EX-99.2 6 d871575dex992.htm EX-99.2 EX-99.2

Exhibit 99.2

EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Consolidated Financial Statements

December 31, 2014, 2013 and 2012

(With Independent Auditors’ Report Thereon)


Independent Auditors’ Report

The Board of Directors and Stockholders

Explorer Pipeline Company:

We have audited the accompanying consolidated financial statements of Explorer Pipeline Company and its subsidiary, which comprise the consolidated balance sheets as of December 31, 2014 and 2013, and the related consolidated statements of income and retained earnings, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2014, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements 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 consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.


Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Explorer Pipeline Company and its subsidiary as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in accordance with U.S. generally accepted accounting principles.

/s/KPMG LLP

Tulsa, Oklahoma

February 13, 2015

 

2


EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Consolidated Balance Sheets

December 31, 2014 and 2013

 

Assets    2014     2013  

Current assets:

    

Cash and cash equivalents

   $ 32,767,094        39,236,791   

Accounts receivable – trade

     53,181,162        49,413,284   

Accounts receivable – affiliated companies

     3,964,962        10,754,440   

Income tax receivable

     4,145,651        9,681,303   

Unbilled revenue – other

     3,898,820        3,125,139   

Unbilled revenue – affiliated companies

     503,514        571,507   

Materials and supplies

     10,257,344        9,158,537   

Other current assets

     11,742,296        11,656,776   
  

 

 

   

 

 

 

Total current assets

  120,460,843      133,597,777   
  

 

 

   

 

 

 

Property, plant and equipment, at cost (note 3)

  862,119,923      815,665,009   

Accumulated depreciation

  (389,802,181   (369,081,738
  

 

 

   

 

 

 

Net property, plant and equipment

  472,317,742      446,583,271   

Deferred charges and other assets

  16,393,126      17,417,719   
  

 

 

   

 

 

 

Total assets

$ 609,171,711      597,598,767   
  

 

 

   

 

 

 

 

3


EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Consolidated Balance Sheets

December 31, 2014 and 2013

 

Liabilities and Stockholders’ Equity    2014     2013  

Current liabilities:

    

Accounts payable

   $ 38,322,379        50,423,097   

Accrued expenses and other current liabilities (note 6)

     8,078,903        10,899,547   

Accrued interest

     4,648,636        5,069,034   

Current installments of unsecured notes and revolver (note 4)

     16,363,636        16,363,636   
  

 

 

   

 

 

 

Total current liabilities

  67,413,554      82,755,314   
  

 

 

   

 

 

 

Long-term debt (note 4):

Series N note, 4.85%, due 2015

  —        5,000,000   

Series O note, 6.15%, due 2017

  250,000,000      250,000,000   

Series K note, 6.76%, due 2017

  9,090,909      13,636,364   

Series L note, 7.01%, due 2022

  47,727,273      54,545,455   

Advancing term debt

  12,000,000      —     
  

 

 

   

 

 

 

Total long-term debt, net of current installments

  318,818,182      323,181,819   

Commitments and contingencies (note 8)

Deferred interest income

  1,702,074      2,470,745   

Other noncurrent liabilities (note 6)

  33,296,797      23,446,027   

Deferred income taxes

  77,665,367      78,828,186   
  

 

 

   

 

 

 

Total liabilities

  498,895,974      510,682,091   
  

 

 

   

 

 

 

Stockholders’ equity:

Common stock, $1 par value per share. Authorized and issued 21,920 shares

  21,920      21,920   

Accumulated other comprehensive loss

  (8,980,775   (4,499,024

Retained earnings

  119,234,592      91,393,780   
  

 

 

   

 

 

 

Total stockholders’ equity

  110,275,737      86,916,676   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

$ 609,171,711      597,598,767   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Consolidated Statements of Income and Retained Earnings

Years Ended December 31, 2014, 2013 and 2012

 

     2014     2013     2012  

Revenues:

      

Operating revenue

   $ 339,764,749        299,287,081        227,818,649   

Other income

     2,700,323        2,287,539        74,467,879   
  

 

 

   

 

 

   

 

 

 

