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 September 30, 1997
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 16 pages
GENESIS ENERGY, L.P.
Form 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Condensed Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 1997,
Pro Forma Condensed Consolidated Statements of Operations for
the Three and Nine Months Ended September 30, 1996, and
Condensed Statements of Operations for the Three and Nine
Months Ended September 30, 1996 (Predecessor) 4
Condensed Consolidated Statement of Cash Flows for the Nine
Months Ended September 30, 1997, and
Condensed Statement of Cash Flows for the Nine Months Ended
September 30, 1996 (Predecessor) 5
Condensed Consolidated Statement of Partners' Capital for the
Nine Months Ended September 30, 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
GENESIS ENERGY, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
1997 1996
------------- ------------
Assets (Unaudited)
Current assets
Cash and cash equivalents $ 17,460 $ 11,878
Accounts receivable -
Trade 227,452 336,358
Related party 83,186 52,449
Inventories 3,931 8,290
Other 689 1,396
-------- --------
Total current assets 332,718 410,371
Property and equipment, at cost 102,554 100,097
Less: Accumulated depreciation (15,007) (11,160)
-------- --------
Net property and equipment 87,547 88,937
Other assets, net of amortization 10,400 10,592
-------- --------
Total assets $430,665 $509,900
======== ========
Liabilities and Partners' Capital
Current liabilities
Accounts payable -
Trade $229,522 $387,322
Related party 84,389 3,430
Accrued liabilities 7,982 7,811
-------- --------
Total current liabilities 321,893 398,563
Commitments and contingencies (Note 8)
Minority interests 27,786 26,257
Partners' capital
Common unitholders, 8,625 units issued and
outstanding 79,367 83,378
General partner 1,619 1,702
-------- --------
Total partners' capital 80,986 85,080
-------- --------
Total liabilities and partners' capital $430,665 $509,900
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
GENESIS ENERGY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit amounts)
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
1997 1996 1996 1997 1996 1996
-------- ---------- -------- ---------- ---------- ----------
(Pro Forma) (Predecessor) (Pro Forma) (Predecessor)
REVENUES:
Gathering and marketing revenues
Unrelated parties $696,919 $ 797,622 $614,967 $2,266,977 $2,106,517 $1,635,072
Related parties 142,978 283,569 281,604 401,480 1,225,112 1,219,309
Pipeline revenues 4,881 4,418 - 13,489 12,756 -
-------- ---------- -------- ---------- ---------- ----------
Total revenues 844,778 1,085,609 896,571 2,681,946 3,344,385 2,854,381
COST OF SALES:
Crude costs unrelated parties 745,788 997,276 818,198 2,512,246 3,018,778 2,562,838
Crude costs related parties 88,506 78,661 74,333 138,160 282,282 269,654
Field operating costs 2,916 3,795 1,893 9,190 11,361 5,561
Pipeline operating costs 1,629 1,111 - 4,438 3,599 -
-------- ---------- -------- ---------- ---------- ----------
Total cost of sales 838,839 1,080,843 894,424 2,664,034 3,316,020 2,838,053
-------- ---------- -------- ---------- ---------- ----------
GROSS MARGIN 5,939 4,766 2,147 17,912 28,365 16,328
EXPENSES:
General and administrative 2,047 1,973 918 6,360 6,631 2,707
Depreciation and amortization 1,572 1,160 268 4,704 5,241 1,218
-------- ---------- -------- ---------- ---------- ----------
OPERATING INCOME 2,320 1,633 961 6,848 16,493 12,403
OTHER INCOME (EXPENSE):
Interest, net 264 - 131 725 - 210
Other, net 28 1 - 71 (78) (80)
-------- ---------- -------- ---------- ---------- ----------
Income before income taxes and
minority interests 2,612 1,634 1,092 7,644 16,415 12,533
Income tax provision - - 430 - - 4,732
-------- ---------- -------- ---------- ---------- ----------
Net income before minority interests 2,612 1,634 662 7,644 16,415 7,801
Minority interests 523 326 - 1,529 3,281 -
-------- ---------- -------- ---------- ---------- ----------
NET INCOME $ 2,089 $ 1,308 $ 662 $ 6,115 $ 13,134 $ 7,801
======== ========== ======== ========== ========== ==========
NET INCOME PER COMMON UNIT $ 0.24 $ 0.15 $ 0.69 $ 1.49
======== ========== ========== ==========
NUMBER OF COMMON UNITS OUTSTANDING 8,625 8,625 8,625 8,625
======== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
GENESIS ENERGY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
1997 1996
-------- --------
(Predecessor)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,115 $ 7,801
