===============================================================================
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, 1998
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 15 pages
2
GENESIS ENERGY, L.P.
Form 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets - September 30, 1998 and
December 31, 1997 3
Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997 5
Condensed Consolidated Statement of Partners' Capital for the
Nine Months Ended September 30, 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
3
GENESIS ENERGY, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
1998 1997
-------- --------
Assets (Unaudited)
Current assets
Cash and cash equivalents $ 2,897 $ 11,812
Accounts receivable -
Trade 201,749 209,869
Related party - -
Inventories 6,132 7,033
Other 4,217 3,488
-------- --------
Total current asset 214,995 232,202
Property and equipment, at cost 114,689 105,102
Less: Accumulated depreciation (18,994) (16,464)
-------- --------
Net property and equipment 95,695 88,638
Other assets, net of amortization 13,719 10,274
-------- --------
Total assets $324,409 $331,114
======== ========
Liabilities and Partners' Capital
Current liabilities
Accounts payable -
Trade $194,314 $215,159
Related party 6,569 2,832
Accrued liabilities 6,024 6,547
-------- --------
Total current liabilities 206,907 224,538
Long-term debt 18,600 -
Commitments and contingencies (Note 8)
Minority interests 29,524 28,225
Partners' capital
Common unitholders, 8,625 units issued; 8,562
and 8,625 units outstanding at September 30,
1998 and December 31, 1997, respectively 68,942 76,783
General partner 1,408 1,568
-------- --------
Subtotal 70,350 78,351
Treasury units, 66 units at September 30, 1998 (972) -
-------- --------
Total partners' capital 69,378 78,351
-------- --------
Total liabilities and partners' capital $324,409 $331,114
======== ========
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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- ---------- ----------
REVENUES:
Gathering and marketing revenues
Unrelated parties $516,353 $696,919 $1,701,582 $2,266,977
Related parties 6,260 142,978 24,726 401,480
-------- -------- ---------- ----------
Pipeline revenues 3,829 4,881 12,204 13,489
Total revenues 526,442 844,778 1,738,512 2,681,946
COST OF SALES:
Crude costs unrelated parties 500,199 745,788 1,674,175 2,512,246
Crude costs related parties 12,707 88,506 27,519 138,160
Field operating costs 3,289 2,916 10,293 9,190
Pipeline operating costs 1,815 1,629 5,710 4,438
-------- -------- ---------- ----------
Total cost of sales 518,010 838,839 1,717,697 2,664,034
-------- -------- ---------- ----------
GROSS MARGIN 8,432 5,939 20,815 17,912
EXPENSES:
General and administrative 3,078 2,047 8,599 6,360
Depreciation and amortization 1,989 1,572 5,627 4,704
Nonrecurring charge (Note 5) - - 373 -
-------- -------- ---------- ----------
OPERATING INCOME 3,365 2,320 6,216 6,848
OTHER INCOME (EXPENSE):
Interest, net (14) 264 276 725
Other, net (24) 28 8 71
-------- -------- ---------- ----------
Net income before minority interests 3,327 2,612 6,500 7,644
Minority interests 665 523 1,299 1,529
-------- -------- ---------- ----------
NET INCOME $ 2,662 $ 2,089 $ 5,201 $ 6,115
======== ======== ========== ==========
NET INCOME PER COMMON UNIT - BASIC AND DILUTED $ 0.30 $ 0.24 $ 0.59 $ 0.69
======== ======== ========== ==========
NUMBER OF COMMON UNITS OUTSTANDING 8,617 8,625 8,622 8,625
======== ======== ========== ==========
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)
Nine Months Ended September 30,
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,201 $ 6,115
Adjustments to reconcile net income to net cash
provided by (used in) operating activities -
Depreciation 4,811 4,347
Amortization of intangible assets 816 357
Minority interests equity in earnings 1,299 1,529
Loss (gain) on disposals of fixed assets 256 (71)
Other noncash charges 1,233 50
Changes in components of working capital -
Accounts receivable 8,120 78,169
Inventories 901 4,359
Other current assets (729) 707
Accounts payable (17,108) (76,841)
Accrued liabilities (1,756) 121
-------- --------
Net cash provided by operating activities 3,044 18,842
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (12,312) (3,234)
Increase in other assets (4,261) (165)
Proceeds from sales of assets 188 348
-------- --------
Net cash used in investing activities (16,385) (3,051)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under Loan Agreement 18,600 -
Distributions:
To common unitholders (12,938) (10,005)
To general partner (264) (204)
Purchase of common units for treasury (972) -
-------- --------
Net cash provided by (used in) financing activities 4,426 (10,209)
-------- --------
Net (decrease) increase in cash and cash equivalents (8,915) 5,582
Cash and cash equivalents at beginning of period 11,812 11,878
-------- --------
Cash and cash equivalents at end of period $ 2,897 $ 17,460
======== ========
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 Treasury
Unitholders Partner Units Total
------- ------ ------ -------
Partners' capital at December 31, 1997 $76,783 $1,568 $ - $78,351
Net income for the nine months ended September 30, 1998 5,097 104 - 5,201
Distributions during the nine months ended September 30, 1998 (12,938) (264) - (13,202)
Purchase of common units for treasury - - (972) (972)
------- ------ ------ -------
Partners' capital at September 30, 1998 $68,942 $1,408 $ (972) $69,378
======= ====== ====== =======
The accompanying notes are an integral part of these consolidated financial
statements.