Total revenues

  342,465,072      301,574,620      302,286,528   
  

 

 

   

 

 

   

 

 

 

Costs and expenses:

Operations and maintenance

  120,521,479      96,456,631      74,399,079   

General and administrative

  35,949,800      34,168,679      29,831,081   

Taxes, other than income taxes

  9,289,983      8,980,741      9,462,069   

Depreciation and amortization

  23,270,900      22,585,098      22,248,601   

Interest expense

  20,086,300      21,172,109      22,113,501   

Impairment loss

  —        —        8,698,391   
  

 

 

   

 

 

   

 

 

 

Total costs and expenses

  209,118,462      183,363,258      166,752,722   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

  133,346,610      118,211,362      135,533,806   

Income taxes:

Current income taxes (note 5)

  47,162,926      39,970,513      48,169,960   

Deferred income tax expense (note 5)

  1,526,232      3,522,563      1,278,885   
  

 

 

   

 

 

   

 

 

 

Total income taxes

  48,689,158      43,493,076      49,448,845   
  

 

 

   

 

 

   

 

 

 

Net income

  84,657,452      74,718,286      86,084,961   

Retained earnings, beginning of year

  91,393,780      84,167,174      41,045,412   
  

 

 

   

 

 

   

 

 

 

Retained earnings, available

  176,051,232      158,885,460      127,130,373   

Less dividends

  (56,816,640   (67,491,680   (42,963,199
  

 

 

   

 

 

   

 

 

 

Retained earnings, end of year

$ 119,234,592      91,393,780      84,167,174   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2014, 2013 and 2012

 

     2014     2013      2012  

Net income

   $ 84,657,452        74,718,286         86,084,961   

Other comprehensive income (loss), net of tax:

       

Pension and other postretirement benefits

     (4,481,751     6,487,678         1,594,761   
  

 

 

   

 

 

    

 

 

 

Comprehensive income

$ 80,175,701      81,205,964      87,679,722   
  

 

 

   

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

6


EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Consolidated Statements of Cash Flows

Years Ended December 31, 2014, 2013 and 2012

 

     2014     2013     2012  

Cash flows from operating activities:

      

Cash received from customers

   $ 342,080,661        297,496,935        198,087,217   

Cash paid to suppliers and employees

     (168,944,661     (123,495,533     (105,762,152

Other income received

     2,700,323        2,287,538        2,037,879   

Interest paid (net of amounts capitalized)

     (21,275,369     (21,899,979     (21,945,594

Income taxes paid

     (41,627,274     (51,759,125     (44,483,048

Ad valorem and other taxes paid

     (9,289,983     (8,980,741     (9,462,069
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

  103,643,697      93,649,095      18,472,233   
  

 

 

   

 

 

   

 

 

 

Cash flows used in investing activities:

Capital expenditures

  (48,206,323   (19,124,885   (15,123,699

Proceeds from the sale of assets

  123,443      —        75,000,000   

Return on investment

  (10,000   16,297      —     
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

  (48,092,880   (19,108,588   59,876,301   
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

Payment of financing costs

  (840,238   (498,005   (67,112

Repayment of long term notes

  (16,363,636   (16,363,636   (16,363,636

Proceeds from long-term borrowing

  12,000,000      —        —     

Proceeds from settlement of interest rate swap

  —        3,077,000      —     

Dividends paid

  (56,816,640   (67,491,680   (42,963,199
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

  (62,020,514   (81,276,321   (59,393,947
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

  (6,469,697   (6,735,814   18,954,587   

Cash and cash equivalents, beginning of year

  39,236,791      45,972,605      27,018,018   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of year

$ 32,767,094      39,236,791      45,972,605   
  

 

 

   

 

 

   

 

 

 

Reconciliation of net income to net cash provided by operating activities:

Net income

$ 84,657,452      74,718,286      86,084,961   

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

  23,270,900      22,585,098      22,248,601   

Noncash portion of change in value of interest rate swap

  (768,671   (329,431   —     

Gain on sale of assets

  —        —        (72,430,000

Impairment loss

  —        —        8,698,391   

Deferred income tax expense

  1,526,232      3,522,563      1,278,885   

Decrease (increase) in accounts receivable and unbilled revenue

  2,315,912      (1,790,148   (29,731,434

Decrease in interest and other receivables

  —        568,795      77,834   

(Increase) decrease income tax receivable

  5,535,652      (9,681,303   —     

(Increase) in materials and supplies

  (1,098,807   (960,471   (165,932

Decrease (increase) in other current assets

  (85,520   3,390,230      (6,434,332

Decrease (increase) in deferred charges and other assets

  952,340      (4,601,970   —     

(Decrease) increase in accounts payable, accrued expenses and

other current liabilities

  (14,921,362   7,168,682      5,068,271   

(Decrease) increase in accrued interest

  (420,398   (967,235   90,073   

Increase (decrease) in income tax payable

  —        (2,107,309   3,686,915   

Increase in other noncurrent liabilities

  2,679,967      2,133,308      —     
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

$ 103,643,697      93,649,095      18,472,233   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosure of noncash items:

Change in fair value of interest rate swap and corresponding change in fair value of long-term debt

$ —        470,103      905,322   

Impact of pension accounting:

Increase (decrease) in accrued expenses and other current liabilities

$ 7,170,802      (10,396,287   (2,551,614

Increase (decrease) to accumulated other comprehensive loss

  4,481,751      (6,487,678   1,594,761   

Decrease (increase) to deferred income tax liability

  2,689,051      (3,908,608   (956,853

See accompanying notes to consolidated financial statements.

 

7


EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

 

(1) Summary of Significant Accounting Policies

 

  (a) Description of Business

Explorer Pipeline Company and subsidiary (the Company) owns and operates an approximate 1,830 mile common carrier petroleum products pipeline system. Products shipped include gasoline, jet fuel, diesel and diluent. The system extends from Gulf Coast refineries and import facilities in Texas and into the mid-western United States. Through connections with other product pipelines, the Company serves more than seventy major population centers in sixteen states. Approximately 19%, 21% and 29% of the Company’s operating revenues were derived from its owner companies in 2014, 2013 and 2012 respectively. Operating revenues include revenues from 10 significant nonaffiliated customers of approximately 51%, 55% and 51% of operating revenues in 2014, 2013 and 2012 respectively. The Company is dependent upon continued demand in the population centers it serves for petroleum products and availability of product to its customers.

The pipeline operations of the Company are subject, as to rate filings, accounting, and other matters, to the regulatory authority of the Federal Energy Regulatory Commission (FERC).

 

  (b) Principles of Consolidation

The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiary, Explorer Pipeline Services Company. All significant intercompany balances and transactions have been eliminated in consolidation.

 

  (c) Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents.

 

  (d) Transportation Revenue

Transportation revenue is recorded at delivery, except that one half of the revenue on shipments in transit at year end is accrued.

 

  (e) Materials and Supplies

Materials and supplies are stated at the lower of average cost or market.

 

  (f) Property, Plant and Equipment

Property, plant and equipment are stated at cost, including any allocable amount of administrative and other costs incurred in connection with the construction of the pipeline. Retirements and sales of property, plant and equipment are charged to accumulated depreciation as prescribed by FERC when related specific assets cannot be identified. Depreciation is provided by the straight line method at rates prescribed by FERC which are in accordance with US GAAP. These rates range from 2.25% to 20.00% per annum.

 

8 (Continued)


EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

 

 

  (g) Impairments

Long lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

 

  (h) Deferred Charges and Other Assets

Deferred charges and other assets consist of tank heels, environmental insurance receivable, and deferred loan costs that are being amortized over the lives of the related loans. Amortization expense related to deferred loan costs was $922,491, $898,153 and $598,693 for 2014, 2013 and 2012 respectively, and is reflected in depreciation and amortization on the consolidated statements of income and retained earnings.

 

  (i) Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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 on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

 

  (j) Pension and Other Postretirement Plans

The Company has a defined benefit pension plan covering all employees employed prior to January 1, 2007. The benefits are based on years of service and employee compensation. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. The Company also sponsors a defined benefit healthcare plan for substantially all retirees and employees.

