============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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
------- -------
============================================================================
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 - March 31, 2002 and
December 31, 2001 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 2002 and 2001 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2002 and 2001 5
Consolidated Statement of Partners' Capital for the Three
Months Ended March 31, 2002 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
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
<page> 3
GENESIS ENERGY, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2002 2001
-------- --------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 531 $ 5,777
Accounts receivable:
Trade 79,945 160,734
Related party - 1,064
Inventories 1,197 3,737
Other 6,863 10,788
-------- --------
Total current assets 88,536 182,100
FIXED ASSETS, at cost 115,236 115,336
Less: Accumulated depreciation (70,809) (69,626)
-------- --------
Net fixed assets 44,427 45,710
OTHER ASSETS, net of amortization 887 2,303
-------- --------
TOTAL ASSETS $133,850 $230,113
======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable -
Trade $ 85,297 $172,848
Related party 588 697
Accrued liabilities 7,627 10,144
-------- --------
Total current liabilities 93,512 183,689
LONG-TERM DEBT 6,500 13,900
COMMITMENTS AND CONTINGENCIES (Note 10)
MINORITY INTERESTS 515 515
PARTNERS' CAPITAL
Common unitholders, 8,625 units issued and
outstanding 32,648 31,361
General partner 675 648
-------- --------
Total partners' capital 33,323 32,009
-------- --------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $133,850 $230,113
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
4
GENESIS ENERGY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit amounts)
(Unaudited)
Three Months Ended
March 31,
2002 2001
-------- --------
REVENUES:
Gathering and marketing revenues
Unrelated parties $231,891 $900,693
Related parties 3,036 25,900
Pipeline revenues 4,312 3,700
-------- --------
Total revenues 239,239 930,293
COST OF SALES:
Crude costs, unrelated parties 226,817 890,518
Crude costs, related parties - 28,700
Field operating costs 3,990 4,073
Pipeline operating costs 2,994 2,377
-------- --------
Total cost of sales 233,801 925,668
-------- --------
GROSS MARGIN 5,438 4,625
EXPENSES:
General and administrative 2,088 2,727
Depreciation and amortization 1,423 1,897
-------- --------
OPERATING INCOME 1,927 1
OTHER INCOME (EXPENSE):
Interest income 5 71
Interest expense (405) (206)
Change in fair value of derivatives (702) 3,409
Gain on asset disposals 489 129
-------- --------
Income before minority interests and cumulative effect
of adoption of accounting principle 1,314 3,404
Minority interests - -
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE 1,314 3,404
Cumulative effect of adoption of accounting principle,
net of minority interest effect - 467
-------- --------
NET INCOME $ 1,314 $ 3,871
======== ========
NET INCOME PER COMMON UNIT - BASIC AND DILUTED:
Income before cumulative effect of adoption of
accounting principle $ 0.15 $ 0.39
======== ========
Cumulative effect of adoption of accounting principle,
net of minority interest effect $ - $ 0.05
======== ========
Net income $ 0.15 $ 0.44
======== ========
WEIGHTED AVERAGE NUMBER OF COMMON UNITS OUTSTANDING 8,625 8,624
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
5
GENESIS ENERGY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,314 $ 3,871
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation 1,211 1,566
Amortization of intangible assets 212 331
Cumulative effect of adoption of accounting principle - (467)
Change in fair value of derivatives 702 (3,409)
Minority interests equity in earnings - -
Gain on asset disposals (489) (129)
Other noncash charges 810 15
Changes in components of working capital -
Accounts receivable 81,853 101,788
Inventories 2,540 (6,250)
Other current assets 3,925 588
Accounts payable (87,660) (92,788)
Accrued liabilities (3,219) 5,763
-------- --------
Net cash provided by operating activities 1,199 10,879
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (749) (198)
Change in other assets 1 (1)
Proceeds from sale of assets 1,703 414
-------- --------
Net cash provided by investing activities 955 215
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt (7,400) (4,000)
Distributions:
To common unitholders - (1,725)
To General Partner - (35)
-------- --------
Net cash used in financing activities (7,400) (5,760)
-------- --------
Net (decrease) increase in cash and cash equivalents (5,246) 5,334
Cash and cash equivalents at beginning of period 5,777 5,508
-------- --------
Cash and cash equivalents at end of period $ 531 $ 10,842
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
6
GENESIS ENERGY, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(In thousands)
(Unaudited)
Partners' Capital
----------------------------
Common General
Unitholders Partner Total
------- ------ -------
Partners' capital at December 31, 2001 $31,361 $ 648 $32,009
Net income for the three months ended
March 31, 2002 1,287 27 1,314
------- ------ -------
Partners' capital at March 31, 2002 $32,648 $ 675 $33,323
======= ====== =======
The accompanying notes are an integral part of these consolidated
financial statements.
