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 June 30, 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
<PAGE> 1
GENESIS ENERGY, L.P.
Form 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements ----
Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998 5
Consolidated Statement of Partners' Capital for the Six
Months Ended June 30, 1999 6
Notes to 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 17
Item 6. Exhibits and Reports on Form 8-K 17
<PAGE> 2
GENESIS ENERGY, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
1999 1998
-------- --------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 2,179 $ 7,710
Accounts receivable -
Trade 152,387 167,600
Related party 8,190 4,634
Inventories 9,404 1,966
Other 2,944 3,306
-------- --------
Total current assets 175,104 185,216
FIXED ASSETS, at cost 118,533 119,310
Less: Accumulated depreciation (22,168) (20,707)
-------- --------
Net fixed assets 96,365 98,603
OTHER ASSETS, net of amortization 12,647 13,354
-------- --------
TOTAL ASSETS $284,116 $297,173
======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable -
Trade $154,548 $172,143
Related party 9,756 6,200
Accrued liabilities 3,840 5,171
-------- --------
Total current liabilities 168,144 183,514
LONG-TERM DEBT 24,500 15,800
COMMITMENTS AND CONTINGENCIES (Note 8)
MINORITY INTERESTS 30,467 29,988
PARTNERS' CAPITAL
Common unitholders, 8,625 units issued and
outstanding 60,104 66,832
General partner 1,219 1,357
-------- --------
Subtotal 61,323 68,189
Treasury Units, 21 units (318) (318)
-------- --------
Total partners' capital 61,005 67,871
TOTAL LIABILITIES AND PARTNERS' CAPITAL $284,116 $297,173
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 3
<TABLE>
GENESIS ENERGY, L.P.
STATEMENTS OF OPERATIONS
(In thousands, except per unit amounts)
(Unaudited)
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
-------- ------- -------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Gathering and marketing revenues
Unrelated parties $483,404 $556,831 $853,777 $1,185,229
Related parties 25,638 966 34,892 18,466
Pipeline revenues 4,346 4,016 8,442 8,375
-------- -------- -------- ----------
Total revenues 513,388 561,813 897,111 1,212,070
COST OF SALES:
Crude costs, unrelated parties 467,287 547,634 833,204 1,173,976
Crude costs, related parties 34,856 2,459 42,273 14,812
Field operating costs 2,958 3,643 5,610 7,004
Pipeline operating costs 1,966 2,030 3,934 3,895
-------- -------- -------- ----------
Total cost of sales 507,067 555,766 885,021 1,199,687
-------- -------- -------- ----------
GROSS MARGIN 6,321 6,047 12,090 12,383
EXPENSES:
General and administrative 3,016 2,780 6,039 5,521
Depreciation and amortization 2,064 2,005 4,112 3,638
Nonrecurring charge (Note 6) - 373 - 373
-------- -------- -------- ----------
OPERATING INCOME 1,241 889 1,939 2,851
OTHER INCOME (EXPENSE):
Interest income 39 121 69 305
Interest expense (306) (9) (516) (15)
Gain on asset sales 31 13 900 32
-------- -------- -------- ----------
INCOME BEFORE MINORITY INTERESTS 1,005 1,014 2,392 3,173
Minority interests 201 203 479 634
-------- -------- -------- ----------
NET INCOME $ 804 $ 811 $ 1,913 $ 2,539
======== ======== ======== ==========
NET INCOME PER COMMON UNIT - BASIC AND DILUTED $ 0.09 $ 0.09 $ 0.22 $ 0.29
======== ======== ======== ==========
NUMBER OF COMMON UNITS OUTSTANDING 8,604 8,625 8,604 8,625
======== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 4
GENESIS ENERGY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
1999 1998
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,913 $ 2,539
Adjustments to reconcile net income to net
cash (used in) provided by operating activities -
Depreciation 3,408 3,171
Amortization of intangible assets 704 467
Minority interests equity in earnings 479 634
(Gain) loss on disposals of fixed assets (900) 233
Other noncash charges 746 814
Changes in components of working capital -
Accounts receivable 11,657 15,655
Inventories (7,438) 873
Other current assets 362 (1,416)
Accounts payable (14,039) (20,803)
Accrued liabilities (2,077) 2,326
-------- --------
Net cash (used in) provided by operating activities (5,185) 4,493
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (1,284) (4,661)
Decrease (increase) in other assets 3 (4,244)
Proceeds from sales of assets 1,014 138
-------- --------
Net cash used in investing activities (267) (8,767)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under Credit Facilities 8,700 5,000
Distributions:
To common unitholders (8,603) (8,625)
To general partner (176) (176)
-------- --------
Net cash used in financing activities (79) (3,801)
-------- --------
Net (decrease) increase in cash and cash equivalents (5,531) (8,075)
Cash and cash equivalents at beginning of period 7,710 11,812
-------- --------
Cash and cash equivalents at end of period $ 2,179 $ 3,737
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 5
<TABLE>
GENESIS ENERGY, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(In thousands)
(Unaudited)
<CAPTION>
Partners' Capital
--------------------------------------
Common General Treasury
Unitholders Partner Units Total
------- ------ ------ -------
<S> <C> <C> <C> <C>
