| TEPPCO PARTNERS LP Item 1A Risk Factors Unitholders and potential investors in our Units should carefully consider the following risk factors, in addition to other information in this Report |
| We are identifying these risk factors as important factors that could cause our actual results to differ materially from those contained in any written or oral forward-looking statements made by or on behalf of us |
| We are relying upon the safe-harbor for forward-looking statements and any such statements made by or on behalf of us are qualified by reference to the following cautionary statements, as well as to those set forth elsewhere in this Report |
| Risks Relating to Our Business Potential future acquisitions and expansions may affect our business by substantially increasing the level of our indebtedness and contingent liabilities and increasing our risks of being unable to effectively integrate these new operations |
| As part of our business strategy, we evaluate and acquire assets and businesses and undertake expansions that we believe complement our existing assets and businesses |
| Acquisitions and expansions may require substantial capital or the incurrence of substantial indebtedness |
| Consummation of future acquisitions and expansions may significantly change our capitalization and results of operations |
| Our growth may be limited if acquisitions or expansions are not made on economically favorable terms |
| We are negotiating terms of a Joint Venture agreement with Enterprise relating to the construction and financing of the Jonah Expansion |
| If we fail to timely consummate a Joint Venture agreement before the completion of the Jonah Expansion, then the terms of the Joint Venture will be determined by non-appealable, binding arbitration |
| We cannot assure you that any such terms determined by arbitration will be economically favorable to us |
| Acquisitions and business expansions involve numerous risks, including difficulties in the assimilation of the assets and operations of the acquired businesses, inefficiencies and difficulties that arise because of unfamiliarity with new assets, personnel and the businesses associated with them and new geographic areas and the diversion of management’s attention from other business concerns |
| Further, unexpected costs and challenges may arise whenever businesses with different operations or management are combined, and we may experience unanticipated delays in realizing the benefits of an acquisition |
| Following an acquisition, we may discover previously unknown liabilities associated with the acquired business for which we have no recourse under applicable indemnification provisions |
| Our debt instruments may limit our ability to borrow additional funds and increase the costs of borrowing |
| We are subject to restrictions that may limit our ability to structure or refinance existing or future debt and may prevent us from entering into transactions |
| These restrictions include the maintenance of financial ratios, as well as limits on our ability to incur additional indebtedness |
| These financial restrictions could result in higher costs of borrowing |
| Additionally, rising short-term interest rates may also increase our financing costs |
| Our cash distributions may vary based on our performance and level of reserves |
| Distributions are dependent on the amount of cash we generate and may fluctuate based on our performance |
| The cash that is distributed will vary based on many factors, some of which are outside of our control |
| Cash distributions are based on cash flow measures, and are not determined by our level of profitability |
| Expanding our natural gas gathering business by constructing new pipelines and compression facilities subjects us to construction risks and risks that natural gas supplies will not be available upon completion of the new pipelines |
| We expect to expand the capacity of our existing natural gas gathering systems through the construction of additional facilities |
| The construction of gathering facilities requires the expenditure of significant amounts of capital, which may exceed our estimates |
| Generally, we may have only limited natural gas supplies committed to these facilities prior to their construction |
| Moreover, we may construct facilities to capture anticipated future growth in production in a region in which anticipated production growth does not materialize |
| As a result, there is the risk that new facilities may not be able to attract enough natural gas to achieve our expected investment return, which could adversely affect our financial position or results of operations |
| 23 ______________________________________________________________________ Our interstate tariff rates are subject to review and possible adjustment by federal regulators, which could have a material adverse effect on our financial condition and results of operations |
| The FERC, pursuant to the Interstate Commerce Act, regulates the tariff rates for our interstate common carrier pipeline operations |
| To be lawful under that Act, interstate tariff rates must be just and reasonable and not unduly discriminatory |
| Shippers may protest, and the FERC may investigate, the lawfulness of new or changed tariff rates |
| The FERC can suspend those tariff rates for up to seven months |
| It can also require refunds of amounts collected under rates ultimately found unlawful |
| The FERC can also challenge tariff rates that have become final and effective |
| Because of the complexity of rate making, the lawfulness of any rate is never assured |
| The FERC uses prescribed rate methodologies for approving regulated tariff rates for transporting crude oil and refined products |
| These methodologies may limit our ability to set rates based on our actual costs or may delay the use of rates reflecting increased costs |
| Changes in the FERC’s approved methodology for approving rates could adversely affect us |
| Adverse decisions by the FERC in approving our regulated rates could adversely affect our cash flow |
