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 JUNE 30, 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 47-0424520
------------------------------------ ----------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1330 Post Oak Blvd.
Suite 2700
Houston, Texas 77056
------------------------------------- -----------------------------
------------------------------------- -----------------------------
(Address of principal executive offices) (Zip Code)
(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
1
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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 June 30, 1996 and 1995, and
Six Months Ended June 30, 1996 and 1995 3
Condensed Consolidated Balance Sheets (unaudited) -
June 30, 1996 and December 31, 1995 4
Condensed Consolidated Statements of Cash Flows (unaudited) -
Six Months Ended June 30, 1996 and 1995 5
Condensed Consolidated Statement of Partners' Capital (unaudited) -
Six Months Ended June 30, 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 20
ITEM 6. Exhibits and Reports on Form 8-K 20
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue............................................ $ 1,692,296 $ 1,233,954 $ 3,244,516 $ 2,518,945
Cost of Sales...................................... 1,645,920 1,212,228 3,165,895 2,475,304
------------- ------------- ------------- -------------
Gross Margin....................................... 46,376 21,726 78,621 43,641
Expenses
Operating expenses.............................. 30,770 16,388 53,943 35,817
Depreciation and amortization................... 4,979 2,597 8,924 5,236
------------- ------------- ------------- -------------
35,749 18,985 62,867 41,053
------------- ------------- ------------- -------------
Operating Income .................................. 10,627 2,741 15,754 2,588
Other Income (Expense)
Interest income................................. 184 261 252 378
Interest and related charges.................... (794) (1,353) (1,712) (2,820)
Other, net...................................... (5) 379 (16) 486
-------------- ------------- -------------- -------------
(615) (713) (1,476) (1,956)
-------------- -------------- -------------- --------------
Income From Continuing Operations.................. 10,012 2,028 14,278 632
Income (Loss) From
Discontinued Operations (Note 4)................ - (54,385) - (62,980)
------------- -------------- ------------- --------------
Income (Loss) Before
Extraordinary Item.............................. 10,012 (52,357) 14,278 (62,348)
Extraordinary Item (Note 11)....................... - (1,315) - (1,315)
------------- -------------- ------------- --------------
Net Income (Loss).................................. $ 10,012 $ (53,672) $ 14,278 $ (63,663)
============= ============== ============= ==============
Net Income (Loss) Per Unit
Continuing Operations........................... $ 0.52 $ 0.12 $ 0.74 $ 0.04
Discontinued Operations......................... - (3.13) - (3.63)
Extraordinary Item.............................. - (0.08) - (0.08)
------------- ------------- ------------- --------------
Total.............................................. $ 0.52 $ (3.09) $ 0.74 $ (3.67)
============= ============= ============= ==============
Number of Units Outstanding........................ 18,830 17,000 18,830 17,000
============= ============= ============= =============
<FN>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</FN>
</TABLE>
3
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<TABLE>
EOTT ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
1996 1995
------------- --------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents....................................................... $ 1,567 $ 2,276
Trade and other receivables, net of allowance for doubtful
accounts of $ 3,009 and $2,397, respectively................................. 485,349 439,619
Inventories..................................................................... 91,654 101,376
Net assets of discontinued operations (Note 4).................................. 5,115 3,460
Other .......................................................................... 8,076 3,877
------------- --------------
Total current assets......................................................... 591,761 550,608
------------- --------------
Property, Plant & Equipment, at cost................................................ 210,913 211,318
Less: Accumulated depreciation.................................................. 80,144 73,753
------------- --------------
Net property, plant & equipment.............................................. 130,769 137,565
------------- --------------
Other Assets, net of amortization................................................... 8,532 7,954
------------- --------------
Total Assets........................................................................ $ 731,062 $ 696,127
============= ==============
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Trade accounts payable ......................................................... $ 551,493 $ 506,764
Accrued taxes payable........................................................... 6,440 5,295
Note payable - affiliate (Note 8)............................................... 24,228 -
Note payable (Note 6)........................................................... - 85,000
Short-term borrowings - affiliate............................................... 13,700 2,200
Short-term borrowings........................................................... 582 5,559
Other........................................................................... 14,375 4,853
------------- --------------
Total current liabilities.................................................... 610,818 609,671
------------- --------------
Long - Term Liabilities............................................................. 1,259 1,546
------------- --------------
Commitments and Contingencies (Note 10)
Additional Partnership Interests (Note 8)........................................... 9,091 9,091
------------- --------------
Partners' Capital
Common Unitholders.............................................................. 66,186 37,992
Subordinated Unitholders........................................................ 41,420 36,219
General Partner................................................................. 2,288 1,608