The Company records annual amounts relating to its pension and postretirement plans based on calculations that incorporate various actuarial and other assumptions, including discount rates, mortality, assumed rates of return, compensation increases, turnover rates and healthcare cost trend rates. The Company reviews its assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is appropriate to do so. The effect of modifications to those assumptions is recorded in accumulated other comprehensive income and amortized to net periodic cost over future periods using the corridor method. The Company believes

 

9 (Continued)


EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

 

that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience and market conditions.

The net periodic costs are recognized as employees render the services necessary to earn the postretirement benefits.

 

  (k) Environmental Remediation Contingencies

Liabilities for environmental remediation contingencies, environmental remediation costs arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. The costs for a specific clean-up site are discounted if the aggregate amount of the obligation and the amount and timing of the cash payments for that site are fixed or reliably determinable based upon information derived from the remediation plan for that site. Recoveries from third parties that are probable of realization are separately recorded, and are not offset against the related environmental liability.

Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of a remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Recoveries for environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. The discounted and undiscounted amount of the environmental remediation obligations net of insurance receivable is $6,718,590 and $8,099,554, respectively, as of December 31, 2014 and $6,275,242 and $7,674,045, respectively, as of December 31, 2013. The discounted liability and insurance receivable is reflected in other non-current liabilities and deferred charges and other assets, respectively, on the consolidated balance sheets.

 

  (l) Use of Estimates

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. These estimates include fair value of derivative instruments, depreciation periods for property, plant and equipment, pension obligations, and environmental remediation contingencies.

 

  (m) Derivative Instruments and Hedging Activities

The Company uses interest rate swaps to manage interest rate risk. All derivative instruments are recorded at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows, or foreign currencies. If the hedged exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other

 

10 (Continued)


EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness, as well as the ineffective portion of the hedge, are reported in earnings immediately.

 

  (n) Asset Retirement Obligations

The Company records the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of the fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. After the initial measurement of the asset retirement obligation, the liability is adjusted at the end of each reporting period to reflect changes in the estimated future cash flows underlying the obligation. Determination of any amounts recognized is based upon numerous estimates and assumptions, including future retirement costs, future inflation rates and the credit-adjusted risk-free interest rates. If the obligation is settled for an amount other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement.

The Company is obligated by contractual or regulatory requirements to remove facilities or perform other remediation upon retirement of the Company’s assets. However, management is not able to reasonably determine the fair value of the asset retirement obligations since future dismantlement and removal dates are indeterminate. The Company will record such asset retirement obligations in the period in which more information becomes available to reasonably estimate the settlement dates of the retirement obligations. As of December 31, 2014 and 2013, there was no asset retirement obligation recorded.

 

  (o) Reclassifications

Certain reclassifications have been made in the prior years’ consolidated financial statements to conform to the current year’s presentation.

 

(2) Company Ownership

The Company’s stockholders at December 31, 2014 are:

 

     Shares      Percentage  

EXPL Pipeline Investment LLC

     1,490         6.80

Phillips 66 Pipeline LLC

     2,386         10.88

Shell Pipeline Company LP

     7,885         35.97

MPL Investment LLC

     5,372         24.51

Phillips 66 Company

     1,879         8.57

Sunoco Pipeline L.P.

     2,908         13.27
  

 

 

    

 

 

 

Total shares authorized and issued

  21,920      100.00
  

 

 

    

 

 

 

 

11 (Continued)


EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

 

 

(3) Property, Plant and Equipment

A summary of property, plant and equipment by class of asset is as follows:

 

     December 31  
     2014      2013  

Land

   $ 9,822,408        9,682,408  

Rights-of-way

     23,182,414        23,182,414  

Line pipe, fittings and pipeline

     376,725,958        373,932,910  

Buildings

     17,730,875        17,367,105  

Pumping and station equipment and tanks

     344,025,929        339,730,855  

Office furniture, vehicles and other assets

     33,596,512        31,266,016  

Noncarrier property

     277,306        277,306  

Construction in progress

     56,758,521        20,225,995  
  

 

 

    

 

 

 
$ 862,119,923     815,665,009  
  

 

 

    

 

 

 

Total depreciation of property, plant and equipment for 2014, 2013 and 2012 was $22,348,409, $21,686,945 and $21,649,908 respectively. The Company had no capitalized interest for 2014, 2013 and 2012.

