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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 SEPTEMBER 30, 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
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(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
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Page
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PART I. FINANCIAL INFORMATION
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ITEM 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended September 30, 1998 and 1997, and
Nine Months Ended September 30, 1998 and 1997 .....................................................3
Condensed Consolidated Balance Sheets (Unaudited) -
September 30, 1998 and December 31, 1997...........................................................4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended September 30, 1998 and 1997......................................................5
Condensed Consolidated Statement of Partners' Capital (Unaudited) -
Nine Months Ended September 30, 1998...............................................................6
Notes to Condensed Consolidated Financial Statements..................................................7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..............................................................................27
ITEM 6. Exhibits and Reports on Form 8-K...............................................................27
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ---------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue............................................ $ 1,295,652 $ 1,774,230 $ 3,866,931 $ 5,986,409
Cost of Sales...................................... 1,261,916 1,747,442 3,776,492 5,901,467
------------- ------------- ------------- -------------
Gross Margin....................................... 33,736 26,788 90,439 84,942
Expenses
Operating expenses.............................. 27,304 22,684 74,129 71,900
Depreciation and amortization................... 5,279 4,474 14,357 12,750
------------- ------------- ------------- -------------
Total......................................... 32,583 27,158 88,486 84,650
------------- ------------- ------------- -------------
Operating Income (Loss) ........................... 1,153 (370) 1,953 292
Other Income (Expense)
Interest income................................. 185 213 527 460
Interest and related charges.................... (2,547) (1,778) (6,370) (4,812)
Other, net...................................... (597) 24 (913) (128)
------------- ------------- ------------- -------------
Total......................................... (2,959) (1,541) (6,756) (4,480)
------------- ------------- ------------- -------------
Net Loss........................................... $ (1,806) $ (1,911) $ (4,803) $ (4,188)
============= ============= ============= =============
Basic Net Loss Per Unit
Common.......................................... $ (0.03) $ (0.10) $ (0.18) $ (0.22)
============= ============ ============= =============
Subordinated.................................... $ (0.20) $ (0.10) $ (0.36) $ (0.22)
============= ============ ============= =============
Diluted Net Loss Per Unit.......................... $ (0.09) $ (0.10) $ (0.25) $ (0.22)
============= ============ ============= =============
Number of Units Outstanding
for Diluted Computation ........................ 18,830 18,830 18,830 18,830
============= ============= ============= =============
</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 BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents....................................................... $ 6,626 $ 3,737
Trade and other receivables, net of allowance for doubtful
accounts of $1,737 and $1,660, respectively.................................. 405,215 463,983
Inventories..................................................................... 157,122 173,637
Other .......................................................................... 11,139 7,603
------------- --------------
Total current assets......................................................... 580,102 648,960
------------- --------------
Property, Plant & Equipment, at cost................................................ 253,327 224,528
Less: Accumulated depreciation.................................................. 108,373 97,224
------------- --------------
Net property, plant & equipment.............................................. 144,954 127,304
------------- --------------
Other Assets, net of amortization................................................... 5,561 6,657
------------- --------------
Total Assets........................................................................ $ 730,617 $ 782,921
============= ==============
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Trade accounts payable ......................................................... $ 496,453 $ 586,897
Accrued taxes payable........................................................... 10,690 5,462
Note payable - affiliate (Note 4)............................................... 39,300 39,300
Short-term borrowings - affiliate............................................... 25,100 70,000
Repurchase agreements........................................................... 88,493 -
Other........................................................................... 8,471 6,113
------------- --------------
Total current liabilities.................................................... 668,507 707,772
------------- --------------
Long-Term Liabilities............................................................... - 281
------------- --------------
Commitments and Contingencies (Note 9)
Additional Partnership Interests (Note 6)........................................... 21,928 12,775
------------- --------------
Partners' Capital
Common Unitholders.............................................................. (8,289) 7,490
Special Unitholders ............................................................ 21,801 25,060
Subordinated Unitholders........................................................ 25,680 28,169
General Partner................................................................. 990 1,374
------------- --------------
Total Partners' Capital............................................................. 40,182 62,093
------------- --------------
Total Liabilities and Partners' Capital............................................. $ 730,617 $ 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>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Reconciliation of net loss to net cash
provided by operating activities -
Net loss........................................................................ $ (4,803) $ (4,188)
Depreciation................................................................. 12,834 11,227
Amortization of intangible assets............................................ 1,523 1,523
(Gains) losses on disposal of assets......................................... 191 (30)
Changes in components of working capital -
Receivables................................................................ 58,768 279,996
Inventories................................................................ 18,047 32,112
Other current assets....................................................... (3,536) 3,134
Trade accounts payable..................................................... (90,444) (305,560)
Accrued taxes payable...................................................... 5,228 (1,685)
Other current liabilities.................................................. 2,560 (15,212)
Other assets and liabilities............................................... 1,176 430
------------- --------------
Net Cash Provided By Operating Activities........................................... 1,544 1,747
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment............................. 664 29
Acquisitions.................................................................... (28,500) (12,000)
Increases to property, plant and equipment...................................... (5,946) (9,048)
Other, net...................................................................... (28) 1
-------------- --------------
Net Cash Used In Investing Activities............................................... (33,810) (21,018)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term borrowings - affiliate........................ (44,900) 28,000
Increase in note payable - affiliate............................................ - 15,072
Increase in repurchase agreements............................................... 88,493 -
Distributions to Unitholders.................................................... (17,108) (23,985)
Issuance of Additional Partnership Interests.................................... 9,153 -
Other........................................................................... (483) (406)
------------- --------------
Net Cash Provided By Financing Activities........................................... 35,155 18,681
------------- --------------
Increase (Decrease) In Cash and Cash Equivalents.................................... 2,889 (590)
Cash and Cash Equivalents, Beginning of Period...................................... 3,737 5,261
------------- --------------
Cash and Cash Equivalents, End of Period............................................ $ 6,626 $ 4,671
============= ==============
Supplemental Cash Flow Information:
Interest paid................................................................... $ 6,555 $ 4,053
============= ==============
</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 STATEMENT OF PARTNERS' CAPITAL
(IN THOUSANDS)
(UNAUDITED)
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<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 loss............................................... (1,529) (651) (2,489) (134)
Cash distributions..................................... (14,250) (2,608) - (250)
------------- ------------- ------------- -----------
Balance at September 30, 1998.......................... $ (8,289) $ 21,801 $ 25,680 $ 990
============= ============= ============= ===========
</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
September 30, 1998 and December 31, 1997, and the results of operations for the
three and nine months ended September 30, 1998 and 1997, cash flows for the nine
months ended September 30, 1998 and 1997 and changes in partners' capital for
the nine months ended September 30, 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 ASSETS
On July 1, 1998, the Partnership acquired crude oil gathering and
transportation assets in West Texas and New Mexico from Koch Pipeline Company,
L.P., a subsidiary of Koch Industries, Inc., and Koch Oil Company, a division of
Koch Industries, Inc. (collectively "Koch"). The asset purchase included
approximately 300 miles of common carrier pipelines, associated storage
facilities for approximately 500,000 barrels and lease purchase contracts for up
to 40,000 lease barrels of crude oil per day. The purchase price was
approximately $28.5 million and was financed with short-term borrowings from
Enron.
On September 21, 1998, the Partnership signed a definitive agreement to
purchase certain additional crude oil gathering and transportation assets in key
oil producing regions from Koch. The asset purchase will include approximately
3,900 miles of crude oil pipelines, crude transport trucks, meter stations,
vehicles, storage tanks and lease purchase contracts for approximately 220,000
lease barrels of crude oil per day from
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
production in 11 central and western states including Texas, Oklahoma, Kansas
and California (the "Assets"). The transaction will almost triple EOTT's
pipeline mileage and almost double crude oil lease barrels under contract. The
total estimated purchase price of the Assets is approximately $230.5 million,
which includes consideration of $184 million in cash, 2,000,000 Common Units and
2,000,000 Subordinated Units. EOTT will finance the cash portion of the purchase
price through borrowings from Enron, consisting of a $100 million bridge loan
due December 31, 1999 and $84 million of term debt, due December 31, 1999. EOTT
will also enter into a $1 billion credit facility with Enron that provides
increased credit support for the Partnership. The transaction is expected to
close by December 1, 1998.