------------- --------------
Total Partners' Capital............................................................. 109,894 75,819
------------- --------------
Total Liabilities and Partners' Capital............................................. $ 731,062 $ 696,127
============= ==============
<FN>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</FN>
</TABLE>
4
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<TABLE>
EOTT ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1996 1995
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Reconciliation of net income (loss) to net cash
provided by operating activities -
Net income (loss)............................................................... $ 14,278 $ (63,663)
Depreciation................................................................. 7,909 4,301
Amortization of intangible assets............................................ 1,015 935
(Gains) losses on disposal of assets......................................... 135 (306)
Changes in components of working capital -
Receivables................................................................ (45,730) 97,739
Inventories................................................................ 9,722 46,788
Other current assets....................................................... (4,199) 511
Trade payables............................................................. 44,729 (103,326)
Accrued taxes payable...................................................... 1,145 1,274
Other current liabilities.................................................. 9,522 (4,681)
Discontinued operations...................................................... (1,655) 53,295
-------------- --------------
Net Cash Provided By Operating Activities........................................... 36,871 32,867
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment............................. 880 1,484
Additions to property, plant and equipment...................................... (3,713) (4,188)
Other, net...................................................................... (8) 269
-------------- --------------
Net Cash Used In Investing Activities............................................... (2,841) (2,435)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in short-term borrowings............................................... (5,264) (43,021)
Increase in short-term borrowings - affiliate................................... 11,500 23,000
Decrease in note payable........................................................ (85,000) -
Increase in note payable - affiliate............................................ 24,228 -
Distributions to Unitholders.................................................... (10,579) (7,372)
Principal payments under capital lease obligation............................... - (875)
Issuance of Common Units........................................................ 29,772 -
Contribution from General Partner............................................... 604 -
------------- --------------
Net Cash Used In Financing Activities............................................... (34,739) (28,268)
-------------- --------------
Increase (Decrease) In Cash and Cash Equivalents.................................... (709) 2,164
Cash and Cash Equivalents, Beginning of Period...................................... 2,276 2,020
------------- --------------
Cash and Cash Equivalents, End of Period............................................ $ 1,567 $ 4,184
============= ==============
<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....................................... 8,791 5,201 286
Cash distributions............................... (10,369) - (210)
Issuance of Common Units......................... 29,772 - -
Contribution from General Partner................ - - 604
----------- ------------- -----------
Balance at June 30, 1996......................... $ 66,186 $ 41,420 $ 2,288
=========== ============= ===========
<FN>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</FN>
</TABLE>
6
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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 accompany- ing condensed consolidated
financial statements and related notes present the financial position as of June
30, 1996 and December 31, 1995, the results of operations for the three and six
months ended June 30, 1996 and 1995, cash flows for the six months ended June
30, 1996 and 1995 and changes in partners' capital for the six months ended June
30, 1996.
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 8, directly holds an approximate 11% interest in the
Partnership.
3. CHANGE IN ACCOUNTING PRINCIPLE
In the second quarter of 1996, the Partnership changed its method of
accounting for inventories from the last-in, first-out ("LIFO") method to the
average cost method. The change did not have a significant effect on the results
of operations for 1996 and is not expected to be material in future periods
based upon the manner in which the Partnership currently operates. Prior to this
change, the Partnership's inventory costs would not have differed significantly
under the two methods. The change was made to conform the inventory costing
method used for financial reporting purposes to that used by the Partnership to
manage its commercial operations.
7
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. 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 reflected 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 $5.1 million at June
30, 1996 consist primarily of the Arizona asphalt terminals and related working
capital, less estimated disposition costs.
Amounts related to the West Coast Operations discontinued in 1995 are
summarized below (in thousands):
<TABLE>
Three Months Six Months
Ended Ended
June 30, June 30,
1995 1995
------------- -----------
<S> <C> <C>
Revenues............................................... $ 162,686 $ 315,808
=========== ===========
Gross margin........................................... $ (1,834) $ (5,596)
============ ===========
Loss from discontinued operations...................... $ (7,585) $ (16,180)
=========== ===========
Loss on disposal of discontinued operations............ $ (46,800) $ (46,800)
=========== ===========
</TABLE>
The 1995 loss from discontinued operations was 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.