 

(4) Debt

Effective August 21, 2014 the Company has a commercial paper program supported by a renegotiated $100,000,000 revolving credit agreement with a $75,000,000 advancing term loan facility with, Bank of Oklahoma, JP Morgan Chase, BANCFIRST, and US Bank, which expires August 21, 2019. The Company had a commercial paper program supported by an $80,000,000 revolving credit agreement with, JP Morgan Chase, Bank of Oklahoma and US Bank, which was scheduled to expire August 19, 2015, but was renegotiated effective August 21, 2014. This revolving credit agreement allows outstanding commercial paper and draws on the revolver to be classified as noncurrent. There were no amounts outstanding under the commercial paper program or revolver at December 31, 2014 and 2013. There was $12,000,000 outstanding on the advancing term loan as of December 31, 2014.

The Company also has long term debt outstanding under the Series K, L, N and O unsecured notes. Required annual principal payments are as follows:

 

2015

$ 16,363,636   

2016

  11,963,636   

2017

  261,963,636   

2018

  7,418,182   

2019

  17,018,182   

Thereafter

  20,454,546   

 

12 (Continued)


EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

 

The notes have certain restrictive financial debt covenants, the most significant of which are a leverage ratio and coverage ratio covenant. The Company was in compliance with all restrictive financial debt covenants as of December 31, 2014 and 2013.

 

(5) Income Taxes

Income tax expense for the years ended December 31, 2014, 2013 and 2012 consists of:

 

     2014      2013      2012  

Current:

        

Federal

   $ 43,379,628        36,676,943        45,408,894  

State

     3,783,298        3,293,570        2,761,066  
  

 

 

    

 

 

    

 

 

 
  47,162,926     39,970,513     48,169,960  
  

 

 

    

 

 

    

 

 

 

Deferred:

Federal

  1,410,099     3,274,053     1,205,580  

State

  116,133     248,510     73,305  
  

 

 

    

 

 

    

 

 

 
  1,526,232     3,522,563     1,278,885  
  

 

 

    

 

 

    

 

 

 
$ 48,689,158     43,493,076     49,448,845  
  

 

 

    

 

 

    

 

 

 

Temporary differences between the consolidated financial statement carrying amounts and tax basis of property, plant and equipment (principally differences in depreciation), certain accrued liabilities, and pension and other postretirement benefit plan liabilities gave rise to substantially all of the net deferred tax liability at December 31, 2014, 2013 and 2012.

The effective tax rate exceeds the U.S. federal income tax rate of 35% in 2014, 2013 and 2012 primarily due to state income taxes.

 

(6) Pension and Other Postretirement Benefits

The Company has a defined benefit pension plan covering all employees employed prior to January 1, 2007. The benefits are based on years of service and employee’s compensation.

In addition to the defined benefit pension plan, the Company makes available postretirement medical and life benefits to all retired employees and their eligible dependents. For the year ended December 31, 2014, participants under the age of 65 were eligible to receive reimbursement through a Health Reimbursement Account for eligible premium expenses associated with health insurance enrollment. For the 2014 Plan Year, eligible retirees were eligible for up to $400 per month of eligibility and eligible retirees plus eligible dependents were eligible for up to $1,100 per month of eligibility. Life insurance for participants under the age of 65 was contributory and participants paid 30% of the active premium for the face amount of life benefits. Upon reaching age 65, participants paid all of any Part D Prescription Plan and 30% of the fully insured rate for the cost of medical benefits with the Company paying the full cost for life benefits.

 

13 (Continued)


EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

 

For the year ended December 31, 2013, the plan was contributory and participants under age 65 paid approximately 35% of the cost of medical benefits and 30% of the active premium for the face amount of life benefits. Upon reaching age 65, participants paid 30% of the cost of medical benefits with the Company paying the full cost for life benefits. For the year ended December 31, 2012, the plan was contributory and participants under age 65 paid approximately 35% of the cost of medical benefits and 30% of the active premium for the face amount of life benefits. Upon reaching age 65, participants paid all of any Part D Prescription Plan and 25% of the remaining fully insured rate with the Company paying the full cost for life benefits.