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. Pursuant to the Support Agreement, as
further discussed in Note 6, effective with the closing of the acquisition of
Assets from Koch, Enron will increase the Enron Facility to $1 billion and
extend the maturity date to December 31, 2001. 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, 1997, EOTT had $39.3 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 is provided at a rate
of LIBOR plus .3% per annum. On February 10, 1998, the maturity date of the Term
Loan was extended to March 31, 1999. As a condition of the financing
arrangements with Enron discussed in Note 6, the Term Loan will be redeemed and
reissued for term debt.
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 and September 30, 1998, 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 during 1997 and losses associated
with lower gross margins from grade and basis differentials in the North
American crude oil segment as well as non-recurring charges for the nine months
ended September 30, 1998. EOTT received waivers from Enron for both periods.
The General Partner believes that the Enron Facility, which is to be
amended pursuant to the Support Agreement, 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.
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 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 with respect to each quarter. Enron has committed to
provide cash distribution support in an amount necessary to pay MQDs on Common
and Special Units, with respect to quarters ending on or before March 31, 1999,
(of which $7.1 million is still available to be advanced) in exchange for
Additional Partnership Interests ("APIs"). As discussed in Note 6, if requisite
Unitholder approvals are obtained, Enron will increase its cash distribution
support to $29 million and extend it through the fourth quarter of 2001.
The Partnership Agreement authorizes EOTT to issue other equity securities.
As discussed in Note 6, after the acquisition of Assets from Koch closes, the
Partnership will seek Unitholder approval of a proposal which would authorize
the issuance of up to 10 million new Common Units which could be used to raise
cash to reduce debt, for acquisitions or other Partnership needs.
At September 30, 1998, EOTT has outstanding forward commodity repurchase
agreements of approximately $88.5 million. The agreements, which have terms of
thirty days, require EOTT to repurchase the crude oil inventory on October 20,
1998 for approximately $88.9 million.
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. EARNINGS (LOSS) PER UNIT
Net loss shown in the table below excludes the approximate two percent
interest of the General Partner. Net loss per Unit is calculated as follows (in
millions, except per unit amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
Wtd. Wtd.
Net Average Per Net Average Per
Loss Units Unit Loss Units Unit
--------- -------- --------- -------- ------- ---------
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Basic (1)
Common $ (359) 11,830 $ (0.03) $(1,178) 11,830 $ (0.10)
Subordinated $ (1,373) 7,000 $ (0.20) $ (695) 7,000 $ (0.10)
Diluted (2) $ (1,732) 18,830 $ (0.09) $(1,873) 18,830 $ (0.10)
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
1998 1997
----------------------------------- ------------------------------------
Wtd. Wtd.
Net Average Per Net Average Per
Loss Units Unit Loss Units Unit
-------- -------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Basic (1)
Common $ (2,180) 11,830 $ (0.18) $(2,578) 11,830 $ (0.22)
Subordinated $ (2,489) 7,000 $ (0.36) $(1,526) 7,000 $ (0.22)
Diluted (2) $ (4,669) 18,830 $ (0.25) $(4,104) 18,830 $ (0.22)
</TABLE>
(1) Net loss, excluding the two percent General Partner interest, has
been apportioned to each class of Unitholder based on the
ownership of total Units outstanding in accordance with the
Partnership Agreement, which is also reflected on the Statement of
Partners' Capital, and Special Units are considered Common Units.
Due to a negative capital account balance for the Common
Unitholders, the total loss to be allocated to the Common
Unitholders was reallocated to the remaining Unitholders based on
their ownership percentage. The negative Limited Partners' capital
account shown in the Statement of Partners' Capital does not
represent a commitment by the partners to contribute cash to the
Partnership.
(2) The diluted loss per Unit calculation assumes the conversion of
Subordinated Units into Common Units.
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue................................... $ 307 $ 9,631 $ 10,301 $ 33,140
Cost of Sales............................. $ 14,426 $ 17,429 $ 29,256 $ 61,658
</TABLE>
Revenue in 1998 and 1997 consists primarily of crude oil sales to Enron
Reserve Acquisition Corp. and Enron Gas Liquids, Inc. Cost of sales consists
primarily of crude oil and condensate purchases from Enron Oil & Gas Company and
Enron Reserve Acquisition Corp. 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 September 30, 1998 and December 31, 1997 were
$0.2 million and $2.8 million, respectively, and are classified as trade and
other receivables. Related party payables at September 30, 1998 and December 31,
1997 were $1.8 million and $3.6 million, respectively, and are classified as
trade accounts payable.
Additional Partnership Interests ("APIs"). On November 14, 1997, February
13, 1998, May 15, 1998 and August 14, 1998, Enron paid $3.7 million, $3.8
million, $2.8 million and $2.5 million, respectively, in support of EOTT's third
and fourth quarter 1997 and first and second 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 and special distributions through March 1999, as necessary (of which
$7.1 million is still available to be advanced). As discussed in Note 6, if
requisite Unitholder approvals are obtained, Enron will increase its cash
distribution support to $29 million and extend it through the fourth quarter of
2001.
Financing of Acquisitions. In February 1997, the Partnership acquired
intrastate and interstate common carrier pipelines from CITGO Pipeline Company
for approximately $12 million which was financed with term debt from Enron. As
discussed further in Note 3, on July 1, 1998, the Partnership acquired crude oil
gathering and transportation assets from Koch for approximately $28.5 million
which was financed with short-term borrowings from Enron.
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Support Agreement. Pursuant to a Support Agreement dated September 21, 1998
(a) Enron agreed to make loans to the Partnership to fund the cash portion of
the consideration to be paid to Koch for the Assets at closing as discussed in
Note 3 and to refinance indebtedness incurred in a prior acquisition of assets
from Koch on July 1, 1998, (b) Enron agreed to increase and extend the
Partnership's credit facility with Enron to $1 billion through December 31,
2001, (c) the Partnership agreed to issue 1,150,000 Special Units to Enron in
exchange for Enron's commitment to contribute $21.9 million in APIs to the
Partnership on the earlier of the date certain proposals, discussed further
below, are approved by the Unitholders at a special meeting of Unitholders or
May 17, 1999, (d) Enron agreed that if certain proposals are approved by the
Unitholders it will extend its cash distribution support through the fourth
quarter of 2001, and (e) the Partnership agreed that, if any additional APIs are
issued prior to approval of certain proposals by the Unitholders, it will issue
additional Common Units at $19.00 per share in exchange for such additional
APIs. After the acquisition of Assets from Koch closes, the Partnership will
seek Unitholder approval of two proposals which would authorize the issuance of
up to 10 million new Common Units and change the terms of the Special Units so
that they are convertible into Common Units and will permit the Partnership to
list on the New York Stock Exchange the Common Units to be issued on conversion
of the outstanding Special Units. Pursuant to the Support Agreement, EOTT will
borrow from Enron $212.5 million, consisting of a $100 million bridge loan and
$112.5 million of term debt and enter into a $1 billion credit facility with
Enron, to replace its existing $600 million credit facility.
7. NON-RECURRING CHARGES
During the third quarter of 1998, the Partnership recorded approximately
$2.4 million of non-recurring non-cash charges. The charges consisted primarily
of a $0.7 million lower of cost or market adjustment of certain propane
inventories, a $1.0 million write-off of certain information system development
costs, additional bad debt allowances and other charges.
8. OTHER INCOME (EXPENSE), NET
The components of other income (expense), net are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
1998 1997 1998 1997
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Loss on foreign currency transactions................ $ (521) $ (209) $ (1,012) $ (329)
Gain (loss) on disposal of fixed assets.............. (268) 30 (191) 30
Litigation settlements............................... 94 130 51 130
Other, net........................................... 98 73 239 41
----------- ----------- ----------- -----------
Total............................................ $ (597) $ 24 $ (913) $ (128)
=========== =========== =========== ===========
</TABLE>
9. LITIGATION AND OTHER CONTINGENCIES
EOTT is, in the ordinary course of business, a defendant in various
lawsuits, some of which are covered in whole or in part by insurance. The
Partnership is responsible for all litigation and other claims relating to the
business acquired from 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
12
<PAGE> 13
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
Assessment for Crude Oil Production Tax from the Comptroller of Public
Accounts, State of Texas. The Partnership received a letter from the
Comptroller's Office dated October 9, 1998 assessing the Partnership for
severance taxes the Comptroller's Office alleges are due on a difference the
Comptroller's Office believes exists between the market value of crude oil and
the value reported on the Partnership's crude oil tax report for the period of
September 1, 1994 through December 31, 1997. The letter states that the action,
based on a desk audit of the Partnership's crude oil production reports, is
partly to preserve the statute of limitations where crude oil severance tax may
not have been paid on the true market price of the crude oil. The letter further
states that the Comptroller's position is similar to claims made in several
lawsuits, including the Texas Federal Anti-Trust Suit, in which the Partnership
is a defendant. The amount of the assessment, including penalty and interest, is
approximately $1.1 million. While the claim is still being reviewed, the General
Partner believes the Partnership should be without liability in this or related
matters.