7
GENESIS ENERGY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Partnership Structure
Genesis Energy, L.P. ("GELP" or the "Partnership") was formed in December
1996 as an initial public offering of 8.6 million Common Units, representing
limited partner interests in GELP of 98%. The general partner of GELP is
Genesis Energy, L.L.C. (the "General Partner") which owns a 2% general
partner interest in GELP. The General Partner is owned by Salomon Smith
Barney Holdings Inc. ("Salomon") and Salomon Brothers Holding Company Inc.,
in 54% and 46% interests, respectively. See Note 11.
Genesis Crude Oil, L.P. is the operating limited partnership and is owned
99.99% by GELP and 0.01% by the General Partner. Genesis Crude Oil, L.P.
has two subsidiary 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 as GCOLP.
2. Basis of Presentation
The accompanying financial statements and related notes present the
consolidated financial position as of March 31, 2002 and December 31, 2001
for GELP, its results of operations and cash flows for the three months
ended March 31, 2002 and 2001, and changes in its partners' capital for the
three months ended March 31, 2002.
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
accounting principles generally accepted in the United States of America
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, 2001 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 March 31, 2002 and 2001 was
8,625,000 and 8,623,916, 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 either period
presented.
3. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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.
SFAS No. 142, "Goodwill and Other Intangible Assets", and SFAS No. 144,
"Accounting for Impairment on Disposal of Long-Lived Assets", were adopted
by the Partnership effective January 1, 2002. These statements had no
effect on the consolidated financial statements of the Partnership.
8
4. Business Segment and Customer Information
Based on its management approach, the Partnership believes that all of its
material operations revolve around the gathering and marketing of crude oil,
and it currently reports its operations, both internally and externally, as
a single business segment. ExxonMobil Corporation and Marathon Ashland
Petroleum LLC accounted for 14% and 13%, respectively, of revenues in the
first quarter of 2002. No customer accounted for more than 10% of the
Partnership's revenues in the same period in 2001.
5. Inventory Reduction
As a result of a change in the Partnership's operations to focus on its
gathering activities, and due to changes made in its gathering business as a
result of changes in its credit facilities, the Partnership determined that
the volume of crude oil needed to ensure efficient and uninterrupted
operation of its gathering business should be reduced. These crude oil
volumes had been carried at their weighted average cost and classified as
fixed assets. The Partnership realized additional gross margin of
approximately $337,000 as a result of the sale of these volumes.
6. Credit Resources and Liquidity
In 2001, Genesis had a $300 million Master Credit Support Agreement
("Guaranty Facility") with Salomon and a $25 million working capital
facility ("WC Facility") with BNP Paribas.
Effective December 19, 2001, GCOLP entered into a two-year $130 million
Senior Secured Revolving Credit Facility ("Credit Agreement") with Citicorp
North America, Inc. ("Citicorp"). Citicorp and Salomon, the owner of the
Partnership's General Partner, are both wholly-owned subsidiaries of
Citigroup Inc.
In May 2002, the Credit Agreement was amended to reduce the maximum
facility amount to $80 million. The Credit Agreement replaced the Guaranty
Facility and the WC Facility. The Credit Agreement has a $25 million
sublimit for working capital loans. Any amount not being used for working
capital loans is available for letters of credit to support crude oil
purchases.
During the first four months of 2002, Salomon continued to provide
guaranties to the Partnership's counterparties under a transition
arrangement between Salomon, Citicorp and the Partnership. For crude oil
purchases in January 2002 through April 2002, a maximum of $100 million,
respectively, in guaranties were available to be issued under the Salomon
guaranty facility.
The key terms of the amended Credit Agreement are as follows:
* Letter of credit fees are based on the Applicable Leverage Level
("ALL") and will range from 1.50% to 2.75%. Through the amendment
date, the rate was fixed at 3.00%. The ALL is a function of GCOLP's
average daily debt to its earnings before interest, depreciation and
amortization for the four preceding quarters.
* The interest rate on working capital borrowings is also based on the
ALL and allows for loans based on the prime rate or the LIBOR rate at
the Partnership's option. The interest rate on prime rate loans can
range from the prime rate to the prime rate plus 1.25%. The interest
rate for LIBOR-based loans can range from the LIBOR rate plus 1.50%
to the LIBOR rate plus 2.75%. Through the amendment date, the
additional prime rate percentage was fixed at 0.50%. At March 31,
2002, the interest rate on the Partnership's borrowings was 5.25%.
* The Partnership will pay a commitment fee on the unused portion of
the $80 million commitment. This commitment fee is also based on the
ALL and will range from 0.375% to 0.50%. Through the amendment date,
the commitment fee was fixed at 0.50%.
