<PAGE> 1
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, 1997
[ ] 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 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
--- ---
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EOTT ENERGY PARTNERS, L.P.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended March 31, 1997 and 1996.........................................................3
Condensed Consolidated Balance Sheets (Unaudited) -
March 31, 1997 and December 31, 1996...............................................................4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended March 31, 1997 and 1996.........................................................5
Condensed Consolidated Statement of Partners' Capital (Unaudited) -
Three Months Ended March 31, 1997..................................................................6
Notes to Condensed Consolidated Financial Statements..................................................7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................................12
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..............................................................................17
ITEM 6. Exhibits and Reports on Form 8-K...............................................................17
</TABLE>
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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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Revenue...................................................................... $ 2,279,168 $ 1,552,220
Cost of Sales................................................................ 2,244,250 1,519,975
------------- -------------
Gross Margin................................................................. 34,918 32,245
Expenses
Operating expenses........................................................ 25,451 23,173
Depreciation and amortization............................................. 4,124 3,945
------------- -------------
Total................................................................... 29,575 27,118
------------- -------------
Operating Income ............................................................ 5,343 5,127
Other Income (Expense)
Interest income........................................................... 126 68
Interest and related charges.............................................. (1,403) (918)
Other, net................................................................ (152) (11)
------------- -------------
Total................................................................... (1,429) (861)
------------- -------------
Net Income................................................................... $ 3,914 $ 4,266
============= =============
Net Income Per Unit.......................................................... $ 0.20 $ 0.22
============= ==============
Number of Units Outstanding.................................................. 18,830 18,830
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
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EOTT ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------- --------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents....................................................... $ 187 $ 5,261
Trade and other receivables, net of allowance for doubtful
accounts of $2,503 and $2,266, respectively.................................. 554,649 704,784
Inventories..................................................................... 152,023 169,298
Other .......................................................................... 21,921 9,496
------------- --------------
Total current assets......................................................... 728,780 888,839
------------- --------------
Property, Plant & Equipment, at cost................................................ 227,463 213,449
Less: Accumulated depreciation.................................................. 89,287 85,667
------------- --------------
Net property, plant & equipment.............................................. 138,176 127,782
------------- --------------
Other Assets, net of amortization................................................... 9,068 9,576
------------- --------------
Total Assets........................................................................ $ 876,024 $ 1,026,197
============= ==============
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Trade accounts payable ......................................................... $ 664,755 $ 818,673
Accrued taxes payable........................................................... 6,985 8,465
Note payable - affiliate (Note 4)............................................... 39,300 24,228
Short-term borrowings - affiliate............................................... 39,800 38,500
Short-term borrowings........................................................... 623 615
Other........................................................................... 13,788 19,521
------------- --------------
Total current liabilities.................................................... 765,251 910,002
------------- --------------
Long-Term Liabilities............................................................... 721 931
------------- --------------
Commitments and Contingencies (Note 8)
Additional Partnership Interests (Note 6)........................................... 9,091 9,091
------------- --------------
Partners' Capital
Common Unitholders.............................................................. 31,271 33,984
Special Unitholders............................................................. 29,412 29,908
Subordinated Unitholders........................................................ 38,166 40,065
General Partner................................................................. 2,112 2,216
------------- --------------
Total Partners' Capital............................................................. 100,961 106,173
------------- --------------
Total Liabilities and Partners' Capital............................................. $ 876,024 $ 1,026,197
============= ==============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
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EOTT ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Reconciliation of net income to net cash
provided by operating activities -
Net income ........................................ $ 3,914 $ 4,266
Depreciation ................................... 3,616 3,465
Amortization of intangible assets .............. 508 480
(Gains) losses on disposal of assets ........... -- 12
Changes in components of working capital -