Cameron Parish School Board, et al. vs. Texaco, Inc., et al.; Civil Action
No. C-98-111; In the United States District Court for the Western District of
Louisiana, Lake Charles Division. This case was originally filed as a state law
claim in Louisiana. When the case was removed to federal court, the anti-trust
claims were added, similar to the claims made in the Texas Federal Anti-Trust
Suit and the Mississippi Anti-Trust Suit. The plaintiffs claim that this
litigation arises out of a combination and conspiracy of the defendant oil
companies to fix, depress, stabilize and maintain at artificially low levels the
prices paid for the first purchase of lease production oil sold from leases in
which the class members own interests. This case, along with the Texas Federal
Anti-Trust Suit and the Mississippi Anti-Trust Suit, and other cases, was
transferred by the Judicial Panel on Multidistrict Litigation to the Southern
District of Texas (MDL No. 1206) by Transfer Order dated January 14, 1998. On
October 22, 1998, the judge granted the Plaintiffs' motion to amend the petition
and add additional defendants. The Partnership and the General Partner were
added to the case as defendants at that time. No money amounts were claimed and
it is not possible to determine any potential exposure until further discovery
is done. Though still in its early stages, the General Partner believes the
Partnership should be without liability in this or related matters.
10. 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 to equity and was
required to be adopted in the first quarter of 1998. For the three months and
the nine months ended September 30, 1998, traditional net loss and comprehensive
loss are the same.
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
13
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. The statement requires companies to
capitalize certain costs that are incurred in developing or designing computer
software. 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.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. The standard cannot be applied retroactively but early adoption
is permitted. EOTT has not yet determined the impacts of adopting SFAS No. 133;
however, this standard could increase volatility in earnings and partners'
capital, through other comprehensive income.
11. SUBSEQUENT EVENTS
On October 13, 1998, the Board of Directors of EOTT Energy Corp., as
General Partner, declared the Partnership's regular quarterly cash distribution
of $0.475 for all Common and Special Units for the period July 1, 1998 through
September 30, 1998. The third quarter distribution will be paid on November 13,
1998 to the General Partner and all Common and Special Unitholders of record as
of October 30, 1998. The distribution will be paid utilizing Available Cash from
the Partnership. Enron has committed to support payment of distributions on EOTT
Common and Special Units through March 1999, as necessary (of which $7.1 million
is still available to be advanced). As discussed in Note 6, if requisite
Unitholder approvals are obtained, Enron will increase its cash distribution
support to $29 million and extend it through the fourth quarter of 2001.
14
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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 integrating the assets to be acquired from Koch
Pipeline Company, L.P. and Koch Oil Company into the Partnership's field and
administrative operations, the ability of the Partnership to continue purchasing
crude oil under the contracts acquired, 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 oil 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.
RECENT DEVELOPMENTS
On July 1, 1998, the Partnership acquired crude oil gathering and
transportation assets in West Texas and New Mexico from Koch Pipeline Company,
L.P., a subsidiary of Koch Industries, Inc., and Koch Oil Company, a division of
Koch Industries, Inc. (collectively "Koch"). The asset purchase included
approximately 300 miles of common carrier pipelines, associated storage
facilities for approximately 500,000 barrels and lease purchase contracts for up
to 40,000 lease barrels of crude oil per day. The purchase price was
approximately $28.5 million and was financed with short-term borrowings from
Enron.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
On September 21, 1998, the Partnership signed a definitive agreement to
purchase certain additional crude oil gathering and transportation assets in key
oil producing regions from Koch. The asset purchase will include approximately
3,900 miles of crude oil pipelines, crude transport trucks, meter stations,
vehicles, storage tanks and lease purchase contracts for approximately 220,000
lease barrels of crude oil per day from production in 11 central and western
states including Texas, Oklahoma, Kansas and California (the "Assets"). The
transaction will almost triple EOTT's pipeline mileage and almost double crude
oil lease barrels under contract. The total estimated purchase price of the
Assets is approximately $230.5 million, which includes consideration of $184
million in cash, 2,000,000 Common Units and 2,000,000 Subordinated Units. EOTT
will finance the cash portion of the purchase price through borrowings from
Enron, consisting of a $100 million bridge loan due December 31, 1999 and $84
million of term debt, due December 31, 1999. EOTT will also enter into a $1
billion credit facility with Enron that provides increased credit support for
the Partnership. The transaction is expected to close by December 1, 1998.
Pursuant to a Support Agreement dated September 21, 1998 (a) Enron agreed
to make loans to the Partnership to fund the cash portion of the consideration
to be paid to Koch for the Assets at closing as discussed in Note 3 to the
Condensed Consolidated Financial Statements and to refinance indebtedness
incurred in a prior acquisition of assets from Koch on July 1, 1998, (b) Enron
agreed to increase and extend the Partnership's credit facility with Enron to $1
billion through December 31, 2001, (c) the Partnership agreed to issue 1,150,000
Special Units to Enron in exchange for Enron's commitment to contribute $21.9
million in APIs to the Partnership on the earlier of the date certain proposals,
discussed further below, are approved by the Unitholders at a special meeting of
Unitholders or May 17, 1999, (d) Enron agreed that if certain proposals are
approved by the Unitholders it will extend its cash distribution support through
the fourth quarter of 2001, and (e) the Partnership agreed that, if any
additional APIs are issued prior to approval of certain proposals by the
Unitholders, it will issue additional Common Units at $19.00 per share in
exchange for such additional APIs. After the acquisition of Assets from Koch
closes, the Partnership will seek Unitholder approval of two proposals which
would authorize the issuance of up to 10 million new Common Units and change the
terms of the Special Units so that they are convertible into Common Units and
will permit the Partnership to list on the New York Stock Exchange the Common
Units to be issued on conversion of the outstanding Special Units.
The asset acquisitions from Koch, which will complement EOTT's core crude
oil gathering and transportation business, should result in substantial
economies of scale and should strengthen EOTT's ability to serve customers
throughout North America. In addition, these acquisitions should enhance EOTT's
ability to fund Common Unit distributions from cash flows. If requisite
Unitholder approvals are obtained, Enron's extension of cash distribution
support will further assure Common Unitholders of continued reliable
distributions.
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 $1.8 million or $0.09 per diluted Unit for the
third quarter of 1998 compared to a net loss of $1.9 million or $0.10 per
diluted Unit for the third quarter of 1997. The third quarter loss in 1998
includes approximately $2.4 million of non-recurring charges which consisted of
a $0.7
16
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
million lower of cost or market adjustment of certain propane inventories, a
$1.0 million write-off of certain information system development costs,
additional bad debt allowances and other charges.
Selected financial data for EOTT's business segments are summarized below,
in millions:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
North American crude oil................. $ 1,272.1 $ 1,538.0 $ 3,693.3 $ 5,276.2
Refined products marketing............... 24.2 236.2 174.3 710.2
Intersegment revenues.................... (0.7) - (0.7) -
------------- ------------- ------------- -----------
Total.................................. $ 1,295.6 $ 1,774.2 $ 3,866.9 $ 5,986.4
============= ============= ============= =============
Gross margin:
North American crude oil................. $ 33.4 $ 25.9 $ 89.6 $ 81.5
Refined products marketing............... 0.4 0.9 0.9 3.4
------------- ------------- ------------- -------------
Total.................................. $ 33.8 $ 26.8 $ 90.5 $ 84.9
============= ============= ============= =============
Operating income (loss):
North American crude oil................. $ 8.1 $ 3.8 $ 20.7 $ 13.7
Refined products marketing............... (0.1) 0.3 (0.5) 1.6
Corporate................................ (6.8) (4.5) (18.2) (15.0)
------------- ------------- ------------- -------------
Total.................................. $ 1.2 $ (0.4) $ 2.0 $ 0.3
============= ============= ============= =============
</TABLE>
Gross margin is the difference between the sales prices of crude oil or
other petroleum products and the costs of crude oil and other products
purchased, including costs paid to third parties for transportation and handling
charges. Both of EOTT's business segments are characterized by large volumes and
generally very thin and volatile profit margins on purchase and sale
transactions. The absolute price levels for crude oil and refined products do
not necessarily bear a direct relationship to margins per barrel, although such
price levels significantly impact revenues and cost of sales. As a result,
period-to-period variations in revenues and cost of sales are not meaningful,
and therefore are not discussed.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1997.
