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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, 2000
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
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This report contains 19 pages
<PAGE> 2
GENESIS ENERGY, L.P.
Form 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Condensed Consolidated Balance Sheets - March 31, 2000 and
December 31, 1999 3
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2000 and 1999 5
Condensed Consolidated Statement of Partners' Capital for the
Three Months Ended March 31, 2000 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
<PAGE> 3
GENESIS ENERGY, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2000 1999
-------- --------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 1,975 $ 6,664
Accounts receivable -
Trade 422,806 241,529
Related party - 7,030
Inventories 2,409 404
Other 9,454 19,090
-------- --------
Total current assets 436,644 274,717
FIXED ASSETS, at cost 116,417 116,332
Less: Accumulated depreciation (24,133) (22,419)
-------- --------
Net fixed assets 92,284 93,913
OTHER ASSETS, net of amortization 11,630 11,962
-------- --------
TOTAL ASSETS $540,558 $380,592
======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Current portion of long-term debt $ 21,900 $ 19,900
Accounts payable -
Trade 395,913 251,742
Related party 25,887 1,604
Accrued liabilities 11,634 19,290
-------- --------
Total current liabilities 455,334 292,536
COMMITMENTS AND CONTINGENCIES (Note 8)
ADDITIONAL PARTNERSHIP INTERESTS 6,100 3,900
MINORITY INTERESTS 30,426 30,571
PARTNERS' CAPITAL
Common unitholders, 8,625 units issued, and
8,625 and 8,620 units outstanding at
March 31, 2000 and December 31, 1999,
respectively 47,748 52,574
General partner 951 1,051
-------- --------
Subtotal 48,699 53,625
Treasury Units, 5 units at December 31, 1999 (1) (40)
-------- --------
Total partners' capital 48,698 53,585
-------- --------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $540,558 $380,592
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 4
GENESIS ENERGY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit amounts)
(Unaudited)
Three Months Ended March 31,
2000 1999
---------- --------
REVENUES:
Gathering and marketing revenues
Unrelated parties $ 998,430 $370,373
Related parties - 9,254
Pipeline revenues 3,413 4,096
---------- --------
Total revenues 1,001,843 383,723
COST OF SALES:
Crude costs, unrelated parties 957,496 365,917
Crude costs, related parties 34,781 7,417
Field operating costs 3,214 2,652
Pipeline operating costs 2,053 1,968
Total cost of sales 997,544 377,954
GROSS MARGIN 4,299 5,769
EXPENSES:
General and administrative 2,656 3,023
Depreciation and amortization 2,046 2,048
---------- --------
OPERATING INCOME (LOSS) (403) 698
OTHER INCOME (EXPENSE):
Interest income 37 30
Interest expense (348) (210)
(Loss) gain on asset disposals (12) 869
---------- --------
Income (loss) before minority interests (726) 1,387
Minority interests (145) 278
---------- --------
NET INCOME (LOSS) $ (581) $ 1,109
========== ========
NET INCOME (LOSS) PER COMMON UNIT -
BASIC AND DILUTED $ (0.07) $ 0.13
========== ========
NUMBER OF COMMON UNITS OUTSTANDING 8,624 8,604
========== ========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 5
GENESIS ENERGY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31,
2000 1999
---------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (581) $ 1,109
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities -
Depreciation 1,716 1,699
Amortization of intangible assets 330 349
Minority interests equity in earnings (losses) (145) 278
(Loss) gain on asset disposals 12 (869)
Other noncash charges 333 373
Changes in components of working capital -
Accounts receivable (174,247) 25,721
Inventories (2,005) (4,675)
Other current assets 9,636 (1,178)
Accounts payable 168,454 (24,683)
Accrued liabilities (7,895) (1,307)
--------- --------
Net cash used in operating activities (4,392) (3,183)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (99) (665)
Decrease in other assets 2 1
Proceeds from sale of assets - 983
--------- --------
Net cash (used in) provided by investing activities (97) 319
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under Loan Agreement 2,000 6,700
Distributions:
To common unitholders (4,312) (4,301)
To General Partner (88) (88)
Issuance of additional partnership interests 2,200 -
Net cash (used in) provided by financing activities (200) 2,311
--------- --------
Net decrease in cash and cash equivalents (4,689) (553)
Cash and cash equivalents at beginning of period 6,664 7,710
--------- --------
Cash and cash equivalents at end of period $ 1,975 $ 7,157
