<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
[ ] 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)
<TABLE>
<S> <C>
Delaware 76-0424520
---------------------------------------- ----------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1330 Post Oak Boulevard
Suite 2700
Houston, Texas 77056
---------------------------------------- ----------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(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
ITEM 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended September 30, 1999 and 1998, and Nine Months
Ended September 30, 1999 and 1998..................................................................3
Condensed Consolidated Balance Sheets (Unaudited) -
September 30, 1999 and December 31, 1998...........................................................4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended September 30, 1999 and 1998......................................................5
Condensed Consolidated Statement of Partners' Capital (Unaudited) -
Nine Months Ended September 30, 1999...............................................................6
Notes to Condensed Consolidated Financial Statements..................................................7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................................................17
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.....................................31
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..............................................................................32
ITEM 6. Exhibits and Reports on Form 8-K...............................................................32
</TABLE>
2
<PAGE> 3
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,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue ........................................ $ 2,315,464 $ 1,295,652 $ 6,007,924 $ 3,866,931
Cost of Sales .................................. 2,258,404 1,261,916 5,842,371 3,776,492
------------ ------------ ------------ ------------
Gross Margin ................................... 57,060 33,736 165,553 90,439
Expenses
Operating expenses .......................... 40,700 27,304 115,515 74,129
Depreciation and amortization ............... 8,250 5,279 24,740 14,357
------------ ------------ ------------ ------------
Total ..................................... 48,950 32,583 140,255 88,486
------------ ------------ ------------ ------------
Operating Income ............................... 8,110 1,153 25,298 1,953
Other Income (Expense)
Interest income ............................. 120 185 440 527
Interest and related charges ................ (7,650) (2,547) (21,470) (6,370)
Other, net .................................. (30) (597) 998 (913)
------------ ------------ ------------ ------------
Total ..................................... (7,560) (2,959) (20,032) (6,756)
------------ ------------ ------------ ------------
Net Income (Loss) Before Cumulative
Effect of Accounting Change ................. 550 (1,806) 5,266 (4,803)
Cumulative Effect of Accounting
Change (Note 9) ............................. -- -- 1,747 --
------------ ------------ ------------ ------------
Net Income (Loss) .............................. $ 550 $ (1,806) $ 7,013 $ (4,803)
============ ============ ============ ============
Basic Net Income (Loss) Per Unit (Note 4)
Common ...................................... $ 0.02 $ (0.03) $ 0.26 $ (0.18)
============ ============ ============ ============
Subordinated ................................ $ 0.02 $ (0.20) $ 0.33 $ (0.36)
============ ============ ============ ============
Diluted Net Income (Loss) Per Unit (Note 4) .... $ 0.02 $ (0.09) $ 0.29 $ (0.25)
============ ============ ============ ============
Average Units Outstanding
for Diluted Computation ..................... 24,052 18,830 24,002 18,830
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE> 4
EOTT ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ................................ $ 2,025 $ 3,033
Trade and other receivables, net of allowance for doubtful
accounts of $1,732 and $1,860 respectively ............ 856,778 403,335
Inventories .............................................. 146,615 137,545
Other .................................................... 47,613 30,328
------------ ------------
Total current assets .................................. 1,053,031 574,241
------------ ------------
Property, Plant & Equipment, at cost ......................... 549,280 497,807
Less: Accumulated depreciation ........................... 134,532 112,568
------------ ------------
Net property, plant & equipment ....................... 414,748 385,239
------------ ------------
Other Assets, net of amortization ............................ 6,809 6,340
------------ ------------
Total Assets ................................................. $ 1,474,588 $ 965,820
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Trade accounts payable ................................... $ 961,828 $ 524,822
Accrued taxes payable .................................... 10,254 5,192
Short-term borrowings - affiliate ........................ 84,200 28,297
Bridge loan - affiliate .................................. -- 42,000
Term loan - affiliate .................................... -- 175,000
Repurchase agreements .................................... 89,800 83,016
Other .................................................... 13,030 9,983
------------ ------------
Total current liabilities ............................. 1,159,112 868,310
------------ ------------
Long-Term Liabilities
Term loan - affiliate .................................... 175,000 --
Other .................................................... 1,377 --
------------ ------------
Total long-term liabilities ........................... 176,377 --
------------ ------------
Commitments and Contingencies (Note 8)
Additional Partnership Interests (Note 6) .................... 2,547 21,928
------------ ------------
Partners' Capital
Common Unitholders ....................................... 87,276 14,472
Special Unitholders ...................................... -- 21,092
Subordinated Unitholders ................................. 41,256 38,315
General Partner .......................................... 8,020 1,703
------------ ------------
Total Partners' Capital ............................... 136,552 75,582
------------ ------------
Total Liabilities and Partners' Capital ...................... $ 1,474,588 $ 965,820
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE> 5
EOTT ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities -
Net income (loss) ........................................... $ 7,013 $ (4,803)
Depreciation ................................................ 23,619 12,834
Amortization of intangible assets ........................... 1,121 1,523
(Gains) losses on disposal of assets ........................ (548) 191
Changes in components of working capital -
Receivables .............................................. (453,443) 58,768
Inventories .............................................. (9,070) 18,047
Other current assets ..................................... (17,285) (3,536)
Trade accounts payable ................................... 437,006 (90,444)
Accrued taxes payable .................................... 5,062 5,228
Other current liabilities ................................ (672) 2,560
Other assets and liabilities ................................ 38 1,176
------------ ------------
Net Cash Provided By (Used In) Operating Activities ............. (7,159) 1,544
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment ......... 549 664
Acquisitions ................................................ (33,000) (28,500)
Additions to property, plant and equipment .................. (16,380) (5,946)
Other, net .................................................. -- (28)
------------ ------------
Net Cash Used In Investing Activities ........................... (48,831) (33,810)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term borrowings - affiliate .... 55,903 (44,900)
Decrease in bridge loan - affiliate ......................... (42,000) --
Increase in repurchase agreements ........................... 6,784 88,493
Issuance of Common Units .................................... 52,920 --
Contribution from General Partner ........................... 535 --
Distributions to Unitholders ................................ (21,426) (17,108)
Issuance of Additional Partnership Interests ................ 2,547 9,153
Other, net .................................................. (281) (483)
------------ ------------
Net Cash Provided By Financing Activities ....................... 54,982 35,155
------------ ------------
Increase (Decrease) In Cash and Cash Equivalents ................ (1,008) 2,889
Cash and Cash Equivalents, Beginning of Period .................. 3,033 3,737
------------ ------------
Cash and Cash Equivalents, End of Period ........................ $ 2,025 $ 6,626
============ ============
Supplemental Cash Flow Information:
Interest paid ............................................... $ 20,891 $ 6,555
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE> 6
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>
Partners' Capital at December 31, 1998 .............. $ 14,472 $ 21,092 $ 38,315 $ 1,703
Net income .......................................... 3,294 618 2,941 160
Cash distributions .................................. (19,609) (1,416) -- (401)
Issuance of Common Units ............................ 52,920 -- -- 535
Contribution of Additional Partnership Interests .... 15,905 -- -- 6,023
Conversion of Special Units ......................... 20,294 (20,294) -- --
------------ ------------ ------------ ------------
Partners' Capital at September 30, 1999 ............. $ 87,276 $ -- $ 41,256 $ 8,020
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
<PAGE> 7
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, 1999 and December 31, 1998, the results of operations for the
three and nine months ended September 30, 1999 and 1998, cash flows for the nine
months ended September 30, 1999 and 1998 and changes in partners' capital for
the nine months ended September 30, 1999. For the three and nine months ended
September 30, 1999 and 1998, traditional net income (loss) and comprehensive
income (loss) are the same.
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 25% subordinated limited partner interest. Enron, through its
ownership of EOTT Common Units, directly holds an approximate 12% interest in
the Partnership.
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, 1998 filed with the SEC.
Certain reclassifications have been made to prior period amounts to conform
with the current period presentation.
2. 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 purchase price was
approximately $28.5 million and was financed with short-term borrowings from
Enron.