The measurement date used to determine pension and other postretirement benefit obligations and plan assets for the pension plan and the postretirement benefit plan is December 31.

The following table sets forth the plans’ benefit obligations, fair value of plan assets, and funded status at December 31, 2014 and 2013:

 

     Pension benefits      Postretirement benefits  
     2014      2013      2014      2013  

Projected benefit obligation

   $ (37,141,848      (30,705,119      (16,495,524      (11,895,846

Fair value of plan assets

     32,507,733         30,786,487        —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Funded status

$ (4,634,115   81,368      (16,495,524   (11,895,846
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued benefit cost

$ (4,634,115   81,368      (16,495,524   (11,895,846

Accrued benefit cost is reflected in accrued expenses and other current liabilities on the consolidated balance sheets.

Accumulated other comprehensive loss includes, $8,980,775 and $4,499,024, related to the plans at December 31, 2014 and 2013, respectively. This amount is primarily comprised of net actuarial loss of $14,353,240 and $7,182,438, at December 31, 2014 and 2013, respectively.

The accumulated benefit obligation for the pension plan was $31,145,892 and $25,777,513 at December 31, 2014 and 2013, respectively.

 

14 (Continued)


EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

 

Net periodic benefit cost recognized and other changes in plan assets and benefit obligations recognized in accumulated other comprehensive loss in 2014 and 2013 were:

 

     Pension benefits      Postretirement benefits  
     2014      2013      2014      2013  

Net periodic benefit cost recognized

   $ 1,808,664         2,189,621         1,153,777         1,502,186   

Other changes in plan assets and benefit obligations:

           

Amortization of transition obligation

     —           —           (16,793      (41,140

Net actuarial loss (gain)

     4,952,047         (4,716,856      3,858,032         (3,179,200

Amortization of net loss

     (885,228      (1,301,405      —           (43,919

Prior service credit

     —           —           —           (964,477

Amortization of prior service cost

     —           —           —           (91,208
  

 

 

    

 

 

    

 

 

    

 

 

 

Total recognized in accumulated other comprehensive income (loss)

  4,066,819      (6,018,261   3,841,239      (4,319,944
  

 

 

    

 

 

    

 

 

    

 

 

 

Total recognized in net periodic benefit cost and accumulated other comprehensive income (loss)

$ 5,875,483      (3,828,640   4,995,016      (2,817,758
  

 

 

    

 

 

    

 

 

    

 

 

 

The net loss for the defined benefit pension plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year is $1,220,000. The transition obligation, prior service cost, and net loss for the defined benefit postretirement plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are $0 and $0 respectively.

Weighted average assumptions used to determine benefit obligations at December 31, 2014 and 2013 were as follows:

 

     Pension
benefits
    Postretirement
benefits
 
     2014     2013     2014     2013  

Discount rate

     3.64     4.46     3.94     4.90

Rate of compensation increase

     3.00        3.00        3.00        3.00   

 

  15   (Continued)


EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

 

Weighted average assumptions used to determine net benefit cost for the years ended December 31, 2014 and 2013 were as follows:

 

     Pension
benefits
    Postretirement
benefits
 
     2014     2013     2014     2013  

Discount rate

     4.46     3.55     4.90     3.98

Expected long-term rate of return on plan assets

     6.00        6.00        —          —     

Rate of compensation increase

     3.00        3.00        3.00        3.00   

The Company’s overall expected long term rate of return on assets is 6.00%. The expected long term rate of return is based on the portfolio as a whole and not on the sum of the returns on individual asset categories. The return is based exclusively on historical returns, without adjustments.

For measurement purposes, a 7.5% annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 2014, dropping to an ultimate 5% trend in 2019.

