<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 JUNE 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-12872
EOTT ENERGY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 76-0424520
- ------------------------------- ----------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1330 Post Oak Boulevard
Suite 2700
Houston, Texas 77056
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(713) 993-5200
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
<PAGE> 2
EOTT ENERGY PARTNERS, L.P.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended June 30, 1999 and 1998, and Six Months
Ended June 30, 1999 and 1998.......................................................................3
Condensed Consolidated Balance Sheets (Unaudited) -
June 30, 1999 and December 31, 1998................................................................4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended June 30, 1999 and 1998............................................................5
Condensed Consolidated Statement of Partners' Capital (Unaudited) -
Six Months Ended June 30, 1999.....................................................................6
Notes to Condensed Consolidated Financial Statements..................................................7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................16
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.....................................29
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..............................................................................30
ITEM 6. Exhibits and Reports on Form 8-K...............................................................30
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue ......................................... $ 2,259,303 $ 1,231,875 $ 3,692,460 $ 2,571,279
Cost of Sales ................................... 2,203,606 1,202,719 3,583,967 2,514,576
------------ ------------ ------------ ------------
Gross Margin .................................... 55,697 29,156 108,493 56,703
Expenses
Operating expenses ........................... 38,632 23,435 74,815 46,825
Depreciation and amortization ................ 8,350 4,564 16,490 9,078
------------ ------------ ------------ ------------
Total ...................................... 46,982 27,999 91,305 55,903
------------ ------------ ------------ ------------
Operating Income ................................ 8,715 1,157 17,188 800
Other Income (Expense)
Interest income .............................. 145 171 320 342
Interest and related charges ................. (7,318) (2,033) (13,820) (3,823)
Other, net ................................... 640 (569) 1,028 (316)
------------ ------------ ------------ ------------
Total ...................................... (6,533) (2,431) (12,472) (3,797)
------------ ------------ ------------ ------------
Net Income (Loss) Before Cumulative
Effect of Accounting Change .................. 2,182 (1,274) 4,716 (2,997)
Cumulative Effect of Accounting
Change (Note 9) .............................. -- -- 1,747 --
------------ ------------ ------------ ------------
Net Income (Loss) ............................... $ 2,182 $ (1,274) $ 6,463 $ (2,997)
============ ============ ============ ============
Basic Net Income (Loss) Per Unit (Note 4)
Common ....................................... $ 0.09 $ (0.06) $ 0.24 $ (0.15)
============ ============ ============ ============
Subordinated ................................. $ 0.09 $ (0.07) $ 0.31 $ (0.16)
============ ============ ============ ============
Diluted Net Income (Loss) Per Unit (Note 4) ..... $ 0.09 $ (0.07) $ 0.26 $ (0.16)
============ ============ ============ ============
Number of Units Outstanding
for Diluted Computation ...................... 23,976 18,830 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>
JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ................................................. $ 3,652 $ 3,033
Trade and other receivables, net of allowance for doubtful
accounts of $1,732 and $1,860 respectively ............................. 649,824 403,335
Inventories ............................................................... 102,580 137,545
Other ..................................................................... 62,837 30,328
----------- -----------
Total current assets ................................................... 818,893 574,241
----------- -----------
Property, Plant & Equipment, at cost .......................................... 543,040 497,807
Less: Accumulated depreciation ............................................ 126,431 112,568
----------- -----------
Net property, plant & equipment ........................................ 416,609 385,239
----------- -----------
Other Assets, net of amortization ............................................. 5,533 6,340
----------- -----------
Total Assets .................................................................. $ 1,241,035 $ 965,820
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Trade accounts payable .................................................... $ 768,342 $ 524,822
Accrued taxes payable ..................................................... 8,761 5,192
Short-term borrowings - affiliate ......................................... 50,200 28,297
Bridge loan - affiliate ................................................... 42,000 42,000
Term loan - affiliate ..................................................... 175,000 175,000
Repurchase agreements ..................................................... 89,998 83,016
Other ..................................................................... 14,229 9,983
----------- -----------
Total current liabilities .............................................. 1,148,530 868,310
----------- -----------
Long-Term Liabilities ......................................................... 153 --
----------- -----------
Commitments and Contingencies (Note 8)
Additional Partnership Interests (Note 6) ..................................... 2,547 21,928
----------- -----------
Partners' Capital
Common Unitholders ........................................................ 41,123 14,472
Special Unitholders ....................................................... -- 21,092
Subordinated Unitholders .................................................. 41,064 38,315
General Partner ........................................................... 7,618 1,703
----------- -----------
Total Partners' Capital ....................................................... 89,805 75,582
----------- -----------
Total Liabilities and Partners' Capital ....................................... $ 1,241,035 $ 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>
SIX MONTHS ENDED
JUNE 30,
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities -
Net income (loss) ........................................... $ 6,463 $ (2,997)
Depreciation ................................................ 15,456 8,063
Amortization of intangible assets ........................... 1,034 1,015
Gains on disposal of assets ................................. (436) (77)
Changes in components of working capital -
Receivables .............................................. (246,489) 65,824
Inventories .............................................. 34,965 28,020
Other current assets ..................................... (32,509) (2,906)
Trade accounts payable ................................... 243,520 (141,397)
Accrued taxes payable .................................... 3,569 (514)
Other current liabilities ................................ 527 3,436
Other assets and liabilities ................................ 52 397
---------- ----------
Net Cash Provided By (Used In) Operating Activities ............. 26,152 (41,136)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment ......... 548 640
Acquisitions ................................................ (33,000) --
Additions to property, plant and equipment .................. (10,064) (3,268)
Other, net .................................................. -- 24
---------- ----------
Net Cash Used In Investing Activities ........................... (42,516) (2,604)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term borrowings - affiliate .... 21,903 (41,400)
Increase in repurchase agreements ........................... 6,982 89,540
Distributions to Unitholders ................................ (14,168) (11,400)
Issuance of Additional Partnership Interests ................ 2,547 6,677
Other, net .................................................. (281) (319)
---------- ----------
Net Cash Provided By Financing Activities ....................... 16,983 43,098
---------- ----------
Increase (Decrease) In Cash and Cash Equivalents ................ 619 (642)
Cash and Cash Equivalents, Beginning of Period .................. 3,033 3,737
---------- ----------
Cash and Cash Equivalents, End of Period ........................ $ 3,652 $ 3,095
========== ==========
Supplemental Cash Flow Information:
Interest paid ............................................... $ 13,464 $ 3,944
========== ==========
</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>
Partners' Capital at December 31, 1998 .............. $ 14,472 $ 21,092 $ 38,315 $ 1,703
Net income .......................................... 2,947 618 2,749 149
Cash distributions .................................. (12,495) (1,416) -- (257)
Contribution of Additional Partnership Interests .... 15,905 -- -- 6,023
Conversion of Special Units ......................... 20,294 (20,294) -- --
--------- --------- --------- ---------
Partners' Capital at June 30, 1999 .................. $ 41,123 $ -- $ 41,064 $ 7,618
========= ========= ========= =========
</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 June 30, 1999 and December 31, 1998, the results of operations
for the three and six months ended June 30, 1999 and 1998, cash flows for the
six months ended June 30, 1999 and 1998 and changes in partners' capital for
the six months ended June 30, 1999. For the three and six months ended June 30,
1999 and 1998, traditional net income (loss) and comprehensive income (loss)
are the same.
On March 24, 1994, the General Partner completed an initial public
offering of 10 million Common Units at $20.00 per unit, representing limited
partner interests in the Partnership. In addition to its aggregate approximate
2% general partner interest in the Partnership, the General Partner owns an
approximate 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 included consideration of $184.5 million in cash, 2,000,000 Common Units,
2,000,000 Subordinated Units and $11.4 million in transaction costs. EOTT
financed the majority of the purchase price through short-term borrowings from
Enron. See additional discussion regarding Enron financing in Note 3.