| Additional challenges to our tariff rates could be filed with the FERC Although our intrastate natural gas gathering systems are generally exempt from FERC regulation under the Natural Gas Act of 1938, FERC regulation still significantly affects our natural gas gathering business |
| In recent years, the FERC has pursued pro-competition policies in its regulation of interstate natural gas pipelines |
| If the FERC does not continue this approach as it considers proposals by natural gas pipelines to allow negotiated gathering rates that are not limited by rate ceilings, pipeline rate case proposals and revisions to rules and policies that may affect our shippers’ rights of access to interstate natural gas transportation capacity, it could have an adverse effect on the rates we are able to charge in the future |
| Our partnership status may be a disadvantage to us in calculating our cost of service for rate-making purposes |
| In a 1995 decision involving an unrelated oil pipeline limited partnership, the FERC partially disallowed the inclusion of income taxes in that partnership’s cost of service |
| In another FERC proceeding involving a different oil pipeline limited partnership, the FERC held that the oil pipeline limited partnership may not claim an income tax allowance for income attributable to non-corporate limited partners, both individuals and other entities |
| Because corporations are taxpaying entities, income taxes are generally allowed to be included as a corporate cost-of-service |
| While we currently do not use the cost-of-service methodology to support our rates, these decisions might adversely affect us should we elect in the future to use the cost-of-service methodology or should we be required to use that methodology to defend our rates if challenged by our customers |
| This could put us at a competitive disadvantage |
| Competition could adversely affect our operating results |
| Our refined products and LPG transportation business competes with other pipelines in the areas where we deliver products |
| We also compete with trucks, barges and railroads in some of the areas we serve |
| Competitive pressures may adversely affect our tariff rates or volumes shipped |
| The crude oil gathering and marketing business is characterized by thin margins and intense competition for supplies of crude oil at the wellhead |
| A decline in domestic crude oil production has intensified competition among gatherers and marketers |
| Our crude oil transportation business competes with common carriers and proprietary pipelines owned and operated by major oil companies, large independent pipeline companies and other companies in the areas where our pipeline systems deliver crude oil and natural gas liquids |
| New supplies of natural gas are necessary to offset natural declines in production from wells connected to our gathering system and to increase throughput volume, and we encounter competition in obtaining contracts to gather natural gas supplies |
| Competition in natural gas gathering is based in large part on reputation, efficiency, system reliability, gathering system capacity and price arrangements |
| Our key competitors in the gas gathering segment include independent gas gatherers and major integrated energy companies |
| Alternate gathering facilities are available to producers we serve, and those producers may also elect to construct proprietary gas gathering systems |
| If the production delivered to our gathering system declines, our revenues from such operations will decline |
| 24 ______________________________________________________________________ Our business requires extensive credit risk management that may not be adequate to protect against customer nonpayment |
| Risks of nonpayment and nonperformance by customers are a major consideration in our businesses |
| Our credit procedures and policies may not be adequate to fully eliminate customer credit risk |
| We manage our exposure to credit risk through credit analysis, credit approvals, credit limits and monitoring procedures |
| We utilize letters of credit and guarantees for certain of our receivables |
| However, these procedures and policies do not fully eliminate customer credit risk |
| During each of the years ended December 31, 2005, 2004 and 2003, we expensed less than dlra1dtta0 million of uncollectible receivables |
| Our crude oil marketing business involves risks relating to product prices |
| Our crude oil operations subject us to pricing risks as we buy and sell crude oil for delivery on our crude oil pipelines |
| These are the risks that price relationships between delivery points, classes of products or delivery periods will change after our initial purchases and before physical delivery of the crude oil |
| Pipelines are dependent on their interconnections with other pipelines to reach their destination markets |
| Decreased throughput on interconnected pipelines due to testing, line repair and reduced pressures could result in reduced throughput on our own pipeline systems |
| Such reduced throughput may adversely impact our profitability |
| Reduced demand could affect shipments on the pipelines |
| Reductions in that demand adversely affect our pipeline business |
| Market demand varies based upon the different end uses of the products we ship |
| We cannot predict the impact of future fuel conservation measures, alternate fuel requirements, government regulation or technological advances in fuel economy and energy-generation devices, all of which could reduce the demand for refined petroleum products and LPGs in the areas we serve |
| Demand for gasoline, which has in recent years accounted for approximately forty percent of our refined products transportation revenues, depends upon price, prevailing economic conditions and demographic changes in the markets we serve |
| Weather conditions, government policy and crop prices affect the demand for refined products used in agricultural operations |
