EXHIBIT 99.1
July 31, 2002
Ms. Susan O. Rheney
Mr. J. Conley Stone
Mr. Herbert I. Goodman
Audit Committee of the Board of Directors of
Genesis Energy, Inc.
General Partner of Genesis Energy, L.P.
500 Dallas, Suite 2500
Houston, Texas 77002
Members of the Audit Committee:
Genesis Energy, Inc. (the "General Partner"), which is 100%
owned by Denbury Resources, Inc. ("Denbury") and which is the
General Partner of Genesis Energy, L.P., engaged GulfStar Group
II, Ltd., ("GulfStar") on behalf of the Audit Committee of the
Board of Directors of the General Partner to render an opinion
to the Audit Committee (the "Fairness Opinion") that an
amendment (the "Proposed Amendment") to the Second Amended and
Restated Agreement of Limited Partnership (the "Amended
Partnership Agreement") of Genesis Energy, L.P., which provides
for a change to the conditions under which the General Partner
may be removed (referred to herein as the "Transaction") is fair
from a financial point of view to the Common Unitholders (the
"Common Unitholders") of Genesis Energy L.P. ("Genesis" or the
"Partnership).
The following describes the effects of the Proposed
Amendment:
* Prior to the Proposed Amendment, the General Partner of
Genesis could only be removed by the Unitholders, "for Cause",
and said removal required an affirmative vote of the holders
of at least a super-majority (66%) of the outstanding Limited
Partner Interests in Genesis, including Limited Partner
Interests held by the General Partner and its affiliates
(subject to certain "block voting" restrictions in the Amended
Partnership Agreement).
* The Amended Partnership Agreement as amended by the
Proposed Amendment would provide that the General Partner may
be removed "with or without Cause", and removal without
"Cause" would only require an affirmative vote of the holders
of at least a simple majority of the outstanding Limited
Partner Interests, excluding Limited Partner Interests held by
the General Partner and its affiliates, subject to the same
"block voting" restrictions.
* Under the Amended Partnership Agreement, as amended by the
Proposed Amendment, if it is proposed that the removal is
without Cause and an affiliate of Denbury is proposed to be
removed and not proposed as the successor, any action for
removal must also provide for Denbury to be granted an option
to purchase the Mississippi pipeline assets of Genesis (the
"Mississippi Assets") for a purchase price of 110% of fair
market value ("FMV") as determined by independent appraisal.
In rendering its Fairness Opinion, GulfStar has assumed
that the Transaction will be completed on the terms contained in
the Amended Partnership Agreement, without waiver of any
material term or condition, and GulfStar has also assumed that
the final form of these documents would be substantially similar
to the last draft or version reviewed by GulfStar. GulfStar's
opinion is based upon the Transaction when taken as a whole and
the opinion expressed herein does not pertain to the fairness of
any specific element of the Transaction.
In conducting our analysis and arriving at our opinion
expressed herein, we have considered such financial and other
factors as we deemed appropriate under the circumstances,
including, without limitation, the following:
The Partnership and Common Unitholders
* Certain publicly available financial statements and
other information concerning the Partnership, including the
Partnership's annual report on Form 10-K for the year ended
December 31, 2001.
* Discussions of the past and current operations, the
financial condition and prospects of the Partnership with the
Partnership's management.
* The historical financial performance of the Partnership
including the following: (i) in the fourth quarter of 2000,
Genesis restructured its existing Partnership Agreement,
pursuant to a vote of the Common Unitholders, which lowered
the Minimum Quarterly Distribution ("MQD") from $0.50
($2.00/unit per annum) per Common Unit to $0.20 ($0.80/unit
per annum) per Common Unit; (ii) Genesis has not made
distributions to the Common Unitholders since the third
quarter of 2001 and per the Partnership's Form 10-K, the
Partnership does not expect to pay any distribution during
2002; (iii) Genesis recently reorganized their existing
operations and discontinued the Partnership's bulk crude oil
trading operations and (iv) in December 2001, the Partnership
completed a recapitalization which replaced its Salomon Smith
Barney Master Credit Agreement with a Credit Agreement with
Citicorp North America, Inc., which provides that
distributions to Common Unitholders and the General Partner
can only be made if the borrowing base exceeds the usage
(working capital borrowings plus outstanding letters of
credit) for every day of the quarter by at least $20.0
million.
* The benefits of the Transaction to Genesis' Common
Unitholders, including: (i) Common Unitholders can remove the
General Partner without Cause with a majority vote (subject to
"block voting" restrictions), (ii) Common Unitholders can
remove the General Partner with or without cause versus only
for cause, (iii) Common Unitholders benefit from increased
utilization of Genesis' Mississippi Assets by Denbury's usage
of Genesis' gathering and pipeline operations in the
Mississippi Region, (iv) Denbury will be required to pay 10%
over FMV of the Mississippi Assets if the option is exercised.
* The historical and recent trading performance of the
Partnership, which within the last five years traded at a high
of $21.38/share on March 10, 1997 and is currently trading at
$2.25/share as of July 25, 2002.