Adjustments to reconcile net income to net
cash provided by (used in) operating activities -
Depreciation 4,347 1,218
Amortization of intangible assets 357 -
Minority interests equity in earnings 1,529 -
(Gain) loss on sales of fixed assets (71) 82
Other noncash charges 50 (526)
Changes in components of working capital -
Accounts receivable 78,169 (27,363)
Inventories 4,359 4,483
Other current assets 707 -
Accounts payable (76,841) 14,175
Accrued liabilities 121 (40)
Accrued income taxes - (772)
-------- --------
Net cash provided by (utilized in) operating activities 18,842 (942)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (3,234) -
Increase in other assets (165) -
Proceeds from sales of assets 348 270
-------- --------
Net cash (used in) provided by investing activities (3,051) 270
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions:
To common unitholders (10,005) -
To general partner (204) -
Net advances from Basis - 672
-------- --------
Net cash (used in) provided by financing activities (10,209) 672
-------- --------
Net increase in cash and cash equivalents 5,582 -
Cash and cash equivalents at beginning of period 11,878 -
-------- --------
Cash and cash equivalents at end of period $ 17,460 $ -
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
GENESIS ENERGY, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(In thousands)
(Unaudited)
Partners' Capital
------------------
Common General
Unitholders Partner
------- ------
Partners' capital at December 31, 1996 $ 83,378 $1,702
Net income for the nine months ended September 30, 1997 5,994 121
Distributions during the nine months ended September 30, 1997 (10,005) (204)
-------- ------
Partners' capital at September 30, 1997 $ 79,367 $1,619
======== ======
The accompanying notes are an integral part of these consolidated financial
statements.
GENESIS CRUDE OIL, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Formation and Offering
In December 1996, Genesis Energy, L.P. ("GELP") 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. ("GCOLP"). At September 30, 1997, the
General Partner owned 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. Such operations acquired from Basis are hereafter
referred to as the "Predecessor".
Unless the context otherwise requires, the term "the Partnership" hereafter
refers to GELP, its operating limited partnership and the Predecessor.
2. Basis of Presentation
The accompanying financial statements and related notes present the
consolidated financial position as of September 30, 1997 for GELP and its
results of operations, cash flows and changes in partners' capital for the
periods indicated. These financial statements also present the results of
operations and cash flows of the Predecessor for the periods indicated.
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, 1996 filed with the SEC.
These financial statements include the accounts of the Predecessor, a
division of Basis, which, until May 1, 1997, was a wholly-owned subsidiary of
Salomon Inc. Cash flows of the Predecessor not funded from operating activities
were funded by Basis prior to the formation of the Partnership.
The unaudited pro forma Condensed Consolidated Statements of Operations for
the three and nine months ended September 30, 1996 reflect certain pro forma
adjustments to the historical results of operations of the Predecessor and
Howell as if the Partnership had been formed on January 1, 1996. These pro
forma adjustments reflect the inclusion of fees associated with the Master
Credit Support Agreement, incremental fees related to execution of futures
contracts on the New York Mercantile Exchange ("NYMEX") as a separate entity,
and incremental general and administrative expenses and compensation costs for
the operation of the Partnership as a separate public entity. The pro forma
adjustments also include additional depreciation and amortization expense due to
the increase in property and intangibles that resulted from applying the
purchase method of accounting to the assets acquired from Howell. The pro forma
adjustments eliminate net interest expense recorded by the Predecessor and
Howell as the Partnership had no long-term debt as of the closing of the public
offering. Income tax provisions have also been eliminated as the Partnership is
not a taxable entity. The pro forma adjustments were made based upon available
information and certain estimates and assumptions which management believes
provide a reasonable basis for presentation.