7
GENESIS ENERGY, 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"). The General Partner owns a 2%
general partner interest in GELP.
Transactions at Formation
At the closing of the offering, GELP contributed the net proceeds of the
offering to GCOLP in exchange for an 80.01% general partner interest in GCOLP.
With the net proceeds of the offering, GCOLP purchased a portion of the crude
oil gathering, marketing and pipeline operations of Howell Corporation
("Howell") and made a distribution to Basis Petroleum, Inc. ("Basis") in
exchange for its conveyance of a portion of its crude oil gathering and
marketing operations. GCOLP issued an aggregate of 2.2 million subordinated
limited partner units ("Subordinated OLP Units") to Basis and Howell to obtain
the remaining operations. Basis' Subordinated OLP units were transferred to its
then parent, Salomon Smith Barney Holdings Inc. ("Salomon") in May 1997.
Unless the context otherwise requires, the term "the Partnership" hereafter
refers to GELP and its operating limited partnership.
2. Basis of Presentation
The accompanying financial statements and related notes present the
consolidated financial position as of September 30, 1998 and December 31, 1997
for GELP and its results of operations, cash flows and changes in partners'
capital for the three and nine months ended September 30, 1998 and 1997.
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, 1997 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 and nine months ended September 30, 1998, was
8,616,621 and 8,622,207, respectively. The weighted average number of Common
Units outstanding was 8,625,000 for the three months and nine months ended
September 30, 1997. 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. The Common
Units that will be issued in accordance with the Restricted Unit Plan are
antidilutive.
3. Adoption of Accounting Standards
SFAS No. 130, "Reporting Comprehensive Income", was issued in June 1997, with
adoption required for fiscal years beginning after December 31, 1997. SFAS No.
130 requires the presentation of an additional income measure (termed
"comprehensive income"), which adjusts traditional net income for certain items
that previously were only reflected as direct charges to equity. For the three
and nine month periods ended September 30, 1998 and 1997, there is not a
difference between "traditional" net income and comprehensive net income.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", was issued in June 1997, establishing standards for the way that
public business enterprises report information about operating segments and
related information in interim and annual financial statements. The Partnership
has evaluated the
8
applicability of the statement and has concluded that the Partnership does
not meet the criteria which required business segment reporting.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
was issued in June 1998. This new standard, which the Partnership will be
required to adopt in the year 2000, will change the method of accounting for
changes in the fair value of certain derivative instruments by requiring that an
entity recognize the derivative at fair value as an asset or liability on its
balance sheet. Depending on the purpose of the derivative and the item it is
hedging, the changes in fair value of the derivative will be recognized in
current earnings or as a component of other comprehensive income in partners'
capital. The Partnership has started the process of evaluating the impact that
this statement will have on its results of operations and financial position.
This new standard could increase volatility in net income and comprehensive
income.
4. Credit Resources
GCOLP entered into credit facilities with Salomon (collectively, the "Credit
Facilities"), pursuant to a Master Credit Support Agreement. GCOLP's
obligations under the Credit Facilities are secured by its receivables,
inventories, general intangibles and cash.
