8 | ) | |
Net income | | | 57.8 | | |
| | | | |
Balance, December 31, 2005 | | | 194.0 | | |
Balance, January 1, 2006 | | | $ | 194.0 | |
Net change in parent advances | | | (38.1 | ) | | | (38.1 | ) |
Net income | | | 47.8 | | | | 47.8 | |
| | | | | | |
Balance, December 31, 2006 | | | 203.7 | | | | 203.7 | |
Net change in parent advances | | | (17.1 | ) | | | (17.1 | ) |
Contributions | | | 54.5 | | | | 54.5 | |
Distributions | | | (44.5 | ) | | | (44.5 | ) |
Net income | | | 58.5 | | | | 58.5 | |
| | | | | | |
Balance, December 31, 2007 | | $ | 255.1 | | | | 255.1 | |
Contributions | | | | 29.5 | |
Distributions | | | | (86.2 | ) |
Net income | | | | 64.5 | |
| | | | | | |
Balance, December 31, 2008 | | | $ | 262.9 | |
| | | | |
See accompanying notesNotes to consolidated financial statements.Consolidated Financial Statements.
189197
DCP EAST TEXAS HOLDINGS, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)(millions)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
|
OPERATING ACTIVITIES: | | | | | | | | | | | | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | |
Net income | | $ | 58.5 | | | $ | 47.8 | | | $ | 57.8 | | | $ | 64.5 | | | $ | 58.5 | | | $ | 47.8 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation expense | | | 15.8 | | | | 14.6 | | | | 14.0 | | | | 16.7 | | | | 15.8 | | | | 14.6 | |
Deferred income taxes | | | (0.1 | ) | | | 1.8 | | | | — | | | | (0.1 | ) | | | (0.1 | ) | | | 1.8 | |
Other, net | | | (0.1 | ) | | | 0.1 | | | | 0.1 | | | | (0.1 | ) | | | (0.1 | ) | | | 0.1 | |
Change in operating assets and liabilities which provided (used) cash: | | | | | | | | | | | | | | | | | | | | | | | | |
Accounts receivable | | | (50.6 | ) | | | 0.3 | | | | (16.9 | ) | | | 45.9 | | | | (50.6 | ) | | | 0.3 | |
Accounts payable | | | 10.2 | | | | (12.6 | ) | | | 33.1 | | | | (28.7 | ) | | | 10.2 | | | | (12.6 | ) |
Other current assets and liabilities | | | 2.9 | | | | (1.0 | ) | | | 1.8 | | | | (0.8 | ) | | | 2.9 | | | | (1.0 | ) |
Other non-current assets and liabilities | | | — | | | | (0.2 | ) | | | (0.1 | ) | | | — | | | | — | | | | (0.2 | ) |
| | | | | | | | | | | | | | |
Net cash provided by operating activities | | | 36.6 | | | | 50.8 | | | | 89.8 | | | | 97.4 | | | | 36.6 | | | | 50.8 | |
| | | | | | | | | | | | | | |
INVESTING ACTIVITIES: | | | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | |
Capital expenditures | | | (24.5 | ) | | | (12.8 | ) | | | (6.1 | ) | | | (31.6 | ) | | | (24.5 | ) | | | (12.8 | ) |
Proceeds from sales of assets | | | — | | | | 0.1 | | | | 0.1 | | | | — | | | | — | | | | 0.1 | |
| | | | | | | | | | | | | | |
Net cash used in investing activities | | | (24.5 | ) | | | (12.7 | ) | | | (6.0 | ) | | | (31.6 | ) | | | (24.5 | ) | | | (12.7 | ) |
| | | | | | | | | | | | | | |
FINANCING ACTIVITIES: | | | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | |
Net change in parent advances | | | (17.1 | ) | | | (38.1 | ) | | | (83.8 | ) | | | — | | | | (17.1 | ) | | | (38.1 | ) |
Distributions | | | (44.5 | ) | | | — | | | | — | | | | (86.2 | ) | | | (44.5 | ) | | | — | |
Contributions | | | 54.3 | | | | — | | | | — | | | | 29.5 | | | | 54.3 | | | | — | |
| | | | | | | | | | | | | | |
Net cash used in financing activities | | | (7.3 | ) | | | (38.1 | ) | | | (83.8 | ) | | | (56.7 | ) | | | (7.3 | ) | | | (38.1 | ) |
| | | | | | | | | | | | | | |
Net change in cash | | | 4.8 | | | | — | | | | — | | |
Cash, beginning of period | | | — | | | | — | | | | — | | |
Net change in cash and cash equivalents | | | | 9.1 | | | | 4.8 | | | | — | |
Cash and cash equivalents, beginning of period | | | | 4.8 | | | | — | | | | — | |
| | | | | | | | | | | | | | |
Cash, end of period | | $ | 4.8 | | | $ | — | | | $ | — | | |
Cash and cash equivalents, end of period | | | $ | 13.9 | | | $ | 4.8 | | | $ | — | |
| | | | | | | | | | | | | | |
See accompanying notesNotes to consolidated financial statements.Consolidated Financial Statements.
190198
DCP EAST TEXAS HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
1. | Description of Business and Basis of Presentation |
DCP East Texas Holdings, LLC, or East Texas, we, our, or us, is a joint venture formed in July 2007 engaged in the business of gathering, transporting, treating, compressing, processing, and fractionating natural gas and natural gas liquids, or NGLs. Our operations, located near Carthage, Texas, include a natural gas processing complex with a total capacity of 780 million cubic feet per day.day and a natural gas liquids fractionator. The facility is connected to our 845about 900 mile gathering system, as well as third party gathering systems. The complex is adjacent to our Carthage Hub, which delivers residue gas to interstate and intrastate pipelines. The Carthage Hub, with an aggregate delivery capacity of 1.5 billion cubic feet per day, acts as a key exchange point for the purchase and sale of residue gas.
East Texas is owned 75% by DCP Midstream, LLC, or Midstream, and 25% by DCP Midstream Partners, LP, or Partners. The consolidated financial statements include the accounts of East Texas and, prior to July 1, 2007, the operations, assets and liabilities contributed to us by Midstream, or the Business. This was a transaction between entities under common control; accordingly, our financial information includes the results for all periods presented. Midstream is a joint venture owned 50% by Spectra Energy Corp (which was spun off by Duke Energy Corporation on January 2, 2007) and 50% by ConocoPhillips. As of December 31, 2007,2008, Midstream owns a 35%an approximate 30% interest in Partners, includingwhich includes 100% of the general partner interest. Midstream directsis currently appointed as our business operations.operator and is responsible forday-to-day operation, maintenance and repair of our assets and the related managerial and administrative duties. East Texas does not currently, and does not expect to, have any employees.
The consolidated financial statements include the accounts of East Texas and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The consolidated financial statements of the Business were prepared from the separate records maintained by Midstream prior to July 1, 2007 and may not necessarily be indicative of the conditions that would have existed, or the results of operations, if the Business had been operated as an unaffiliated entity. Because a direct ownership relationship did not exist among all the various assets comprising East Texas until July 1, 2007, Midstream’s contributions and distributions are shown as net change in parent advances in lieu of contributions and distributions in the consolidated statements of changes in partners’ equity. Transactions between East Texas and other Midstream operations have been identified in the consolidated financial statements as transactions between affiliates. Intercompany balances and transactions have been eliminated. In the opinion of management, all adjustments have been reflected that are necessary for a fair presentation of the consolidated financial statements.
| |
2. | Summary of Significant Accounting Policies |
Use of Estimates — Conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and notes. Although these estimates are based on management’s best available knowledge of current and expected future events, actual results could differ from those estimates.
Cash and Cash Equivalents— Cash and cash equivalents includes all cash balances and highly liquid investments with an original maturity of three months or less.
Fair Value of Financial Instruments — The fair value of accounts receivable and accounts payable are not materially different from their carrying amounts, due to the short-term nature of these instruments. Unrealized gains and losses on non-trading derivative instruments are recorded at fair value.
Accounting for Risk Management and Derivative Activities and Financial Instruments — Each derivative not qualifying as afor the normal purchase orpurchases and normal salesales exception is recorded on a gross basis in the consolidated balance sheets at its fair value as unrealized gains or unrealized losses on derivative instruments. Derivative
199
DCP EAST TEXAS HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
assets and liabilities remain classified in the consolidated balance sheets as unrealized gains or unrealized losses on derivative instruments at fair value until the contractual settlement period impacts earnings.
191
DCP EAST TEXAS HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Our derivative activity includes normal purchase or normal sale contracts, and non-trading derivative instruments related to commodity prices. Normal purchase and normal sale contracts are accounted for under the accrual method and are reflected in the consolidated statements of operations in either sales or purchases upon settlement. Other commodity non-trading derivative instruments are accounted for under themark-to-market method, whereby the change in the fair value of the asset or liability is recognized in the consolidated statements of operations in gains or losses from non-trading derivative activity — affiliates during the current period.