* The amount that the Partnership may have outstanding cumulatively in
working capital borrowings and letters of credit is subject to a
Borrowing Base calculation. The Borrowing Base (as defined in the
9
Credit Agreement) generally includes the Partnership's cash balances,
net accounts receivable and inventory, less deductions for certain
accounts payable, and is calculated monthly.
* Collateral under the Credit Agreement consists of all of the
Partnership's accounts receivable, inventory, cash accounts, margin
accounts and property and equipment.
* The Credit Agreement contains covenants requiring a Current Ratio (as
defined in the Credit Agreement), a Leverage Ratio (as defined in the
Credit Agreement), an Interest Coverage Ratio (as defined in the
Credit Agreement) and limitations on distributions to Unitholders.
The terms above reflect the terms in the amended Credit Agreement. That
amendment also provides that, should the Credit Agreement not be syndicated
to reduce Citicorp's participation to $20 million by September 30, 2002, the
interest rates, commitment fee rates and letter of credit fees will revert
to those in the original Credit Agreement executed on December 19, 2001.
The maximum rates in that agreement were 4.50% for letter of credit fees,
LIBOR plus 4.50% for LIBOR-based loans, the prime rate plus 1.25% for prime
rate loans and 0.75% for commitment fees.
Distributions to Unitholders and the General Partner can only be made if
the Borrowing Base exceeds the usage (working capital borrowings plus
outstanding letters of credit) under the Credit Agreement for every day of
the quarter by at least $20 million. The Partnership did not meet this test
in the first quarter of 2002; therefore, no distribution will be paid for
that quarter. See additional discussion below under "Distributions".
At March 31, 2002, the Partnership had $6.5 million of loans outstanding
under the Credit Agreement. The outstanding loan balance is to be repaid by
December 31, 2003; however, due to the revolving nature of the loans,
additional borrowings and periodic repayments and re-borrowings may be made
until that date. At March 31, 2002, the Partnership had $11.4 million and
$13.2 million outstanding under Salomon guaranties related to March 2002 and
April 2002, respectively, for crude oil purchases.
Credit Availability
As a result of the Partnership's decision to reduce its level of bulk
and exchange transactions, management of the Partnership expects that the
Partnership's need for credit support in the form of guaranties or letters
of credit to be less in 2002 than it was in 2001. However, 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 which could restrict the Partnership's gathering and marketing
activities due to the limitations of the Credit Agreement and Borrowing
Base. This situation 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 (a full definition of Available Cash is set forth in the
Partnership Agreement).
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. As a result of the restructuring approved by Unitholders in
December 2000, the target minimum quarterly distribution ("MQD") for each
quarter was reduced to $0.20 per unit. The Partnership announced in
December 2001 that it would not make a distribution for the fourth quarter
of 2001 due to covenants in the Credit Agreement. Normally, that
distribution would have been paid in February 2002.
Under the terms of the Credit Agreement, the Partnership may not pay a
distribution for any quarter unless the Borrowing Base exceeded the usage
under the Credit Agreement (working capital loans plus outstanding letters
of credit) for every day of the quarter by at least $20 million. For the
first quarter of 2002, the Partnership will not pay a distribution as the
excess of the Borrowing Base over the usage did not exceed $20 million for
every day in the quarter. Management of the Partnership does not expect the
Partnership to pay any distributions in 2002 and is unsure when
distributions will resume. Should distributions resume, the distribution
per common unit will be based upon the Available Cash generated for that
quarter, which may be less than $0.20 per unit.
10
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.
7. 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.
Sales and Purchases of Crude Oil
A summary of sales to and purchases from related parties of crude oil is
as follows (in thousands).
Three Months Three Months
Ended Ended
March 31, March 31,
2002 2001
------------ -----------
Sales to affiliates $3,036 $25,900
Purchases from affiliates $ - $28,700
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 $4,776,000 and $4,939,000 for the three months ended
March 31, 2002 and 2001, respectively.
Credit Facilities
As discussed in Note 6, Citicorp provides a Credit Agreement to the
Partnership. During the first quarter of 2002, Salomon provided guaranties
under a transition arrangement. For the three months ended March 31, 2002
and 2001, the Partnership incurred $47,000 and $423,000, respectively, for
guarantee fees under the Guaranty Facility. In 2002, the Partnership
incurred interest and commitment fees totaling $283,000 under the Credit
Agreement.
8. Supplemental Cash Flow Information
Cash received by the Partnership for interest was $5,000 and $87,000 for
the three months ended March 31, 2002 and 2001, respectively. Payments of
interest and commitment fees were $142,000 and $159,000 for the three months
ended March 31, 2002 and 2001, respectively.
9. 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" (as
amended and interpreted), 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. The initial
adoption of SFAS No. 133 required that the difference between the fair value
of derivative
11
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
the Partnership recorded a cumulative gain for the effect of the adoption of
SFAS No. 133, net of minority interest, of $467,000.
