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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-12295
GENESIS ENERGY, L.P.
(Exact name of registrant as specified in its charter)
Delaware 76-0513049
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 Dallas, Suite 2500, Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 860-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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This report contains 21 pages
2
GENESIS ENERGY, L.P.
Form 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Consolidated Balance Sheets - September 30, 2001 and
December 31, 2000 3
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2001 and 2000 4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2001 and 2000 5
Consolidated Statement of Partners' Capital for the Nine Months
Ended September 30, 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
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GENESIS ENERGY, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2001 2000
-------- --------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 9,871 $ 5,508
Accounts receivable - trade 230,021 329,464
Inventories 2,385 994
Insurance receivable for pipeline spill costs 2,242 5,527
Other 19,621 9,111
-------- --------
Total current assets 264,140 350,604
FIXED ASSETS, at cost 114,347 113,715
Less: Accumulated depreciation (30,138) (25,609)
-------- --------
Net fixed assets 84,209 88,106
OTHER ASSETS, net of amortization 9,645 10,633
-------- --------
TOTAL ASSETS $357,994 $449,343
======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Bank borrowings $ 24,000 $ 22,000
Accounts payable -
Trade 232,875 322,912
Related party 1,191 4,750
Accrued liabilities 15,973 16,546
-------- --------
Total current liabilities 274,039 366,208
COMMITMENTS AND CONTINGENCIES (Note 8)
MINORITY INTERESTS 520 520
PARTNERS' CAPITAL
Common unitholders, 8,624 units issued and
outstanding at September 30, 2001 and
December 31, 2000, respectively 81,769 80,960
General partner 1,678 1,661
-------- --------
Subtotal 83,447 82,621
Treasury Units, 1 unit at September 30, 2001 and
December 31, 2000, respectively (12) (6)
-------- --------
Total partners' capital 83,435 82,615
-------- --------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $357,994 $449,343
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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GENESIS ENERGY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------- ---------- ---------- ----------
<s> <s> <s> <s>
REVENUES:
Gathering and marketing revenues
Unrelated parties $817,995 $1,088,892 $2,635,880 $3,248,593
Related parties - - 25,900 29,820
Pipeline revenues 3,652 4,140 11,039 11,358
-------- ---------- ---------- ----------
Total revenues 821,647 1,093,032 2,672,819 3,289,771
COST OF SALES:
Crude costs unrelated parties 804,035 1,053,505 2,603,128 3,135,028
Crude costs related parties 4,735 26,898 33,435 122,277
Field operating costs 3,853 3,399 11,816 9,810
Pipeline operating costs 2,763 2,326 7,763 6,411
-------- ---------- ---------- ----------
Total cost of sales 815,386 1,086,128 2,656,142 3,273,526
-------- ---------- ---------- ----------
GROSS MARGIN 6,261 6,904 16,677 16,245
EXPENSES:
General and administrative 2,969 2,785 8,695 8,161
Depreciation and amortization 1,863 2,048 5,630 6,129
-------- ---------- ---------- ----------
OPERATING INCOME 1,429 2,071 2,352 1,955
OTHER INCOME (EXPENSE):
Interest income 34 55 153 139
Interest expense (153) (242) (526) (944)
Change in fair value of derivatives (1,589) - 3,499 -
Gain (loss) on asset sales 12 16 160 36
-------- ---------- ---------- ----------
Income (loss) before minority interest and
cumulative effect of change in
accounting principle (267) 1,900 5,638 1,186
Minority interest - 380 1 237
-------- ---------- ---------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (267) 1,520 5,637 949
Cumulative effect of adoption of
Accounting principle, net of minority
interest effect - - 467 -
-------- ---------- ---------- ----------
NET INCOME (LOSS) $ (267) $ 1,520 $ 6,104 $ 949
======== ========== ========== ==========
NET INCOME (LOSS) PER COMMON UNIT -
BASIC AND DILUTED:
Income (loss) before cumulative effect
of change in accounting principle $ (0.03) $ 0.17 $ 0.64 $ 0.11
Cumulative effect of change in
accounting principle, net of minority
interest effect $ - $ - $ 0.05 $ -
======== ========== ========== ==========
Net Income (loss) $ (0.03) $ 0.17 $ 0.69 $ 0.11
======== ========== ========== ==========
NUMBER OF COMMON UNITS OUTSTANDING 8,624 8,617 8,624 8,621
======== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
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GENESIS ENERGY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
2001 2000
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,104 $ 949
Adjustments to reconcile net income to net cash
provided by (used in) operating activities -
Depreciation 4,641 5,140
Amortization of intangible assets 989 989
Cumulative effect of adoption of accounting principle (467) -
Change in fair value of derivatives (3,499) -
Minority interest equity in earnings 1 237
Gain on sales of fixed assets (160) (36)
Other noncash charges 45 649
Changes in components of working capital -
Accounts receivable 99,443 (135,344)
Inventories (1,391) (10)
Other current assets (7,510) 8,603
Accounts payable (93,596) 132,418
Accrued liabilities 3,348 1,766
-------- ---------
Net cash provided by operating activities 7,948 15,361
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (745) (1,378)
Change in other assets (1) 10
Proceeds from sales of assets 446 55
-------- ---------
Net cash used in investing activities (300) (1,313)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under Loan Agreement 2,000 -
Distributions to common unitholders (5,173) (12,934)
Distributions to general partner (105) (264)
Distributions to minority interest owner (1) -
Issuance of additional partnership interests - 7,400
Purchase of treasury units (6) (42)
-------- ---------
Net cash used in financing activities (3,285) (5,840)
-------- ---------
Net increase in cash and cash equivalents 4,363 8,208
Cash and cash equivalents at beginning of period 5,508 6,664
-------- ---------
Cash and cash equivalents at end of period $ 9,871 $ 14,872
======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
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GENESIS ENERGY, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(In thousands)
(Unaudited)
Partners' Capital
---------------------------------
Common General Treasury
Unitholders Partner Units Total
------- ------ ----- -------
Partners' capital at December 31, 2000 $80,960 $1,661 $ (6) $82,615
Net income for the nine months ended
September 30, 2001 5,982 122 - 6,104
Distributions during the nine months ended
September 30, 2001 (5,173) (105) - (5,278)
Purchase of treasury units - - (6) (6)
------- ------ ----- -------
Partners' capital at September 30, 2001 $81,769 $1,678 $ (12) $83,435
======= ====== ===== =======
The accompanying notes are an integral part of these consolidated financial
statements.