8
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. 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 $53.9 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 7.2%. On January 3, 1996,
the Partnership and Enron completed transactions to repay the bridge financing,
which are more fully discussed in Note 8.
Detailed below are summarized pro forma results of operations for the
Partnership for the three and six months ended June 30, 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 8.
<TABLE>
(UNAUDITED: IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
Three Months Ended Six Months Ended
June 30, June 30,
1995 1995
------------- -------------
<S> <C> <C>
Revenue.................................................. $ 1,287,870 $ 2,618,244
============ ============
Gross margin............................................. $ 28,785 $ 57,452
============ ============
Income from continuing operations........................ $ 4,421 $ 5,029
============ ============
Net loss................................................. $ (51,279) $ (59,266)
============ ============
Income from continuing operations per Unit............... $ 0.23 $ 0.26
============ ============
Net loss per Unit........................................ $ (2.67) $ (3.08)
============ ============
Number of Units outstanding (a).......................... 18,830 18,830
============ ============
- -------
(a) Includes 1.8 million Common Units issued to Enron more fully discussed in
Note 8.
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.
</TABLE>
6. CREDIT FACILITIES
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.
9
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 the exiting of the West Coast processing and
asphalt marketing business and the short-term bridge financing. EOTT was in
violation of the Leverage Ratio at June 30, 1996 and the Leverage and Minimum
Working Capital Ratios at March 31, 1996. EOTT received waivers from Enron for
all of these periods.
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 7.2% and primarily funded the working capital requirements as
well as the bridge financing utilized in the Mississippi-Alabama pipeline
acquisition as discussed in Note 5. Subsequent to year end, as further discussed
in Note 8, 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 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.
7. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense was $ .6 million and $ 3.7 million for the six
months ended June 30, 1996 and 1995, respectively.
Non-cash investing activities during the six months ended June 30, 1995
include an obligation for approximately $2.1 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.
10
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. TRANSACTIONS WITH ENRON AND RELATED PARTIES
<TABLE>
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 SIX MONTHS ENDED
JUNE 30, JUNE 30
-------------------------- ----------------------
1996 1995 1996 1995
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue................................... $ 9,466 $ 1,431 $ 15,694 $ 3,173
Cost of Sales............................. $ 23,754 $ 25,316 $ 50,333 $ 51,781
</TABLE>
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. These transactions, in the
opinion of management, are no less favorable than can be obtained from
unaffiliated third parties.
Related party receivables at June 30, 1996 and December 31, 1995 were $3.1
million and $.4 million, respectively, and are classified as trade and other
receivables. Related party payables at June 30, 1996 and December 31, 1995 were
$7.4 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 August 13, 1996,
Enron had purchased 296,800 EOTT Common Units under the purchase program, in
addition to the 1.8 million Units discussed in (i) under "Financing of Pipeline
Acquisition" 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 5
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 originally due at June 30, 1996 and subsequently
extended to March 31, 1997, which carries a per annum interest rate of LIBOR
plus 1% through March 31, 1996, and a rate of LIBOR plus 1.5% through March 31,
1997 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 5.
11
<PAGE>
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. OTHER INCOME (EXPENSE), NET
<TABLE>
The components of other income (expense), net are as follows (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gain on foreign currency transactions................ $ 94 $ 281 $ 76 $ 134
Gain (loss) on disposal of fixed assets.............. (122) 68 (135) 306
Other, net........................................... 23 30 43 46
----------- ----------- ----------- -----------
Total............................................ $ (5) $ 379 $ (16) $ 486
============ =========== =========== ===========
</TABLE>
10. 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
businesses acquired from EOTT Energy Corp., 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.
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.
12
<PAGE>
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. EXTRAORDINARY ITEM
Second quarter 1995 results include a one-time charge of $1.3 million
related to the termination of the credit facility in place prior to obtaining
the Enron Facility as described in Note 6.