Receivables .................................. 150,135 (46,467)
Inventories .................................. 17,275 39,708
Other current assets ......................... (12,425) (4,378)
Trade payables ............................... (153,918) 20,766
Accrued taxes payable ........................ (1,480) 911
Other current liabilities .................... (5,733) 11,367
Discontinued operations ........................ -- (604)
--------- ---------
Net Cash Provided By Operating Activities ............. 1,892 29,526
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment -- 364
Additions to property, plant and equipment ........ (14,014) (2,195)
Other, net ........................................ 4 --
--------- ---------
Net Cash Used In Investing Activities ................. (14,010) (1,831)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in short-term borrowings ................. (202) (5,120)
Increase in short-term borrowings - affiliate ..... 1,300 17,800
Decrease in note payable .......................... -- (85,000)
Increase in note payable - affiliate .............. 15,072 24,228
Distributions to Unitholders ...................... (9,126) (4,846)
Issuance of Common Units .......................... -- 29,772
Contribution from General Partner ................. -- 604
--------- ---------
Net Cash Provided By (Used In) Financing Activities ... 7,044 (22,562)
--------- ---------
Increase (Decrease) In Cash and Cash Equivalents ...... (5,074) 5,133
Cash and Cash Equivalents, Beginning of Period ........ 5,261 2,276
--------- ---------
Cash and Cash Equivalents, End of Period .............. $ 187 $ 7,409
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
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EOTT ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON SPECIAL SUBORDINATED GENERAL
UNITHOLDERS UNITHOLDERS UNITHOLDERS PARTNER
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 ...... $ 33,984 $ 29,908 $ 40,065 $ 2,216
Net income ........................ 2,037 373 1,426 78
Cash distributions ................ (4,750) (869) (3,325) (182)
------------- ------------- ------------- -------------
Balance at March 31, 1997 ......... $ 31,271 $ 29,412 $ 38,166 $ 2,112
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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 accompanying condensed
consolidated financial statements and related notes present the financial
position as of March 31, 1997 and December 31, 1996, and the results of
operations, cash flows and changes in partners' capital for the three months
ended March 31, 1997 and 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, 1996 filed with the SEC.
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% subordinated limited partner interest. Enron, through its
purchase of EOTT Common Units on the open market, directly holds an approximate
11% interest in the Partnership.
3. ACQUISITION OF PIPELINE ASSETS
On February 1, 1997, the Partnership acquired over 400 miles of intrastate
and interstate common carrier pipelines in Louisiana and Texas from CITGO
Pipeline Company ("CITGO Pipeline Acquisition"). Current shipped volumes
associated with these assets amount to approximately 48,000 barrels per day
from leases in certain regions of ArkLaTex, West Texas and southern Louisiana.
Storage associated with the pipeline systems totals approximately 0.5 million
barrels. The purchase price was approximately $12 million and was financed with
term debt from Enron.
7
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. 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 $600
million, as amended December 19, 1996, and the facility has a maturity of March
31, 1998, as amended February 25, 1997. The agreement contains sublimits on the
availability of the Enron Facility of $75 million for working capital loans and
$200 million for letters of credit. Letter of credit fees are based on actual
charges by the banks which range from .20% - .375% per annum. 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.
At December 31, 1996, EOTT had an additional $24.2 million of term debt
outstanding with Enron under a financing arrangement dated January 3, 1996 for
acquisitions and other capital projects (the "Term Loan"). This financing was
initially provided at a rate of LIBOR plus 1% per annum until March 31, 1996, a
rate of LIBOR plus 1.5% through June 30, 1996 and a rate of LIBOR plus .3%
effective September 15, 1996. On February 25, 1997, with an effective date of
February 11, 1997, this note was extended in maturity to March 31, 1998 from its
March 31, 1997 maturity date and the amount available was increased to $39.3
million. In connection with the CITGO Pipeline Acquisition, an additional $12
million of term debt was borrowed to finance the acquisition.
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, 1996, EOTT was in technical violation of the negative
covenant relating to the Leverage Ratio in the Enron Facility and Term Loan -
due principally to increased volumes of business and increases in the price of
crude. At March 31, 1997, EOTT was in violation of the Leverage Ratio and the
Minimum Working Capital Ratio due principally to increased volumes of business.
EOTT received waivers from Enron for both 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 7.0% and primarily funded the working capital requirements as
well as the bridge financing utilized in the Mississippi-Alabama pipeline
acquisition from Amerada Hess Corporation. Subsequent to year end 1995, as
further discussed in Note 6 to the Condensed Consolidated Financial Statements,
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,
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
may 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 and amendments thereto.
Generally, the Partnership will distribute 100% of its Available Cash
within 45 days after the end of each quarter to Unitholders of record and to
the General Partner. Available Cash consists generally of all of the cash
receipts of the Partnership adjusted for its cash distributions and net changes
to reserves. The full definition of Available Cash is set forth in the
Partnership Agreement and amendments thereto, a form which is filed as an
exhibit to the Annual Report on Form 10-K. Distributions of Available Cash to
the Subordinated Unitholders are subject to the prior rights of the Common
Unitholders to receive the Minimum Quarterly Distribution ("MQD") for each
quarter during the Subordination Period, and to receive any arrearages in the
distribution of the MQD on the Common Units for prior quarters during the
Subordination Period.
