<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, 1998
[ ] 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 [ ]
1
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EOTT ENERGY PARTNERS, L.P.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
<S> <C>
ITEM 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended March 31, 1998 and 1997.........................................................3
Condensed Consolidated Balance Sheets (Unaudited) -
March 31, 1998 and December 31, 1997...............................................................4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended March 31, 1998 and 1997.........................................................5
Condensed Consolidated Statement of Partners' Capital (Unaudited) -
Three Months Ended March 31, 1998..................................................................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,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Revenue...................................................................... $ 1,339,404 $ 2,279,168
Cost of Sales................................................................ 1,311,857 2,244,250
------------ -------------
Gross Margin................................................................. 27,547 34,918
Expenses
Operating expenses........................................................ 23,390 25,451
Depreciation and amortization............................................. 4,514 4,124
------------ -------------
Total................................................................... 27,904 29,575
------------ -------------
Operating Income ............................................................ (357) 5,343
Other Income (Expense)
Interest income........................................................... 171 126
Interest and related charges.............................................. (1,790) (1,403)
Other, net................................................................ 253 (152)
------------ ------------
Total................................................................... (1,366) (1,429)
------------ ------------
Net Income (Loss)............................................................ $ (1,723) $ 3,914
============ ============
Basic Net Income (Loss) Per Unit
Common.................................................................... $ (0.09) $ .20
============ ============
Subordinated.............................................................. $ (0.09) $ .20
============ ============
Diluted Net Income (Loss) Per Unit........................................... $ (0.09) $ .20
============ ============
Number of Units Outstanding for Diluted Computation.......................... 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,
1998 1997
------------- -------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents....................................................... $ 6,374 $ 3,737
Trade and other receivables, net of allowance for doubtful
accounts of $1,646 and $1,660 respectively................................... 319,732 463,983
Inventories..................................................................... 116,258 173,637
Other .......................................................................... 8,150 7,603
------------- --------------
Total current assets......................................................... 450,514 648,960
------------- --------------
Property, Plant & Equipment, at cost................................................ 223,993 224,528
Less: Accumulated depreciation.................................................. 99,897 97,224
------------- --------------
Net property, plant & equipment.............................................. 124,096 127,304
------------- --------------
Other Assets, net of amortization................................................... 6,140 6,657
------------- --------------
Total Assets........................................................................ $ 580,750 $ 782,921
============= ==============
Liabilities and Partners' Capital
Current Liabilities
Trade accounts payable ......................................................... $ 389,261 $ 586,897
Accrued taxes payable........................................................... 4,641 5,462
Note payable - affiliate (Note 4)............................................... 39,300 39,300
Short-term borrowings - affiliate............................................... 58,700 70,000
Repurchase agreement............................................................ 10,080 -
Other........................................................................... 7,480 6,113
------------- --------------
Total current liabilities.................................................... 509,462 707,772
------------- --------------
Long-Term Liabilities............................................................... - 281
------------- --------------
Commitments and Contingencies (Note 8)
Additional Partnership Interests (Note 6)........................................... 16,613 12,775
------------- --------------
Partners' Capital
Common Unitholders.............................................................. 1,843 7,490
Special Unitholders............................................................. 24,026 25,060
Subordinated Unitholders........................................................ 27,541 28,169
General Partner................................................................. 1,265 1,374
------------- --------------
Total Partners' Capital............................................................. 54,675 62,093
------------- --------------
Total Liabilities and Partners' Capital............................................. $ 580,750 $ 782,921
============= ==============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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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,
-----------------------------
1998 1997
------------- --------------
<S> <C> <C>
Cash Flows From Operating Activities
Reconciliation of net income (loss) to net cash
provided by operating activities -
Net income (loss)............................................................... $ (1,723) $ 3,914
Depreciation................................................................. 4,007 3,616
Amortization of intangible assets............................................ 507 508
(Gains) losses on disposal of assets......................................... (130) -
Changes in components of working capital -
Receivables................................................................ 144,251 150,135
Inventories................................................................ 57,379 17,275
Other current assets....................................................... (547) (12,425)
Trade payables............................................................. (197,636) (153,918)