On May 1, 1999, EOTT acquired crude oil transportation and storage assets
in West Texas and New Mexico from Texas-New Mexico Pipeline Company which
included approximately 1,800 miles of common carrier crude oil pipelines. EOTT
paid $33 million in cash and financed the acquisition using short-term
borrowings from Enron.
7
<PAGE> 8
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. CREDIT RESOURCES AND LIQUIDITY
In 1995, Enron agreed to provide credit support to the Partnership in the
form of guarantees, letters of credit, loans and letters of indemnity. The
total amount of the credit support was $600 million, as amended December 19,
1996, had a maturity of March 31, 1999 and was replaced with a new facility on
December 1, 1998 as discussed below. As amended, the agreement contained
sublimits of $100 million for working capital loans and $200 million for
letters of credit. Letter of credit fees were based on actual charges by the
banks, which ranged from .20% - .375% per annum. Interest on outstanding loans
was charged at the London Interbank Offering Rate ("LIBOR") plus 25 basis
points per annum. At December 31, 1997, EOTT had a note payable of $39.3
million with Enron under a financing arrangement for acquisitions and other
capital projects. This financing was provided at a rate of LIBOR plus 30 basis
points per annum. The maturity date of the note was March 31, 1999, and the
note was redeemed and reissued under the term loan discussed below.
On December 1, 1998, Enron increased its existing credit facility with the
Partnership to provide additional credit support in the form of guarantees,
letters of credit and working capital loans through December 31, 2001. The
total amount of the Enron facility is $1.0 billion, and it contains sublimits
of $100 million for working capital loans and $900 million for guarantees and
letters of credit. Letter of credit fees are based on actual charges by the
banks which range from .20% - .375% per annum. Interest on outstanding loans is
charged at LIBOR plus 250 basis points per annum.
The Enron facility is subject to defined borrowing base limitations
relating to the Partnership's activities and to the maintenance and protection
of the collateral. The Enron facility permits distributions to Unitholders
subject to certain limitations based on the Partnership's earnings and other
factors. These covenants and restrictions are not expected to materially affect
the Partnership's ability to operate its ongoing business.
At June 30, 1999 and December 31, 1998, EOTT had a term loan of $175
million outstanding with Enron under a financing arrangement to fund a portion
of the cash consideration paid to Koch for the assets purchased in 1998 and to
refinance indebtedness incurred in prior acquisitions. The term loan 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 June 30, 1999 and December 31, 1998, EOTT had $42.0
million of debt outstanding with Enron under a $100 million bridge loan to
finance a portion of the cash consideration for the acquisition of assets from
Koch. The interest rate on the bridge loan 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 access the debt and/or equity markets later this year to refinance
the bridge loan and term loan.
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
8
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
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 June 30, 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 July 20, 1999 for approximately $90.4
million.
Generally, the Partnership will distribute 100% of its Available Cash
within 45 days after the end of each quarter to Unitholders of record and to
the General Partner. Available Cash consists generally of all of the cash
receipts of the Partnership adjusted for its cash distributions and net changes
to reserves. The full definition of Available Cash is set forth in the
Partnership Agreement and amendments thereto, forms of which have been filed as
exhibits to the Annual Report on Form 10-K. Distributions of Available Cash to
the Subordinated Unitholders are subject to the prior rights of the Common
Unitholders to receive the Minimum Quarterly Distribution ("MQD") for each
quarter during the Subordination Period, and to receive any arrearages in the
distribution of the MQD on the Common Units for prior quarters during the
Subordination Period.
MQD is $0.475 per Unit ($1.90 annualized). Enron has committed to provide
total cash distribution support in exchange for Additional Partnership
Interests ("APIs") in an amount necessary to pay MQDs, with respect to quarters
ending on or before December 31, 2001, in an amount up to an aggregate of $29
million ($26.5 million of which remains available).
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.
4. EARNINGS PER UNIT
Net income (loss) shown in the tables below excludes the approximate two
percent interest of the General Partner. Earnings (loss) per unit are
calculated as follows (in millions, except per unit amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------------
1999 1998
------------------------------------- ------------------------------------
Net Wtd. Net Wtd.
Income Average Per Income Average Per
(Loss) Units Unit (Loss) Units Unit
---------- ------ ------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Basic (1)
Common $ 1,336 14,976 $ 0.09 $ (760) 11,830 $ (0.06)
Subordinated $ 803 9,000 $ 0.09 $ (488) 7,000 $ (0.07)
Diluted (2) $ 2,139 23,976 $ 0.09 $ (1,248) 18,830 $ (0.07)
</TABLE>
9
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------------
1999 1998
------------------------------------- ------------------------------------
Net Wtd. Net Wtd.
Income Average Per Income Average Per
(Loss) Units Unit (Loss) Units Unit
---------- ------ ------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Basic (1)
Common $ 3,565 14,976 $ 0.24 $ (1,821) 11,830 $ (0.15)
Subordinated $ 2,749 9,000 $ 0.31 $ (1,116) 7,000 $ (0.16)
Diluted (2) $ 6,314 23,976 $ 0.26 $ (2,937) 18,830 $ (0.16)
</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 net income before cumulative effect of
accounting change and cumulative effect of the change in accounting principle
for the six months ended June 30, 1999 is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
------------------------------------------------
Basic
-------------------------------
Common Subordinated Diluted
------------- ------------- -------------
<S> <C> <C> <C>
Net Income Before Cumulative Effect
of Accounting Change............................ $ 0.17 $ 0.24 $ 0.19
Cumulative Effect of Accounting Change............. 0.07 0.07 0.07
------------- ------------- -------------
Net Income......................................... $ 0.24 $ 0.31 $ 0.26
============= ============= =============
</TABLE>
5. PARTNERS' CAPITAL
The following is a reconciliation of Units outstanding for the six months
ended June 30, 1999.
<TABLE>
<CAPTION>
Common Special Subordinated
Units Units Units
---------- ---------- ------------
<S> <C> <C> <C>
Units Outstanding at December 31, 1998............. 11,996,000 2,980,011 9,000,000
Conversion of Special Units into Common Units...... 2,980,011 (2,980,011) --
---------- ---------- ---------
Units Outstanding at June 30, 1999................. 14,976,011 -- 9,000,000
========== ========== =========
</TABLE>
On February 12, 1999, the Partnership obtained approval of proposals
presented at a Special Meeting of Unitholders. Approval of these proposals,
among other things, (a) authorized the Partnership to issue an additional 10
million Common Units to raise cash to reduce indebtedness, for acquisitions and
other Partnership purposes, (b) changed the terms of the Special Units so that
they became convertible into Common Units and
10
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales to affiliates.................. $ 4,449 $ 3,284 $ 5,004 $ 9,994
Purchases from affiliates............ 260,513 7,419 262,761 14,830
</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, Enron Capital & Trade Resources, and Enron
Reserve Acquisition Corp. and natural gas liquids purchases from Enron Gas
Liquids, Inc. These transactions, in the opinion of management, are no less
favorable than can be obtained from unaffiliated third parties.
Related party receivables at June 30, 1999 and December 31, 1998 were $1.1
million and $0.2 million, respectively, and are classified as trade and other
receivables. Related party payables at June 30, 1999 and December 31, 1998 were
$1.8 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.