Guaranty Facility
Salomon is providing a Guaranty Facility 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 $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 of any obligation to a third
party to the extent that such third party has a prior security interest in the
collateral). GCOLP pays a guarantee fee to Salomon which will increase over the
term of the facility, 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, 1998, the aggregate amount of obligations covered by
guarantees was $210 million, including $113 million in payable obligations and
$97 million of estimated crude oil purchase obligations for October 1998.
Working Capital Facility
Until replacement as described below, Salomon provided GCOLP with a Working
Capital Facility of up to $50 million, which amount included 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.
In August 1998, GCOLP entered into a revolving credit/loan agreement ("Loan
Agreement") with Bank One, Texas, N.A. ("Bank One") to replace the Working
Capital Facility that had been provided by Salomon. The Loan Agreement provides
for loans or letters of credit in the aggregate not to exceed the greater of $35
million or the Borrowing Base (as defined in the Loan Agreement). Loans will
bear interest at a rate chosen by GCOLP which would be one or more of the
following: (a) a Floating Base Rate (as defined in the Loan Agreement) that is
generally the prevailing prime rate less one percent; (b) a rate based on the
Federal Funds Rate plus one and one-half percent or (c) a rate based on LIBOR
plus one and one-quarter percent. The Loan Agreement provides for a revolving
period until August 14, 2000, with interest to be paid monthly. All loans
outstanding on August 14, 2000, are due at that time.
The Loan Agreement is collateralized by the accounts receivable and
inventory of GCOLP, subject to the terms of an Intercreditor Agreement between
Bank One and Salomon. There is no compensating balance requirement under the
Loan Agreement. A commitment fee of 0.35% on the available portion of the
commitment is provided for in the agreement. Material covenants and
restrictions include requirements to maintain a ratio of current assets to
current liabilities of at least 1:1 and to maintain tangible net worth in GCOLP,
as defined in the Loan Agreement, of $65 million.
At September 30, 1998, the Partnership had $18.6 million of loans
outstanding under the Loan Agreement. The Partnership had no letters of credit
outstanding at September 30, 1998.
9
There can be no assurance of the availability or the terms of credit for
the Partnership. The General Partner believes that the Loan Agreement and
Guaranty Facility will be sufficient to support the Partnership's crude oil
purchasing activities and working capital requirements during the terms of these
agreements. 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.
5. Nonrecurring Charge
In the second quarter of 1998, the Partnership shut-in its Main Pass
pipeline. A charge of $373,000 was recorded, consisting of $109,000 of costs
related to the shut-in and a non-cash write-down of the asset of $264,000.
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.
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,
1998 1997
----------- ------------
Sales to affiliates $24,726 $401,480
Purchases from affiliates $27,519 $138,160
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 $11,629,000 and $11,242,000 for the nine months ended September
30, 1998 and 1997, respectively.
The Partnership entered into a Corporate Services Agreement with Basis
pursuant to which Basis, directly or through its affiliates, provided certain
administrative and support services for the benefit of the Partnership. Such
services included human resources, tax, accounting, data processing, NYMEX
transaction clearing and other similar administrative services. The Partnership
ceased to receive services under the agreement at December 31, 1997. Charges by
Basis under the Corporate Services Agreement during the period in 1997 that
Basis was a related party to the Partnership were approximately $400,000.
Treasury Services
The Partnership entered into a Treasury Management Agreement with Basis.
Effective May 1, 1997, Salomon replaced Basis as a party to the Treasury
Management Agreement. Under the Treasury Management Agreement, the Partnership
invests excess cash with Salomon and earns interest at market rates. At
September 30, 1998, the Partnership had no funds deposited with Salomon. At
September 30, 1997, Salomon 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, 1998, the Partnership earned interest of $273,000 on the
investments with Salomon. 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.
Credit Facilities
As discussed in Note 4, Salomon provided Credit Facilities to the
Partnership. For the nine months ended September 30, 1998 and 1997, the
Partnership paid Salomon $462,000 and $591,000, respectively, for guarantee fees
under the Credit Facilities. The Partnership paid Salomon $18,000 for interest
under the Credit Facilities
10
during the nine months ended September 30, 1998. The Partnership paid
Basis $85,000 for interest under the Credit Facilities during the same period.
7. Supplemental Cash Flow Information
Cash received by the Partnership for interest was $378,000 and $891,000 for
the nine months ended September 30, 1998 and 1997, respectively. Payments of
interest were $127,000 and $121,000 for the nine months ended September 30, 1998
and 1997, respectively.