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GENESIS ENERGY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Formation and Offering
In December 1996, Genesis Energy, L.P. ("GELP" or the "Partnership")
completed an initial public offering of 8.6 million Common Units at $20.625 per
unit, representing limited partner interests in GELP of 98%. Genesis Energy,
L.L.C. (the "General Partner") serves as general partner of GELP and its
operating limited partnership, Genesis Crude Oil, L.P. Genesis Crude Oil, L.P.
has two subsidiary limited partnerships, Genesis Pipeline Texas, L.P. and
Genesis Pipeline USA, L.P. Genesis Crude Oil, L.P. and its subsidiary
partnerships will be referred to collectively as GCOLP. The General Partner
owns a 2% general partner interest in GELP.
Transactions at Formation
At the closing of the offering, GELP contributed the net proceeds of the
offering to GCOLP in exchange for an 80.01% general partner interest in GCOLP.
With the net proceeds of the offering, GCOLP purchased a portion of the crude
oil gathering, marketing and pipeline operations of Howell Corporation
("Howell") and made a distribution to Basis Petroleum, Inc. ("Basis") in
exchange for its conveyance of a portion of its crude oil gathering and
marketing operations. GCOLP issued an aggregate of 2.2 million subordinated
limited partner units ("Subordinated OLP Units") to Basis and Howell to obtain
the remaining operations.
Basis' Subordinated OLP Units and its interest in the General Partner were
transferred to its then parent, Salomon Smith Barney Holdings Inc. ("Salomon")
in May 1997. In February 2000, Salomon acquired Howell's interest in the
General Partner. Salomon now owns 100% of the General Partner.
Restructuring
On December 7, 2000, the Partnership was restructured, resulting in the
reduction of the minimum quarterly distribution on Common Units to $0.20 per
unit; the reduction of the distribution thresholds before the General Partner
is entitled to incentive compensation payments; the elimination of the
Subordinated OLP Units in GCOLP; and the elimination of the outstanding
additional partnership interests, or APIs, issued to Salomon in exchange for
its distribution support.
Sale of the General Partner
On August 10, 2001, the Partnership announced that Salomon had entered
into an agreement to sell the General Partner to GEL Acquisition Partnership,
L.P. ("GA Partnership"). This transaction is expected to close before November
30, 2001.
2. Basis of Presentation
The accompanying consolidated financial statements and related notes present
the financial position as of September 30, 2001 and December 31, 2000 for GELP,
the results of operations for the three and nine months ended September 30,
2001 and 2000, cash flows for the nine months ended September 30, 2001 and 2000
and changes in partners' capital for the nine months ended September 30, 2001.
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, 2000 filed with the SEC.
Basic net income per Common Unit is calculated on the weighted average
number of outstanding Common Units. The weighted average number of Common
Units outstanding for the three months ended September 30, 2001 and 2000 was
8,624,000 and 8,617,000, respectively. For the 2001 and 2000 nine month
periods, the weighted
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average number of Common Units outstanding was 8,624,000 and 8,621,000,
respectively. For this purpose, the 2% General Partner interest is excluded
from net income. Diluted net income per Common Unit did not differ from basic
net income per Common Unit for any period presented.
3. New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets." This statement requires that goodwill no longer be
amortized to earnings, but instead be reviewed for impairment. The standard is
effective for fiscal years beginning on January 1, 2002. The Partnership is
currently evaluating the effect on its financial statements of adopting SFAS
No. 142. The Partnership currently records amortization of its goodwill of
$0.5 million annually.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement requires entities to record the fair value of a
liability for legal obligations associated with the retirement obligations of
tangible long-lived assets in the period in which it is incurred. When the
liability is initially recorded, a corresponding increase in the carrying
amount of the related long-lived asset would be recorded. Over time, accretion
of the liability is recognized each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss on settlement. The standard is effective for fiscal
years beginning after June 15, 2002, with earlier application encouraged. The
Partnership is currently evaluating the effect on its financial statements of
adopting SFAS No. 143 and plans to adopt the statement effective January 1,
2003.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment on
Disposal of Long-Lived Assets." This statement clarified the financial
accounting and reporting for the impairment or disposal of long-lived assets.
Impairment is required to be recognized if the carrying amount of a long-lived
asset is not recoverable from its undiscounted cash flows. The impairment loss
to be recognized is the difference between the carrying amount and the fair
value of the asset. The standard also provides guidance on the accounting for
long-lived assets that are held for disposal. This standard is effective for
the Partnership beginning January 1, 2002. The Partnership is currently
evaluating the effect on its financial statements of adopting SFAS No. 144.
4. Business Segment and Customer Information
Based on its management approach, the Partnership believes that all of its
material operations revolve around the gathering, transportation and marketing
of crude oil, and it currently reports its operations, both internally and
externally, as a single business segment. No customer accounted for more than
10% of the Partnership's revenues in any period.
5. Credit Resources
GCOLP entered into credit facilities with Salomon (collectively, the "Credit
Facilities"), pursuant to a Master Credit Support Agreement. GCOLP's
obligations under the Credit Facilities are secured by its receivables,
inventories, general intangibles and cash.
Guaranty Facility
Salomon is providing a Guaranty Facility in connection with the purchase,
sale and exchange of crude oil by GCOLP. The aggregate amount of the Guaranty
Facility is limited to $300 million for the year ending December 31, 2001 (to
be reduced in each case by the amount of any obligation to a third party to the
extent that such third party has a prior security interest in the collateral).