On December 1, 1998, the Partnership acquired certain additional crude oil
gathering and transportation assets (the "Assets"), in key oil producing regions
from Koch. The total purchase price of the Assets was $235.6 million, which
included consideration of $184.5 million in cash, 2,000,000 Common Units,
2,000,000 Subordinated Units and $11.4 million in transaction costs. EOTT
financed the majority of the purchase price through short-term borrowings from
Enron. See additional discussion regarding Enron financing in Note 3.
On May 1, 1999, EOTT acquired crude oil transportation and storage assets
in West Texas and New Mexico from Texas-New Mexico Pipeline Company which
included approximately 1,800 miles of common carrier crude
7
<PAGE> 8
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
oil pipelines. EOTT paid $33 million in cash and financed the acquisition using
short-term borrowings from Enron.
3. CREDIT RESOURCES AND LIQUIDITY
In 1995, Enron agreed to provide credit support to the Partnership in the
form of guarantees, letters of credit, loans and letters of indemnity. The total
amount of the credit support was $600 million, as amended December 19, 1996, had
a maturity of March 31, 1999 and was replaced with a new facility on December 1,
1998 as discussed below. As amended, the agreement contained sublimits of $100
million for working capital loans and $200 million for letters of credit. Letter
of credit fees were based on actual charges by the banks, which ranged from .20%
- - .375% per annum. Interest on outstanding loans was charged at the London
Interbank Offering Rate ("LIBOR") plus 25 basis points per annum. At December
31, 1997, EOTT had a note payable of $39.3 million with Enron under a financing
arrangement for acquisitions and other capital projects. This financing was
provided at a rate of LIBOR plus 30 basis points per annum. The maturity date of
the note was March 31, 1999, and the note was redeemed and reissued under the
term loan discussed below.
On December 1, 1998, Enron increased its existing credit facility with the
Partnership to provide additional credit support in the form of guarantees,
letters of credit and working capital loans through December 31, 2001. The total
amount of the Enron facility is $1.0 billion, and it contains sublimits of $100
million for working capital loans and $900 million for guarantees and 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
LIBOR plus 250 basis points 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
the Partnership's ability to operate its ongoing business.
At September 30, 1999 and December 31, 1998, EOTT had a term loan of $175
million outstanding with Enron under a financing arrangement to fund a portion
of the cash consideration paid to Koch for the assets purchased in 1998 and to
refinance indebtedness incurred in prior acquisitions. The term loan had a
scheduled maturity of December 31, 1999. The interest rate on the term loan was
LIBOR plus 300 basis points. As discussed further below, EOTT issued $235
million of 11% senior notes on October 1, 1999 and as a result, the term loan
was reclassed to long-term liabilities at September 30, 1999.
The Enron facility and term loan are 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 and term loan are 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.
In addition, at December 31, 1998, EOTT had $42 million of debt outstanding
with Enron under a $100 million bridge loan to finance a portion of the cash
consideration for the acquisition of assets from Koch. The interest rate on the
bridge loan was initially LIBOR plus 400 basis points. At the end of each
three-month period, the spread on the bridge loan increased by 25 basis points.
The bridge loan was unsecured, and its maturity date was December 31, 1999.
On September 29, 1999, EOTT issued 3,500,000 Common Units to the public,
with net proceeds to EOTT of $52.9 million. On October 1, 1999, EOTT issued to
the public $235 million of 11% senior notes. The senior notes are due October 1,
2009, and interest is paid semiannually. The senior notes are guaranteed by all
of EOTT's operating limited partnerships. On or after October 1, 2004, EOTT may
redeem the notes, and prior to October 1, 2002, EOTT may redeem up to 35% of the
notes with proceeds of public or private sales of equity at
8
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
specified redemption prices. The net proceeds from the issuance of the notes and
the issuance of the Common Units were used to repay the $175 million term loan
from Enron, the $42 million bridge loan from Enron and $57.3 million of
short-term borrowings outstanding under the working capital facility from Enron.
The General Partner believes that the Enron facility and commodity
repurchase agreements will be sufficient to support the Partnership's crude oil
purchasing activities and working capital and liquidity 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 other 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 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.
In addition, the Partnership Agreement authorizes EOTT to cause the
Partnership to issue additional limited partner interests, the proceeds from
which could be used to provide additional funds for acquisitions or other
Partnership needs.
At December 31, 1998, EOTT had outstanding forward commodity repurchase
agreements of approximately $83.0 million. Pursuant to the agreements, which had
terms of thirty days, EOTT repurchased the crude oil inventory on January 20,
1999 for approximately $83.4 million. At September 30, 1999, EOTT had
outstanding forward commodity repurchase agreements of approximately $89.8
million. Pursuant to the agreements, which had terms of thirty days, EOTT
repurchased the crude oil inventory on October 20, 1999 for approximately $90.2
million.
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, forms of which have been filed as exhibits to
the Annual Report on Form 10-K. Distributions of Available Cash to the
Subordinated Unitholders are subject to the prior rights of the Common
Unitholders to receive the Minimum Quarterly Distribution ("MQD") for each
quarter during the Subordination Period, and to receive any arrearages in the
distribution of the MQD on the Common Units for prior quarters during the
Subordination Period.
MQD is $0.475 per Unit ($1.90 annualized). Enron has committed to provide
total cash distribution support in exchange for Additional Partnership Interests
("APIs") in an amount necessary to pay MQDs, with respect to quarters ending on
or before December 31, 2001, in an amount up to an aggregate of $29 million
($26.5 million of which remains available).
9
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. EARNINGS PER UNIT
Net income (loss) shown in the tables below excludes the approximate two
percent interest of the General Partner. Earnings (loss) per unit are calculated
as follows (in millions, except per unit amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
1999 1998
---------------------------------- ----------------------------------
Net Wtd. Net Wtd.
Income Average Per Income Average Per
(Loss) Units Unit (Loss) Units Unit
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic (1)
Common......... $ 347 15,052 $ 0.02 $ (359) 11,830 $ (0.03)
Subordinated... $ 192 9,000 $ 0.02 $ (1,373) 7,000 $ (0.20)
Diluted (2)...... $ 539 24,052 $ 0.02 $ (1,732) 18,830 $ (0.09)
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
1999 1998
---------------------------------- ----------------------------------
Net Wtd. Net Wtd.
Income Average Per Income Average Per
(Loss) Units Unit (Loss) Units Unit
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic (1)
Common......... $ 3,912 15,002 $ 0.26 $ (2,180) 11,830 $ (0.18)
Subordinated... $ 2,941 9,000 $ 0.33 $ (2,489) 7,000 $ (0.36)
Diluted (2)...... $ 6,853 24,002 $ 0.29 $ (4,669) 18,830 $ (0.25)
</TABLE>
(1) Net income (loss), excluding the two percent General Partner
interest, has been apportioned to each class of Unitholder based on
the ownership of total Units outstanding which is also reflected on
the Statement of Partners' Capital, and Special Units are considered
Common Units during the periods in which they were outstanding. Due
to a negative capital account balance for the Common Unitholders
during the second and third quarters of 1998, the loss allocated to
the Common Unitholders attributable to these periods was reallocated
to the remaining Unitholders based on their ownership percentage.
The allocated loss was fully recouped by the Unitholders allocated
the additional losses in the first quarter of 1999.
(2) The diluted income (loss) per unit calculation assumes the
conversion of Subordinated Units into Common Units.
As previously discussed in Note 3, EOTT issued 3,500,000 Common Units to
the public on September 29, 1999.
10
<PAGE> 11
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Per unit information related to the net income before cumulative effect of
accounting change and cumulative effect of the change in accounting principle
for the nine months ended September 30, 1999 is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------------
Basic
-------------------------------
Common Subordinated Diluted
------------- ------------- -------------
<S> <C> <C> <C>
Net Income Before Cumulative Effect
of Accounting Change............................ $ 0.19 $ 0.26 $ 0.22
Cumulative Effect of Accounting Change............. 0.07 0.07 0.07
------------- ------------- -------------
Net Income......................................... $ 0.26 $ 0.33 $ 0.29
============= ============= =============
</TABLE>
5. PARTNERS' CAPITAL
The following is a reconciliation of Units outstanding for the nine months
ended September 30, 1999.