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.
5. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense was $1.1 million and $0.8 million for
the three months ended March 31, 1997 and 1996, respectively.
On January 5, 1996, EOTT repaid the outstanding balance of the loan
related to the financing of an information systems development project.
6. 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):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenue......................................................... $ 14,826 $ 6,229
Cost of Sales................................................... 25,904 26,579
</TABLE>
Revenue in 1997 and 1996 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.
Related party receivables at March 31, 1997 and December 31, 1996 were
$2.6 million and $3.8 million, respectively, and are classified as trade and
other receivables. Related party payables at March 31, 1997 and December 31,
1996 were $7.6 million and $11.1 million, respectively, and are classified as
trade accounts payable.
9
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 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. In February 1997, the General Partner amended the Partnership
agreement to provide that a holder of APIs may, at it's option, waive its right
to receive distributions of Available Cash to which it would otherwise be
entitled and to provide that in such case the Partnership may retain such cash
for later distribution to partners or for use in the Partnership's business in
subsequent periods. The Partnership's Available Cash for the fourth quarter of
1996 was substantially in excess of the amount necessary to distribute the MQD
on all outstanding Units, and upon adoption of the amendment, Enron, the holder
of APIs, waived its right to receive such excess cash in redemption of APIs.
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 of pipeline and
related assets from Amerada Hess Corporation 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 which were subsequently exchanged for Special Units in July
1996 (ii) issued a promissory note to Enron for $24.2 million originally due
June 30, 1996 (subsequently amended to March 31, 1998), which carries a per
annum interest rate of LIBOR plus 1% through March 31, 1996, a rate of LIBOR
plus 1.5% through June 30, 1996 and a rate of LIBOR plus .3% effective September
15, 1996 (see Note 4 for further discussion) 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 from Enron. Collectively, these proceeds, together with
short-term borrowings from Enron, were used by EOTT to repay the bridge
financing discussed in Note 4.
As discussed further in Note 3, the CITGO Pipeline Acquisition was
financed with term debt from Enron.
7. OTHER INCOME (EXPENSE), NET
The components of other income (expense), net are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Loss on foreign currency transactions........................... $ (190) $ (18)
Gain (loss) on disposal of fixed assets......................... 2 (12)
Other........................................................... 36 19
-------- --------
Total....................................................... $ (152) $ (11)
======== ========
</TABLE>
8. 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 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, 1996.
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
9. NEW ACCOUNTING STANDARDS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 - "Earnings Per
Share". SFAS No. 128 is effective for fiscal years beginning after December 15,
1997 and when adopted, it will require restatement of prior years' net income
(loss) per unit. SFAS No. 128 is intended to provide consistency in the
calculation of earnings per share in the United States with the calculation in
other countries and reduce the complexity of the earnings per share
calculation. The Partnership is currently evaluating the effects of SFAS 128;
however, management believes that the new standard will not have a dilutive
effect on net income per unit.
10. SUBSEQUENT EVENTS
On April 18, 1997, the Board of Directors of EOTT Energy Corp., as General
Partner, declared the Partnership's regular quarterly cash distribution of
$.475 for all Units for the period January 1, 1997 through March 31, 1997. The
first quarter distribution will be paid on May 15, 1997 to the General Partner
and all other Unitholders of record as of April 30, 1997 from the Partnership's
Available Cash.
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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 net income of $3.9 million or $.20 per unit for the first
quarter of 1997 compared to net income of $4.3 million or $.22 per unit for the
first quarter of 1996. The first quarter results reflect higher lease volumes
plus an increase in pipeline transportation revenues as a result of the recent
acquisition of crude oil pipelines from CITGO Pipeline Company offset by
reduced margins in the Partnership's core crude oil gathering business.
Selected financial data for EOTT's business segments are summarized below,
in millions:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1997 1996
---------- -----------
<S> <C> <C>
Revenues:
North American crude oil.................................................. $ 2,016.3 $ 1,410.9
Refined products marketing................................................ 262.9 142.3
Intersegment revenues..................................................... - (1.0)
---------- -----------
Total................................................................... $ 2,279.2 $ 1,552.2
========== ===========
Gross margin:
North American crude oil.................................................. $ 33.3 $ 31.5
Refined products marketing................................................ 1.6 0.7
---------- -----------
Total................................................................... $ 34.9 $ 32.2
========== ===========
Operating income (loss):
North American crude oil.................................................. $ 10.1 $ 11.4
Refined products marketing................................................ .9 -
Corporate................................................................. (5.7) (6.3)
---------- -----------
Total................................................................... $ 5.3 $ 5.1
========== ===========
</TABLE>
Gross margin is the difference between the sales price of crude oil or
other petroleum products and the cost 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.
