UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-12295
GENESIS ENERGY, L.P.
(Exact name of registrant as specified in its charter)
Delaware 76-0513049
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 Dallas, Suite 2500, Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 860-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
This report contains 17 pages
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GENESIS ENERGY, L.P.
Form 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets - March 31, 1999 and
December 31, 1998 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 5
Condensed Consolidated Statement of Partners' Capital for the
Three Months Ended March 31, 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
<PAGE>
GENESIS ENERGY, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
1999 1998
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $7,157 $7,710
Accounts receivable -
Trade 142,497 167,600
Related party 4,016 4,634
Inventories 6,641 1,966
Other 4,484 3,306
--------- ---------
Total current assets 164,795 185,216
FIXED ASSETS, at cost 117,915 119,310
Less: Accumulated depreciation (20,460) (20,707)
--------- ---------
Net fixed assets 97,455 98,603
OTHER ASSETS, net of amortization 13,004 13,354
-------- --------
TOTAL ASSETS $275,254 $297,173
======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable -
Trade $148,943 $172,143
Related party 4,717 6,200
Accrued liabilities 4,237 5,171
-------- --------
Total current liabilities 157,897 183,514
LONG-TERM DEBT 22,500 15,800
COMMITMENTS AND CONTINGENCIES (Note 8)
MINORITY INTERESTS 30,266 29,988
PARTNERS' CAPITAL
Common unitholders, 8,625 units issued
and 8,604 units outstandin 63,618 66,832
General partner 1,291 1,357
-------- --------
Subtotal 64,909 68,189
Treasury Units, 21 units (318) (318)
-------- --------
Total partners' capital 64,591 67,871
-------- --------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $275,254 $297,173
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
GENESIS ENERGY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit amounts)
(Unaudited)
Three Months Ended March 31,
1999 1998
REVENUES:
Gathering and marketing revenues
Unrelated parties $370,373 $628,398
Related parties 9,254 17,500
Pipeline revenues 4,096 4,359
-------- --------
Total revenues 383,723 650,257
COST OF SALES:
Crude costs, unrelated parties 365,917 626,342
Crude costs, related parties 7,417 12,353
Field operating costs 2,652 3,361
Pipeline operating costs 1,968 1,865
-------- --------
Total cost of sales 377,954 643,921
-------- --------
GROSS MARGIN 5,769 6,336
EXPENSES:
General and administrative 3,023 2,741
Depreciation and amortization 2,048 1,633
-------- --------
OPERATING INCOME 698 1,962
OTHER INCOME (EXPENSE):
Interest income 30 184
Interest expense (210) (6)
Gain on asset sales 869 19
-------- --------
Income before minority interests 1,387 2,159
Minority interests 278 431
-------- --------
NET INCOME $1,109 $1,728
======== ========
NET INCOME PER COMMON UNIT - BASIC
AND DILUTED $0.13 $0.20
======== ========
NUMBER OF COMMON UNITS OUTSTANDING 8,604 8,625
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
GENESIS ENERGY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31,
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,109 $1,728
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities-
Depreciation 1,699 1,508
Amortization of intangible assets 349 125
Minority interests equity in earnings 278 431
Gain on asset dispositions (869) (19)
Other noncash charges 373 407
Changes in components of working capital -
Accounts receivable 25,721 14,332
Inventories (4,675) 3,016
Other current assets (1,178) 739
Accounts payable (24,683) (21,436)
Accrued liabilities (1,307) 126
-------- --------
Net cash (used in) provided by operating
activities (3,183) 957
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (665) (2,047)
Decrease (increase) in other assets 1 (311)
Proceeds from sale of assets 983 70
-------- --------
Net cash provided by (used in) investing
activities 319 (2,288)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under Loan Agreement 6,700 -
Distributions:
To common unitholders (4,301) (4,313)
To General Partner (88) (88)
-------- --------
Net cash provided by (used in) financing
activities 2,311 (4,401)
-------- --------
Net decrease in cash and cash equivalents (553) (5,732)
Cash and cash equivalents at beginning
of period 7,710 11,812
-------- --------
Cash and cash equivalents at end of period $7,157 $6,080
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
GENESIS ENERGY, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(In thousands)
(Unaudited)
Partners' Capital
Common General Treasury
Unitholders Partner Units Total
----------- ------- -------- -------
Partners' capital at
December 31, 1998 $66,832 $1,357 $(318) $67,871
Net income for the three months
ended March 31, 1999 1,087 22 - 1,109
Cash distributions for the three
months ended March 31, 1999 (4,301) (88) - (4,389)
------- ------ ----- -------
Partners' capital at
March 31, 1999 $63,618 $1,291 $(318) $64,591
======= ====== ===== =======
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
GENESIS ENERGY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Formation and Offering
In December 1996, Genesis Energy, L.P. ("GELP") completed an initial public
offering of 8.6 million Common Units at $20.625 per unit, representing limited
partner interests in GELP of 98%. Genesis Energy, L.L.C. (the "General
Partner") serves as general partner of GELP and its operating limited
partnership, Genesis Crude Oil, L.P. Genesis Crude Oil, L.P. has two subsidiary
limited partnerships, Genesis Pipeline Texas, L.P. and Genesis Pipeline USA,
L.P. Genesis Crude Oil, L.P. and its subsidiary partnerships will be referred
to collectively as GCOLP. The General Partner owns a 2% general partner
interest in GELP.