North American Crude Oil: Operating income for the North American Crude Oil
segment was $8.1 million for the third quarter 1998, compared to operating
income of $3.8 million for the same period in 1997. Gross margin increased $7.5
million to $33.4 million in the third quarter of 1998 due primarily to
renegotiations of uneconomic lease contracts during 1997 and improved crude
grade and basis differentials in 1998. Operating expenses of $25.3 million for
the third quarter of 1998 were $3.2 million higher than in the third quarter of
1997 due primarily to higher operating costs associated with the acquisition of
assets from Koch on July 1, 1998, additional repairs and maintenance costs and
additional allowances for bad debts.
Refined Products Marketing: The operating loss for Refined Products
Marketing was $0.1 million for the third quarter 1998 compared to operating
income of $0.3 million for the same period in 1997. Gross margin
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
decreased $0.5 million to $0.4 million in the third quarter of 1998 due to the
wind down of the East of Rockies products business. Additionally, operating
expenses of $0.5 million for the third quarter of 1998 decreased $0.1 million
from the same period last year due to lower employee related costs.
Corporate and Other: Corporate costs were $6.8 million for the third
quarter 1998 compared to $4.5 million in the third quarter 1997. The increase is
due primarily to a non-recurring $1.0 million write-off of certain information
system development costs, severance costs for a former officer of the General
Partner and higher information system operating costs. Other income (expense),
net, decreased $0.6 million in the third quarter 1998 compared to the same
period in 1997 due primarily to losses on transactions denominated in foreign
currency and losses on sales of fixed assets partially offset by favorable
litigation settlements. Interest and related charges in the third quarter 1998
were $2.5 million compared to $1.8 million for the same period in 1997 primarily
due to higher borrowings to meet working capital needs and for financing of the
July 1, 1998 acquisition of assets from Koch.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30,1997.
North American Crude Oil: Operating income for the North American Crude Oil
segment was $20.7 million for the first nine months of 1998, compared to $13.7
million for the same period in 1997. Gross margin increased $8.1 million to
$89.6 million in the first nine months of 1998 due primarily to the
renegotiation of uneconomic lease contracts and improved grade and basis
differentials in the North American crude gathering business. Operating expenses
of $68.9 million for the first nine months of 1998 were $1.1 million higher than
in the first nine months of 1997 due primarily to higher operating costs
associated with the acquisition of assets from Koch on July 1, 1998 and
additional allowances for bad debts.
Refined Products Marketing: The operating loss for Refined Products
Marketing was $0.5 million for the first nine months of 1998, compared to
operating income of $1.6 million for the same period in 1997 due to the wind
down of the East of Rockies products business. Operating expenses of $1.4
million for the first nine months of 1998 were $0.4 million lower than in the
first nine months of 1997 due primarily to lower employee related costs.
Corporate and Other: Corporate and other costs of $18.2 million for the
first nine months of 1998 were $3.2 million higher compared to the first nine
months of 1997 due primarily to a non-recurring $1.0 million write-off of
certain information system development costs, severance costs for a former
officer of the General Partner, higher liability and casualty insurance costs
and higher information system operating costs. Other income (expense), net,
decreased $0.8 million during the first nine months of 1998 compared to the same
period in 1997 due primarily to losses on transactions denominated in foreign
currency and losses on sales of fixed assets partially offset by favorable
litigation settlements. Interest and related charges for the first nine months
of 1998 were $6.4 million compared to $4.8 million for the same period in 1997
primarily due to higher borrowings to meet working capital needs and for
financing of the July 1, 1998 acquisition of assets from Koch.
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
LIQUIDITY AND CAPITAL RESOURCES
General
Management anticipates that short-term liquidity as well as sustaining
capital expenditures for the foreseeable future will by funded 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 was $1.5 million for the first
nine months of 1998 compared to net cash provided of $1.7 million for the same
period in 1997.
Cash Flows From Investing Activities
Net cash used in investing activities totaled $33.8 million for the first
nine months of 1998 compared to $21.0 million for the same period in 1997.
Acquisitions for the first nine months of 1998 include the $28.5 million
acquisition of assets from Koch in West Texas on July 1, 1998 compared to the
pipeline acquisition from CITGO Pipeline Company for $12.0 million in 1997.
Increases to property, plant, and equipment in 1998 include capital expenditures
for pipeline connections and improvements, vehicles and computer hardware. There
was $0.7 million in proceeds from asset sales in 1998. The Partnership expects
to incur approximately $2-3 million in sustaining capital expenditures for the
remainder of 1998.
Cash Flows From Financing Activities
Net cash provided by financing activities totaled $35.2 million for the
first nine months of 1998 compared to net cash provided of $18.7 million for the
same period in 1997. The 1998 amount primarily represents an increase in
short-term borrowings to fund working capital needs and finance the acquisition
of assets from Koch in West Texas on July 1, 1998 reduced by distributions paid
to all Common and Special Unitholders for the period October 1, 1997 through
June 30, 1998.
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. Pursuant to the Support Agreement, as
further discussed in Note 6 to the Condensed Consolidated Financial Statements,
effective with the closing of the acquisition of Assets from Koch, Enron will
increase the Enron Facility to $1 billion and extend the maturity date to
December 31, 2001. 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.
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
At December 31, 1997, EOTT had $39.3 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 is provided at a rate
of LIBOR plus .3% per annum. On February 10, 1998, the maturity date of the Term
Loan was extended to March 31, 1999. As a condition of the financing
arrangements with Enron discussed in Note 6 to the Condensed Consolidated
Financial Statements, the Term Loan will be redeemed and reissued for term debt.
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 and September 30, 1998, 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 during 1997 and losses associated
with lower gross margins from grade and basis differentials in the North
American crude oil segment as well as non-recurring charges for the nine months
ended September 30, 1998. EOTT received waivers from Enron for both periods.
The General Partner believes that the Enron Facility, which is to be
amended pursuant to the Support Agreement, 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 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 with respect to each quarter. Enron has committed to
provide total cash distribution support in an amount necessary to pay MQDs on
Common and Special Units, with respect to quarters ending on or before March 31,
1999, (of which $7.1 million is still available to be advanced) in exchange for
additional partnership interests ("APIs"). As previously discussed, if requisite
Unitholder approvals are obtained, Enron will increase its cash distribution
20
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
support to $29 million and extend it through the fourth quarter of 2001. 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.
The Partnership Agreement authorizes EOTT to issue other equity securities.
As previously discussed, after the acquisition of Assets from Koch closes, the
Partnership will seek Unitholder approval of a proposal which would authorize
the issuance of up to 10 million new Common Units which could be used to raise
cash to reduce debt, for acquisitions or other Partnership needs.
YEAR 2000
The Year 2000 problem generally results from the use in computer
hardware and software of two digits rather than four digits to define the
applicable year. When computer systems must process dates both before and after
January 1, 2000, two-digit year "fields" may create processing ambiguities that
can cause errors and system failures. For example, computer programs that have
date-sensitive features may recognize a date represented by "00" as the year
1900, instead of 2000.
The effects of the Year 2000 problem are exacerbated because of the
interdependence of computer and telecommunications systems in the United States
and throughout the world. This interdependence certainly is true for the
Partnership and its suppliers, trading partners, and customers.
State of Readiness
The General Partner's Board of Directors has been briefed about the
Year 2000 problem. The Board has adopted a Year 2000 plan (the "Plan") aimed at
taking reasonable steps to prevent the Partnership's mission-critical functions
from being impaired due to the Year 2000 problem. "Mission-critical" functions
are those critical functions whose loss would cause an immediate stoppage of or
significant impairment to the Partnership's business.