Partners' capital at December 31, 1998 $66,832 $1,357 $(318) $67,871
Net income for the six months ended June 30, 1999 1,875 38 - 1,913
Distributions during the six months ended June 30, 1999 (8,603) (176) - (8,779)
------- ------ ----- -------
Partners' capital at June 30, 1999 $60,104 $1,219 $(318) $61,005
======= ====== ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 6
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
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 June 30, 1999 and December 31, 1998 for
GELP and its results of operations, cash flows and changes in partners' capital
for the three and six months ended June 30, 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 number of outstanding
Common Units. The weighted average number of Common Units outstanding for the
three months ended June 30, 1999 and 1998 was 8,604,000 and 8,625,000,
respectively. For the 1999 and 1998 six month periods, the weighted average
number of Common Units outstanding was 8,604,000 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 standard was subsequently amended by SFAS 137.
This new standard, which the Partnership will be required to adopt for its
fiscal year 2001, will change the method of accounting for changes in the fair
value of certain
<PAGE> 7
derivative instruments by requiring that an entity recognize the 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, transportation and marketing
of crude oil, and it currently reports its operations, both internally and
externally, as a single business segment. No 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, 2000 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 (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 after June 2000,
thereby increasing the cost of the credit support provided to GCOLP under the
Guaranty Facility. At June 30, 1999, the aggregate amount of obligations
covered by guarantees was $103 million, including $62 million in payable
obligations and $41 million of estimated crude oil purchase obligations for July
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 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.
<PAGE> 8
There can be no assurance of the availability or the terms of credit for
the Partnership. 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 2000 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 June 30, 1999 and December 31, 1998, the Partnership had $24.5 million
and $15.8 million, respectively, of loans outstanding under the Loan Agreement.
The Partnership had no letters of credit outstanding at June 30, 1999. At June
30, 1999, $10.5 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 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
<PAGE> 9
MQD on Common Units for prior periods. At June 30, 1999, no APIs have been
purchased by Salomon pursuant to the distribution support commitment. Salomon,
however, will purchase APIs totaling $1.7 million in August 1999 to provide cash
distribution support for the distribution to be paid on August 13, 1999, with
$15.9 million remaining for future cash distribution support. The General
Partner may have to draw on the cash distribution support from Salomon again
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. Nonrecurring Charge
In the second quarter of 1998, the Partnership shut-in its Main Pass
pipeline. A charge of $373,000 was recorded, consisting of $109,000 of costs
related to the shut-in and a non-cash write-down of the asset of $264,000.
7. 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).
Six Months Six Months
Ended Ended
June 30, June 30,
1999 1998
-------- ---------
Sales to affiliates $34,892 $18,466
Purchases from affiliates $42,273 $14,812
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 $8,542,000 and $7,667,000 for the six months ended June 30,
1999 and 1998, respectively.
Credit Facilities
As discussed in Note 5, Salomon provides Credit Facilities to the
Partnership. For the six months ended June 30, 1999 and 1998, the Partnership
paid Salomon $312,000 and $317,000, respectively, for guarantee fees under the
Credit Facilities.
8. Supplemental Cash Flow Information
Cash received by the Partnership for interest was $70,000 and $306,000 for
the six months ended June 30, 1999 and 1998, respectively. Payments of interest
were $500,000 and $16,000 for the six months ended June 30, 1999 and 1998,
respectively.
9. 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> 10
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.
10. Distributions
On July 6, 1999, the Board of Directors of the General Partner declared a
cash distribution of $0.50 per Unit for the quarter ended June 30, 1999. The
distribution will be paid August 13, 1999, to the General Partner and all Common
Unitholders of record as of the close of business on July 30, 1999. The
Subordinated OLP Unitholders will not receive a distribution for the quarter.
This distribution will be paid utilizing approximately $2.7 million cash
available from the Partnership and $1.7 million cash provided by Salomon
pursuant to Salomon's distribution support obligation.
<PAGE> 11
GENESIS ENERGY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 Consolidated Financial Statements and Notes thereto.