| Demand for jet fuel, which has in recent years accounted for approximately twenty percent of our refined products revenues, depends on prevailing economic conditions and military usage |
| Propane deliveries are generally sensitive to the weather and meaningful year-to-year variances have occurred and will likely continue to occur |
| Our gathering system profits and cash flow depend on the volumes of natural gas produced from the fields served by our gathering systems and are subject to factors beyond our control |
| Regional production levels drive the volume of natural gas gathered on our system |
| We cannot influence or control the operation or development of the gas fields we serve |
| Production levels may be affected by: • the absolute price of, volatility in the price of, and market demand for natural gas; • changes in laws and regulations, particularly with regard to taxes, denial of reduced well density spacing, safety and protection of the environment; • the depletion rates of existing wells; • adverse weather and other natural phenomena; • the availability of drilling and service rigs; and • industry changes, including the effect of consolidations or divestitures |
| Any declines in the volumes of natural gas delivered for gathering on our system will adversely affect our revenues and could, if sustained or pronounced, materially adversely affect our financial position or results of operations |
| 25 ______________________________________________________________________ Our operations are subject to governmental laws and regulations relating to the protection of the environment and safety which may expose us to significant costs and liabilities |
| Our current operations as well as the construction of new facilities are subject to federal, state and local laws and regulations relating to protection of the environment and occupational health and safety |
| There is inherent risk of the incurrence of environmental costs and liabilities in our operations due to permit requirements, our handling of the products we gather or transport, air emissions related to our operations, historical industry operations, waste disposal practices and the construction of new facilities in environmentally protected areas, some of which may be material |
| We currently own or lease, and have owned or leased, many properties that have been used for many years to terminal or store crude oil, petroleum products or other chemicals |
| Owners, tenants or users of these properties may have disposed of or released hydrocarbons or solid wastes on or under them |
| Additionally, some sites we operate are located near current or former refining and terminaling operations |
| There is a risk that contamination has migrated from those sites to ours |
| In addition, the possibility exists that stricter laws, regulations or enforcement policies could significantly increase our compliance costs and the cost of any remediation that may become necessary, some of which may be material |
| Various state and federal governmental authorities including the US Environmental Protection Agency, the Bureau of Land Management, the Department of Transportation and the Occupational Safety and Health Administration have the power to enforce compliance with these regulations and the permits issued under them, and violators are subject to administrative, civil and criminal penalties, including civil fines, injunctions or both |
| Liability may be incurred without regard to fault under CERCLA, RCRA, and analogous state laws for the remediation of contaminated areas |
| Private parties, including the owners of properties through which our pipeline systems pass, may also have the right to pursue legal actions to enforce compliance as well as to seek damages for non-compliance with environmental laws and regulations or for personal injury or property damage |
| Our insurance may not cover all environmental risks and costs or may not provide sufficient coverage in the event an environmental claim is made against us |
| Our business may be adversely affected by increased costs due to stricter pollution control requirements or liabilities resulting from non-compliance with required operating or other regulatory permits |
| New environmental regulations might adversely affect our products and activities, including processing, storage, transportation and construction and maintenance activities, as well as waste management and air emissions |
| Federal and state agencies also could impose additional safety requirements, any of which could affect our profitability |
| Contamination resulting from spills or releases of petroleum products is an inherent risk within the petroleum pipeline industry |
| To the extent that groundwater contamination requiring remediation exists along our pipeline systems as a result of past operations, we believe any such contamination could be controlled or remedied without having a material adverse effect on our financial position, but such costs are site specific, and we cannot be assured that the effect will not be material in the aggregate |
| Terrorist attacks aimed at our facilities could adversely affect our business |
| On September 11, 2001, the United States was the target of terrorist attacks of unprecedented scale |
| Since the September 11th attacks, the United States government has issued warnings that energy assets, specifically our nation’s pipeline infrastructure, may be the future target of terrorist organizations |
| These developments have subjected our operations to increased risks |
| Any future terrorist attack on our facilities, those of our customers and, in some cases, those of other pipelines, could have a material adverse effect on our business |
| Our business involves many hazards and operational risks, some of which may not be covered by insurance |
| Our operations are subject to the many hazards inherent in the transportation of refined petroleum products, LPGs and petrochemicals, the transportation of crude oil and the gathering, compressing, treating and processing of natural gas and NGLs and in the storage of residue gas, including ruptures, leaks and fires |