3. Accounting Policies
A summary of the Partnership's significant accounting policies is included in
Note 3 of the Notes to Consolidated Financial Statements included in the
Partnership's Annual Report on Form 10-K for the year ended December 31, 1996.
Derivative Financial Instruments
The Partnership routinely utilizes forward contracts, swaps, options and
futures contracts in an effort to minimize the impact of market fluctuations on
inventories and contractual commitments. Gains and losses on forward contracts,
swaps, options and futures contracts used to hedge future contract purchases of
unpriced domestic crude oil, where firm commitments to sell are required prior
to establishment of the purchase price, are deferred until the margin from the
underlying risk element of the hedged item is recognized in accordance with
Statement of Financial Accounting Standards (SFAS) No. 80, "Accounting for
Futures Contracts." Deferred gains and losses from derivative financial
instruments are included in the Consolidated Balance Sheets in accrued
liabilities or accounts receivable, respectively. Recognized gains and losses
from derivative financial instruments are included in cost of crude in the
Consolidated Statements of Operations.
Based on the historical correlations between the NYMEX price for West Texas
intermediate crude at Cushing, Oklahoma, and the various trading hubs at which
the Partnership trades, the Partnership's management believes the hedging
program has been effective in minimizing the overall price risk. The
Partnership continuously monitors the basis differentials between its various
trading hubs and Cushing, Oklahoma, to further manage its basis exposure.
Should a derivative financial instrument cease to serve as a hedge of
inventories or contractual commitments, the derivative financial instrument is
accounted for under the marked-to-market method of accounting. Under this
method, derivative financial instruments are reflected at market value and the
resulting unrealized gains and losses are recognized currently in cost of crude
in the Consolidated Statements of Operations.
4. Adoption of Accounting Standards
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position No. 96-1, "Environmental Remediation Liabilities,"
which established new accounting and reporting for the recognition and
disclosure of environmental remediation liabilities. The provisions of the
statement are effective for the Partnership for the year ending December 31,
1997 and was adopted on January 1, 1997. This new standard did not have a
significant effect on the Partnership's consolidated financial position or
results of operations.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," which established new accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of liabilities.
The statement is effective for the Partnership for the year ending December 31,
1997 and was adopted on January 1, 1997. The adoption of the new standard did
not have a significant effect on the Partnership's consolidated financial
position or results of operations.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share", which established new accounting and reporting
standards for earnings per share. The statement is effective for the
Partnership for the year ending December 31, 1998. The adoption of this new
standard is not expected to have a dilutive effect on the Partnership's
previously reported net income per unit.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information". SFAS No. 130 establishes standards
for reporting and displaying of comprehensive income and its components. SFAS
No. 131 establishes standards for the way that public business enterprises
report information about operating segments and related information in interim
and annual financial statements. SFAS No. 130 and 131 are effective for periods
beginning after December 15, 1997. These two statements will not have any
effect on the Partnership's 1997 financial statements; however, management is
evaluating what, if any, additional disclosures may be required when these two
statements are implemented.
5. Credit Resources
Pursuant to a Master Credit Support Agreement, GCOLP has established credit
facilities with Salomon Inc (the "Credit Facilities"). GCOLP's obligations
under the Credit Facilities are secured by its receivables, inventories, general
intangibles and cash.
