SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- - ---
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-12872
EOTT ENERGY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 76-0424520
------------------------------- -----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1330 Post Oak Boulevard
Suite 2700
Houston, Texas 77056
--------------------------------- -----------------------
(Address of principal executive (Zip Code)
offices)
(713) 993-5200
-------------------------------
(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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EOTT ENERGY PARTNERS, L.P.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended March 31, 1996 and 1995............................3
Condensed Consolidated Balance Sheets (Unaudited) -
March 31, 1996 and December 31, 1995..................................4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended March 31, 1996 and 1995............................5
Condensed Consolidated Statement of Partners' Capital (Unaudited) -
Three Months Ended March 31, 1996.....................................6
Notes to Condensed Consolidated Financial Statements.....................7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................18
ITEM 6. Exhibits and Reports on Form 8-K..................................18
2
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<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EOTT ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Unit Amounts)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Revenue...................................................................... $ 1,552,220 $ 1,284,991
Cost of Sales................................................................ 1,519,975 1,263,076
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Gross Margin................................................................. 32,245 21,915
Expenses
Operating expenses........................................................ 23,173 19,429
Depreciation and amortization............................................. 3,945 2,639
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Total................................................................... 27,118 22,068
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Operating Income (Loss)...................................................... 5,127 (153)
Other Income (Expense)
Interest income........................................................... 68 117
Interest and related charges.............................................. (918) (1,467)
Other, net................................................................ (11) 107
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Total................................................................... (861) (1,243)
------------- -------------
Income (Loss) From Continuing Operations..................................... 4,266 (1,396)
Loss From Discontinued Operations (Note 3)................................... - (8,595)
------------- -------------
Net Income (Loss)............................................................ $ 4,266 $ (9,991)
============= =============
Income (Loss) Per Unit
Continuing Operations..................................................... $ 0.22 $ (0.08)
Discontinued Operations................................................... - (0.50)
------------- -------------
Net Income................................................................... $ 0.22 $ (0.58)
============ =============
Number of Units Outstanding.................................................. 18,830 17,000
============= =============
<FN>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</FN>
</TABLE>
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<TABLE>
EOTT ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
MARCH 31, DECEMBER 31,
1996 1995
------------- --------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents....................................................... $ 7,409 $ 2,276
Trade and other receivables, net of allowance for doubtful
accounts of $2,697 and $2,397, respectively.................................. 486,086 439,619
Inventories..................................................................... 61,668 101,376
Net assets of discontinued operations (Note 3).................................. 4,064 3,460
Other .......................................................................... 8,255 3,877
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Total current assets......................................................... 567,482 550,608
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Property, Plant & Equipment, at cost................................................ 212,512 211,318
Less: Accumulated depreciation.................................................. 76,593 73,753
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Net property, plant & equipment.............................................. 135,919 137,565
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Other Assets, net of amortization................................................... 7,474 7,954
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Total Assets........................................................................ $ 710,875 $ 696,127
============= ==============
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Trade accounts payable ......................................................... $ 527,530 $ 506,764
Accrued taxes payable........................................................... 6,206 5,295
Note payable - affiliate (Note 7)............................................... 24,228 -
Note payable - (Note 5)......................................................... - 85,000
Short-term borrowings - affiliate............................................... 20,000 2,200
Short-term borrowings........................................................... 582 5,559
Other........................................................................... 16,220 4,853
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Total current liabilities.................................................... 594,766 609,671
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Long-Term Liabilities............................................................... 1,403 1,546
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Commitments and Contingencies (Note 9)
Additional Partnership Interests (Note 7)........................................... 9,091 9,091
Partners' Capital
Common Unitholders.............................................................. 65,641 37,992
Subordinated Unitholders........................................................ 37,773 36,219
General Partner................................................................. 2,201 1,608
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Total Partners' Capital............................................................. 105,615 75,819
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Total Liabilities and Partners' Capital............................................. $ 710,875 $ 696,127