The Guaranty Facility was scheduled to terminate on December 31, 2001.
Conditioned upon closing of the sale of the General Partner to GA Partnership,
Salomon has agreed to extend the Guaranty Facility to March 31, 2002. The
aggregate amount of the Guaranty Facility, however, will be reduced to $100
million on January 1, 2002.
GCOLP pays a guarantee fee to Salomon. At September 30, 2001, the
aggregate amount of obligations covered by guarantees was $142 million,
including $67 million in payable obligations and $75 million of estimated crude
oil purchase obligations for October 2001.
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The Master Credit Support Agreement contains various restrictive and
affirmative covenants including (i) restrictions on indebtedness other than (a)
pre-existing indebtedness, (b) indebtedness pursuant to Hedging Agreements (as
defined in the Master Credit Support Agreement) entered into in the ordinary
course of business and (c) indebtedness incurred in the ordinary course of
business by acquiring and holding receivables to be collected in accordance
with customary trade terms, (ii) restrictions on certain liens, investments,
guarantees, loans, advances, lines of business, acquisitions, mergers,
consolidations and sales of assets and (iii) compliance with certain risk
management policies, audit and receivable risk exposure practices and cash
management practices as may from time to time be revised or altered by Salomon
in its sole discretion.
Pursuant to the Master Credit Support Agreement, GCOLP is required to
maintain (a) Consolidated Tangible Net Worth of not less than $50 million, (b)
Consolidated Working Capital of not less than $1 million, (c) a ratio of its
Consolidated Current Liabilities to Consolidated Working Capital plus net
property, plant and equipment of not more than 7.5 to 1, and (d) a ratio of
Consolidated Total Liabilities to Consolidated Tangible Net Worth of not more
than 10.0 to 1 (as such terms are defined in the Master Credit Support
Agreement). The Partnership was in compliance with the provisions of this
agreement at September 30, 2001.
An Event of Default could result in the termination of the Credit
Facilities at the discretion of Salomon. Significant Events of Default include
(a) a default in the payment of (i) any principal on any payment obligation
under the Credit Facilities when due or (ii) interest or fees or other amounts
within two business days of the due date, (b) the guaranty exposure amount
exceeding the maximum credit support amount for two consecutive calendar
months, (c) failure to perform or otherwise comply with any covenants contained
in the Master Credit Support Agreement if such failure continues unremedied for
a period of 30 days after written notice thereof and (d) a material
misrepresentation in connection with any loan, letter of credit or guarantee
issued under the Credit Facilities. Removal of the General Partner will result
in the termination of the Credit Facilities and the release of all of Salomon's
obligations thereunder.
Working Capital Facility
Prior to June 2000, GCOLP had a revolving credit/loan agreement ("Loan
Agreement") with Bank One, Texas, N.A. In June 2000, the Loan Agreement was
replaced with a secured revolving credit facility ("Credit Agreement") with BNP
Paribas. The Credit Agreement provides for loans or letters of credit in the
aggregate not to exceed the greater of $25 million or the Borrowing Base (as
defined in the Credit Agreement).
During 2000, loans bore interest at a rate chosen by GCOLP which would be
one or more of the following: (a) a rate based on LIBOR plus 1.4% or (b) BNP
Paribas' prime rate minus 1.0%. In 2001, the Credit Agreement was amended to
change the interest rates to LIBOR plus 2.25% or BNP Paribas prime rate minus
0.875%.
The Credit Agreement expires on the earlier of (a) February 28, 2003 or
(b) 30 days prior to the termination of the Master Credit Support Agreement
with Salomon. As the Master Credit Support Agreement is now expected to
terminate on March 31, 2002, as a result of Salomon's extension upon sale of
the General Partner, the Credit Agreement with BNP Paribas is currently
scheduled to expire on February 28, 2002.
The Credit Agreement is collateralized by the accounts receivable,
inventory, cash accounts and margin accounts of GCOLP, subject to the terms of
an Intercreditor Agreement between BNP Paribas and Salomon. There is no
compensating balance requirement under the Credit Agreement. A commitment fee
of 0.35% on the available portion of the commitment is provided for in the
agreement. Material covenants and restrictions include the following: (a)
maintain a Current Ratio (calculated after the exclusion of debt under the
Credit Agreement from current liabilities) of 1.0 to 1.0; (b) maintain a
Tangible Capital Base (as defined in the Credit Agreement) in GCOLP of not less
than $65 million; and (c) maintain a Maximum Leverage Ratio (as defined in the
Credit Agreement) of not more than 7.5 to 1.0. Additionally, the Credit
Agreement imposes restrictions on the ability of GCOLP to sell its assets,
incur other indebtedness, create liens and engage in mergers and acquisitions.
The Partnership was in compliance with the ratios of the Credit Agreement at
September 30, 2001.
At September 30, 2001, the Partnership had $24.0 million of loans
outstanding under the Credit Agreement. The Partnership had no letters of
credit outstanding at September 30, 2001. At September 30, 2001, $1.0 million
was available to be borrowed under the Credit Agreement.
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Replacement Facility
Fleet National Bank has been engaged by the Partnership to provide a $100
million Senior Letter of Credit and Loan Credit Facility ("Fleet Facility").
Fleet will act as agent for the facility.
The Fleet Facility is expected to close before November 30, 2001.
Initially, the Fleet Facility will replace the Credit Agreement by providing up
to $30 million for working capital purposes and for approved acquisition
purposes. When the Guaranty Facility terminates at March 31, 2002, the Fleet
Facility will become a $100 million facility for letter of credit and working
capital purposes with a sublimit of $30 million as discussed above. The total
available to GCOLP will be subject to a borrowing base calculation.
The Fleet Facility will expire after three years. Rates to be paid by
GCOLP for letters of credit and interest on borrowings will vary depending on
GCOLP's leverage ratio. The Fleet Facility is expected to have covenants
similar to the requirements in the Guaranty Facility and the Credit Agreement.
No assurance can be made that the Partnership will be able to replace the
existing facilities.