The Partnership is implementing the Plan, which will be modified as
events warrant. Under the Plan, the Partnership will continue to inventory its
mission-critical computer hardware and software systems and embedded chips
(computer chips with date-related functions, contained in a wide variety of
devices), and software; assess the effects of Year 2000 problems on the
mission-critical functions of the Partnership's businesses; remedy material
disruptions or other material adverse effects on mission-critical functions,
processes and systems; verify and test the mission-critical systems to which
remediation efforts have been applied; and attempt to ameliorate those
mission-critical aspects of the Year 2000 problem that are not remediated by
January 1, 2000, including the development of contingency plans to cope with the
mission-critical consequences of Year 2000 problems that have not been
identified or remediated by that date.
21
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
Implementation of the Plan is directly supervised by the General
Partner's Chief Information Officer, who is the Year 2000 Project Director. The
Project Director coordinates the implementation of the Plan with the assistance
of an Oversight Committee, consisting of selected employees of the General
Partner and one member of the Board of Directors. The Partnership also has
engaged (or will engage, as appropriate) certain outside consultants,
technicians and other external resources to aid in formulating and implementing
the Plan.
The Plan recognizes that the computer, telecommunications, and other
systems ("Outside Systems") of outside entities ("Outside Entities") have the
potential for major, mission-critical, adverse effects on the conduct of the
Partnership's business. The Partnership does not have control of these Outside
Entities or Outside Systems. However, the Plan includes an ongoing process of
contacting Outside Entities whose systems, in the General Partner's judgment,
have, or may have, a substantial effect on the Partnership's ability to continue
to conduct the mission-critical aspects of its business without disruption from
Year 2000 problems. The Plan envisions the Partnership attempting to inventory
and assess the extent to which these Outside Systems may not be "Year 2000
ready" or "Year 2000 compatible" (that is, able to process data reliably, both
before and after January 1, 2000, without disruption due to an inability
reliably to process date information). The Partnership will attempt reasonably
to coordinate with these Outside Entities in an ongoing effort to obtain
assurance that the Outside Systems that are mission-critical to the Partnership
will be Year 2000 compatible well before January 1, 2000. Consequently, the
Partnership will work prudently with Outside Entities in a reasonable attempt to
inventory, assess, analyze, convert (where necessary), test (where necessary),
and develop contingency plans for the Partnership's connections to these
mission-critical Outside Systems, to ascertain the extent to which they are, or
can be made to be, Year 2000 ready and compatible with the Partnership's
remediation of its own mission-critical systems.
It is important to recognize that the processes of inventorying,
assessing, analyzing, converting (where necessary), testing (where necessary),
and developing contingency plans for mission-critical items in anticipation of
the Year 2000 event are necessarily iterative processes. That is, the steps are
repeated as the Partnership learns more about the Year 2000 problem and its
effects on the Partnership's internal systems and on Outside Systems. As the
steps are repeated, it is likely that new problems will be identified and
addressed. The Partnership anticipates that it will continue with these
processes through January 1, 2000 and, if necessary based on experience, into
the Year 2000 in order to assess and remediate problems that reasonably can be
identified only after the start of the new century.
As of November 1998, the Partnership is at various stages in
implementation of the Plan as shown in the following tables. The Plan includes
verification and validation of certain of the Partnership's mission-critical
facilities and functions by independent consultants. These consultants will
participate to varying degrees in many or all of the stages, including the
inventory, assessment, and testing phases. The Partnership will continue closely
to monitor work under the Plan and will revise estimated completion dates for
the initial iteration of each listed process according to experience. All dates
are only relevant for the initial iteration of the applicable stage of the
Plan. Any notation of "complete" conveys the fact only that the initial
iteration of this phase has been substantially completed. All dates are only
relevant for the initial iteration of the applicable stage of the Plan.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Year 2000 Plan Readiness
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Inventory Assessment Analysis Conversion Testing Y2K-Ready Contingency Plan
- --------------------------------------------------------------------------------------------------------------------
Mission-Critical C IP IP IP IP IP IP
Internal Items
- --------------------------------------------------------------------------------------------------------------------
Mission-Critical C IP IP IP IP IP TBI
Outside Entities
- --------------------------------------------------------------------------------------------------------------------
Legend: C = Complete IP = In Process TBI = To Be Initiated
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Year 2000 Plan Estimated Completion Dates
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Inventory Assessment Analysis Conversion Testing Y2K-Ready Contingency Plan
- --------------------------------------------------------------------------------------------------------------------
Mission-Critical 7/98 12/98 1/99 2/99 3/99 7/99 10/99
Internal Items
- --------------------------------------------------------------------------------------------------------------------
Mission-Critical 7/98 2/99 4/99 7/99 9/99 10/99 10/99
Outside Entities
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Costs to Address Year 2000 Issues
Preliminary estimates of the total Year 2000 costs, which will be
expensed as incurred, range from $2 million to $3 million. However, the
estimated costs of implementing the Plan do not take into account the costs, if
any, that might be incurred as a result of Year 2000 related failures that occur
despite the Partnership's implementation of the Plan. These projects, which
began in 1997, will continue through 1999. Although management believes that its
estimates are reasonable, there can be no assurance, for the reasons
22
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
stated in the "Summary" section, below, that the actual costs of implementing
the Plan will not differ materially from the estimated costs or that the
Partnership will not be materially adversely affected by Year 2000 issues.
Year 2000 Risk Factors
Certain of the Partnership's operations are regulated by governmental
authorities. The Partnership expects to satisfy these regulatory authorities'
requirements for achieving Year 2000 readiness. If the Partnership's reasonable
expectations in this regard are in error, and if a regulatory authority should
order the temporary cessation of the Partnership's operations in one or more of
these areas, the adverse effect on the Partnership could be material. Outside
Entities could face similar problems that materially adversely affect the
Partnership.
Between now and 2000 there will be increased competition for people
skilled in the technical and managerial skills necessary to deal with the Year
2000 problem. While the Partnership is taking substantial precautions to recruit
and retain sufficient people skilled in dealing with the Year 2000 problem, and
has hired consultants who bring additional skilled people to deal with the Year
2000 problem as it affects the Partnership, the Partnership could face shortages
of skilled personnel or other resources, such as Year 2000 ready computer chips,
and these shortages might delay or otherwise impair the Partnership's ability to
assure that its mission-critical systems are Year 2000 ready. Outside Entities
could face similar problems that materially adversely affect the Partnership.
The General Partner believes that the possible impact of the shortage of skilled
people is not, and will not be, unique to the Partnership.
The Partnership estimates that its mission-critical systems will be
Year 2000-ready substantially before January 1, 2000. However, there is no
assurance that the Plan will succeed in accomplishing its purpose or that
unforeseen circumstances will not arise during the implementation of the Plan
that would materially adversely affect the Partnership.
The Partnership is taking reasonable steps to identify, assess, and,
where appropriate, to replace devices that contain embedded chips. Despite these
reasonable efforts, the Partnership anticipates that it will not be able to find
and remediate all embedded chips in the Partnership's systems. Further, the
Partnership anticipates that Outside Entities on which the Partnership depends
also will not be able to find and remediate all embedded chips in their systems.
Some of the embedded chips that fail to operate or that produce anomalous
results may create system disruptions or failures. Some of these disruptions or
failures may spread from the systems in which they are located to other systems
in a cascade. These cascading failures may have adverse effects upon the
Partnership's ability to maintain safe operations, and may also have adverse
effects upon the Partnership's ability to serve its customers and otherwise to
fulfill certain contractual and other legal obligations. The embedded chip
problem is widely recognized as one of the more difficult aspects of the Year
2000 problem across industries and throughout the world. The possible adverse
impact of the embedded chip problem is not, and will not be, unique to the
Partnership.
The Partnership cannot assure that suppliers upon which it depends for
essential goods and services will convert and test their mission-critical
systems and processes in a timely manner. Failure of delay by all or some of
these entities, including the U.S. and state or local governments and foreign
governments, could create substantial disruptions having a material adverse
affect on the Partnership's business.