12. SUBSEQUENT EVENTS
DISTRIBUTIONS
On July 16 , 1996, the Board of Directors of EOTT Energy Corp., as General
Partner, declared the Partnership's regular quarterly cash distribution of $.475
per Unit for the period April 1, 1996 through June 30, 1996. The second quarter
distribution will be paid on August 14, 1996 to the General Partner and all
other Unitholders of record including the Subordinated Unitholder as of July 31,
1996.
SPECIAL UNITS
Effective July 16, 1996, EOTT created a new class of limited partner
interest designated as Special Units and exchanged the Special Units on a
one-for-one basis for the 1,830,011 Common Units issued to Enron in connection
with the financing of the acquisition discussed in Note 8. The Special Units
rank pari passu with the Common Units in all distributions and upon liquidation
and will vote as a class with the Common Units. The exchange permitted EOTT to
avoid the cost of New York Stock Exchange listing of the Common Units issued to
Enron in connection with the financing of the acquisition, including the cost
associated with seeking Unitholder approval for the listing. The Special Units
may become convertible in Common Units on a one-for-one basis in certain events.
The Special Units will be Common Unit equivalents, and the exchange will have no
adverse impact on EOTT or on income or distributions per Common Unit.
13
<PAGE>
EOTT ENERGY PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT Energy Partners, L.P. "EOTT" or (the "Partnership") is one of the
largest independent gatherers and marketers of crude oil in North America, with
operations throughout most of the United States and 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 CONTINUING OPERATIONS
EOTT reported income from continuing operations for the second quarter of
1996 of $10.0 million compared to $2.0 million for the second quarter of 1995.
The improved performance is attributable to higher per unit margins and higher
volumes. The increased volumes primarily relate to the Hess acquisition.
Unusually favorable market conditions in the second quarter enabled EOTT to
capture higher margins on basis differentials.
<TABLE>
Selected financial data for EOTT's business segments are summarized below,
(in millions):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
North American crude oil................. $ 1,555.2 $ 1,151.7 $ 2,966.0 $ 2,376.6
Refined products marketing............... 137.1 82.3 279.4 142.3
Intersegment revenues .................. - - (0.9) -
-------------- ------------- ------------- -------------
Total.................................. $ 1,692.3 $ 1,234.0 $ 3,244.5 $ 2,518.9
============= ============= ============= =============
Gross margin:
North American crude oil................. $ 44.5 $ 21.1 $ 76.0 $ 41.8
Refined products marketing............... 1.8 0.6 2.6 1.8
------------- ------------- ------------- -------------
Total.................................. $ 46.3 $ 21.7 $ 78.6 $ 43.6
============= ============= ============= =============
Operating income (loss):
North American crude oil................. $ 17.4 $ 6.3 $ 28.8 $ 11.5
Refined products marketing............... 0.7 - 0.8 0.6
Corporate................................ (7.5) (3.6) (13.8) (9.5)
-------------- ------------- -------------- -------------
Total.................................. $ 10.6 $ 2.7 $ 15.8 $ 2.6
============= ============= ============= =============
</TABLE>
Gross margin is the difference between the sales prices of crude oil or
other petroleum products and the costs of crude oil and other 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. 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.
14
<PAGE>
EOTT ENERGY PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1995.
NORTH AMERICAN CRUDE OIL: Operating income for the North American Crude Oil
segment was $17.4 million for the second quarter of 1996, compared to $6.3
million for the same period in 1995. Gross margin increased $23.4 million to
$44.5 million in the second quarter of 1996 due primarily to higher volumes
related to the acquisition of pipeline and related assets (see Note 5 to the
Condensed Consolidated Financial Statements), combined with an 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% from 204,100 barrels per day
("bpd") for the second quarter of 1995 to 264,800 bpd in 1996 due primarily to
the acquisition of pipeline and related assets. Operating expenses of $27.1
million for the second quarter of 1996 were $12.3 million higher than in the
second quarter of 1995 due again to higher operating costs associated with the
expanded activities in Mississippi, Alabama and California as well as higher
benefits and other employee related expenses.
REFINED PRODUCTS MARKETING: Operating income for Refined Products Marketing
increased $.7 million for the second quarter of 1996 compared to the same period
in 1995. Trade volumes were 56,400 bpd in the second quarter of 1996 compared to
38,900 bpd in 1995. Gross margin increased $1.2 million to $1.8 million in the
second quarter of 1996 due primarily to the expansion of products trading in
states west of the Rockies, primarily in California and Oregon. Operating
expenses of $1.1 million for the second quarter of 1996 were $.5 million higher
than in the second quarter 1995 due primarily to higher benefits and other
employee related costs.