Transactions at Formation
At the closing of the offering, GELP contributed the net proceeds of the
offering to GCOLP in exchange for an 80.01% general partner interest in GCOLP.
With the net proceeds of the offering, GCOLP purchased a portion of the crude
oil gathering, marketing and pipeline operations of Howell Corporation
("Howell") and made a distribution to Basis Petroleum, Inc. ("Basis") in
exchange for its conveyance of a portion of its crude oil gathering and
marketing operations. GCOLP issued an aggregate of 2.2 million subordinated
limited partner units ("Subordinated OLP Units") to Basis and Howell to obtain
the remaining operations. Basis' Subordinated OLP units were transferred to its
then parent, Salomon Smith Barney Holdings Inc. ("Salomon") in May 1997.
Unless the context otherwise requires, the term "the Partnership" hereafter
refers to GELP and its operating limited partnership.
2. Basis of Presentation
The accompanying financial statements and related notes present the
consolidated financial position as of March 31, 1999 and December 31, 1998 for
GELP and its results of operations, cash flows and changes in partners' capital
for the three months ended March 31, 1999 and 1998.
The financial statements included herein have been prepared by the
Partnership without audit pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Accordingly, they reflect all
adjustments (which consist solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the financial
results for interim periods. Certain information and notes normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. However, the Partnership believes that the disclosures are
adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Partnership's Annual Report on Form 10-K for the year
ended December 31, 1998 filed with the SEC.
Basic net income per Common Unit is calculated on the weighted average number
of outstanding Common Units. The weighted average number of Common Units
outstanding for the three months ended March 31, 1999 and 1998 was 8,603,525 and
8,625,000, respectively. For this purpose, the 2% General Partner interest is
excluded from net income. Diluted net income per Common Unit did not differ
from basic net income per Common Unit for either period presented.
3. New Accounting Pronouncements
In November 1998, the Emerging Issues Task Force (EITF) reached a consensus
on EITF Issue 98-10, "Accounting for Energy Trading and Risk Management
Activities". This consensus, effective in the first quarter of 1999, requires
that "energy trading" contracts be marked-to-market, with gains or losses
recognized in current earnings. The Partnership has determined that its
activities do not meet the definition in EITF Issue 98-10 of "energy trading"
activities and, therefore, is not required to make any change in its accounting.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
was issued in June 1998. This new standard, which the Partnership will be
required to adopt for its fiscal year 2000, will change the method of accounting
for changes in the fair value of certain derivative instruments by requiring
that an entity recognize the
<PAGE>
derivative at fair value as an asset or liability
on its balance sheet. Depending on the purpose of the derivative and the item
it is hedging, the changes in fair value of the derivative will be recognized in
current earnings or as a component of other comprehensive income in partners'
capital. The Partnership is in the process of evaluating the impact that this
statement will have on its results of operations and financial position. This
new standard could increase volatility in net income and comprehensive income.
4. Business Segment and Customer Information
Based on its management approach, the Partnership believes that all of its
material operations revolve around the gathering and marketing of crude oil, and
it currently reports its operations, both internally and externally, as a single
business segment. A significant portion of the Partnership's revenues in 1997
and earlier periods resulted from transactions with Basis and other Salomon
affiliates. No other customer accounted for more than 10% of the Partnership's
revenues in any period.
5. Credit Resources
GCOLP entered into credit facilities with Salomon (collectively, the "Credit
Facilities") pursuant to a Master Credit Support Agreement. GCOLP's obligations
under the Credit Facilities are secured by its receivables, inventories, general
intangibles and cash.