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
11
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EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
quarter, the MQD and any Common Unit Arrearages have been paid, but only to the
extent that Available Cash with respect to such quarter exceeds the amount
necessary to pay the MQD on all Units and any Common Unit Arrearages. As
discussed in Note 5, certain Unitholder approvals were obtained on February 12,
1999 and as a result, Enron increased its cash distribution support to $29
million and extended it through the fourth quarter of 2001 and contributed the
$21.9 million in APIs outstanding pursuant to its commitment made in connection
with the Support Agreement. On May 14, 1999, Enron paid $2.5 million in support
of EOTT's first quarter 1999 distributions to its Common Unitholders and General
Partner.
7. OTHER INCOME (EXPENSE), NET
The components of other income (expense), net are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Gain (loss) on foreign currency transactions.... $ 205 $ (470) $ 326 $ (491)
Gain (loss) on disposal of fixed assets......... 270 (53) 436 77
Other, net...................................... 165 (46) 266 98
---------- ---------- ---------- ----------
Total....................................... $ 640 $ (569) $ 1,028 $ (316)
========== ========== ========== ==========
</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. A final judgement was entered on August 11, 1999.
If no appeal to the final judgment is filed, the cases referenced above will be
dismissed.
The State of Texas, et al. vs. Amerada Hess Corporation, et al., Cause No.
97-12040; In the 53rd Judicial District Court of Travis County, Texas. EOTT and
several other defendants entered into a Settlement Agreement in this matter on
August 5, 1999. Even though this Settlement Agreement disposed of any claims
the State of Texas may have had in the State of Texas Royalty Suit, a similar
action filed in Lee County, Texas in 1995, it did not dismiss the State of
Texas Royalty Suit.
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 and six months ended June
30, 1999, EOTT had a net mark-to-market gain of $1.0 million and $3.1 million,
respectively.
10. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. The standard cannot
be applied retroactively, but early adoption is permitted. EOTT has not yet
determined the impact of adopting SFAS No. 133; however, this standard could
increase volatility in earnings and partners' capital, through other
comprehensive income.
11. BUSINESS SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information."
This standard requires that companies report certain information about
operating segments in complete sets of financial statements and in condensed
financial statements of interim periods for fiscal years beginning after
December 15, 1997. EOTT adopted this statement for the fiscal year ending
December 31, 1998 and restated prior year information.
EOTT has three reportable segments, which management believes are
necessary to make decisions about resources to be allocated and assess its
performance: North American Crude Oil - East of Rockies, Pipeline Operations
and West Coast Operations. The North American Crude Oil - East of Rockies
segment primarily purchases, gathers, transports and markets crude oil. The
Pipeline Operations segment operates approximately 7,400 active miles of common
carrier pipelines operated in 12 states. The West Coast Operations include
crude oil gathering and marketing, refined products marketing and a natural gas
liquids business.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies as discussed in Note 2 included
in the Partnership's Annual Report on Form 10-K for the year ended December 31,
1998. EOTT evaluates performance based on operating income (loss).
EOTT accounts for intersegment revenue and transfers between North
American Crude Oil - East of Rockies and West Coast Operations as if the sales
or transfers were to third parties, that is, at current market prices.
Intersegment revenues for Pipeline Operations are based on published pipeline
tariffs.
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 JUNE 30, 1999
Revenue from external customers ........ $ 2,107,679 $ 6,928 $ 144,710 $ (14) $ 2,259,303
Intersegment revenue (a) ............... 18,273 22,178 8,779 (49,230) --
------------ ------------ ------------ ------------ ------------
Total revenue ....................... 2,125,952 29,106 153,489 (49,244) 2,259,303
------------ ------------ ------------ ------------ ------------
Gross margin ........................... 19,886 28,443 7,416 (48) 55,697
------------ ------------ ------------ ------------ ------------
Operating income (loss) ................ (637) 13,564 2,017 (6,229) 8,715
Other expense .......................... -- -- -- (6,533) (6,533)
------------ ------------ ------------ ------------ ------------
Net income (loss) ...................... (637) 13,564 2,017 (12,762) 2,182
------------ ------------ ------------ ------------ ------------
Depreciation and amortization .......... (2,349) (5,078) (497) (426) (8,350)
------------ ------------ ------------ ------------ ------------
- ---------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 1998
Revenue from external customers ........ $ 1,024,687 $ 1,686 $ 180,998 $ 24,504 $ 1,231,875
Intersegment revenue (a) ............... 12,377 3,415 -- (15,792) --
------------ ------------ ------------ ------------ ------------
Total revenue ....................... 1,037,064 5,101 180,998 8,712 1,231,875
------------ ------------ ------------ ------------ ------------
Gross margin ........................... 22,170 4,983 2,719 (716) 29,156
------------ ------------ ------------ ------------ ------------
Operating income (loss) ................ 7,356 441 492 (7,132) 1,157
Other expense .......................... -- -- -- (2,431) (2,431)
------------ ------------ ------------ ------------ ------------
Net income (loss) ...................... 7,356 441 492 (9,563) (1,274)
------------ ------------ ------------ ------------ ------------
Depreciation and amortization .......... (2,314) (1,683) (133) (434) (4,564)
------------ ------------ ------------ ------------ ------------
- ---------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1999
Revenue from external customers ........ $ 3,422,926 $ 10,070 $ 259,478 $ (14) $ 3,692,460
Intersegment revenue (a) ............... 31,395 42,472 14,333 (88,200) --
------------ ------------ ------------ ------------ ------------
Total revenue ....................... 3,454,321 52,542 273,811 (88,214) 3,692,460
------------ ------------ ------------ ------------ ------------
Gross margin ........................... 41,978 52,007 14,556 (48) 108,493
------------ ------------ ------------ ------------ ------------
Operating income (loss) ................ 932 24,325 4,402 (12,471) 17,188
Other expense .......................... -- -- -- (12,472) (12,472)
------------ ------------ ------------ ------------ ------------
Net income (loss) before cumulative
effect of accounting change ......... 932 24,325 4,402 (24,943) 4,716
------------ ------------ ------------ ------------ ------------
Depreciation and amortization .......... (4,746) (9,884) (991) (869) (16,490)
------------ ------------ ------------ ------------ ------------
- ---------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1998
Revenue from external customers ........ $ 2,102,518 $ 3,270 $ 354,883 $ 110,608 $ 2,571,279
Intersegment revenue (a) ............... 20,471 6,833 123 (27,427) --
------------ ------------ ------------ ------------ ------------
Total revenue ....................... 2,122,989 10,103 355,006 83,181 2,571,279
------------ ------------ ------------ ------------ ------------
Gross margin ........................... 41,782 9,940 5,013 (32) 56,703
------------ ------------ ------------ ------------ ------------
Operating income (loss) ................ 11,500 809 430 (11,939) 800
Other expense .......................... -- -- -- (3,797) (3,797)
------------ ------------ ------------ ------------ ------------
Net income (loss) before cumulative
effect of accounting change ......... 11,500 809 430 (15,736) (2,997)
------------ ------------ ------------ ------------ ------------
Depreciation and amortization .......... (4,668) (3,323) (242) (845) (9,078)
------------ ------------ ------------ ------------ ------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS AT JUNE 30, 1999 .......... $ 822,386 $ 317,636 $ 83,863 $ 17,150 $ 1,241,035
------------ ------------ ------------ ------------ ------------
TOTAL ASSETS AT DECEMBER 31, 1998 ...... 608,655 279,315 60,677 17,173 965,820
------------ ------------ ------------ ------------ ------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Intersegment revenue for North American Crude Oil - EOR and West Coast
Operations is made at prices comparable to those received from
external customers. Intersegment revenue for Pipeline Operations is
transportation costs charged to North American Crude Oil - EOR for the
transport of crude oil at published pipeline tariffs.
(b) Corporate and Other also includes the East of Rockies refined products
business in 1998 and intersegment eliminations.