CORPORATE AND OTHER: Corporate and other costs of $7.5 million for the
second quarter of 1996 were $3.9 million higher compared to the second quarter
of 1995 due primarily to higher benefits as well as other employee related costs
and systems operating costs. Interest and related charges for the second quarter
of 1996 were $.8 million compared to $1.4 million for the same period in 1995.
The decrease is due primarily to lower interest expense on lower short-term
borrowings. Other income (expense), net, consisting primarily of gains (losses)
on transactions denominated in foreign currency and gains (losses) on the sale
of property, plant and equipment, was negligible for the second quarter 1996
compared to $.4 million for the same period in 1995.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1995.
NORTH AMERICAN CRUDE OIL: Operating income for the North American Crude Oil
segment was $28.8 million for the first half of 1996, compared to $11.5 million
for the same period in 1995. Gross margin increased $34.2 million to $76.0
million in the first half of 1996 due primarily to higher volumes related to the
acquisition of pipeline and related assets (see Note 5 to the Condensed
Consolidated Financial Statements), combined with an 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% from 200,000 barrels per day ("bpd")
for the first half of 1995 to 260,800 bpd in 1996 due primarily to the
acquisition of pipeline and related assets. Operating expenses of $47.2 million
for the first half of 1996 were $16.9 million higher than in the first of 1995
due again to higher operating costs associated with the expanded activities in
Mississippi, Alabama and California along with higher benefits and other
employee related costs.
REFINED PRODUCTS MARKETING: Operating income for Refined Products Marketing
was $.8 million for the first half of 1996, compared to $.6 million for the same
period in 1995. Trade volumes were 61,200 bpd in the first half of 1996 compared
to 35,400 bpd in 1995, and margins increased $0.19 per barrel in 1996. Gross
margin increased $.8 million to $2.6 million in the first half of 1996 due
primarily to the expansion of products trading in states west of the Rockies,
primarily California and Oregon. Operating expenses of $1.8 million for the
first half of 1996 were $.6 million higher than in the first half of 1995 due
primarily to higher benefits and other employee related costs.
15
<PAGE>
EOTT ENERGY PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CORPORATE AND OTHER: Corporate and other costs of $13.8 million for the
first half of 1996 were $4.3 million higher compared to the first half of 1995
due primarily to higher benefits as well as other employee related costs and
systems operating costs. Interest and related charges for the first half of 1996
were $1.7 million compared to $2.8 million for the same period in 1995. The
decrease is due primarily to lower interest expnese on lower short-term
borrowings. Other income (expense), net, consisting primarily of gains (losses)
on transactions denominated in foreign currency and gains (losses) on the sale
of property, plant and equipment, was negiligible for the second quarter of 1996
compared to $.5 million for the same period in 1995.
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 reflected 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 $5.1 million at June
30, 1996 consist primarily of the Arizona asphalt terminals and related working
capital, less estimated disposition costs.
16
<PAGE>
EOTT ENERGY PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
Amounts related to the West Coast Operations discontinued in 1995 are
summarized below (in thousands):
Three Months Six Months
Ended Ended
June 30, June 30,
1995 1995
----------- -----------
<S> <C> <C>
Revenues............................................... $ 162,686 $ 315,808
=========== ===========
Gross margin........................................... $ (1,834) $ (5,596)
============ ===========
Loss from discontinued operations...................... $ (7,585) $ (16,180)
=========== ===========
Loss on disposal of discontinued operations............ $ (46,800) $ (46,800)
=========== ===========
</TABLE>
The 1995 loss from discontinued operations was 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 Facility, more fully described in Note 6 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 $36.9 million for the
first half of 1996 compared to net cash provided of $32.9 million for the same
period in 1995. The increase is primarily due to higher income from continuing
operations in the first half of 1996 as a result of unusually favorable market
conditions enabling higher per Unit margins as well as increased volumes related
to the Hess acquisition.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in investing activities totaled $2.8 million for the first
half of 1996 compared to $2.4 million for the same period in 1995. Proceeds from
asset sales totaled $.9 million in 1996 primarily from the sale of surplus
transportation equipment. Additions to property, plant, and equipment of $3.7
million during 1996 include $1.5 million for pipeline connections and
improvements and $1.3 million for information systems development. The
Partnership expects to incur approximately $4.1 million in sustaining capital
expenditures for the remainder of 1996.