Valuation — When available, quoted market prices or prices obtained through external sources are used to determine a contract’s fair value. For contracts with a delivery location or duration for which quoted market prices are not available, fair value is determined based on pricing models developed primarily from historical and expected correlations with quoted market prices.
Values are adjusted to reflect the credit risk inherent in the transaction as well as the potential impact of liquidating open positions in an orderly manner over a reasonable time period under current conditions. Changes in market prices and management estimates directly affect the estimated fair value of these contracts. Accordingly, it is reasonably possible that such estimates may change in the near term.
Property, Plant and Equipment — Property, plant and equipment are recorded at historicaloriginal cost. The costs of maintenance and repairs, which are not significant improvements, are expensed when incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The costs of maintenance and repairs, which are not significant improvements, are expensed when incurred. Expenditures to extend the useful lives of the assets are capitalized.
Asset retirement obligations associated with tangible long-lived assets are recorded at fair value in the period in which they are incurred, if a reasonable estimate of fair value can be made, and added to the carrying amount of the associated asset. This additional carrying amount is then depreciated over the life of the asset. The liability increases due to the passage of time based on the time value of money until the obligation is settled. We recognize a liability of a conditional asset retirement obligation as soon as the fair value of the liability can be reasonably estimated. A conditional asset retirement obligation is defined as an unconditional legal obligation to perform an asset retirement activity in which the timingand/or method of settlement are conditional on a future event that may or may not be within the control of the entity.
Long-Lived Assets — We periodically evaluate whether the carrying value of long-lived assets has been impaired when circumstances indicate the carrying value of those assets may not be recoverable. This evaluation is based on undiscounted cash flow projections. The carrying amount is not recoverable if it exceeds the undiscounted sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. We consider various factors when determining if these assets should be evaluated for impairment, including but not limited to:
| | |
| • | significant adverse change in legal factors or business climate; |
|
| • | a current-period operating or cash flow loss combined with a history of operating or cash flow losses, or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset; |
|
| • | an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset; |
|
| • | significant adverse changes in the extent or manner in which an asset is used, or in its physical condition; |
|
| • | a significant adverse change in the market value of an asset; or |
200
DCP EAST TEXAS HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
| • | a current expectation that, more likely than not, an asset will be sold or otherwise disposed of before the end of its estimated useful life. |
192
DCP EAST TEXAS HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
If the carrying value is not recoverable, the impairment loss is measured as the excess of the asset’s carrying value over its fair value. We assess the fair value of long-lived assets using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third party comparable sales, andinternally developed discounted cash flow models.analysis and analyses from outside advisors. Significant changes in market conditions resulting from events such as the condition of an asset or a change in management’s intent to utilize the asset would generally require management to reassess the cash flows related to the long-lived assets.
Revenue Recognition — We generate the majority of our revenues from natural gas gathering, processing, compressing, transporting,compression, transportation, and fractionatingfractionation of natural gas and NGLs. We realize revenues either by selling the residue natural gas and NGLs, or by receiving fees from the producers.
We obtain access to raw natural gas and provide our midstream natural gas services principally under contracts that contain a combination of one or more of the following arrangements.
| | |
| • | Fee-based arrangements —Under fee-based arrangements, we receive a fee or fees for one or more of the following services: gathering, compressing, treating, processing, or transporting of natural gas. Our fee-based arrangements include natural gas purchase arrangements pursuant to which we purchase raw natural gas at the wellhead, or other receipt points, at an index related price at the delivery point less a specified amount, generally the same as the fees we would otherwise charge for gathering of raw natural gas from the wellhead location to the delivery point. The revenue we earn is directly related to the volume of natural gas that flows through our systems and is not directly dependent on commodity prices. To the extent a sustained decline in commodity prices results in a decline in volumes, however, our revenues from these arrangements would be reduced. |
|
| • | Percent-of-proceeds/indexPercent-of-proceeds arrangements —Under percentage-of-proceeds/indexpercent-of-proceeds arrangements, we generally purchase natural gas from producers at the wellhead, or other receipt points, gather the wellhead natural gas through our gathering system, treat and process the natural gas, and then sell the resulting residue natural gas and NGLs based on index prices from published index market prices. We remit to the producers either anagreed-upon percentage of the actual proceeds that we receive from our sales of the residue natural gas and NGLs, or anagreed-upon percentage of the proceeds based on index related prices for the natural gas and the NGLs, regardless of the actual amount of the sales proceeds we receive. Certain of these arrangements may also result in our returning all or a portion of the residue natural gasand/or the NGLs to the producer, in lieu of returning sales proceeds. Our revenues under percent-of-proceeds/indexpercent-of-proceeds arrangements correlate directly with the price of natural gasand/or NGLs. |
|
| • | Keep-whole arrangements— Under the terms of a keep-whole processing contract, we gather raw natural gas from the producer for processing, marketsell the NGLs and return to the producer residue natural gas with a British thermal unit, or Btu, content equivalent to the Btu content of the raw natural gas gathered. This arrangement keeps the producer whole to the thermal value of the raw natural gas received. Under these types of contracts, we are exposed to the “frac spread.” The frac spread is the difference between the value of the NGLs extracted from processing and the value of the Btu equivalent of the residue natural gas. We benefit in periods when NGL prices are higher relative to natural gas prices. |
We recognize revenue for sales and services under the four revenue recognition criteria, as follows:
| | |
| • | Persuasive evidence of an arrangement exists —Our customary practice is to enter into a written contract, executed by both us and the customer. |
|
| • | Delivery —Delivery is deemed to have occurred at the time custody is transferred, or in the case of fee-based arrangements, when the services are rendered. To the extent we retain product as inventory, |
193201
DCP EAST TEXAS HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
| | delivery occurs when the inventory is subsequently sold and custody is transferred to the third party purchaser. |
| | |
| • | The fee is fixed or determinable— We negotiate the fee for our services at the outset of our fee-based arrangements. In these arrangements, the fees are nonrefundable. For other arrangements, the amount of revenue, based on contractual terms, is determinable when the sale of the applicable product has been completed upon delivery and transfer of custody. |
|
| • | CollectabilityCollectibility is probable —CollectabilityCollectibility is evaluated on acustomer-by-customer basis. New and existing customers are subject to a credit review process, which evaluates the customers’ financial position (for example, cash positioncredit metrics, liquidity and credit rating) and their ability to pay. If collectabilitycollectibility is not considered probable at the outset of an arrangement in accordance with our credit review process, revenue is recognized whenuntil the feecash is collected. |
We generally report revenues gross in the consolidated statements of operations, as we typically act as the principal in these transactions, take custody ofto the product, and incur the risks and rewards of ownership. Effective April 1, 2006, any new or amended contracts for certain sales and purchases of inventory with the same counterparty, when entered into in contemplation of one another, are reported net as one transaction. We recognize revenues for non-trading derivative activity in the consolidated statements of operations as gains or losses from non-trading derivative activity — affiliates, includingmark-to-market gains and losses and financial or physical settlement.
Quantities of natural gas or NGLs over-delivered or under-delivered related to imbalance agreements with customers, producers or pipelines are recorded monthly as other receivables or other payables using current market prices or the weighted-average prices of natural gas or NGLs at the plant or system. These balances are settled with deliveries of natural gas or NGLs, or with cash. Included in the consolidated balance sheets as accounts receivable — other as of December 31, 20072008 and 20062007 were imbalances totaling $0.8$1.1 million and $0.4$0.8 million, respectively. Included in the consolidated balance sheets as accounts payable — other as of December 31, 20072008 and 20062007 were imbalances totaling $0.9 million and $2.9 million, and $2.2 million, respectivelyrespectively.
Environmental Expenditures — Environmental expenditures are expensed or capitalized as appropriate, depending upon the future economic benefit. Expenditures that relate to an existing condition caused by past operations, and that do not generate current or future revenue, are expensed. Liabilities for these expenditures are recorded on an undiscounted basis when environmental assessmentsand/orclean-ups are probable and the costs can be reasonably estimated. Environmental liabilities are included in the consolidated balances sheets as other current liabilities. EnvironmentalThere were no environmental liabilities included in the consolidated balance sheets as other current liabilities as of December 31, 20072008 and 2006 were insignificant and $0.3 million, respectively.2007.
Income Taxes — DeferredWe are structured as a joint venture which is a pass-through entity for federal income tax purposes. Our income tax expense includes certain jurisdictions, including state, local, franchise and margin taxes of the joint venture and subsidiaries. We follow the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the future tax consequences attributable toof temporary differences between the financial statement carrying amounts and the tax basis of existingthe assets and liabilities, and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of any tax rate change on deferred taxes is recognized in the period that includes the enactment date of the tax rate change. Realizability of deferred tax assets is assessed and, if necessary, a valuation allowance is recorded to write down the deferred tax assets to their realizable value.liabilities. East Texas is a member of a consolidated group. We have calculated current and deferred income taxes as if we were a separate taxpayer.