14
<PAGE> 15
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. REALIGNMENT INITIATIVES
In late 1997, EOTT decided to exit the marginal East of Rockies refined
products business and streamlined business processes throughout the
organization and realigned reporting responsibilities to improve the
Partnership's overall cost structure. The realignment initiatives have been
completed and the reserves were adequate to complete the initiatives.
13. SUBSEQUENT EVENTS
On July 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 April 1, 1999 through June 30, 1999.
The second quarter distribution of $7.3 million was paid on August 13, 1999 to
the General Partner and all Common Unitholders of record as of July 30, 1999.
The distribution was paid utilizing Available Cash from the Partnership.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
Information Regarding Forward-Looking Information
The statements in this Quarterly Report on Form 10-Q that are not
historical information are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Such forward-looking statements include the discussions
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations." Any forward-looking statements are not guarantees of future
performance and involve significant risks and uncertainties and actual results
may vary materially from those in the forward-looking statements as a result of
various factors. Important factors that could cause actual results to differ
materially from those in the forward-looking statements herein include the
Partnership's success in obtaining additional lease barrels and maintaining
lease barrels, demands for various grades of crude oil and the resulting
changes in pricing relationships, developments relating to possible
acquisitions or business combination opportunities, industry conditions, the
ability of the Partnership to avoid environmental liabilities, developments at
FERC relating to pipeline tariff regulation, the successful resolution of
litigation, the success of the Partnership's risk management activities, the
ability of the Partnership to refinance some of its debt 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, marketing, storage and resale of crude oil and other petroleum
products and related activities. Statement of Financial Accounting Standards
No. 131, "Reporting Disaggregated Information About a Business Enterprise",
requires that segment reporting for public companies be measured the same way
management identifies and evaluates information internally. EOTT adopted this
standard for year end 1998 reporting and restated all prior year information
based on the following reportable business segments: North American Crude Oil -
East of Rockies, Pipeline Operations and West Coast Operations (see Note 11 to
the Condensed Consolidated Financial Statements for certain financial
information by business segment).
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.
In general, as EOTT purchases crude oil in its gathering and marketing
operations, it simultaneously establishes a margin by selling crude oil for
physical delivery to third party users, such as independent refiners or major
oil companies, or by entering into a future delivery obligation with respect to
futures contracts on the NYMEX, thereby minimizing or eliminating exposure to
price fluctuations. Through these transactions, EOTT seeks to maintain
positions that are substantially balanced between crude oil purchases, on the
one hand, and sales or future delivery obligations, on the other hand. As a
result, changes in the absolute price level for crude oil do not necessarily
impact the margin from gathering and marketing.
Although EOTT generally maintains a balanced position in terms of overall
volumes, some risks cannot always be fully hedged, such as a portion of certain
basis risks. Basis risk arises when EOTT acquires crude oil by purchase or
exchange that does not meet the specifications of the crude oil it is
contractually obligated to deliver, whether in terms of geographic location,
grade or delivery schedule. EOTT seeks to limit its price risk and also manage
its margins through a combination of physical sales, NYMEX hedging activities
and
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
exchanges of crude oil with third parties. It is EOTT's policy not to acquire
and hold crude oil, futures contracts or other derivative products for the
purpose of speculating on crude oil price changes.
The profitability of EOTT depends to a significant extent upon its ability
to maximize gross margin. Gross margin from gathering, marketing and pipeline
operations varies from period to period, depending to a significant extent upon
changes in the supply and demand of crude oil and the resulting changes in U.S.
crude oil inventory levels. The gross margin from gathering and marketing
operations is generated by the difference between the price of crude oil at the
point of purchase and the price of crude oil at the point of sale, minus the
associated costs of gathering and transportation. In addition to purchasing
crude oil at the wellhead, EOTT purchases crude oil in bulk at major pipeline
terminal points and major marketing points and enters into exchange
transactions with third parties. These bulk and exchange transactions are
characterized by large volumes and narrow profit margins on purchase and sales
transactions, and the absolute price levels for crude oil do not necessarily
bear a relationship to gross margin, although such price levels significantly
impact revenues and cost of sales. Because period-to-period variations in
revenues and cost of sales are not generally meaningful in analyzing the
variation in gross margin for gathering and marketing operations such changes
are not addressed in the following discussion.
Pipeline revenues and gross margins are primarily a function of the level
of throughput and storage activity and are generated by the difference between
the regulated published tariff and the fixed and variable costs of operating
the pipeline. A majority of the pipeline revenues are generated by transporting
crude oil at published pipeline tariffs for the North American Crude Oil - East
of Rockies business segment. Changes in revenues and pipeline operating costs,
therefore, are relevant to the analysis of financial results of EOTT's pipeline
operations and are addressed in the following discussion of pipeline
operations.
RECENT DEVELOPMENTS
On May 1, 1999, EOTT acquired crude oil transportation and storage assets
in West Texas and New Mexico from Texas-New Mexico Pipeline Company which
included approximately 1,800 miles of common carrier crude oil pipelines. EOTT
paid $33 million in cash and financed the acquisition using short-term
borrowings from Enron. See additional discussion regarding Enron financing in
Note 3 to the Condensed Consolidated Financial Statements.
On February 12, 1999, the Partnership obtained approval of proposals
presented at a Special Meeting of Unitholders. Approval of these proposals,
among other things, (a) authorized the Partnership to issue an additional 10
million Common Units to raise cash to reduce indebtedness, for acquisitions and
other Partnership purposes, (b) changed the terms of the Special Units so that
they became convertible into Common Units and (c) resulted in an increase in
Enron's cash distribution support to $29 million and an extension of that
support through the fourth quarter of 2001. As a result of the approval of the
proposals, Enron contributed the $21.9 million in APIs outstanding pursuant to
its commitment made in connection with the Support Agreement discussed in Note
6 to the Condensed Consolidated Financial Statements.
On December 1, 1998, the Partnership acquired certain additional crude oil
gathering and transportation assets (the "Assets"), in key oil producing
regions from Koch Pipeline Company, L.P., a subsidiary of Koch Industries,
Inc., and Koch Oil Company, a division of Koch Industries, Inc. (collectively
"Koch"). The total purchase price of the Assets was $235.6 million, which
includes consideration of $184.5 million in cash, 2,000,000 Common Units,
2,000,000 Subordinated Units and $11.4 million in transaction costs. EOTT
financed the majority of the purchase price through short-term borrowings from
Enron. See additional discussion regarding Enron financing in Note 3 to the
Condensed Consolidated Financial Statements.
On July 1, 1998, the Partnership acquired crude oil gathering and
transportation assets in West Texas and New Mexico from Koch. The purchase
price was approximately $28.5 million and was financed with short-term
borrowings from Enron.
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
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 $2.2 million or $0.09 per diluted Unit for the
second quarter of 1999 compared to a net loss of $1.3 million or $0.07 per
diluted Unit for the second quarter of 1998. The second quarter 1999 results
reflect increased lease volumes and margins associated with the 1998 and 1999
asset acquisitions and the adoption of conclusions reached by the Emerging
Issues Task Force in Issue No. 98-10 ("Issue 98-10"), "Accounting for Contracts
Involved in Energy Trading and Risk Management Activities." Issue 98-10
requires energy trading contracts (as defined) to be recorded at fair value on
the balance sheet, with the change in fair value included in earnings. The
adoption of Issue 98-10 in the first quarter of 1999 included a $1.7 million
cumulative effect as of January 1, 1999, approximately $1.0 million of net
unrealized mark-to-market gains in the second quarter and approximately $3.1
million of net unrealized mark-to-market gains for the six months ended June
30, 1999.