Guaranty Facility
Salomon is providing a Guaranty Facility through December 31, 1999 in
connection with the purchase, sale and exchange of crude oil by GCOLP. The
aggregate amount of the Guaranty Facility is limited to $300 million for the
year ending December 31, 1999 (to be reduced in each case by the amount of any
obligation to a third party to the extent that such third party has a prior
security interest in the collateral). GCOLP pays a guarantee fee to Salomon
which will increase over the three-year period, thereby increasing the cost of
the credit support provided to GCOLP under the Guaranty Facility. At March 31,
1999, the aggregate amount of obligations covered by guarantees was $134
million, including $72 million in payable obligations and $62 million of
estimated crude oil purchase obligations for April 1999.
The Master Credit Support Agreement contains various restrictive and
affirmative covenants including (i) restrictions on indebtedness other than (a)
pre-existing indebtedness, (b) indebtedness pursuant to Hedging Agreements (as
defined in the Master Credit Support Agreement) entered into in the ordinary
course of business and (c) indebtedness incurred in the ordinary course of
business by acquiring and holding receivables to be collected in accordance with
customary trade terms, (ii) restrictions on certain liens, investments,
guarantees, loans, advances, lines of business, acquisitions, mergers,
consolidations and sales of assets and (iii) compliance with certain risk
management policies, audit and receivable risk exposure practices and cash
management practices as may from time to time be revised or altered by Salomon
in its sole discretion.
Pursuant to the Master Credit Support Agreement, GCOLP is required to
maintain (a) Consolidated Tangible Net Worth of not less than $50 million, (b)
Consolidated Working Capital of not less than $1 million, (c) a ratio of its
Consolidated Current Liabilities to Consolidated Working Capital plus net
property, plant and equipment of not more than 7.5 to 1, (d) a ratio of
Consolidated Earnings before Interest, Taxes, Depreciation and Amortization to
Consolidated Fixed Charges of at least 1.75 to 1 as of the last day of each
fiscal quarter prior to December 31, 1999 and (e) a ratio of Consolidated Total
Liabilities to Consolidated Tangible Net Worth of not more than 10.0 to 1 (as
such terms are defined in the Master Credit Support Agreement).
An Event of Default could result in the termination of the Credit
Facilities at the discretion of Salomon. Significant Events of Default include
(a) a default in the payment of (i) any principal on any payment obligation
under the Credit Facilities when due or (ii) interest or fees or other amounts
within two business days of the due date, (b) the guaranty exposure amount
exceeding the maximum credit support amount for two consecutive calendar months,
(c) failure to perform or otherwise comply with any covenants contained in the
Master Credit Support Agreement if such failure continues unremedied for a
period of 30 days after written notice thereof and (d) a material
misrepresentation in connection with any loan, letter of credit or guarantee
issued under the Credit
<PAGE>
Facilities. Removal of the General Partner will result
in the termination of the Credit Facilities and the release of all of Salomon's
obligations thereunder.
There can be no assurance of the availability or the terms of credit for
the Partnership. At this time, Salomon does not intend to provide guarantees or
other credit support after the three-year credit support period expires in
December 1999. If the General Partner is removed without its consent, Salomon's
credit support obligations will terminate. In addition, Salomon's obligations
under the Master Credit Support Agreement may be transferred or terminated early
subject to certain conditions. Management of the Partnership intends to replace
the Guaranty Facility with a letter of credit facility with one or more third
party lenders prior to December 1999 and has had preliminary discussions with
banks about a replacement letter of credit facility. The General Partner may be
required to reduce or restrict the Partnership's gathering and marketing
activities because of limitations on its ability to obtain credit support and
financing for its working capital needs. The General Partner expects that the
overall cost of a replacement facility may be substantially greater than what
the Partnership is incurring under its existing Master Credit Support Agreement.
Any significant decrease in the Partnership's financial strength, regardless of
the reason for such decrease, may increase the number of transactions requiring
letters of credit or other financial support, make it more difficult for the
Partnership to obtain such letters of credit, and/or may increase the cost of
obtaining them. This situation could in turn adversely affect the Partnership's
ability to maintain or increase the level of its purchasing and marketing
activities or otherwise adversely affect the Partnership's profitability and
Available Cash.
Working Capital Facility
In August 1998, GCOLP entered into a revolving credit/loan agreement ("Loan
Agreement") with Bank One, Texas, N.A. ("Bank One") to replace the Working
Capital Facility that had been provided by Salomon. The Loan Agreement provides
for loans or letters of credit in the aggregate not to exceed the greater of $35
million or the Borrowing Base (as defined in the Loan Agreement). Loans will
bear interest at a rate chosen by GCOLP which would be one or more of the
following: (a) a Floating Base Rate (as defined in the Loan Agreement) that is
generally the prevailing prime rate less one percent; (b) a rate based on the
Federal Funds Rate plus one and one-half percent or (c) a rate based on LIBOR
plus one and one-quarter percent. The Loan Agreement provides for a revolving
period until August 14, 2000, with interest to be paid monthly. All loans
outstanding on August 14, 2000, are due at that time.