* The requirements to remove the General Partner found in
other public MLPs that are considered Genesis' peer group,
including El Paso Energy Partners, LP, Kinder Morgan Energy
Partners, L.P., TEPPCO Partners, LP, EOTT Energy Partners, LP,
Inergy, LP; Plains All American Pipeline, LP, Enbridge
Partners, LP, Kaneb Pipe Line Partners, LP. After the terms
of Genesis' Partnership Agreement are amended, Genesis will
have the lowest Common Unitholder vote requirement (requiring
only a majority interest) to remove its general partner
without Cause within its peer group.
* The uncertainty associated with Genesis' outstanding
environmental issues in Mississippi. An oil spill in 1999 on
the Mississippi pipeline is still pending EPA sanctions.
* The original proposal made by Denbury with respect to the
Transaction contained rights that adhered to the benefit of
Denbury including: (i) certain covenants, (ii) obligations for
Genesis to maintain the pipeline, and (iii) ability of Denbury
to exercise its option in the case of Genesis' bankruptcy or
insolvency. After negotiations, Denbury agreed to eliminate
these provisions resulting in benefit to the Common
Unitholders of the Partnership. In addition, Denbury
originally proposed a purchase price of 100% of FMV on
exercise of the option, which was increased to 110% of FMV
after negotiation.
* The Partnership's historical ability to obtain a simple-
majority Common Unitholder vote to effect changes to the
Partnership Agreement. Genesis demonstrated on December 7,
2000, that securing a majority vote is feasible when it
obtained a 52.0% majority Common Unitholder vote to amend the
then existing Partnership Agreement.
* The current ownership of Genesis' Common Units. As of July
25, 2002, no one particular Common Unitholder accounted for
more than 5.0% ownership of the Partnership. Denbury owns no
Common Units.
The General Partner
* The lack of marketability of Genesis' General Partner,
demonstrated by the difficulty of completing a sale of the
general partner in spite of efforts made since 1998.
* The overall lack of merger and acquisition activity for
General Partner interests and Master Limited Partnerships
within the crude oil and natural gas pipeline, gathering and
marketing industry.
* The reduction in the value of the General Partner due to
the loss of a degree of "control" by reducing the burden of
removing the General Partner from "with Cause" on a
supermajority vote to "with or without Cause" and to a simple-
majority vote (subject to "block voting" restrictions) for
removal "without Cause."
* The possibility of a hostile takeover of the General
Partner or Genesis. According to the Amended Partnership
Agreement, if any person or group other than the general
partner or its affiliates beneficially owns 20.0% or more of
the limited partners' interest, then the limited partners'
interests held by such person or group will not be voted;
therefore, the potential for a hostile takeover is non-
existent.
Denbury
* Certain publicly available financial statements and other
information concerning Denbury Resources, Inc., including the
annual report on Form 10-K for the year ended December 31,
2001.
* The location and concentration of Denbury's current
operations. Denbury's operations are highly concentrated in
Mississippi. For the year ended December 31, 2001, 70.2% of
Denbury's 109.5 MMBOE oil and gas reserves were located in
Mississippi and 81.2% of Denbury's 399.9 productive wells were
in Mississippi. Additionally, Denbury solidified its
Mississippi market position by recently acquiring additional
properties in Mississippi including the McCombs Field and by
being the highest bidder for, and thus the likely purchaser
of, certain assets of the bankrupt oil and gas company, Coho
Energy, Inc.
* Denbury's strong position in the Mississippi market creates
a situation where any potential successor to Denbury as
General Partner would not want to diminish a relationship with
Denbury because negatively impacting Denbury's volumes of
crude oil throughput in the Partnership's Mississippi pipeline
would harm the financial interests of the Partnership and
Common Unitholders.
* Denbury's motivation to amend the Amended Partnership
Agreement. Denbury desires to avoid consolidating the
Partnership's operating results into Denbury's financial
statements, which Denbury management believes would confuse
shareholders and distort Denbury's existing financial
statements. Denbury intends to fully disclose the
consolidated operations, including Genesis, through summary
consolidated financial information in the footnotes to its
financial statements.
The Mississippi Assets
* The historical underperformance of the Mississippi Assets,
which have produced either negative or break-even cash flows
since 2000.
* The universe of potential buyers for the Mississippi Assets
is limited.
The Option
* The likelihood that the General Partner would be removed
and the option triggered is remote due to the following: (i)
the only event that triggers the option is the removal of the
General Partner without cause, (ii) removing Denbury or a
Denbury affiliate as General Partner could potentially
decrease Denbury's crude oil volumes of throughput in the
pipeline, which would financially harm the Partnership and the
Common Unitholders and (iii) there currently is not another
visible interested party to acquire the General Partner.
* The fact that Denbury's option only pertains to the
Mississippi pipeline assets and does not pertain to any of
Genesis' gathering and/or marketing assets.