The fair value of the Partnership's net asset for derivatives had
decreased by $0.7 million for the three months ended March 31, 2002, which
is reported as a loss in the consolidated statement of operations under the
caption "Change in fair value of derivatives". The consolidated balance
sheet includes $2.7 million in other current assets and $1.3 million in
accrued liabilities as a result of recording the fair value of derivatives.
In 2002 and 2001, the Partnership did not designate any of its derivatives
as hedging instruments under SFAS No. 133.
10. Contingencies
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. In April 2002, the court dismissed the suit;
however, the plaintiff filed a motion to alter or amend the judgment. No
decision has been rendered on the motion. Management of the General Partner
believes that the complaint is without merit and intends to vigorously
defend the action.
Pennzoil Lawsuit
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.
Other Matters
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. As a result of this crude oil
spill, certain federal and state regulatory agencies will likely impose
fines and penalties that would not be covered by insurance.
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 primarily as a result of the spill from the
Mississippi System, recorded a charge of $1.5 million for the year ended
December 31, 2001.
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
consolidated financial position, results of operations or cash flows of the
Partnership.
11. Subsequent Event
On May 14, 2002, Salomon sold its 100% ownership interest in the General
Partner to a subsidiary of Denbury Resources, Inc.
12
GENESIS ENERGY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Genesis Energy, L.P. ("Genesis" or "the Partnership"), 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 and New Mexico. 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 - Three Months Ended March 31, 2002 Compared with
Three Months Ended March 31, 2001
Selected financial data for this discussion of the results of operations
follows, in thousands, except volumes per day.
Three Months Ended March 31,
2002 2001
------- --------
Gross margin
Gathering and marketing $ 4,120 $ 3,302
Pipeline $ 1,318 $ 1,323
General and administrative expenses $ 2,088 $ 2,727
Depreciation and amortization $ 1,423 $ 1,897
Operating income $ 1,927 $ 1
Interest income (expense), net $ (400) $ (135)
Change in fair value of derivatives $ (702) $ 3,409
Net gain on asset disposals $ 489 $ 129
Volumes per day
Wellhead 67,466 93,146
Bulk and exchange 67,115 268,367
Pipeline 75,409 89,459
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 generally 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 the gathering and marketing business, Genesis seeks to purchase and
sell crude oil at points along the Distribution Chain where it can achieve
positive gross margins. Genesis generally purchases crude oil at prevailing
prices from producers at the wellhead under short-term contracts and then
transports the crude along the Distribution Chain for sale to or exchange
with customers. Prior to the first quarter of 2002, Genesis purchased crude
oil in bulk at major pipeline terminal points. Additionally, Genesis enters
into exchange transactions with third parties. Genesis generally enters
into exchange transactions only when the cost of the exchange is less than
the alternate cost that would be incurred in transporting or storing the
crude oil. In addition, Genesis will exchange one grade of crude oil for
another to maximize margins or meet contract delivery requirements. These
exchange transactions are characterized by large volumes and narrow profit
margins on purchases and sales.
13
Generally, as Genesis purchases crude oil, it simultaneously establishes a
margin by selling crude oil for physical delivery to third party users, such
as independent refiners or major oil companies. Through these transactions,
Genesis seeks to maintain a position that is substantially balanced between
crude oil purchases, on the one hand, and sales or future delivery
obligations, on the other hand. It is the policy of Genesis 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.
Gross margin from gathering and marketing operations was $4.1 million for
the quarter ended March 31, 2002, as compared to $3.3 million for the
quarter ended March 31, 2001.
The factors affecting gross margin were:
* a decrease of 63% in wellhead, bulk and exchange purchase volumes
between 2001 and 2002, which was offset by a 169% 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;
* a $0.3 million increase in gross margin in the 2002 quarter as a
result of the sale of crude oil that is no longer needed to ensure
efficient and uninterrupted operations;
* a decrease of $0.4 million in credit costs due primarily to the
reduction in bulk and exchange transactions; and
* a decrease of $0.1 million in field operating costs, due to slight
increases in payroll and benefits costs, rental costs for
tractor/trailers and insurance offset by small decreases in fuel and
repairs.
The Partnership experienced a large decline in its overall volumes for
gathering and marketing due to the reduction in bulk and exchange
transactions beginning January 1, 2002. As part of the change to a letter
of credit bank facility from the Salomon Guaranty Facility, the Partnership
eliminated high volume, low margin transactions that consumed significant
credit resources. Under a letter of credit facility, the margins generated
from these transactions would be insufficient to provide for the cost of the
letter of credit.
The Partnership also reviewed its wellhead purchase contracts to determine
whether margins under these contracts would support higher credit costs per
barrel. In some cases where contracts could not be renegotiated to improve
margins after considering the higher cost of credit, contracts were
cancelled.