We are treated as a pass-through entity for U.S. federal income tax purposes. As such, we do not directly pay federal income taxes. The Texas legislature replaced their franchise tax with a margin tax system in May 2006. As of 2007, we are subject to the Texas margin tax, which is treated as an income tax. Accordingly, we recorded a deferred tax liability and related expense in 20072008 and 2006,2007, related to the temporary differences that are expected to reverse in periods when the tax will apply.
194202
DCP EAST TEXAS HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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3. | Recent Accounting Pronouncements |
Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards, or SFAS, No. 162 “The Hierarchy of Generally Accepted Accounting Principles,” or SFAS 162 — In May 2008, the FASB issued SFAS 162, which is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for nongovernmental entities. SFAS 162 is effective 60 days following the Securities and Exchange Commission, or SEC’s, approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We have assessed the impact of the adoption of SFAS 162, and believe that there will be no impact on our consolidated results of operations, cash flows or financial position.
SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” or SFAS 161 — In March 2008, the FASB issued SFAS 161, which requires disclosures of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for us on January 1, 2009. We are in the process of assessing the impact of SFAS 161 on our disclosures, and will make the required disclosures in our December 31, 2009 consolidated financial statements.
SFAS No. 141(R) “Business Combinations (revised 2007),” or SFAS 141(R) —In December, 2007, the FASB issued SFAS 141(R), which requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS 141(R) is effective for us on January 1, 2009. As this standard will be applied prospectively upon adoption, we will account for all transactions with closing dates subsequent to the adoption date in accordance with the provisions of the standard.
Statement of Financial Accounting Standards, or SFAS, No. 159, The“The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FAS 115,115”, or SFAS 159— In February 2007, the Financial Accounting Standards Board, or FASB, issued SFAS 159, which allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. SFAS 159 also establishes presentation and disclosure requirements designed to draw comparison between entities that elect different measurement attributes for similar assets and liabilities. SFAS 159 isbecame effective for us on January 1, 2008. We have not elected the fair value option relative to any of our financial assets and liabilities which are not otherwise required to be measured at fair value by other accounting standards. Therefore, there is no effect of adoption reflected in our consolidated results of operations, cash flows or financial position.
SFAS No. 157, Fair“Fair Value Measurements,Measurements”, or SFAS 157 —In September 2006, the FASB issued SFAS 157, which provides guidancewas effective for using fair value to measure assets and liabilities. The standard establishes a framework for measuring fair value and expands the disclosure requirements surrounding assumptions made in the measurement of fair value.us on January 1, 2008. SFAS 157:
| | |
| • | defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; |
|
| • | establishes a framework for measuring fair value; |
|
| • | establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date; |
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DCP EAST TEXAS HOLDINGS, LLC
TheNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
| • | nullifies the guidance in Emerging Issues Task Force, or EITF,02-3,Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Involved in Energy Trading and Risk Management Activities, which required the deferral of profit at inception of a transaction involving a derivative financial instrument in the absence of observable data supporting the valuation technique; and |
|
| • | significantly expands the disclosure requirements around instruments measured at fair value. |
Upon adoption of this standard will result in us making slight changes to our valuation methodologies to incorporatewe incorporated the marketplace participant view as prescribed by SFAS 157. Such changes will include,included, but willwere not be limited to changes in valuation policies to reflect an exit price methodology, the effect of considering our own non-performance risk on the valuation of liabilities, and the effect of any change in our credit rating or standing. We expect the cumulative effect after-taxThere has been no impact to be insignificantour earnings as a result of adoption on January 1, 2008.adopting SFAS 157. All changes in our valuation methodology have been incorporated into our fair value calculations subsequent to adoption.
Pursuant to FASB Financial Staff Position157-2, the FASB issued a partial deferral, ending on December 31, 2008, of the implementation of SFAS 157 as it relates to all non-financial assets and liabilities where fair value is the required measurement attribute by other accounting standards. While we have adopted SFAS 157 for all financial assets and liabilities effective January 1, 2008, we have not assessedare in the process of assessing the impact that the adoption of SFAS 157 will have on our non-financial assets and liabilities.
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes —An Interpretation of FASB Statement 109, or FIN 48— In July 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109,Accounting for Income Taxes.FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 were effective for us on January 1, 2007, and the adoption of FIN 48 didliabilities, but do not haveexpect a material impact on our consolidated results of operations, cash flows or financial position.
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DCP EAST TEXAS HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)positions upon adoption.
EITF IssueFASB FSPNo. 04-13,157-3 Accounting“Determining the Fair Value of a Financial Asset When the Market for Purchases and Sales of Inventory with the Same Counterparty,That Asset is Not Active,” orEITF 04-13FSP 157-3— In September 2005,October 2008, the FASB ratified the EITF’s consensus on Issueissued04-13,FSP 157-3, which requiresprovides guidance in situations where a) observable inputs do not exist, b) observable inputs exist but only in an entity to treat salesinactive market and purchases of inventory between the entity and the same counterparty as one transaction for purposes of applying APB Opinion No. 29,Accounting for Nonmonetary Transactions, or APB 29, when such transactions are entered into in contemplation of each other. When such transactions are legally contingent on each other, they are considered to have been entered into in contemplation of each other. The EITF also agreed on other factors thatc) how market quotes should be considered when assessing the relevance of observable and unobservable inputs to determine fair value.FSP 157-3 was effective upon issuance, including prior periods for which financial statements have not been issued. We believe that the financial assets that are reflected in determining whether transactions have been entered into in contemplationour financial statements are transacted within active markets, and therefore, there is no effect on our consolidated results of each other.EITF 04-13 is to be applied to new arrangements that we enter into after March 31, 2006. The impactoperations, cash flows or financial positions as a result of the adoption ofEITF 04-13 for the year ended December 31, 2006 was a reduction of sales and purchases of approximately $44.3 million. this FSP.
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4. | Agreements and Transactions with Affiliates |
The employees supporting our operations are employees of Midstream. Costs incurred by Midstream on our behalf for salaries and benefits of operating personnel, as well as capital expenditures, maintenance and repair costs, and taxes have been directly allocated to us. Midstream also provides centralized corporate functions on our behalf, including legal, accounting, cash management, insurance administration and claims processing, risk management, health, safety and environmental, information technology, human resources, credit, payroll, internal audit, taxes and engineering. Midstream records the accrued liabilities and prepaid expenses for most general and administrative expenses in its financial statements, including liabilities related to payroll, short and long-term incentive plans, employee retirement and medical plans, paid time off, audit, tax, insurance and other service fees. Through June 30, 2007, our share of those costs were allocated based on Midstream’s proportionate investment (consisting of property, plant and equipment, equity method investment and intangibles) compared to our investment. In management’s estimation, the allocation methodologies used through June 30, 2007 were reasonable and resulted in an allocation to us of our costs of doing business borne by Midstream.
Effective July 1, 2007, as part of the agreement with Midstream, we are required to reimburse Midstream for salaries of operating personnel and employee benefits as well as capital expenditures, maintenance and repair costs, insurance, taxes and other direct, indirect, and allocable costs and expenses incurred by Midstream on our behalf. We also pay Midstream an annual fee for centralized corporate functions performed by Midstream on our behalf, including legal, accounting, cash management, insurance administration and claims
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DCP EAST TEXAS HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
processing, risk management, health, safety and environmental, information technology, human resources, credit, payroll, internal audit, taxes and engineering. The agreement states that the fee for 2007 shall be $4.0 million as prorated from July 1 through December 31, 2007. For 2008, the fee is subject to adjustmentwas $8.3 million as adjusted for changes in the Consumer Price Index. After 2008, the fee shall be mutually agreed upon. If East Texas makes any acquisitions or otherwise expands prior to December 31, 2008, then the amount shall be reasonably increased.
Prior to July 1, 2007, we had no cash balances on the consolidated balances sheets. Up to that date, all of our cash management activity was performed by Midstream on our behalf, including collection of receivables, payment of payables, and the settlement of sales and purchases transactions with Midstream, which were recorded as parent advances and were included in parent equity on the accompanying consolidated balance sheets.
We currently, and anticipate to continue to, sell to Midstream, and purchase from and sell to ConocoPhillips, in the ordinary course of business. Midstream was a significant customer during the years ended December 31, 2008, 2007, 2006, and 2005.2006.