Selected financial data for EOTT's business segments are summarized below,
in millions:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
North American Crude Oil - East of Rockies ......... $ 2,125.9 $ 1,037.1 $ 3,454.3 $ 2,123.0
Pipeline Operations ................................ 29.1 5.1 52.6 10.1
West Coast Operations .............................. 153.5 181.0 273.8 355.0
Corporate and Other (2) ........................... -- 24.5 -- 110.6
Intersegment Eliminations .......................... (49.2) (15.8) (88.2) (27.4)
----------- ----------- ----------- -----------
Total .............................................. $ 2,259.3 $ 1,231.9 $ 3,692.5 $ 2,571.3
=========== =========== =========== ===========
Gross margin:
North American Crude Oil - East of Rockies (1) .... $ 19.9 $ 22.2 $ 42.0 $ 41.8
Pipeline Operations ................................ 28.4 5.0 52.0 9.9
West Coast Operations .............................. 7.4 2.7 14.5 5.0
Corporate and Other (2) ........................... -- (0.7) -- --
----------- ----------- ----------- -----------
Total .............................................. $ 55.7 $ 29.2 $ 108.5 $ 56.7
=========== =========== =========== ===========
Operating income (loss):
North American Crude Oil - East of Rockies (1) .... $ (0.6) $ 7.4 $ 1.0 $ 11.5
Pipeline Operations ................................ 13.5 0.4 24.3 0.8
West Coast Operations .............................. 2.1 0.5 4.4 0.4
Corporate and Other (2) ........................... (6.3) (7.1) (12.5) (11.9)
----------- ----------- ----------- -----------
Total .............................................. $ 8.7 $ 1.2 $ 17.2 $ 0.8
=========== =========== =========== ===========
</TABLE>
(1) Includes intersegment transportation costs from the Pipeline
Operations segment for the transport of crude oil at published
pipeline tariffs. In 1999, intersegment transportation costs from the
Pipeline Operations segment represented $22.2 million and $42.5
million for the three months and six months ended June 30,
respectively. For the three months and six months ended June 30,
1998, intersegment transportation costs from the Pipeline Operations
segment represented $3.4 million and $6.8 million, respectively.
(2) 1998 amounts include East of Rockies refined products business.
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998.
North American Crude Oil - East of Rockies: The North American Crude Oil
segment had an operating loss of $0.6 million for the second quarter 1999,
compared to operating income of $7.4 million for the same period in 1998. As a
result of the acquisition of assets from Koch, the North American Crude Oil
segment is incurring increased transportation costs from the Pipeline Operations
segment due to the significant increase in the volume of crude oil transported
at higher published tariff rates as well as incurring additional operating costs
associated with the asset acquisitions. Gross margin decreased $2.3 million to
$19.9 million in the second quarter of 1999 due primarily to increased
transportation costs or tariffs paid to the Pipeline Operations segment
partially offset by approximately $1.4 million of unrealized mark-to-market
gains being recorded in the second quarter for certain energy contracts.
Operating expenses of $20.5 million for the second quarter 1999 were $5.7
million higher than in the second quarter of 1998 due primarily to higher
operating costs and employee related costs associated with the acquisitions of
assets from Koch.
Pipeline Operations: Pipeline Operations had operating income of $13.5
million for the second quarter 1999 compared to operating income of $0.4 million
for the same period in 1998. Revenues, which include only two months of activity
related to the asset acquisition from Texas-New Mexico Pipeline Company in 1999,
increased $24.0 million to $29.1 million in the second quarter of 1999 due
primarily to increased activity related to the acquisition of pipelines from
Koch and Texas-New Mexico Pipeline Company. Approximately $22.2 million and $3.4
million of revenues for the three months ended June 30, 1999 and 1998,
respectively, were generated from tariffs charged to the North American Crude
Oil segment. Operating expenses of $14.9 million for the second quarter of 1999
were $10.3 million higher than in the second quarter of 1998 due to higher
employee related costs, operating costs and depreciation associated with the
acquisitions of assets from Koch and Texas-New Mexico Pipeline Company.
West Coast Operations: West Coast Operations had operating income of $2.1
million for the second quarter 1999, compared to $0.5 million for the same
period in 1998 primarily due to increased margins associated with the crude oil
blending operations acquired from Koch and increased margins in refined products
marketing due to disruptions in supply and demand as a result of refinery
outages. Operating expenses of $5.3 million for the second quarter of 1999 were
$3.1 million higher than in the second quarter of 1998 due to higher employee
related costs, operating costs and depreciation associated with the acquisition
of assets from Koch.
Corporate and Other: Corporate and Other costs were $6.3 million for the
second quarter 1999 compared to $6.4 million in the second quarter 1998,
exclusive of results of the East of Rockies products business. The decrease is
due primarily to 1998 severance costs for a former officer of the General
Partner partially offset by higher employee related costs, 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 $1.2 million in the second quarter 1999
compared to the same period in 1998 primarily due to gains on foreign currency
transactions and gains on sales of fixed assets. Interest and related charges in
the second quarter 1999 were $7.3 million compared to $2.0 million for the same
period in 1998. The increase is due primarily to higher average short-term debt
in 1999 due to the financing of the acquisitions of assets from Koch and
Texas-New Mexico Pipeline Company.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998.
North American Crude Oil - East of Rockies: Operating income for the North
American Crude Oil segment was $1.0 million for the first half of 1999, compared
to $11.5 million for the same period in 1998. As previously discussed, as a
result of the acquisition of assets from Koch, the North American Crude Oil
segment is incurring increased transportation costs from the Pipeline Operations
segment due to the significant increase in the volume of crude oil transported
at higher published tariff rates as well as incurring additional
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
operating costs associated with the asset acquisitions. Gross margin increased
$0.2 million to $42.0 million in the first half of 1999 due primarily to
increased margins related to the asset acquisitions in 1998 and approximately
$2.7 million of unrealized mark-to-market gains being recorded in the first half
of 1999 for certain energy contracts. These increases were offset by the
increase in transportation costs charged by the Pipeline Operations segment and
by approximately $3 million of higher cost of sales associated with covering
inventory variances in a period of rapidly rising crude oil prices. The
inventory variances, which are a result of actual lease volumes being less than
expected lease volumes, were largely due to the integration of the $235.6
million acquisition of assets from Koch, which nearly doubled the amount of
lease barrels under contract. Operating expenses of $41.0 million for the first
half of 1999 were $10.7 million higher than in the first half of 1998 due
primarily to higher operating costs and employee related costs associated with
the acquisitions of assets from Koch in December 1998.
Pipeline Operations: Pipeline Operations had operating income of $ 24.3
million for the first half of 1999 compared to operating income of $0.8 million
for the same period in 1998. Revenues, which include only two months of activity
related to the asset acquisition from Texas-New Mexico Pipeline Company in 1999,
increased $42.5 million to $52.6 million in the first half of 1999 due primarily
to increased activity related to the acquisitions of pipelines from Koch and
Texas-New Mexico Pipeline Company. Approximately $42.5 million and $6.8 million
of revenues for the six months ended June 30, 1999 and 1998, respectively, were
generated from tariffs charged to the North American Crude Oil segment.
Operating expenses of $27.7 million for the first half of 1999 were $18.6
million higher than in the first half of 1998 due to higher employee related
costs, operating costs and depreciation associated with the acquisitions of
assets from Koch and Texas-New Mexico Pipeline Company.
West Coast Operations: West Coast Operations had operating income of $4.4
million for the first half of 1999, compared to $0.4 million for the same
period in 1998 primarily due to increased margins associated with the crude oil
blending operations acquired from Koch and increased margins in refined
products marketing due to disruptions in supply and demand due to refinery
outages. Operating expenses of $10.1 million for the first half of 1999 were
$5.5 million higher than for the same period in 1998 due to higher employee
related costs, operating costs and depreciation associated with the acquisition
of assets from Koch.