17
<PAGE>
EOTT ENERGY PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used in financing activities totaled $34.7 million for the first
half of 1996 compared to $28.3 million for the same period of 1995. The 1995
amount primarily represents short-term borrowings to fund working capital
requirements under a prior credit facility. During the first quarter of 1996,
EOTT issued approximately 1.8 million Common Units in exchange for $29.8 million
in a private placement with Enron. On July 16, 1996, Enron and EOTT exchanged
the Common Units for Special Units, more fully described in Note 12. 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 5
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 the exiting of the West Coast processing and
asphalt marketing business and the short-term bridge financing. EOTT was in
violation of the Leverage Ratio at June 30, 1996 and the Leverage and Minimum
Working Capital Ratios at March 31, 1996. EOTT received waivers from Enron for
all of these periods.
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 7.2% and primarily funded the working capital requirements as
well as the bridge financing utilized in the Mississippi-Alabama pipeline
acquisition as discussed in Note 5. Subsequent to year end, as further discussed
in Note 8, 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.
18
<PAGE>
EOTT ENERGY PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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
throughout the remainder of 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, and the success of the Partnership's risk management activities.
19
<PAGE>
EOTT ENERGY PARTNERS, L.P.
PART II. OTHER INFORMATION
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 3.3 Amendment No.2 dated as of July 16, 1996, to the Amended and
Restated Agreement of Limited Partnership of EOTT Energy
Partners, L.P.
Exhibit 18 Preferability letter on change in accounting principle
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
None
20
<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: August 14, 1996 By: EOTT ENERGY CORP. as
General Partner
/s/ STEVEN A. APPELT
Steven A. Appelt
Vice President, Chief Financial Officer
21
<PAGE>
AMENDMENT NO. 2 TO
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF
EOTT ENERGY PARTNERS, L.P.
THIS AMENDMENT NO. 2 TO AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF EOTT ENERGY PARTNERS, L.P. (this "Amendment"), dated as of July
16, 1996, is entered into and effectuated by EOTT Energy Corp., a Delaware
corporation, as the General Partner, pursuant to authority granted to it in
Section 4.2 of the Amended and Restated Agreement of Limited Partnership of EOTT
Energy Partners, L.P., dated as of March 25, 1995, as amended (the "Partnership
Agreement"). Capitalized terms used but not defined herein are used as defined
in the Partnership Agreement.
WHEREAS, Section 4.2 of the Partnership Agreement provides that the
General Partner (pursuant to its powers of attorney from the Limited Partners
and Assignees), without the approval of any Limited Partner or Assignee except
as otherwise provided in the Partnership Agreement, may amend any provision of
the Partnership Agreement to create such additional Units, or classes or series
thereof, or other Partnership Securities, for any Partnership purpose, at any
time or from time to time, and may issue such Partnership Securities for such
consideration and on such terms and conditions as shall be established by the
General Partner in its sole discretion; and
WHEREAS, the General Partner deems it in the best interest of the
Partnership to effect this Amendment and to exchange the Special Units created
hereby for 1,810,011 Common Units issued to Enron Corp. in connection with the
financing of the acquisition of assets from Amerada Hess Corporation effective
January 1, 1996; and
WHEREAS, the General Partner has determined that the creation of
Special Units provided for in this Amendment and the exchange of Units
contemplated hereby will be in the best interest of the Partnership and
beneficial to the Limited Partners, including the holders of the Common Units,
because it should result in a cost savings to the Partnership and should have no
adverse impact on the holders of Common Units;
NOW, THEREFORE, the Partnership Agreement is hereby amended to create a
new class of Partnership Securities as follows:
1. ESTABLISHMENT OF TERMS OF SPECIAL UNITS. There is hereby created a series of
Units to be designated as "Special Units," consisting of 1,830,011 Special Units
and having the following terms and conditions:
A. All allocations of items of Partnership income, gain, loss, deduction
and credit shall be allocated to the Special Units on a basis that is pro
rata with the Common Units, so that the amount thereof allocated to each
Common Unit will equal the amount thereof allocated to each Special Unit;
B. The Special Units shall have the right to share in Partnership
distributions on a pro rata basis with the Common Units, so that the amount
of any Partnership distribution to each Common Unit will equal the amount
of such distribution to each Special Unit;
C. The Special Units shall have rights upon dissolution and liquidation of