<TABLE>
<CAPTION>
Common Special Subordinated
Units Units Units
------------- ------------- -------------
<S> <C> <C> <C>
Units Outstanding at December 31, 1998............. 11,996,000 2,980,011 9,000,000
Conversion of Special Units into Common Units...... 2,980,011 (2,980,011) --
Issuance of Common Units........................... 3,500,000 -- --
------------- ------------- -------------
Units Outstanding at September 30, 1999............ 18,476,011 -- 9,000,000
============= ============= =============
</TABLE>
On February 12, 1999, the Partnership obtained approval of proposals
presented at a Special Meeting of Unitholders. Approval of these proposals,
among other things, (a) authorized the Partnership to issue an additional 10
million Common Units to raise cash to reduce indebtedness, for acquisitions and
other Partnership purposes, (b) changed the terms of the Special Units so that
they became convertible into Common Units and (c) resulted in an increase in
Enron's distribution support to $29 million and an extension of the support
through the fourth quarter of 2001. As a result of the approval of the
proposals, Enron contributed the $21.9 million in APIs outstanding pursuant to
its commitment made in connection with the Support Agreement discussed in Note
6.
On September 29, 1999, EOTT issued 3,500,000 Common Units to the public for
net proceeds of $52.9 million. The net proceeds were used to repay loans to
Enron. See further discussion in Note 3.
6. TRANSACTIONS WITH ENRON AND RELATED PARTIES
Revenue and Cost of Sales. A summary of revenue and cost of sales with
Enron and its affiliates are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales to affiliates.................. $ 7,123 $ 307 $ 12,127 $ 10,301
Purchases from affiliates............ 10,053 14,426 272,814 29,256
</TABLE>
Revenue in 1999 and 1998 consists primarily of crude oil sales to Enron
Reserve Acquisition Corp. and natural gas liquids sales to Enron Gas Liquids,
Inc. Cost of sales consists primarily of crude oil and condensate
11
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
purchases from Enron Oil & Gas Company, Enron Capital & Trade Resources, 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, 1999 and December 31, 1998 were
$3.8 and $0.2 million, respectively, and are classified as trade and other
receivables. Related party payables at September 30, 1999 and December 31, 1998
were $0.5 million and $1.6 million, respectively, and are classified as trade
accounts payable.
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 paid to Koch for the Assets at closing as discussed in Note 2
and to refinance indebtedness incurred in the 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, (d) Enron agreed
to contribute $21.9 million in APIs to the Partnership on the earlier of the
date of Unitholder approval of certain proposals, discussed further in Note 5,
or May 17, 1999, (e) Enron agreed that if certain proposals were approved by the
Unitholders it would extend its cash distribution support through the fourth
quarter of 2001, and (f) the Partnership agreed that, if any additional APIs
were issued prior to approval of certain proposals by the Unitholders, it would
issue additional Common Units at $19.00 per share in exchange for such
additional APIs. As discussed further in Note 5, the Partnership obtained
Unitholder approval of these proposals on February 12, 1999. Pursuant to the
Support Agreement, EOTT borrowed from Enron a $42 million bridge loan and a $175
million term loan and entered into a $1 billion credit facility with Enron, to
replace its existing $600 million credit facility.
Special Units. Effective July 16, 1996, EOTT created a new class of limited
partner interest designated as Special Units. The Special Units ranked pari
passu with the Common Units in all distributions and upon liquidation and were
voted as a class with the Common Units. In connection with the Support
Agreement, the Partnership issued 1,150,000 Special Units to Enron in December
1998 and, as discussed further below, Enron contributed $21.9 million APIs to
the Partnership in February 1999. The Special Units were converted into Common
Units in March 1999 on a one-for-one basis pursuant to the Support Agreement
following the favorable vote of Unitholders in February 1999.
Additional Partnership Interests. As of December 31, 1998, Enron had paid
$21.9 million in distribution support. 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.
As discussed in Note 5, certain Unitholder approvals were obtained on February
12, 1999, and as a result Enron increased its cash distribution support to $29
million and extended it through the fourth quarter of 2001 and contributed the
$21.9 million in APIs outstanding pursuant to its commitment made in connection
with the Support Agreement. On May 14, 1999, Enron purchased $2.5 million in
APIs in support of EOTT's first quarter 1999 distributions to its Common
Unitholders and General Partner.
12
<PAGE> 13
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. 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,
------------------------- ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Gain (loss) on foreign currency transactions.... $ (159) $ (521) $ 167 $ (1,012)
Gain (loss) on disposal of fixed assets......... 112 (268) 548 (191)
Other, net...................................... 17 192 283 290
---------- ---------- ---------- ----------
Total....................................... $ (30) $ (597) $ 998 $ (913)
========== ========== ========== ==========
</TABLE>
8. LITIGATION AND OTHER CONTINGENCIES
EOTT is, in the ordinary course of business, a defendant in various
lawsuits, some of which are covered in whole or in part by insurance. The
Partnership is responsible for all litigation and other claims relating to the
business acquired from EOTT Energy Corp., although the Partnership will be
entitled to the benefit of certain insurance maintained by Enron covering
occurrences prior to the closing of the offering. The Partnership believes that
the ultimate resolution of litigation, individually and in the aggregate, will
not have a materially adverse impact on the Partnership's financial position or
results of operations. Various legal actions have arisen in the ordinary course
of business, the most significant of which are discussed in "Part I, Item 3.
Legal Proceedings" of EOTT's Annual Report filed on Form 10-K for the year ended
December 31, 1998.
The Texas Federal Anti-Trust Suit, the Mississippi Federal Anti-Trust Suit,
and the Louisiana Federal Anti-Trust Suit (as those terms are defined in the
Form 10-K referred to above), along with several other suits to which EOTT was
not a party, were consolidated for settlement purposes and transferred to the
Southern District of Texas in Corpus Christi by Transfer Order dated January 14,
1998. EOTT and the General Partner, along with a majority of the other named
defendants, entered into a Settlement Agreement in December 1998, whereby the
Settling Defendants agreed to settle their claims with the Plaintiffs. Adequate
reserves have been recorded for EOTT's portion of the settlement. The settlement
was verbally approved by the Honorable Judge Janis Jack on April 7, 1999. A
final judgment was entered on August 11, 1999. Several appeals were timely filed
against the judgment, so it is not yet final.
The State of Texas, et al. vs. Amerada Hess Corporation, et al., Cause No.
97-12040; In the 53rd Judicial District Court of Travis County, Texas (the
"Common Purchaser Act Case"). EOTT and several other defendants entered into a
Settlement Agreement in this matter on August 5, 1999. The impact of the
settlement was not material to the financial statements. Even though this
Settlement Agreement disposed of any claims the State of Texas may have had in a
similar action filed in Lee County, Texas in 1995, discussed previously and
referred to as the State of Texas Royalty Suit, it did not dismiss the State of
Texas Royalty Suit, nor did it dismiss any potential severance tax claims which
the State of Texas may have in the Common Purchaser Act Case.
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.
13
<PAGE> 14
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. CHANGE IN ACCOUNTING PRINCIPLE
In December 1998, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue 98-10, "Accounting for Contracts Involved in Energy Trading
and Risk Management Activities." Issue 98-10 is effective for fiscal years
beginning after December 15, 1998, and requires energy trading contracts (as
defined) to be recorded at fair value on the balance sheet, with the change in
fair value included in earnings. The consensus requires the effect of initial
application of Issue 98-10 to be recorded as a cumulative effect of a change in
accounting principle effective January 1, 1999, for calendar year companies. The
cumulative effect of adopting Issue 98-10 effective January 1, 1999 was $1.7
million and is reflected as an increase in net income in the Condensed
Consolidated Statement of Operations. For the three and nine months ended
September 30, 1999, EOTT had a net mark-to-market loss of $2.8 million and a
mark-to-market gain of $0.3 million, respectively.
10. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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, 2000. The standard cannot be applied
retroactively, but early adoption is permitted. EOTT has not yet determined the
impact of adopting SFAS No. 133; however, this standard could increase
volatility in earnings and partners' capital, through other comprehensive
income.
11. BUSINESS SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." This
standard requires that companies report certain information about operating
segments in complete sets of financial statements and in condensed financial
statements of interim periods for fiscal years beginning after December 15,
1997. EOTT adopted this statement for the fiscal year ending December 31, 1998
and restated prior year information.