Pipeline gross margin was $1.3 million for the quarters ended March 31,
2002 and 2001. Several factors affecting pipeline gross margin changed,
however. These changes were:
* a decrease in throughput of 16% between the two periods, resulting in
a revenue decrease of $0.5 million;
* an increase in revenues from sales of pipeline loss allowance barrels
of $1.0 million as a result of higher crude prices and a higher volume
sold;
* an increase of 5% in the average tariff on shipments resulting in a
$0.1 million increase in revenue; and
* an increase of pipeline operating costs of $0.6 million in the 2002
period as a result of an increase of $0.1 million in insurance costs,
an increase of $0.3 million in maintenance projects and slight
increases totaling $0.3 million in monitoring costs, personnel costs,
tank rentals and other costs, offset by a decrease in electricity
costs of $0.1 million.
General and administrative expenses were $2.1 million for the three months
ended March 31, 2002, which was a decrease of $0.6 million from the 2001
period. The decrease in general and administrative expenses is attributable
to the elimination of personnel and costs involved in bulk and exchange
activities. A change to the Partnership's bonus
14
program to eliminate bonuses unless distributions are being paid resulted
in no accrual for bonus expense in the 2002 period. An accrual of $0.3
million was recorded for bonus expense in the 2001 period.
Depreciation and amortization in the 2002 quarter decreased by $0.5
million when compared to the 2001 period. As a result of the impairment of
the pipeline assets in 2001, the value to be depreciated had been reduced.
Interest expense increased $0.2 million due to an increase in commitment
fees. In 2001, the Partnership paid commitment fees on the unused portion
of its $25 million facility with BNP Paribas. In the 2002 quarter, the
Partnership paid commitment fees on the unused portion of its $130 million
Credit Agreement with Citicorp.
Change in fair value of 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.
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.
The fair value of the Partnership's net asset for derivatives had
decreased by $0.7 million for the three months ended March 31, 2002. The
fair value of derivative contracts at March 31, 2002, was determined using
the sources for fair value as shown in the table below (in thousands).
Fair Value of Contracts at Period-End
-----------------------------------------
Maturity Maturity Maturity in
less than 3-6 Excess of Total
Source of Fair Value 3 Months Months 6 Months Fair Value
-------------------- --------- -------- ----------- ----------
Prices actively quoted $ 1,464 $ - $ - $ 1,464
Prices provided by other
external sources - - - -
Prices based on models and
other valuation methods (123) 1 - (122)
--------- -------- ----------- ----------
Total $ 1,341 $ 1 $ - $ 1,342
========= ======== =========== ==========
The consolidated balance sheet includes $2.7 million in other current
assets and $1.3 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.
The gain on asset disposals in the 2002 period included a gain of $0.5
million from the sale of the Partnership's memberships in the New York
Mercantile Exchange ("NYMEX"). 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.
Liquidity and Capital Resources
Cash Flows
Cash flows provided by operating activities were $1.2 million for the
three months ended March 31, 2002. Operating activities in the prior year
period provided cash of $10.9 million primarily due to the timing of payment
for NYMEX transactions and related margin calls.
For the three months ended March 31, 2002, cash flows provided by
investing activities was $1.0 million. In the 2001 first quarter, investing
activities utilized cash flows of $0.2 million. In the first quarter of
2002, the
15
Partnership received cash of $1.7 million from the sale of the NYMEX seats
and expended $0.7 million for property additions. The Partnership received
cash of $0.4 million from the sale of excess equipment and expended $0.2
million for additions in property and equipment, primarily related to
pipeline operations in the 2001 period.
Cash flows used in financing activities were $7.4 million in the quarter
ended March 31, 2002. The Partnership reduced its borrowings under its
Credit Agreement by $7.4 million. In the prior year period, the Partnership
reduced its borrowings by $4.0 million and paid a total of $1.8 million in
distributions to the Common Unitholders and the General Partner.
Working Capital and Credit Resources
Effective December 19, 2001, GCOLP entered into a two-year $130 million
Senior Secured Revolving Credit Facility ("Credit Agreement") with Citicorp.
Citicorp and Salomon, the owner of the Partnership's General Partner, are
both wholly-owned subsidiaries of Citigroup Inc.
In May 2002, the Credit Agreement was amended to reduce the maximum
facility amount to $80 million. The Credit Agreement has a $25 million
sublimit for working capital loans. Any amount not being used for working
capital loans is available for letters of credit to support crude oil
purchases.
During December 2001 and the first four months of 2002, Salomon
continued to provide guaranties to the Partnership's counterparties under a
transition arrangement between Salomon, Citicorp and the Partnership. For
crude oil purchases in January 2002 through April 2002, a maximum of $100
million in guaranties were available to be issued under the Salomon Guaranty
Facility.