The Loan Agreement is collateralized by the accounts receivable and
inventory of GCOLP, subject to the terms of an Intercreditor Agreement between
Bank One and Salomon. There is no compensating balance requirement under the
Loan Agreement. A commitment fee of 0.35% on the available portion of the
commitment is provided for in the agreement. Material covenants and
restrictions include requirements to maintain a ratio of current assets (as
defined in the Loan Agreement) to current liabilities of at least 1:1 and to
maintain tangible net worth in GCOLP, as defined in the Loan Agreement, of not
less than $65 million.
At March 31, 1999 and December 31, 1998, the Partnership had $22.5 million
and $15.8 million, respectively, of loans outstanding under the Loan Agreement.
The Partnership had no letters of credit outstanding at March 31, 1999. At
March 31, 1999, $12.5 million was available to be borrowed under the Loan
Agreement.
Distributions
Generally, GCOLP will distribute 100% of its Available Cash within 45 days
after the end of each quarter to Unitholders of record and to the General
Partner. Available Cash consists generally of all of the cash receipts less
cash disbursements of GCOLP adjusted for net changes to reserves. (A full
definition of Available Cash is set forth in the Partnership Agreement.)
Distributions of Available Cash to the holders of Subordinated OLP Units are
subject to the prior rights of holders of Common Units to receive the minimum
quarterly distribution ("MQD") for each quarter during the subordination period
(which will not end earlier than December 31, 2001) and to receive any
arrearages in the distribution of the MQD on the Common Units for prior quarters
during the subordination period. MQD is $0.50 per unit.
Salomon has committed, subject to certain limitations, to provide total
cash distribution support, with respect to quarters ending on or before December
31, 2001, in an amount up to an aggregate of $17.6 million in exchange
<PAGE>
for
Additional Partnership Interests ("APIs"). Salomon's obligation to purchase
APIs will end no later than December 31, 2001, with the actual termination
subject to the levels of distributions that have been made prior to the
termination date. Any APIs purchased by Salomon are not entitled to cash
distributions or voting rights. The APIs will be redeemed if and to the extent
that Available Cash for any future quarter exceeds an amount necessary to
distribute the MQD on all Common Units and Subordinated OLP Units and to
eliminate any arrearages in the MQD on Common Units for prior periods. At March
31, 1999, no APIs have been purchased by Salomon pursuant to the distribution
support commitment. As a result of poor domestic crude oil market conditions,
the General Partner may have to draw on the cash distribution support from
Salomon during 1999.
In addition, the Partnership Agreement authorizes the General Partner to
cause GCOLP to issue additional limited partner interests and other equity
securities, the proceeds from which could be used to provide additional funds
for acquisitions or other GCOLP needs.
6. Transactions with Related Parties
Sales, purchases and other transactions with affiliated companies, in the
opinion of management, are conducted under terms no more or less favorable than
those conducted with unaffiliated parties.
Sales and Purchases of Crude Oil
A summary of sales to and purchases from related parties of crude oil is as
follows (in thousands).
Three Months Three Months
Ended Ended
March 31, March 31,
1999 1998
------------ ------------
Sales to affiliates $9,254 $17,500
Purchases from affiliates $7,417 $12,353
General and Administrative Services
The Partnership does not directly employ any persons to manage or operate
its business. Those functions are provided by the General Partner. The
Partnership reimburses the General Partner for all direct and indirect costs of
these services. Total costs reimbursed to the General Partner by the
Partnership were $4,441,000 and $3,546,000 for the three months ended March 31,
1999 and 1998, respectively.
Credit Facilities
As discussed in Note 4, Salomon provides Credit Facilities to the
Partnership. For the three months ended March 31, 1999 and 1998, the
Partnership paid Salomon $139,000 and $154,000, respectively, for guarantee fees
under the Credit Facilities.
7. Supplemental Cash Flow Information
Cash received by the Partnership for interest was $32,000 and $184,000 for
the three months ended March 31, 1999 and 1998, respectively. Payments of
interest were $198,000 and $8,000 for the three months ended March 31, 1999 and
1998, respectively.
8. Contingencies
The Partnership is subject to various environmental laws and regulations.