========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 6
GENESIS ENERGY, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Partners' Capital
-------------------------------------
Common General Treasury
Unitholders Partner Units Total
------- ------ ----- -------
<S> <C> <C> <C> <C>
Partners' capital at December 31, 1999 $52,574 $1,051 $ (40) $53,585
Net loss for the three months ended March 31, 2000 (569) (12) - (581)
Cash distributions for the three months ended
March 31, 2000 (4,312) (88) - (4,400)
Issuance of treasury units to Restricted Unit Plan
participants - - 39 39
Excess of expense over cost of treasury units issued
for Restricted Unit Plan 55 - - 55
------- ------ ---- -------
Partners' capital at March 31, 2000 $47,748 $951 $ (1) $48,698
======= ====== ==== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 7
GENESIS ENERGY, L.P.
NOTES TO CONDENSED 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. After formation, Basis and Howell owned 54% and 46%
of the General Partner, respectively.
Basis' Subordinated OLP units and its interest in the General Partner were
transferred to its then parent, Salomon Smith Barney Holdings Inc. ("Salomon")
in May 1997. In February 2000, Salomon acquired Howell's interest in the
General Partner. Salomon now owns 100% of the General Partner.
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, 2000 and December 31, 1999 for
GELP and its results of operations, cash flows and changes in partners' capital
for the three months ended March 31, 2000 and 1999.
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, 1999 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, 2000 and 1999 was 8,624,324 and
8,603,525, 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, it was not required to make any change in its
accounting.
<PAGE> 8
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 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 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 for the
year ending December 31, 2000 (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 increases over the remaining term, thereby increasing the cost of the
credit support provided to GCOLP under the Guaranty Facility. At March 31,
2000, the aggregate amount of obligations covered by guarantees was $273
million, including $167 million in payable obligations and $106 million of
estimated crude oil purchase obligations for April 2000.
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
<PAGE> 9
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.
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 credit support period expires in December 2000,
except under the conditions discussed in note 10. 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 March 31, 2000 and December 31, 1999, the Partnership had $21.9 million
and $19.9 million, respectively, of loans outstanding under the Loan Agreement.
The Partnership had no letters of credit outstanding at March 31, 2000. At
March 31, 2000, $13.1 million was available to be borrowed under the Loan
Agreement.
Management of the Partnership has entered into discussions regarding
replacement of the Bank One Loan Agreement with a long-term facility. Based
upon these discussions, management expects that it will be able to replace the
Loan Agreement with a long-term facility subject to similar terms. If the
Partnership is unable to complete the replacement agreement noted above, then
other options will be pursued, some of which may have terms not as favorable to
the Partnership, including increasing costs and pledging additional collateral.
While management believes that it will be able to replace the Loan Agreement on
a long-term basis prior to its maturity, there can be no assurance that it will
be able to do so.
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
<PAGE> 10
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. In 1999, the Partnership utilized $3.9 million of the
distribution support from Salomon. An additional $2.2 million and $2.6 million
were utilized in February 2000 and May 2000, respectively. After the
distribution in May 2000, $8.7 million of distribution support has been utilized
and $8.9 million remains available through December 31, 2001, or until such
amount is fully utilized, whichever comes first.
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.
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,
2000 1999
------- -------
Sales to affiliates $ - $9,254
Purchases from affiliates $34,781 $7,417
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 $3,969,000 and $4,441,000 for the three months ended March 31,
2000 and 1999, respectively.