Corporate and Other: Corporate and Other costs were $12.5 million for the
first half of 1999 compared to $11.9 million in the first half of 1998. The
increase is due primarily to higher system operating costs and insurance costs
partially offset by lower severance costs. Other income (expense), net,
consisting primarily of gains (losses) on transactions denominated in foreign
currency and gains on sales of fixed assets, increased $1.3 million to income
of $1.0 million in the first half of 1999 compared to a loss of $0.3 million in
the same period in 1998 primarily due to gains on foreign currency transactions
and gains on sales of fixed assets. Interest and related charges in the first
half of 1999 were $13.8 million compared to $3.8 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 acquisitions of assets from Koch and Texas-New Mexico Pipeline
Company.
LIQUIDITY AND CAPITAL RESOURCES
General
Management anticipates that short-term liquidity as well as sustaining
capital expenditures for the foreseeable future will be funded primarily by
cash generated from operations in addition to lines of credit provided by
Enron, as more fully described in Note 3 to the Condensed Consolidated
Financial Statements.
20
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
Cash Flows From Operating Activities
Net cash provided by operating activities totaled $26.2 million for the
first half of 1999 compared to net cash used in operating activities of $41.1
million for the same period in 1998 primarily due to improved operating results
associated with acquisitions from Koch and Texas-New Mexico Pipeline Company.
Cash Flows From Investing Activities
Net cash used in investing activities totaled $42.5 million for the first
half of 1999 compared to $2.6 million for the same period in 1998. Cash
additions to property, plant, and equipment and acquisitions of $43.1 million
in 1999 primarily include $33.0 million representing cash consideration for the
asset acquisition from Texas-New Mexico Pipeline Company, $5.4 million for
other pipeline connections and improvements, and $1.1 million for information
systems development. Proceeds from asset sales were $0.5 million in the first
half of 1999 compared to $0.6 million in the first half of 1998.
Cash Flows From Financing Activities
Net cash provided by financing activities totaled $17.0 million for the
first half of 1999 compared to net cash provided of $43.1 million for the same
period in 1998. The 1999 amount primarily represents increases in short-term
borrowings for working capital needs and acquisition financing offset by
distributions paid to all Common and Special Unitholders for the period October
1, 1998 through March 31, 1999.
Working Capital and Credit Resources
In 1995, Enron agreed to provide credit support to the Partnership in the
form of guarantees, letters of credit, loans and letters of indemnity. The
total amount of the credit support was $600 million, as amended December 19,
1996, had a maturity of March 31, 1999 and was replaced with a new facility on
December 1, 1998 as discussed below. As amended, the agreement contained
sublimits of $100 million for working capital loans and $200 million for
letters of credit. Letter of credit fees were based on actual charges by the
banks, which ranged from .20% - .375% per annum. Interest on outstanding loans
was charged at the London Interbank Offering Rate ("LIBOR") plus 25 basis
points per annum. At December 31, 1997, EOTT had a note payable of $39.3
million with Enron under a financing arrangement for acquisitions and other
capital projects. This financing was provided at a rate of LIBOR plus 30 basis
points per annum. The maturity date of the note was March 31, 1999, and the
note was redeemed and reissued under the term loan discussed below.
On December 1, 1998, Enron increased its existing credit facility with the
Partnership to provide additional credit support in the form of guarantees,
letters of credit and working capital loans through December 31, 2001. The
total amount of the Enron facility is $1.0 billion, and it contains sublimits
of $100 million for working capital loans and $900 million for guarantees and
letters of credit. Letter of credit fees are based on actual charges by the
banks which range from .20% - .375% per annum. Interest on outstanding loans is
charged at LIBOR plus 250 basis points per annum.
The Enron facility is subject to defined borrowing base limitations
relating to the Partnership's activities and to the maintenance and protection
of the collateral. The Enron facility permits distributions to Unitholders
subject to certain limitations based on the Partnership's earnings and other
factors. These covenants and restrictions are not expected to materially affect
the Partnership's ability to operate its ongoing business.
At June 30, 1999 and December 31, 1998, EOTT had a term loan of $175
million outstanding with Enron under a financing arrangement to fund a portion
of the cash consideration paid to Koch for the assets purchased in 1998 and to
refinance indebtedness incurred in prior acquisitions. The term loan matures on
December 31, 1999. The interest rate on the term loan is LIBOR plus 300 basis
points.
21
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
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 June 30, 1999 and December 31, 1998, EOTT had $42.0
million of debt outstanding with Enron under a $100 million bridge loan to
finance a portion of the cash consideration for the acquisition of assets from
Koch. The interest rate on the bridge loan 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 access the debt and/or equity markets later this year to refinance
the bridge loan and term loan.
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.
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 June 30, 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 July 20, 1999 for approximately $90.4
million.
Distributions
Generally, the Partnership will distribute 100% of its Available Cash
within 45 days after the end of each quarter to Unitholders of record and to
the General Partner. Available Cash consists generally of all of the cash
receipts of the Partnership adjusted for its cash distributions and net changes
to reserves. The full definition of Available Cash is set forth in the
Partnership Agreement and amendments thereto, forms of which have been filed as
exhibits to the Annual Report on Form 10-K. Distributions of Available Cash to
the 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.
22
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
MQD is $0.475 per Unit ($1.90 annualized). Enron has committed to provide
total cash distribution support in exchange for Additional Partnership
Interests in an amount necessary to pay MQDs, with respect to quarters ending
on or before December 31, 2001, in an amount up to an aggregate of $29 million
($26.5 million of which remains available).
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.
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.
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.
23
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
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 August 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 C IP IP IP IP IP
Internal Items
---------------------------------------------------------------------------------
Mission-Critical C C C C IP IP TBI
Outside Entities
---------------------------------------------------------------------------------
</TABLE>
Legend: C = Complete IP = In Process TBI = To Be Initiated
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
YEAR 2000 PROJECT ESTIMATED COMPLETION DATES
------------------------------------------------------------------------------------
Inventory Assessment Analysis Conversion Testing Y2K-Ready Contingency Plan
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mission-Critical 7/98 5/99 8/99 9/99 9/99 9/99 10/99
Internal Items
------------------------------------------------------------------------------------
Mission-Critical 7/98 5/99 6/99 8/99 9/99 10/99 10/99
Outside Entities
------------------------------------------------------------------------------------
</TABLE>
The Partnership has substantially completed remediation on all business
applications currently in production, along with related hardware and software.
Embedded systems (generally pipeline SCADA devices) are running behind schedule
primarily because of acquisitions of additional assets by the Partnership which
have significantly increased the number of devices to analyze and test.
Completed testing of the embedded systems is anticipated by the end of
September. As of August of 1999, the
24
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
Partnership is Year 2000 ready on approximately 75% of its equipment.
Remediation is in progress on an additional 10% of the equipment and the
analysis of the remaining equipment is nearing completion.
Letters requesting the status of Year 2000 readiness were sent to
substantially all vendors and business partners. Follow-up requests were sent
to parties in that initial group identified as mission-critical. The status of
Year 2000 readiness for these mission-critical counterparties is being
verified by means such as telephone surveys and viewing website updates.
Because the Partnership's Year 2000 Plan treats Year 2000 efforts as an
iterative process, the Partnership will commence additional cycles of
inventory, assessment, remediation, and validation testing, which will be
conducted in parallel, and in coordination, with the Partnership's Year 2000
contingency plan.
Costs to Address Year 2000 Issues
Preliminary estimates of the total Year 2000 costs, which 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. The Partnership continues to be concerned with
hidden defects in computer code, including re-coding errors in remediated code;
sabotage of remediated code; embedded devices with Year 2000 defects; and the
potential failure of mission-critical Outside Entities. The Partnership is
developing contingency plans to prepare to the extent practicable to avoid
substantial Year 2000 related disruptions that may have a material adverse
effect on the Partnership. None of these problems is unique to the Partnership.
