<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 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
<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
<S> <C>
ITEM 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended March 31, 1999 and 1998.........................................................3
Condensed Consolidated Balance Sheets (Unaudited) -
March 31, 1999 and December 31, 1998...............................................................4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended March 31, 1999 and 1998.........................................................5
Condensed Consolidated Statement of Partners' Capital (Unaudited) -
Three Months Ended March 31, 1999..................................................................6
Notes to Condensed Consolidated Financial Statements..................................................7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................................15
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.....................................26
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..............................................................................27
ITEM 4. Submission of Matters to a Vote of Security Holders............................................27
ITEM 6. Exhibits and Reports on Form 8-K...............................................................27
</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
MARCH 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenue ......................................................... $ 1,433,157 $ 1,339,404
Cost of Sales ................................................... 1,380,361 1,311,857
------------ ------------
Gross Margin .................................................... 52,796 27,547
Expenses
Operating expenses ........................................... 36,183 23,390
Depreciation and amortization ................................ 8,140 4,514
------------ ------------
Total ...................................................... 44,323 27,904
------------ ------------
Operating Income ................................................ 8,473 (357)
Other Income (Expense)
Interest income .............................................. 175 171
Interest and related charges ................................. (6,502) (1,790)
Other, net ................................................... 388 253
------------ ------------
Total ...................................................... (5,939) (1,366)
------------ ------------
Net Income (Loss) Before Cumulative Effect of Accounting Change . 2,534 (1,723)
Cumulative Effect of Accounting Change (Note 9) ................. 1,747 --
------------ ------------
Net Income (Loss) ............................................... $ 4,281 $ (1,723)
============ ============
Basic Net Income (Loss) Per Unit
Common ....................................................... $ 0.15 $ (0.09)
============ ============
Subordinated ................................................. $ 0.22 $ (0.09)
============ ============
Diluted Net Income (Loss) Per Unit .............................. $ 0.17 $ (0.09)
============ ============
Number of Units Outstanding for Diluted Computation ............. 23,976 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>
MARCH 31, DECEMBER 31,
1999 1998
---------- ----------
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents ................................... $ 3,501 $ 3,033
Trade and other receivables, net of allowance for doubtful
accounts of $1,800 and $1,860 respectively ............... 541,926 403,335
Inventories ................................................. 106,971 137,545
Other ....................................................... 60,350 30,328
---------- ----------
Total current assets ..................................... 712,748 574,241
---------- ----------
Property, Plant & Equipment, at cost ............................ 502,539 497,807
Less: Accumulated depreciation .............................. 119,435 112,568
---------- ----------
Net property, plant & equipment .......................... 383,104 385,239
---------- ----------
Other Assets, net of amortization ............................... 5,998 6,340
---------- ----------
Total Assets .................................................... $1,101,850 $ 965,820
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Trade accounts payable ...................................... $ 621,816 $ 524,822
Accrued taxes payable ....................................... 6,411 5,192
Short-term borrowings - affiliate ........................... 52,200 28,297
Bridge loan - affiliate ..................................... 42,000 42,000
Term loan - affiliate ....................................... 175,000 175,000
Repurchase agreements ....................................... 90,018 83,016
Other ....................................................... 13,251 9,983
---------- ----------
Total current liabilities ................................ 1,000,696 868,310
---------- ----------
Long-Term Liabilities ........................................... 6,298 --
---------- ----------
Commitments and Contingencies (Note 8)
Additional Partnership Interests (Note 6) ....................... -- 21,928
---------- ----------
Partners' Capital
Common Unitholders .......................................... 46,901 14,472
Special Unitholders ......................................... -- 21,092
Subordinated Unitholders .................................... 40,261 38,315
General Partner ............................................. 7,694 1,703
---------- ----------
Total Partners' Capital ......................................... 94,856 75,582
---------- ----------
Total Liabilities and Partners' Capital ......................... $1,101,850 $ 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>
THREE MONTHS ENDED
MARCH 31,
-------------------------
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) ......................................... $ 4,281 $ (1,723)
Depreciation .............................................. 7,600 4,007
Amortization of intangible assets ......................... 540 507
Gains on disposal of assets ............................... (166) (130)
Changes in components of working capital -
Receivables ............................................ (138,591) 144,251
Inventories ............................................ 30,574 57,379
Other current assets ................................... (30,022) (547)
Trade payables ......................................... 96,994 (197,636)
Accrued taxes payable .................................. 1,219 (821)
Other current liabilities .............................. 3,436 1,244
Other assets and liabilities .............................. 6,121 10
---------- ----------
Net Cash Provided By (Used In) Operating Activities ........... (18,014) 6,541
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment ....... 268 561
Additions to property, plant and equipment ................ (5,588) (1,412)
Other, net ................................................ -- 182
---------- ----------
Net Cash Used In Investing Activities ......................... (5,320) (669)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term borrowings - affiliate .. 23,903 (11,300)
Increase in repurchase agreements ......................... 7,002 10,080
Distributions to Unitholders .............................. (6,935) (5,695)
Issuance of Additional Partnership Interests .............. -- 3,838
Other ..................................................... (168) (158)
---------- ----------
Net Cash Provided By (Used In) Financing Activities ........... 23,802 (3,235)
---------- ----------
Increase In Cash and Cash Equivalents ......................... 468 2,637
Cash and Cash Equivalents, Beginning of Period ................ 3,033 3,737
---------- ----------
Cash and Cash Equivalents, End of Period ...................... $ 3,501 $ 6,374
========== ==========
Supplemental Cash Flow Information:
Interest paid ............................................. $ 6,408 $ 1,868
========== ==========
</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)
<TABLE>
<CAPTION>
COMMON SPECIAL SUBORDINATED GENERAL
UNITHOLDERS UNITHOLDERS UNITHOLDERS PARTNER
----------- ----------- ----------- -------
<S> <C> <C> <C> <C>
Balance at December 31, 1998........................... $ 14,472 $ 21,092 $ 38,315 $ 1,703
Net income (loss)...................................... 1,611 618 1,946 106
Cash distributions..................................... (5,381) (1,416) - (138)
Contribution of Additional Partnership Interests....... 15,905 - - 6,023
Conversion of Special Units............................ 20,294 (20,294) - -
------------- ------------- ------------- -----------
Balance at March 31, 1999.............................. $ 46,901 $ - $ 40,261 $ 7,694
============= ============= ============= ===========
</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 March 31, 1999 and December 31, 1998, the results of operations
and cash flows for the three months ended March 31, 1999 and 1998 and changes
in partners' capital for the three months ended March 31, 1999. For the three
months ended March 31, 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 29% subordinated limited partner interest. Enron, through its
ownership of EOTT Common Units, directly holds an approximate 14% 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 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.
7
<PAGE> 8
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. CREDIT RESOURCES AND LIQUIDITY
In 1995, Enron Corp. agreed to provide credit support (the "Credit
Facility") 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 on the availability of the Credit
Facility 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
(the "Note Payable"). This financing was provided at a rate of LIBOR plus 30
basis points per annum. The maturity date of the Note Payable was March 31,
1999 and the Note Payable 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 (the "Enron Facility") 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 on the availability of the Enron Facility 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
EOTT's ability to operate the ongoing Partnership business.
At March 31, 1999 and December 31, 1998, EOTT had $175 million of debt
(the "Term Loan") 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 matures on December 31, 1999. The interest rate on the Term Loan is LIBOR
plus 300 basis points.
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 March 31, 1999 and December 31, 1998, EOTT had $42.0
million of debt outstanding with Enron under a $100 million bridge loan (the
"Bridge Loan") to finance a portion of the cash consideration for the
acquisition of assets from Koch. The interest rate on the Bridge Loan is
initially LIBOR plus 400 basis points. At the end of each three-month period,
the spread on the Bridge Loan will increase by 25 basis points. The Bridge Loan
is unsecured and matures on December 31, 1999.
As discussed above, the interim Bridge Loan ($42 million) and Term Loan
($175 million) provided by Enron are due December 31, 1999. The General Partner
intends to refinance the Bridge Loan and Term Loan on a long-term basis before
maturity. The General Partner anticipates that the debt will be refinanced
using a combination of financing alternatives including (a) third party bank
debt, (b) private placement of debt, (c) an offering of high yield debt and/or
(d) an equity offering utilizing some portion of the additional 10 million
Common Units which were authorized to be issued subsequent to year end (see
Note 5).
8
<PAGE> 9
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The General Partner believes that the Enron Facility, Bridge Loan, Term
Loan and subsequent refinancing discussed previously 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.
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. Enron has committed to provide total cash
distribution support 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 in exchange for Additional Partnership Interests ("APIs").