Credit Facilities
As discussed in Note 4, Salomon provides Credit Facilities to the
Partnership. For the three months ended March 31, 2000 and 1999, the
Partnership paid Salomon $319,000 and $139,000, respectively, for guarantee fees
under the Credit Facilities.
7. Supplemental Cash Flow Information
Cash received by the Partnership for interest was $43,000 and $32,000 for the
three months ended March 31, 2000 and 1999, respectively. Payments of interest
were $335,000 and $198,000 for the three months ended March 31, 2000 and 1999,
respectively.
<PAGE> 11
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.
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.
Pipeline Oil Spill
On December 20, 1999, the Partnership had a spill of crude oil from its
Mississippi System. Approximately 8,000 barrels of oil spilled from the
pipeline near Summerland, Mississippi and entered a creek nearby. Some of the
oil then flowed into the Leaf River.
The Partnership responded to this incident immediately, deploying crews to
evaluate, clean up and monitor the spilled oil. At February 1, 2000, the spill
had been substantially cleaned up, with ongoing maintenance and reduced clean-up
activity expected to continue for several more months.
The estimated cost of the spill clean-up is expected to be $18 million.
The incident was reported to insurers, and incurred costs related to the clean-
up efforts have been reimbursed or approved for reimbursement by the insurers.
As a result of this crude oil spill, certain federal and state regulatory
agencies may impose fines and penalties that would not be reimbursed by
insurance. At this time, it is not possible to predict whether the Partnership
will be fined, the amounts of such fines, or whether such governmental agencies
would prevail in imposing such fines.
The segment of the Mississippi System where the spill occurred has been
temporarily shut down and will not be returned to service until regulators give
their approval. Regulatory authorities may require specific testing or changes
to the pipeline before allowing the Partnership to restart that segment of the
system. At this time, it is unknown whether there will be any required testing
or changes and the related cost of that testing or changes.
If Management of the Partnership determines that the costs of testing or
changes are too high, that segment of the system may not be restarted. If this
part of the Mississippi System is taken out of service, the net book value of
that portion of the pipeline would be written down to its net realizable value,
resulting in a non-cash write-off of approximately $6.0 million. Tariff
revenues from this segment of the pipeline for the year 1999 were $0.6 million.
Crude Oil Contamination
In February and March 2000, the Partnership purchased crude oil from a
third party that was subsequently determined to contain organic chlorides.
These barrels were delivered into the Partnership's Texas pipeline system and
contaminated at least 24,000 barrels of oil held in storage and some portion of
44,000 barrels of oil in the pipeline. The north end of the Texas pipeline
system has been temporarily shut down. Some of these barrels were delivered to
another party.
The third party has provided the Partnership with evidence that it has
sufficient resources to cover the total expected damages incurred by the
Partnership. Management of the Partnership believes that it will recover any
damages incurred from the third party. The contaminated barrels are reflected
in inventory at their cost of approximately $2.0 million.
<PAGE> 12
9. Distributions
On April 13, 2000, the Board of Directors of the General Partner declared a
cash distribution of $0.50 per Unit for the three months ended March 31, 2000.
This distribution will be paid on May 15, 2000, to the General Partner and all
Common Unitholders of record as of the close of business on May 1, 2000. The
Subordinated OLP Unitholders will not receive a distribution for that period.
The distribution will be paid utilizing approximately $1.8 million of cash
available from the Partnership and $2.6 million of cash provided by Salomon
pursuant to Salomon's Distribution Support Agreement.