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.
9. Distributions
On October 6, 1998, the Board of Directors of the General Partner declared a
cash distribution of $0.50 per Unit for the quarter ended September 30, 1998.
The distribution will be paid November 13, 1998, to the General Partner and all
Common Unitholders of record as of the close of business on October 30, 1998.
The Subordinated OLP Unitholders will not receive a distribution for the
quarter.
11
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 September 30, Nine Months Ended September 30,
1998 1997 1998 1997
------ ------ ------- ------
Gross margin
Gathering and marketing $6,418 $2,687 $14,321 $8,861
Pipeline $2,014 $3,252 $ 6,494 $9,051
General and administrative expenses $3,078 $2,047 $ 8,599 $6,360
Depreciation and amortization $1,989 $1,572 $ 5,627 $4,704
Operating income $3,365 $2,320 $ 6,216 $6,848
Interest income, net $ (14) $ 264 $ 276 $ 725
Barrels per day
Wellhead 113,097 104,303 116,641 105,087
Bulk and exchange 319,857 371,485 327,630 367,427
Pipeline 77,899 92,552 84,015 88,890
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.
Nine Months Ended September 30, 1998 Compared with Nine Months Ended
September 30, 1997
Gross margin from gathering and marketing operations was $14.3 million for
the nine months ended September 30, 1998, as compared to $8.9 million for the
nine months ended September 30, 1997. The improvement primarily resulted from
the application of risk management techniques that were utilized to lock in an
opportunity for favorable margins and the acquisition of the gathering and
marketing assets of Falco S&D, Inc. in April 1998.
Pipeline gross margin was $6.5 million for the nine months ended September
30, 1998, as compared to pipeline gross margin of $9.1 million for the first
nine months of 1997. Pipeline revenues decreased $1.3 million, as a result of a
4,875 barrel per day decline in throughput associated with a drop in oil
production. Oil producers have drilled fewer new wells and have not maintained
production levels from existing wells that are connected to the Partnership's
pipelines. In addition, the pipelines experienced higher operating costs.
These higher costs can be
12
attributed to repairs on the Main Pass pipeline, lease payments beginning
in the second quarter of 1998 on a new segment of pipeline, and increased
routine maintenance expenditures.
General and administrative expenses were $8.6 million for the nine months
ended September 30, 1998, as compared to $6.4 million for the 1997 period. This
increase of $2.2 million can be attributed to four factors. In the 1998 period,
the Partnership recorded a non-cash charge of $1.2 million related to its
Restricted Unit Plan. The estimated total charge for the Restricted Unit Plan
is being recognized over the three-year vesting period beginning in 1998.
Additionally, in 1998 the Partnership no longer benefited from the sharing of
certain costs with Basis Petroleum Inc. under the terms of a Corporate Services
Agreement, as it did in 1997. The third item related to additional marketing
and administrative personnel being added by the Partnership in April 1998 as a
result of the Falco asset acquisition. Lastly, severance pay of $0.2 million
was recorded in the 1998 period.
Depreciation and amortization increased $0.9 million from the 1997 period
to $5.6 million for the 1998 nine month period, primarily attributable to
depreciation on the assets acquired from Falco.
In the 1998 period, the Partnership recorded a nonrecurring charge of $0.4
million as a result of the shut-in of its Main Pass pipeline. The charge
consisted of $0.1 million of costs related to the shut-in and a $0.3 million
write-down of the asset.
Three Months Ended September 30, 1998 Compared with Three Months Ended
September 30, 1997
Gross margin from gathering and marketing operations was $6.4 million for
the three months ended September 30, 1998, as compared to $2.7 million for the
three months ended September 30, 1997. The improvement primarily resulted from
the application of risk management techniques that were utilized to lock in
favorable margins and the acquisition of the gathering and marketing assets of
Falco S&D, Inc. in April 1998.
Pipeline gross margins decreased $1.2 million between the 1997 and 1998
third quarters. A decline in throughput of 14,653 barrels per day created the
largest impact on gross margin. This decline in throughput can be attributed
largely to decreased production by oil producers.
General and administrative expenses increased $1.0 million between the 1998
and 1997 quarters primarily as a result of the same factors that are discussed
above related to the increase in general and administrative expenses between the
nine-month periods. The increase in depreciation and amortization between the
third quarter periods is attributable to depreciation and amortization of the
assets acquired from Falco.