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 March 31, 1999, EOTT had
outstanding forward commodity repurchase agreements of approximately $90.0
million. Pursuant to the agreements, which had terms of thirty days, EOTT
repurchased the crude oil inventory on April 20, 1999 for approximately $90.5
million.
9
<PAGE> 10
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. EARNINGS PER UNIT
Net income (loss) shown in the table below excludes the approximate two
percent interest of the General Partner. Earnings (loss) per unit are
calculated as follows (in millions, except per unit amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------------
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 $ 2,229 14,976 $ 0.15 $(1,061) 11,830 $(0.09)
Subordinated $ 1,946 9,000 $ 0.22 $ (628) 7,000 $(0.09)
Diluted (2) $ 4,175 23,976 $ 0.17 $(1,689) 18,830 $(0.09)
</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 are 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 earnings (loss) per unit calculation assumes the conversion of
Subordinated Units into Common Units.
Per unit information related to the cumulative effect of the change in
accounting principle for the three months ended March 31, 1999 is as follows:
<TABLE>
<CAPTION>
Basic
-------------------------------
Common Subordinated Diluted
------------- ------------- -------------
<S> <C> <C> <C>
Net Income Before Cumulative Effect
of Accounting Change............................ $ 0.08 $ 0.15 $ 0.10
Cumulative Effect of Accounting Change............. $ 0.07 $ 0.07 $ 0.07
------------- ------------- -------------
Net Income......................................... $ 0.15 $ 0.22 $ 0.17
============= ============= =============
</TABLE>
5. PARTNERS' CAPITAL
The following is a reconciliation of Units outstanding for the three
months ended March 31, 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) --
------------ ------------ ------------
Units Outstanding at March 31, 1999 .............. 14,976,011 -- 9,000,000
============ ============ ============
</TABLE>
10
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EOTT ENERGY PARTNERS, L.P.
NOTES TO 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 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.
6. TRANSACTIONS WITH ENRON AND RELATED PARTIES
Revenue and Cost of Sales. A summary of revenue and cost of sales with
Enron and its affiliates are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenue......................................................... $ 555 $ 6,710
Cost of Sales................................................... 2,248 7,411
</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 purchases
from Enron Oil & Gas Company and natural gas liquids purchases from Enron Gas
Liquids, Inc. These transactions, in the opinion of management, are no less
favorable than can be obtained from unaffiliated third parties.
Related party receivables at March 31, 1999 and December 31, 1998 were
$0.1 million and $0.2 million, respectively, and are classified as trade and
other receivables. Related party payables at March 31, 1999 and December 31,
1998 were $1.4 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 a prior acquisition of assets
from Koch on July 1, 1998, (b) Enron agreed to increase and extend the
Partnership's credit facility with Enron to $1 billion through December 31,
2001, (c) the Partnership agreed to issue 1,150,000 Special Units to Enron, (d)
Enron agreed to contribute $21.9 million in APIs to the Partnership on the
earlier of the date certain proposals, discussed further in Note 5, are
approved by the Unitholders at a special meeting of Unitholders or May 17,
1999, (e) Enron agreed that if certain proposals are approved by the
Unitholders it will extend its cash distribution support through the fourth
quarter of 2001, and (f) the Partnership agreed that, if any additional APIs
are issued prior to approval of certain proposals by the Unitholders, it will
issue additional Common Units at $19.00 per share in exchange for such
additional APIs. 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 $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
was 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.
11
<PAGE> 12
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
7. OTHER INCOME (EXPENSE), NET
The components of other income (expense), net are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Gain (loss) on foreign currency transactions.................... $ 121 $ (21)
Gain on disposal of fixed assets................................ 166 130
Other........................................................... 101 144
----------- -----------
Total....................................................... $ 388 $ 253
=========== ===========
</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, 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. The Settling Defendants are waiting for a final
judgment to be entered. If no appeal to the final judgment is filed, the cases
referenced above will be dismissed.
The Partnership believes that it has obtained or has applied for all of
the necessary permits required by federal, state, and local environmental
agencies for the operation of its business. Further, the Partnership believes
that there are no outstanding liabilities or claims relating to environmental
matters individually, and in the aggregate, which would have a material adverse
impact on the Partnership's financial position or results of operations.
12
<PAGE> 13
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 months ended March 31,
1999, EOTT had a net mark-to-market gain of $2.1 million.
10. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". The
Statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. The standard cannot be applied retroactively, but early adoption
is permitted. EOTT has not yet determined the 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 5,300 active miles of common
carrier pipelines operated in 15 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.
13
<PAGE> 14
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 MARCH 31, 1999
Revenue from external customers ..... $ 1,315,247 $ 3,142 $ 114,768 $ -- $ 1,433,157
Intersegment revenue (a) ............ 13,122 20,294 5,554 (38,970) --
----------- ----------- ----------- ----------- -----------
Total revenue .................... 1,328,369 23,436 120,322 (38,970) 1,433,157
----------- ----------- ----------- ----------- -----------
Gross margin ........................ 22,092 23,564 7,140 -- 52,796
----------- ----------- ----------- ----------- -----------
Operating income (loss) ............. 1,569 10,761 2,385 (6,242) 8,473
Other expense ....................... -- -- -- (5,939) (5,939)
----------- ----------- ----------- ----------- -----------
Net income (loss) before cumulative
effect of accounting change........ 1,569 10,761 2,385 (12,181) 2,534
----------- ----------- ----------- ----------- -----------
THREE MONTHS ENDED MARCH 31, 1998
Revenue from external customers ..... $ 1,077,831 $ 1,584 $ 173,885 $ 86,104 $ 1,339,404
Intersegment revenue (a) ............ 8,094 3,418 123 (11,635) --
----------- ----------- ----------- ----------- -----------
Total revenue .................... 1,085,925 5,002 174,008 74,469 1,339,404
----------- ----------- ----------- ----------- -----------
Gross margin ........................ 19,612 4,957 2,294 684 27,547
----------- ----------- ----------- ----------- -----------
Operating income (loss) ............. 4,144 368 (62) (4,807) (357)
Other expense ....................... -- -- -- (1,366) (1,366)
----------- ----------- ----------- ----------- -----------
Net income (loss) before cumulative
effect of accounting change........ 4,144 368 (62) (6,173) (1,723)
----------- ----------- ----------- ----------- -----------
TOTAL ASSETS AT MARCH 31, 1999 ...... $ 723,939 $ 280,573 $ 75,092 $ 22,246 $ 1,101,850
----------- ----------- ----------- ----------- -----------
TOTAL ASSETS AT DECEMBER 31, 1998 ... 608,655 279,315 60,677 17,173 965,820
----------- ----------- ----------- ----------- -----------
</TABLE>
(a) Intersegment sales for North American Crude Oil - EOR and West Coast
Operations are made at prices comparable to those received from
external customers. Intersegment sales for Pipeline Operations are
based on published pipeline tariffs.
(b) Corporate and Other also includes the East of Rockies refined products
business and intersegment eliminations.
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 April 20, 1999, the Board of Directors of EOTT Energy Corp., as General
Partner, declared the Partnership's regular quarterly cash distribution of
$.475 for all Common Units for the period January 1, 1999 through March 31,
1999. The first quarter distribution of $7.2 million was paid on May 14, 1999
to the General Partner and all Common Unitholders of record as of April 30,
1999. The distribution was paid utilizing $4.7 million of Available Cash from
the Partnership and $2.5 million cash provided by Enron pursuant to Enron's
distribution support obligation. After payment of the first quarter
distribution in May 1999, the cumulative amount paid from the Enron
distribution support will total $2.5 million.
On May 1, 1999, EOTT acquired crude oil transportation and storage assets
in key oil producing regions from Texas-New Mexico Pipeline Company which
included approximately 2,000 miles of common carrier crude oil pipelines. EOTT
paid $33 million in cash and financed the acquisition using short-term
borrowings from Enron.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
Information Regarding Forward-Looking Information
The statements in this Quarterly Report on Form 10-Q that are not
historical information are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Such forward-looking statements include the discussions
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations." Any forward-looking statements are not guarantees of future
performance, involve significant risks and uncertainties and actual results may
vary materially from those in the forward-looking statements as a result of
various factors. Important factors that could cause actual results to differ
materially from those in the forward-looking statements herein include the
Partnership's success in obtaining additional lease barrels, 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 at FERC relating
to pipeline tariff regulation, the successful resolution of litigation, the
success of the Partnership's risk management activities and conditions of the
capital and equity markets during the periods covered by the forward-looking
statements. Although the Partnership believes that its expectations regarding
future events are based on reasonable assumptions, it can give no assurance
that these are all the factors that could cause actual results to vary
materially from the forward-looking statements or that its expectations
regarding future developments will prove to be correct.