Although management believes that its estimates are reasonable, there can be no
assurance, for the reasons stated in the "Summary" section, below, that the
actual costs of implementing the Plan will not differ materially from the
estimated costs or that the Partnership will not be materially adversely
affected by Year 2000 issues.
Year 2000 Risk Factors
Certain of the Partnership's operations are regulated by governmental
authorities. The Partnership 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.
25
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
The Partnership is taking reasonable steps to identify, assess, and, where
appropriate, to replace devices that contain embedded chips. Despite these
reasonable efforts, the Partnership anticipates that it will not be able to
find and remediate all embedded chips in the Partnership's systems. Further,
the Partnership anticipates that Outside Entities on which the Partnership
depends also will not be able to find and remediate all embedded chips in their
systems. Some of the embedded chips that fail to operate or that produce
anomalous results may create system disruptions or failures. Some of these
disruptions or failures may spread from the systems in which they are located
to other systems in a cascade. These cascading failures may have adverse
effects upon the Partnership's ability to maintain safe operations, and may
also have adverse effects upon the Partnership's ability to serve its customers
and otherwise to fulfill certain contractual and other legal obligations. The
embedded chip problem is widely recognized as one of the more difficult aspects
of the Year 2000 problem across industries and throughout the world. The
possible adverse impact of the embedded chip problem is not, and will not be,
unique to the Partnership.
The Partnership cannot assure that suppliers upon which it depends for
essential goods and services will convert and test their mission-critical
systems and processes in a timely manner. Failure of delay by all or some of
these entities, including the U.S. and state or local governments and foreign
governments, could create substantial disruptions having a material adverse
affect on the Partnership's business.
The Partnership may face additional risk as a result of the uncertainties,
and possible additional litigation, resulting from the enactment of the U.S.
federal "Year 2000 Act." Because experience with this recently enacted
legislation is very limited, the Partnership cannot at this time quantify the
financial impact or potential business disruption that may result from this
legislation. However, the adverse impact on the Partnership's business could be
material.
In a 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.
26
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
Contingency Plans
As part of the Plan, the Partnership is developing contingency plans that
will deal with two aspects of the Year 2000 problem: (1) that the Partnership,
despite its good-faith, reasonable efforts, may not have satisfactorily
remediated all its internal mission-critical systems; and (2) that Outside
Systems may not be Year 2000 ready, despite the Partnership's good-faith,
reasonable efforts to work with Outside Entities. The Partnership's contingency
plans are being designed to minimize the disruptions or other adverse effects
resulting from Year 2000 incompatibilities regarding these mission-critical
functions or systems, and to facilitate the early identification and
remediation of mission-critical Year 2000 problems that first manifest
themselves after January 1, 2000.
These contingency plans will contemplate an assessment of all its
mission-critical internal information technology systems and its internal
operational systems that use computer-based controls. This process has begun
and will continue as circumstances require. Further, the Partnership will in
that time frame assess any mission-critical disruptions due to Year
2000-related failures that are external to the Partnership. These assessments
will be conducted for all of the Partnership's operations.
These contingency plans include, where appropriate, the creation of teams
that will be standing by on the eve of the new millennium, prepared to respond
rapidly and otherwise as necessary to mission-critical Year 2000-related
problems as soon as they become known. The composition of teams that are
assigned to deal with Year 2000 problems will vary according to the nature,
mission-criticality, and location of the problem.
Summary
The Partnership has a Plan to deal with the Year 2000 challenge and
believes that it will be able to achieve substantial Year 2000 readiness with
respect to the mission-critical systems that it controls. From a
forward-looking perspective, the extent and magnitude of the Year 2000 problem
as it will affect the Partnership, both before and for some period after
January 1, 2000, are difficult to predict or quantify for a number of reasons.
Among these are: the difficulty of locating "embedded" chips that may be in a
great variety of mission-critical hardware used for process or flow control,
environmental, transportation, access, communications, and other systems; the
difficulty of inventorying, assessing, remediating, verifying and testing
Outside Systems; the difficulty in locating all mission-critical software
(computer code) internal to the Partnership that is not Year 2000 compatible,
or that may be subject to re-coding errors or sabotage; and the unavailability
of certain necessary internal or external resources, including but not limited
to trained technicians and other personnel to perform adequate remediation,
verification, and testing of mission-critical Partnership systems or Outside
Systems. There can be no assurance, for example, that all of the Partnership's
systems and all Outside Systems 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 Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
27
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOTT ENERGY PARTNERS, L.P.
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. The standard cannot
be applied retroactively but early adoption is permitted. EOTT has not yet
determined the impact of adopting SFAS No. 133; however, this standard could
increase volatility in earnings and partners' capital, through other
comprehensive income.
OUTLOOK
EOTT will continue to pursue attractive acquisition or business
combination opportunities to increase the scale of its business, add cash flow,
and reduce earnings variability. The acquisition of assets from Texas-New
Mexico Pipeline Company, effective May 1, 1999, should 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 gathering and marketing opportunities. EOTT management
is committed to continue improving internal business processes in all
operational, marketing, and administrative areas and thereby achieve
improvements in productivity.
As discussed previously, the interim bridge loan and term loan provided by
Enron are due on December 31, 1999. EOTT intends to access the debt and/or
equity markets later this year to refinance the bridge loan and term loan.
Historically, the crude oil gathering and marketing business has been very
competitive with thin and variable profit margins. Market conditions and the
amount of crude oil produced cannot be projected with certainty. The
Partnership intends to continue to pay MQDs to all its Common Unitholders and
paid second quarter distributions to all its Common Unitholders on August 13,
1999 without any distribution support from Enron; however, due to the changing
market conditions and the decline in crude oil being produced which affects
operating results, it is possible that distribution support from Enron may be
needed to pay MQDs in the future. Enron has committed to provide total cash
distribution support in an amount necessary to pay MQDs and has increased its
cash distribution support to $29 million ($26.5 million of which remains
available) and extended it through the fourth quarter 2001, which should
further assure Common Unitholders of continued reliable distributions.
28
<PAGE> 29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EOTT ENERGY PARTNERS, L.P.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in Item 3 updates, and should be read in
conjunction with, information set forth in Part II, Item 7A in EOTT's Annual
Report on Form 10-K for the year ended December 31, 1998, in addition to the
interim 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.
29
<PAGE> 30
PART II. OTHER INFORMATION
EOTT ENERGY PARTNERS, L.P.
ITEM 1. Legal Proceedings
See Part I. Item 1, Note 8 to the Condensed Consolidated Financial
Statements entitled "Litigation and Other Contingencies," which is incorporated
herein by reference.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 10.30 Amendment dated August 11, 1999 to the Amended and
Restated Credit Agreement as of December 1, 1998 between
EOTT Energy Operating Limited Partnership, as Borrower,
and Enron Corp., as Lender
Exhibit 10.31 Amendment dated August 11, 1999 to the Amended and
Restated Term Credit Agreement as of December 1, 1998
between EOTT Energy Operating Limited Partnership, as
Borrower, and Enron Corp., as Lender
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
None
30
<PAGE> 31
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: August 16, 1999 By: EOTT ENERGY CORP. as
General Partner
/s/ LORI L. MADDOX
-----------------------------------------
Lori L. Maddox
Controller
(Principal Accounting Officer)
31
<PAGE> 32
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.30 Amendment dated August 11, 1999 to the Amended and Restated
Credit Agreement as of December 1, 1998 between EOTT Energy
Operating Limited Partnership, as Borrower, and Enron Corp.,
as Lender
10.31 Amendment dated August 11, 1999 to the Amended and Restated
Term Credit Agreement as of December 1, 1998 between EOTT
Energy Operating Limited Partnership, as Borrower, and Enron
Corp., as Lender
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.30
SECOND AMENDMENT AGREEMENT
This Second Amendment Agreement (this "Amendment") dated as of August
11, 1999, is among EOTT Energy Operating Limited Partnership ("Borrower") and
Enron Corp. ("Lender") under the Amended and Restated Credit Agreement dated as
of December 1, 1998, as amended, among the Borrower and the Lender (the
"Agreement"). In consideration of the mutual covenants contained herein, the
Borrower and the Lender agree as set forth herein.