23
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
In a recent Securities and Exchange Commission release regarding Year
2000 disclosures, the Securities and Exchange Commission stated that public
companies must disclose the most reasonably likely worst case Year 2000
scenario. Analysis of the most reasonably likely worst case Year 2000 scenarios
the Partnership may face leads to contemplation of the following possibilities:
widespread failure of electrical, gas, and similar supplies by utilities serving
the Partnership; widespread disruption of the services of communications common
carriers; similar disruption to means and modes of transportation for the
Partnership and its employees, contractors, suppliers, and customers;
significant disruption to the Partnership's ability to gain access to, and
remain working in, office buildings and other facilities; the failure of
substantial numbers of the Partnership's mission-critical information (computer)
hardware and software systems, including both internal business systems and
systems (such as those with embedded chips) controlling operational facilities
such as electrical generation, transmission, and distribution systems and oil
facilities and pipelines; and the failure of Outside Systems, the effects of
which would have a cumulative material adverse impact on the Partnership's
mission-critical systems. Among other things, the Partnership could face
substantial claims by customers or loss of revenues due to service
interruptions, inability to fulfill contractual obligations, inability to
account for certain revenues or obligations or to bill customers accurately and
on a timely basis, and increased expenses associated with litigation,
stabilization of operations following mission-critical failures, and the
execution of contingency plans. The Partnership could also experience an
inability by customers, traders, and others to pay, on a timely basis or at all,
obligations owed to the Partnership. Under these circumstances, the adverse
effect on the Partnership, and the diminution of the Partnership's revenues,
would be material, although not quantifiable at this time. Further in this
scenario, the cumulative effect of these failures could have a substantial
adverse effect on the economy, domestically and internationally. The adverse
effect on the Partnership, and the diminution of the Partnership's revenues,
from a domestic or global recession or depression, also is likely to be
material, although not quantifiable at this time.
The Partnership will continue to monitor business conditions with the
aim of assessing and quantifying material adverse effects, if any, that result
or may result from the Year 2000 problem.
Contingency Plans
As part of the Plan, the Partnership is developing contingency plans
that will deal with two aspects of the Year 2000 problem: (1) that the
Partnership, despite its good-faith, reasonable efforts, may not have
satisfactorily remediated all its internal mission-critical systems; and (2)
that Outside Systems may not be Year 2000 ready, despite the Partnership's
good-faith, reasonable efforts to work with Outside Entities. The Partnership's
contingency plans are being designed to minimize the disruptions or other
adverse effects resulting from Year 2000 incompatibilities regarding these
mission-critical functions or systems, and to facilitate the early
identification and remediation of mission-critical Year 2000 problems that first
manifest themselves after January 1, 2000.
These contingency plans will contemplate an assessment of all its
mission-critical internal information technology systems and its internal
operational systems that use computer-based controls. This process has begun and
will continue as circumstances require. Further, the Partnership will in that
time frame assess any mission-critical disruptions due to Year 2000-related
failures that are external to the Partnership. These assessments will be
conducted for all of the Partnership's operations.
These contingency plans include, where appropriate, the creation of
teams that will be standing by on the eve of the new millennium, prepared to
respond rapidly and otherwise as necessary to mission-critical
24
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
Year 2000-related problems as soon as they become known. The composition of
teams that are assigned to deal with Year 2000 problems will vary according to
the nature, mission-criticality, and location of the problem.
Summary
The Partnership has a Plan to deal with the Year 2000 challenge and
believes that it will be able to achieve substantial Year 2000 readiness with
respect to the mission critical systems that it controls. From a forward-looking
perspective, the extent and magnitude of the Year 2000 problem as it will affect
the Partnership, both before and for some period after January 1, 2000, are
difficult to predict or quantify for a number of reasons. Among these are: the
difficulty of locating "embedded" chips that may be in a great variety of
mission-critical hardware used for process or flow control, environmental,
transportation, access, communications, and other systems; the difficulty of
inventorying, assessing, remediating, verifying and testing Outside Systems; the
difficulty in locating all mission-critical software (computer code) internal to
the Partnership that is not Year 2000 compatible; and the unavailability of
certain necessary internal or external resources, including but not limited to
trained technicians and other personnel to perform adequate remediation,
verification, and testing of mission-critical Partnership systems or Outside
Systems. There can be no assurance, for example, that all of the Partnership's
systems and all Outside Systems will be adequately remediated so that they are
Year 2000 ready by January 1, 2000, or by some earlier date, so as not to create
a material disruption to the Partnership's business. If, despite the
Partnership's reasonable efforts under its Year 2000 Plan, there are
mission-critical Year 2000-related failures that create substantial disruptions
to the Partnership's business, the adverse impact on the Partnership's business
could be material. Year 2000 costs are difficult to estimate accurately because
of unanticipated vendor delays, technical difficulties, the impact of tests of
Outside Systems, and similar events. Moreover, the estimated costs of
implementing the Plan do not take into account the costs, if any, that might be
incurred as a result of Year 2000-related failures that occur despite the
Partnership's implementation of the Plan.
OTHER MATTERS
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. The statement requires companies to
capitalize certain costs that are incurred in developing or designing computer
software. 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.
In June 1998, the Financial Accounting Standards Board issued SFAS No.133,
"Accounting for Derivative Instruments and Hedging Activities". The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The
25
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999. The standard cannot be applied
retroactively but early adoption is permitted. EOTT has not yet determined the
impacts of adopting SFAS No. 133; however, this standard could increase
volatility in earnings and partners' capital, through other comprehensive
income.
OUTLOOK
Gross margin related to EOTT's core North American crude oil business has
improved due to renegotiations of uneconomic lease contracts during 1997 and
improved grade and basis differentials in 1998. 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. 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, (of which
$7.1 million is still available to be advanced).
The asset acquisitions from Koch are a major step toward consolidation
of the industry and EOTT achieving a leadership position in the North American
crude oil marketing and transportation industry. The new assets, which
complement our core crude oil business, should result in substantial economies
of scale and should strengthen our ability to serve customers throughout North
America. In addition, these acquisitions should enhance EOTT's ability to fund
common unit distributions from cash flows. If requisite Unitholder approvals are
obtained, Enron has agreed to increase its cash distribution support to $29
million and extend it through the fourth quarter of 2001 which will further
assure Common Unitholders of continued reliable distributions.
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.
26
<PAGE> 27
PART II. OTHER INFORMATION
EOTT ENERGY PARTNERS, L.P.
ITEM 1. Legal Proceedings
See Part I. Item 1, Note 9 to the Condensed Consolidated Financial
Statements entitled "Litigation and Other Contingencies," which is
incorporated herein by reference.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 10.22 Support Agreement dated September 21, 1998 between
EOTT Energy Partners, L.P., EOTT Energy Operating Limited
Partnership and Enron Corp.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
None
27
<PAGE> 28
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: November 13, 1998 By: EOTT ENERGY CORP. as
General Partner
/s/ LORI L. MADDOX
----------------------------------
Lori L. Maddox
Controller
(Principal Accounting Officer)
28
<PAGE> 29
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- --------------- -----------------------------------------------------
Exhibit 10.22 Support Agreement dated September 21, 1998 between EOTT
Energy Partners, L.P., EOTT Energy Operating Limited
Partnership and Enron Corp.
Exhibit 27 Financial Data Schedule
29
<PAGE> 1
EXHIBIT 10.22
SUPPORT AGREEMENT
This Support Agreement (this "Agreement") dated as of September 21,
1998 is by and among Enron Corp., an Oregon corporation ("Enron"), EOTT Energy
Partners, L.P., a Delaware limited partnership (the "Partnership"), and EOTT
Energy Operating Limited Partnership, a Delaware limited partnership (the
"Operating Partnership"). Any capitalized terms used but not defined herein
shall have the meaning given to such term in the Ancillary Agreement dated as of
March 25, 1994, as amended, among each of the parties hereto (the "Ancillary
Agreement") or in the Amended and Restated Agreement of Limited Partnership of
EOTT Energy Partners, L.P. dated as of March 25, 1994, as amended (the
"Partnership Agreement"). The term "Closing" shall mean the Closing as defined
in the Purchase and Sale Agreement (the "Purchase Agreement") dated the date
hereof among the Partnership, the Operating Partnership, Koch Pipeline Company,
L.P. and Koch Oil Company, a division of Koch Industries, Inc.