OVERVIEW
Through its affiliated limited partnerships, EOTT Energy Operating Limited
Partnership, EOTT Energy Canada Limited Partnership, and EOTT Energy Pipeline
Limited Partnership, EOTT is engaged in the purchasing, gathering,
transporting, trading, storage and resale of crude oil and 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).
The purchase and resale of crude oil is a highly competitive activity with
very thin and volatile profit margins. EOTT's operating results are sensitive to
a number of factors including: 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. EOTT purchases crude oil lease
barrels at prevailing market prices. Generally, as EOTT purchases lease barrels,
it simultaneously enters into a corresponding sale transaction to secure a
profit, thereby minimizing or eliminating exposure to price fluctuations. EOTT
seeks to maintain a substantially balanced position at all times; however, EOTT
has certain basis risks (the risk that price relationships between delivery
points, grades of crude oil or delivery periods will change) which cannot be
completely hedged. In addition, EOTT's marketing strategies also provide the
potential to enhance the value of the crude oil that EOTT purchases.
RECENT DEVELOPMENTS
On May 1, 1999, EOTT acquired crude oil transportation and storage assets
in key oil producing regions from Texas-New Mexico Pipeline Company which
included approximately 2,000 miles of common carrier crude oil pipelines. EOTT
paid $33 million in cash and financed the acquisition using short-term
borrowings from Enron.
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
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
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.
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 $4.3 million or $0.17 per diluted Unit for the
first quarter of 1999 compared to a net loss of $1.7 million or $0.09 per
diluted Unit for the first quarter of 1998. The first quarter 1999 results
reflect increased lease volumes and margins associated with the asset
acquisitions in 1998 and the adoption of conclusions reached by the Emerging
Issues Task Force Issue No. 98-10 ("Issue 98-10"), "Accounting for Contracts
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 and approximately $2.1 million of
unrealized mark-to-market gains in the current period.
Selected financial data for EOTT's business segments are summarized below,
in millions:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
North American Crude Oil - East Rockies................................... $ 1,328.4 $ 1,085.9
Pipeline Operations....................................................... 23.5 5.0
West Coast Operations..................................................... 120.3 174.0
Corporate and Other....................................................... - 86.1
Intersegment eliminations................................................. (39.0) (11.6)
----------- ------------
Total..................................................................... $ 1,433.2 $ 1,339.4
=========== ============
Gross margin:
North American Crude Oil - East of Rockies................................ $ 22.1 $ 19.6
Pipeline Operations....................................................... 23.6 4.9
West Coast Operations..................................................... 7.1 2.3
Corporate and Other....................................................... - 0.7
------------ ------------
Total................................................................... $ 52.8 $ 27.5
=========== ============
Operating income (loss):
North American Crude Oil - East of Rockies................................ $ 1.6 $ 4.1
Pipeline Operations....................................................... 10.8 0.4
West Coast Operations..................................................... 2.3 (0.1)
Corporate and Other....................................................... (6.2) (4.8)
------------ ------------
Total................................................................... $ 8.5 $ (0.4)
=========== ============
</TABLE>
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
The North American Crude Oil - East of Rockies business segment and West
Coast Operations business segment are characterized by generally very thin and
volatile profit margins on purchase and sale transactions, and the absolute
price levels for crude oil and other petroleum products do not necessarily bear
a direct relationship to margins per barrel, although such price levels
significantly impact revenues and cost of sales. Gross margin is the difference
between the sales price of crude oil or other petroleum products and the cost
of crude oil and products purchased, including costs paid to third parties for
transportation and handling charges. As a result, period-to-period variations
in revenues and cost of sales are not meaningful, and therefore are not
discussed for the North American Crude Oil - East of Rockies and West Coast
Operations business segments. Pipeline Operations revenues are primarily a
function of the level of crude oil transported through the pipeline, known as
throughput and the applicable published pipeline tariffs.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998.
North American Crude Oil - East of Rockies: Operating income for the North
American Crude Oil segment was $1.6 million for the first quarter 1999,
compared to $4.1 million for the same period in 1998. Gross margin increased
$2.5 million to $22.1 million in the first quarter of 1999 due primarily to
increased margins related to the asset acquisitions in 1998 and the
mark-to-market of certain energy contracts which resulted in approximately $2.1
million of unrealized gains being recorded in the current period. Operating
expenses of $20.5 million for the first quarter 1999 were $5.0 million higher
than in the first quarter of 1998 due primarily to higher operating costs and
employee related costs associated with the acquisition of assets from Koch in
December 1998.
Pipeline Operations: Pipeline Operations had operating income of $10.8
million for the first quarter 1999 compared to operating income of $0.4 million
for the same period in 1998. Revenues increased $18.5 million to $23.5 million
in the first quarter of 1999 due primarily to increased activity related to the
acquisition of pipelines from Koch. Operating expenses of $12.8 million for the
first quarter of 1999 were $8.3 million higher than in the first quarter of
1998 due to higher employee related costs, operating costs and depreciation and
amortization associated with the acquisition of assets from Koch.
West Coast Operations: West Coast Operations had operating income of $2.3
million for the first quarter 1999, compared to an operating loss of $0.1
million for the same period in 1998 primarily due to increased volumes and
margins related to the acquisition of assets from Koch. Operating expenses of
$4.8 million for the first quarter of 1999 were $2.4 million higher than in the
first quarter of 1998 due to higher employee related costs, operating costs and
depreciation and amortization associated with the acquisition of assets from
Koch.
Corporate and Other: Corporate and Other costs were $6.2 million for the
first quarter 1999 compared to $5.5 million in the first quarter 1998. The
increase is due primarily to higher system operating costs and insurance costs.
Other income (expense), net, consisting primarily of gains (losses) on
transactions denominated in foreign currency and gains on sales of fixed
assets, increased $0.1 million in the first quarter 1999 compared to the same
period in 1998 primarily due to gains on foreign currency transactions.
Interest and related charges in the first quarter 1999 were $6.5 million
compared to $1.8 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 acquisition
of assets from Koch.
LIQUIDITY AND CAPITAL RESOURCES
General
Management anticipates that short-term liquidity as well as sustaining
capital expenditures for the foreseeable future will be funded primarily by
cash generated from operations in addition to lines of credit provided by
Enron, more fully described in Note 3 to the Condensed Consolidated Financial
Statements.
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
Cash Flows From Operating Activities
Net cash used in operating activities totaled $18.0 million for the first
quarter of 1999 compared to net cash provided by operating activities of $6.5
million for the same period in 1998. Net cash used in operating activities in
the first quarter of 1999 is primarily due to increased cash requirements
related to NYMEX trading activities.
Cash Flows From Investing Activities
Net cash used in investing activities totaled $5.3 million for the first
quarter of 1999 compared to $0.7 million for the same period in 1998. Proceeds
from asset sales were $0.3 million in 1999 compared to $0.6 million in asset
sales the first quarter of 1998. Additions to property, plant, and equipment of
$5.6 million in 1999 include $3.5 million for pipeline connections and
improvements and $0.9 million for information systems development. The
Partnership expects to incur approximately $7-8 million in sustaining capital
expenditures for the remainder of 1999.
Cash Flows From Financing Activities
Net cash provided by financing activities totaled $23.8 million for the
first quarter of 1999 compared to net cash used of $3.2 million for the same
period in 1998. The 1999 amount primarily represents increases in short-term
borrowings for working capital needs offset by distributions paid to all Common
and Special Unitholders for the period October 1, 1998 through December 31,
1998.
Working Capital and Credit Resources
In 1995, Enron Corp. agreed to provide credit support (the "Credit
Facility") 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 on the availability of the Credit Facility 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 (the "Note
Payable"). This financing was provided at a rate of LIBOR plus 30 basis points
per annum. The maturity date of the Note Payable was March 31, 1999 and the Note
Payable 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 (the "Enron Facility") 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 on the availability of the Enron Facility 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
EOTT's ability to operate the ongoing Partnership business.
At March 31, 1999 and December 31, 1998, EOTT had $175 million of debt
(the "Term Loan") outstanding with Enron under a financing arrangement to fund
a portion of the cash consideration paid to Koch for the assets
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
purchased in 1998 and to refinance indebtedness incurred in prior acquisitions.
The Term Loan matures on December 31, 1999. The interest rate on the Term Loan
is LIBOR plus 300 basis points.
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 March 31, 1999 and December 31, 1998, EOTT had $42.0
million of debt outstanding with Enron under a $100 million bridge loan (the
"Bridge Loan") to finance a portion of the cash consideration for the
acquisition of assets from Koch. The interest rate on the Bridge Loan is
initially LIBOR plus 400 basis points. At the end of each three-month period,
the spread on the Bridge Loan will increase by 25 basis points. The Bridge Loan
is unsecured and matures on December 31, 1999.