The following table summarizes benefit costs, benefits paid, and employer contributions for the years ended December 31, 2014, 2013 and 2012:

 

     Pension benefits      Postretirement benefits  
     2014      2013      2012      2014      2013      2012  

Benefit cost

   $ 1,808,664         2,189,621         2,097,233         1,153,777         1,502,186         1,430,898   

Benefits paid

     1,529,838         2,516,521         1,719,685         395,338         379,987         328,378   

Employer contributions

     1,160,000         1,200,000         4,859,367         395,338         379,987         328,378   

 

  16   (Continued)


EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

 

 

  (a) Plan Assets

The asset allocations of the Company’s pension benefits at December 31, 2014 and 2013 measurement dates were as follows:

 

     Pension benefits – plan assets  
            Fair value measurements at
December 31, 2014
 
     Total      Quoted
prices in
active
markets for
identical
assets
(Level 1)
     Significant
observable
inputs
(Level 2)
     Significant
unobservable
inputs
(Level 3)
 

Asset category:

           

Cash

   $ 4,871,290         4,871,290         —           —     

Mutual funds:

           

U.S. equity

     17,888,024         17,888,024         —           —     

International equity

     1,628,777         1,628,777         —           —     

Bond funds

     8,119,642         8,119,642         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 32,507,733      32,507,733      —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Pension benefits – plan assets  
            Fair value measurements at
December 31, 2013
 
     Total      Quoted
prices in
active
markets for
identical
assets

(Level 1)
     Significant
observable
inputs
(Level 2)
     Significant
unobservable
inputs
(Level 3)
 

Asset category:

           

Cash

   $ 4,567,717         4,567,717         —           —     

Mutual funds:

           

U.S. equity

     17,047,081         17,047,081         —           —     

International equity

     1,559,712         1,559,712         —           —     

Bond funds

     7,611,977         7,611,977         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 30,786,487      30,786,487      —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

17 (Continued)


EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

 

 

     Plan assets  
     December 31  
     2014     2013  

Asset category:

    

Cash

     15.0     14.8

Equity securities

     60.0        60.5   

Debt securities

     25.0        24.7   
  

 

 

   

 

 

 

Total

  100.0   100.0
  

 

 

   

 

 

 

The Company’s investment policies and strategies for the pension plan use target allocations for the individual asset categories. The Company’s investment goals are to maximize returns subject to specific risk management policies. Its risk management policies permit investments in mutual funds, and prohibit direct investments in debt and equity securities and derivative financial instruments. The Company addresses diversification by the use of mutual fund investments whose underlying investments are in domestic and international fixed income securities and domestic and international equity securities. These mutual funds are readily marketable and can be sold to fund benefit payment obligations as they become payable.

 

  (b) Cash Flows

The Company’s funding policy is to contribute annually no less than the minimum requirement under the Employee Retirement Income Security Act of 1974. Pursuant to this policy, the Company expects to contribute $1,200,000 and $426,461 to its pension plan and postretirement benefit plan, respectively in 2015.

The pension and postretirement benefits expected to be paid in each year 2015 – 2019 are $1,777,180; $1,653,702; $2,246,684; $2,927,095 and $3,725,255 respectively. The aggregate benefits expected to be paid in the five years thereafter are $17,972,499. The expected benefits are based on the same assumptions used to measure the Company’s benefit obligations at December 31, 2014 and include estimated future employee service.

The Company also has a contributory thrift plan which is available to substantially all employees. The Company matches employee contributions up to 6% of the employee’s base salary. In addition, a separate 401(k) plan went into effect January 1, 2007 for all employees hired subsequent to that date. Total contributions by the Company to the two plans were approximately $1,485,135, $1,374,588 and $1,217,709 for 2014, 2013 and 2012, respectively.

 

(7) Derivative Instruments and Hedging Activities

The Company is subject to the risk of fluctuation in interest rates in the normal course of business. The Company manages interest rate risk through the use of fixed rate debt, floating rate debt and, at times, interest rate swaps. The Company does not speculate using derivative instruments.

The Company had one interest rate swap agreement, which was designated a fair value hedge. The interest rate swap was redeemed during 2013. The interest rate under the swap reset semiannually based on the six-month LIBOR at the reset date. The amount remaining to be realized in earnings related to the interest rate

 

18 (Continued)


EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

 

swap was $1,702,074 at December 31, 2014. Long-term debt was also adjusted to recognize the change in fair value of the related hedged liability. The amount remaining in long-term debt at the date of redemption will be recognized in earnings over the remainder of the original term of the interest rate swap.