EOTT has three reportable segments, which management believes are necessary
to make decisions about resources to be allocated and assess its performance:
North American Crude Oil - East of Rockies, Pipeline Operations and West Coast
Operations. The North American Crude Oil - East of Rockies segment primarily
purchases, gathers, transports and markets crude oil. The Pipeline Operations
segment operates approximately 7,400 active miles of common carrier pipelines
operated in 12 states. The West Coast Operations include crude oil gathering and
marketing, refined products marketing and a natural gas liquids business.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies as discussed in Note 2 included
in the Partnership's Annual Report on Form 10-K for the year ended December 31,
1998. EOTT evaluates performance based on operating income (loss).
EOTT accounts for intersegment revenue and transfers between North American
Crude Oil - East of Rockies and West Coast Operations as if the sales or
transfers were to third parties, that is, at current market prices. Intersegment
revenues for Pipeline Operations are based on published pipeline tariffs.
14
<PAGE> 15
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL INFORMATION BY BUSINESS SEGMENT
(In Thousands)
<TABLE>
<CAPTION>
NORTH
AMERICAN WEST CORPORATE
CRUDE OIL PIPELINE COAST AND
- EOR OPERATIONS OPERATIONS OTHER (B) CONSOLIDATED
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1999
Revenue from external customers ..... $ 2,120,192 $ 8,837 $ 186,435 $ -- $ 2,315,464
Intersegment revenue (a) ............ 7,706 23,389 3,027 (34,122) --
----------- ----------- ----------- ----------- -----------
Total revenue .................... 2,127,898 32,226 189,462 (34,122) 2,315,464
----------- ----------- ----------- ----------- -----------
Gross margin ........................ 19,072 30,975 7,013 -- 57,060
----------- ----------- ----------- ----------- -----------
Operating income (loss) ............. (1,154) 13,405 1,683 (5,824) 8,110
Other expense ....................... -- -- -- (7,560) (7,560)
----------- ----------- ----------- ----------- -----------
Net income (loss) ................... (1,154) 13,405 1,683 (13,384) 550
----------- ----------- ----------- ----------- -----------
Depreciation and amortization ....... (1,906) (5,414) (497) (433) (8,250)
----------- ----------- ----------- ----------- -----------
THREE MONTHS ENDED SEPTEMBER 30, 1998
Revenue from external customers ..... $ 1,168,399 $ 1,891 $ 125,288 $ 74 $ 1,295,652
Intersegment revenue (a) ............ 14,837 5,746 374 (20,957) --
----------- ----------- ----------- ----------- -----------
Total revenue .................... 1,183,236 7,637 125,662 (20,883) 1,295,652
----------- ----------- ----------- ----------- -----------
Gross margin ........................ 24,425 7,432 1,867 12 33,736
----------- ----------- ----------- ----------- -----------
Operating income (loss) ............. 7,573 1,164 (488) (7,096) 1,153
Other expense ....................... -- -- -- (2,959) (2,959)
----------- ----------- ----------- ----------- -----------
Net income (loss) ................... 7,573 1,164 (488) (10,055) (1,806)
----------- ----------- ----------- ----------- -----------
Depreciation and amortization ....... (2,324) (2,282) (115) (558) (5,279)
----------- ----------- ----------- ----------- -----------
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenue from external customers ..... $ 5,543,118 $ 18,907 $ 445,913 $ (14) $ 6,007,924
Intersegment revenue (a) ............ 39,101 65,861 17,360 (122,322) --
----------- ----------- ----------- ----------- -----------
Total revenue .................... 5,582,219 84,768 463,273 (122,336) 6,007,924
----------- ----------- ----------- ----------- -----------
Gross margin ........................ 61,050 82,982 21,569 (48) 165,553
----------- ----------- ----------- ----------- -----------
Operating income (loss) ............. (222) 37,730 6,085 (18,295) 25,298
Other expense ....................... -- -- -- (20,032) (20,032)
----------- ----------- ----------- ----------- -----------
Net income (loss) before cumulative
effect of accounting change ...... (222) 37,730 6,085 (38,327) 5,266
----------- ----------- ----------- ----------- -----------
Depreciation and amortization ....... (6,652) (15,298) (1,488) (1,302) (24,740)
----------- ----------- ----------- ----------- -----------
NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenue from external customers ..... $ 3,270,917 $ 5,161 $ 480,171 $ 110,682 $ 3,866,931
Intersegment revenue (a) ............ 35,308 12,579 497 (48,384) --
----------- ----------- ----------- ----------- -----------
Total revenue .................... 3,306,225 17,740 480,668 62,298 3,866,931
----------- ----------- ----------- ----------- -----------
Gross margin ........................ 66,207 17,372 6,880 (20) 90,439
----------- ----------- ----------- ----------- -----------
Operating income (loss) ............. 19,073 1,973 (58) (19,035) 1,953
Other expense ....................... -- -- -- (6,756) (6,756)
----------- ----------- ----------- ----------- -----------
Net income (loss) before cumulative
effect of accounting change ...... 19,073 1,973 (58) (25,791) (4,803)
----------- ----------- ----------- ----------- -----------
Depreciation and amortization ....... (6,992) (5,605) (357) (1,403) (14,357)
----------- ----------- ----------- ----------- -----------
TOTAL ASSETS AT SEPTEMBER 30, 1999 .. $ 1,062,066 $ 316,201 $ 75,910 $ 20,411 $ 1,474,588
----------- ----------- ----------- ----------- -----------
TOTAL ASSETS AT DECEMBER 31, 1998 ... 608,655 279,315 60,677 17,173 965,820
----------- ----------- ----------- ----------- -----------
</TABLE>
(a) Intersegment revenue for North American Crude Oil - EOR and West Coast
Operations is made at prices comparable to those received from
external customers. Intersegment revenue for Pipeline Operations is
transportation costs charged to North American Crude Oil - EOR for the
transport of crude oil at published pipeline tariffs.
(b) Corporate and Other also includes the East of Rockies refined products
business in 1998 and intersegment eliminations.
15
<PAGE> 16
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. REALIGNMENT INITIATIVES
In late 1997, EOTT decided to exit the marginal East of Rockies refined
products business and streamlined business processes throughout the organization
and realigned reporting responsibilities to improve the Partnership's overall
cost structure. The realignment initiatives have been completed and the reserves
were adequate to complete the initiatives.
13. SUBSEQUENT EVENTS
On October 19, 1999, 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 Units for the period July 1, 1999 through September 30,
1999. The third quarter distribution of $9.0 million was paid on November 12,
1999 to the General Partner and all Common Unitholders of record as of October
29, 1999. The distribution was paid utilizing Available Cash from the
Partnership.
16
<PAGE> 17
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 and involve significant risks and uncertainties, and actual results
may vary materially from those in the forward-looking statements as a result of
various factors. Important factors that could cause actual results to differ
materially from those in the forward-looking statements herein include the
Partnership's success in obtaining additional lease barrels and maintaining
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 ability of the
Partnership to avoid environmental liabilities, developments relating to
pipeline tariff regulation, the successful resolution of litigation, the success
of the Partnership's risk management activities, and the 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,
marketing, storage and resale of crude oil and other petroleum products and
related activities. Statement of Financial Accounting Standards 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. EOTT adopted this standard for
year end 1998 reporting and restated all prior year information based on the
following reportable business segments: North American Crude Oil - East of
Rockies, Pipeline Operations and West Coast Operations (see Note 11 to the
Condensed Consolidated Financial Statements for certain financial information by
business segment).
Gathering and Marketing Operations
In general, as we purchase crude oil in our gathering and marketing
operations, we simultaneously establish a margin by selling crude oil for
physical delivery to third party users, such as independent refiners or major
oil companies, or by entering into a future delivery obligation with respect to
futures contracts on the NYMEX, thereby minimizing or eliminating exposure to
price fluctuations. Through these transactions, we seek to maintain positions
that are substantially balanced between crude oil purchases, on the one hand,
and sales or future delivery obligations, on the other hand. As a result,
changes in the absolute price level for crude oil do not necessarily impact the
margin from gathering and marketing.