Prior to December 31, 2006, we sold to and purchased from Duke Energy Corporation. On January 2, 2007, Duke Energy Corporation spun off their natural gas businesses, including their 50% ownership interest in Midstream, to Duke Energy shareholders. As a result of this transaction, Duke Energy Corporation’s 50%
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DCP EAST TEXAS HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ownership interest in Midstream was transferred to Spectra Energy Corp. Consequently, Duke Energy Corporation is not considered a related party for reporting periods after January 2, 2007. We had no significant transactions with Spectra Energy Corp.
The following table summarizes transactions with affiliates :affiliates:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | (Millions) | | | (Millions) | |
|
DCP Midstream, LLC: | | | | | | | | | | | | | | | | | | | | | | | | |
Sales of natural gas, NGLs and condensate | | $ | 263.2 | | | $ | 276.3 | | | $ | 355.2 | | | $ | 284.4 | | | $ | 263.2 | | | $ | 276.3 | |
Losses from non-trading derivative activity | | | $ | 0.6 | | | $ | 0.1 | | | $ | 1.1 | |
General and administrative expense | | $ | 10.3 | | | $ | 11.3 | | | $ | 9.8 | | | $ | 8.5 | | | $ | 10.3 | | | $ | 11.3 | |
Duke Energy Corporation: | | | | | | | | | | | | | | | | | | | | | | | | |
Sales of natural gas, NGLs and condensate | | $ | — | | | $ | 6.6 | | | $ | 6.7 | | | $ | — | | | $ | — | | | $ | 6.6 | |
Purchases of natural gas and NGLs | | $ | — | | | $ | 0.1 | | | $ | 3.8 | | | $ | — | | | $ | — | | | $ | 0.1 | |
ConocoPhillips: | | | | | | | | | | | | | | | | | | | | | | | | |
Sales of natural gas, NGLs and condensate | | $ | 7.7 | | | $ | 3.7 | | | $ | 3.7 | | | $ | 29.3 | | | $ | 7.7 | | | $ | 3.7 | |
Transportation and processing services | | $ | 0.1 | | | $ | 0.3 | | | $ | 0.3 | | | $ | 0.2 | | | $ | 0.1 | | | $ | 0.3 | |
Purchases of natural gas and NGLs | | $ | 1.1 | | | $ | 9.2 | | | $ | 21.5 | | | $ | 0.1 | | | $ | 1.1 | | | $ | 9.2 | |
We had accounts receivable and accounts payable with affiliates as follows:
| | | | | | | | | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2007 | | 2006 | | | 2008 | | 2007 | |
| | (Millions) | | | (Millions) | |
|
DCP Midstream LLC: | | | | | | | | | | | | | | | | |
Accounts receivable | | $ | 64.5 | | | $ | — | | | $ | 20.6 | | | $ | 64.5 | |
Accounts payable | | $ | 1.5 | | | $ | — | | | $ | 2.4 | | | $ | 1.5 | |
ConocoPhillips: | | | | | | | | | | | | | | | | |
Accounts receivable | | $ | — | | | $ | 0.1 | | | $ | 0.1 | | | $ | — | |
Accounts payable | | $ | — | | | $ | 0.6 | | |
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DCP EAST TEXAS HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Capital Project Reimbursement
In addition, Midstream has reimbursed us for work we performed on certain capital projects as defined in the Contribution Agreement. We received $2.3 million and $3.4 million of capital reimbursements during the yearyears ended December 31, 2007. Payment is2008 and 2007, respectively. These reimbursements are treated as a contributioncontributions from Midstream.
Competition
Neither Midstream or Partners, nor any of their respective affiliates are restricted under the limited liability agreement from competing with us in other business opportunities, transactions, ventures, or other arrangements that may be competitive with or the same as us.
Indemnification
Effective upon closing on July 1, 2007, Midstream will indemnify us until July 1, 2008 for the breach of the representations and warranties made under the acquisition agreement (except certain corporate related matters that survive indefinitely) and certain litigation, environmental matters, title defects and tax matters associated with these assets that were identified at the time of closing and that were attributable to periods prior to the closing date. In addition, the same affiliate of DCP Midstream, LLC agreed to indemnify us until
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DCP EAST TEXAS HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
July 1, 2008 for the overpayment or underpayment of trade payables or receivables that pertain to periods prior to closing, agreed to indemnify us until July 1, 2009 for any claims for fines or penalties of any governmental authority for periods prior to the closing and that are associated with certain our assets that were formerly owned by Gulf South and UP Fuels, and agreed to indemnify us indefinitely for breaches of the agreement and certain existing claims. The indemnity obligation for breach of the representations and warranties is not effective until claims exceed in the aggregate $2.7 million and is subject to a maximum liability of $27.0 million. This indemnity obligation for all other claims other than a breach of the representations and warranties does not become effective until an individual claim or series of related claims exceed $50,000.
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5. | Property, Plant and Equipment |
A summary of property, plant and equipment is as followsfollows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Depreciable
| | December 31, | | | Depreciable
| | December 31, | |
| | Life | | 2007 | | 2006 | | | Life | | 2008 | | 2007 | |
| | | | (Millions) | | | | | (Millions) | |
|
Gathering systems | | | 15 – 30 Years | | | $ | 78.9 | | | $ | 70.0 | | | | 15 – 30 Years | | | $ | 92.8 | | | $ | 78.9 | |
Processing plants | | | 25 – 30 Years | | | | 218.5 | | | | 218.4 | | | | 25 – 30 Years | | | | 219.8 | | | | 218.5 | |
Transportation | | | 25 – 30 Years | | | | 40.0 | | | | 34.3 | | | | 25 – 30 Years | | | | 42.6 | | | | 40.0 | |
Underground storage | | | | 20 – 50 Years | | | | 0.1 | | | | — | |
General plant | | | 3 – 5 Years | | | | 7.8 | | | | 7.2 | | | | 3 – 5 Years | | | | 7.9 | | | | 7.8 | |
Construction work in progress | | | | | | | 14.7 | | | | 6.5 | | | | | | | | 30.3 | | | | 14.7 | |
| | | | | | | | | | |
| | | | | | | 359.9 | | | | 336.4 | | | | | | | | 393.5 | | | | 359.9 | |
Accumulated depreciation | | | | | | | (123.4 | ) | | | (108.1 | ) | | | | | | | (140.1 | ) | | | (123.4 | ) |
| | | | | | | | | | |
Property, plant and equipment, net | | | | | | $ | 236.5 | | | $ | 228.3 | | | | | | | $ | 253.4 | | | $ | 236.5 | |
| | | | | | | | | | |
Depreciation expense was $15.8 million, $14.6 million and $14.0 million for the years ended December 31, 2008, 2007 and 2006, was $16.7 million, $15.8 million and 2005,$14.6 million respectively. At December 31, 2008, we had non-cancelable purchase obligations of approximately $0.8 million for capital projects anticipated to be completed in 2009.
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6. | Estimated Fair Value of Financial Instruments |
We have determined the following fair value amounts using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptionsand/or estimation methods may have a material effect on the estimated fair value amounts. The following summarizes the estimated fair value of financial instruments:
| | | | | | | | | | | | | | | | |
| | December 31, 2007 | | | December 31, 2006 | |
| | Carrying
| | | Estimated Fair
| | | Carrying
| | | Estimated Fair
| |
| | Amount | | | Value | | | Amount | | | Value | |
| | (Millions) | |
|
Accounts receivable | | $ | 81.3 | | | $ | 81.3 | | | $ | 31.0 | | | $ | 31.0 | |
Accounts payable | | $ | 58.0 | | | $ | 58.0 | | | $ | 47.6 | | | $ | 47.6 | |
The fair value of accounts receivable and accounts payable are not materially different from their carrying amounts because of the short term nature of these instruments or the stated rates approximating market rates.
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DCP EAST TEXAS HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS��— (Continued)
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7. | Risk Management and Derivative Activities, Credit Risk and Financial Instruments |
The only impact of our derivative activity was losses from non-trading derivative activity — affiliates of $0.6 million, $0.1 million $1.1 million and $1.7$1.1 million for the years ended December 31, 2008, 2007 and 2006, and 2005, respectively.
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DCP EAST TEXAS HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We are exposed to market risks, including changes in commodity prices. We may use financial instruments such as forward contracts, swaps and futures to mitigate the effects of the identified risks. In general, we attempt to mitigate risks related to the variability of future cash flows resulting from changes in applicable commodity prices. Midstream has a comprehensive risk management policy, or the Risk Management Policy, and a risk management committee, to monitor and manage market risks associated with commodity prices. Midstream’s Risk Management Policy prohibits the use of derivative instruments for speculative purposes.
Commodity Price Risk — Our principal operations of gathering, processing, and transporting natural gas, and the accompanying operations of transporting and sale of NGLs create commodity price risk due to market fluctuations in commodity prices, primarily with respect to the prices of NGLs and natural gas. As an owner and operator of natural gas processing assets, we have an inherent exposure to market variables and commodity price risk. The amount and type of price risk is dependent on the underlying natural gas contracts to purchase and process raw natural gas. Risk is also dependent on the types and mechanisms for sales of natural gas, NGLs and condensate, and related products produced, processed or transported.