Policies and procedures are in place to monitor compliance. The Partnership's
management has made an assessment of its potential environmental exposure and
determined that such exposure is not material to its consolidated financial
position, results of operations or cash flows. As part of the formation of the
Partnership, Basis and Howell agreed to be responsible for certain environmental
conditions related to their ownership and operation of their respective assets
contributed to the Partnership and for any environmental liabilities which Basis
or Howell may have assumed from prior owners of these assets.
<PAGE>
The Partnership is subject to lawsuits in the normal course of business and
examination by tax and other regulatory authorities. Such matters presently
pending are not expected to have a material adverse effect on the financial
position, results of operations or cash flows of the Partnership.
As part of the formation of the Partnership, Basis and Howell agreed to each
retain liability and responsibility for the defense of any future lawsuits
arising out of activities conducted by Basis and Howell prior to the formation
of the Partnership and have also agreed to cooperate in the defense of such
lawsuits.
9. Distributions
On April 19, 1999, the Board of Directors of the General Partner declared a
cash distribution of $0.50 per Unit for the three months ended March 31, 1999.
This distribution will be paid on May 14, 1999, to the General Partner and all
Common Unitholders of record as of the close of business on April 30, 1999. The
Subordinated OLP Unitholders will not receive a distribution for that period.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Genesis Energy, L.P., operates crude oil common carrier pipelines and is one
of the largest independent gatherers and marketers of crude oil in North
America, with operations concentrated in Texas, Louisiana, Alabama, Florida,
Mississippi, New Mexico, Kansas and Oklahoma. The following review of the
results of operations and financial condition should be read in conjunction with
the Condensed Consolidated Financial Statements and Notes thereto.
Results of Operations - Three Months Ended March 31, 1999 Compared with Three
Months Ended March 31, 1998
Selected financial data for this discussion of the results of operations
follows, in thousands, except volumes per day.
Three Months Ended March 31,
1999 1998
-------- --------
Gross margin
Gathering and marketing $3,641 $3,842
Pipeline $2,128 $2,494
General and administrative expenses $3,023 $2,741
Depreciation and amortization $2,048 $1,633
Operating income $698 $1,962
Interest income (expense), net $(180) $178
Volumes per day
Wellhead 88,160 110,723
Bulk and exchange 273,195 342,908
Pipeline 88,754 89,519
Gross margin from gathering and marketing operations is generated by the
difference between the price of crude oil at the point of purchase and the price
of crude oil at the point of sale, minus the associated costs of aggregation and
transportation. The absolute price levels of crude oil do not necessarily bear
a relationship to gross margin, although such price levels significantly impact
revenues and cost of sales. As a result, period-to-period variations in
revenues and cost of sales are generally not meaningful in analyzing the
variation in gross margin. Such changes are not addressed in the following
discussion.
Pipeline gross margins are primarily a function of the level of throughput
and storage activity and are generated by the difference between the regulated
published tariff and the fixed and variable costs of operating the pipeline.
Changes in revenues, volumes and pipeline operating costs, therefore, are
relevant to the analysis of financial results of the Partnership's pipeline
operations.
Gross margin from gathering and marketing operations was $3.6 million for the
quarter ended March 31, 1999, as compared to $3.8 million for the quarter ended
March 31, 1998. The primary factors affecting gathering and marketing gross
margin were a decline in volumes, partially offset by increased margins per
barrel. Lower oil prices reduced the production available for the Partnership
to purchase due to curtailed production and drilling activities by oil
producers. In addition, effective in the 1999 first quarter, the Partnership
lost a large contract with a producer, resulting in a volume decline of
approximately 21,000 barrels per day. This decline in volumes did not have a
material impact on gross margin due to the profit sharing nature of the
contract.
Pipeline gross margin was $2.1 million for the quarter ended March 31, 1999,
as compared to the pipeline gross margin of $2.5 million for the first quarter
of 1998. Pipeline throughput decreased by 765 barrels per day between the two
periods, reducing revenues.
<PAGE>
General and administrative expenses were $3.0 million for the three months
ended March 31, 1999, an increase of $0.3 million over the 1998 period. The
increase in 1999 can be attributed partially to $0.1 million of expenditures
related to work being performed on the Year 2000 issue. The remaining increase
is related to general increases in expenses between the two periods.
Depreciation and amortization increased in the 1999 quarter as a result of
depreciation and amortization on gathering and marketing assets acquired in
April 1998 and pipeline assets acquired in October 1998. Additionally, in the
1999 quarter, the Partnership recognized a gain of $0.9 million as a result of
the sale of excess tractors and trailers.