Although we generally maintain a balanced position in terms of overall
volumes, some risks cannot always be fully hedged, such as a portion of certain
basis risks. Basis risk arises when we acquire crude oil by purchase or exchange
that does not meet the specifications of the crude oil we are contractually
obligated to deliver, whether in terms of geographic location, grade or delivery
schedule. We seek to limit our price risk and also manage our margins through a
combination of physical sales, NYMEX hedging activities and exchanges of crude
oil with third parties. Certain of these contracts are marked-to-market in the
current period, while the value of the related physical contract is recognized
in the period of delivery which creates a difference in the timing of earnings
recognition. However, it is our policy not to acquire and hold crude oil,
futures contracts or other derivative products for the purpose of speculating on
crude oil price changes.
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
Our operating results are sensitive to a number of factors including:
grades or 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.
Gross margin from gathering, marketing and pipeline operations varies from
period to period, depending to a significant extent upon changes in the supply
and demand of crude oil and the resulting changes in United States crude oil
inventory levels. The gross margin from gathering and marketing operations is
generated by the difference between the price of crude oil at the point of
purchase and the price of crude oil at the point of sale, minus the associated
costs of gathering and transportation. In addition to purchasing crude oil at
the wellhead, we purchase crude oil in bulk at major pipeline terminal points
and major marketing points and enter into exchange transactions with third
parties. These bulk and exchange transactions are characterized by large volumes
and narrow profit margins on purchase and sales transactions, and the absolute
price levels for crude oil do not necessarily bear a relationship to gross
margin, although such price levels significantly impact revenues and cost of
sales. Because period-to-period variations in revenues and cost of sales are not
generally meaningful in analyzing the variation in gross margin for gathering
and marketing operations such changes are not addressed in the following
discussion.
During periods when the demand for crude oil is weak, the market for crude
oil is often in contango, meaning that the price of crude oil in a given month
is less than the price of crude oil in a subsequent month. In a contango market,
storing crude oil is favorable, because storage owners at major trading
locations can simultaneously purchase production at low current prices for
storage and sell at higher prices for future delivery. When there is a higher
demand than supply of crude oil in the near term, the market is backward,
meaning that the price of crude oil in a given month exceeds the price of crude
oil in a subsequent month. A backward market has a positive impact on marketing
margins because crude oil gatherers can capture a premium for prompt deliveries.
Pipeline Operations
Pipeline revenues and gross margins are primarily a function of the level
of throughput and storage activity and are generated by the difference between
the regulated published tariff and the fixed and variable costs of operating the
pipeline. A majority of the pipeline revenues are generated by transporting
crude oil at published pipeline tariffs for the North American Crude Oil - East
of Rockies business segment. Approximately 72.6% of the revenues of the Pipeline
Operations business segment for the three months ended September 30, 1999, were
generated from tariffs charged to the North American Crude Oil - East of Rockies
business segment. Changes in revenues and pipeline operating costs, therefore,
are relevant to the analysis of financial results of our pipeline operations and
are addressed in the following discussion of pipeline operations.
RECENT DEVELOPMENTS
On September 29, 1999, EOTT issued 3,500,000 Common Units to the public
with net proceeds to EOTT of $52.9 million. On October 1, 1999, EOTT issued to
the public $235 million of 11% senior notes. The senior notes are due October 1,
2009, and interest is paid semiannually. The senior notes are guaranteed by all
of EOTT's operating limited partnerships. The net proceeds from the issuance of
the notes and the issuance of the Common Units were used to repay the $175
million term loan from Enron, the $42 million bridge loan from Enron and $57.3
million of short-term borrowings outstanding under the working capital facility
from Enron.
On May 1, 1999, EOTT acquired crude oil transportation and storage assets
in West Texas and New Mexico from Texas-New Mexico Pipeline Company which
included approximately 1,800 miles of common
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
carrier crude oil pipelines. EOTT paid $33 million in cash and financed the
acquisition using short-term borrowings from Enron. See additional discussion
regarding Enron financing in Note 3 to the Condensed Consolidated Financial
Statements.
On February 12, 1999, the Partnership obtained approval of proposals
presented at a Special Meeting of Unitholders. Approval of these proposals,
among other things, (a) authorized the Partnership to issue an additional 10
million Common Units to raise cash to reduce indebtedness, for acquisitions and
other Partnership purposes, (b) changed the terms of the Special Units so that
they became convertible into Common Units and (c) resulted in an increase in
Enron's cash distribution support to $29 million and an extension of that
support through the fourth quarter of 2001. As a result of the approval of the
proposals, Enron contributed the $21.9 million in APIs outstanding pursuant to
its commitment made in connection with the Support Agreement discussed in Note 6
to the Condensed Consolidated Financial Statements.
On December 1, 1998, the Partnership acquired certain additional crude oil
gathering and transportation assets (the "Assets"), in key oil producing regions
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
total purchase price of the Assets was $235.6 million, which includes
consideration of $184.5 million in cash, 2,000,000 Common Units, 2,000,000
Subordinated Units and $11.4 million in transaction costs. EOTT financed the
majority of the purchase price through short-term borrowings from Enron. See
additional discussion regarding Enron financing in Note 3 to the Condensed
Consolidated Financial Statements.
On July 1, 1998, the Partnership acquired crude oil gathering and
transportation assets in West Texas and New Mexico from Koch. The purchase price
was approximately $28.5 million and was financed with short-term borrowings from
Enron.
Consistent with the Partnership's acquisition strategy, EOTT is engaged in
discussions with a third party relating to the possible acquisition of contracts
and transportation assets, including trucks, crude oil pipelines and storage
facilities. EOTT entered into a confidentiality agreement that provided that the
owner of the assets would furnish EOTT with confidential information for use in
its evaluation of the assets. EOTT had the exclusive right to discuss this
possible purchase of the assets with the owner until November 1, 1999, or until
an earlier date on which one of the parties gives written notice to the other
that negotiations between the parties have terminated. While the confidentiality
agreement has expired, EOTT is continuing to discuss the potential purchase of
the assets with the owner. EOTT has previously indicated to the potential seller
that it believes that the acquisition price for the assets would be in the range
of $210 million to $240 million, but we have not reached any agreement regarding
the price for the assets or any other terms of the transaction. If an agreement
is reached regarding this acquisition, the Partnership may finance the purchase
price through the issuance of additional Common Units, the issuance of public or
private debt securities or loans or some combination of the foregoing. EOTT can
give no assurance regarding when or whether it will reach agreement with the
owner on the terms of the acquisition or that, if it does reach agreement, the
acquisition will be completed.
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 net income of $0.5 million or $0.02 per diluted Unit for the
third quarter of 1999, which includes mark-to-market losses of $2.8 million or
$0.12 per diluted Unit, compared to a net loss of $1.8 million or $0.09 per
diluted Unit for the third quarter of 1998. The third quarter 1999 results
reflect increased lease volumes and margins associated with the 1998 and 1999
asset acquisitions and the adoption of conclusions reached by the Emerging
Issues Task Force in Issue No. 98-10 ("Issue 98-10"), "Accounting for Contracts
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
Involved in Energy Trading and Risk Management Activities." Issue 98-10 requires
energy trading contracts (as defined) to be recorded at fair value on the
balance sheet, with the change in fair value included in earnings. The adoption
of Issue 98-10 in the first quarter of 1999 included a $1.7 million cumulative
effect as of January 1, 1999, approximately $2.8 million of net unrealized
mark-to-market losses in the third quarter and approximately $0.3 million of net
unrealized mark-to-market gains for the nine months ended September 30, 1999.