Accrued taxes payable...................................................... (821) (1,480)
Other current liabilities.................................................. 1,244 (5,733)
Other assets and liabilities................................................. 10 -
------------- --------------
Net Cash Provided By Operating Activities........................................... 6,541 1,892
------------- --------------
Cash Flows From Investing Activities
Proceeds from sale of property, plant and equipment............................. 561 -
Additions to property, plant and equipment...................................... (1,412) (14,014)
Other, net...................................................................... 182 4
------------- --------------
Net Cash Used In Investing Activities............................................... (669) (14,010)
------------- --------------
Cash Flows From Financing Activities
Increase (decrease) in short-term borrowings - affiliate........................ (11,300) 1,300
Increase in note payable - affiliate............................................ - 15,072
Repurchase agreement............................................................ 10,080 -
Distributions to Unitholders.................................................... (5,695) (9,126)
Issuance of Additional Partnership Interests.................................... 3,838 -
Other........................................................................... (158) (202)
------------- --------------
Net Cash Provided By (Used In) Financing Activities................................. (3,235) 7,044
------------- --------------
Increase (Decrease) In Cash and Cash Equivalents.................................... 2,637 (5,074)
Cash and Cash Equivalents, Beginning of Period...................................... 3,737 5,261
------------- --------------
Cash and Cash Equivalents, End of Period............................................ $ 6,374 $ 187
============= ==============
Supplemental Cash Flow Information:
Interest paid .................................................................. $ 1,868 $ 1,102
============= ==============
</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, 1997........................... $ 7,490 $ 25,060 $ 28,169 $ 1,374
Net income (loss)...................................... (897) (164) (628) (34)
Cash distributions..................................... (4,750) (870) - (75)
------------- ------------- ------------- -----------
Balance at March 31, 1998.............................. $ 1,843 $ 24,026 $ 27,541 $ 1,265
============= ============= ============= ===========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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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, 1998 and December 31, 1997, the results of operations and cash flows
for the three months ended March 31, 1998 and 1997 and changes in partners'
capital for the three months ended March 31, 1998.
The financial statements included herein have been prepared by the
Partnership without audit pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Accordingly, they reflect all
adjustments (which consist solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the financial
results for interim periods. Certain information and notes normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. However, the Partnership believes that the disclosures are adequate
to make the information presented not misleading. These financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Partnership's Annual Report on Form 10-K for the year ended
December 31, 1997 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 and Special Units, 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"). Shipped volumes associated with
these assets amount to approximately 48,000 barrels per day from leases in
certain regions of Arkansas, Louisiana and Texas. 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.
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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 as amended February 10,
1998, has a maturity of March 31, 1999. The agreement contains sublimits on the
availability of the Enron Facility of $100 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 $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 original March 31, 1997
maturity date and the amount available was increased to $39.3 million. In early
1997, an additional $15 million of term debt was borrowed primarily to finance
the CITGO Pipeline Acquisition. On February 10, 1998, the maturity date of the
Term Loan was extended to March 31, 1999.
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, 1997, EOTT was in technical violation of the negative
covenants relating to the Tangible Net Worth, Leverage Ratio and Working Capital
Ratio in the Enron Facility and Term Loan - due principally to the operating
loss associated with the deterioration of grade and basis differentials in the
crude oil markets. At March 31, 1998, EOTT was in violation of the Tangible Net
Worth, Leverage Ratio and the Working Capital Ratio due to the operating loss
associated with the deterioration of grade and basis differentials and lower
lease volumes. EOTT received waivers from Enron for both periods.
The General Partner believes that the Enron Facility will be sufficient to
support the Partnership's crude oil 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.
8
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 and Special
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. Enron has committed to provide total cash
distribution support in an amount necessary to pay MQDs, with respect to
quarters ending on or before March 31, 1999, in an amount up to an aggregate of
$29 million (of which $19.4 million has been advanced through May 15, 1998) in
exchange for Additional Partnership Interests.
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. Earnings Per Unit
Net income (loss) shown in the table below excludes the approximate two
percent interest of the General Partner. Earnings (loss) per unit are calculated
as follows (in millions, except per unit amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------------------------------------------
1998 1997
-------------------------------- -------------------------------
Net Wtd. Net Wtd.
Income Average Per Income Average Per
(Loss) Units Unit (Loss) Units Unit
-------- -------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Basic (1)
Common $ (1,061) 11,830 $ (0.09) $ 2,410 11,830 $ 0.20
Subordinated $ (628) 7,000 $ (0.09) $ 1,426 7,000 $ 0.20
Diluted (2) $ (1,689) 18,830 $ (0.09) $ 3,836 18,830 $ 0.20
</TABLE>
(1) Net income (loss), excluding the two percent General Partner
interest, has been apportioned to each class of Unitholder based
on the ownership of total Units outstanding which is also
reflected on the Statement of Partners' Capital, and Special
Units are considered Common Units.