The key terms of the amended Credit Agreement are as follows:
* Letter of credit fees are based on the Applicable Leverage Level
("ALL") and will range from 1.50% to 2.75%. Through the amendment
date, the rate was fixed at 3.00%. The ALL is a function of GCOLP's
average daily debt to its earnings before interest, depreciation and
amortization for the four preceding quarters.
* The interest rate on working capital borrowings is also based on the
ALL and allows for loans based on the prime rate or the LIBOR rate
at the Partnership's option. The interest rate on prime rate loans
can range from the prime rate to the prime rate plus 1.25%. The
interest rate for LIBOR-based loans can range from the LIBOR rate
plus 1.50% to the LIBOR rate plus 2.75%. Through the amendment
date, the additional prime rate percentage was fixed at 0.50%. At
March 31, 2002, the interest rate on the Partnership's borrowings
was 5.25%.
* The Partnership will pay a commitment fee on the unused portion of
the $80 million commitment. This commitment fee is also based on
the ALL and will range from 0.375% to 0.50%. Through the amendment
date, the commitment fee was fixed at 0.50%.
* The amount that the Partnership may have outstanding cumulatively in
working capital borrowings and letters of credit is subject to a
Borrowing Base calculation. The Borrowing Base (as defined in the
Credit Agreement) generally includes the Partnership's cash
balances, net accounts receivable and inventory, less deductions for
certain accounts payable, and is calculated monthly.
* Collateral under the Credit Agreement consists of all of the
Partnership's accounts receivable, inventory, cash accounts, margin
accounts and property and equipment.
* The Credit Agreement contains covenants requiring a Current Ratio
(as defined in the Credit Agreement), a Leverage Ratio (as defined
in the Credit Agreement), an Interest Coverage Ratio (as defined in
the Credit Agreement) and limitations on distributions to
Unitholders.
The terms above reflect the terms in the amended Credit Agreement. That
amendment also provides that, should the Credit Agreement not be syndicated
to reduce Citicorp's participation to $20 million by September 30, 2002, the
interest rates, commitment fee rates and letter of credit fees will revert
to those in the original Credit Agreement
16
executed on December 19, 2001. The maximum rates in that agreement were
4.50% for letter of credit fees, LIBOR plus 4.50% for LIBOR-based loans, the
prime rate plus 1.25% for prime rate loans and 0.75% for commitment fees.
Distributions to Unitholders and the General Partner can only be made if
the Borrowing Base exceeds the usage (working capital borrowings plus
outstanding letters of credit) under the Credit Agreement for every day of
the quarter by at least $20 million. See additional discussion below under
"Distributions".
Management of the Partnership believes that the terms of the Credit
Agreement with Citicorp are similar to the terms that could have been
obtained from a third party. The Credit Agreement terms are similar to the
terms the Partnership had discussed with other banks.
At March 31, 2002, the Partnership had $6.5 million of loans outstanding
under the Credit Agreement. The outstanding loan balance is to be repaid by
December 31, 2003; however, due to the revolving nature of the loans,
additional borrowings and periodic repayments and re-borrowings may be made
until that date. At March 31, 2002, the Partnership had $11.4 million and
$13.2 million outstanding under Salomon guaranties for crude oil purchases
related to March 2002 and April 2002, respectively.
As a result of the Partnership's decision to reduce its level of bulk
and exchange transactions, management of the Partnership expects that the
Partnership's need for credit support in the form of guaranties or letters
of credit to be less in 2002 than it was in 2001. However, 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, which could restrict the Partnership's gathering and marketing
activities due to the limitations of the Credit Agreement and Borrowing
Base. This situation 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.
Contractual Obligation and Commercial Commitments
In addition to the Credit Agreement discussed above, the Partnership has
contractual obligations under operating leases as well as commitments to
purchase crude oil. The table below summarizes these obligations and
commitments at March 31, 2002 (in thousands).
Payments Due by Period
------------------------------------------
Less than 1 - 3 4 - 5 After 5
Contractual Cash Obligations Total 1 Year Years Years Years
---------------------------- -------- ------- ------- ------ ------
<s> <c> <c> <c> <c> <c>
Long-term Debt $ 6,500 $ - $ 6,500 $ - $ -
Operating Leases 18,323 3,992 7,761 4,021 2,549
Unconditional Purchase
Obligations <F1> 94,245 86,611 7,634 - -
-------- ------- ------- ------ ------
Total Contractual Cash
Obligations $119,068 $90,603 $21,895 $4,021 $2,549
======== ======= ======= ====== ======
<FN>
<F1>
The unconditional purchase obligations included above are contracts to
purchase crude oil, generally at market-based prices. For purposes of this
table, market prices at March 31, 2002, were used to value the obligations,
such that actual obligations may differ from the amounts included above.