RECITALS
WHEREAS, simultaneously with the execution of this Agreement, the
Partnership and the Operating Partnership have entered into the Purchase
Agreement with Koch Pipeline Company, L.P. and Koch Oil Company, a division of
Koch Industries, Inc. (collectively, "Koch") providing for the purchase by the
Partnership or its designee of certain assets of Koch in exchange for cash and
Common Units and Subordinated Units of the Partnership; and
WHEREAS, in order to effect the Closing, the Partnership or its
designee must obtain funds for the cash portion of the purchase price; and in
order to own and operate the assets to be acquired pursuant to the Purchase
Agreement, the Partnership or its designee must arrange for a new credit
facility that provides for more credit support than is available under the
existing credit facility with Enron; and
WHEREAS, pursuant to the Ancillary Agreement, Enron undertook, among
other things, to purchase from the Partnership up to $29 million in APIs at any
one time Outstanding in order to support distributions of Available Cash to
holders of Common Units through the end of the first quarter of 1999; and
pursuant to such undertaking Enron has purchased approximately $21.9 million in
APIs, all of which remain Outstanding; and
WHEREAS, the parties hereto believe that an increase and extension of
Enron's distribution support commitment will have a positive impact on the value
of the Common Units and Subordinated Units to be issued to Koch at the Closing;
and
WHEREAS, this Agreement is a material inducement to Koch to enter
into the Purchase Agreement; and
WHEREAS, in consideration of the agreements of the Partnership herein,
Enron is willing (a) to provide financing to enable the Partnership or its
designee to effect the Closing; (b) to enter into a new credit facility that
provides for increased credit support for the Partnership
1
<PAGE> 2
or its designee; and (c) if certain proposals are approved by the requisite vote
of Unitholders at a special meeting of Unitholder (the "Special Meeting") to be
held following the Closing, to extend its distribution support through the
quarter ending December 31, 2001 and to increase the unused portion of such
commitment to $29 million;
NOW THEREFORE, for and in consideration of the premises and mutual
covenants and agreements herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. BRIDGE LOAN, SENIOR LOAN AND CREDIT FACILITY.
(a) Enron and the Operating Partnership hereby agree that as soon as
practical they will enter into a loan agreement providing for a $100,000,000
bridge loan on the terms and conditions set forth in Exhibit A to this Agreement
and that they will effect the funding of such bridge loan simultaneously with
the Closing.
(b) Enron and the Operating Partnership hereby agree that as soon as
practical they will enter into a loan agreement providing for a $175,000,000
senior loan on the terms and conditions set forth in Exhibit B to this Agreement
and that they will effect the funding of such senior loan simultaneously with
the Closing.
(c) Enron and the Operating Partnership hereby agree that as soon as
practical they will enter into a $1,000,000,000 revolving credit facility on the
terms and conditions set forth in Exhibit C to this Agreement and that such
credit facility shall become effective simultaneously with the Closing.
2. ISSUANCE OF ADDITIONAL SPECIAL UNITS AT THE CLOSING. Enron hereby
agrees to cancel $21,927,641 in APIs now outstanding upon the earlier to occur
of (i) the approval of the Proposals (as defined in this Agreement) or (ii) May
17, 1999. Simultaneously with the Closing, and in consideration of Enron's
binding commitment to cancel $21,927,641 in APIs now outstanding, the
Partnership will issue to Enron 1,150,000 Special Units, having rights and
privileges identical to the existing Special Units.
3. THE SPECIAL MEETING. The Partnership agrees that, as soon as
practical following the Closing, it will call the Special Meeting for the
purpose of considering and voting upon the following proposals (collectively,
the "Proposals"):
(a) A proposal (the "Common Units Proposal") that, if approved by the
requisite vote of the holders of at least 2/3 of the outstanding Common Units
and Special Units, voting at the Special Meeting together as a single class,
will permit the Partnership to issue up to 10,000,000 additional Common Units
for any Partnership purpose, including issuance in a public offering in order to
repay indebtedness and for future acquisitions; and
2
<PAGE> 3
(b) A proposal (the "Listing Proposal") that, if approved by the
requisite vote of the holders of a majority of the outstanding Common Units,
will permit the listing on the New York Stock Exchange of Common Units to be
issued by the Partnership in exchange for the Special Units; in accordance with
the terms of the Special Units, the Listing Proposal, if so approved, will
result in a change in the terms of the Special Units to provide that each
Special Unit is convertible into one Common Unit at the option of the holder of
such Special Units.
4. EVENTS OCCURRING UPON APPROVAL OF PROPOSALS. If each of the
Proposals is approved by the requisite vote of Unitholders entitled to vote
thereon, then immediately following the receipt of such approvals:
(a) Enron will convert all Special Units into Common Units;
(b) If additional APIs have been issued between the date hereof and the
date of such vote, the Partnership will issue to Enron additional Common Units
in exchange for such additional APIs, on the basis of one Common Unit for each
$19.00 of additional APIs, so that immediately following such issuance there
will be no APIs outstanding; and
(c) The Ancillary Agreement will be amended (without any further action
on the part of the parties thereto) as follows:
The definition of the term "Support Period" is hereby amended in
its entirety to read as follows:
"SUPPORT PERIOD" shall mean the period commencing upon the Closing Date
and ending upon the earliest to occur of (a) the Liquidation Date, (b)
December 31, 2001, and (c) the removal of EOTT (or other Person that is
an affiliate of Enron (ignoring for this purpose the proviso in the
definition of "Affiliate")) as General Partner of the MLP pursuant to
Section 13.2 of the MLP Agreement under circumstances where Cause does
not exist.
5. MISCELLANEOUS.
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
(b) This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their successors,
legal representatives and assigns.
(c) The obligations of the parties hereunder are
conditioned upon the satisfaction (or waiver
acceptable to the parties hereto) of the conditions
to the obligations of Buyer (as such term is defined
in the Purchase Agreement) to effect the Closing and
the occurrence of the Closing.
3
<PAGE> 4
EXECUTED by each of the parties hereto as of the date written above.
ENRON CORP.
By: /s/ Louis E. Potempa
------------------------------------------
Name: Louis E. Potempa
------------------------------------------
Title: Vice President, Corporate Development
------------------------------------------
EOTT ENERGY PARTNERS, L.P.
By: EOTT Energy Corp., General Partner
By: /s/ Michael D. Burke
------------------------------------------
Name: Michael D. Burke
------------------------------------------
Title: Chief Executive Officer and President
------------------------------------------
EOTT ENERGY OPERATING LIMITED PARTNERSHIP
By: EOTT Energy Corp., General Partner
By: /s/ Michael D. Burke
------------------------------------------
Name: Michael D. Burke
------------------------------------------
Title: Chief Executive Officer and President
------------------------------------------
4
<PAGE> 5
EXHIBIT A
BRIDGE LOAN TERM SHEET
BORROWER: EOTT Energy Operating Limited Partnership ("EOTT").
LENDER: Enron Capital Management ("ECM"), a division of and
on behalf of Enron Corp., ("Enron") an Oregon
corporation.
FACILITY: A $100,000,000 term loan.
USE OF FUNDS: To finance the acquisition of certain assets from
Koch Industries, Inc.
LIBOR: Interest determined for periods ("Interest Periods")
of one, two, three or six months (as selected by the
Borrower) at an annual rate equal to London Interbank
Offered Rate ("LIBOR") for corresponding deposits of
U.S. dollars, plus appropriate margin. LIBOR to be
determined two business days prior to first day of
each Interest Period as the rate for the
corresponding maturity on Telerate page 3750..
Interest shall be payable at the end of each Interest
Period or quarterly, whichever is earlier, and
calculated on the basis of actual number of days
elapsed in a year of 360 days.
BASE RATE: Defined as the higher of (i) Federal Funds Rate, as
published by the Federal Reserve Bank of New York one
business day in arrears, plus 1/2 of 1%, or (ii)
Prime Commercial Lending Rate published from time to
time in the Wall Street Journal, calculated on the
basis of actual number of days elapsed in a year of
365/366 days.
SPREAD OVER LIBOR: Initially, 400 basis points. At the end of each
three month period, the spread will increase by 25
basis points.
DEFAULT INTEREST RATE: Any amount of the principal and interest which is not
paid when due (whether at stated maturity, by
acceleration or otherwise) shall bear interest, from
the date on which such amount is due until such
amount is paid in full, at a rate per anum equal to
the Base Rate plus [200] basis points.
INTEREST PAYMENT DATES: Quarterly in arrears.
MATURITY DATE: December 31, 1999.
REPAYMENT: All outstanding principal under the Facility is due
on the Maturity Date.
LOAN CONVERSION: The Lender has the option at maturity to convert any
funded amount under the Facility, including any
accrued interest, into EOTT common units at the
Conversion Price. Upon Conversion, the Lender will
have demand registration rights.
CONVERSION PRICE: 95% of the then publicly traded price per EOTT common
unit.
COSTS AND TAXATION: All payments will be made free and clear of any
taxes. If necessary, the Borrower will reimburse the
Lender for any taxes paid.