By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, the Company is not exposed to the counterparty’s credit risk in those circumstances. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties. The derivative instruments entered into by the Company do not contain credit risk related contingent features.

Market risk is the adverse effect on the value of an interest rate swap that results from a change in interest rates. The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

 

(8) Commitments and Contingencies

The Company leases pipeline right of way and office premises and equipment. All of the Company’s leases are classified as operating leases.

The following is a schedule by year of minimum future rentals on operating leases for office premises, equipment and right-of-way commitments as of December 31, 2014:

 

Year ending December 31:

2015

  4,290,119   

2016

  4,240,641   

2017

  4,272,500   

2018

  4,296,623   

2019

  4,319,732   

Thereafter

  10,351,252   

The Company has entered into both cancelable and noncancelable leases for pipeline right of way. All right of way leases are essentially future lease commitments since they relate to the operation of the pipeline and are necessary for its continued operation. The annual rental payments for these leases were approximately $428,635, $409,074 and $383,674 for December 31, 2014, 2013 and 2012 respectively. Total rental expense was approximately $4,302,356, $3,208,702 and $2,487,932 for the years ended December 31, 2014, 2013 and 2012 respectively, and is reflected in general and administrative expenses on the consolidated statements of income and retained earnings. It is expected that, in the normal course of business, leases that expire will be renewed or replaced by other leases; thus, it is anticipated that future annual rental expense will not be substantially less than the amount shown for 2014.

At December 31, 2014 and 2013, the Company had letters of credit outstanding of approximately $2,005,000 related to insurance companies and remediation projects.

 

19 (Continued)


EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

 

The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

 

(9) Fair Value Measurements and the Fair Value Option

 

  (a) Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, accounts receivable, receivables from affiliated companies, interest and other receivables, other assets, accounts payable, accrued expenses and other current liabilities, and accrued interest approximate fair value because of the short maturity of those instruments. The estimated fair value of the Company’s Series K, L, N, and O secured notes and advancing term note at December 31, 2014 and 2013 was a $368,232,299 and $377,067,565, respectively. The carrying amount of these notes was $335,181,818 and $339,545,455 at December 31, 2014 and 2013, respectively.

The fair values of the financial instruments discussed above represent management’s best estimates of the amounts that would be received to sell those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants at that date. Those fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Company’s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by the Company based on the best information available in the circumstances.

The fair value of the Company’s long term debt is measured using quoted offered side prices when quoted market prices are available. If quoted market prices are not available, the fair value is determined by discounting the future cash flows of each instrument at rates that reflect, among other things, market interest rates and the Company’s credit standing. In determining an appropriate spread to reflect its credit standing, the Company considers credit default swap spreads, bond yields of other long term debt offered by the Company, and interest rates currently offered to the Company for similar debt instruments of comparable maturities by the Company’s bankers as well as other banks that regularly compete to provide financing to the Company.

 

  (b) Fair Value Hierarchy

The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

 

    Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

20 (Continued)


EXPLORER PIPELINE COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014, 2013 and 2012

 

 

    Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

    Level 3 inputs are unobservable inputs for the asset or liability.

The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The pension plan assets are considered Level 1 and there are no Level 2 or 3 assets or liabilities in the financial statements at fair value.

The consolidated financial statements as of and for the years ended December 31, 2014 and 2013 do not include any nonrecurring fair value measurements relating to assets or liabilities.

 

(10) Sale of Pipeline

In August 2012, the Company sold a pipeline segment, approximately 50 miles in length that runs from the Lake Charles, Louisiana area to the Port Arthur, Texas area for $75,000,000. The sale included the associated pump station facilities and all other related assets. The sale resulted in a gain of approximately $72,430,000 which is included in other income in the consolidated statements of income and retained earnings. The Company obtained approval from FERC to recognize a gain on the sale of the assets.

 

(11) Subsequent Events

Management has evaluated subsequent events through February 13, 2015, the date these financial statements were available to be issued. There were no subsequent events that required recognition or disclosure in the financial statements.

 

21