Liquidity and Capital Resources
Cash Flows
Cash flows used in operating activities were $3.2 million for the three
months ended March 31, 1999. An increase in inventory quantities and values
utilized operating cash flows. Operating activities in the prior year period
provided cash of $1.0 million primarily due to variations in the timing of
payment of crude purchase obligations.
For the three months ended March 31, 1999, cash flows provided by investing
activities were $0.3 million. The Partnership received cash of $1.0 million
from the sale of excess equipment and expended $0.7 million for additions in
property and equipment, primarily related to pipeline operations. In the 1998
first quarter, investing activities utilized cash flows of $2.3 million for
property and equipment additions.
Cash flows provided by financing activities were $2.3 million in the
quarter ended March 31, 1999. The Partnership borrowed $6.7 million under its
Loan Agreement. The Partnership also paid a distribution to common unitholders
and the General Partner.
Working Capital and Credit Resources
As discussed in Note 5 of the Notes to Condensed Consolidated Financial
Statements, the Partnership has a Guaranty Facility with Salomon through
December 31, 1999 and a Loan Agreement with Bank One for working capital
purposes that extends through August 2000. At this time, Salomon does not
intend to provide guarantees or other credit support after the three-year credit
support period expires in December 1999. If the General Partner is removed
without its consent, Salomon's credit support obligations will terminate. In
addition, Salomon's obligations under the Master Credit Support Agreement may be
transferred or terminated early subject to certain conditions. Management of
the Partnership intends to replace the Guaranty Facility with a letter of credit
facility with one or more third party lenders prior to December 1999 and has had
preliminary discussions with banks about a replacement letter of credit
facility. The General Partner may be required to reduce or restrict the
Partnership's gathering and marketing activities because of limitations on its
ability to obtain credit support and financing for its working capital needs.
The General Partner expects that the overall cost of a replacement facility may
be substantially greater than what the Partnership is incurring under its
existing Master Credit Support Agreement. Any significant decrease in the
Partnership's financial strength, regardless of the reason for such decrease,
may increase the number of transactions requiring letters of credit or other
financial support, make it more difficult for the Partnership to obtain such
letters of credit, and/or may increase the cost of obtaining them. This
situation could in turn adversely affect the Partnership's ability to maintain
or increase the level of its purchasing and marketing activities or otherwise
adversely affect the Partnership's profitability and Available Cash.
The Partnership will pay a distribution of $0.50 per Unit for the three
months ended March 31, 1999 on May 14, 1999 to the General Partner and all
Common Unitholders of record as of the close of business on April 30, 1999. The
subordinated OLP Unitholders will not receive a distribution for that period.
Although the Partnership will not have to draw on the cash distribution support
from Salomon to make this distribution, the Partnership may have to draw on that
support later in 1999.
<PAGE>
Year 2000 Issue
Many software applications, equipment and embedded chip systems identify
dates using only the last two digits of the year. These systems may be unable
to distinguish between dates in the year 2000 and the year 1900. If not
addressed, this condition could cause such systems to fail or provide incorrect
information when using dates after December 31, 1999. Due to the Partnership's
dependence on such systems, this condition could have an adverse effect on the
Partnership.
Partnership's State of Readiness
To address the Year 2000 issue, the Partnership has formed a Year 2000
Steering Committee to coordinate execution of a project to identify, assess and
remedy any critical Year 2000 issues that might impact the Partnership ("Year
2000 Project" or "the Project"). The Year 2000 Project Steering Committee has
established six phases for the Project. The six phases include (i) awareness,
(ii) inventory, (iii) assessment, (iv) remediation, (v) testing and (vi)
implementation. The Year 2000 Steering Committee has classified the key
automated systems for analysis as (a) financial systems applications, (b)
operational system applications, (c) hardware and equipment, (d) embedded chip
systems and (e) third-party systems. The Year 2000 Project includes addressing
the Year 2000 exposure of third parties whose operations are material to the
operations of the Partnership. The Partnership has retained a Year 2000
consulting firm to review the Partnership's Year 2000 Project Plan, execution of
that Plan and associated contingency plans. The Year 2000 consulting firm
reports its findings to the Year 2000 Steering Committee periodically. The
status of the Year 2000 Project is reviewed with the Board of Directors at its
quarterly meetings.
The awareness phase of the Year 2000 project consists of an enterprise-wide
awareness program to communicate to employees and other stakeholders the Year
2000 problems, the issues affecting the Partnership and the processes to be
applied to the Project and to solicit participation to enhance the likelihood of
success of this Project. The initial awareness phase activities have been
completed; however, activities associated with the awareness phase will continue
throughout the course of the Project.