| These risks could result in substantial losses due to personal injury or loss of life, severe damage to and destruction of property and equipment and pollution or other environmental damage and may result in curtailment or suspension of our related operations |
| We are not fully insured against all risks incident to our business |
| If a significant accident or event occurs that is not fully insured, it could adversely affect our financial position or results of operations |
| 26 ______________________________________________________________________ We depend on the leadership and involvement of our key personnel for the success of our business |
| We depend on the leadership and involvement of our key personnel to identify and develop business opportunities and make strategic decisions |
| We are currently searching for a permanent chief executive officer |
| Our chief financial officer was appointed in January 2006, and our general counsel will be appointed effective March 1, 2006, each having approximately twenty or more years of relevant experience |
| However, while retention plans are in place for certain senior executives, any future unplanned departures could have a material adverse effect on our business, financial conditions and results of operations |
| Legacy senior executives have compensation agreements in place; however, new leadership appointments are not party to any compensation agreements |
| Risks Relating to Our Partnership Structure We are a holding company and depend entirely on our operating subsidiaries’ distributions to service our debt obligations |
| We are a holding company with no material operations |
| If we cannot receive cash distributions from our operating subsidiaries, we will not be able to meet our debt service obligations |
| Our operating subsidiaries may from time to time incur additional indebtedness under agreements that contain restrictions, which could further limit each operating subsidiary’s ability to make distributions to us |
| The debt securities issued by us and the guarantees issued by our subsidiary guarantors will be structurally subordinated to the claims of the creditors of our operating subsidiaries who are not guarantors of the debt securities |
| Our non-guarantor operating subsidiaries currently have no indebtedness for borrowed money |
| Holders of the debt securities will not be creditors of our operating partnerships that have not guaranteed the debt securities |
| The claims to the assets of non-guarantor operating subsidiaries derive from our own partnership interests in those operating subsidiaries |
| Claims of our non-guarantor operating subsidiaries’ creditors will generally have priority as to the assets of those operating subsidiaries over our own partnership interest claims and will therefore have priority over the holders of our debt, including the debt securities |
| Our non-guarantor operating subsidiaries’ creditors may include: • general creditors, • trade creditors, • secured creditors, • taxing authorities, and • creditors holding guarantees |
| We may issue additional limited partnership interests, diluting existing interests of unitholders and benefiting our General Partner |
| Our partnership agreement allows us to issue additional Units and other equity securities without unitholder approval |
| These additional securities may be issued to raise cash or acquire additional assets or businesses or for other partnership purposes |
| Our partnership agreement does not limit the number of Units and other equity securities we may issue |
| If we issue additional Units or other equity securities, the proportionate partnership interest and voting power of our existing unitholders will decrease |
| The issuance could negatively affect the amount of cash distributed to unitholders and the market price of our Units |
| At our current level of cash distributions, our General Partner receives as incentive distributions approximately 50prca of any incremental increase in our distributions |
| As a result, acquisitions funded through the issuance of additional Units may benefit our General Partner more than our unitholders |
| Our tax treatment depends on our status as a partnership for federal income tax purposes and our exemption from state-level taxation by states |
| If we were treated as a corporation, cash distributions would be reduced substantially |
| One of the primary benefits of investing in our Units is dependent on the treatment of our entity as a partnership for federal income tax purposes |
| Currently, to maintain our partnership status under the “Qualifying Income Exception”, we must derive 90prca of annual gross income from certain activities |
| We may not be able to meet this requirement despite our best 27 ______________________________________________________________________ efforts |
| Additionally, the legal requirements for partnership status may change and we may not be able to meet the new standard |
| Several states are considering subjecting partnerships to tax at the entity level |
| If a state imposed tax on us at the entity level, the cash available for distributions would be reduced |
| Some of our executive officers and directors face potential conflicts of interest in managing our business |
| Certain of our executive officers and directors are also officers and/or directors of EPCO and other affiliates of EPCO These relationships may create conflicts of interest regarding corporate opportunities and other matters |
| The resolution of any such conflicts may not always be in our or our unitholders’ best interests |
| In addition, these overlapping executive officers and directors allocate their time among us, EPCO and other affiliates of EPCO These officers and directors face potential conflicts regarding the allocation of their time, which may adversely affect our business, results of operations and financial condition |
| Our General Partner and its affiliates may have conflicts with our partnership |