============= ==============
<FN>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</FN>
</TABLE>
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<TABLE>
EOTT ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities -
Net income (loss)............................................................... $ 4,266 $ (9,991)
Depreciation................................................................. 3,465 2,169
Amortization of intangible assets............................................ 480 470
(Gains) losses on disposal of assets......................................... 12 (227)
Changes in components of working capital -
Receivables................................................................ (46,467) (22,912)
Inventories................................................................ 39,708 21,749
Other current assets....................................................... (4,378) 2,502
Trade payables............................................................. 20,766 (17,446)
Accrued taxes payable...................................................... 911 (793)
Other current liabilities.................................................. 11,367 (3,522)
Discontinued operations...................................................... (604) (476)
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Net Cash Provided By (Used in) Operating Activities................................. 29,526 (28,477)
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment............................. 364 1,330
Additions to property, plant and equipment...................................... (2,195) (2,172)
Other, net...................................................................... - 83
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Net Cash Used In Investing Activities............................................... (1,831) (759)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term borrowings.................................... (5,120) 37,545
Increase in short-term borrowings - affiliate................................... 17,800 -
Decrease in note payable........................................................ (85,000) -
Increase in note payable - affiliate............................................ 24,228 -
Distributions to Unitholders.................................................... (4,846) (7,372)
Principal payments under capital lease obligation............................... - (435)
Issuance of Common Units........................................................ 29,772 -
Contribution from General Partner............................................... 604 -
------------- --------------
Net Cash Provided By (Used In) Financing Activities................................. (22,562) 29,738
------------- --------------
Increase In Cash and Cash Equivalents............................................... 5,133 502
Cash and Cash Equivalents, Beginning of Period...................................... 2,276 2,020
------------- --------------
Cash and Cash Equivalents, End of Period............................................ $ 7,409 $ 2,522
============= ==============
<FN>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</FN>
</TABLE>
5
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<TABLE>
EOTT ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(In Thousands)
(Unaudited)
Common Subordinated General
Unitholders Unitholders Partner
------------- -------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1995........................... $ 37,992 $ 36,219 $ 1,608
Net income............................................. 2,627 1,554 85
Cash distributions..................................... (4,750) - (96)
Issuance of Common Units............................... 29,772 - -
Contribution from General Partner...................... - - 604
------------- ------------- -------------
Balance at March 31, 1996.............................. $ 65,641 $ 37,773 $ 2,201
============= ============= =============
<FN>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</FN>
</TABLE>
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In connection with a reorganization of the business conducted by EOTT
Energy Corp., an indirect wholly-owned subsidiary of Enron Corp. ("Enron"), into
limited partnership form and a concurrent initial public offering of Common
Units of EOTT Energy Partners, L.P. ("EOTT" or the "Partnership") effective
March 24, 1994, the net assets of EOTT Energy Corp., its wholly-owned foreign
subsidiary, EOTT Energy Ltd., and Enron Products Marketing Company ("EPMC") were
acquired by three operating limited partnerships in which the Partnership is
directly or indirectly the 99% limited partner. EOTT Energy Corp., a Delaware
corporation, serves as the General Partner of the Partnership and its related
operating limited partnerships. The accompanying condensed consolidated
financial statements and related notes present the financial position as of
March 31, 1996 and December 31, 1995, and the results of operations, cash flows
and changes in partners' capital for the three months ended March 31, 1996 and
1995.
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, 1995 filed with the Securities and Exchange Commission.
Certain reclassifications have been made to prior period amounts to conform
with the current period presentation.
2. FORMATION AND OFFERING
On March 24, 1994, the General Partner completed an initial public offering
of 10 million Common Units at $20.00 per unit, representing limited partner
interests in the Partnership. In addition to its aggregate approximate 2%
general partner interest in the Partnership, the General Partner owns an
approximate 37% limited partner interest in the Partnership in the form of
Subordinated Units. Enron, through its purchase of EOTT Common Units, more fully
described in Note 7, directly holds an approximate 11% interest in the
Partnership.
3. DISCONTINUED OPERATIONS
On September 29, 1995, EOTT transferred to Paramount Petroleum Corporation
("PPC") EOTT's West Coast processing and asphalt marketing business (other than
its Arizona asphalt terminals and its asphalt marketing business based out of
those terminals). The transfer was made pursuant to an agreement dated August
15, 1995 between EOTT and certain of its affiliates and PPC and certain of its
affiliates.
EOTT's decision to exit the West Coast business segment was made primarily
due to persistently low crack spreads in 1995 and EOTT's inability to
effectively protect itself against potential future losses due to the volatility
in the crack spread. The crack spread is the difference between the sales price
of refined products and the cost of feedstocks, principally crude oil.
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In August 1995, EOTT's Board of Directors approved a formal plan to
dispose of the West Coast business segment. The second quarter 1995 results of
discontinued operations included a charge of $46.8 million, or $2.70 per Unit.