* The fact that Denbury's option provides that Denbury pay
110.0% of the FMV the Mississippi Assets. The option could
potentially impair the marketable value of the Mississippi
Assets in the event they were marketed to prospective buyers
after, but not before, and only if, Denbury or its affiliate
is removed as General Partner without cause. There is no
restriction on the sale of the Mississippi Assets prior to the
time, if any, that a proposal to remove the General Partner
without cause is received. In addition, there currently are
no other major strategic operators in the Mississippi region
or any other visible buyers to acquire the Mississippi Assets.
* The lack of transferability of the option is a benefit to
the Common Unitholders. Should Denbury ever decide to sell
its General Partner interest, no succeeding entity will have a
right to the option. In this case, Denbury receives nothing
in return for amending the Amended Partnership Agreement.
* In the event that the option is exercised, both the
succeeding General Partner and Denbury have the right to
appoint a valuation firm to set the FMV of the Mississippi
Assets; therefore, neither party has an advantageous position
with regard to setting the FMV of the Assets.
Miscellaneous
* The terms of the Amended Partnership Agreement as compared
to the terms of the Amended Partnership Agreement as amended
by the Proposed Amendment.
* The opinion of Delaware counsel, Morris, Nichols, Arsht &
Tunnell, regarding the following subject matters: (i) that the
Proposed Amendment discussed herein may be effected by its
execution and delivery by the General Partner, (ii) that the
Proposed Amendment does not violate the Amended Partnership
Agreement and (iii) that the Proposed Amendment is not in
violation of the Delaware Revised Uniform Limited Partnership
Act.
* The FASB Exposure Draft dated May 24, 1999, as it pertains
to the ability of Limited Partners to remove the General
Partner "without Cause".
* Conversations with Genesis' and Denbury's counsel with
regard to the fiduciary responsibilities of companies
incorporated in Delaware.
* The general economic, market and financial conditions and
our experience in connection with similar transactions.
* A review of such other information, financial studies,
analyses and investigations, and financial, economic and
market criteria that GulfStar considered relevant.
GulfStar is serving as a financial advisor to the Audit
Committee of the Board of Directors of Genesis Energy, Inc., in
connection with this transaction, and we will receive a fee for
our services. GulfStar, as part of its investment banking
business, is regularly engaged in, among other things, the
valuation of businesses and their securities in mergers,
acquisitions and recapitalizations; private placements of
capital; and valuations for estate, corporate and other
purposes. GulfStar is not aware of any present or prior
relationship between GulfStar and Genesis, Genesis' affiliates
or Genesis' Common Unitholders, or between GulfStar and Denbury,
Denbury's affiliates or Denbury's stockholders, or between
GulfStar and Genesis Energy, Inc., Genesis Energy, Inc.'s
affiliates or Genesis Energy, L.P.'s Common Unitholders, which,
in its opinion, would affect its ability to render a fair and
independent opinion in this matter.
In rendering our opinion, GulfStar has relied upon and
assumed, without independent verification, the accuracy and
completeness of all financial and other information, publicly
available, furnished to, or otherwise discussed with GulfStar
for the purposes of the opinion. With respect to information
provided to or otherwise discussed with GulfStar, GulfStar
assumed and was advised by the management of Genesis that such
information was reasonably prepared on a basis that reflects
their best currently available estimates and judgments.
GulfStar was not engaged to, and therefore GulfStar did not,
verify the accuracy or completeness of any information. GulfStar
has relied upon the assurances of the management of Genesis that
they are not aware of any facts that would make such information
inaccurate or misleading. GulfStar did not conduct a physical
inspection of the properties or facilities of the Partnership
nor did it make or obtain any independent evaluation or
appraisals of any such properties or facilities or assets and
liabilities.
The opinion expressed herein assesses only the fairness of
the Transaction. Additionally, GulfStar has not reviewed the
legal matters associated with the Transaction and has relied
upon Genesis obtaining the advice of legal counsel as to all
such matters.
Our opinion is based upon circumstances existing at the
date hereof, including general economic and monetary market
conditions. Events occurring after the date hereof, including,
but not limited to, changes affecting the United States economy,
the United States oil and gas industry, or material changes in
the assets or liabilities of the Partnership, could materially
affect the assumptions used in preparing this opinion.
Our opinion as expressed herein is limited to the fairness,
from a financial point of view, to the Common Unitholders of the
Transaction and does not constitute tax advice, or a
recommendation to any of the Common Unitholders with respect to
the proposed amendment to the Partnership Agreement.
The foregoing opinion may be included in a public filing,
but is not to be used, circulated, quoted or otherwise referred
to for any other purpose, except in accordance with our prior
written consent.
Based upon and subject to the foregoing, including the
various assumptions and limitations set forth herein, and such
other matters that we consider relevant, we are of the opinion
that as of the date hereof the Transaction is fair, when taken
as a whole, from a financial point of view, to the Common
Unitholders of Genesis.
Sincerely,
/s/ GulfStar Group II, Ltd.
GulfStar Group II, Ltd.