Credit Availability
Although the Partnership's consolidated balance sheet reflected a working
capital deficit of $9.9 million at September 30, 2001, replacement of the
Credit Agreement with the Fleet Facility will result in the short-term bank
borrowings being reclassified to long-term. On a pro forma basis, this change
would result in the Partnership's consolidated balance sheet reflecting working
capital of $14.1 million.
The Partnership is making changes to its business operations as it
transitions from $300 million of credit availability and $25 million of working
capital borrowing availability to a $100 million total facility. As a result
of the changes in the size and cost of the Partnership's credit facility, the
level of bulk and exchange volumes in the Partnership's gathering and marketing
operations will be substantially reduced, resulting in decreased gross margins
and less Available Cash for distribution to unitholders.
Distributions
Generally, GCOLP 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 less
cash disbursements of GCOLP adjusted for net changes to reserves. (A full
definition of Available Cash is set forth in the Partnership Agreement.) As a
result of the restructuring approved by unitholders on December 7, 2000, the
minimum quarterly distribution ("MQD") for each quarter has been reduced to
$0.20 per unit beginning with the distribution for the fourth quarter of 2000,
which was paid in February 2001.
On October 31, 2001, the Partnership and GA Partnership announced that,
after closing on the purchase of the General Partner, GA Partnership intends to
reduce the quarterly distribution from $0.20 per unit to $0.10 per unit
beginning with the distribution for the fourth quarter of 2001, which will be
paid in February 2002.
Other
The Partnership Agreement authorizes the General Partner to cause GCOLP to
issue additional limited partner interests and other equity securities, the
proceeds from which could be used to provide additional funds for acquisitions
or other GCOLP needs.
6. Transactions with Related Parties
Sales, purchases and other transactions with affiliated companies, in the
opinion of management, are conducted under terms no more or less favorable than
those conducted with unaffiliated parties.
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Sales and Purchases of Crude Oil
A summary of sales to and purchases from related parties of crude oil is
as follows (in thousands).
Nine Months Ended September 30,
2001 2000
------- --------
Sales to affiliates $25,900 $ 29,820
Purchases from affiliates $33,435 $122,277
General and Administrative Services
The Partnership does not directly employ any persons to manage or operate
its business. Those functions are provided by the General Partner. The
Partnership reimburses the General Partner for all direct and indirect costs of
these services. Total costs reimbursed to the General Partner by the
Partnership were $13,877,000 and $12,519,000 for the nine months ended
September 30, 2001 and 2000, respectively.
Credit Facilities
As discussed in Note 5, Salomon provides a Guaranty Facility to the
Partnership. For the nine months ended September 30, 2001 and 2000, the
Partnership paid Salomon $1,049,000 and $1,234,000, respectively, for guarantee
fees under the Credit Facilities.
7. Supplemental Cash Flow Information
Cash received by the Partnership for interest was $179,000 and $133,000 for
the nine months ended September 30, 2001 and 2000, respectively. Payments of
interest were $390,000 and $1,029,000 for the nine months ended September 30,
2001 and 2000, respectively.
8. Derivatives
The Partnership utilizes crude oil futures contracts and other financial
derivatives to reduce its exposure to unfavorable changes in crude oil prices.
On January 1, 2001, the Partnership adopted the provisions of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which
established new accounting and reporting guidelines for derivative instruments
and hedging activities. SFAS No. 133 established 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. SFAS No. 133
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. Companies must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting.
Under SFAS No. 133, the Partnership marks to fair value all of its
derivative instruments at each period end with changes in fair value being
recorded as unrealized gains or losses. Such unrealized gains or losses will
change, based on prevailing market prices, at each balance sheet date prior to
the period in which the transaction actually occurs. In general, SFAS No. 133
requires that at the date of initial adoption, the difference between the fair
value of derivative instruments and the previous carrying amount of those
derivatives be recorded in net income or other comprehensive income, as
appropriate, as the cumulative effect of a change in accounting principle.
On January 1, 2001, recognition of the Partnership's derivatives resulted in
a gain of $0.5 million, which has been recognized in the consolidated statement
of operations as the cumulative effect of adopting SFAS No. 133. The actual
cumulative effect adjustment differs from the estimate reported in the
Partnership's Form 10-K for the year ended December 31, 2000 due to a
refinement in the manner in which the fair value of the Partnership's
derivatives was determined.
The fair value of the Partnership's net asset for derivatives had increased
by $3.5 million for the nine months ended September 30, 2001, which is reported
as a gain in the consolidated statement of operations under the caption "Change
in fair value of derivatives". The consolidated balance sheet includes $16.3
million in other current assets
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and $12.3 million in accrued liabilities as a result of recording the fair
value of derivatives. The Partnership has not designated any of its
derivatives as hedging instruments.
9. Contingencies
The Partnership is subject to various environmental laws and regulations.
Policies and procedures are in place to monitor compliance. The Partnership's
management has made an assessment of its potential environmental exposure and
determined that such exposure is not material to its consolidated financial
position, results of operations or cash flows.
Unitholder Litigation
On June 7, 2000, Bruce E. Zoren, a holder of units of limited partner
interests in the partnership, filed a putative class action complaint in the
Delaware Court of Chancery, No. 18096-NC, seeking to enjoin the restructuring
and seeking damages. Defendants named in the complaint include the
partnership, Genesis Energy L.L.C., members of the board of directors of
Genesis Energy, L.L.C., and Salomon Smith Barney Holdings Inc. The plaintiff
alleges numerous breaches of the duties of care and loyalty owed by the
defendants to the purported class in connection with making a proposal for
restructuring. Management of the General Partner believes that the complaint
is without merit and intends to vigorously defend the action.
Crude Oil Contamination and Pennzoil Lawsuit
In the first quarter of 2000, the Partnership purchased crude oil from a
third party that was subsequently determined to contain organic chlorides.
These barrels were delivered into the Partnership's Texas pipeline system and
potentially contaminated 24,000 barrels of oil held in storage and 44,000
barrels of oil in the pipeline. The Partnership has disposed of all
contaminated crude.