10. Subsequent Event
On May 10, 2000, the Partnership announced that based on the recommendation
of the Special Committee appointed by the General Partner, the General Partner
and the Board of Directors of the General Partner of the Partnership unanimously
approved a financial restructuring of the Partnership. The proposal for a
financial restructuring of the Partnership is subject to approval by holders of
a majority of the Partnership's outstanding public common units. Assuming
unitholder approval, the proposed restructuring is expected to be effective
beginning with distributions for the third quarter of 2000. Under the terms of
the restructuring:
- the Partnership will set the minimum quarterly distribution at $0.20 per
Common Unit, a level that is commensurate with the Partnership's current
and anticipated future cash flow. The current minimum quarterly
distribution is $0.50 per Common Unit;
- Salomon will contribute to the operating partnership the remaining balance
of its distribution support obligation;
- the Partnership will make a special distribution to all common unitholders
of the remaining distribution support obligation reduced by the amount
of costs associated with the proposed restructuring;
- the General Partner will relinquish its 2% share of the special
distribution and any rights to incentive distributions that it may have in
connection with such special distribution;
- all outstanding Subordinated OLP Units will be eliminated, thereby
increasing the common unitholder's effective combined ownership from the
current 80% to 98% and eliminating the requirement that common units
accrue arrearages;
- Salomon will relinquish all of its $17.6 million of additional partnership
interests received for meeting its distribution support obligation;
- the respective distribution thresholds that must be achieved before the
general partner is entitled to incentive distributions will be set at 125%,
140%, and 165% of the minimum quarterly distribution or $0.25, $0.28 and
$0.33 per unit; and
- Salomon will extend for one year, on the current terms and conditions, its
$300 million Master Credit Support Agreement due to expire on
December 31, 2000.
In connection with the proposal for restructuring, the Partnership is
preparing a proxy statement to be mailed to all of the Partnership's public
unitholders that will contain a more detailed description of the proposal.
<PAGE> 13
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 Condensed Consolidated Financial Statements and Notes thereto.
Results of Operations - Three Months Ended March 31, 2000 Compared with Three
Months Ended March 31, 1999
Selected financial data for this discussion of the results of operations
follows, in thousands, except volumes per day.
Three Months Ended March 31,
2000 1999
------ ------
Gross margin
Gathering and marketing $ 2,939 $ 3,641
Pipeline $ 1,360 $ 2,128
General and administrative expenses $ 2,656 $ 3,023
Depreciation and amortization $ 2,046 $ 2,048
Operating income (loss) $ (403) $ 698
Interest income (expense), net $ (311) $ (180)
Other income (expense), net $ (12) $ 869
Volumes per day
Wellhead 102,481 88,160
Bulk and exchange 289,652 273,195
Pipeline 88,172 88,754
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 $2.9 million for the
quarter ended March 31, 2000, as compared to $3.6 million for the quarter ended
March 31, 1999. Although the Partnership increased its average wellhead volumes
by 14,000 barrels per day in the 2000 first quarter as compared to the 1999
period, these volume increases were a result of competitive marketing efforts.
Volume increases obtained by competitive marketing efforts tend to result in
incrementally lower average gross margin per barrel. Additionally, costs for
guarantees under the Master Credit Support Agreement increased $0.2 million in
the 2000 quarter when compared to the 1999 period due primarily to the higher
crude oil prices in the 2000 period.
<PAGE> 14
Pipeline gross margin was $1.4 million for the quarter ended March 31, 2000,
as compared to the pipeline gross margin of $2.1 million for the first quarter
of 1999. Pipeline throughput declined only 582 barrels per day, but the average
length of the hauls in the first quarter of 2000 was significantly shorter than
in the prior year, thereby reducing revenues. Additionally, the segment of the
Mississippi System where the Partnership had an oil spill in December 1999 was
temporarily shut down during the first quarter of 2000, reducing tariffs from
that system. Pipeline gross margin for the first quarter of 1999 includes $0.3
million of storage revenue.
General and administrative expenses were $2.7 million for the three months
ended March 31, 2000, a decrease of $0.3 million from the 1999 period. The
decrease in 2000 can be attributed primarily to a decline in personnel costs and
related benefits. Additionally, 1999 general and administrative expenses
included $0.1 million of costs related to the preparing for the Year 2000
systems issues.