Results of Operations
Selected financial data for this discussion of the results of operations
follows, in thousands, except barrels per day.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Gross margin
Gathering and marketing $ 3,941 $ 4,061 $ 7,582 $ 7,903
Pipeline $ 2,380 $ 1,986 $ 4,508 $ 4,480
General and administrative expenses $ 3,016 $ 2,780 $ 6,039 $ 5,521
Depreciation and amortization $ 2,064 $ 2,005 $ 4,112 $ 3,638
Nonrecurring charge $ - $ 373 $ - $ 373
Operating income $ 1,241 $ 889 $ 1,939 $ 2,851
Interest income (expense), net $ (267) $ 112 $ (447) $ 290
Barrels per day
Wellhead 88,985 126,224 88,614 118,361
Bulk and exchange 263,187 320,137 268,026 331,577
Pipeline 95,590 84,753 92,190 87,123
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.
Six Months Ended June 30, 1999 Compared with Six Months Ended June 30, 1998
Gross margin from gathering and marketing operations was $7.6 million for
the six months ended June 30, 1999, as compared to $7.9 million for the six
months ended June 30, 1998. The decrease primarily resulted from a decline in
volumes. The production available for the Partnership to purchase was lower due
to curtailed production and drilling by oil producers. In addition, effective
in January 1999, 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 flat at $4.5 million for the six month periods in
1999 and 1998. Although total throughput increased, a higher percentage of
shipments were made on lower tariff systems. In addition, revenues in
<PAGE> 12
the 1999 period included tank storage fees of $0.6 million. These revenues
are not expected to continue after the second quarter.
General and administrative expenses increased $0.5 million between the 1999
and 1998 six-month periods. This increase can be attributed primarily to two
items. The first item relates to the additional marketing and administrative
personnel added by the Partnership in April 1998 as a result of the Falco asset
acquisition. The second item relates to the expenditures in 1999 for Year 2000
remediation.
Depreciation and amortization increased $0.5 million between the six months
ended June 30, 1999 and the same period in 1998. This increase resulted
primarily from depreciation and amortization beginning in the second quarter of
1998 on the assets acquired from Falco and in the fourth quarter of 1998 on the
West Columbia pipeline system.
In the 1998 six-month period, the Partnership recorded a nonrecurring
charge of $0.4 million as a result of the shut-in of its Main Pass pipeline.
The charge consisted of $0.1 million of costs related to the shut-in and a $0.3
million write-down of the asset. In the first quarter of 1999, the Partnership
recognized a gain of $0.9 million as a result of the sale of excess tractor and
trailers.
In the 1999 six-month period, the Partnership incurred net interest expense
of $0.4 million. In the 1998 period, the Partnership received net interest
income of $0.3 million. The increase in interest cost in 1999 was due primarily
to an increase in debt throughout 1998 as a result of the acquisition of assets.
Three Months Ended June 30, 1999 Compared with Three Months Ended June 30,
1998
Gross margin from gathering and marketing was $3.9 million for the three
months ended June 30, 1999, as compared to $4.1 million for the three months
ended June 30, 1998. The decline primarily resulted from the decline in volumes
discussed above.
Pipeline gross margin was $2.4 million for the three months ended June 30,
1999, as compared to $2.0 million for the three months ended June 30, 1998.
This increase of $0.4 million in gross margin can be attributed primarily to
tank storage revenues. These revenues are not expected to continue beyond the
second quarter.
General and administrative expenses increased $0.2 million between the 1999
and 1998 quarters primarily as a result of Year 2000 remediation expenditures
and general cost increases. Also, as discussed above, the Partnership recorded
a nonrecurring charge in the second quarter of 1998 related to its Main Pass
pipeline.
Interest costs were higher in the 1999 quarter due to higher debt levels.
Debt increased throughout 1998 primarily as a result of the acquisition of
assets resulting in higher debt balances for 1999. In addition, in 1999 the
Partnership increased its inventory levels, further increasing debt.
Liquidity and Capital Resources
Cash Flows
Cash flows utilized in operating activities were $5.2 million for the six
months ended June 30, 1999. In the 1998 six-month period, cash flows from
operating activities were $4.5 million. The change between the two periods
results primarily from an increase in inventories in the 1999 period and
variations in the timing of payment of crude purchase obligations.
For the six months ended June 30, 1999, cash flows utilized in investing
activities were $0.3 million. The Partnership expended $1.3 million for
property and equipment additions related to pipeline operations, and received
cash inflows of $1.0 million primarily from the sale of excess trucking
equipment in the first quarter of 1999. In the 1998 first six months, investing
activities utilized cash flows of $8.8 million as a result of property and
equipment additions primarily related to the acquisition of the gathering and
marketing assets of Falco and to pipeline operations.