As discussed above, the interim Bridge Loan ($42 million) and Term Loan
($175 million) provided by Enron are due December 31, 1999. The General Partner
intends to refinance the Bridge Loan and Term Loan on a long-term basis before
maturity. The General Partner anticipates that the debt will be refinanced
using a combination of financing alternatives including (a) third party bank
debt, (b) private placement of debt, (c) an offering of high yield debt and/or
(d) an equity offering utilizing some portion of the additional 10 million
Common Units which were authorized to be issued subsequent to year end (see
Note 5 to the Condensed Consolidated Financial Statements).
The General Partner believes that the Enron Facility, Bridge Loan, Term
Loan and subsequent refinancing discussed previously 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.
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.
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
MQD is $0.475 per Unit. Enron has committed to provide total cash
distribution support in an amount necessary to pay MQDs, with respect to
quarters ending on or before December 31, 2001, in an amount up to an aggregate
of $29 million in exchange for Additional Partnership Interests ("APIs").
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 March 31, 1999, EOTT had
outstanding forward commodity repurchase agreements of approximately $90.0
million. Pursuant to the agreements, which had terms of thirty days, EOTT
repurchased the crude oil inventory on April 20, 1999 for approximately $90.5
million.
YEAR 2000
The Year 2000 problem generally results from the use in computer hardware
and software of two digits rather than four digits to define the applicable
year. When computer systems must process dates both before and after January 1,
2000, two-digit year "fields" may create processing ambiguities that can cause
errors and system failures. For example, computer programs that have
date-sensitive features may recognize a date represented by "00" as the year
1900, instead of 2000.
The effects of the Year 2000 problem are exacerbated because of the
interdependence of computer and telecommunications systems in the United States
and throughout the world. This interdependence certainly is true for the
Partnership and its suppliers, trading partners, and customers.
State of Readiness
The General Partner's Board of Directors has been briefed about the Year
2000 problem. The Board has adopted a Year 2000 plan (the "Plan") aimed at
taking reasonable steps to prevent the Partnership's mission-critical functions
from being impaired due to the Year 2000 problem. "Mission-critical" functions
are those critical functions whose loss would cause an immediate stoppage of or
significant impairment to the Partnership's business.
The Partnership is implementing the Plan, which will be modified as events
warrant. Under the Plan, the Partnership will continue to inventory its
mission-critical computer hardware and software systems and embedded chips
(computer chips with date-related functions, contained in a wide variety of
devices), and software; assess the effects of Year 2000 problems on the
mission-critical functions of the Partnership's businesses; remedy material
disruptions or other material adverse effects on mission-critical functions,
processes and systems; verify and test the mission-critical systems to which
remediation efforts have been applied; and attempt to ameliorate those
mission-critical aspects of the Year 2000 problem that are not remediated by
January 1, 2000, including the development of contingency plans to cope with
the mission-critical consequences of Year 2000 problems that have not been
identified or remediated by that date.
Implementation of the Plan is directly supervised by the General Partner's
Chief Information Officer, who is the Year 2000 Project Director. The Project
Director coordinates the implementation of the Plan with the assistance of an
Oversight Committee, consisting of selected employees of the General Partner
and one member of its Board of Directors. The Partnership also has engaged (or
will engage, as appropriate) certain outside consultants, technicians and other
external resources to aid in formulating and implementing the Plan.
20
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
The Plan recognizes that the computer, telecommunications, and other
systems ("Outside Systems") of outside entities ("Outside Entities") have the
potential for major, mission-critical, adverse effects on the conduct of the
Partnership's business. The Partnership does not have control of these Outside
Entities or Outside Systems. However, the Plan includes an ongoing process of
contacting Outside Entities whose systems, in the General Partner's judgment,
have, or may have, a substantial effect on the Partnership's ability to continue
to conduct the mission-critical aspects of its business without disruption from
Year 2000 problems. The Plan envisions the Partnership attempting to inventory
and assess the extent to which these Outside Systems may not be "Year 2000
ready" or "Year 2000 compatible" (that is, able to process data reliably, both
before and after January 1, 2000, without disruption due to an inability to
process date information). The Partnership will attempt reasonably to coordinate
with these Outside Entities in an ongoing effort to obtain assurance that the
Outside Systems that are mission-critical to the Partnership will be Year 2000
compatible well before January 1, 2000. Consequently, the Partnership will work
prudently with Outside Entities in a reasonable attempt to inventory, assess,
analyze, convert (where necessary), test (where necessary), and develop
contingency plans for the Partnership's connections to these mission-critical
Outside Systems, to ascertain the extent to which they are, or can be made to
be, Year 2000 ready and compatible with the Partnership's remediation of its own
mission-critical systems.
It is important to recognize that the processes of inventorying,
assessing, analyzing, converting (where necessary), testing (where necessary),
and developing contingency plans for mission-critical items in anticipation of
the Year 2000 event are necessarily iterative processes. That is, the steps are
repeated as the Partnership learns more about the Year 2000 problem and its
effects on the Partnership's internal systems and on Outside Systems. As the
steps are repeated, it is likely that new problems will be identified and
addressed. The Partnership anticipates that it will continue with these
processes through January 1, 2000 and, if necessary based on experience, into
the Year 2000 in order to assess and remediate problems that reasonably can be
identified only after the start of the new century.
As of May 1999, the Partnership is at various stages in implementation of
the Plan as shown in the following tables. The Plan includes verification and
validation of certain of the Partnership's mission-critical facilities and
functions by independent consultants. These consultants will participate to
varying degrees in many or all of the stages, including the inventory,
assessment, and testing phases. The Partnership will continue closely to
monitor work under the Plan and will revise estimated completion dates for the
initial iteration of each listed process according to experience. The Koch
acquisition in December of 1998 has caused some of the dates set forth below to
be adjusted. 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 IP IP IP IP IP IP
Internal Items
- ------------------- ---------- ----------- ---------- ----------- -------- ----------- ------------------
Mission-Critical C IP IP IP IP IP TBI
Outside Entities
- ------------------- ---------- ----------- ---------- ----------- -------- ----------- ------------------
Legend: C = Complete IP = In Process TBI = To Be Initiated
</TABLE>
21
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
<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 5/99 6/99 7/99 8/99 10/99
Internal Items
- ------------------- ---------- ----------- ---------- ----------- -------- ----------- ------------------
Mission-Critical 7/98 5/99 6/99 8/99 9/99 10/99 10/99
Outside Entities
- ------------------- ---------- ----------- ---------- ----------- -------- ----------- ------------------
</TABLE>
Costs to Address Year 2000 Issues
Preliminary estimates of the total Year 2000 costs, which will be expensed
as incurred, range from $2 million to $3 million. However, the estimated costs
of implementing the Plan do not take into account the costs, if any, that might
be incurred as a result of Year 2000 related failures that occur despite the
Partnership's implementation of the Plan. These projects, which began in 1997,
will continue through 1999. Although management believes that its estimates are
reasonable, there can be no assurance, for the reasons stated in the "Summary"
section, below, that the actual costs of implementing the Plan will not differ
materially from the estimated costs or that the Partnership will not be
materially adversely affected by Year 2000 issues.
Year 2000 Risk Factors
Certain of the Partnership's operations are regulated by governmental
authorities. The Partnership expects to satisfy these regulatory authorities'
requirements for achieving Year 2000 readiness. If the Partnership's reasonable
expectations in this regard are in error, and if a regulatory authority should
order the temporary cessation of the Partnership's operations in one or more of
these areas, the adverse effect on the Partnership could be material. Outside
Entities could face similar problems that materially adversely affect the
Partnership.
Between now and 2000 there will be increased competition for people
skilled in the technical and managerial skills necessary to deal with the Year
2000 problem. While the Partnership is taking substantial precautions to
recruit and retain sufficient people skilled in dealing with the Year 2000
problem, and has hired consultants who bring additional skilled people to deal
with the Year 2000 problem as it affects the Partnership, the Partnership could
face shortages of skilled personnel or other resources, such as Year 2000 ready
computer chips, and these shortages might delay or otherwise impair the
Partnership's ability to assure that its mission-critical systems are Year 2000
ready. Outside Entities could face similar problems that materially adversely
affect the Partnership. The General Partner believes that the possible impact
of the shortage of skilled people is not, and will not be, unique to the
Partnership.
The Partnership estimates that its mission-critical systems will be Year
2000-ready substantially before January 1, 2000. However, there is no assurance
that the Plan will succeed in accomplishing its purpose or that unforeseen
circumstances will not arise during the implementation of the Plan that would
materially adversely affect the Partnership.