Credit Risk — We sell natural gas to marketing affiliates of natural gas pipelines, marketing affiliates of integrated oil companies, marketing affiliates of Midstream, national wholesale marketers, industrial end-users and gas-fired power plants. Our principal NGL customers include an affiliate of Midstream, producers and marketing companies. Concentration of credit risk may affect our overall credit risk, in that these customers may be similarly affected by changes in economic, regulatory or other factors. Where exposed to credit risk, we analyze the counterparties’ financial condition prior to entering into an agreement, establish credit limits, and monitor the appropriateness of these limits on an ongoing basis. We operate under Midstream’s corporate credit policy. Midstream’s corporate credit policy, as well as the standard terms and conditions of our agreements, prescribe the use of financial responsibility and reasonable grounds for adequate assurances. These provisions allow Midstream’s credit department to request that a counterparty remedy credit limit violations by posting cash or letters of credit for exposure in excess of an established credit line. The credit line represents an open credit limit, determined in accordance with Midstream’s credit policy and guidelines. The agreements also provide that the inability of counterparty to post collateral is sufficient cause to terminate a contract and liquidate all positions. The adequate assurance provisions also allow us to suspend deliveries, cancel agreements or continue deliveries to the buyer after the buyer provides security for payment to us in a form satisfactory to us.
Commodity Non-Trading Derivative Activity — The sale of energy related products and services exposes us to the fluctuations in the market values of exchanged instruments. On a monthly basis, we may enter into non-trading derivative instruments in order to match the pricing terms to manage our purchase and sale portfolios. Midstream manages our marketing portfolios in accordance with their Risk Management Policy, which limits exposure to market risk.
Normal Purchases and Normal Sales — If a contract qualifies and is designated as a normal purchase or normal sale, no recognition of the contract’s fair value in the consolidated financial statements is required until the associated delivery period impacts earnings. We have applied this accounting election for contracts involving the purchase or sale of physical natural gas or NGLs in future periods.
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DCP EAST TEXAS HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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8.7. | Asset Retirement Obligations |
Our asset retirement obligations relate primarily to the retirement of various gathering pipelines and processing facilities, obligations related toright-of-way easement agreements, and contractual leases for land use. We recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred, if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset. This additional carrying amount is then depreciated over the life of the asset. The liability increases due to the passage of time based on the time value of money until the
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DCP EAST TEXAS HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
obligation is settled. Accretion expense for the years ended December 31, 2008, 2007 2006 and 20052006 was not significant.
The asset retirement obligation is adjusted each quarter for any liabilities incurred or settled during the period, accretion expense and any revisions made to the estimated cash flows. The asset retirement obligation as December 31, 20072008 and 20062007 included in the consolidated balance sheets as other long-term liabilities was $0.5$0.6 million and $0.4$0.5 million, respectively.
In May 2006, the State of Texas enacted a margin-based franchise tax law that replaced the existing franchise tax, commonly referred to as the Texas margin tax. The Texas margin tax is assessed at 1% of taxable margin apportioned to Texas. As a result of the change in Texas franchise law, our status in the state of Texas changed from non-taxable to taxable. Since the Texas margin tax is considered an income tax, in 2006 we recorded a non-current deferred tax liability of $1.8 million. The Texas margin tax becomesbecame effective for franchise tax reports due on or after January 1, 2008. The 2008 tax will bewas based on revenues earned during the 2007 fiscal year. Accordingly, we recorded current tax expense for the Texas margin tax beginning infor 2008 and 2007 of $0.6 million and $0.8 million, respectively, and a reduction in deferred taxes of $0.1 million.million for both 2008 and 2007.
Our effective tax rate differs from statutory rates primarily due to our being treated as a pass-through entity for United States income tax purposes, while being treated as a taxable entity in Texas.
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10.9. | Commitments and Contingent Liabilities |
Litigation — We are not a party to any significant legal proceedings, but are a party to various administrative and regulatory proceedings and commercial disputes that have arisen in the ordinary course of our business. Management currently believes that the ultimate resolution of the foregoing matters, taken as a whole, and after consideration of amounts accrued, insurance coverage or other indemnification arrangements, will not have a material adverse effect upon our consolidated results of operations, financial position, or cash flows.
Insurance — For the period August 2006 through August 2007, Midstream’s insurance coverage was carried with an affiliate of ConocoPhillips and third party insurers. Prior to August 2006, Midstream carried a portion of their insurance coverage with an affiliate of Duke Energy Corporation. Effective in August 2007, insurance coverage is carried with third party insurers. Midstream’s insurance coverage includes: (1) commercial general public liability insurance for liabilities arising to third parties for bodily injury and property damage resulting from operations; (2) workers’ compensation liability coverage to required statutory limits; (3) automobile liability insurance for all owned, non-owned and hired vehicles covering liabilities to third parties for bodily injury and property damage; (4) excess liability insurance above the established primary limits for commercial general liability and automobile liability insurance; and (5) property insurance covering the replacement value of all real and personal property damage, including damages arising from boiler and machinery breakdowns, windstorms, earthquake, flood damage and business interruption/extra expense. All coverages are subject to certain limits and deductibles, the terms and conditions of which are common for companies with similar types of operations.
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DCP EAST TEXAS HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A portion of the insurance costs described above are allocated by Midstream to us through the allocation methodology described in Note 4.
Environmental — The operation of pipelines, plants and other facilities for gathering, transporting, processing, or treating natural gas, NGLs and other products is subject to stringent and complex laws and regulations pertaining to health, safety and the environment. As an owner or operator of these facilities, we must comply with United States laws and regulations at the federal, state and local levels that relate to air and
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DCP EAST TEXAS HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
water quality, hazardous and solid waste management and disposal, and other environmental matters. The cost of planning, designing, constructing and operating pipelines, plants, and other facilities must incorporate compliance with environmental laws and regulations and safety standards. Failure to comply with these laws and regulations may trigger a variety of administrative, civil and potentially criminal enforcement measures, including citizen suits, which can include the assessment of monetary penalties, the imposition of remedial requirements, and the issuance of injunctions or restrictions on operation. Management believes that, based on currently known information, compliance with these laws and regulations will not have a material adverse effect on our consolidated results of operations, financial position or cash flows.
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11.10. | Supplemental Cash Flow Information |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | (Millions) | | | (Millions) | |
|
Non-cash investing and financing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Non-cash additions of property, plant and equipment | | $ | 0.9 | | | $ | 3.1 | | | $ | 0.6 | | | $ | 2.0 | | | $ | 0.9 | | | $ | 3.1 | |
Contributions related to environmental reserves retained by Midstream | | $ | 0.2 | | | $ | — | | | $ | — | | |
Accrued contributions related to reimbursements | | | $ | — | | | $ | 0.2 | | | $ | — | |
In February 2009, we announced that our East Texas natural gas processing complex and residue natural gas delivery system known as the Carthage Hub, have been temporarily shut in following a fire that was caused by a third party underground pipeline outside of our property line that ruptured. No employees or contractors were injured in the incident. There was no significant damage to the natural gas processing complex. As of February 25, 2009, the complex began processing through one of the five plants, and it is expected that full processing capacities will be restored for the entire complex over the next 30 days. Residue gas will be redelivered into limited available pipeline interconnects while the Carthage Hub undergoes inspection and repairs.
In February 2009, Midstream entered into an agreement to contribute an additional 25.1% interest in East Texas to Partners in exchange for 3.5 million Class D units. This transaction is expected to close in April 2009. Subsequent to this transaction, Partners will consolidate East Texas in their consolidated financial statements.