12
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1996.
North American Crude Oil: Operating income for the North American Crude Oil
segment was $10.1 million for the first quarter 1997, compared to $11.4 million
for the same period in 1996. Gross margin increased $1.8 million to $33.3
million in the first quarter of 1997 due primarily to higher pipeline
transportation revenues related to the recent acquisition of pipeline assets
(see Note 3 to the Condensed Consolidated Financial Statements), combined with a
six percent increase in crude lease purchases from 297,500 barrels per day
("bpd") for the first quarter 1996 to 314,500 bpd in 1997. Operating expenses of
$23.2 million for the first quarter 1997 were $3.1 million higher than in the
first quarter of 1996 due primarily to operating costs associated with the
recent acquisition of pipeline assets and higher operating costs primarily
associated with the increase in lease volumes.
Refined Products Marketing: Refined Products Marketing operating income
was $0.9 million for the first quarter 1997 compared to negligible operating
income for the same period in 1996. Trade volumes were 108,700 bpd in the first
quarter of 1997 compared to 65,700 bpd in 1996. Gross margin increased $0.9
million to $1.6 million in the first quarter of 1997 due primarily to higher
distillate demand in the Northeast versus 1996. Additionally, operating
expenses for the first quarter of 1997 were relatively flat compared to the
same period last year.
Corporate and Other: Corporate costs were $5.7 million for the first
quarter 1997 compared to $6.3 million in the first quarter 1996. The decrease
is due primarily to lower systems operating costs and lower liability and
casualty insurance costs. Other income (expense), net, consisting primarily of
losses on transactions denominated in foreign currency increased $0.1 million
in the first quarter 1997 compared to the same period in 1996. Interest and
related charges in the first quarter 1997 were $1.4 million compared to $0.9
million for the same period in 1996. The increase is due to higher average
short-term debt required to meet working capital needs, primarily related to
higher crude inventories and debt used to finance the recent acquisition of
crude oil pipeline assets.
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 provided by
Enron, more fully described in Note 4 to the Condensed Consolidated Financial
Statements. Management expects cash generated from operations will be sufficient
to fund short-term liquidity as well as sustaining capital expenditures for the
foreseeable future.
Cash Flows From Operating Activities
Net cash provided by operating activities decreased $27.6 million to $1.9
million for the first quarter of 1997 compared to $29.5 million for the same
period in 1996 primarily due to increases in inventory.
Cash Flows From Investing Activities
Net cash used in investing activities totaled $14.0 million for the first
quarter of 1997 compared to $1.8 million for the same period in 1996, primarily
due to the acquisition noted above. There were no asset sales in 1997 compared
to $.4 million in proceeds from asset sales in 1996. Additions to property,
plant, and equipment of $14.0 million in 1997 include $12 million for the
pipeline acquisition, $1.0 million for pipeline connections
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
and improvements and $.2 million for information systems development. The
Partnership expects to incur approximately $4-5 million in sustaining capital
expenditures for the remainder of 1997.
Cash Flows From Financing Activities
Net cash provided by financing activities totaled $7.0 million for the
first quarter of 1997 compared to net cash used of $22.6 million for the same
period in 1996. The 1997 amount primarily represents short-term borrowings to
fund working capital needs and finance the recent pipeline acquisition reduced
by full distributions paid to all Unitholders for the period October 1, 1996
through December 31, 1996. 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 from Amerada Hess on December 29,
1995.
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 $600
million, as amended December 19, 1996, and the facility has a maturity of March
31, 1998, as amended February 25, 1997. The agreement contains sublimits on the
availability of the Enron Facility of $75 million for working capital loans and
$200 million for letters of credit. Letter of credit fees are based on actual
charges by the banks which range from .20% - .375% per annum. 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.
At December 31, 1996, EOTT had an additional $24.2 million of term debt
outstanding with Enron under a financing arrangement dated January 3, 1996 for
acquisitions and other capital projects (the "Term Loan"). This financing was
initially provided at a rate of LIBOR plus 1% per annum until March 31, 1996, a
rate of LIBOR plus 1.5% through June 30, 1996 and a rate of LIBOR plus .3%
effective September 15, 1996. On February 25, 1997, with an effective date of
February 11, 1997, this note was extended in maturity to March 31, 1998 from its
March 31, 1997 maturity date and the amount available was increased to $39.3
million. In connection with the CITGO Pipeline Acquisition, an additional
$12 million of term debt was borrowed to finance the acquisition.