This charge included the repayment of the PPC bank debt at June 30, 1995 ($9.4
million); write-off of leasehold improvements at the refinery ($7.4 million);
estimated third quarter operating losses ($6.0 million); additional expenses
($10.0 million) including transaction fees, lease cancellation costs and working
capital reserves; and a lump-sum settlement ($14.0 million) related to taxes on
the debt repayment and for the assumption of other contractual obligations, none
of which were environmentally related. Subsequent to the second quarter 1995,
EOTT recorded a $1.0 million benefit which reflects a settlement at an amount
less than estimated on the PPC bank obligation assumed by EOTT as part of the
agreement with PPC, and an additional charge of $3.8 million associated with the
final liquidation of the processing inventories.
The remaining net assets of discontinued operations of $4.1 million at
March 31, 1996 consist primarily of the Arizona asphalt terminals and related
working capital, less estimated disposition costs. As of May 7, 1996, EOTT had a
signed letter of intent to sell the terminal assets.
Amounts and per unit data related to the discontinued West Coast Operations
are summarized below (in thousands, except per Unit amounts):
Three Months
Ended
March 31,
1995
-----------
Revenues............................................... $ 153,122
===========
Gross margin........................................... $ (3,762)
===========
Loss from discontinued operations...................... $ (8,595)
===========
Loss from discontinued operations per Unit............. $ (0.50)
===========
The loss from discontinued operations is due primarily to significantly
lower crack spreads which, on an industry-wide basis, were at their lowest
levels in five years. These operating results also include an allocation of
interest expense based on the ratio of net assets of the discontinued operations
to the sum of consolidated net assets plus consolidated debt.
4. ACQUISITION OF PIPELINE ASSETS
On December 29, 1995, but effective January 1, 1996, the Partnership
acquired pipeline and related assets from Amerada Hess Corporation. The acquired
assets include a 265 mile crude oil gathering system and the Mississippi-Alabama
pipeline, a 349 mile common carrier crude oil pipeline extending from a terminal
in Mobile, Alabama to Liberty Station in Southwestern Mississippi, as well as
certain associated crude inventories. Tank storage associated with the acquired
systems and the Mobile terminal is approximately 5.1 million barrels. The
purchase price was approximately $54.0 million and was accounted for as an asset
purchase. Allocation of the purchase price to the acquired assets at December
31, 1995 was based upon an independent estimated appraisal of fair value. Final
fair value amounts were not materially different than the estimate.
At the time of the closing, Enron had assisted the Partnership in the
arrangement of bridge financing for the asset purchase with a commercial bank in
the form of a promissory note issued by the Partnership to the bank due January
3, 1996 carrying an average annual interest rate of 7.0%. On January 3, 1996,
the Partnership and Enron completed transactions to repay the bridge financing,
which are more fully discussed in Note 7.
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Detailed below are summarized pro forma results of operations for the
Partnership for the three months ended March 31, 1995 as though the acquisition
had taken place at the beginning of the period. Pro forma adjustments include
additional depreciation expense, elimination of income taxes, and additional
interest expense related to the $24.2 million note issued to Enron related to
the financing of the acquisition more fully discussed in Note 7.
(Unaudited: in thousands, except per Unit amounts)
Three Months Ended
March 31,
1995
---------------
Revenue.................................................. $ 1,330,374
Gross margin............................................. $ 28,667
Income from continuing operations........................ $ 608
Net loss................................................. $ (7,987)
Income from continuing operations per Unit............... $ 0.03
Net loss per Unit........................................ $ (0.42)
Number of Units outstanding (a).......................... 18,830
- - -------
(a) Includes 1.8 million Common Units issued to Enron more fully discussed in
Note 7.
The unaudited pro forma results of operations are not intended to be
indicative of actual operating results had the transactions occurred when
indicated, nor do they purport to indicate operating results which may occur in
the future.
5. CREDIT RESOURCES AND LIQUIDITY
On June 30, 1995, Enron agreed to provide credit support (the "Enron
Facility") to the Partnership in the form of guarantees, letters of credit,
loans and letters of indemnity. The total amount of the Enron Facility is $450
million and the facility has a maturity of March 31, 1997, as amended February
19, 1996. The agreement contains sublimits on the availability of the Enron
Facility of $60 million for working capital loans and $150 million for letters
of credit. A fee of .375% per annum is charged on the stated amount of
outstanding letters of credit. Interest on outstanding loans is charged at the
London Interbank Offered Rate ("LIBOR") plus .25% per annum.