Cash flows used in financing activities by the Partnership during the first
six months of 1999 totaled $0.1 million. Distributions paid to the common
unitholders and the general partner totaling $8.8 million utilized cash flows.
Borrowings under the Credit Facilities of $8.7 million for inventories and
capital expenditures provided
<PAGE> 13
financing cash flows. In the 1998 six month period, cash flows utilized in
financing activities were $3.8 million, representing distributions to the common
unitholders and the general partner offset by $5.0 million borrowed under the
Credit Facilities.
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, 2000 and a Loan Agreement with Bank One for working capital
purposes that extends through August 2000. 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 2000. 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 June 30, 1999 on August 13, 1999 to the General Partner and all
Common Unitholders of record as of the close of business on July 30, 1999. The
subordinated OLP Unitholders will not receive a distribution for that period.
This distribution will be paid utilizing approximately $2.7 million of cash
available from the Partnership and $1.7 million of cash provided by Salomon,
pursuant to Salomon's distribution support obligation. Salomon previously
committed to provide cash distribution support in an amount up to $17.6 million
through December 31, 2001, with $15.9 million available after the second quarter
distributions. The Partnership may have to draw again in 1999 on the cash
distribution support from Salomon.
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.
<PAGE> 14
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 has been 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 was substantially completed by the end of the second
quarter of 1999.
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.
Management expects that the testing and implementation phases will be
substantially completed during the third quarter of 1999.
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 $500,000 and $700,000.
The Partnership expects to fund these expenditures with cash from operations or
borrowings. Cash expenditures through June 30, 1999 were approximately
$299,000, 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
<PAGE> 15
respond to any Year 2000 compliance failures that may occur. Such plans
are expected to be substantially 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, refiner demand for various grades of crude oil and the resulting
changes in pricing relationships, developments relating to possible acquisitions
or business combination opportunities, disruptions caused by the Year 2000
issue, the success of the Partnership's risk management activities 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
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 June
30, 1999, the Partnership used futures and forward 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) 448
Carrying value (in thousands) $ 9,068
Fair value (in thousands) $ 9,068
Commodity Futures Contracts
Contract volumes (1,000 bbls) 13,480 12,817
Weighted average price per bbl $ 17.46 $ 17.48
Contract value (in thousands) $235,323 $224,084
Fair value (in thousands) $257,555 $244,719
Commodity Forward Contracts:
Contract volumes (1,000 bbls) 3,497 3,724
Weighted average price per bbl $16.67 $16.91
Contract value (in thousands) $58,291 $62,976
Fair value (in thousands) $65,834 $70,928
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 June 30, 1999 closing prices of the
applicable NYMEX futures contract adjusted for location and grade differentials,
as necessary.
<PAGE> 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Part I. Item 1. Note 9 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.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
A report on Form 8-K was filed June 1, 1999 to announce the
extension of the expiration date of the Guaranty Facility to
December 31, 2000 by Salomon.
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: August 11, 1999 By: /s/ Ross A. Benavides
--------------------------
Ross A. Benavides
Chief Financial Officer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-Q OF
GENESIS ENERGY, L.P. FOR THE PERIOD ENDED JUNE 30, 1999 AN IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED IN THAT FORM 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,179
<SECURITIES> 0
<RECEIVABLES> 160,577
<ALLOWANCES> 0
<INVENTORY> 9,404
<CURRENT-ASSETS> 175,104
<PP&E> 118,533
<DEPRECIATION> 22,168
<TOTAL-ASSETS> 284,116
<CURRENT-LIABILITIES> 168,144
<BONDS> 24,500
0
0
<COMMON> 0<F1>
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 284,116<F2>
<SALES> 888,669
<TOTAL-REVENUES> 897,111
<CGS> 875,477
<TOTAL-COSTS> 889,133<F3>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 516
<INCOME-PRETAX> 1,913
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,913<F4>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,913<F4>
<EPS-BASIC> 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
$30,467 AND PARTNERS' CAPITAL CONSISTING OF THE CAPITAL OF THE COMMON
UNITHOLDERS OF $60,104, TREASURY UNITS OF ($318) AND THE CAPITAL OF THE GENERAL
PARTNER OF $1,219.
<F3>TOTAL COSTS INCLUDES DEPRECIATION AND AMORTIZATION OF $4,112.
<F4>THE MINORITY INTERESTS IN NET INCOME OF GENESIS ENERGY, L.P. IS $479.
<F5>BASIC NET INCOME PER COMMON UNIT IS $0.22.
<F6>DILUTED NET INCOME PER COMMON UNIT IS $0.22.
</FN>
</TABLE>