The Partnership has been named one of the defendants in a complaint filed
by Thomas Richard Brown on January 11, 2001, in the 125th District Court of
Harris County, cause No. 2001-01176. Mr. Brown, an employee of Pennzoil-Quaker
State Company ("PQS"), seeks damages for burns and other injuries suffered as a
result of a fire and explosion that occurred at the Pennzoil Quaker State
refinery in Shreveport, Louisiana, on January 18, 2000. On January 17, 2001,
PQS filed a Plea in Intervention in the cause filed by Mr. Brown. PQS seeks
property damages, loss of use and business interruption. Both plaintiffs claim
the fire and explosion was caused, in part, by Genesis selling to PQS crude oil
that was contaminated with organic chlorides. Management of the Partnership
believes that the suit is without merit and intends to vigorously defend itself
in this matter. Management of the Partnership believes that any potential
liability will be covered by insurance.
Pipeline Oil Spill
On December 20, 1999, the Partnership had a spill of crude oil from its
Mississippi System. Approximately 8,000 barrels of oil spilled from the
pipeline near Summerland, Mississippi, and entered a creek nearby. A portion
of the oil then flowed into the Leaf River. The oil spill is covered by
insurance and the financial impact to the Partnership for the cost of the
clean-up has not been material. Subject to the results of testing and
regulatory approval, the Partnership intends to restart this segment of the
Mississippi System during the early part of 2002.
As a result of this crude oil spill, certain federal and state regulatory
agencies may impose fines and penalties that would not be covered by insurance.
At this time, it is not possible to predict whether the Partnership will be
fined, the amount of such fines or whether such governmental agencies will
prevail in imposing such fines.
The Partnership is subject to lawsuits in the normal course of business
and examination by tax and other regulatory authorities. Such matters
presently pending are not expected to have a material adverse effect on the
financial position, results of operations or cash flows of the Partnership.
10. Distributions
On October 5, 2001, the Board of Directors of the General Partner declared a
cash distribution of $0.20 per Unit for the quarter ended September 30, 2001.
The distribution will be paid November 14, 2001, to the General Partner and all
Common Unitholders of record as of the close of business on October 31, 2001.
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11. Subsequent Events
As discussed above, GA Partnership is expected to close on a transaction to
acquire the General Partner before November 30, 2001. On October 31, 2001, GA
Partnership announced that, after closing on the purchase of the General
Partner, it intends to reduce the quarterly distribution from $0.20 per unit to
$0.10 per unit effective with the distribution for the fourth quarter of 2001,
which will be paid in February 2002.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Genesis Energy, L.P., operates crude oil common carrier pipelines and is an
independent gatherer and marketer of crude oil in North America, with
operations concentrated in Texas, Louisiana, Alabama, Florida, Mississippi, New
Mexico, Kansas and Oklahoma. 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.
Results of Operations
Selected financial data for this discussion of the results of operations
follows, in thousands, except barrels per day.
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------- -------- -------- --------
Gross margin
Gathering and marketing $ 5,372 $ 5,090 $ 13,401 $ 11,298
Pipeline $ 889 $ 1,814 $ 3,276 $ 4,947
General and administrative expenses $ 2,969 $ 2,785 $ 8,695 $ 8,161
Depreciation and amortization $ 1,863 $ 2,048 $ 5,630 $ 6,129
Operating income $ 1,429 $ 2,071 $ 2,352 $ 1,955
Interest income (expense), net $ (119) $ (187) $ (373) $ (805)
Change in fair value of derivatives $ (1,589) $ - $ 3,499 $ -
Gain on asset disposals $ 12 $ 16 $ 160 $ 36
Barrels per day
Wellhead 82,280 98,601 86,390 100,852
Bulk and exchange 260,292 286,031 74,074 312,367
Pipeline 81,829 87,889 86,106 89,512
The profitability of Genesis depends to a significant extent upon its
ability to maximize gross margin. Gross margins from gathering and marketing
operations are a function of volumes purchased and 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 aggregation and transportation.
The absolute price levels for crude oil do not necessarily bear a relationship
to gross margin as absolute price levels normally impact revenues and cost of
sales by equivalent amounts. 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.
In our gathering and marketing business, we seek to purchase and sell crude
oil at points along the Distribution Chain where we can achieve positive gross
margins. We generally purchase crude oil at prevailing prices from producers
at the wellhead under short-term contracts. We then transport the crude along
the Distribution Chain for sale to or exchange with customers. In addition to
purchasing crude at the wellhead, Genesis purchases crude oil in bulk at major
pipeline terminal points and enters into exchange transactions with third
parties. We generally enter into exchange transactions only when the cost of
the exchange is less than the alternate cost we would incur in transporting or
storing the crude oil. In addition, we often exchange one grade of crude oil
for another to maximize our margins or meet our contract delivery requirements.
These bulk and exchange transactions are characterized by large volumes and
narrow profit margins on purchases and sales.
Generally, as we purchase crude oil, we simultaneously establish a margin by
selling crude oil for physical delivery to third party users, such as
independent refiners or major oil companies, or by entering into a future
delivery obligation with respect to futures contracts on the NYMEX. Through
these transactions, we seek to maintain a position that is substantially
balanced between crude oil purchases, on the one hand, and sales or future
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delivery obligations, on the other hand. It is our policy not to hold crude
oil, futures contracts or other derivative products for the purpose of
speculating on crude oil price changes.
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. Changes in revenues, volumes and pipeline operating costs,
therefore, are relevant to the analysis of financial results of Genesis'
pipeline operations and are addressed in the following discussion of pipeline
operations of Genesis.
Nine Months Ended September 30, 2001 Compared with Nine Months Ended
September 30, 2000
Gross margin from gathering and marketing operations was $13.4 million for
the nine months ended September 30, 2001, as compared to $11.3 million for the
nine months ended September 30, 2000.