</FN>
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 in December 2000, the target minimum quarterly distribution
("MQD") for each quarter was reduced to $0.20 per unit beginning with the
distribution for the fourth quarter of 2000, which was paid in February
2001.
17
Under the terms of the Credit Agreement, the Partnership may not pay a
distribution for any quarter unless the Borrowing Base exceeded the usage
under the Credit Agreement (working capital loans plus outstanding letters
of credit) for every day of the quarter by at least $20 million plus the
total amount of the distribution. In order to exceed the required total,
the Partnership will need to reduce working capital loans and/or the amount
of letters of credit issued on the Partnership's behalf by Citicorp.
For the first and second quarters of 2002, the Partnership will not pay
a distribution as the excess of the Borrowing Base over the usage dropped
below the required total. Management of the Partnership does not anticipate
that the Partnership will pay any distributions in 2002 and is unsure when
distributions will resume. Should distributions resume, the distribution
per common unit will be based upon the Available Cash generated for that
quarter, which may be less than $0.20 per unit.
For the first quarter of 2001, the Partnership paid a distribution to
the Common Unitholders and the General Partner of $0.20 per unit.
Other Matters
Crude Oil Contamination
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.
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. 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.
Sale of the General Partner by Salomon
On May 14, 2002, Salomon sold its 100% ownership interest in the
General Partner to a subsidiary of Denbury Resources, Inc. ("Denbury").
Denbury is an independent oil and gas company.
New Accounting Standard
In June, 2001, the FASB issued FAS 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 FAS No. 143
and plans to adopt the statement effective January 1, 2003.
18
Outlook
Historically, the crude oil gathering and marketing business has been
very competitive with thin and volatile profit margins. The ability to
generate margin in the crude oil gathering and marketing business is not
directly related to the absolute level of crude oil prices, but is generated
by the difference between the price at which crude oil is sold and the price
paid and other costs incurred in the purchase and transportation of the
crude oil, as well as the volume of crude oil available for purchase. In
order to maximize gross margin, management has been and will continue to
analyze all aspects of its gathering and marketing business in order to make
decisions associated with managing its marketing operations, field
operations and administrative support.
Another factor affecting crude oil gathering and marketing gross
margins is changes in the domestic production of crude oil. Short-term and
long-term crude oil price trends impact the amount of capital that producers
have available to maintain existing production and to invest in developing
crude reserves, which in turn impacts the amount of crude oil that is
available to be gathered and marketed by Genesis and its competitors.
During the period from 1999 through 2001, crude oil prices were marked by
significant volatility which made it very difficult to estimate the amount
of crude oil available to purchase. Management expects to continue to be
subject to volatility and long-term declines in the availability of crude
oil production for purchase by Genesis.
Genesis' gathering and marketing operations are also impacted by credit
support costs in the form of guaranties and letters of credit. As stated
above, gathering and marketing gross margins are not tied to the absolute
prices of crude oil. In contrast, the per barrel cost of credit is a
function of the absolute price of crude oil, such that, as crude oil prices
rise, credit costs increase. In anticipation of the change to a smaller
credit facility during the first quarter of 2002, management began making
changes to its business model in the latter half of 2001 in order to be able
to operate with a $100 million revolving credit facility with a higher per
barrel cost. These changes resulted in a substantial decrease in the
Partnership's bulk and exchange activity by the end of 2001. Had the
Partnership continued to engage in its bulk and exchange activity,
management believes that increases in the related cost of credit would have
substantially offset the gross margin provided by that activity.
Additionally, the Partnership began reviewing its wellhead purchase
contracts to determine whether margins under those contracts would support
higher credit costs per barrel. In some cases where contract terms could
not be renegotiated to improve margins after considering the higher cost of
credit, contracts were cancelled.
The cost of credit is impacted by the extent to which trade
counterparties require credit support. In the aftermath of the Enron
collapse, the Partnership experienced increased demand for credit from
producers. Genesis then initiated a program to reduce the credit support
provided to counterparties. As a result, demand for credit support
decreased. No assurances can be made that such credit requirements will
decrease further or that such credit support requirements will not increase
over time.
Like the gathering and marketing operations, prospects for Genesis'
pipeline operations also are impacted by production declines. Declining
production in the areas surrounding Genesis' pipelines have reduced tariff
revenues while costs are expected either to remain fixed or to increase due
to various conditions, including increasing insurance costs, new pipeline
integrity management regulations and commercial and residential development
over our pipeline right of ways. Consequently, pipeline gross margins are
expected to decline unless Genesis obtains substantial increases in its
tariff rates. Genesis has increased tariffs beginning in May 2002 in some
areas and intends to pursue increases in tariff rates in other areas;
however, it is uncertain whether such increases can be obtained and whether
such increases will be sufficient to offset production declines in the
pipeline operating areas and any increased maintenance and operating costs
related to its pipelines.