201209
DCP EAST TEXAS HOLDINGS, LLC
SCHEDULE II — CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Charged to
| | | | | | | | | Charged to
| | | | | |
| | Balance at
| | Consolidated
| | | | Balance at
| | | Balance at
| | Consolidated
| | | | Balance at
| |
| | Beginning of
| | Statements of
| | Deductions/
| | End of
| | | Beginning of
| | Statements of
| | Deductions/
| | End of
| |
| | Period | | Operations | | Other | | Period | | | Period | | Operations | | Other | | Period | |
| | (Millions) | | | (Millions) | |
| |
December 31, 2008 | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | | $ | 0.5 | | | $ | (0.1 | ) | | $ | — | | | $ | 0.4 | |
| | | | | | | | | |
December 31, 2007 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 0.2 | | | $ | 0.3 | | | $ | — | | | $ | 0.5 | | | $ | 0.2 | | | $ | 0.3 | | | $ | — | | | $ | 0.5 | |
Environmental | | | 0.3 | | | | — | | | | (0.3 | ) | | | — | | | | 0.3 | | | | — | | | | (0.3 | ) | | | — | |
| | | | | | | | | | | | | | | | | | |
| | $ | 0.5 | | | $ | 0.3 | | | $ | (0.3 | ) | | $ | 0.5 | | | $ | 0.5 | | | $ | 0.3 | | | $ | (0.3 | ) | | $ | 0.5 | |
| | | | | | | | | | | | | | | | | | |
December 31, 2006 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 0.1 | | | $ | 0.1 | | | $ | — | | | $ | 0.2 | | | $ | 0.1 | | | $ | 0.1 | | | $ | — | | | $ | 0.2 | |
Environmental | | | 0.4 | | | | — | | | | (0.1 | ) | | | 0.3 | | | | 0.4 | | | | — | | | | (0.1 | ) | | | 0.3 | |
| | | | | | | | | | | | | | | | | | |
| | $ | 0.5 | | | $ | 0.1 | | | $ | (0.1 | ) | | $ | 0.5 | | | $ | 0.5 | | | $ | 0.1 | | | $ | (0.1 | ) | | $ | 0.5 | |
| | | | | | | | | | | | | | | | | | |
December 31, 2005 | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | — | | | $ | 0.1 | | | $ | — | | | $ | 0.1 | | |
Environmental | | | — | | | | 0.4 | | | | — | | | | 0.4 | | |
| | | | | | | | | | |
| | $ | — | | | $ | 0.5 | | | $ | — | | | $ | 0.5 | | |
| | | | | | | | | | |
202210
A list of exhibits required by Item 601 ofRegulation S-K to be filed as part of this report:
| | | | |
Exhibit
| | |
Number
| | Description
|
|
| 10 | .1* | | Purchase and Sale Agreement, dated March 7, 2007, between Anadarko Gathering Company, Anadarko Energy Services Company and DCP Midstream Partners, LP (attached as Exhibit 99.1 to DCP Midstream Partners, LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 14, 2007). |
| 10 | .2* | | Bridge Credit Agreement, dated May 9, 2007 among DCP Midstream Operating, LP, DCP Midstream Partners, LP and Wachovia Bank, National Association (attached as Exhibit 99.2 to DCP Midstream Partners, LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 14, 2007). |
| 10 | .3* | | Third Amendment to Omnibus Agreement, dated May 9, 2007, among DCP Midstream, LLC, DCP Midstream Partners, LP, DCP Midstream GP, LP, DCP Midstream GP, LLC, and DCP Midstream Operating, LP (attached as Exhibit 99.3 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 14, 2007). |
| 10 | .4* | | First Amendment to Credit Agreement, dated May 9, 2007, among DCP Midstream Operating, LP, DCP Midstream Partners, LP and Wachovia Bank, National Association (attached as Exhibit 99.4 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 14, 2007). |
| 10 | .5* | | Contribution and Sale Agreement, dated May 21, 2007, between Gas Supply Resources Holdings, Inc., DCP Midstream, LLC and DCP Midstream Partners, LP (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 25, 2007). |
| 10 | .6* | | Common Unit Purchase Agreement, dated May 21, 2007, by and among DCP Midstream Partners, LP and the Purchasers listed therein (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 25, 2007). |
| 10 | .7* | | Contribution Agreement, dated May 23, 2007, among DCP LP Holdings, LP, DCP Midstream, LLC, DCP Midstream GP, LP and DCP Midstream Partners, LP (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 25, 2007). |
| 10 | .8* | | Common Unit Purchase Agreement, dated June 19, 2007, by and among DCP Midstream Partners, LP and the Purchasers listed therein (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on June 25, 2007). |
| 10 | .9* | | Registration Rights Agreement, dated June 22, 2007, by and among DCP Midstream Partners, LP and the Purchasers listed therein (attached as Exhibit 10.2 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on June 25, 2007). |
| 10 | .10* | | Amended and Restated Credit Agreement, dated June 21, 2007, among DCP Midstream Operating, LP, DCP Midstream Partners, LP and Wachovia Bank, National Association as Administrative Agent (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on June 27, 2007). |
| 10 | .11* | | Fourth Amendment to Omnibus Agreement, dated July 1, 2007, by and among DCP Midstream, LLC, DCP Midstream GP, LLC, DCP Midstream GP, LP, DCP Midstream Partners, LP, and DCP Midstream Operating, LP (attached as Exhibit 10.2 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on July 2, 2007). |
| 10 | .12* | | Amended and Restated Limited Liability Company Agreement of DCP East Texas Holdings, LLC, dated July 1, 2007, between DCP Midstream, LLC and DCP Assets Holding, LP (attached as Exhibit 10.3 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on July 2, 2007). |
| 10 | .13* | | Fifth Amendment to Omnibus Agreement dated August 7, 2007, among DCP Midstream, LLC, DCP Midstream Partners, LP, DCP Midstream GP, LP, DCP Midstream GP, LLC, and DCP Midstream Operating, LP (attached as Exhibit 10.1 to DCP Midstream Partners, LP Form 10-Q (FileNo. 001-32678) filed with the Securities and Exchange Commission on August 9, 2007). |
| 10 | .14* | | Sixth Amendment to Omnibus Agreement, dated August 29, 2007, among DCP Midstream, LLC, DCP Midstream Partners, LP, DCP Midstream GP, LP, DCP Midstream GP, LLC, and DCP Midstream Operating, LP (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on September 5, 2007). |
| | | | |
Exhibit
| | |
Number | | Description |
|
| 3 | .1 | | Amendment No. 1 to Amended and Restated Limited Liability Company Agreement of DCP Midstream GP, LLC dated as of January 20, 2009 and Amended and Restated Limited Liability Company Agreement of DCP Midstream GP, LLC dated December 7, 2005. |
| 10 | .1* | | Purchase and Sale Agreement, dated March 7, 2007, between Anadarko Gathering Company, Anadarko Energy Services Company and DCP Midstream Partners, LP (attached as Exhibit 99.1 to DCP Midstream Partners, LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 14, 2007). |
| 10 | .2* | | Bridge Credit Agreement, dated May 9, 2007 among DCP Midstream Operating, LP, DCP Midstream Partners, LP and Wachovia Bank, National Association (attached as Exhibit 99.2 to DCP Midstream Partners, LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 14, 2007). |
| 10 | .3* | | Third Amendment to Omnibus Agreement, dated May 9, 2007, among DCP Midstream, LLC, DCP Midstream Partners, LP, DCP Midstream GP, LP, DCP Midstream GP, LLC, and DCP Midstream Operating, LP (attached as Exhibit 99.3 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 14, 2007). |
| 10 | .4* | | First Amendment to Credit Agreement, dated May 9, 2007, among DCP Midstream Operating, LP, DCP Midstream Partners, LP and Wachovia Bank, National Association (attached as Exhibit 99.4 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 14, 2007). |
| 10 | .5* | | Contribution and Sale Agreement, dated May 21, 2007, between Gas Supply Resources Holdings, Inc., DCP Midstream, LLC and DCP Midstream Partners, LP (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 25, 2007). |
| 10 | .6* | | Common Unit Purchase Agreement, dated May 21, 2007, by and among DCP Midstream Partners, LP and the Purchasers listed therein (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 25, 2007). |
| 10 | .7* | | Contribution Agreement, dated May 23, 2007, among DCP LP Holdings, LP, DCP Midstream, LLC, DCP Midstream GP, LP and DCP Midstream Partners, LP (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 25, 2007). |
| 10 | .8* | | Common Unit Purchase Agreement, dated June 19, 2007, by and among DCP Midstream Partners, LP and the Purchasers listed therein (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on June 25, 2007). |
| 10 | .9* | | Registration Rights Agreement, dated June 22, 2007, by and among DCP Midstream Partners, LP and the Purchasers listed therein (attached as Exhibit 10.2 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on June 25, 2007). |
| 10 | .10* | | Amended and Restated Credit Agreement, dated June 21, 2007, among DCP Midstream Operating, LP, DCP Midstream Partners, LP and Wachovia Bank, National Association as Administrative Agent (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on June 27, 2007). |
| 10 | .11* | | Fourth Amendment to Omnibus Agreement, dated July 1, 2007, by and among DCP Midstream, LLC, DCP Midstream GP, LLC, DCP Midstream GP, LP, DCP Midstream Partners, LP, and DCP Midstream Operating, LP (attached as Exhibit 10.2 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on July 2, 2007). |