Depreciation and amortization in the 2000 quarter was flat when compared to
the 1999 period. Interest expense increased $0.1 million due to higher average
debt and higher market interest rates. Other income in the 1999 period included
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 $4.4 million for the three
months ended March 31, 2000. Fluctuations in the timing of payment for NYMEX
transactions and related margin calls combined with fluctuations in the timing
of payment of costs related to the oil spill discussed below and the collection
of the related receivable from insurance companies contributed to the
utilization of cash flows for operating activities. Operating activities in the
prior year period utilized cash of $3.2 million primarily due to increases in
inventory quantities and values.
For the three months ended March 31, 2000, cash flows utilized in investing
activities were $0.1 million. In the 1999 first quarter, investing activities
provided cash flows of $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.
Cash flows used in financing activities were $0.2 million in the quarter
ended March 31, 2000. The Partnership borrowed $2.0 million under its Loan
Agreement and received $2.2 from the issuance of APIs to Salomon. The
Partnership also paid a distribution to common unitholders and the General
Partner totaling $4.4 million.
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 14, 2000. Management of the Partnership
has entered into discussions regarding replacement of the Bank One Loan
Agreement with a long-term facility. Based upon these discussions, management
expects that it will be able to replace the Loan Agreement with a long-term
facility subject to similar terms. If the Partnership is unable to complete the
replacement agreement noted above, then other options will be pursued, some of
which may have terms less favorable to the Partnership, including increasing
costs and pledging additional collateral. While management believes that it
will be able to replace the Loan Agreement on a long-term basis prior to its
maturity, there can be no assurance that it will be able to do so.
At this time, Salomon does not intend to provide guarantees or other credit
support after the credit support period expires in December 2000, except as
discussed in the proposed restructuring below. 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 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
<PAGE> 15
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
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, 2000 on May 15, 2000 to the General Partner and all
Common Unitholders of record as of the close of business on May 1, 2000. The
subordinated OLP Unitholders will not receive a distribution for that period.
The distribution will be paid utilizing approximately $1.8 million of cash
available from the Partnership and $2.6 million of cash provided by Salomon
pursuant to Salomon's Distribution Support Agreement.
Under the Distribution Support Agreement, 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. After the distribution in May 2000,
$8.7 million of distribution support has been utilized and $8.9 million remains
available through December 31, 2001, or until such amount is fully utilized,
whichever comes first. The Distribution Support Agreement will be terminated
effective July 1, 2000 if the proposed restructuring discussed below is approved
by a majority of the Partnership's unitholders.
Proposed Restructuring
On May 10, 2000, the Partnership announced that based on the recommendation
of the Special Committee appointed by the General Partner, the General Partner
and the Board of Directors of the General Partner of the Partnership unanimously
approved a financial restructuring of the Partnership. The proposal for a
financial restructuring of the Partnership is subject to approval by holders of
a majority of the Partnership's outstanding public common units. Assuming
unitholder approval, the proposed restructuring is expected to be effective
beginning with distributions for the third quarter of 2000. Under the terms of
the restructuring:
- the Partnership will set the minimum quarterly distribution at $0.20 per
Common Unit, a level that is commensurate with the Partnership's current
and anticipated future cash flow. The current minimum quarterly
distribution is $0.50 per Common Unit;
- Salomon will contribute to the operating partnership the remaining balance
of its distribution support obligation;
- the Partnership will make a special distribution to all common unitholders
of the remaining distribution support obligation reduced by the amount
of costs associated with the proposed restructuring;
- the General Partner will relinquish its 2% share of the special
distribution and any rights to incentive distributions that it may have in
connection with such special distribution;
- all outstanding Subordinated OLP Units will be eliminated, thereby
increasing the common unitholder's effective combined ownership from the
current 80% to 98% and eliminating the requirement that common units
accrue arrearages;
- Salomon will relinquish all of its $17.6 million of additional partnership
interests received for meeting its distribution support obligation;
- the respective distribution thresholds that must be achieved before the
general partner is entitled to incentive distributions will be set at 125%,
140%, and 165% of the minimum quarterly distribution or $0.25, $0.28 and
$0.33 per unit; and
- Salomon will extend for one year, on the current terms and conditions, its
$300 million Master Credit Support Agreement due to expire on
December 31, 2000.