RANKING: The Facility shall rank parri passu with all other
senior indebtedness of the Borrower.
COLLATERAL: Unsecured.
5
<PAGE> 6
EXHIBIT B
SENIOR LOAN TERM SHEET
BORROWER: EOTT Energy Operating Limited Partnership ("EOTT").
LENDER: Enron Capital Management ("ECM"), a division of and
on behalf of Enron Corp., ("Enron") an Oregon
corporation.
FACILITY: Up to $175,000,000 (single draw) term loan.
USE OF FUNDS: To finance the acquisition of certain assets
from Koch Industries, Inc.
LIBOR: Interest determined for periods ("Interest Periods")
of one, two, three or six months (as selected by the
Borrower) at an annual rate equal to London Interbank
Offered Rate ("LIBOR") for corresponding deposits of
U.S. dollars, plus appropriate margin. LIBOR to be
determined two business days prior to first day of
each Interest Period as the rate for the
corresponding maturity on Telerate page 3750..
Interest shall be payable at the end of each Interest
Period or quarterly, whichever is earlier, and
calculated on the basis of actual number of days
elapsed in a year of 360 days.
BASE RATE: Defined as the higher of (i) Federal Funds Rate, as
published by the Federal Reserve Bank of New York one
business day in arrears, plus 1/2 of 1%, or (ii)
Prime Commercial Lending Rate published from time to
time in the Wall Street Journal, calculated on the
basis of actual number of days elapsed in a year of
365/366 days.
SPREAD OVER LIBOR: 300 basis points.
DEFAULT INTEREST RATE: Any amount of the principal and interest which is not
paid when due (whether at stated maturity, by
acceleration or otherwise) shall bear interest, from
the date on which such amount is due until such
amount is paid in full, at a rate per anum equal to
the Base Rate plus 200 basis points.
INTEREST PAYMENT DATES: Quarterly in arrears.
MATURITY DATE: December 31, 1999.
REPAYMENT: All outstanding principal under the Facility is due
on the Maturity Date.
COSTS AND TAXATION: All payments will be made free and clear of any
taxes. If necessary, the Borrower will reimburse the
Lender for any taxes paid.
RANKING: The Facility shall rank parri passu with all other
senior indebtedness of the Borrower.
COLLATERAL: A 1st lien on all of the Borrower's assets.
6
<PAGE> 7
EXHIBIT C
TRADING FACILITIES TERM SHEET
BORROWER: EOTT Energy Operating Limited Partnership ("EOTT").
LENDER: Enron Capital Management ("ECM"), a division of and
on behalf of Enron Corp., ("Enron") an Oregon
corporation.
FACILITY: A $1.0 billion three-year revolving borrowing base
credit facility.
<TABLE>
<CAPTION>
FACILITY SUB-LIMITS: Credit Instrument(s) Amount*
-------------------- --------
<S> <C> <C>
Letters of Credit and Enron Corp. Guarantees $900 million
Advances $100 million
*Total outstandings at any time not to exceed $1.0 billion.
</TABLE>
USE OF FUNDS: Letters of Credit and Guarantees are to facilitate
the purchase of crude oil for resale, and advances
are for working capital requirements related to the
purchase and resale of crude oil.
PRICING: Advances: LIBOR plus 250 basis points p.a.
payable monthly based on the
average daily balance.
Letters of Credit: Reimbursement of Lender's actual
cost charged by the issuing
Financial institution.
Guarantees: No charge for the first two
years, thereafter a 50 basis
points per annum charge on the
amount in excess of [$330
multiplied by the 20-day average
price of WTI crude divided by
$15].
LIBOR: Interest determined for periods ("Interest Periods")
of one, two, three or six months (as selected by the
Borrower) at an annual rate equal to London Interbank
Offered Rate ("LIBOR") for corresponding deposits of
U.S. dollars, plus appropriate margin. LIBOR to be
determined two business days prior to first day of
each Interest Period as the rate for the
corresponding maturity on Telerate page 3750.
Interest shall be payable at the end of each Interest
Period or quarterly, whichever is earlier, and
calculated on the basis of actual number of days
elapsed in a year of 360 days.
BASE RATE: Defined as the higher of (i) Federal Funds Rate, as
published by the Federal Reserve Bank of New York one
business day in arrears, plus 1/2 of 1%, or (ii)
Prime Commercial Lending Rate published from time to
time in the Wall Street Journal, calculated on the
basis of actual number of days elapsed in a year of
365/366 days.
DEFAULT INTEREST RATE: Any amount of the principal and interest which is not
paid when due (whether at stated maturity, by
acceleration or otherwise) shall bear interest, from
the date on which such amount is due until such
amount is paid in full, at a rate per anum equal to
the Base Rate plus 200 basis points.
EXPIRATION DATE: Three (3) years.
REPAYMENT: All outstanding Loan Amounts under any Credit
Instrument are due on expiration date according to
the applicable Maximum Tenor.
7
<PAGE> 8
AVAILABILITY: i) The availability of all credit extensions
will be subject to the following borrowing
base calculations (refer to ii below for
definition):
a) 100% of pledged cash and Marketable
Securities held by bank(s);
b) 100% of the Enron Corp. Subordinated
Debt commitment
c) 90% of pre-approved Qualified Accounts
receivables rated at least A3/A- or
non-approved receivables backed by
Letters of Credit issued by banks
acceptable to the Lender;
d) 87% of pre-approved Qualified Accounts
rated at least BBB;
e) 85% of pre-approved Qualified Accounts
not included in b. or c. above;
f) 80% of Eligible Margin Deposits (net
equity accounts with approved brokers
subject to a satisfactory three party
agreement;
g) 80% of inventory calculated on a Marked
to Market basis;
h) 80% of the cost of crude oil contracted
for but undelivered and covered by
Letters of Credit issued under this
facility;
i) 80% of qualified net exchange
receivables; and
j) 85%/82%/80% of product delivered under
sales contracts but not billed, based
upon value of sales contracts under b.,
c. and d. above, respectively (accrued
accounts receivable).
Less 100% of the amount of any unpaid accounts
payable due to interest owners in Texas, New
Mexico and other states where interest owners
maintain an automatic priority security
interest in oil sold and the proceeds of
such sale (this requirement shall be waived
during the period in which Enron Corp. is the
Lender.)
ii) EOTT will provide monthly Borrowing Base
certificates directly to the Lender within
ten (10) days of the reporting date that set
forth a computation of the required
collateral base and detailed back-up
information that includes: (a) a schedule of
qualified accounts and accrued accounts
receivable that show the aging of such
accounts; (b) a schedule of netted qualified
exchange balances; (c) a schedule of
qualified inventory; and (d) a schedule of
all contras applied against (a), (b) and (c);
Qualified Accounts and accrued accounts
receivable are limited to those pre-approved
by the Lender if over $250,000, which have
been reduced by the amount of any right of
reduction, counterclaim, offset or adjustment
by account debtors; accounts which are not
more than 30 days past due; and accounts
which are subject to a valid and duly
perfected first lien granted to Lender under
a Security Agreement;
Qualified exchange balances include the
amount of product valued at an independent
posting, to be delivered to EOTT pursuant to
valid and binding exchange contracts by
exchangers pre-approved by the Lender which
are subject to no other liens, encumbrances,
charges or claims; and
iii) Offshore Advances are subject to
availability, prepayment penalties,
reimbursement for reserves and minimum
advance amounts.
8
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,626
<SECURITIES> 0
<RECEIVABLES> 405,215
<ALLOWANCES> 1,737
<INVENTORY> 157,122
<CURRENT-ASSETS> 580,102
<PP&E> 253,327
<DEPRECIATION> 108,373
<TOTAL-ASSETS> 730,617
<CURRENT-LIABILITIES> 668,507
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 40,182<F1>
<TOTAL-LIABILITY-AND-EQUITY> 730,617
<SALES> 3,866,931
<TOTAL-REVENUES> 3,866,931
<CGS> 3,776,492
<TOTAL-COSTS> 3,864,978
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,370
<INCOME-PRETAX> (4,803)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,803)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,803)
<EPS-PRIMARY> 0.00<F2>
<EPS-DILUTED> (0.25)
<FN>
<F1>"Other SE" represents consolidated Partners' Capital.
<F2>"EPS Primary" represents Basic Common EPS of $(0.18) and Basic Subordinated
EPS of $(0.36).
</FN>
</TABLE>