The Enron Facility is subject to defined borrowing base limitations
relating to the Partnership's activities and to the maintenance and protection
of the collateral. The Enron Facility permits distributions to Unitholders
subject to certain limitations based on the Partnership's earnings and other
factors. These covenants and restrictions are not expected to materially affect
EOTT's ability to operate the ongoing Partnership business. The Enron Facility
is secured by a first priority lien on and security interest in all receivables
and inventory of the Partnership. The borrowing base is the sum of cash and cash
equivalents, specified percentages of eligible receivables, inventory, and
products contracted for or delivered but not billed. The Enron Facility is
non-recourse to the General Partner and the General Partner's assets. The
Partnership is restricted from entering into additional financing arrangements
without the prior approval of Enron.
At December 31, 1995, EOTT was in technical violation of certain negative
covenants related to the Enron Facility - including Leverage Ratio, Minimum
Working Capital Ratio, and Maximum Fixed Assets - due principally to the
operating losses associated with and the exiting of the West Coast processing
and asphalt marketing business and the short-term bridge financing. At March 31,
1996, EOTT was in violation of the Leverage and Minimum Working Capital ratios
and received waivers from Enron for each of these periods.
9
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1995, EOTT had $85 million of short-term borrowings
outstanding with a commercial bank. Such borrowings were at an average annual
interest rate of 7.0% and primarily funded the working capital requirements as
well as the bridge financing utilized in the Mississippi-Alabama pipeline
acquisition as discussed in Note 4. Subsequent to year end, as further discussed
in Note 7, the short-term borrowings were repaid.
The General Partner believes that the Enron Facility will be sufficient to
support the Partnership's crude oil and refined product purchasing activities
and working capital requirements. No assurance, however, can be given that the
General Partner will not 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 Partnership's ability to obtain letters of credit to support its
purchases of crude oil or refined petroleum products is fundamental to the
Partnership's gathering and marketing activities. Additionally, EOTT has a
significant need for working capital due to the large dollar volume of trading
and marketing transactions in which it engages. 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 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 as defined in the Partnership
Agreement.
The Partnership Agreement authorizes EOTT to issue other equity securities,
the proceeds from which could be used to provide additional funds for
acquisitions or other Partnership needs.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense was $.8 million and $1.6 million for the
three months ended March 31, 1996 and 1995, respectively.
Non-cash investing activities during the three months ended March 31, 1995
include an obligation for approximately $1.4 million to finance ongoing systems
development. At December 31, 1995, the balance of these obligations is included
in short-term borrowings on the Consolidated Balance Sheets. On January 5, 1996,
EOTT repaid the outstanding balance of the financing in connection with the
information systems development.
7. TRANSACTIONS WITH ENRON AND RELATED PARTIES
REVENUE AND COST OF SALES. A summary of revenue and cost of sales with
Enron and its affiliates are as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
--------------------------
1996 1995
----------- -----------
Revenue..................................... $ 6,229 $ 1,742
Cost of Sales............................... 26,579 26,465
Revenue in 1996 and 1995 consists primarily of crude oil sales to Enron
Reserve Acquisition Corp. Cost of sales consists primarily of crude oil and
condensate purchases from Enron Oil & Gas Company and natural gas liquids
purchases from Enron Gas Liquids, Inc. These transactions in the opinion of
management are no less favorable than can be obtained from unaffiliated third
parties.
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Related party receivables at March 31, 1996 and December 31, 1995 were $3.7
million and $.4 million, respectively, and are classified as trade and other
receivables. Related party payables at March 31, 1996 and December 31, 1995 were
$11.6 million and $8.4 million, respectively, and are classified as trade
accounts payable.
PURCHASE OF COMMON UNITS. On March 10, 1995, Enron authorized the purchase
of up to $15 million of EOTT Units on the open market. As of May 10, 1996, Enron
had purchased 296,800 EOTT Common Units under the purchase program, in addition
to the 1.8 million Units discussed below.
ADDITIONAL PARTNERSHIP INTERESTS ("APIs"). On May 15, 1995 and August 14,
1995, Enron paid $4.3 million and $4.8 million, respectively in support of
EOTT's first and second quarter 1995 distributions to its Common Unitholders and
the General Partner. In exchange for the distribution support, Enron received
APIs in the Partnership. APIs have no voting rights and are non-distribution
bearing; however, APIs will be entitled to be redeemed if, with respect to any
quarter, the Minimum Quarterly Distribution ("MQD") and any Common Unit
Arrearages have been paid, but only to the extent that Available Cash with
respect to such quarter exceeds the amount necessary to pay the MQD on all Units
and any Common Unit Arrearages. Enron has committed to support payment of EOTT
common distributions up to an aggregate of $29 million through March 1998, as
necessary.