| 10 | .12* | | Amended and Restated Limited Liability Company Agreement of DCP East Texas Holdings, LLC, dated July 1, 2007, between DCP Midstream, LLC and DCP Assets Holding, LP (attached as Exhibit 10.3 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on July 2, 2007). |
| 10 | .13* | | Fifth Amendment to Omnibus Agreement dated August 7, 2007, among DCP Midstream, LLC, DCP Midstream Partners, LP, DCP Midstream GP, LP, DCP Midstream GP, LLC, and DCP Midstream Operating, LP (attached as Exhibit 10.1 to DCP Midstream Partners, LPForm 10-Q (FileNo. 001-32678) filed with the Securities and Exchange Commission on August 9, 2007). |
203211
| | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
Number | Number | | Description | Number | | Description |
|
| 10 | .15* | | Registration Rights Agreement, dated August 29, 2007, by and among DCP Midstream Partners, LP and the Purchasers listed therein (attached as Exhibit 10.2 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on September 5, 2007). | 10 | .14* | | Sixth Amendment to Omnibus Agreement, dated August 29, 2007, among DCP Midstream, LLC, DCP Midstream Partners, LP, DCP Midstream GP, LP, DCP Midstream GP, LLC, and DCP Midstream Operating, LP (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on September 5, 2007). |
| 12 | .1 | | Ratio of Earnings to Fixed Charges. | 10 | .15* | | Registration Rights Agreement, dated August 29, 2007, by and among DCP Midstream Partners, LP and the Purchasers listed therein (attached as Exhibit 10.2 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on September 5, 2007). |
| 21 | .1 | | List of Subsidiaries of DCP Midstream Partners, LP. | 10 | .16 | | Contribution Agreement dated February 24, 2009, among DCP Midstream Partners, LP, DCP LP Holdings, LLC, DCP Midstream GP, LP and DCP Midstream, LLC. |
| 23 | .1 | | Consent of Deloitte & Touche LLP on Consolidated Financial Statements and Financial Statement Schedule of DCP Midstream Partners, LP and the effectiveness of DCP Midstream Partners, LP’s internal control over financial reporting. | 12 | .1 | | Ratio of Earnings to Fixed Charges. |
| 23 | .2 | | Consent of Ernst & Young LLP on Consolidated Financial Statements of Discovery Producer Services LLC. | 21 | .1 | | List of Subsidiaries of DCP Midstream Partners, LP. |
| 23 | .3 | | Consent of Deloitte & Touche LLP on Consolidated Financial Statements and Financial Statement Schedule of DCP East Texas Holdings, LLC. | 23 | .1 | | Consent of Deloitte & Touche LLP on Consolidated Financial Statements and Financial Statement Schedule of DCP Midstream Partners, LP and the effectiveness of DCP Midstream Partners, LP’s internal control over financial reporting. |
| 23 | .4 | | Consent of Deloitte & Touche LLP on Consolidated Balance Sheet of DCP Midstream GP, LP. | 23 | .2 | | Consent of Ernst & Young LLP on Consolidated Financial Statements of Discovery Producer Services LLC. |
| 23 | .5 | | Consent of Deloitte & Touche LLP on Consolidated Balance Sheet of DCP Midstream, LLC. | 23 | .3 | | Consent of Deloitte & Touche LLP on Consolidated Financial Statements of DCP East Texas Holdings, LLC. |
| 31 | .1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | 23 | .4 | | Consent of Deloitte & Touche LLP on Consolidated Balance Sheet of DCP Midstream GP, LP. |
| 31 | .2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | 23 | .5 | | Consent of Deloitte & Touche LLP on Consolidated Balance Sheet of DCP Midstream, LLC. |
| 32 | .1 | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | 31 | .1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32 | .2 | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | 31 | .2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 99 | .1 | | Consolidated Balance Sheet of DCP Midstream GP, LP as of December 31, 2007. | 32 | .1 | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 99 | .2 | | Consolidated Balance Sheet of DCP Midstream, LLC as of December 31, 2007. | 32 | .2 | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | 99 | .1 | | Consolidated Balance Sheet of DCP Midstream GP, LP as of December 31, 2008. |
| | 99 | .2 | | Consolidated Balance Sheet of DCP Midstream, LLC as of December 31, 2008. |
| | |
* | | Each such exhibit has heretofore been filed with the SEC as part of the filing indicated and is incorporated herein by reference. |
204212
SIGNATURES
Pursuant to the requirements of the 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, in the City of Denver, State of Colorado, on March 7, 2008.5, 2009.
DCP Midstream Partners, LP
| | |
| By: | /s/ DCP Midstream GP, LP |
its General Partner
| | |
| By: | /s/ DCP Midstream GP, LLC |
its General Partner
Name: Mark A. Borer
| | |
| Title: | President and Chief Executive Officer |
205213
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears below constitutes and appoints each of Mark A. Borer and Thomas E. LongAngela A. Minas as hishis/her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or in his name, place, and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this annual report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| | | | | | |
Signature | | Title | | Date |
|
| | | | |
/s/ Mark A. Borer Mark A. Borer | | President, Chief Executive Officer and Director (Principal Executive Officer) | | March 7, 20085, 2009 |
| | | | |
/s/ Thomas E. LongAngela A. Minas
Thomas E. LongAngela A. Minas | | Vice President and Chief Financial Officer (Principal Financial Officer) | | March 7, 20085, 2009 |
| | | | |
/s/ Scott R. Delmoro Scott R. Delmoro | | Chief Accounting Officer (Principal Accounting Officer) | | March 7, 20085, 2009 |
| | | | |
/s/ Fred J. FowlerThomas C. O’Connor
Fred J. FowlerThomas C. O’Connor | | Chairman of the Board | | March 7, 2008 |
| | | | |
/s/ Willie C.W. Chiang
Willie C.W. Chiang | | and Director | | March 7, 2008 |
| | | | |
/s/ Sigmund L. Cornelius
Sigmund L. Cornelius | | Director | | March 7, 20085, 2009 |
| | | | |
/s/ Paul F. Ferguson, Jr. Paul F. Ferguson, Jr. | | Director | | March 7, 20085, 2009 |
| | | | |
/s/ Gregory J. Goff Gregory J. Goff | | Director | | March 5, 2009 |
| | | | |
/s/ Alan N. Harris Alan N. Harris | | Director | | March 5, 2009 |
| | | | |
/s/ John E. Lowe John E. Lowe | | Director | | March 5, 2009 |
| | | | |
/s/ Frank A. McPherson Frank A. McPherson | | Director | | March 7, 20085, 2009 |
| | | | |
/s/ Thomas C. Morris Thomas C. Morris | | Director | | March 7, 2008 |
| | | | |
/s/ Thomas C. O’Connor
Thomas C. O’Connor | | Director | | March 7, 20085, 2009 |
| | | | |
/s/ Stephen R. Springer Stephen R. Springer | | Director | | March 7, 20085, 2009 |
206214
EXHIBIT INDEX
| | | | |
Exhibit
| | |
Number
| | Description
|
|
| 10 | .1* | | Purchase and Sale Agreement, dated March 7, 2007, between Anadarko Gathering Company, Anadarko Energy Services Company and DCP Midstream Partners, LP (attached as Exhibit 99.1 to DCP Midstream Partners, LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 14, 2007). |
| 10 | .2* | | Bridge Credit Agreement, dated May 9, 2007 among DCP Midstream Operating, LP, DCP Midstream Partners, LP and Wachovia Bank, National Association (attached as Exhibit 99.2 to DCP Midstream Partners, LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 14, 2007). |
| 10 | .3* | | Third Amendment to Omnibus Agreement, dated May 9, 2007, among DCP Midstream, LLC, DCP Midstream Partners, LP, DCP Midstream GP, LP, DCP Midstream GP, LLC, and DCP Midstream Operating, LP (attached as Exhibit 99.3 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 14, 2007). |
| 10 | .4* | | First Amendment to Credit Agreement, dated May 9, 2007, among DCP Midstream Operating, LP, DCP Midstream Partners, LP and Wachovia Bank, National Association (attached as Exhibit 99.4 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 14, 2007). |
| 10 | .5* | | Contribution and Sale Agreement, dated May 21, 2007, between Gas Supply Resources Holdings, Inc., DCP Midstream, LLC and DCP Midstream Partners, LP (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 25, 2007). |
| 10 | .6* | | Common Unit Purchase Agreement, dated May 21, 2007, by and among DCP Midstream Partners, LP and the Purchasers listed therein (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 25, 2007). |
| 10 | .7* | | Contribution Agreement, dated May 23, 2007, among DCP LP Holdings, LP, DCP Midstream, LLC, DCP Midstream GP, LP and DCP Midstream Partners, LP (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 25, 2007). |
| 10 | .8* | | Common Unit Purchase Agreement, dated June 19, 2007, by and among DCP Midstream Partners, LP and the Purchasers listed therein (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on June 25, 2007). |
| 10 | .9* | | Registration Rights Agreement, dated June 22, 2007, by and among DCP Midstream Partners, LP and the Purchasers listed therein (attached as Exhibit 10.2 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on June 25, 2007). |