(2) The diluted earnings per Unit calculation assumes the conversion
of Subordinated Units into Common Units.
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):
Three Months Ended
March 31,
------------------
1998 1997
----------- -----------
Revenue............................. $ 6,710 $ 14,826
Cost of Sales....................... 7,411 25,904
Revenue in 1998 and 1997 consists primarily of crude oil sales to Enron
Reserve Acquisition Corp. and natural gas liquids sales to Enron Gas Liquids,
Inc. Cost of sales consists primarily of crude oil and condensate purchases from
Enron Oil & Gas Company and natural gas liquids purchases from Enron Gas
Liquids, Inc. These transactions, in the opinion of management, are no less
favorable than can be obtained from unaffiliated third parties.
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Related party receivables at March 31, 1998 and December 31, 1997 were $0.9
million and $2.8 million, respectively, and are classified as trade and other
receivables. Related party payables at March 31, 1998 and December 31, 1997 were
$2.2 million and $3.6 million, respectively, and are classified as trade
accounts payable.
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. On November 14, 1997, February 13, 1998 and May 15, 1998,
Enron paid $3.7 million, $3.8 million and $2.8 million, respectively, in support
of EOTT's third and fourth quarter 1997 and first quarter 1998 distributions to
its Common and Special 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 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. Enron has committed to support payment of
EOTT common distributions up to an aggregate of $29 million through March 1999,
as necessary.
Financing of Pipeline Acquisition. 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,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Loss on foreign currency transactions........................... $ (21) $ (190)
Gain (loss) on disposal of fixed assets......................... 130 2
Other........................................................... 144 36
----------- -----------
Total....................................................... $ 253 $ (152)
=========== ===========
</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, 1997.
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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.
At March 31, 1998, EOTT has an outstanding forward commodity repurchase
agreement of approximately $10 million. The agreement requires EOTT to
repurchase the commodities on a specific date and at a specified price in the
future.
9. New Accounting Standards
During June 1997, Statement of Financial Accounting Standards ("SFAS")
No. 130, "Comprehensive Income" was issued, which requires the presentation of
comprehensive income which is traditional net income (loss) adjusted for certain
items that previously were only reflected as direct charges for equity and is
required to be adopted in the first quarter of 1998. At March 31, 1998,
traditional net income (loss) and comprehensive income (loss) are the same.
10. Subsequent Events
On April 13, 1998, the Board of Directors of EOTT Energy Corp., as General
Partner, declared the Partnership's regular quarterly cash distribution of $.475
for all Common and Special Units for the period January 1, 1998 through March
31, 1998. The first quarter distribution of $5.7 million has been paid on May
15, 1998 to the General Partner and all Common and Special Unitholders of record
as of April 30, 1998. The distribution was paid utilizing $2.9 million of
Available Cash from the Partnership and $2.8 million cash provided by Enron
pursuant to Enron's distribution support obligation. After payment of the first
quarter distribution in May 1998, the cumulative amount paid from the Enron
distribution support will total $19.4 million.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
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." Any forward-looking statements are not guarantees of future
performance, involve significant risks and uncertainties and actual results may
vary materially from those in the forward-looking statements as a result of
various factors. 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, demands for various
grades of crude oil and the resulting changes in pricing relationships,
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. Although the Partnership
believes that its expectations regarding future events are based on reasonable
assumptions, it can give no assurance that these are all the factors that could
cause actual results to vary materially from the forward-looking statements or
that its expectations regarding future developments will prove to be correct.
Overview
Through its affiliated limited partnerships, EOTT Energy Operating Limited
Partnership, EOTT Energy Canada Limited Partnership, and EOTT Energy Pipeline
Limited Partnership, EOTT is engaged in the purchasing, gathering, transporting,
trading, storage and resale of crude oil and refined petroleum products and
related activities. EOTT's business segments are its North American Crude Oil
gathering and marketing operations, and its Refined Products Marketing business.
In late 1997, EOTT made the decision to exit the East of Rockies refined
products business.
The purchase and resale of crude is a highly competitive activity with very
thin and volatile profit margins. EOTT's operating results are sensitive to a
number of factors including: types of crude oil, individual refinery demand for
specific grades of crude oil, area market price structures for the different
grades of crude oil, location of customers, availability of transportation
facilities and timing and costs (including storage) involved in delivering crude
oil to the appropriate customer. EOTT purchases lease barrels at prevailing
market prices. Generally, as EOTT purchases lease barrels, it simultaneously
enters into a corresponding sale transaction to secure a profit, thereby
minimizing or eliminating exposure to price fluctuations. In addition, EOTT's
marketing strategies also provide the potential to enhance the crude oil EOTT
purchases.