FINANCING OF PIPELINE ACQUISITION. On January 3, 1996, EOTT and Enron
concluded financing arrangements related to the acquisition discussed in Note 4
in which the Partnership (i) issued and sold to Enron 1,830,011 Common Units for
$29.8 million in cash in a private placement (ii) issued a promissory note to
Enron for $24.2 million due at June 30, 1996, which carries a per annum interest
rate of LIBOR plus 1% through March 31, 1996, and a rate of LIBOR plus 1.5%
through June 30, 1996 and (iii) received a $.6 million capital contribution
related to the General Partner's approximate 2% interest in the Partnership. The
balance of the purchase price was financed through short-term borrowings with
Enron. Collectively, these proceeds, together with short-term borrowings from
Enron, were used by EOTT to repay the bridge financing discussed in Note 4.
8. OTHER INCOME (EXPENSE), NET
The components of other income (expense), net are as follows (in
thousands):
THREE MONTHS ENDED
MARCH 31,
--------------------------
1996 1995
----------- -----------
Loss on foreign currency transactions........ $ (18) $ (147)
Gain (loss) on disposal of fixed assets...... (12) 227
Other........................................ 19 27
----------- -----------
Total.................................... $ (11) $ 107
=========== ===========
9. LITIGATION AND OTHER CONTINGENCIES
EOTT is, in the ordinary course of business, a defendant in various
lawsuits, some of which are covered in whole or in part by insurance. The
Partnership is responsible for all litigation and other claims relating to the
business acquired from the Predecessor, although the Partnership will be
entitled to the benefit of certain insurance maintained by Enron covering
occurrences prior to the closing of the offering. The Partnership believes that
the ultimate resolution of litigation, individually and in the aggregate, will
not have a materially adverse impact on the Partnership's financial position or
results of operations. Various legal actions have arisen in the ordinary course
of business, the most significant of which are discussed in "Part I, Item 3.
Legal Proceedings" of EOTT's Annual Report filed on Form 10-K for the year ended
December 31, 1995 and below.
11
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MCMAHON FOUNDATION AND J. TOM POYNER VS. AMERADA HESS CORPORATION, ET AL.
(INCLUDING EOTT ENERGY OPERATING LIMITED PARTNERSHIP), CIVIL ACTION NO.
H-96-1155; UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF TEXAS, HOUSTON
DIVISION (FEDERAL ANTI-TRUST SUIT): This suit was filed on April 10, 1996 as a
class action complaint for violation of the federal antitrust laws. The relevant
area is the entire continental United States, except for Alaska, New York, Ohio,
Pennsylvania, West Virginia and the Wilmington Field at Long Beach, California.
The plaintiffs claim that there is a combination and conspiracy among the
defendant oil companies to fix, depress, stabilize and maintain at artificially
low levels the price paid for the first purchase of lease production oil sold
from leases in which the class members own interests. This was allegedly
accomplished by agreement of the defendants to routinely pay for first purchases
at posted prices rather than competitive market prices and maintain them in a
range below competitive market prices through an undisclosed scheme of using
posted prices in buy/sell transactions among themselves to create the illusion
that posted prices are genuine market prices. The plaintiffs allege violations
from October of 1986 forward. No money amounts were claimed, so it is not
possible to determine any potential exposure until further discovery has been
done. While the petition is vague and discovery has not yet begun, the General
Partner believes the Partnership, as a first purchaser, should be without
liability in this or related matters.
The Partnership believes that it has obtained or has applied for all of the
necessary permits required by federal, state, and local environmental agencies
for the operation of its business. Further, the Partnership believes that there
are no outstanding liabilities or claims relating to environmental matters
individually and in the aggregate, which would have a material adverse impact on
the Partnership's financial position or results of operations.
10. NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121 - "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of."
SFAS No. 121 is effective for fiscal years beginning after December 15, 1995 and
requires, among other things, that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset; may not be recoverable. Effective January 1, 1996, EOTT adopted this
standard with no effect on EOTT's financial condition or results of operations.
11. SUBSEQUENT EVENTS
On April 18, 1996, the Board of Directors of EOTT Energy Corp., as General
Partner, declared the Partnership's regular quarterly cash distribution of $.475
per Common Unit for the period January 1, 1996 through March 31, 1996. The first
quarter distribution will be paid on May 15, 1996 to the General Partner and
Common Unitholders of record as of April 30, 1996 from the Partnership's
Available Cash.