| 10 | .10* | | Amended and Restated Credit Agreement, dated June 21, 2007, among DCP Midstream Operating, LP, DCP Midstream Partners, LP and Wachovia Bank, National Association as Administrative Agent (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on June 27, 2007). |
| 10 | .11* | | Fourth Amendment to Omnibus Agreement, dated July 1, 2007, by and among DCP Midstream, LLC, DCP Midstream GP, LLC, DCP Midstream GP, LP, DCP Midstream Partners, LP, and DCP Midstream Operating, LP (attached as Exhibit 10.2 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on July 2, 2007). |
| 10 | .12* | | Amended and Restated Limited Liability Company Agreement of DCP East Texas Holdings, LLC, dated July 1, 2007, between DCP Midstream, LLC and DCP Assets Holding, LP (attached as Exhibit 10.3 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on July 2, 2007). |
| 10 | .13* | | Fifth Amendment to Omnibus Agreement dated August 7, 2007, among DCP Midstream, LLC, DCP Midstream Partners, LP, DCP Midstream GP, LP, DCP Midstream GP, LLC, and DCP Midstream Operating, LP (attached as Exhibit 10.1 to DCP Midstream Partners, LP Form 10-Q (FileNo. 001-32678) filed with the Securities and Exchange Commission on August 9, 2007). |
| 10 | .14* | | Sixth Amendment to Omnibus Agreement, dated August 29, 2007, among DCP Midstream, LLC, DCP Midstream Partners, LP, DCP Midstream GP, LP, DCP Midstream GP, LLC, and DCP Midstream Operating, LP (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on September 5, 2007). |
| 10 | .15* | | Registration Rights Agreement, dated August 29, 2007, by and among DCP Midstream Partners, LP and the Purchasers listed therein (attached as Exhibit 10.2 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on September 5, 2007). |
| | | | |
Exhibit
| | |
Number | | Description |
|
| 3 | .1 | | Amendment No. 1 to Amended and Restated Limited Liability Company Agreement of DCP Midstream GP, LLC dated as of January 20, 2009 and Amended and Restated Limited Liability Company Agreement of DCP Midstream GP, LLC dated December 7, 2005. |
| 10 | .1* | | Purchase and Sale Agreement, dated March 7, 2007, between Anadarko Gathering Company, Anadarko Energy Services Company and DCP Midstream Partners, LP (attached as Exhibit 99.1 to DCP Midstream Partners, LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 14, 2007). |
| 10 | .2* | | Bridge Credit Agreement, dated May 9, 2007 among DCP Midstream Operating, LP, DCP Midstream Partners, LP and Wachovia Bank, National Association (attached as Exhibit 99.2 to DCP Midstream Partners, LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 14, 2007). |
| 10 | .3* | | Contribution and Sale Agreement, dated May 9, 2007, among DCP Midstream, LLC, DCP Midstream Partners, LP, DCP Midstream GP, LP, DCP Midstream GP, LLC, and DCP Midstream Operating, LP (attached as Exhibit 99.3 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 14, 2007). |
| 10 | .4* | | First Amendment to Credit Agreement, dated May 9, 2007, among DCP Midstream Operating, LP, DCP Midstream Partners, LP and Wachovia Bank, National Association (attached as Exhibit 99.4 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 14, 2007). |
| 10 | .5* | | Contribution Agreement, dated May 21, 2007, among DCP LP Holdings, LP, DCP Midstream, LLC and DCP Midstream Partners, LP (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 25, 2007). |
| 10 | .6* | | Common Unit Purchase Agreement, dated May 21, 2007, by and among DCP Midstream Partners, LP and the Purchasers listed therein (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 25, 2007). |
| 10 | .7* | | Contribution Agreement, dated May 23, 2007, among DCP Midstream Partners, LP (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on May 25, 2007). |
| 10 | .8* | | Common Unit Purchase Agreement, dated June 19, 2007, among DCP Midstream Partners, LP and the Purchasers listed therein (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on June 25, 2007). |
| 10 | .9* | | Registration Rights Agreement, dated June 22, 2007, by and among DCP Midstream Partners, LP and the Purchasers listed therein (attached as Exhibit 10.2 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on June 25, 2007). |
| 10 | .10* | | Amended and Restated Credit Agreement, dated July 1, 2007, among DCP Midstream, LLC and Wachovia Bank, National Association as Administrative Agent (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on June 27, 2007). |
| 10 | .11* | | Fourth Amendment to Omnibus Agreement, dated July 1, 2007, by and among DCP Midstream, LLC, DCP Midstream GP, LLC, DCP Midstream GP, LP, DCP Midstream Partners, LP, and DCP Midstream Operating, LP (attached as Exhibit 10.2 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on July 2, 2007). |
| 10 | .12* | | Amended and Restated Limited Liability Company Agreement of DCP East Texas Holdings, LLC, dated July 1, 2007, between DCP Midstream, LLC and DCP Assets Holding, LP (attached as Exhibit 10.3 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on July 2, 2007). |
| 10 | .13* | | Fifth Amendment to Omnibus Agreement dated August 7, 2007, among DCP Midstream, LLC, DCP Midstream Partners, LP, DCP Midstream GP, LP, DCP Midstream GP, LLC, and DCP Midstream Operating, LP (attached as Exhibit 10.1 to DCP Midstream Partners, LPForm 10-Q (FileNo. 001-32678) filed with the Securities and Exchange Commission on August 9, 2007). |
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| | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
Number | Number | | Description | Number | | Description |
|
| 12 | .1 | | Ratio of Earnings to Fixed Charges. | 10 | .14* | | Sixth Amendment to Omnibus Agreement, dated August 29, 2007, among DCP Midstream, LLC, DCP Midstream Partners, LP, DCP Midstream GP, LP, DCP Midstream GP, LLC, and DCP Midstream Operating, LP (attached as Exhibit 10.1 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on September 5, 2007). |
| 21 | .1 | | List of Subsidiaries of DCP Midstream Partners, LP. | 10 | .15* | | Registration Rights Agreement, dated August 29, 2007, by and among DCP Midstream Partners, LP and the Purchasers listed therein (attached as Exhibit 10.2 to DCP Midstream Partners LP’s current report onForm 8-K (FileNo. 001-32678) filed with the SEC on September 5, 2007). |
| 23 | .1 | | Consent of Deloitte & Touche LLP on Consolidated Financial Statements and Financial Statement Schedule of DCP Midstream Partners, LP and the effectiveness of DCP Midstream Partners, LP’s internal control over financial reporting. | 10 | .16 | | Contribution Agreement dated February 24, 2009, among DCP Midstream Partners, LP, DCP LP Holdings, LLC, DCP Midstream GP, LP and DCP Midstream, LLC. |
| 23 | .2 | | Consent of Ernst & Young LLP on Consolidated Financial Statements of Discovery Producer Services LLC. | 12 | .1 | | Ratio of Earnings to Fixed Charges. |
| 23 | .3 | | Consent of Deloitte & Touche LLP on Consolidated Financial Statements and Financial Statement Schedule of DCP East Texas Holdings, LLC. | 21 | .1 | | List of Subsidiaries of DCP Midstream Partners, LP. |
| 23 | .4 | | Consent of Deloitte & Touche LLP on Consolidated Balance Sheet of DCP Midstream GP, LP. | 23 | .1 | | Consent of Deloitte & Touche LLP on Consolidated Financial Statements and Financial Statement Schedule of DCP Midstream Partners, LP and the effectiveness of DCP Midstream Partners, LP’s internal control over financial reporting. |
| 23 | .5 | | Consent of Deloitte & Touche LLP on Consolidated Balance Sheet of DCP Midstream, LLC. | 23 | .2 | | Consent of Ernst & Young LLP on Consolidated Financial Statements of Discovery Producer Services LLC. |
| 31 | .1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | 23 | .3 | | Consent of Deloitte & Touche LLP on Consolidated Financial Statements of DCP East Texas Holdings, LLC. |
| 31 | .2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | 23 | .4 | | Consent of Deloitte & Touche LLP on Consolidated Balance Sheet of DCP Midstream GP, LP. |
| 32 | .1 | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | 23 | .5 | | Consent of Deloitte & Touche LLP on Consolidated Balance Sheet of DCP Midstream, LLC. |
| 32 | .2 | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | 31 | .1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 99 | .1 | | Consolidated Balance Sheet of DCP Midstream GP, LP as of December 31, 2007. | 31 | .2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 99 | .2 | | Consolidated Balance Sheet of DCP Midstream, LLC as of December 31, 2007. | 32 | .1 | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | 32 | .2 | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | 99 | .1 | | Consolidated Balance Sheet of DCP Midstream GP, LP as of December 31, 2008. |
| | 99 | .2 | | Consolidated Balance Sheet of DCP Midstream, LLC as of December 31, 2008. |
| | |
* | | Each such exhibit has heretofore been filed with the SEC as part of the filing indicated and is incorporated herein by reference. |
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