Liquidity and Capital Resources
Cash Flows
Cash flows from operating activities were $3.0 million for the nine months
ended September 30, 1998. Operating activities in the prior year period
generated cash of $18.8 million primarily due to variations in the timing of
payment of crude purchase obligations.
For the nine months ended September 30, 1998, cash flows utilized in
investing activities were $16.4 million resulting from additions to property and
equipment. In the second quarter of 1998, the Partnership acquired the
gathering and marketing assets of Falco S&D, Inc. In the third quarter of 1998,
the Partnership acquired a pipeline system in the West Columbia area of Texas
from Equilon Pipeline Company, L.L.C. for approximately $7.1 million. In the
1997 nine month period, investing activities utilized cash flows of $3.1 million
as a result of additions to property and equipment, primarily related to
pipeline operations.
Cash flows provided by financing activities by the Partnership during the
first nine months of 1998 totaled $4.4 million. Distributions paid to the
common unitholders and the general partner totaling $13.2 million utilized cash
flows. The Partnership also purchased 66,000 Common Units in the open market at
a cost of $1.0 million. Borrowings under the Loan Agreement of $18.6 million
provided financing cash flows. Cash flows used in financing activities of $10.2
million in the 1997 period represented distributions to the common unitholders
and the general partner.
13
Working Capital and Credit Resources
As discussed in Note 4 of the Notes to Condensed Consolidated Financial
Statements, Salomon provided a Working Capital Facility to the Partnership until
August 1998. At this time, that Working Capital Facility was replaced with a
revolving credit/loan agreement ("Loan Agreement") with Bank One, Texas, N.A.
("Bank One"). The Loan Agreement provides for loans or letters of credit in the
aggregate not to exceed the greater of $35 million or the Borrowing Base (as
defined in the Loan Agreement). Loans will bear interest at a rate chosen by
GCOLP which would be one or more of the following: (a) a Floating Base Rate (as
defined in the Loan Agreement) that is generally the prevailing prime rate less
one percent; (b) a rate based on the Federal Funds Rate plus one and one-half
percent or (c) a rate based on LIBOR plus one and one-quarter percent. The Loan
Agreement provides for a revolving period until August 14, 2000, with interest
to be paid monthly. All loans outstanding on August 14, 2000, are due at that
time.
The Loan Agreement is collateralized by the accounts receivable and
inventory of GCOLP, subject to the terms of an Intercreditor Agreement between
Bank One and Salomon. There is no compensating balance requirement under the
Loan Agreement. A commitment fee of 0.35% on the available portion of the
commitment is provided for in the agreement. Material covenants and
restrictions include requirements to maintain a ratio of current assets to
current liabilities of at least 1:1 and to maintain tangible net worth in GCOLP,
as defined in the Loan Agreement, of $65 million.
At September 30, 1998, the Partnership had $18.6 million of loans
outstanding under the Loan Agreement. The Partnership had no letters of credit
outstanding at September 30, 1998.
Year 2000 Issue
Many software applications, equipment and embedded chip systems identify
dates using only the last two digits of the year. These systems may be unable
to distinguish between dates in the year 2000 and the year 1900. If not
addressed, this condition could cause such systems to fail or provide incorrect
information when using dates after December 31, 1999. Due to the Partnership's
dependence on such systems, this condition could have an adverse effect on the
Partnership.
Partnership's State of Readiness
To address the Year 2000 issue, the Partnership has formed a Year 2000
Steering Committee to coordinate execution of a Project to identify, assess, and
remedy any Year 2000 issues that might impact the Partnership. The Year 2000
Project Steering Committee has established six phases for the Project. The six
phases include (i) awareness, (ii) inventory, (iii) assessment, (iv)
remediation, (v) testing and (vi) implementation. The Year 2000 Steering
Committee has classified the key automated systems for analysis as (a) financial
systems applications, (b) operational system applications, (c) hardware and
equipment; (d) embedded chip systems, and (e) third-party systems. The Year
2000 Project includes addressing the Year 2000 exposure of third parties whose
operations are material to the operations of the Partnership. The Partnership
intends to retain a Year 2000 consulting firm to review the Partnership's Year
2000 Project Plan, execution of that Plan, and associated contingency plans.
The awareness phase of the Year 2000 project consists of an enterprise-wide
awareness program to communicate to employees and other stakeholders the
processes to be applied to the Project and to solicit participation to enhance
the likelihood of success of this Project. The awareness phase will continue
throughout the course of the Project. The inventory phase entails identifying
all software applications, equipment, embedded chip systems and third-party
systems that should be evaluated as part of this Project. Substantially all
applications, equipment and systems have been identified for evaluation. Due to
the dynamic nature of systems in the operations of the Partnership, the
identification phase will be updated and reassessed throughout the course of the
Project.