The inventory phase entails identifying all software applications,
equipment, embedded chip systems and third-party systems that should be
evaluated as part of this Project. All applications, equipment and systems have
been identified for evaluation. Due to the dynamic nature of systems in the
operations of the Partnership, the identification phase will be updated and
reassessed throughout the course of the Project. A Year 2000 Change Management
Program is being developed to monitor and control system changes that could
affect the Partnership's Year 2000 Project.
The assessment phase includes analysis and testing of inventoried
applications, equipment and systems to determine the business impact,
probability of failure and identification of the proper course of action to
achieve Year 2000 compliance. All systems have been analyzed to determine the
business impact of failure. All critical applications, equipment and systems
have been assessed as to the probability of failure. The determination of the
proper course of action for all critical applications, equipment and systems
that are not yet compliant is substantially complete.
The assessment phase of the project includes reasonable efforts to obtain
representation and assurances from third parties that their applications,
hardware and equipment, and systems being used by or impacting the Partnership
are or will be modified to be Year 2000 compliant. To date, the responses from
such third parties are positive but inconclusive. As a result, management
cannot predict the potential consequences to the Partnership if applications,
hardware or systems under the control of third parties are not Year 2000
compliant.
The remediation phase will include the modification, conversion or
replacement of existing applications, hardware and systems that are determined
not to be Year 2000 compliant. A software consulting firm has been engaged to
perform the remediation phase on the Partnership's critical financial and
operational systems that are to be modified or converted. Remediation of all
other critical systems is currently underway and is expected to be completed by
the end of the second quarter of 1999 or shortly thereafter.
The testing phase will validate the results of the remediation phase. The
implementation phase will perform business system modifications for
applications, hardware and systems that are affected by the remediation phase.
<PAGE>
Management expects that the testing and implementation phases will be
substantially completed during the third quarter of 1999. Since the Partnership
does not expect to materially change operating processes as part of the Year
2000 Project, management does not expect the implementation phase to be a
significant part of the Project.
Costs of the Year 2000 Project
While the total cost of the Year 2000 Project is still under evaluation,
management currently estimates that the total costs to be incurred by the
Partnership for the Year 2000 Project will be between $400,000 and $600,000.
The Partnership expects to fund these expenditures with cash from operations or
borrowings. Cash expenditures through March 31, 1999 were approximately
$251,000, with $33,000 of that amount for hardware. The Partnership does not
separately track the internal costs incurred for the Year 2000 Project.
Internal costs are primarily the payroll related costs for the Partnership's
information systems group, Year 2000 Steering Committee members and other
operations personnel involved in the Project. Management has not deferred
specific information technology projects as a direct result of the Year 2000
issue.
Risk of Year 2000 Issues
Major applications that pose the greatest Year 2000 risks for the
Partnership if the Year 2000 Project is not successful are the Partnership's
financial and operational system applications and embedded chip systems in field
equipment. Potential problems resulting if the Year 2000 Project is not
successful include disruptions of the Partnership's financial and operational
functions. Affected financial functions include the ability to collect revenue,
issue payments and carry on commercial and banking transaction execution
activities. Operational functions that could be disrupted include the
Partnership's crude oil transportation, storage, gathering and marketing
activities.
Contingency Plans
The goal of the Year 2000 Project is to ensure that all critical systems
and business processes under the direct control of the Partnership remain
functional. However, since certain systems and processes may be interrelated
with systems outside of the control of the Partnership, there can be no
assurance that the Year 2000 Project will be completely successful.
Consequently, contingency and business plans are being developed to respond to
any Year 2000 compliance failures that may occur. Such plans are expected to be
completed by the end of the third quarter of 1999.
Management does not expect the costs of the Year 2000 project to have a
material adverse effect on the Partnership's financial position, results of
operations or cash flows. At this time, however, the Partnership cannot
conclude that any failure of the Partnership or third parties to achieve Year
2000 compliance will not adversely affect the Partnership.
Forward Looking Statements
The statements in this Report on Form 10-Q that are not historical
information are forward looking statements within the meaning of Section 27a of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Although the Partnership believes that its expectations regarding future
events are based on reasonable assumptions, it can give no assurance that its
goals will be achieved or that its expectations regarding future developments
will prove to be correct. Important factors that could cause actual results to
differ materially from those in the forward looking statements herein include
changes in regulations, the Partnership's success in obtaining additional lease
barrels, changes in crude oil production volumes (both world-wide as well as in
areas in which the Partnership has operations), developments relating to
possible acquisitions or business combination opportunities, volatility of crude
oil prices and grade differentials, the success of the Partnership's risk
management activities, the Partnership's ability to replace its credit support
from Salomon with a bank facility, the Partnership's success in dealing with the
Year 2000 issue and the related costs of the Year 2000 issue and conditions of
the capital markets and equity markets during the periods covered by the forward
looking statements.