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,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
North American Crude Oil - East of Rockies .... $2,127.9 $1,183.2 $5,582.2 $3,306.2
Pipeline Operations ........................... 32.2 7.6 84.8 17.7
West Coast Operations ......................... 189.4 125.7 463.2 480.7
Corporate and Other(2) ........................ -- 0.1 -- 110.7
Intersegment Eliminations ..................... (34.1) (21.0) (122.3) (48.4)
-------- -------- -------- --------
Total ......................................... $2,315.4 $1,295.6 $6,007.9 $3,866.9
======== ======== ======== ========
Gross margin:
North American Crude Oil - East of Rockies(1).. $ 19.1 $ 24.4 $ 61.1 $ 66.2
Pipeline Operations ........................... 31.0 7.5 83.0 17.4
West Coast Operations ......................... 7.0 1.9 21.5 6.9
Corporate and Other(2) ........................ -- -- -- --
-------- -------- -------- --------
Total ......................................... $ 57.1 $ 33.8 $ 165.6 $ 90.5
======== ======== ======== ========
Operating income (loss):
North American Crude Oil - East of Rockies(1).. $ (1.2) $ 7.6 $ (0.2) $ 19.1
Pipeline Operations ........................... 13.4 1.2 37.7 2.0
West Coast Operations ......................... 1.7 (0.5) 6.1 (0.1)
Corporate and Other(2) ........................ (5.8) (7.1) (18.3) (19.0)
-------- -------- -------- --------
Total ......................................... $ 8.1 $ 1.2 $ 25.3 $ 2.0
======== ======== ======== ========
</TABLE>
(1) Includes intersegment transportation costs from the Pipeline
Operations segment for the transport of crude oil at published
pipeline tariffs. In 1999, intersegment transportation costs from the
Pipeline Operations segment represented $23.4 million and $65.9
million for the three months and nine months ended September 30, 1999
respectively. For the three months and nine months ended September 30,
1998, intersegment transportation costs from the Pipeline Operations
segment represented $5.8 million and $12.6 million, respectively.
(2) 1998 amounts include East of Rockies refined products business.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1998.
North American Crude Oil - East of Rockies: The North American Crude Oil
segment had an operating loss of $1.2 million for the third quarter 1999,
compared to operating income of $7.6 million for the same period in 1998. As a
result of the acquisition of assets from Koch, the North American Crude Oil
segment is incurring increased transportation costs from the Pipeline Operations
segment due to the significant increase in the volume of crude oil transported
at higher published tariff rates as well as incurring additional operating costs
associated with the asset acquisitions. Gross margin decreased $5.3 million to
$19.1 million in the third quarter of 1999 due primarily to increased
transportation costs or tariffs paid to the Pipeline Operations
20
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
segment and $1.6 million of unrealized mark-to-market losses being recorded in
the third quarter for certain energy contracts. Crude oil lease volumes
increased significantly from an average of 278,200 barrels per day for the three
months ended September 30, 1998 to an average of 402,700 barrels per day for the
three months ended September 30, 1999 due to the acquisitions of assets from
Koch. Operating expenses of $20.3 million for the third quarter 1999 were $3.5
million higher than in the third quarter of 1998 due primarily to higher
operating costs and employee related costs associated with the acquisitions of
assets from Koch.
Pipeline Operations: Pipeline Operations had operating income of $13.4
million for the third quarter 1999 compared to operating income of $1.2 million
for the same period in 1998. Revenues, which include three months of activity
related to the asset acquisition from Texas-New Mexico Pipeline Company in 1999,
increased $24.6 million to $32.2 million in the third quarter of 1999 due
primarily to increased activity related to the acquisition of pipelines from
Koch and Texas-New Mexico Pipeline Company. Approximately $23.4 million and $5.8
million of revenues for the three months ended September 30, 1999 and 1998,
respectively, were generated from tariffs charged to the North American Crude
Oil segment. Pipeline volumes averaged 562,200 barrels per day for the three
months ended September 30, 1999 compared to 191,000 barrels per day for the
three months ended September 30, 1998. Operating expenses of $17.6 million for
the third quarter of 1999 were $11.3 million higher than in the third quarter of
1998 due to higher employee related costs, operating costs and depreciation
associated with the acquisitions of assets from Koch and Texas-New Mexico
Pipeline Company.
West Coast Operations: West Coast Operations had operating income of $1.7
million for the third quarter 1999, compared to an operating loss of $0.5
million for the same period in 1998 primarily due to increased margins
associated with the crude oil blending operations acquired from Koch. Operating
expenses of $5.3 million for the third quarter of 1999 were $2.9 million higher
than in the third quarter of 1998 due to higher employee related costs,
operating costs and depreciation associated with the acquisition of assets from
Koch.
Corporate and Other: Corporate and Other costs were $5.8 million for the
third quarter 1999 compared to $7.1 million in the third quarter 1998. The
decrease is due primarily to a $1.0 million write-off of certain information
system development costs in 1998 and lower system operating costs in 1999. Other
income (expense), net, consisting primarily of gains (losses) on transactions
denominated in foreign currency and gains (losses) on sales of fixed assets,
increased $0.6 million in the third quarter 1999 compared to the same period in
1998 primarily due to reduced foreign currency transaction losses and gains on
sales of fixed assets. Interest and related charges in the third quarter 1999
were $7.6 million compared to $2.5 million for the same period in 1998. The
increase is due primarily to higher average short-term debt in 1999 due to the
financing of the acquisitions of assets from Koch and Texas-New Mexico Pipeline
Company.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1998.
North American Crude Oil - East of Rockies: Operating loss for the North
American Crude Oil segment was $0.2 million for the first nine months of 1999,
compared to operating income of $19.1 million for the same period in 1998. As
previously discussed, as a result of the acquisition of assets from Koch, the
North American Crude Oil segment is incurring increased transportation costs
from the Pipeline Operations segment due to the significant increase in the
volume of crude oil transported at higher published tariff rates as well as
incurring additional operating costs associated with the asset acquisitions.
Gross margin decreased $5.1 million to $61.1 million in the first nine months of
1999 due primarily to increased transportation costs or tariffs paid to the
Pipeline Operations segment offset by approximately $1.1 million of unrealized
mark-to-market gains being recorded in the first nine months of 1999 for certain
energy contracts. Crude oil lease volumes increased significantly from an
average of 273,000 barrels per day for the nine months ended September 30, 1998
to an average of 409,500 barrels per day for the nine months ended September 30,
1999 due to the acquisition of assets from Koch. Operating expenses of $61.3
million for the first nine months of
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
1999 were $14.2 million higher than in the first nine months of 1998 due
primarily to higher operating costs and employee related costs associated with
the acquisitions of assets from Koch in December 1998.
Pipeline Operations: Pipeline Operations had operating income of $37.7
million for the first nine months of 1999 compared to operating income of $2.0
million for the same period in 1998. Revenues, which include five months of
activity related to the asset acquisition from Texas-New Mexico Pipeline Company
in 1999, increased $67.1 million to $84.8 million in the first nine months of
1999 due primarily to increased activity related to the acquisitions of
pipelines from Koch and Texas-New Mexico Pipeline Company. Approximately $65.9
million and $12.6 million of revenues for the nine months ended September 30,
1999 and 1998, respectively, were generated from tariffs charged to the North
American Crude Oil segment. Pipeline volumes averaged 486,500 barrels per day
for the nine months ended September 30, 1999 compared to 165,200 barrels per day
for the nine months ended September 30, 1998. Operating expenses of $45.3
million for the first nine months of 1999 were $29.9 million higher than in the
first nine months of 1998 due to higher employee related costs, operating costs
and depreciation associated with the acquisitions of assets from Koch and
Texas-New Mexico Pipeline Company.
West Coast Operations: West Coast Operations had operating income of $6.1
million for the first nine months of 1999, compared to an operating loss of $0.1
million for the same period in 1998 primarily due to increased margins
associated with the crude oil blending operations acquired from Koch and
increased margins in refined products marketing due to disruptions in supply and
demand resulting from refinery outages. Operating expenses of $15.4 million for
the first nine months of 1999 were $8.4 million higher than for the same period
in 1998 due to higher employee related costs, operating costs and depreciation
associated with the acquisition of assets from Koch.
Corporate and Other: Corporate and Other costs were $18.3 million for the
first nine months of 1999 compared to $19.0 million in the first nine months of
1998. The decrease is due primarily to a $1.0 million write-off of certain
information system development costs in 1998, lower severance costs and
depreciation in 1999 partially offset by higher insurance costs in 1999. Other
income (expense), net, consisting primarily of gains (losses) on transactions
denominated in foreign currency and gains (losses) on sales of fixed assets,
increased $1.9 million to income of $1.0 million in the first nine months of
1999 primarily due to gains on foreign currency transactions and gains on sales
of fixed assets. Interest and related charges in the first nine months of 1999
were $21.5 million compared to $6.4 million for the same period in 1998. The
increase is due to higher average short-term debt in 1999 due to the financing
of the acquisitions of assets from Koch and Texas-New Mexico Pipeline Company.