12
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
EOTT is one of the largest independent gatherers and marketers of crude oil
in North America, with operations throughout most of the United States and in
Canada. EOTT also engages, to a lesser extent, in refined products marketing as
well as gathering and marketing of natural gas liquids ("NGLs"), and other crude
oil-related marketing activities. 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
EOTT reported income from continuing operations of $4.3 million or $.22 per
unit for the first quarter of 1996 compared to a loss from continuing operations
of $1.4 million or $.08 per unit for the first quarter of 1995. The improved
performance is attributable to higher margins in the North American crude oil
segment. First quarter 1995 results include a loss of $8.6 million or $.50 per
unit attributable to EOTT's discontinued West Coast processing and asphalt
marketing business.
Selected financial data for EOTT's business segments are summarized below,
in millions:
THREE MONTHS ENDED
MARCH 31,
----------------------------
1996 1995
---------- -----------
Revenues:
North American crude oil................... $ 1,410.9 $ 1,225.1
Refined products marketing................. 142.3 59.9
Intersegment revenues...................... (1.0) -
---------- -----------
Total.................................... $ 1,552.2 $ 1,285.0
========== ===========
Gross margin:
North American crude oil................... $ 31.5 $ 20.7
Refined products marketing................. 0.7 1.2
---------- -----------
Total.................................... $ 32.2 $ 21.9
========== ===========
Operating income (loss):
North American crude oil................... $ 11.4 $ 5.2
Refined products marketing................. - 0.6
Corporate.................................. (6.3) (6.0)
---------- -----------
Total.................................... $ 5.1 $ (0.2)
========== ===========
Gross margin is the difference between the sales prices of crude oil or
other petroleum products and the costs of crude and products purchased,
including costs paid to third parties for transportation and handling charges.
Both of EOTT's business segments are characterized by large volumes and
generally very thin and volatile profit margins on purchase and sale
transactions, and the absolute price levels for crude oil and refined products
do not necessarily bear a direct relationship to margins per barrel, 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 not meaningful,
and therefore are not discussed.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1995.
NORTH AMERICAN CRUDE OIL: Operating income for the North American Crude Oil
segment was $11.4 million for the first quarter 1996, compared to $5.2 million
for the same period in 1995. Gross margin increased $10.8 million to $31.5
million in the first quarter of 1996 due primarily to higher volumes related to
the acquisition of pipeline and related assets (see Note 4 to the Condensed
Consolidated Financial Statements), combined with an overall 39% improvement in
average margins per barrel compared to the activity for the same period in 1995.
U.S. crude lease purchases were up almost 30 percent from 198,100 barrels per
day ("bpd") for the first quarter 1995 to 256,900 bpd in 1996 due to the
acquisition of pipeline and related assets. Operating expenses of $20.1 million
for the first quarter 1996 were $4.6 million higher than in the first quarter
1995 due again to operating costs associated with the acquisition of pipeline
and related assets.
REFINED PRODUCTS MARKETING: Refined Products Marketing operating income was
negligible for the first quarter 1996 compared to operating income of $.6
million for the same period in 1995 due primarily to lower margins. Fewer
opportunities to participate in the rack market existed due to limited market
volatility which resulted in a gross margin decrease of $.5 million from $1.2
million for the first quarter of 1995 to $.7 million in 1996. On a per unit
basis, margin per barrel was $0.12 per barrel in 1996 compared to $0.41 per
barrel in 1995. Operating expenses were up $.1 million in 1996 compared to 1995.
CORPORATE AND OTHER: Corporate costs were $6.3 million for the first
quarter 1996 compared to $6.0 million in the first quarter 1995. The increase is
due primarily to employee related costs primarily benefits and incentive
compensation. Other income (expense), net, consisting primarily of losses on
transactions denominated in foreign currency and gains (losses) on the sale of
property, plant and equipment, was negligible for the first quarter 1996
compared to $.1 million for the same period in 1995. Interest and related
charges for the first quarter 1996 were $.9 million compared to $1.5 million for
the same period in 1995. The decrease is due primarily to lower interest expense
on lower short-term borrowings obtained under the Enron Credit Facility compared
to similar costs experienced under a prior credit facility. See additional
discussion under WORKING CAPITAL AND CREDIT RESOURCES below.
DISCONTINUED OPERATIONS
On September 29, 1995, EOTT transferred to Paramount Petroleum Corporation
("PPC") EOTT's West Coast processing and asphalt marketing business (other than
its Arizona asphalt terminals and its asphalt marketing business based out of
those terminals). The transfer was made pursuant to an agreement dated August
15, 1995 between EOTT and certain of its affiliates and PPC and certain of its
affiliates.
EOTT's decision to exit the West Coast business segment was made primarily
due to persistently low crack spreads in 1995 and EOTT's inability to
effectively protect itself against potential future losses due to the volatility
in the crack spread. The crack spread is the difference between the sales price
of refined products and the cost of feedstocks, principally crude oil.