Guaranty Facility
Salomon Inc is providing a Guaranty Facility through December 31, 1999 in
connection with the purchase, sale and exchange of crude oil by GCOLP. The
aggregate amount of the Guaranty Facility is limited to $500 million for the
period July 1, 1997 to December 31, 1997, $400 million for the year ending
December 31, 1998 and $300 million for the year ending December 31, 1999 (to be
reduced in each case by the amount utilized at any one time pursuant to the
Working Capital Facility, as described below, and 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 under the Master Credit Support Agreement as
described below). GCOLP pays a guarantee fee to Salomon Inc which will increase
over the three-year period, thereby increasing the cost of the credit support
provided to GCOLP under the Guaranty Facility from a below-market rate to a rate
that may be higher than rates paid to independent financial institutions for
similar credit. At September 30, 1997, the aggregate amount of obligations
covered by guarantees was $251 million, including $129 million in payable
obligations and $122 million of estimated crude oil purchase obligations for
October 1997.
Working Capital Facility
Salomon has agreed to provide GCOLP, through December 31, 1997, with a
Working Capital Facility of up to $50 million, which amount includes direct cash
advances not to exceed $35 million outstanding at any one time and letters of
credit that may be required in the ordinary course of GCOLP's business. The
Partnership had letters of credit in the amount of $2.8 million outstanding at
September 30, 1997. No direct cash advances were outstanding at September 30,
1997. The Partnership expects to arrange for a working capital facility through
one or more third party lenders prior to the expiration of the availability of
the Working Capital Facility.
There can be no assurance of the availability or the terms of credit for
the Partnership. The General Partner believes that the Credit Facilities will
be sufficient to support the Partnership's crude oil purchasing activities and
working capital requirements. No assurance, however, can be given that the
General Partner will not be required to reduce or restrict the Partnership's
gathering and marketing activities because of limitations on its ability to
obtain credit support and financing for its working capital needs.
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. Basis was a wholly-owned subsidiary
of Salomon Inc until May 1, 1997, when Basis was sold to Valero Energy
Corporation. Basis transferred its 54% interest in the general partner and its
approximately 1.2 million Subordinated OLP Units to Salomon Inc on June 5, 1997.
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 Nine Months
Ended Ended
September 30, September 30,
1997 1996
-------- ----------
(Predecessor)
Sales to affiliates $401,480 $1,219,309
Purchases from affiliates $138,160 $269,654
Clearing of Commodities Futures Transactions
The Partnership cleared a portion of its commodity futures transactions on
the NYMEX through Basis Clearing, Inc., a wholly-owned subsidiary of Basis. In
April 1997, Basis Clearing, Inc., ceased its clearing activities for the
Partnership. The Partnership paid commissions to Basis Clearing, Inc., of
$29,000 for the nine months ended September 30, 1997.
The Predecessor cleared its NYMEX transactions through Basis Clearing,
Inc., which was a wholly-owned subsidiary of Basis and Phibro Energy Clearing,
Inc., a wholly-owned subsidiary of Phibro Inc., a wholly-owned subsidiary of
Salomon Inc. The Predecessor paid commissions of $445,000 to these entities for
the nine months ended September 30, 1996.
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 $11,242,000 for the nine months ended September 30, 1997.
In December 1996, the Partnership entered into a Corporate Services
Agreement with Basis pursuant to which Basis, directly or through its
affiliates, agreed to provide certain administrative and support services for
the benefit of the Partnership. Such services may include human resources, tax,
accounting, data processing, NYMEX transaction clearing and other similar
administrative services. Under such agreement, Basis does not receive a fee for
such services but the Partnership reimburses Basis or its affiliates for (i)
allocated personnel costs (such as salaries and employee benefits) of the
personnel actually providing such services, (ii) rent on office space allocated
to the General Partner in Basis' offices in Houston, Texas and (iii) all
reasonable out-of-pocket expenses related to the provision of such services.
Either the Partnership or Basis may terminate or reduce the level of services
under certain circumstances as described in the Corporate Services Agreement.
In the event the Corporate Services Agreement is terminated, the cost to the
Partnership of obtaining the services covered thereby from third parties would
likely be higher than the cost of such services under the Corporate Services
Agreement. In addition, the Partnership has agreed to indemnify and hold
harmless Basis and its affiliates from all claims and damages arising from the
provision of services under the Corporate Services Agreement, unless due to the
gross negligence or willful misconduct of Basis or its affiliates. Charges by
Basis under the Corporate Services Agreement during the period in 1997 that
Basis was a related party to the Partnership were approximately $100,000 per
month.