The Partnership is taking reasonable steps to identify, assess, and, where
appropriate, to replace devices that contain embedded chips. Despite these
reasonable efforts, the Partnership anticipates that it will not be able to
find and remediate all embedded chips in the Partnership's systems. Further,
the Partnership anticipates that Outside Entities on which the Partnership
depends also will not be able to find and remediate all embedded chips in their
systems. Some of the embedded chips that fail to operate or that produce
anomalous results may create system disruptions or failures. Some of these
disruptions or failures may spread from the systems in which they are located
to other systems in a cascade. These cascading failures may have adverse
effects upon the
22
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
Partnership's ability to maintain safe operations, and may also have adverse
effects upon the Partnership's ability to serve its customers and otherwise to
fulfill certain contractual and other legal obligations. The embedded chip
problem is widely recognized as one of the more difficult aspects of the Year
2000 problem across industries and throughout the world. The possible adverse
impact of the embedded chip problem is not, and will not be, unique to the
Partnership.
The Partnership cannot assure that suppliers upon which it depends for
essential goods and services will convert and test their mission-critical
systems and processes in a timely manner. Failure of delay by all or some of
these entities, including the U.S. and state or local governments and foreign
governments, could create substantial disruptions having a material adverse
affect on the Partnership's business.
In a recent Securities and Exchange Commission release regarding Year 2000
disclosures, the Securities and Exchange Commission stated that public
companies must disclose the most reasonably likely worst case Year 2000
scenario. Analysis of the most reasonably likely worst case Year 2000 scenarios
the Partnership may face leads to contemplation of the following possibilities:
widespread failure of electrical, gas, and similar supplies by utilities
serving the Partnership; widespread disruption of the services of
communications common carriers; similar disruption to means and modes of
transportation for the Partnership and its employees, contractors, suppliers,
and customers; significant disruption to the Partnership's ability to gain
access to, and remain working in, office buildings and other facilities; the
failure of substantial numbers of the Partnership's mission-critical
information (computer) hardware and software systems, including both internal
business systems and systems (such as those with embedded chips) controlling
operational facilities such as oil facilities and pipelines; and the failure of
Outside Systems, the effects of which would have a cumulative material adverse
impact on the Partnership's mission-critical systems. Among other things, the
Partnership could face substantial claims by customers or loss of revenues due
to service interruptions, inability to fulfill contractual obligations,
inability to account for certain revenues or obligations or to bill customers
accurately and on a timely basis, and increased expenses associated with
litigation, stabilization of operations following mission-critical failures,
and the execution of contingency plans. The Partnership could also experience
an inability by customers, traders, and others to pay, on a timely basis or at
all, obligations owed to the Partnership. Under these circumstances, the
adverse effect on the Partnership, and the diminution of the Partnership's
revenues, would be material, although not quantifiable at this time. Further in
this scenario, the cumulative effect of these failures could have a substantial
adverse effect on the economy, domestically and internationally. The adverse
effect on the Partnership, and the diminution of the Partnership's revenues,
from a domestic or global recession or depression, also is likely to be
material, although not quantifiable at this time.
The Partnership will continue to monitor business conditions with the aim
of assessing and quantifying material adverse effects, if any, that result or
may result from the Year 2000 problem.
Contingency Plans
As part of the Plan, the Partnership is developing contingency plans that
will deal with two aspects of the Year 2000 problem: (1) that the Partnership,
despite its good-faith, reasonable efforts, may not have satisfactorily
remediated all its internal mission-critical systems; and (2) that Outside
Systems may not be Year 2000 ready, despite the Partnership's good-faith,
reasonable efforts to work with Outside Entities. The Partnership's contingency
plans are being designed to minimize the disruptions or other adverse effects
resulting from Year 2000 incompatibilities regarding these mission-critical
functions or systems, and to facilitate the early identification and
remediation of mission-critical Year 2000 problems that first manifest
themselves after January 1, 2000.
These contingency plans will contemplate an assessment of all its
mission-critical internal information technology systems and its internal
operational systems that use computer-based controls. This process has begun
and will continue as circumstances require. Further, the Partnership will in
that time frame assess any
23
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
mission-critical disruptions due to Year 2000-related failures that are
external to the Partnership. These assessments will be conducted for all of the
Partnership's operations.
These contingency plans include, where appropriate, the creation of teams
that will be standing by on the eve of the new millennium, prepared to respond
rapidly and otherwise as necessary to mission-critical Year 2000-related
problems as soon as they become known. The composition of teams that are
assigned to deal with Year 2000 problems will vary according to the nature,
mission-criticality, and location of the problem.
Summary
The Partnership has a Plan to deal with the Year 2000 challenge and
believes that it will be able to achieve substantial Year 2000 readiness with
respect to the mission-critical systems that it controls. From a
forward-looking perspective, the extent and magnitude of the Year 2000 problem
as it will affect the Partnership, both before and for some period after
January 1, 2000, are difficult to predict or quantify for a number of reasons.
Among these are: the difficulty of locating "embedded" chips that may be in a
great variety of mission-critical hardware used for process or flow control,
environmental, transportation, access, communications, and other systems; the
difficulty of inventorying, assessing, remediating, verifying and testing
Outside Systems; the difficulty in locating all mission-critical software
(computer code) internal to the Partnership that is not Year 2000 compatible;
and the unavailability of certain necessary internal or external resources,
including but not limited to trained technicians and other personnel to perform
adequate remediation, verification, and testing of mission-critical Partnership
systems or Outside Systems. There can be no assurance, for example, that all of
the Partnership's systems and all Outside Systems will be adequately remediated
so that they are Year 2000 ready by January 1, 2000, or by some earlier date,
so as not to create a material disruption to the Partnership's business. If,
despite the Partnership's reasonable efforts under its Year 2000 Plan, there
are mission-critical Year 2000-related failures that create substantial
disruptions to the Partnership's business, the adverse impact on the
Partnership's business could be material. Year 2000 costs are difficult to
estimate accurately because of unanticipated vendor delays, technical
difficulties, the impact of tests of Outside Systems, and similar events.
Moreover, the estimated costs of implementing the Plan do not take into account
the costs, if any, that might be incurred as a result of Year 2000-related
failures that occur despite the Partnership's implementation of the Plan.
OTHER MATTERS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". The
Statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. The standard cannot be applied retroactively but early adoption
is permitted. EOTT has not yet determined the 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 its scale of business, add cash flow, and
reduce earnings volatility. The acquisition of assets from Texas-New
24
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
Mexico Pipeline Company, effective May 1, 1999, will provide 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 marketing and trading opportunities. EOTT management is
committed to continue improving internal business processes in all operational,
marketing, and administrative areas and thereby achieve improvements in
productivity.
Historically, this business has been very competitive with thin and
volatile profit margins. Due to the volatility of crude oil prices and the
decline in crude oil production, crude oil gathering margins continue to be
volatile. The volatility of the market and the amount of crude oil produced
cannot be projected with any level of certainty. The Partnership intends to
continue to pay MQDs to all its Common Unitholders; however, due to the
volatility of the market 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 and extended it through the fourth
quarter 2001, which should further assure Common Unitholders of continued
reliable distributions.
25
<PAGE> 26
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EOTT ENERGY PARTNERS, L.P.
ITEM 3. 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 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.
26
<PAGE> 27
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 4. Submission of Matters to a Vote of Security Holders
On February 12, 1999, the Partnership obtained approval of three proposals
presented at a Special Meeting of Unitholders. The three proposals and the
votes cast for each proposal are as follows: (1) authorization for the
Partnership to issue an additional 10,000,000 Common Units; for - 10,369,173;
against - 277,605; abstain - 125,903 (2) approval to change the terms of the
Special Units so that they are convertible into Common Units and will permit
those Common Units to be listed on the New York Stock Exchange; for -
7,457,327; against - 222,937; abstain - 112,406 (3) approval of the recent
acquisition of assets from Koch Pipeline Company, L.P. and Koch Oil Company, in
order to permit the listing on the New York Stock Exchange of Common Units that
may be issued upon conversion of the Subordinated Units that were issued to
Koch Pipeline Company in connection with the transaction; for - 5,548,016;
against - 131,557; abstain - 113,097.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 10.29 Form of Executive Employment Agreement between EOTT Energy
Corp. and Dana R. Gibbs
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
None
27
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EOTT ENERGY PARTNERS, L.P.