The factors affecting gross margin were:
* a 37 percent increase in the average difference between the price of
crude oil at the point of purchase and the price of crude oil at the
point of sale, which increased gross margin by $7.1 million;
* a 13 percent decline in wellhead, bulk and exchange purchase volumes
between the nine month periods in 2001 and 2000, resulting in a
decrease in gross margin of $2.9 million;
* a decrease of $0.2 million in credit costs primarily due to a decrease
in the absolute price level of crude oil;
* an increase of $2.0 million in field operating costs, primarily from a
$0.3 million increase in payroll and benefits costs, a $0.1 million
increase in fuel costs, a $0.5 million decrease in repair costs and a
$2.1 million increase in rental costs due to the replacement of the
tractor/trailer fleet with a leased fleet during the fourth quarter of
2000. The increased payroll and fuel costs can be attributed to an
approximate 5% increase in the number of barrels transported by the
Partnership in its trucks; and
* an unrealized gain recorded in the 2000 period of $0.3 million related
to written option contracts.
Pipeline gross margin was $3.3 million for the nine months ended
September 30, 2001, as compared to pipeline gross margin of $4.9 million for
the first nine months of 2000, a decline of $1.6 million. Pipeline revenues
declined $0.3 million as a result of declines in throughput and average tariff.
Throughput declined 2 percent between the nine-month periods 2000 and 2001,
resulting in a revenue decrease of $0.1 million. The average tariff collected
on shipments was down 1 percent, resulting in a revenue decrease of $0.2
million. Pipeline operating costs were $1.3 million higher in the 2001 period
primarily due to increased expenditures for spill prevention and general
maintenance.
General and administrative expenses were $8.6 million for the nine months
ended September 30, 2001, as compared to $8.2 million for the 2000 period. The
increase of $0.4 million is attributable to the following areas: $1.0 million
in salaries, bonus expense and benefits and $0.3 million in professional
services, offset by a decrease of $0.9 million in restricted unit expense.
Net interest expense for the nine months ended September 30, 2001 was $0.4
million. In the 2000 period, the Partnership incurred net interest expense of
$0.8 million. This decrease in interest cost in 2001 can be attributed
primarily to lower average balances outstanding. Daily average debt
outstanding declined by $7.6 million in the 2001 period.
The gain on asset disposals in the 2001 period included a gain of $0.1
million as a result of the sale of excess tractors.
Three Months Ended September 30, 2001 Compared with Three Months Ended
September 30, 2000
Gross margin from gathering and marketing operations was $5.4 million for
the three months ended September 30, 2001, as compared to $5.1 million for the
three months ended September 30, 2000.
The factors affecting gross margin were:
* a 31 percent increase in the average difference between the price of
crude oil at the point of purchase and the price of crude oil at the
point of sale, which increased gross margin by $2.3 million;
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* a decrease of 11 percent in wellhead, bulk and exchange purchase
volumes between 2000 and 2001, resulting in a decrease in gross margin
of $0.9 million;
* a decrease of $0.3 million in credit costs primarily due to a decrease
in the absolute price level of crude oil;
* an increase of $0.5 million in field operating costs, primarily from a
$0.7 million increase in rental costs due to the tractor/trailer fleet
replacement, offset by a decrease of $0.2 million in repairs due to
the new fleet; and
* an unrealized gain of $0.9 million in the 2002 period related to
written option contracts.
Pipeline gross margin decreased $0.9 million between the 2000 and 2001
third quarters. Throughput declined 5 percent, resulting in a $0.2 million
decrease in pipeline revenue. Revenues from the sales of pipeline loss
allowance volumes declined $0.4 million as a result of lower crude oil prices.
Pipeline operating costs were $0.4 million higher in 2001 primarily to
increased expenditures for pipeline maintenance and spill prevention measures.
Offsetting these items was an increase of 2 percent in the average tariff
collected on shipments, resulting in an increase in revenue of $0.1 million.
General and administrative expenses increased $0.2 million during the
three months ended September 30, 2001, as compared to the same period in 2000.
The primary factors in this increase were a $0.1 million increase in salaries,
bonus expense and benefits and $0.1 million increase in professional services.
Net interest expense decreased by $0.1 million in the 2001 third quarter
due primarily to lower average debt outstanding.
Liquidity and Capital Resources
Cash Flows
Cash flows from operating activities were $7.9 million for the nine months
ended September 30, 2001. Operating activities in the prior year period
generated cash of $15.4 million. The decrease in 2001 can be attributed to
differences in the timing of payment for current assets and liabilities.
For the nine months ended September 30, 2001, cash flows utilized in
investing activities were $0.3 million resulting from net additions to property
and equipment. In the 2000 period, the Partnership expended $1.3 million for
net property additions.
Cash flows utilized in financing activities by the Partnership during the
first nine months of 2001 totaled $3.3 million. Distributions paid to the
common unitholders and the general partner totaling $5.3 million utilized cash
flows. The Partnership borrowed $2.0 million under its working capital
facility in the 2001 period. Cash flows utilized in financing activities of
$5.8 million in the 2000 period represented distributions to the common
unitholders and the general partner, offset by the issuance of $7.4 million of
(Additional Partnership Interests) APIs to Salomon.
Working Capital and Credit Resources
As discussed in Note 5 of the Notes to Condensed Consolidated Financial
Statements, the Partnership has a $300 million Guaranty Facility with Salomon
through December 31, 2001, and a $25 million Credit Agreement with BNP Paribas
for working capital purposes. Conditioned upon the closing of the sale of the
General Partner to GA Partnership, the Guaranty Facility will extend to March
31, 2002. The aggregate amount of the Guaranty Facility, however, will be
reduced to $100 million on January 1, 2002. Fleet National Bank has been
engaged by the Partnership to provide a three-year $100 Senior Letter of Credit
and Loan Credit Facility. Closing on the Fleet Facility is expected to occur
before November 30, 2001. Initially the Fleet Facility will replace the Credit
Agreement with BNP Paribas with a $30 million working capital facility. When
the Guaranty Facility terminates on March 31, 2002, the Fleet Facility will be
a $100 million facility for letter of credit and working capital purposes with
a sublimit of $30 million for working capital and approved acquisitions. The
total available to the Partnership will be subject to a borrowing base
calculation.