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, 1996, EOTT was in technical violation of the negative
covenant relating to the Leverage Ratio in the Enron Facility and Term Loan -
due principally to increased volumes of business and increases in the price of
crude. At March 31, 1997, EOTT was in violation of the Leverage Ratio and the
Minimum Working Capital Ratio due principally to increased volumes of business.
EOTT received waivers from Enron for both periods.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
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 from Amerada Hess Corporation. Subsequent to year end 1995, as
further discussed in Note 6 to the Condensed Consolidated Financial Statements,
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, may 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 and amendments thereto.
Generally, the Partnership will distribute 100% of its Available Cash
within 45 days after the end of each quarter to Unitholders of record and to
the General Partner. Available Cash consists generally of all of the cash
receipts of the Partnership adjusted for its cash distributions and net changes
to reserves. The full definition of Available Cash is set forth in the
Partnership Agreement and amendments thereto, a form which is filed as an
exhibit to the Annual Report on Form 10-K. Distributions of Available Cash to
the Subordinated Unitholders are subject to the prior rights of the Common
Unitholders to receive the Minimum Quarterly Distribution ("MQD") for each
quarter during the Subordination Period and to receive any arrearages in the
distribution of the MQD on the Common Units for prior quarters during the
Subordination Period.
MQD is $0.475 per unit with respect to each quarter. Enron has committed to
provide total cash distribution support, with respect to quarters ending on or
before March 31, 1998, in an amount up to an aggregate of $29 million in
exchange for additional partnership interests ("APIs"). As a result of the
losses from discontinued operations EOTT did not have sufficient Available Cash
to make the 1995 first or second quarter MQD. Accordingly, first and second
quarter Common Unit and General Partner distributions totaling $4.3 million and
$4.8 million, respectively, were made from the Enron cash support commitment.
The APIs purchased by Enron are not entitled to cash distributions or voting
rights. The APIs are required to be redeemed if and to the extent that Available
Cash for any quarter exceeds an amount necessary to distribute the MQD on all
Common and Subordinated Units and to eliminate arrearages, if any, in the MQD on
Common Units for prior periods. In February 1997, the General Partner amended
the Partnership Agreement to provide that a holder of APIs may, at its option,
waive its right to receive distributions of Available Cash to which it would
otherwise be entitled and to provide that in such case the Partnership may
retain such cash for later distribution to partners or for use in the
Partnership's business in subsequent periods. The Partnership's Available Cash
for the fourth quarter of 1996 was substantially in excess of the amount
necessary to distribute the MQD on all outstanding Units, and upon adoption of
the amendment, Enron, the holder of APIs, waived its right to receive such
excess cash in redemption of APIs.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
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
Gross margins for 1996 benefited from unusually strong crude oil
market conditions which enabled higher per barrel margins in the core crude oil
gathering business. Due to the volatility of crude oil prices in 1997, crude
oil gathering margins are suffering industry-wide, which will impact second
quarter 1997 results. Based on current earnings and cash flow projections, the
Partnership intends to continue to pay MQDs to all its Common Unitholders.
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, industry conditions, 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.
16
<PAGE> 17
PART II. OTHER INFORMATION
EOTT ENERGY PARTNERS, L.P.
ITEM 1. Legal Proceedings
See Part I. Item 1, Note 8 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.
None
17
<PAGE> 18
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 15, 1997 By: EOTT ENERGY CORP. as
General Partner
/s/ STEVEN A. APPELT
---------------------------------------
Steven A. Appelt
Vice President, Chief Financial Officer
(Principal Accounting Officer)
18
<PAGE> 19
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27 Financial Data Schedule
<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-31-1996
<PERIOD-END> MAR-31-1997
<CASH> 187
<SECURITIES> 0
<RECEIVABLES> 557,152
<ALLOWANCES> 2,503
<INVENTORY> 152,023
<CURRENT-ASSETS> 728,780
<PP&E> 227,463
<DEPRECIATION> 89,287
<TOTAL-ASSETS> 876,024
<CURRENT-LIABILITIES> 765,251
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 100,961
<TOTAL-LIABILITY-AND-EQUITY> 876,024
<SALES> 2,279,168
<TOTAL-REVENUES> 2,279,168
<CGS> 2,244,250
<TOTAL-COSTS> 2,273,825
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,403
<INCOME-PRETAX> 3,914
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,914
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,914
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