Basis allocated certain general and administrative costs to the Predecessor
for ancillary services, insurance and office space. These costs amounted to
approximately $900,000 for the nine months ended September 30, 1996.
Treasury Services
The Partnership entered into a Treasury Management Agreement with Basis.
Under the Treasury Management Agreement, the Partnership loans excess cash to
Basis at an interest rate that is the mid-point between a market rate from third
parties on invested funds and the cost to Basis of borrowing funds from Salomon
Inc. Effective May 1, 1997, Salomon Inc replaced Basis as a party to the
Treasury Management Agreement. At September 30, 1997, Salomon Inc owed the
Partnership $14.8 million under the Treasury Management Agreement. Such amount
has been classified in the consolidated balance sheet as cash and cash
equivalents. For the nine months ended September 30, 1997, the Partnership
earned interest of $518,000 on these loans by the Partnership to Basis and
Salomon Inc.
Credit Facilities
As discussed in Note 5, Salomon Inc and Basis provide Credit Facilities to
the Partnership. For the nine months ended September 30, 1997, the Partnership
paid Salomon Inc $591,000 for guarantee fees under the Credit Facilities. The
Partnership paid Basis $85,000 for interest under the Credit Facilities during
the same period.
Sale of Basis
As discussed above, on May 1, 1997, Salomon Inc sold 100% of the stock of
Basis to Valero Energy Corporation. Basis subsequently transferred its
Subordinated OLP interests and its interest in the General Partner to Salomon
Inc. Additionally, Salomon Inc assumed Basis' obligations to the Partnership
under the Master Credit Support Agreement and the Treasury Management Agreement.
The Partnership has several other agreements in place with Basis.
Salomon Inc will provide certain services under the Corporate Services
Agreement, and Basis will continue to provide the remaining services under the
Corporate Services Agreement through at least December 31, 1997, unless
terminated earlier by the Partnership.
As a result of the sale, the Partnership relocated to new offices during
October 1997. Accordingly, the Partnership purchased various items that were
heretofore supplied by Basis pursuant to the Corporate Services Agreement.
Additionally, the Partnership will hire additional personnel and contract with
third party vendors to perform certain of the functions that were previously
performed by Basis pursuant to the Corporate Services Agreement, including
telecommunications related services, accounting and human resource services,
corporate office services, and NYMEX brokering and clearing activities. The
General Partner estimates that the Partnership will make expenditures of a one-
time nature of approximately $1.7 million in connection with the foregoing. In
order to mitigate the impact of these costs on the Partnership, Salomon Inc
agreed to amend the Master Credit Support Agreement, lowering the future costs
of credit support. The present value of that benefit is approximately $1.7
million, assuming full utilization of the facility. The General Partner is
evaluating the additional annual costs that will be incurred but anticipates
that it will be substantially less than the $1.3 million stated in the
Partnership's Prospectus, issued in relation to its recent initial public
offering, to replace the services and employee benefit plans that are presently
provided by Basis pursuant to the Corporate Services Agreement.
The Partnership and Basis are parties to a non-competition agreement that
continues through December 2, 2006. Management believes that Basis continues to
be bound by that agreement subsequent to Valero Energy Corporation's purchase of
Basis. No assurance can be given concerning the enforceability of the non-
competition agreement against Basis, and it is not possible to quantify the
significance of any such future competition.
7. Supplemental Cash Flow Information
Cash received by the Partnership for interest was $891,000 for the nine
months ended September 30, 1997. Payments of interest were $121,000 for the
nine months ended September 30, 1997.
Cash received by the Predecessor for imputed interest was $210,000 for the
nine months ended September 30, 1996.
Cash paid for state income taxes and the imputed cash payments made by the
Predecessor for federal income taxes totaled $6,030,000 during the nine months
ended September 30, 1996 related to 1995.