LIQUIDITY AND CAPITAL RESOURCES
General
Management anticipates that short-term liquidity as well as sustaining
capital expenditures for the foreseeable future will be funded primarily by cash
generated from operations in addition to lines of credit provided by Enron and
commodity repurchase agreements, as more fully described in Note 3 to the
Condensed Consolidated Financial Statements.
Cash Flows From Operating Activities
Net cash used in operating activities totaled $7.2 million for the first
nine months of 1999 compared to net cash provided by operating activities of
$1.5 million for the same period in 1998 primarily due to increased cash
requirements related to NYMEX hedging activities.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
Cash Flows From Investing Activities
Net cash used in investing activities totaled $48.8 million for the first
nine months of 1999 compared to $33.8 million for the same period in 1998. Cash
additions to property, plant, and equipment and acquisitions of $49.4 million in
1999 primarily include $33.0 million representing cash consideration for the
asset acquisition from Texas-New Mexico Pipeline Company, $7.6 million for other
pipeline connections and improvements, and $4.1 million for information systems
development. Proceeds from asset sales were $0.5 million in the first nine
months of 1999 compared to $0.7 million in the first nine months of 1998.
Cash Flows From Financing Activities
Net cash provided by financing activities totaled $55.0 million for the
first nine months of 1999 compared to net cash provided of $35.2 million for the
same period in 1998. The 1999 amount primarily represents net proceeds from the
issuance of 3,500,000 Common Units and increases in short-term borrowings for
working capital needs and acquisition financing, offset by the repayment of the
$42.0 million bridge loan from Enron and distributions paid to all Common and
Special Unitholders for the period October 1, 1998 through June 30, 1999.
Working Capital and Credit Resources
In 1995, Enron agreed to provide credit support to the Partnership in the
form of guarantees, letters of credit, loans and letters of indemnity. The total
amount of the credit support was $600 million, as amended December 19, 1996, had
a maturity of March 31, 1999 and was replaced with a new facility on December 1,
1998 as discussed below. As amended, the agreement contained sublimits of $100
million for working capital loans and $200 million for letters of credit. Letter
of credit fees were based on actual charges by the banks, which ranged from
.20% - .375% per annum. Interest on outstanding loans was charged at the London
Interbank Offering Rate ("LIBOR") plus 25 basis points per annum. At December
31, 1997, EOTT had a note payable of $39.3 million with Enron under a financing
arrangement for acquisitions and other capital projects. This financing was
provided at a rate of LIBOR plus 30 basis points per annum. The maturity date of
the note was March 31, 1999, and the note was redeemed and reissued under the
term loan discussed below.
On December 1, 1998, Enron increased its existing credit facility with the
Partnership to provide additional credit support in the form of guarantees,
letters of credit and working capital loans through December 31, 2001. The total
amount of the Enron facility is $1.0 billion, and it contains sublimits of $100
million for working capital loans and $900 million for guarantees and 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
LIBOR plus 250 basis points 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
the Partnership's ability to operate its ongoing business.
At September 30, 1999 and December 31, 1998, EOTT had a term loan of $175
million outstanding with Enron under a financing arrangement to fund a portion
of the cash consideration paid to Koch for the assets purchased in 1998 and to
refinance indebtedness incurred in prior acquisitions. The term loan had a
scheduled maturity of December 31, 1999. The interest rate on the term loan was
LIBOR plus 300 basis points. As discussed further below, EOTT issued $235
million of 11% senior notes on October 1, 1999 and as a result, the term loan
was reclassed to long-term liabilities at September 30, 1999.
The Enron facility and term loan are 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
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
facility and term loan are 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.
In addition, at December 31, 1998, EOTT had $42 million of debt outstanding
with Enron under a $100 million bridge loan to finance a portion of the cash
consideration for the acquisition of assets from Koch. The interest rate on the
bridge loan was initially LIBOR plus 400 basis points. At the end of each
three-month period, the spread on the bridge loan increased by 25 basis points.
The bridge loan was unsecured, and its maturity date was December 31, 1999.
On September 29, 1999, EOTT issued 3,500,000 Common Units to the public
with net proceeds to EOTT of $52.9 million. On October 1, 1999, EOTT issued to
the public $235 million of 11% senior notes. The senior notes are due October 1,
2009 and interest is paid semiannually. The senior notes are guaranteed by all
of EOTT's operating limited partnerships. On or after October 1, 2004, EOTT may
redeem the notes, and prior to October 1, 2002, EOTT may redeem up to 35% of the
notes with proceeds of public or private sales of equity at specified redemption
prices. The net proceeds from the issuance of the notes and the issuance of the
Common Units were used to repay the $175 million term loan from Enron, the $42
million bridge loan from Enron and $57.3 million of short-term borrowings
outstanding under the working capital facility from Enron.
The General Partner believes that the Enron facility and commodity
repurchase agreements will be sufficient to support the Partnership's crude oil
purchasing activities and working capital and liquidity 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 other 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 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.
In addition, the Partnership Agreement authorizes EOTT to cause the
Partnership to issue additional limited partner interests, the proceeds from
which could be used to provide additional funds for acquisitions or other
Partnership needs.
At December 31, 1998, EOTT had outstanding forward commodity repurchase
agreements of approximately $83.0 million. Pursuant to the agreements, which had
terms of thirty days, EOTT repurchased the crude oil inventory on January 20,
1999 for approximately $83.4 million. At September 30, 1999, EOTT had
outstanding forward commodity repurchase agreements of approximately $89.8
million. Pursuant to the agreements, which had terms of thirty days, EOTT
repurchased the crude oil inventory on October 20, 1999 for approximately $90.2
million.
Distributions
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, forms of which have been filed as exhibits to
the Annual Report on Form 10-K. Distributions of Available Cash to the
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
Subordinated Unitholders are subject to the prior rights of the Common
Unitholders to receive the Minimum Quarterly Distribution ("MQD") for each
quarter during the Subordination Period, and to receive any arrearages in the
distribution of the MQD on the Common Units for prior quarters during the
Subordination Period.
MQD is $0.475 per Unit ($1.90 annualized). Enron has committed to provide
total cash distribution support in exchange for Additional Partnership Interests
in an amount necessary to pay MQDs, with respect to quarters ending on or before
December 31, 2001, in an amount up to an aggregate of $29 million ($26.5 million
of which remains available).
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 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 has implemented the Plan, which has been modified as events
warranted. Under the Plan, the Partnership inventoried 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;
assessed the effects of Year 2000 problems on the mission-critical functions of
the Partnership's businesses; remedied material disruptions or other material
adverse effects on mission-critical functions, processes and systems; verified
and tested the mission-critical systems to which remediation efforts had been
applied; and attempted to ameliorate those mission-critical aspects of the Year
2000 problem that may not be 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.
Implementation of the Plan has been directly supervised by the General
Partner's Director of Systems, who is the Year 2000 Project Director. The
Project Director coordinated the implementation of the Plan with the assistance
of an Oversight Committee, consisting of selected employees of the General
Partner and one member of its Board of Directors. The Partnership also engaged
certain outside consultants, technicians and other external resources to aid in
formulating and implementing the Plan.
The Plan recognized 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
25
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
to continue to conduct the mission-critical aspects of its business without
disruption from Year 2000 problems. The Plan envisioned 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 to process date information). The Partnership has reasonably
attempted to coordinate with these Outside Entities in an ongoing effort to
obtain assurance that the Outside Systems that are mission-critical to the
Partnership are Year 2000 compatible before January 1, 2000. Consequently, the
Partnership has worked 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 have
been repeated as the Partnership learned more about the Year 2000 problem and
its effects on the Partnership's internal systems and on Outside Systems. As the
steps have been repeated, new problems have been 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 1999, the Partnership is in the final stages in the
implementation of the Plan as shown in the following tables. The Plan included
verification and validation of certain of the Partnership's mission-critical
facilities and functions by independent consultants. These consultants
participated to varying degrees in many or all of the stages, including the
inventory, assessment, and testing phases. The Partnership has continued to
closely monitor work under the Plan and has revised estimated completion dates
for 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.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
YEAR 2000 PROJECT READINESS
- ---------------------------------------------------------------------------------------------------------
Inventory Assessment Analysis Conversion Testing Y2K-Ready Contingency Plan
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mission-Critical C C C C IP IP IP
Internal Items
- ---------------------------------------------------------------------------------------------------------
Mission-Critical C C C C IP IP IP
Outside Entities
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Legend: C = Complete IP = In Process
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
YEAR 2000 PROJECT ESTIMATED COMPLETION DATES
- ---------------------------------------------------------------------------------------------------------
Inventory Assessment Analysis Conversion Testing Y2K-Ready Contingency Plan
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mission-Critical 7/98 5/99 8/99 9/99 11/99 11/99 11/99
Internal Items
- ---------------------------------------------------------------------------------------------------------
Mission-Critical 7/98 5/99 6/99 8/99 11/99 12/99 12/99
Outside Entities
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The Partnership has substantially completed remediation on all business
applications currently in production, along with related hardware and software.