Price Risk Management and Financial Instruments
The Partnership's primary price risk relates to the effect of crude oil price
fluctuations on its inventories and the fluctuations each month in grade and
location differentials and their effects on future contractual commitments. The
<PAGE>
Partnership utilizes New York Mercantile Exchange ("NYMEX") commodity based
futures contracts, forward contracts, swap agreements and option contracts to
hedge its exposure to these market price fluctuations. Management believes the
hedging program has been effective in minimizing overall price risk. At March
31, 1999, the Partnership used futures, forward and option contracts in its
hedging program with the latest contract being settled in July 2000.
Information about these contracts is contained in the table set forth below.
Sell (Short) Buy (Long)
Contracts Contracts
--------- ---------
Crude Oil Inventory:
Volume (1,000 bbls) 373
Carrying value (in thousands) $6,322
Fair value (in thousands) $6,322
Commodity Futures Contracts
Contract volumes (1,000 bbls) 20,407 20,869
Weighted average price per bbl $14.51 $14.38
Contract value (in thousands) $296,057 $300,069
Fair value (in thousands) $340,196 $348,243
Commodity Forward Contracts:
Contract volumes (1,000 bbls) 4,824 4,447
Weighted average price per bbl $13.53 $13.77
Contract value (in thousands) $65,284 $61,227
Fair value (in thousands) $78,309 $72,951
Commodity Option Contracts:
Contract volumes (1,000 bbls) 327
Weighted average strike price per bbl $14.24
Contract value (in thousands) $312
Fair value (in thousands) $860
The table above presents notional amounts in barrels, the weighted average
contract price, total contract amount in U.S. dollars and total fair value
amount in U.S. dollars. Fair values were determined by using the notional
amount in barrels multiplied by the March 31, 1999 closing prices of the
applicable NYMEX futures contract adjusted for location and grade differentials,
as necessary.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Part I. Item 1. Note 8 to the Condensed Consolidated Financial
Statements entitled "Contingencies", which is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
None
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
GENESIS ENERGY, L.P.
(A Delaware Limited Partnership)
By: GENESIS ENERGY, L.L.C., as
General Partner
Date: May 12, 1999 By: /s/ Ross A. Benavides
-----------------------------
Ross A. Benavides
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION FROM THE FORM 10-Q OF GENESIS
ENERGY, L.P. FOR THE PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED IN THAT FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,157
<SECURITIES> 0
<RECEIVABLES> 146,513
<ALLOWANCES> 0
<INVENTORY> 6,641
<CURRENT-ASSETS> 164,795
<PP&E> 117,915
<DEPRECIATION> 20,460
<TOTAL-ASSETS> 275,254
<CURRENT-LIABILITIES> 157,897
<BONDS> 22,500
0
0
<COMMON> 0<F1>
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 275,254<F2>
<SALES> 379,627
<TOTAL-REVENUES> 383,723
<CGS> 373,334
<TOTAL-COSTS> 380,002<F3>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 210
<INCOME-PRETAX> 1,387
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,109<F4>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,109<F4>
<EPS-PRIMARY> 0<F5>
<EPS-DILUTED> 0<F6>
<FN>
<F1>GENESIS ENERGY, L.P. IS A MASTER LIMITED PARTNERSHIP AND THEREFORE HAS NO
COMMON STOCK OUTSTANDING.
<F2>GENESIS ENERGY, L.P. IS A MASTER LIMITED PARTNERSHIP. ITS BALANCE SHEET
INCLUDES MINORITY INTERESTS IN ITS SUBSIDIARY, GENESIS CRUDE OIL, L.P. OF
$30,266 AND PARTNERS' CAPITAL CONSISTING OF THE CAPITAL OF THE COMMON
UNITHOLDERS OF $63,618, THE CAPITAL OF THE GENERAL PARTNER OF $1,291 AND
TREASURY UNITS OF $318.
<F3>TOTAL COSTS INCLUDES DEPRECIATION AND AMORTIZATION OF $2,048.
<F4>THE MINORITY INTERESTS IN NET INCOME OF GENESIS ENERGY, L.P. IS $278.
<F5>BASIC NET INCOME PER COMMON UNIT IS $0.13.
<F6>DILUTED NET INCOME PER COMMON UNIT IS $0.13.
</FN>
</TABLE>