In connection with the proposal for restructuring, the Partnership is
preparing a proxy statement to be mailed to all of the Partnership's public
unitholders that will contain a more detailed description of the proposal.
<PAGE> 16
Crude Oil Spill
On December 20, 1999, the Partnership had a spill of crude oil from its
Mississippi System. Approximately 8,000 barrels of oil spilled from the
pipeline near Summerland, Mississippi and entered a creek nearby. Some of the
oil then flowed into the Leaf River.
The Partnership responded to this incident immediately, deploying crews to
evaluate, clean up and monitor the spilled oil. At February 1, 2000, the spill
had been substantially cleaned up, with ongoing maintenance and reduced clean-up
activity expected to occur for several more months.
The estimated cost of the spill clean-up is expected to be $18 million.
The incident was reported to insurers, and incurred costs related to the clean-
up efforts have been reimbursed or approved for reimbursement by the insurers.
As a result of this crude oil spill, certain federal and state regulatory
agencies may impose fines and penalties that would not be reimbursed by
insurance. At this time, it is not possible to predict whether the Partnership
will be fined, the amounts of such fines, or whether such governmental agencies
would prevail in imposing such fines.
The segment of the Mississippi System where the spill occurred has been
temporarily shut down and will not be returned to service until regulators give
their approval. Regulatory authorities may require specific testing or changes
to the pipeline before allowing the Partnership to restart that segment of the
system. At this time, it is unknown whether there will be any required testing
or changes and the related cost of that testing or changes.
If Management of the Partnership determines that the costs of testing or
changes are too high, that segment of the system may not be restarted. If this
part of the Mississippi System is taken out of service, the net book value of
that portion of the pipeline would be written down to its net realizable value,
resulting in a non-cash write-off of approximately $6.0 million. Tariff
revenues for this segment of the system in the year 1999 were $0.6 million.
Crude Oil Contamination
In February and March 2000, the Partnership purchased crude oil from a
third party that was subsequently determined to contain organic chlorides.
These barrels were delivered into the Partnership's Texas pipeline system and
contaminated at least 24,000 barrels of oil held in storage and some portion of
44,000 barrels of oil in the pipeline. The north end of the Texas pipeline
system has been temporarily shut down. Some of these barrels were delivered to
another party.
The third party has provided the Partnership with evidence that it has
sufficient resources to cover the total expected damages incurred by the
Partnership. Management of the Partnership believes that it will recover any
damages incurred from the third party. The contaminated barrels are reflected
in inventory at their cost of approximately $2.0 million.
Current Business Conditions
Despite significant increases in crude oil prices in the first quarter of
2000, U.S. onshore crude oil production volumes have not improved. Further,
management of the General Partner has not seen significant improvement in the
drilling and workover rig counts that would indicate that producers are
expending capital to increase production. The first sign of recovery is
normally an increase in the number of workover rigs, the rigs used for jobs that
increase production from existing wells. In 1998, the monthly average number of
workover rigs operating in the Partnership's primary operating areas was 653
rigs. That count dropped to 497 in 1999. In the first quarter of 2000, that
count had risen to 573. Similarly, the average number of rotary rigs being
utilized in the Partnership's primary operating areas to find or develop oil or
natural gas declined from 386 rigs in 1998 to 275 rigs in 1999. In the first
quarter of 2000, that count had risen to 351. Management of the General Partner
believes that producers that survived the price downturn in 1998 and early 1999
by borrowing from banks or utilizing cash reserves are using the increased cash
flow from higher prices to repay debt and replenish cash. Although there has
been some increase in the number of drilling and workover rigs being utilized in
the Partnership's primary operating areas during the early part of 2000,
management of the General Partner expects that this increased activity is more
likely to have the effect of reducing natural production declines rather than
significantly increasing wellhead volumes in its operating areas in 2000.
<PAGE> 17
The Partnership's improved volumes in 2000 compared to the first quarter
1999 were due primarily to obtaining existing production through competitive
marketing efforts. Increased volumes obtained through competition for existing
production generally results in incrementally lower margins per barrel.