(A Delaware Limited Partnership)
Date: May 17, 1999 By: EOTT ENERGY CORP. as
General Partner
/s/ LORI L.MADDOX
--------------------------------
Lori L. Maddox
Controller
(Principal Accounting Officer)
28
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
Exhibit 10.29 Form of Executive Employment Agreement between EOTT Energy
Corp. and Dana R.Gibbs
Exhibit 27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.29
EXECUTIVE EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement"), is entered into between EOTT
ENERGY CORP., a Delaware corporation, having offices at 1330 Post Oak
Blvd., Suite 2700, Houston, Texas 77056 ("Employer" and "Company"), and
DANA R. GIBBS, an individual currently residing at 23702 Powder Mill
Drive, Tomball, Texas 77375 ("Employee"), to be effective as of the
effective date of April 1, 1999.
WITNESSETH:
WHEREAS, Employee is currently employed under that certain Executive
Employment Agreement between Enron Capital & Trade Resources Corp. and
Dana R. Gibbs, effective December 1, 1998, and Employee is willing to
continue his employment with EOTT Energy Corp. under the terms and
conditions set forth in this Executive Employment Agreement which shall
supersede all previous agreements; and
NOW, THEREFORE, for and in consideration of the mutual promises,
covenants, and obligations contained herein, Employer and Employee agree
as follows:
ARTICLE 1: EMPLOYMENT AND DUTIES:
1.1. Employer agrees to employ Employee, and Employee agrees to be
employed by Employer, beginning as of the Effective Date of this Agreement and
continuing for a period of three (3) years, (the "Term"), subject to the terms
and conditions of this Agreement.
1.2. Employee initially shall be employed as Executive Vice President,
EOR Business, reporting to the President and Chief Executive Officer of the
Employer. Employee agrees to serve in the assigned position and to perform
diligently and to the best of Employee's abilities the duties and services
appertaining to such position as determined by Employer, as well as such
additional or different duties and services appropriate to such position which
Employee from time to time may be reasonably directed to perform by Employer.
Employee shall at all times comply with and be subject to such policies and
procedures as Employer may establish from time to time.
1.3. Employee shall, during the period of Employee's employment by
Employer, devote Employee's full business time, energy, and best efforts to the
business and affairs of Employer. Employee may not engage, directly or
indirectly, in any other business, investment, or activity that interferes with
Employee's performance of Employee's duties hereunder, is contrary to the
interests of Employer, or requires any significant portion of Employee's
business time.
1.4. Employee acknowledges and agrees that Employee owes a fiduciary
duty of loyalty, fidelity and allegiance to act at all times in the best
interests of the Employer and to do no act which would injure Employer's
business, its interests, or its reputation. Employee agrees to be in compliance
with the policies and procedures as described and contained in the EOTT Energy
Corp. and Enron Corp. Conduct of Business Affairs booklets.
<PAGE> 2
ARTICLE 2: COMPENSATION AND BENEFITS:
2.1. Employee's annual base salary during the Term shall be not less
than the sum of Two Hundred Thousand and No/100 Dollars ($200,000.00), which
shall be paid in installments in accordance with Employer's standard payroll
practice. Employee's annual incentive target shall be 50% of Employee's annual
base salary with the opportunity to receive a maximum up to 100% of Employee's
annual base salary. Employee shall receive four (4) weeks of vacation annually.
On each January 31, 2000, and January 31, 2001, Employer shall pay Employee a
Retention Bonus in the amount of $100,000.00. If Employee voluntarily
terminates his or her employment within three (3) months after receipt of a
Retention Bonus, Employee must repay the entire Retention Bonus to Employer.
2.2. While employed by Employer (both during the Term and thereafter),
Employee shall be allowed to participate, on the same basis generally as other
employees of Employer, in all general employee benefit plans and programs,
including improvements or modifications of the same, which on the effective
date or thereafter are made available by Employer to all or substantially all
of Employer's employees. Such benefits, plans, and programs may include,
without limitation, medical, health, and dental care, life insurance,
disability protection, and qualified plans. Nothing in this Agreement is to be
construed or interpreted to provide greater rights, participation, coverage, or
benefits under such benefit plans or programs than provided to similarly
situated employees pursuant to the terms and conditions of such benefit plans
and programs.
2.3. Employee shall be eligible to participate in the EOTT Energy
Corp. Long Term Incentive Plan, and EOTT Energy Corp. Annual Incentive Plan
currently maintained or hereafter maintained by Employer for its officers as a
group. Under the EOTT Energy Corp. Long Term Incentive Plan, in 1999 Employee
shall receive a grant of 53,475 PAR Units at $9.35 PAR Price. Employee shall
vest 25% per year upon the anniversary date of grant.
Employee shall receive a similar grant for each year of this Agreement.
2.4. Employer shall not by reason of this Article 2 be obligated to
institute, maintain, or refrain from changing, amending, or discontinuing, any
such incentive compensation or employee benefit program or plan, so long as
such actions are similarly applicable to covered employees generally. Moreover,
unless specifically provided for in a written plan document adopted by the
Board of Directors of Employer, none of the benefits or arrangements described
in this Article 2 shall be secured or funded in any way, and each shall instead
constitute an unfunded and unsecured promise to pay money in the future
exclusively from the general assets of Employer.
2.5. Employer may withhold from any compensation, benefits, or amounts
payable under this Agreement all federal, state, city, or other taxes as may be
required pursuant to any law or governmental regulation or ruling.
ARTICLE 3: TERMINATION PRIOR TO EXPIRATION OF TERM AND EFFECTS OF SUCH
TERMINATION:
3.1. Notwithstanding any other provisions of this Agreement, Employer
shall have the right to terminate Employee's employment under this Agreement at
any time prior to the expiration of the Term for any of the following reasons:
<PAGE> 3
(i) For "cause" upon the good faith determination by the
Employer's Chairman of the Board and President that "cause"
exists for the termination of the employment relationship. As
used in this Section 3.1(i), the term "cause" shall mean [a]
Employee's gross negligence or willful misconduct in the
performance of the duties and services required of Employee
pursuant to this Agreement; or [b] Employee's final
conviction of a felony or of a misdemeanor involving moral
turpitude; [c] Employee's involvement in a conflict of
interest as referenced in Section 1.4 for which Employer
makes a determination to terminate the employment of
Employee; or [d] Employee's material breach of any material
provision of this Agreement which remains uncorrected for
thirty (30) days following written notice to Employee by
Employer of such breach. It is expressly acknowledged and
agreed that the decision as to whether "cause" exists for
termination of the employment relationship by Employer is
delegated to the Chairman of the Board and President of
Employer for determination. If Employee disagrees with the
decision reached by the Chairman of the Board and President
of Employer, the dispute will be limited to whether the
Chairman of the Board and President of Employer reached their
decision in good faith;
(ii) for any other reason whatsoever, with or without cause, in
the sole discretion of the Employer's Chairman of the Board
and President;
(iii) upon Employee's death; or
(iv) upon Employee's becoming incapacitated by accident, sickness,
or other circumstance which renders him or her mentally or
physically incapable of performing the duties and services
required of Employee.
The termination of Employee's employment by Employer prior to the expiration of
the Term shall constitute a "Termination for Cause" if made pursuant to Section
3.1(i); the effect of such termination is specified in Section 3.4. The
termination of Employee's employment by Employer prior to the expiration of the
Term shall constitute an "Involuntary Termination" if made pursuant to Section
3.1(ii); the effect of such termination is specified in Section 3.5. The effect
of the employment relationship being terminated pursuant to Section 3.1(iii) as
a result of Employee's death is specified in Section 3.6. The effect of the
employment relationship being terminated pursuant to Section 3.1(iv) as a
result of the Employee becoming incapacitated is specified in Section 3.7.
3.2. Notwithstanding any other provisions of this Agreement except
Section 7.5, Employee shall have the right to terminate the employment
relationship under this Agreement at any time prior to the expiration of the
Term of employment for any of the following reasons:
<PAGE> 4
(i) a material breach by Employer of any material provision of
this Agreement which remains uncorrected for 30 days
following written notice of such breach by Employee to
Employer; or
(ii) for any other reason whatsoever, in the sole discretion of
Employee.
The termination of Employee's employment by Employee prior to the expiration of
the Term shall constitute an "Involuntary Termination" if made pursuant to
Section 3.2(i); the effect of such termination is specified in Section 3.5. The
termination of Employee's employment by Employee prior to the expiration of the
Term shall constitute a "Voluntary Termination" if made pursuant to Section
3.2(ii); the effect of such termination is specified in Section 3.3.
3.3. Upon a "Voluntary Termination" of the employment relationship by
Employee prior to expiration of the Term, all future compensation to which
Employee is entitled and all future benefits for which Employee is eligible
shall cease and terminate as of the date of termination. Employee shall be
entitled to pro rata salary through the date of such termination, but Employee
shall not be entitled to any bonuses or incentive compensation not yet paid at
the date of such termination.