Based on the factors described above, management does not believe that
it is feasible for Genesis to restore the distribution and grow it further,
relying solely on internal growth. Genesis must make accretive acquisitions
of qualified MLP assets to restore and increase distribution and increase
value for Genesis' unitholders. On May 14, 2002, Salomon sold its 100%
ownership interest in the General Partner to a subsidiary of Denbury
Resources Inc.
Genesis owns and operates a 261-mile pipeline system in Mississippi
adjacent to several of Denbury's existing and prospective oil fields.
Denbury is the largest oil and natural gas operator in the state of
Mississippi. There may be mutual benefits to Denbury and Genesis due to
this common production and transportation area. Because of the new
relationship, Genesis may obtain certain commitments for increased crude oil
volumes, while Denbury may obtain the certainty of transportation for its
oil production at competitive market rates. As Denbury continues to acquire
and develop old oil fields using carbon dioxide (CO2) based tertiary
recovery operations, Denbury would expect to add crude oil gathering and CO2
supply infrastructure to these fields. Genesis may be able to provide or
acquire this infrastructure and provide support to Denbury's development of
these fields. Further, as the fields are developed over time, it may create
increased demand for Genesis' crude oil transportation services.
In order to increase the effectiveness of the Denbury related strategic
opportunities, the Partnership continues to evaluate opportunities to
dispose of underperforming assets and increase operating income by reducing
nonessential expenditures. Based on anticipated business conditions for
2002, including certain restrictive covenants in Genesis' Credit Agreement,
the Partnership does not expect to pay any cash distributions to unitholders
during 2002. No assurance can be made that the Partnership will be able to
grow the asset base or restore distributions to the unitholders.
As discussed in Distributions above, the Partnership may not pay a
distribution for any quarter unless the Borrowing Base exceeded the usage
under the Credit Agreement (working capital loans plus outstanding letters
of credit) for every day of the quarter by at least $20 million plus the
total amount of the distribution. If the Partnership meets this
requirement, management does not expect to make distributions unless it
believes such distributions and the Partnership's ability to meet the
requirement of the Credit Agreement can be sustained on a reasonable basis.
Forward Looking Statements
The statements in this report on 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 the counterparties;
* the costs of obtaining liability and property insurance at a
reasonable cost;
* the Partnership's ability in the future to generate sufficient amounts
of Available Cash to permit the payment to unitholders of a 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;
* the costs of testing under the IMP and any repairs required as a
result of that testing;
* the Partnership's success in increasing tariff rates on its common
carrier pipelines;
* 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.
20
Item 3. Quantitative and Qualitative 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 March 31, 2002, the Partnership used
forward and option contracts in its hedging program with the latest contract
being settled in May 2002. Information about these contracts is contained
in the table set forth below.
Sell (Short) Buy (Long)
Contracts Contracts
------- ------
Crude Oil Inventory
Volume (1,000 bbls) 50
Carrying value (in thousands) $1,101
Fair value (in thousands) $1,313
Commodity Forward Contracts:
Contract volumes (1,000 bbls) 423 366
Weighted average price per bbl $ 24.12 $24.08
Contract value (in thousands) $10,191 $8,804
Mark-to-market change (in thousands) 513 467
------- ------
Market settlement value (in thousands) $10,704 $9,271
======= ======
Commodity Option Contracts:
Contract volumes (1,000 bbls) 10
Weighted average strike price per bbl $20.00
Contract value (in thousands) $ 2
Mark-to-market change (in thousands) (1)
------
Market settlement value (in thousands) $ 1
======
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 March 31, 2002 closing prices
of the applicable NYMEX futures contracts adjusted for location and grade
differentials, as necessary.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Part I. Item 1. Note 10 to the Condensed Consolidated Financial
Statements entitled "Contingencies", which is incorporated herein by
reference.
21
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Amended and Restated Credit Agreement dated as of May 3,
2002, between Genesis Crude Oil, L.P., Genesis Energy,
L.L.C., Genesis Energy, L.P., Citicorp North America, Inc.
and Certain Financial Institutions
(b) Reports on Form 8-K.
A report on Form 8-K was filed on February 11, 2002, to file three
press releases that had previously announced the receipt of $21 million from
Enron Reserve Acquisition Corporation for the delivery of crude oil in
November 2001 and the receipt of a commitment from Citicorp North America,
Inc. to provide a two-year credit facility, the closing of the two-year
credit facility with Citicorp North America, Inc., and the termination of
the definitive agreement for the sale of its general partner, Genesis
Energy, L.L.C. to GEL Acquisition Partnership.
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: May 14, 2002 By: /s/ Ross A. Benavides
------------------------------
Ross A. Benavides
Chief Financial Officer