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. Unless the context otherwise requires, the term
"EOTT" hereafter refers to the Partnership and its affiliated partnerships.
Results of Operations
EOTT reported a net loss of $1.7 million or $0.09 per unit for the first
quarter of 1998 compared to net income of $3.9 million or $0.20 per unit for the
first quarter of 1997. The first quarter 1998 results reflect lower lease
volumes and reduced margins in the Partnership's core crude oil gathering
business.
12
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
Selected financial data for EOTT's business segments are summarized below,
in millions:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
North American crude oil.................................................. $ 1,237.5 $ 2,016.3
Refined products marketing................................................ 101.9 262.9
Intersegment revenues..................................................... - -
----------- ------------
Total..................................................................... $ 1,339.4 $ 2,279.2
=========== ============
Gross margin:
North American crude oil.................................................. $ 27.1 $ 33.3
Refined products marketing................................................ 0.4 1.6
------------ ------------
Total................................................................... $ 27.5 $ 34.9
============ ============
Operating income (loss):
North American crude oil.................................................. $ 4.9 $ 10.1
Refined products marketing................................................ (0.1) 0.9
Corporate................................................................. (5.2) (5.7)
----------- ------------
Total................................................................... $ (0.4) $ 5.3
=========== ============
</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.
Three Months Ended March 31, 1998 Compared with Three Months Ended March
31, 1997.
North American Crude Oil: Operating income for the North American Crude Oil
segment was $4.9 million for the first quarter 1998, compared to $10.1 million
for the same period in 1997. Gross margin decreased $6.2 million to $27.1
million in the first quarter of 1998 due primarily to the deterioration in grade
and basis differentials in the North American Crude gathering business.
Operating expenses of $22.2 million for the first quarter 1998 were $1.0 million
lower than in the first quarter of 1997 due primarily to lower operating costs
associated with lower lease volumes and lower employee related costs.
Refined Products Marketing: Refined Products Marketing had an operating
loss of $0.1 million for the first quarter 1998 compared to operating income of
$0.9 million for the same period in 1997. Gross margin decreased $1.2 million to
$0.4 million in the first quarter of 1998 due primarily to the wind down of the
East of Rockies products business. Additionally, operating expenses for the
first quarter of 1998 were $0.2 million lower than in the first quarter of 1997
due to lower employee related costs.
Corporate and Other: Corporate costs were $5.2 million for the first
quarter 1998 compared to $5.7 million in the first quarter 1997. The decrease is
due primarily to lower employee related costs. Other income (expense), net,
consisting primarily of (gains) losses on transactions denominated in foreign
currency and gains on sales of fixed assets increased $0.4 million in the first
quarter 1998 compared to the same period in 1997.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
Interest and related charges in the first quarter 1998 were $1.8 million
compared to $1.4 million for the same period in 1997. The increase is due to
higher average short-term debt required to meet working capital needs.
Liquidity and Capital Resources
General
Management anticipates that short-term liquidity as well as sustaining
capital expenditures for the foreseeable future will be funded 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.
Cash Flows From Operating Activities
Net cash provided by operating activities increased $4.6 million to $6.5
million for the first quarter of 1998 compared to $1.9 million for the same
period in 1997. The increase is primarily due to decreases in inventory.
Cash Flows From Investing Activities
Net cash used in investing activities totaled $0.7 million for the first
quarter of 1998 compared to $14.0 million for the same period in 1997, primarily
due to the acquisition of pipeline assets in 1997. Proceeds from asset sales
were $0.6 million in 1998 compared to no asset sales the first quarter of 1997.
Additions to property, plant, and equipment of $1.4 million in 1998 include $1.1
million for information systems development and $0.1 million for pipeline
connections and improvements. The Partnership expects to incur approximately
$4-5 million in sustaining capital expenditures for the remainder of 1998.
Cash Flows From Financing Activities
Net cash used in financing activities totaled $3.2 million for the first
quarter of 1998 compared to net cash provided of $7.0 million for the same
period in 1997. The 1998 amount primarily represents distributions paid to all
Common and Special Unitholders for the period October 1, 1997 through December
31, 1997.
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 as amended February 10,
1998, has a maturity of March 31, 1999. The agreement contains sublimits on the
availability of the Enron Facility of $100 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 $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 original
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
March 31, 1997 maturity date and the amount available was increased to $39.3
million. In early 1997, an additional $15 million of term debt was borrowed
primarily to finance the CITGO Pipeline Acquisition. On February 10, 1998, the
maturity date of the Term Loan was extended to March 31, 1999.