3.4. If Employee's employment hereunder shall be terminated by
Employer for Cause prior to expiration of the Term, all future compensation to
which Employee is entitled and all future benefits for which Employee is
eligible shall cease and terminate as of the date of termination. Employee
shall be entitled to pro rata salary through the date of such termination, but
Employee shall not be entitled to any bonuses or incentive compensation not yet
paid at the date of such termination.
3.5. Upon an Involuntary Termination of the employment relationship by
either Employer or Employee prior to expiration of the Term, Employee shall be
entitled, after execution of a Waiver and Release Agreement, in consideration
of Employee's continuing obligations hereunder after such termination
(including, without limitation, Employee's non-competition obligations), if
Employee's employment ceases during the Term of this Agreement, upon the
execution of a waiver and release agreement, Employee shall receive two years
base salary. Said amount shall be paid in two installments: (i) one (1) year's
base salary within thirty (30) days of the Involuntary Termination Date; and
(ii) the remaining sum of one (1) year's base salary twelve (12) months later.
As used in this Agreement, "Involuntary Termination" shall also mean
termination of Employee's employment with Employer if such termination results
from:
(i) termination by Employee within 90 days of and in connection
with or based upon any of the following:
(a) a substantial and/or material reduction in the
nature or scope of Employee's duties and/or
responsibilities, which results in Employee not
having an officer position and results in an overall
material and substantial reduction from the duties
and stature of the Officer Position as such duties
are constituted as of the effective date of this
Agreement or later agreed to by Employee and
Employer, which reduction remains in place and
uncorrected for thirty(30) days following written
notice of such breach to Employer by Employee;
<PAGE> 5
(b) a reduction in Employee's base pay or an exclusion
from a benefit plan or programs (except as part of a
general cutback for all employees or officers);
(c) a change in the location for the primary performance
of Employee's services under this Agreement from the
city in which Employee was serving at the time of
notification to a city which is more than 100 miles
away from such location, which change is not
approved by Employee;
(ii) termination by Employee within one (1) year of Change of
Control Date and the happening of one of the events described
above at Section 3.5(i).
Employee shall not be under any duty or obligation to seek or accept other
employment following Involuntary Termination and the amounts due Employee
hereunder shall not be reduced or suspended if Employee accepts subsequent
employment, provided however, in the event Employee is re-employed by Enron,
its subsidiaries, or its affiliates or becomes re-employed by EOTT Energy Corp.
during the severance period (the period represented by the number of weeks of
your basic severance payment), Employee will be required to reimburse the
difference between the re-hire date and the end of the severance period.
Employee's rights under this Section 3.5 are Employee's sole and exclusive
rights against Employer, or its affiliates, and Employer's sole and exclusive
liability to Employee under this Agreement, in contract, tort, or otherwise,
for any Involuntary Termination of the employment relationship. Employee
covenants not to sue or lodge any claim, demand or cause of action against
Employer for any sums for Involuntary Termination other than those sums
specified in this Section 3.5. If Employee breaches this covenant, Employer
shall be entitled to recover from Employee all sums expended by Employer
(including costs and attorneys fees) in connection with such suit, claim,
demand or cause of action.
3.6. Upon termination of the employment relationship as a result of
Employee's death, Employee's heirs, administrators, or legatees shall be
entitled to Employee's pro rata salary through the date of such termination,
but Employee's heirs, administrators, or legatees shall not be entitled to any
bonuses or incentive compensation not yet paid to Employee at the date of such
termination.
3.7. Upon termination of the employment relationship as a result of
Employee's incapacity, Employee shall be entitled to his or her pro rata salary
through the date of such termination, but Employee shall not be entitled to any
bonuses or incentive compensation not yet paid to Employee at the date of such
termination.
3.8. In all cases, the compensation and benefits payable to Employee
under this Agreement upon termination of the employment relationship shall be
offset against any amounts to which Employee may otherwise be entitled under
any and all severance plans, and policies of Employer, or its affiliates.
3.9. Termination of the employment relationship does not terminate
those obligations imposed by this Agreement which are continuing obligations,
including, without limitation, Employee's obligations under Articles 5 and 6.
<PAGE> 6
ARTICLE 4: CONTINUATION OF EMPLOYMENT BEYOND TERM; TERMINATION AND EFFECTS OF
TERMINATION:
4.1. Should Employee remain employed by Employer beyond the expiration
of the Term of this Agreement, and this Agreement has not been extended by
Employer, the Employer-Employee relationship shall be Employment at Will,
terminable at any time by either Employer or Employee for any reason
whatsoever, with or without cause. Upon an Involuntary Termination of the
employment relationship by the Employer, Employee shall be entitled, after
execution of a Waiver and Release Agreement in consideration of Employee's
confidentiality and non-competition obligations of Articles 5 and 6 for a
period of one year following the termination date, to receive an amount equal
to two (2) year's base salary.
ARTICLE 5: OWNERSHIP AND PROTECTION OF INFORMATION; COPYRIGHTS:
5.1. All information, ideas, concepts, improvements, discoveries, and
inventions, whether patentable or not, which are conceived, made, developed or
acquired by Employee, individually or in conjunction with others, during
Employee's employment by Employer (whether during business hours or otherwise
and whether on Employer's premises or otherwise) which relate to Employer's
business, products or services (including, without limitation, all such
information relating to corporate opportunities, research, financial and sales
data, pricing and trading terms, evaluations, opinions, interpretations,
acquisition prospects, the identity of customers or their requirements, the
identity of key contacts within the customer's organizations or within the
organization of acquisition prospects, or marketing and merchandising
techniques, prospective names, and marks) shall be disclosed to Employer and
are and shall be the sole and exclusive property of Employer. Moreover, all
drawings, memoranda, notes, records, files, correspondence, drawings, manuals,
models, specifications, computer programs, maps and all other writings or
materials of any type embodying any of such information, ideas, concepts,
improvements, discoveries, and inventions are and shall be the sole and
exclusive property of Employer.
5.2. Employee acknowledges that the business of Employer, Enron Corp.,
and their affiliates is highly competitive and that their strategies, methods,
books, records, and documents, their technical information concerning their
products, equipment, services, and processes, procurement procedures and
pricing techniques, the names of and other information (such as credit and
financial data) concerning their customers and business affiliates, all
comprise confidential business information and trade secrets which are
valuable, special, and unique assets which Employer, Enron Corp., or their
affiliates use in their business to obtain a competitive advantage over their
competitors. Employee further acknowledges that protection of such confidential
business information and trade secrets against unauthorized disclosure and use
is of critical importance to Employer, Enron Corp., and their affiliates in
maintaining their competitive position. Employee hereby agrees that Employee
will not, at any time during or after his or her employment by Employer, make
any unauthorized disclosure of any confidential business information or trade
secrets of Employer, Enron Corp., or their affiliates, or make any use thereof,
except in the carrying out of his or her employment responsibilities hereunder.
Enron Corp. and its affiliates shall be third party beneficiaries of Employee's
obligations under this Section. As a result of Employee's employment by
Employer, Employee may also from time to time have access to, or knowledge of,
confidential business information or trade secrets of third parties, such as
customers, suppliers, partners, joint venturers, and the like, of Employer,
Enron
<PAGE> 7
Corp., and their affiliates. Employee also agrees to preserve and protect the
confidentiality of such third party confidential information and trade secrets
to the same extent, and on the same basis, as Employer's confidential business
information and trade secrets. Employee acknowledges that money damages would
not be sufficient remedy for any breach of this Article 5 by Employee, and
Employer shall be entitled to enforce the provisions of this Article 5 by
terminating any payments then owing to Employee under this Agreement and/or to
specific performance and injunctive relief as remedies for such breach or any
threatened breach. Such remedies shall not be deemed the exclusive remedies for
a breach of this Article 5, but shall be in addition to all remedies available
at law or in equity to Employer, including the recovery of damages from
Employee and his or her agents involved in such breach.
ARTICLE 6: POST-EMPLOYMENT NON-COMPETITION OBLIGATIONS:
6.1. As part of the consideration for the compensation and benefits to
be paid to Employee hereunder, and as an additional incentive for Employer to
enter into this Agreement, Employer and Employee agree to the non-competition
provisions of this Article 6. Employee agrees that during the period of
Employee's non-competition obligations hereunder, Employee will not, directly
or indirectly for Employee or for others, in any geographic area or market
where Employer or any of its affiliated companies are conducting any business
as of the date of termination of the employment relationship or have during the
previous twelve months conducted any business:
(i) engage in any business competitive with the business
conducted by Employer;
(ii) render advice or services to, or otherwise assist, any other
person, association, or entity who is engaged, directly or
indirectly, in any business competitive with the business
conducted by Employer;
(iii) induce any employee of Employer or any of its affiliates to
terminate his or her employment with Employer or its
affiliates, or hire or assist in the hiring of any such
employee by person, association, or entity not affiliated
with Employer.