In August 1995, EOTT's Board of Directors approved a formal plan to
dispose of the West Coast business segment. The second quarter 1995 results of
discontinued operations included a charge of $46.8 million, or $2.70 per Unit.
This charge included the repayment of the PPC bank debt at June 30, 1995 ($9.4
million); write-off of leasehold improvements at the refinery ($7.4 million);
estimated third quarter operating losses ($6.0 million); additional expenses
($10.0 million) including transaction fees, lease cancellation costs and working
capital reserves; and a lump-sum settlement ($14.0 million) related to taxes on
the debt repayment and for the assumption of other contractual obligations, none
of which were environmentally related. Subsequent to the second quarter 1995,
EOTT recorded a $1.0 million benefit which reflects a settlement at an amount
less than estimated on the PPC bank obligation assumed by EOTT as part of the
agreement with PPC, and an additional charge of $3.8 million associated with the
final liquidation of the processing inventories.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
The remaining net assets of discontinued operations of $4.1 million at
March 31, 1996 consist primarily of the Arizona asphalt terminals and related
working capital, less estimated disposition costs. As of May 7, 1996, EOTT had a
signed letter of intent to sell the terminal assets.
Amounts and per unit data related to the discontinued West Coast Operations
are summarized below (in thousands, except per Unit amounts):
Three Months
Ended
March 31,
1995
-----------
Revenues............................................... $ 153,122
===========
Gross margin........................................... $ (3,762)
===========
Loss from discontinued operations...................... $ (8,595)
===========
Loss from discontinued operations per Unit............. $ (0.50)
===========
The loss from discontinued operations is due primarily to significantly
lower crack spreads which, on an industry-wide basis, were at their lowest
levels in five years. These operating results also include an allocation of
interest expense based on the ratio of net assets of the discontinued operations
to the sum of consolidated net assets plus consolidated debt.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Management expects that short-term cash requirements will be met primarily
by cash generated from operations in addition to lines of credit available under
the Enron Credit Facility, more fully described in Note 5 to the Condensed
Consolidated Financial Statements. Management expects cash generated from
operations will be sufficient to fund short-term liquidity as well as fund
sustaining capital expenditures for the foreseeable future.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities totaled $29.5 million for the
first quarter of 1996 compared to net cash used of $28.5 million for the same
period in 1995. The increase primarily reflects reductions in inventory,
activities related to the acquisition noted above, and the discontinuance of
EOTT's West Coast operations. Additionally, cash flow improved due to lower cash
requirements related to NYMEX trading activities and the timing of certain lease
crude purchases.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in investing activities totaled $1.8 million for the first
quarter of 1996 compared to $.8 million for the same period in 1995. Proceeds
from asset sales totaled $.4 million in 1996 compared to $1.3 million in 1995.
Additions to property, plant, and equipment of $2.2 million in 1996 include $1.1
million for pipeline connections and improvements and $.8 million for
information systems development. The Partnership expects to incur approximately
$4.8 million in sustaining capital expenditures for the remainder of 1996.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used in financing activities totaled $22.6 million for the first
quarter of 1996 compared to net cash provided of $29.7 million for the same
period in 1995. The 1995 amount primarily represents short-term borrowings to
fund working capital requirements under a prior credit facility. During the
first quarter 1996 EOTT issued 1.8 million Common Units in exchange for $29.8
million in a private placement with Enron. EOTT also received $24.2 million in
exchange for a promissory note issued to Enron. These proceeds, together with
other short term borrowings from Enron, were used by EOTT to repay $85 million
in bridge financing related in part to the acquisition of pipeline assets at
December 29, 1995. See additional discussion under Note 4 to the Condensed
Consolidated Financial Statements - Acquisition of Pipeline Assets.
WORKING CAPITAL AND CREDIT RESOURCES
On June 30, 1995, Enron agreed to provide credit support (the "Enron
Facility") to the Partnership in the form of guarantees, letters of credit,
loans and letters of indemnity. The total amount of the Enron Facility is $450
million and the facility has a maturity of March 31, 1997, as amended February
19, 1996. The agreement contains sublimits on the availability of the Enron
Facility of $60 million for working capital loans and $150 million for letters
of credit. A fee of .375% per annum is charged on the stated amount of
outstanding letters of credit. Interest on outstanding loans is charged at the
London Interbank Offered Rate ("LIBOR") plus .25% per annum.