The assessment phase includes analysis and testing of all inventoried
applications, equipment and systems to determine the business impact,
probability of failure and identification of the proper course of action to
achieve Year 2000 compliance. The portion of the assessment phase related to
financial and operational systems applications has been substantially completed,
and the necessary modifications and conversions are either underway or will
commence in the near future. The portion of the assessment phase which will
determine the nature and
14
impact of the Year 2000 issue for hardware and equipment, embedded chip
systems and third-party developed software is continuing.
The assessment phase of the project includes efforts to obtain
representation and assurances from third parties that their applications,
hardware and equipment, and systems being used by or impacting the Partnership
are or will be modified to be Year 2000 compliant. To date, the responses from
such third parties are positive but inconclusive. As a result, management
cannot predict the potential consequences to the Partnership if applications,
hardware or systems under the control of third parties are not Year 2000
compliant.
The remediation phase will include the modification, conversion or
replacement of existing applications, hardware and systems that are determined
not to be Year 2000 compliant. The testing phase will validate the results of
the remediation phase. The implementation phase will perform business system
modifications for applications, hardware and systems that are affected by the
remediation phase. Management expects that the remediation, testing and
implementation phases will be substantially completed by mid-1999. A software
consulting firm has been engaged to perform the remediation phase on the
Partnership's significant financial and operational systems that are to be
modified or converted. Since the Partnership does not expect to materially
change operating processes as part of the Year 2000 Project, management does not
expect the implementation phase to be a significant part of the Project.
Costs of the Year 2000 Project
While the total cost of the Year 2000 Project is still under evaluation,
management currently estimates that future costs to be incurred by the
Partnership for the Year 2000 Project will be between $350,000 and $500,000.
The Partnership expects to fund these expenditures with cash from operations or
borrowings. To date, the Partnership has primarily used internal resources to
execute the Year 2000 Project. External cash expenditures to date are estimated
to be approximately $10,000. Management has not deferred specific information
technology projects as a direct result of the Year 2000 issue.
Risk of Year 2000 Issues
Major applications that pose the greatest Year 2000 risks for the
Partnership if the Year 2000 Project is not successful are the Partnership's
financial and operational system applications and embedded chip systems in field
equipment. Potential problems resulting if the Year 2000 Project is not
successful include disruptions of the Partnership's financial and operational
functions. Affected financial functions include the ability to collect revenue,
issue payments and carry on commercial and banking transaction execution
activities. Operational functions that could be disrupted include the
Partnership's crude oil transportation, storage, gathering and marketing
activities.
Contingency Plans
The goal of the Year 2000 Project is to ensure that all critical systems
and business processes under the direct control of the Partnership remain
functional. However, since certain systems and processes may be interrelated
with systems outside of the control of the Partnership, there can be no
assurance that the Year 2000 Project will be completely successful.
Consequently, contingency and business plans are being developed to respond to
any Year 2000 compliance failures that may occur. Development of such
contingency and business plans is under way. Such plans are scheduled to be
completed by the end of the first quarter of 1999.
Management does not expect the costs of the Year 2000 project to have a
material adverse effect on the Partnership's financial position, results of
operations or cash flows. At this time, however, the Partnership cannot
conclude that any failure of the Partnership or third parties to achieve Year
2000 compliance will not adversely affect the Partnership.
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
15
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, the success of the Partnership's Year 2000 project 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 10.1 Loan Agreement by and between Genesis Crude Oil, L.P. and
Bank One, Texas, N.A. dated as of August 14, 1998
Exhibit 10.2 Amendment No. 1 to Loan Agreement by and between Genesis
Crude Oil, L.P. and Bank One, Texas, N.A.
Exhibit 10.3 Employment Agreement between Genesis Energy, L.L.C. and Ross
A. Benavides
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 12, 1998 By: /s/ Ross A. Benavides
--------------------------
Ross A. Benavides
Chief Financial Officer