8. 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. As part of the formation of the
Partnership, Basis and Howell agreed to be responsible for certain environmental
conditions related to their ownership and operation of their respective assets
contributed to the Partnership and for any environmental liabilities which Basis
or Howell may have assumed from prior owners of these assets.
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.
As part of the formation of the Partnership, Basis and Howell agreed to each
retain liability and responsibility for the defense of any future lawsuits
arising out of activities conducted by Basis and Howell prior to the formation
of the Partnership and have also agreed to cooperate in the defense of such
lawsuits.
In July 1997, the Partnership signed a lease for office space which it began
occupying in October 1997. The estimated future minimum lease payments under
this lease and the Partnership's other operating leases are as follows.
October 1, 1997 to December 31, 1997 $ 351,000
Year ended December 31, 1998 956,000
Year ended December 31, 1999 884,000
Year ended December 31, 2000 419,000
Year ended December 31, 2001 402,000
Year ended December 31, 2002 402,000
Thereafter 1,276,000
----------
Total $4,690,000
==========
9. Distributions
On August 15, 1997, the Partnership paid a cash distribution of $0.50 per
Unit for the quarter ended June 30, 1997, to the General Partner and all Common
Unitholders of record as of the close of business on July 31, 1997. The
Subordinated OLP Unitholders did not receive a distribution for the quarter.
On October 2, 1997, the Board of Directors of the General Partner declared a
cash distribution of $0.50 per Unit for the quarter ended September 30, 1997.
The distribution will be paid November 14, 1997, to the General Partner and all
Common Unitholders of record as of the close of business on October 31, 1997.
The Subordinated OLP Unitholders will not receive a distribution for the
quarter.
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., operates crude oil common carrier pipelines and is one
of the largest independent gatherers and marketers 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,
1997 1996 1997 1996
------ ------ ------ ------
(Pro Forma) (Pro Forma)
Gross margin
Gathering and marketing $2,687 $1,459 $8,861 $19,208
Pipeline $3,252 $3,307 $9,051 $ 9,157
General and administrative expenses $2,047 $1,973 $6,360 $ 6,631
Depreciation and amortization $1,572 $1,160 $4,704 $ 5,241
Operating income $2,320 $1,633 $6,848 $16,493
Interest income, net $ 264 $ - $ 725 $ -
Barrels per day
Wellhead 104,303 112,293 105,087 116,101
Bulk 112,674 132,500 143,795 178,462
Pipeline 92,552 91,217 88,890 87,727
Nine Months Ended September 30, 1997 Compared with Pro Forma Nine Months
Ended September 30, 1996
Gross margin from gathering and marketing operations is generated by the
difference between the price of crude oil at the point of purchase and the price
of crude oil at the point of sale, minus the associated costs of aggregation and
transportation. The absolute price levels of crude oil do not necessarily bear
a relationship to gross margin, although such price levels significantly impact
revenues and cost of sales. As a result, period-to-period variations in
revenues and cost of sales are generally not meaningful in analyzing the
variation in gross margin. Such changes are not addressed in the following
discussion.
Pipeline 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 the Partnership's pipeline
operations.
Gross margin from gathering and marketing operations was $8.9 million for
the nine months ended September 30, 1997, as compared to $19.2 million for the
pro forma nine months ended September 30, 1996. In the 1996 period, crude oil
inventories were at very low levels and demand for crude oil from refiners was
strong. Gathering and marketing margins expanded as sale prices increased
faster than prices paid to producers for crude oil at the wellhead. In the 1997
period, crude oil supply exceeded refiner demand and gathering and marketing
margins declined as sale prices decreased much quicker than prices paid to
producers. Margins in the 1997 period were also adversely impacted by increases
in the cost to exchange sweet and sour grades of crude oil at Midland, Texas,
for West Texas Intermediate at Cushing, Oklahoma.
Pipeline gross margin was $9.1 million for the nine months ended September
30, 1997, as compared to the pro forma pipeline gross margin of $9.2 million for
the first nine months of 1996. Pipeline barrels per day increased by 1,163
barrels between the two periods, slightly increasing pipeline revenue.