The Enron Facility is subject to defined borrowing base limitations
relating to the Partnership's activities and to the maintenance and protection
of the collateral. The Enron Facility permits distributions to Unitholders
subject to certain limitations based on the Partnership's earnings and other
factors. These covenants and restrictions are not expected to materially affect
EOTT's ability to operate the ongoing Partnership business. The Enron Facility
is secured by a first priority lien on and security interest in all receivables
and inventory of the Partnership. The borrowing base is the sum of cash and cash
equivalents, specified percentages of eligible receivables, inventory, and
products contracted for or delivered but not billed. The Enron Facility is
non-recourse to the General Partner and the General Partner's assets. The
Partnership is restricted from entering into additional financing arrangements
without the prior approval of Enron.
At December 31, 1995, EOTT was in technical violation of certain negative
covenants related to the Enron facility - including Leverage Ratio, Minimum
Working Capital Ratio, and Maximum Fixed Assets - due principally to the
operating losses associated with and the exiting of the West Coast processing
and asphalt marketing business and the short-term bridge financing. At March 31,
1996, EOTT was in violation of the Leverage and Minimum Working Capital ratios
and received waivers from Enron.
At December 31, 1995, EOTT had $85 million of short-term borrowings
outstanding with a commercial bank. Such borrowings were at an average annual
interest rate of 7.0% and primarily funded the working capital requirements as
well as the bridge financing utilized in the Mississippi-Alabama pipeline
acquisition as discussed in Note 4. Subsequent to year end, as further discussed
in Note 7, the short-term borrowings were repaid.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
The General Partner believes that the Enron Facility will be sufficient to
support the Partnership's crude oil and refined product purchasing activities
and working capital requirements. No assurance, however, can be given that the
General Partner will not 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 Partnership's ability to obtain letters of credit to support its
purchases of crude oil or refined petroleum products is fundamental to the
Partnership's gathering and marketing activities. Additionally, EOTT has a
significant need for working capital due to the large dollar volume of trading
and marketing transactions in which it engages. 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 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 as defined in the Partnership
Agreement.
The Partnership Agreement authorizes EOTT to issue other equity securities,
the proceeds from which could be used to provide additional funds for
acquisitions or other Partnership needs.
OUTLOOK
Based on current earnings and cash flow projections, the Partnership
expects to pay distributions to its Common Unitholders from Available Cash
during 1996 without distribution support from Enron.
INFORMATION REGARDING FORWARD-LOOKING INFORMATION
The statements in this Quarterly 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. Such forward looking statements include the discussions in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." 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 the Partnership's success in obtaining additional lease barrels,
developments relating to possible acquisitions or business combination
opportunities, the success of the Partnership's risk management activities and
conditions of the capital and equity markets during the periods covered by the
forward looking statements.
17
<PAGE>
PART II. OTHER INFORMATION
EOTT ENERGY PARTNERS, L.P.
ITEM 1. Legal Proceedings
See Part I. Item 1, Note 9 to the Condensed Consolidated Financial
Statements entitled "Litigation and Other 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.
January 1, 1996 RE: Closing of purchase and sale transaction to acquire
certain assets from Amerada Hess Corporation.
January 3, 1996 RE: Issuance of Common Units to Enron Corp. and other
financing related to asset acquisition.
March 13, 1996 RE: Amendment No. 1 to Current Report dated January 1,
1996 - Item 7. Financial Statements, Pro Forma
Financial Information, and Exhibits reflecting
the above acquisition.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EOTT ENERGY PARTNERS, L.P.
(A Delaware Limited Partnership)
Date: May 14, 1996 By: EOTT ENERGY CORP. as
General Partner
MARIAN E. RAGLAND
Marian E. Ragland
Vice President, Controller
(Principal Accounting Officer)
19
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000917464
<NAME> EOTT ENERGY PARTNERS, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 7,409
<SECURITIES> 0
<RECEIVABLES> 486,086
<ALLOWANCES> 2,697
<INVENTORY> 61,668
<CURRENT-ASSETS> 567,482
<PP&E> 212,512
<DEPRECIATION> 76,593
<TOTAL-ASSETS> 710,875
<CURRENT-LIABILITIES> 594,766
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 105,615
<TOTAL-LIABILITY-AND-EQUITY> 710,875
<SALES> 1,545,806
<TOTAL-REVENUES> 1,552,220
<CGS> 1,519,975
<TOTAL-COSTS> 1,547,093
<OTHER-EXPENSES> 11
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 918
<INCOME-PRETAX> 4,266
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,266
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,266
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
<FN>
(1) "Other SE" represents consolidated Partners' Capital.
(2) EPS represents earnings per Common Unit.
</FN>
</TABLE>