the Partnership, including the right to share in any liquidating
distributions, that are pro rata with the Common Units, so that the amount
of any liquidating distribution to each Common Unit will equal the amount
of such distribution to each Special Unit;
D. The Special Units will not be redeemable by the Partnership except as
provided in Section 5 hereof;
E. The Special Units will not have the privilege of conversion except as
provided in Section 3 or Section 4 hereof;
<PAGE>
F. The Special Units will have voting rights that are identical to the
voting rights of the Common Units and will vote with the Common Units as a
single class, so that each Special Unit will be entitled to one vote on
each matter with respect to which each Common Unit is entitled to be voted;
each reference in the Partnership Agreement to a vote of holders of Common
Units shall be deemed to be a reference to the holders of Common Units and
Special Units;
G. The Special Units will be evidenced by certificates in such form as the
General Partner may approve and, subject to the satisfaction of any
applicable legal and regulatory requirements, may be assigned or
transferred in a manner identical to the assignment and transfer of other
Units; the General Partner will act as registrar and transfer agent for the
Special Units; and
H. Except as otherwise provided in this Amendment and unless the context
otherwise requires, for purposes of allocations referred to in Section
1.A., the right to share in Partnership distributions referred to in
Section 1.B., rights upon dissolution and liquidation referred to in
Section 1.C. and voting rights referred to in Section 1.F, and for all
other purposes, the Special Units and the Common Units shall be considered
as a single class of Units, each Special Unit shall be treated in a manner
that is identical, in all respects, to each Common Unit, and each reference
in the Partnership Agreement to Common Units shall also be deemed to be a
reference to Special Units.
2. EXCHANGE OF SPECIAL UNITS FOR 1,830,011 COMMON UNITS OWNED BY ENRON
CORP. The terms and conditions upon which the Special Units will be issued are
as follows: as promptly as practicable following the execution of this
Amendment, the Partnership will issue the 1,830,011 Special Units to Enron Corp.
in exchange for the 1,830,011 Common Units issued to Enron Corp. on January 3,
1996; upon receipt of certificates representing such Common Units the
Partnership will issue a certificate representing such Special Units.
3. VOTE OF HOLDERS OF PARTNERSHIP SECURITIES. At any time, upon written
notice to the General Partner, any holder of Special Units will have the right
to require the Partnership to submit to a vote or consent of its securityholders
the approval of a change in the terms of the Special Units to provide that each
Special Unit is convertible into one Common Unit at the option of the holder of
such Special Unit, such conversion option to be exercisable by any holder of
Special Units in whole or in part at any time and from time to time. The vote or
consent required for such change will be the requisite vote required, under New
York Stock Exchange rules or New York Stock Exchange staff interpretations of
such rules, for listing of the Common Units that would be issued upon any such
conversion. Upon receipt of the required vote or consent, the terms of the
Special Units will be changed so that they become convertible as described
above.
4. CHANGE OF NEW YORK STOCK EXCHANGE RULES OR INTERPRETATIONS. If at any
time the rules of the New York Stock Exchange or the New York Stock Exchange
staff interpretations of such rules are changed so that no vote or consent of
securityholders of the Partnership is required as a condition to the listing of
the Common Units that would be issued upon such conversion, the terms of the
Special Units will be changed so that each Special Unit is convertible (without
any vote of any securityholders of the Partnership) into one Common Unit at the
option of the holder thereof, such conversion option to be exercisable by any
holder of Special Units in whole or in part at any time and from time to time.
<PAGE>
5. REDEMPTION OF SPECIAL UNITS IN CERTAIN EVENTS. In the event that (a) any
holder of Special Units requires the Partnership to submit to a vote or consent
of its securityholders the approval of a change in the terms of the Special
Units to provide that they are convertible as provided in Section 3, and (b) the
securityholders do not approve such change by the requisite vote, then the terms
of the Special Units will be changed so that each Special Unit will be
convertible at the option of the holder thereof into the right to receive cash
from the Partnership in an amount equal to the then fair market value of one
Common Unit, such conversion option to be exercisable in whole or in part at any
time and from time to time. Notwithstanding the foregoing, in such case no
holder of Special Units shall have the right to convert its Special Units unless
such holder and its affiliates voted their Partnership Securities for approval
of such change (if and to the extent that such Partnership Securities were
entitled to be voted).