Operating costs increased slightly in the 1997 period, resulting in the decrease
in gross margin.
General and administrative expenses were $6.4 million for the nine months
ended September 30, 1997, a slight decrease from the prior year period.
Depreciation and amortization declined $0.5 million from the 1996 period to $4.7
million for the 1997 nine month period, primarily attributable to certain assets
becoming fully depreciated during 1996.
Three Months Ended September 30, 1997 Compared with Pro Forma Three Months
Ended September 30, 1996
During the third quarter of 1996, gathering and marketing gross margins
were reduced as crude oil supply exceeded refiner demand and margins declined as
sale prices decreased much quicker than prices paid to producers. This trend
continued into 1997; however, the Partnership was able to reduce prices paid to
producers, resulting in slightly better margins in the 1997 third quarter.
Pipeline gross margins decreased slightly in the 1997 third quarter when
compared to the pro forma results for the 1996 third quarter. As discussed
above, throughput volumes increased; however, increases in operating costs
resulted in the decreased margins.
Liquidity and Capital Resources
Cash Flows
Cash flows from operating activities were $18.8 million for the nine months
ended September 30, 1997. Operating activities of the Predecessor in the prior
year period utilized cash of $0.9 million primarily due to variations in the
timing of payment of crude purchase obligations.
For the nine months ended September 30, 1997, cash flows utilized in
investing activities were $3.1 million as a result of additions in property and
equipment, primarily related to pipeline operations. In the 1996 nine month
period, investing activities of the Predecessor produced cash flows of $0.3
million as a result of the sale of surplus property and equipment.
Cash flows used in financing activities by the Partnership during the first
nine months of 1997 totaled $10.2 million. This amount represents distributions
paid to the common unitholders and the general partner. Cash flows provided in
financing activities of $0.7 million in the 1996 period resulted from advances
to Basis by the Predecessor.
Working Capital and Credit Resources
As discussed in Note 5 of the Notes to Condensed Consolidated Financial
Statements, Salomon Inc assumed Basis' obligations to the Partnership under the
Master Credit Support Agreement and extended the term of these agreements to
December 31, 1997. The Partnership expects to arrange for a working capital
facility through one or more third party lenders prior to the scheduled
expiration.
The Partnership has sufficient funds on hand to fund the one-time
expenditures associated with relocating the Partnership offices as discussed in
Note 6 of the Notes to Condensed Consolidated Financial Statements.
The Partnership made its initial distribution to the Common Unitholders and
the General Partner during the second quarter of 1997. A quarterly distribution
of $0.50 per unit was paid during the third quarter and a like distribution has
been declared payable during the fourth quarter to the Common Unitholders and
the General Partner. The holders of the Subordinated OLP Units did not receive
a distribution during the second or third quarter and will not receive a
distribution during the fourth quarter.
Forward Looking Statements
The statements in this Report on Form 10-Q that are not historical
information are forward looking statements within the meaning of Section 27a of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Although the Partnership believes that its expectations regarding future
events are based on reasonable assumptions, it can give no assurance that its
goals will be achieved or that its expectations regarding future developments
will prove to be correct. Important factors that could cause actual results to
differ materially from those in the forward looking statements herein include
changes in regulations, the Partnership's success in obtaining additional lease
barrels, refiner demand for various grades of crude oil and the resulting
changes in pricing relationships, developments relating to possible acquisitions
or business combination opportunities, the success of the Partnership's risk
management activities and conditions of the capital markets and equity markets
during the periods covered by the forward looking statements.
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.
Exhibit 10. Second Amendment to Master Credit Support Agreement
Exhibit 10. Third Amendment to Master Credit Support Agreement
Exhibit 10. Office Lease at One Allen Center between Trizec Allen
Center Limited Partnership (Landlord) and Genesis
Crude Oil, L.P. (Tenant)
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
None
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 14, 1997 By: /s/ Allyn R. Skelton, II
-------------------------
Allyn R. Skelton, II
Chief Financial Officer