| The directors and officers of our General Partner and its affiliates (including EPCO and other affiliates of EPCO) have duties to manage the General Partner in a manner that is beneficial to its member |
| At the same time, the General Partner has duties to manage us in a manner that is beneficial to us |
| Therefore, the General Partner’s duties to us may conflict with the duties of its officers and directors to its member |
| Provisions of our partnership agreement, the partnership agreements for each of our operating partnerships and/or the administrative services agreement provide for a standard of care that may allow our General Partner to approve actions in the context of possible conflicts, which under state law a corporation would be required to analyze with greater scrutiny |
| Possible conflicts may include, among others, the following: • decisions of our General Partner regarding the amount and timing of cash expenditures, borrowings and issuances of additional Units or other equity securities can affect the amount of incentive compensation payments we make to our General Partner; • decisions of our General Partner regarding our acquisitions, expansions or business strategy, which may provide benefits to the General Partner and its affiliates; • under our partnership agreement we reimburse the General Partner for the costs of managing and operating us; • under our partnership agreement, it is not a breach of our General Partner’s fiduciary duties for affiliates of our General Partner to engage in activities that compete with us; • the directors and officers of our General Partner are allowed to resolve conflicts of interest involving us and EPCO and its affiliates; • the directors and officers of our General Partner are allowed to take into account the interests of parties other than us, such as EPCO and its affiliates, in resolving conflicts of interest; • any resolution of a conflict of interest by the directors and officers of our General Partner not made in bad faith and that is fair and reasonable to us shall be binding on the partners and shall not be a breach of our partnership agreement; • we do not have any employees and we rely solely on employees of EPCO; • our partnership agreement does not restrict the General Partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf; and • the directors and officers of our General Partner and EPCO control the enforcement of obligations owed to us by our general partner, EPCO and its affiliates |
| In addition, the partnership agreements grant broad rights of indemnification to the General Partner and its directors, officers, employees and affiliates for acts taken in good faith in a manner believed to be in or not opposed to our best interests |
| We have significant business relationships with entities controlled by Dan L Duncan, including EPCO and its affiliates |
| For detailed information on these relationships and related transactions with these entities, see Item 13 included within this Report |
| Unitholders have limited voting rights and control of management |
| Our General Partner manages and controls our activities and the activities of our operating partnerships |
| Unitholders have no right to elect the General Partner or the directors of the General Partner on an annual or other ongoing basis |
| However, if the General Partner resigns or is removed, its successor may be elected by holders of a majority of the Units |
| Unitholders may remove the General Partner only by a vote of the holders of at least 66 2/3prca of the Units and only after receiving state regulatory approvals required for the transfer of control of a public utility |
| As a result, unitholders will have limited influence on matters affecting our operations, and third parties may find it difficult to gain control of us or influence our actions |
| If EPCO or other entities that own or control our General Partner are presented with certain business opportunities, Enterprise will have the first right to pursue such opportunities |
| Our previous relationship with DEFS and Duke Energy from time to time resulted in business opportunities for us |
| We do not know whether similar opportunities will be available from EPCO or its affiliates |
| EPCO, Enterprise, DFI and certain affiliated entities (collectively, the “Group”), our General Partner and us, are parties to an administrative services agreement that provides, among other things, that neither the Group, on one hand, nor our General Partner, on the other hand, have any obligation to present business opportunities to the other |
| To the extent that our General Partner shares executive offices or other personnel with EPCO and its affiliates, there may be conflicts in the allocation of their time and compensation costs between our business and the business of EPCO and its other affiliates |
| Our General Partner manages our operations and activities |
| We have entered into an administrative services agreement with EPCO and its affiliates to provide all administrative, operational and other services, including employee support, for us and our General Partner |
| Some of the EPCO employees providing these services 28 ______________________________________________________________________ to us may also have duties and responsibilities related to EPCO and its affiliates, including Enterprise |
| The services performed by these shared personnel will generally be limited to non-commercial functions, including but not limited to human resources, information technology, financial and accounting services and legal services |
| EPCO may encounter conflicts of interest in allocating the available time and employee costs of shared personnel between us and other EPCO affiliates |
| We do not have an independent compensation committee and our independent directors do not deliberate, decide or approve recommendations related to the compensation of our executive officers or other key employees |
| The determination of executive officer and key employee compensation could involve conflicts of interest resulting in economically unfavorable arrangements for us |