6. DETERMINATION OF FAIR MARKET VALUE OF A COMMON UNIT. For purposes of
Section 5 hereof, the fair market value of one Common Unit will be the average
closing price per Common Unit reported at the close of trading on the New York
Stock Exchange for the 20 trading days immediately preceding the second trading
day prior to the date the holder of Special Units notifies the Partnership that
such holder desires to exercise the option in Section 5 hereof.
This Amendment will be governed by and construed in accordance with the
laws of the State of Delaware.
IN WITNESS WHEREOF, this Amendment has been executed as of the date
first written above.
GENERAL PARTNER:
EOTT ENERGY CORP.
BY: /S/ PHILIP J. HAWK
Philip J. Hawk
President
LIMITED PARTNERS:
All Limited Partners now
and hereafter admitted as
limited partners of the
Partnership, pursuant to
Powers of Attorney now and
hereafter executed in favor
of, and granted and
delivered to, the General
Partner.
By: EOTT Energy Corp.,
General Partner,
as
attorney-in-fact
for all Limited
Partners pursuant
to the Powers of
Attorney granted
pursuant to
Section 1.4 of the
Partnership
Agreement.
By: /S/ PHILIP J. HAWK
Philip J. Hawk
President
August 13, 1996
EOTT Energy Partners,L.P.
1330 Post Oak Blvd.
Suite 2700
Houston, Texas 77056
Re: Quarterly Report on Form 10-Q Report for the quarter ended June 30, 1996
Gentlemen:
This letter is written to meet the requirements of Regulation S-K calling for a
letter from the registrant's independent accountants whenever there has been a
change in accounting principle or practice.
We have been informed that, during the second quarter of 1996, the
Partnership changed from the last-in, first-out ("LIFO") method of accounting
for inventory to the average cost method. According to the management of the
Partnership, this change was made to conform the inventory costing method used
for financial reporting purposes to that used by the Partnership to manage its
commercial operations. In addition, the change is also preferable because the
differences between the results under LIFO and average cost accounting methods
are not material to the historical results of operations of the Partnership and
are not expected to be material in future periods based upon the manner in which
the Partnership currently operates.
A complete coordinated set of financial and reporting standards for determining
the preferability of accounting principles among acceptable alternative
principles has not been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change in accounting
described in the preceding paragraph is to a preferable method. However, we have
reviewed the pertinent factors, including those related to financial reporting,
in this particular case on a subjective basis, and our opinion stated below is
based on our determination made in this manner.
We are of the opinion that the Partnership's change in method of accounting is
to an acceptable alternative method of accounting, which, based upon the reasons
stated for the change and our discussions with you, is also preferable under the
circumstances in this particular case. In arriving at this opinion, we have
relied on the business judgment and business planning of your management.
We have not audited the application of this change to the financial statements
of any period subsequent to December 31, 1995. Further, we have not examined and
do not express any opinion with respect to your financial statements for the
three months and six months ended June 30, 1996.
Very truly yours,
Arthur Andersen LLP
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000917464
<NAME> EOTT ENERGY PARTNERS, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<CASH> 1,567
<SECURITIES> 0
<RECEIVABLES> 485,349
<ALLOWANCES> 3,009
<INVENTORY> 91,654
<CURRENT-ASSETS> 591,761
<PP&E> 210,913
<DEPRECIATION> 80,144
<TOTAL-ASSETS> 731,062
<CURRENT-LIABILITIES> 610,818
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 109,894
<TOTAL-LIABILITY-AND-EQUITY> 731,062
<SALES> 3,225,486
<TOTAL-REVENUES> 3,244,516
<CGS> 3,165,895
<TOTAL-COSTS> 3,228,762
<OTHER-EXPENSES> 16
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1712
<INCOME-PRETAX> 14,278
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,278
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,278
<EPS-PRIMARY> 0.74
<EPS-DILUTED> 0.74
<FN>
(1) "Other SE" represents consolidated Partners' Capital.
(2) EPS represents earnings per Common Unit.
</FN>
</TABLE>