Although the Partnership's consolidated balance sheet reflected a working
capital deficit of $9.9 million at September 30, 2001, replacement of the
Credit Agreement with the Fleet Facility will result in the short-term
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borrowings being reclassified to becoming long-term. On a pro forma basis,
this change would result in the Partnership's consolidated balance sheet
reflecting working capital of $14.1 million at September 30, 2001.
See the discussion below on "Other Matters - Current Business Conditions
and Outlook" regarding the potential effects of a smaller credit facility on
the Partnership's business activities.
No assurance can be made that the Partnership will be able to replace the
existing facilities.
Other Matters
Current Business Conditions and Outlook
Changes in the price of crude oil impact gathering and marketing and
pipeline gross margins to the extent that oil producers adjust production
levels. Short-term and long-term price trends impact the amount of cash flow
that producers have available to maintain existing production and to invest in
new reserves, which in turn impacts the amount of crude oil that is available
to be gathered and marketed by the Partnership and its competitors.
During 1999, 2000 and 2001, oil prices have dropped to approximately $10
per barrel, risen to more than $30 per barrel, and, at October 31, 2001,
declined again to approximately $21 per barrel. This volatility in prices has
affected the producers in the areas where the Partnership operates, thereby
causing volatility in production available for purchase. Additionally, in
2001, the Partnership has been reviewing its purchasing contracts to determine
whether margins will support higher credit costs.
As crude oil prices rise, the Partnership's utilization of, and cost of
credit under, the Guaranty Facility and Fleet Facility increase with respect to
the same volume of business. Additionally, as prices rise, the Partnership may
need to have funds available to fund inventory purchases. Fluctuations in
prices can also require the Partnership to have funds available to meet margin
calls on the NYMEX.
In anticipation of the change from the $300 Guaranty Facility and $25
million Credit Agreement to the $100 million Fleet Facility, management of the
Partnership is making changes to its business operations. These changes will
result in a substantial decrease in the Partnership's level of bulk and
exchange volumes. This decrease in volumes is expected to result in decreased
total gross margins and less Available Cash for distribution to unitholders.
GA Partnership has announced that, after acquiring the General Partner from
Salomon, it plans to reduce the quarterly distribution to unitholders from
$0.20 per unit to $0.10 per unit, effective with the distribution for the
fourth quarter of 2001, to be paid in February 2002.
Management of the General Partner is continuing its efforts to explore
strategic opportunities to grow the asset base of the Partnership in order to
increase distributions to the unitholders. No assurance can be made that the
Partnership will be able to grow the Partnership's asset base to offset
reductions in gross margin and Available Cash that may result from the
Partnership's transition to a credit facility with third party financial
institutions.
Adoption of FAS 133
On January 1, 2001, the Partnership adopted the provisions of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which
established new accounting and reporting guidelines for derivative instruments
and hedging activities. SFAS No. 133 established 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. SFAS No. 133
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. Companies must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting.
Under SFAS No. 133, the Partnership marks to fair value all of its
derivative instruments at each period end with changes in fair value being
recorded as unrealized gains or losses. Such unrealized gains or losses will
change, based on prevailing market prices, at each balance sheet date prior to
the period in which the transaction actually occurs. In general, SFAS No. 133
requires that at the date of initial adoption, the difference between the fair
value of derivative instruments and the previous carrying amount of those
derivatives be recorded in net income or other comprehensive income, as
appropriate, as the cumulative effect of a change in accounting principle.
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On January 1, 2001, recognition of the Partnership's derivatives resulted
in a gain of $0.5 million, which has been recognized in the consolidated
statement of operations as the cumulative effect of adopting SFAS No. 133. The
actual cumulative effect adjustment differs from the estimate reported in the
Partnership's Form 10-K for the year ended December 31, 2000 due to a
refinement in the manner in which the fair value of the Partnership's
derivatives was determined.
The fair value of the Partnership's net asset for derivatives had
increased by $3.5 million for the nine months ended September 30, 2001, which
is reported as a gain in the consolidated statement of operations under the
caption "Change in fair value of derivatives". The Partnership has not
designated any of its derivatives as hedging instruments.
New Accounting Standards
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." This statement requires that goodwill no longer be amortized to
earnings, but instead be reviewed for impairment. The standard is effective
for fiscal years beginning on January 1, 2002. The Partnership is currently
evaluating the effect on its financial statements of adopting SFAS No. 142.
The Partnership currently records amortization of its goodwill of $0.5 million
annually.
In June, 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement requires entities to record the fair
value of a liability for legal obligations associated with the retirement
obligations of tangible long-lived assets in the period in which it is
incurred. When the liability is initially recorded, a corresponding increase
in the carrying amount of the related long-lived asset would be recorded. Over
time, accretion of the liability is recognized each period, and the capitalized
cost is depreciated over the useful life of the related asset. Upon settlement
of the liability, an entity either settles the obligation for its recorded
amount or incurs a gain or loss on settlement. The standard is effective for
fiscal years beginning after June 15, 2002, with earlier application
encouraged. The Partnership is currently evaluating the effect on its
financial statements of adopting SFAS No. 143 and plans to adopt the statement
effective January 1, 2003.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment on
Disposal of Long-Lived Assets." This statement clarified the financial
accounting and reporting for the impairment or disposal of long-lived assets.
Impairment is required to be recognized if the carrying amount of a long-lived
asset is not recoverable from its undiscounted cash flows. The impairment loss
to be recognized is the difference between the carrying amount and the fair
value of the asset. The standard also provides guidance on the accounting for
long-lived assets that are held for disposal. This standard is effective for
the Partnership beginning January 1, 2002. The Partnership is currently
evaluating the effect on its financial statements of adopting SFAS No. 144.