SECTION 1. Amendment to the Agreement
1.1 Section 10.15. Section 10.15 of the Agreement is hereby
amended to read as follow:
Leverage Ratio. The Borrower shall not permit, at any time, the
ratio of its Consolidated Total Liabilities to its Consolidated
Tangible Net Worth plus $75,000,000 to be greater than the ratios set
below, such applicable ratios to be adjusted pursuant to the effective
dates as described below:
<TABLE>
<CAPTION>
Effective as of April 1, 1999 to March 31, 2000
-------------------------------------------------
WTI Price Per Barrel Ratio
-------------------- -----
<S> <C>
Less than or equal to $30 10:1
Greater than $30 10:1
Effective April 1, 2000 and thereafter
-------------------------------------------------
<CAPTION>
WTI Price Per Barrel Ratio
-------------------- -----
<S> <C>
Less than or equal to $30 6:1
Greater than $30 7:1
</TABLE>
SECTION 2. Miscellaneous.
2.1 Amendments, Etc. No amendment or waiver of any provision of
this Amendment nor consent to any departure by the Borrower herefrom,
shall in any event be effective unless effected in accordance with
Section 12.11 of the Agreement.
2.2 Effectiveness. This amendment shall be effective as of April
1, 1999 upon the receipt by the Borrower and the Lender of counterparts
of or copies of signature pages of this Amendment executed by the
Borrower and the Lender in compliance with Section 12.11 of the
Agreement.
2.3 Representations. The Borrower hereby represents and warrants
to the Lenders, after giving effect to this Amendment:
(i) The representations and warranties contained in Section 8 of
the Agreement as amended hereby are correct on and as of the
date hereof as though made on and as of the date hereof and;
<PAGE> 2
Enron Corp.
August 11, 1999
Page 2
(ii) No event has occurred and is continuing which constitutes an
Event of Default or would constitute an Event of Default but
for the requirement that notice be given or time elapse or
both.
2.4 Counterparts. This Amendment may be executed in any number
of counterparts and by the different parties hereto on separate
counterparts, each of which when so executed and delivered shall be an
original, but all of which shall together constitute one and the same
instrument. A set of counterparts executed by all the parties hereto
shall be lodged with the Borrower and the Lender.
2.5 Governing Law; Submission to Jurisdiction; Venue. THIS
AMENDMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS
OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN
ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF TEXAS.
EOTT Energy Operating Limited Partnership
By: EOTT Energy Corp., its General Partner
By: /s/ SUSAN RALPH
---------------------------------------
Name: Susan Ralph
-------------------------------------
Title: Treasurer
------------------------------------
Agreed to and accepted this 11th
day of August, 1999, by:
Enron Corp.
By: /s/ JEFFREY MCMAHON
-------------------------------
Jeffrey McMahon
Senior Vice President, Finance and Treasurer
<PAGE> 1
EXHIBIT 10.31
SECOND AMENDMENT AGREEMENT
This Second Amendment Agreement (this "Amendment") dated as of August
11, 1999, is among EOTT Energy Operating Limited Partnership ("Borrower") and
Enron Corp. ("Lender") under the Amended and Restated Term Credit Agreement
dated as of December 1, 1998, as amended, among the Borrower and the Lender (the
"Agreement"). In consideration of the mutual covenants contained herein, the
Borrower and the Lender agree as set forth herein.
SECTION 1. Amendment to the Agreement
1.1 Section 7.12. Section 7.12 of the Agreement is hereby
amended to read as follow:
Leverage Ratio. The Borrower shall not permit, at any time, the
ratio of its Consolidated Total Liabilities to its Consolidated
Tangible Net Worth plus $75,000,000 to be greater than the ratios set
below, such applicable ratios to be adjusted pursuant to the effective
dates as described below:
<TABLE>
<CAPTION>
Effective as of April 1, 1999 to March 31, 2000
-------------------------------------------------
WTI Price Per Barrel Ratio
-------------------- -----
<S> <C>
Less than or equal to $30 10:1
Greater than $30 10:1
<CAPTION>
Effective April 1, 2000 and thereafter
-------------------------------------------------
WTI Price Per Barrel Ratio
-------------------- -----
<S> <C>
Less than or equal to $30 6:1
Greater than $30 7:1
</TABLE>
SECTION 2. Miscellaneous.
2.1 Amendments, Etc. No amendment or waiver of any provision of
this Amendment nor consent to any departure by the Borrower herefrom,
shall in any event be effective unless effected in accordance with
Section 9.10 of the Agreement.
2.2 Effectiveness. This amendment shall be effective as of April
1, 1999 upon the receipt by the Borrower and the Lender of counterparts
of or copies of signature pages of this Amendment executed by the
Borrower and the Lender in compliance with Section 9.10 of the
Agreement.
2.3 Representations. The Borrower hereby represents and warrants
to the Lenders, after giving effect to this Amendment:
(i) The representations and warranties contained in Section 5 of
the Agreement as amended hereby are correct on and as of the
date hereof as though made on and as of the date hereof and;
<PAGE> 2
Enron Corp.
August 11, 1999
Page 2
(ii) No event has occurred and is continuing which constitutes an
Event of Default or would constitute an Event of Default but
for the requirement that notice be given or time elapse or
both.
2.4 Counterparts. This Amendment may be executed in any number
of counterparts and by the different parties hereto on separate
counterparts, each of which when so executed and delivered shall be an
original, but all of which shall together constitute one and the same
instrument. A set of counterparts executed by all the parties hereto
shall be lodged with the Borrower and the Lender.
2.5 Governing Law; Submission to Jurisdiction; Venue. THIS
AMENDMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS
OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN
ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF TEXAS.
EOTT Energy Operating Limited Partnership
By: EOTT Energy Corp., its General Partner
By: /s/ SUSAN RALPH
---------------------------------------
Name: Susan Ralph
-------------------------------------
Title: Treasurer
------------------------------------
Agreed to and accepted this 11th
day of August, 1999, by:
Enron Corp.
By: /s/ JEFFREY MCMAHON
-------------------------------
Jeffrey McMahon
Senior Vice President, Finance and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000917464
<NAME> EOTT ENERGY PARTNERS, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,652
<SECURITIES> 0
<RECEIVABLES> 649,824
<ALLOWANCES> 1,732
<INVENTORY> 102,580
<CURRENT-ASSETS> 818,893
<PP&E> 543,040
<DEPRECIATION> 126,431
<TOTAL-ASSETS> 1,241,035
<CURRENT-LIABILITIES> 1,148,530
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 89,805<F1>
<TOTAL-LIABILITY-AND-EQUITY> 1,241,035
<SALES> 3,692,460
<TOTAL-REVENUES> 3,692,460
<CGS> 3,583,967
<TOTAL-COSTS> 3,675,272
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,820
<INCOME-PRETAX> 4,716
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,716
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,747
<NET-INCOME> 6,463
<EPS-BASIC> 0.00<F2>
<EPS-DILUTED> 0.26
<FN>
<F1>"Other SE" represents consolidated Partners' Capital.
<F2>"EPS Primary" represents Basic Common EPS of $0.24 and Basic Subordinated EPS
of $0.31.
</FN>
</TABLE>