Embedded systems (generally pipeline SCADA devices) were running behind schedule
primarily because of acquisitions of additional assets by the Partnership which
significantly increased the number of devices to analyze and test. Testing of
the embedded systems was
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
completed by the end of September, with the exception of a few remaining minor
equipment upgrades, which should be installed by November 15, 1999. As of
November of 1999, the Partnership is Year 2000 ready on approximately 95% of its
equipment. Remediation is in progress on an additional 5% of the equipment and
the analysis of the remaining equipment is complete.
Letters requesting the status of Year 2000 readiness were sent to
substantially all vendors and business partners. Follow-up requests were sent to
parties in that initial group identified as mission-critical. The status of Year
2000 readiness for these mission-critical counterparties continues to be
verified by means such as telephone surveys and viewing website updates.
Because the Partnership's Year 2000 Plan treats Year 2000 efforts as an
iterative process, the Partnership has implemented additional cycles of
inventory, assessment, remediation, and validation testing, which continue to be
conducted in parallel, and in coordination, with the Partnership's Year 2000
contingency plan.
Costs to Address Year 2000 Issues
Preliminary estimates of the total Year 2000 costs, which have been
expensed as incurred, ranged from $2 million to $3 million. However, the
estimated costs of implementing the Plan have not taken 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, have continued through 1999. The Partnership continues to
be concerned with hidden defects in computer code, including re-coding errors in
remediated code; sabotage of remediated code; embedded devices with Year 2000
defects; and the potential failure of mission-critical Outside Entities. The
Partnership developed contingency plans to the extent practicable to avoid
substantial Year 2000 related disruptions that may have a material adverse
effect on the Partnership. None of these problems is unique to the Partnership.
Although management believes that its estimates are reasonable, there can be no
assurance, for the reasons 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 believes that it has, based on information the
Partnership had at the time, satisfied 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 has taken 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 does not reasonably
anticipate facing shortages of skilled personnel or other resources, such as
Year 2000 ready computer chips, which 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 believes that, to the best of its knowledge, its
mission-critical systems will be Year 2000-ready before January 1, 2000.
However, there is no assurance that the Plan will succeed in accomplishing its
27
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
purpose or that unforeseen circumstances will not arise during the
implementation of the Plan that would materially adversely affect the
Partnership.
The Partnership has taken reasonable steps to identify, assess, and, where
appropriate, to replace devices that contain embedded chips. Despite these
reasonable efforts, the Partnership anticipates that it has not found and
remediated all embedded chips in the Partnership's systems. Further, the
Partnership anticipates that Outside Entities on which the Partnership depends
also may not have been 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 have converted and tested 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.
The Partnership may face additional risk as a result of the uncertainties,
and possible additional litigation, resulting from the enactment of the U.S.
federal "Year 2000 Act." Because experience with this recently enacted
legislation is very limited, the Partnership cannot at this time quantify the
financial impact or potential business disruption that may result from this
legislation. However, the adverse impact on the Partnership's business could be
material.
In a 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 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.
28
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
The Partnership continues 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 has developed contingency plans to
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 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 include an assessment of all its mission-critical
internal information technology systems and its internal operational systems
that use computer-based controls. This process continues as circumstances
require. Further, the Partnership continues to assess any mission-critical
disruptions due to Year 2000-related failures that are external to the
Partnership. These assessments are being 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 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, or that may be subject to
re-coding errors or sabotage; 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 have been adequately remediated so that they are Year 2000 ready or will
be by January 1, 2000, 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.
29
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
OTHER MATTERS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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, 2000. The standard cannot be applied
retroactively but early adoption is permitted. EOTT has not yet determined the
impact of adopting SFAS No. 133; however, this standard could increase
volatility in earnings and partners' capital, through other comprehensive
income.
OUTLOOK
EOTT will continue to pursue attractive acquisition or business combination
opportunities to increase the scale of its business, add cash flow, and reduce
earnings variability. The acquisition of assets from Texas-New Mexico Pipeline
Company, effective May 1, 1999, provides stable pipeline revenues, which will
help strengthen the dependability of the Partnership's cash flow. Acquisitions
that result in increased lease purchase volumes should help to enhance EOTT's
gathering and marketing opportunities. EOTT management is committed to continue
improving internal business processes in all operational, marketing, and
administrative areas and thereby achieve improvements in productivity.
Historically, the crude oil gathering and marketing business has been very
competitive with thin and variable profit margins. Market conditions and the
amount of crude oil produced cannot be projected with certainty. The Partnership
intends to continue to pay MQDs to all its Common Unitholders and paid third
quarter distributions to all its Common Unitholders on November 12, 1999 without
any distribution support from Enron; however, due to the changing market
conditions and the decline in crude oil being produced which affects operating
results, it is possible that distribution support from Enron may be needed to
pay MQDs in the future. Enron has committed to provide total cash distribution
support in an amount necessary to pay MQDs and has increased its cash
distribution support to $29 million ($26.5 million of which remains available)
and extended it through the fourth quarter 2001, which should further assure
Common Unitholders of continued reliable distributions.
30
<PAGE> 31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EOTT ENERGY PARTNERS, L.P.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in Item 3 updates, and should be read in
conjunction with, information set forth in Part II, Item 7A in EOTT's Annual
Report on Form 10-K for the year ended December 31, 1998, in addition to the
interim condensed consolidated financial statements and accompanying notes
presented in Items 1 and 2 of this Form 10-Q.
There are no material changes in market risks faced by the Company from
those reported in EOTT's Annual Report on Form 10-K for the year ended December
31, 1998.
31
<PAGE> 32
PART II. OTHER INFORMATION
EOTT ENERGY PARTNERS, L.P.
ITEM 1. Legal Proceedings
See Part I. Item 1, Note 8 to the Condensed Consolidated Financial
Statements entitled "Litigation and Other Contingencies," which is incorporated
herein by reference.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
September 8, 1999 RE: Item 5 - Possible acquisition of contracts and
transportation assets.
September 29, 1999 RE: Item 7 - Filing of certain exhibits.
October 1, 1999 RE: Item 7 - Filing of certain exhibits.
32
<PAGE> 33
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 15, 1999 By: EOTT ENERGY CORP. as
General Partner
/s/ LORI L. MADDOX
---------------------------------
Lori L. Maddox
Controller
(Principal Accounting Officer)
<PAGE> 34
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,025
<SECURITIES> 0
<RECEIVABLES> 856,778
<ALLOWANCES> 1,732
<INVENTORY> 146,615
<CURRENT-ASSETS> 1,053,031
<PP&E> 549,280
<DEPRECIATION> 134,532
<TOTAL-ASSETS> 1,474,588
<CURRENT-LIABILITIES> 1,159,112
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 136,552<F1>
<TOTAL-LIABILITY-AND-EQUITY> 1,474,588
<SALES> 6,007,924
<TOTAL-REVENUES> 6,007,924
<CGS> 5,842,371
<TOTAL-COSTS> 5,982,626
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,470
<INCOME-PRETAX> 5,266
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,266
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,747
<NET-INCOME> 7,013
<EPS-BASIC> 0.00<F2>
<EPS-DILUTED> 0.29
<FN>
<F1>"OTHER SE" REPRESENTS CONSOLIDATED PARTNERS' CAPITAL.
<F2>"EPS PRIMARY" REPRESENTS BASIC COMMON EPS OF $0.26 AND BASIC SUBORDINATED EPS
OF $0.33.
</FN>
</TABLE>