As crude oil prices rise, the Partnership's utilization of, and cost of
credit under, the Guaranty Facility increases with respect to the same volume of
business. The General Partner may be required to reduce or restrict the
Partnership's gathering and marketing activities due to the $300 million limit
of the Guaranty Facility. The cost of operating the Partnership's trucking
fleet also rises as fuel costs rise.
Additionally, as prices rise, the Partnership may have to increase the
amount of its Working Capital Facility in order to have funds available to meet
margin calls on the NYMEX and to fund inventory purchases. No assurances can be
made that the Partnership would be able to increase the size of its Working
Capital Facility or that changes to the terms of such increased Working Capital
Facility would not have a material impact on the results of operations or cash
flows of the Partnership.
Forward Looking Statements
The statements in this Annual Report on Form 10-K 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, credit requirements by counterparties of the Partnership,
the Partnership's ability to replace its Guaranty Facility from Salomon with a
bank facility and replace its Working Capital Facility from Bank One with
another facility, any requirements for testing or changes to the Mississippi
System as a result of the December spill and conditions of the capital markets
and equity markets during the periods covered by the forward looking statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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 March
31, 2000, the Partnership used futures, forward and option contracts in its
hedging program with the latest contract being settled in May 2001. Information
about these contracts is contained in the table set forth below.
<PAGE. 18
Sell (Short) Buy (Long)
Contracts Contracts
-------- --------
Crude Oil Inventory:
Volume (1,000 bbls) 46
Carrying value (in thousands) $ 1,192
Fair value (in thousands) $ 1,192
Commodity Futures Contracts:
Contract volumes (1,000 bbls) 16,247 16,832
Weighted average price per bbl $ 27.01 $25.66
Contract value (in thousands) $438,901 $431,921
Fair value (in thousands) $432,275 $444,889
Commodity Forward Contracts:
Contract volumes (1,000 bbls) 5,415 4,473
Weighted average price per bb $ 28.37 $ 27.77
Contract value (in thousands) $153,642 $131,692
Fair value (in thousands) $142,785 $126,652
Commodity Option Contracts:
Contract volumes (1,000 bbls) 3,040
Weighted average strike price per bbl $ 3.25
Contract value (in thousands) $ 590
Fair value (in thousands) $ 405
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, 2000 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> 19
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, 2000 By: /s/ Ross A. Benavides
------------------------------
Ross A. Benavides
Chief Financial Officer
<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, 2000 AND 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,975
<SECURITIES> 0
<RECEIVABLES> 422,806
<ALLOWANCES> 0
<INVENTORY> 2,409
<CURRENT-ASSETS> 436,644
<PP&E> 116,417
<DEPRECIATION> 24,133
<TOTAL-ASSETS> 540,558
<CURRENT-LIABILITIES> 455,334
<BONDS> 0
0
0
<COMMON> 0<F1>
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 540,558<F2>
<SALES> 998,430
<TOTAL-REVENUES> 1,001,843
<CGS> 992,277
<TOTAL-COSTS> 999,590<F3>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 348
<INCOME-PRETAX> (726)
<INCOME-TAX> 0
<INCOME-CONTINUING> (581)<F4>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (581)<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
$30,426 AND PARTNERS' CAPITAL CONSISTING OF THE CAPITAL OF THE COMMON
UNITHOLDERS OF $47,748, THE CAPITAL OF THE GENERAL PARTNER OF $951 AND TREASURY
UNITS OF $1.
<F3>TOTAL COSTS INCLUDES DEPRECIATION AND AMORTIZATION OF $2,046.
<F4>THE MINORITY INTERESTS IN NET LOSS OF GENESIS ENERGY, L.P. IS $145.
<F5>BASIC NET INCOME (LOSS) PER COMMON UNIT IS ($0.07).
<F6>DILUTED NET INCOME (LOSS) PER COMMON UNIT IS $0.07).
</FN>
</TABLE>