Crude Oil Spill
On December 20, 1999, the Partnership had a spill of crude oil from its
Mississippi System. Approximately 8,000 barrels of oil spilled from the
pipeline near Summerland, Mississippi, and entered a creek nearby. A portion
of the oil then flowed into the Leaf River. The oil spill is covered by
insurance and the financial impact to the Partnership for the cost of the
clean-up has not been material. Subject to regulatory approval, the
Partnership intends to restart this segment of the Mississippi System during
the early part of 2002.
As a result of this crude oil spill, certain federal and state regulatory
agencies may impose fines and penalties that would not be covered by insurance.
At this time, it is not possible to predict whether the Partnership will be
fined, the amount of such fines or whether such governmental agencies will
prevail in imposing such fines.
Crude Oil Contamination
In the first quarter of 2000, the Partnership purchased crude oil from a
third party that was subsequently determined to contain organic chlorides.
These barrels were delivered into the Partnership's Texas pipeline system and
potentially contaminated 24,000 barrels of oil held in storage and 44,000
barrels of oil in the pipeline. The Partnership has disposed of all
contaminated crude.
The Partnership has been named one of the defendants in a complaint filed
by Thomas Richard Brown on January 11, 2001, in the 125th District Court of
Harris County, cause No. 2001-01176. Mr. Brown, an employee of Pennzoil-Quaker
State Company ("PQS"), seeks damages for burns and other injuries suffered as a
result of a fire and explosion that occurred at the Pennzoil Quaker State
refinery in Shreveport, Louisiana, on January 18, 2000.
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On January 17, 2001, PQS filed a Plea in Intervention in the cause filed by Mr.
Brown. PQS seeks property damages, loss of use and business interruption.
Both plaintiffs claim the fire and explosion was caused, in part, by Genesis
selling to PQS crude oil that was contaminated with organic chlorides.
Management of the Partnership believes that the suit is without merit and
intends to vigorously defend itself in this matter. Management of the
Partnership believes that any potential liability will be covered by insurance.
Forward Looking Statements
The statements in this Form 10-Q that are not historical information may be
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. Although
management of the General Partner believes that its expectations regarding
future events are based on reasonable assumptions, no assurance can be made
that the Partnership's goals will be achieved or that expectations regarding
future developments will prove to be correct. Important factors that could
cause actual results to differ materially from the expectations reflected in
the forward looking statements herein include, but are not limited to, the
following:
* changes in regulations;
* the Partnership's success in obtaining additional lease barrels;
* changes in crude oil production volumes (both world-wide and in areas in
which the Partnership has operations);
* developments relating to possible acquisitions or business combination
opportunities;
* volatility of crude oil prices and grade differentials;
* the success of the risk management activities;
* credit requirements by counterparties;
* a failure of the Partnership and Fleet to close on new credit facility;
* a failure for the transaction between Salomon and GA Partnership to close;
* the Partnership's ability in the future to generate sufficient amounts of
Available Cash to permit the distribution to unitholders of at least the
minimum quarterly distribution;
* any requirements for testing or changes in the Mississippi pipeline system
as a result of the oil spill that occurred there in December 1999;
* any fines and penalties federal and state regulatory agencies may impose in
connection with the oil spill that would not be reimbursed by insurance;
* results of current or threatened litigation; and
* conditions of capital markets and equity markets during the periods covered
by the forward looking statements.
All subsequent written or oral forward-looking statements attributable to
the Partnership, or persons acting on the Partnership's behalf, are expressly
qualified in their entirety by the foregoing cautionary statements.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
Price Risk Management and Financial Instruments
The Partnership's primary price risk relates to the effect of crude oil
price fluctuations on its inventories and the fluctuations each month in grade
and location differentials and their effects on future contractual commitments.
The Partnership utilizes New York Mercantile Exchange ("NYMEX") commodity based
futures contracts, forward contracts, swap agreements and option contracts to
hedge its exposure to these market price fluctuations. Management believes the
hedging program has been effective in minimizing overall price risk. At
September 30, 2001, the Partnership used futures and forward contracts in its
hedging program with the latest contract being settled in July 2002.
Information about these contracts is contained in the table set forth below.
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Sell (Short) Buy (Long)
Contracts Contracts
-------- --------
<c> <s> <s>
Crude Oil Inventory:
Volume (1,000 bbls) 98
Carrying value (in thousands) $ 2,278
Fair value (in thousands) $ 2,317
Commodity Futures Contracts
Contract volumes (1,000 bbls) 7,249 7,752
Weighted average price per bbl $ 25.32 $ 26.34
Contract value (in thousands) $183,567 $204,225
Fair value (in thousands) $170,691 $182,842
Commodity Forward Contracts:
Contract volumes (1,000 bbls) 8,974 8,653
Weighted average price per bbl $ 26.41 $ 26.02
Contract value (in thousands) $237,024 $225,158
Fair value (in thousands) $207,276 $201,309
Commodity Option Contracts:
Contract volumes (1,000 bbls) 5,371<F1> 3,593<F1>
Weighted average strike price per bbl $ 0.90 $ 2.08
Contract value (in thousands) $ 1,450 $ 880
Fair value (in thousands) $ 1,237 $ 667
<FN>
<F1>
Based on market prices as of September 30, 2001 for option contracts, 2.8
million barrels attributable to sale contracts and 2.0 million barrels
attributable to buy contracts would have been exercisable.
</FN>
The table above presents notional amounts in barrels, the weighted average
contract price, total contract amount in U.S. dollars and total fair value
amount in U.S. dollars. Fair values were determined by using the notional
amount in barrels multiplied by the September 30, 2001 closing prices of the
applicable NYMEX futures contract adjusted for location and grade
differentials, as necessary.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Part I. Item 1. Note 8 to the Condensed Consolidated Financial
Statements entitled "Contingencies", which is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
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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.
GENESIS ENERGY, L.P.
(A Delaware Limited Partnership)
By: GENESIS ENERGY, L.L.C., as
General Partner
Date: November 9, 2001 By: /s/ Ross A. Benavides
----------------------------
Ross A. Benavides
Chief Financial Officer
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