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, 1997, EOTT was in technical violation of the negative
covenants relating to the Tangible Net Worth, Leverage Ratio and Working Capital
Ratio in the Enron Facility and Term Loan due principally to the operating
loss associated with the deterioration of grade and basis differentials in the
crude oil markets. At March 31, 1998, EOTT was in violation of the Tangible Net
Worth, Leverage Ratio and the Working Capital Ratio due to the operating loss
associated with the deterioration of grade and basis differentials and lower
lease volumes. EOTT received waivers from Enron for both periods.
The General Partner believes that the Enron Facility will be sufficient to
support the Partnership's crude oil 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. Enron has committed to provide total cash
distribution support, with respect to quarters ending on or before March 31,
1999, in an amount up to an aggregate of $29 million (of which $19.4 million has
been advanced through May 1998) in exchange for additional partnership interests
("APIs"). The APIs purchased by Enron are not entitled to cash distributions or
voting rights. Originally, the APIs were 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.
15
<PAGE> 16
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.
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.
Other Matters
EOTT utilizes software and related technologies throughout its business
that will be affected by the date change in the year 2000. An evaluation of
EOTT's systems and its third party vendors is currently being performed to
determine the scope of change and related costs to insure that EOTT's systems
continue to function adequately to meet its internal needs and those of its
customers and a detailed implementation plan is being developed based on these
findings. In addition, EOTT is contacting significant business associates to
determine their plans to address year 2000 issues. Preliminary estimates of the
total costs, which will be expensed as incurred, range from $2 million to $3
million. These projects, which began in 1997, will likely continue through 1999.
Statement of Financial Accounting Standards ("SFAS") No. 131, "Reporting
Disaggregated Information About a Business Enterprise" requires that segment
reporting for public companies be measured the same way management identifies
and evaluates information internally. SFAS No. 131 requires adoption of this
standard for year end 1998 reporting and also requires presentation of certain
segment information on a quarterly basis starting in 1999. EOTT is currently
evaluating the impact of this standard.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," which establishes
new accounting and reporting standards for the costs of computer software
developed or obtained for internal use. This statement is effective for
financial statements beginning after December 15, 1998. The impact of this new
standard is not expected to have a significant effect on EOTT's financial
position or results of operations.
Outlook
Due to difficult market conditions, crude oil gathering margins are
suffering industry-wide. The Partnership intends to continue to pay MQDs to all
its Common and Special Unitholders; however, due to the volatility of the market
and other factors which can affect operating results, distribution support from
Enron may be necessary to pay MQDs during the remainder of 1998. Enron has
committed to provide total cash distribution support in an amount necessary to
pay MQDs, with respect to quarters ending on or before March 31, 1999, in an
amount up to an aggregate of $29 million (of which $19.4 million has been
advanced through May 15, 1998).
EOTT will continue to pursue attractive acquisition or business combination
opportunities to increase its scale of business, add cash flow, and reduce
earnings volatility. Acquisitions that result in increased lease purchase
volumes should help to enhance EOTT's marketing and trading opportunities. EOTT
management is committed to continue improving internal business processes in all
operational, marketing, and administrative areas and thereby achieve
improvements in productivity.
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, 1998 By: EOTT ENERGY CORP. as
General Partner
/s/ LORI L.MADDOX
---------------------------------
Lori L. Maddox
Controller
(Principal Accounting Officer)
<PAGE> 19
INDEX TO EXHIBITS
Exhibit 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-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,374
<SECURITIES> 0
<RECEIVABLES> 319,732
<ALLOWANCES> 1,646
<INVENTORY> 116,258
<CURRENT-ASSETS> 450,514
<PP&E> 223,993
<DEPRECIATION> 99,897
<TOTAL-ASSETS> 580,750
<CURRENT-LIABILITIES> 509,462
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 54,675<F1>
<TOTAL-LIABILITY-AND-EQUITY> 580,750
<SALES> 1,339,404
<TOTAL-REVENUES> 1,339,404
<CGS> 1,311,857
<TOTAL-COSTS> 1,339,761
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,790
<INCOME-PRETAX> (1,723)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,723)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,723)
<EPS-PRIMARY> (0.09)<F2>
<EPS-DILUTED> (0.09)
<FN>
<F1>"OTHER SE" represents consolidated Partners' Capital.
<F2>"EPS Primary" represents Basic Common EPS and Basic Subordinated EPS.
</FN>
</TABLE>