These non-competition obligations shall continue for a period of one year after
termination of this employment relationship.
6.2. Employee understands that the foregoing restrictions may limit
his or her ability to engage in certain businesses during the twelve (12) month
period provided for above, but acknowledges that Employee will receive
sufficiently high remuneration and other benefits (e.g., the right to receive
compensation under Section 3.5 upon Involuntary Termination) under this
Agreement to justify such restriction. Employee acknowledges that money damages
would not be sufficient remedy for any breach of this Article 6 by Employee,
and Employer shall be entitled to enforce the provisions of this Article 6 by
terminating any payments then owing to Employee under this Agreement and/or to
specific performance and injunctive relief as remedies for such breach or any
threatened breach. Such remedies shall not be deemed the exclusive remedies for
a breach of this Article 6, but shall be in addition to all remedies available
at law or in equity to
<PAGE> 8
Employer, including, without limitation, the recovery of damages from Employee
and his or her agents involved in such breach.
6.3. It is expressly understood and agreed that Employer and Employee
consider the restrictions contained in this Article 6 to be reasonable and
necessary to protect the proprietary information of Employer. Nevertheless, if
any of the aforesaid restrictions are found by a court having jurisdiction to
be unreasonable, or overly broad as to geographic area or time, or otherwise
unenforceable, the parties intend for the restrictions therein set forth to be
modified by such courts so as to be reasonable and enforceable and, as so
modified by the court, to be fully enforced.
ARTICLE 7: MISCELLANEOUS:
7.1. For purposes of this Agreement the following terms shall have the
meanings ascribed to them below:
(a) "Affiliates" or "Affiliated" means an entity who directly, or
indirectly through one or more intermediaries, controls, is controlled
by, or is under common control with Enron Corp. or Employer.
(b) "Beneficial Owner" shall be defined by reference to Rule 13(d)-3 under
the Securities Exchange Act of 1934, as in effect on September 1,
1989; provided, however, and without limitation, any individual,
corporation, partnership, group, association or other person or entity
which has the right to acquire any Voting Stock at any time in the
future, whether such right is contingent or absolute, pursuant to any
agreement, arrangement or understanding or upon exercise of conversion
rights, warrants or options, or otherwise, shall be the Beneficial
Owner of such Voting Stock.
(c) "Change of Control" of Company shall mean (i) Company merges or
consolidates with any other entity (other than one of Enron Corp.'s
majority owned subsidiaries) and is not the surviving entity (or
survives only as the subsidiary of another entity), (ii) Company sells
all or substantially all of its assets to any other person or entity
(other than (i) a sale of limited partner interests in EOTT Energy
Partners, L.P. or (ii) a sale of assets to another majority owned
subsidiary of Enron Corp. and in connection there with Employee
becomes employed by such subsidiary, EOTT Energy Partners, L.P. or
another partnership in which EOTT Energy Partners, L.P. is the limited
partner), or (iii) Company is dissolved, or if (iv) any third person
or entity (other than Enron Corp. or one of its majority owned
subsidiaries or the trustee or committee of any qualified employee
benefit plan of Company) together with its affiliates shall become,
directly or indirectly, the Beneficial Owner of at least 51% of the
Voting Stock of Company (except as the result of a distribution of the
Voting Stock of the Company to the shareholders of Enron Corp.), or if
(v) during such time as Company has a class of Voting Securities
registered under the Securities Exchange Act of 1934, the individuals
who constituted the members of the Company's Board of Directors
("Incumbent Board") upon the effective date of such registration cease
for any reason to constitute at least a majority thereof, provided
that any person becoming a director whose election or nomination for
election by Company stockholders was approved by a vote of at least
eighty percent (80%) of the directors comprising the Incumbent Board
(either by a specific vote or by approval of the proxy statement of
the Company in which such person is named as a nominee for director,
<PAGE> 9
without objection to such nomination) shall be, for purposes of this
clause (v), considered as though such person were a member of the
Incumbent Board.
(d) "Change of Control Date" shall mean the day on which a Change of
Control becomes effective.
(e) "Involuntary Termination Date" shall mean Employee's last date of
employment by reason of an Involuntary Termination.
(f) "Voting Stock" shall mean all outstanding shares of capital stock of
Company entitled to vote generally in elections for directors,
considered as one class; provided, however, that if Company has shares
of Voting Stock entitled to more or less than one vote for any such
share, each reference to a proportion of shares of Voting Stock shall
be deemed to refer to such proportion of the Votes entitled to be cast
by such shares.
7.2. For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been duly given when personally delivered or when mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to Employer, to:
EOTT Energy Corp.
Box 4666
Houston, Texas 77210
Attention: Vice President, Human Resources
If to Employee, to the address shown on the first page hereof.
Either Employer or Employee may furnish a change of address to the other in
writing in accordance herewith, except that notices of changes of address shall
be effective only upon receipt.
7.3. This Agreement shall be governed in all respects by the laws of
the State of Texas, excluding any conflict-of-law rule or principle that might
refer the construction of the Agreement to the laws of another State or
country.
7.4. No failure by either party hereto at any time to give notice of
any breach by the other party of, or to require compliance with, any condition
or provision of this Agreement shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time.
7.5. If a dispute arises out of or related to this Agreement, other
than a dispute regarding Employee's obligations under Sections 5.2, Article 5,
or Section 6.1, and if the dispute cannot be settled through direct
discussions, then Employer and Employee agree to first endeavor to settle the
dispute in an amicable manner by mediation, before having recourse to any other
proceeding or forum. Thereafter, if either party to this Agreement brings legal
action to enforce the terms of this Agreement, the party who prevails in such
legal action, whether plaintiff or
<PAGE> 10
defendant, in addition to the remedy or relief obtained in such legal action
shall be entitled to recover its, his, or her reasonable expenses incurred in
connection with such legal action, including, without limitation, costs of
Court and reasonable attorneys fees.
7.6. It is a desire and intent of the parties that the terms,
provisions, covenants, and remedies contained in this Agreement shall be
enforceable to the fullest extent permitted by law. If any such term,
provision, covenant, or remedy of this Agreement or the application thereof to
any person, association, or entity or circumstances shall, to any extent, be
construed to be invalid or unenforceable in whole or in part, then such term,
provision, covenant, or remedy shall be construed in a manner so as to permit
its enforceability under the applicable law to the fullest extent permitted by
law. In any case, the remaining provisions of this Agreement or the application
thereof to any person, association, or entity or circumstances other than those
to which they have been held invalid or unenforceable, shall remain in full
force and effect.
7.7. This Agreement shall be binding upon and inure to the benefit of
Employer and any other person, association, or entity which may hereafter
acquire or succeed to all or substantially all of the business or assets of
Employer by any means whether direct or indirect, by purchase, merger,
consolidation, or otherwise. Employee's rights and obligations under Agreement
hereof are personal and such rights, benefits, and obligations of Employee
shall not be voluntarily or involuntarily assigned, alienated, or transferred,
whether by operation of law or otherwise, without the prior written consent of
Employer.
7.8. There exist other agreements between Employer and Employee
relating to the employment relationship between them, e.g., the agreement with
respect to company policies contained in Employer's Conduct of Business Affairs
booklet and agreements with respect to benefit plans. This Agreement replaces
and merges previous agreements and discussions pertaining to the following
subject matters covered herein: the nature of Employee's employment
relationship with Employer and the term and termination of such relationship.
This Agreement constitutes the entire agreement of the parties with regard to
such subject matters, and contains all of the covenants, promises,
representations, warranties, and agreements between the parties with respect
such subject matters. Each party to this Agreement acknowledges that no
representation, inducement, promise, or agreement, oral or written, has been
made by either party with respect to such subject matters, which is not
embodied herein, and that no agreement, statement, or promise relating to the
employment of Employee by Employer that is not contained in this Agreement
shall be valid or binding. Any modification of this Agreement will be effective
only if it is in writing and signed by each party whose rights hereunder are
affected thereby, provided that any such modification must be authorized or
approved by the Board of Directors of Employer.
<PAGE> 11
IN WITNESS WHEREOF, Employer and Employee have duly executed this
Agreement in multiple originals to be effective on the date first stated above.
EOTT ENERGY CORP.
By: /s/ MICHAEL D. BURKE
------------------------------------
PRESIDENT AND CHIEF EXECUTIVE OFFICER
This 21 day of April, 1999
-- --
DANA R. GIBBS
/s/ DANA R. GIBBS
--------------------------------------------------
Name: Dana R. Gibbs
----------------------------------------------
This day of , 19
---------- ------------------- ----
<TABLE> <S> <C>
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<NAME> EOTT ENERGY PARTNERS, L.P.
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