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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-50195
EOTT ENERGY LLC
(Exact name of registrant as specified in its charter)
Delaware 48-1285117
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2000 West Sam Houston Parkway South,
Suite 400
Houston, Texas 77042
- ---------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(713) 993-5200
-----------------------------------------------------
(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 [ ] No [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate by checkmark whether the registrant has filed all documents
and reports to be filed by Section 12, 13, 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes [X] No [ ]
The number of limited liability company units outstanding as of May 8,
2003 was 12,317,340.
EOTT ENERGY LLC
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) -
One Month Ended March 31, 2003 (Successor Company),
Two Months Ended February 28, 2003 and
Three Months Ended March 31, 2002 (Predecessor Company) ...........................................1
Condensed Consolidated Balance Sheets (Unaudited) -
March 31, 2003 (Successor Company) and
December 31, 2002 (Predecessor Company)............................................................2
Condensed Consolidated Statements of Cash Flows (Unaudited) -
One Month Ended March 31, 2003 (Successor Company),
Two Months Ended February 28, 2003 and
Three Months Ended March 31, 2002 (Predecessor Company) ...........................................3
Condensed Consolidated Statement of Members'/Partners'
Capital (Unaudited) - One Month Ended March 31, 2003 (Successor
Company) and Two Months Ended February 28, 2003 (Predecessor
Company)...........................................................................................4
Notes to Condensed Consolidated Financial Statements (Unaudited)......................................5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................................................28
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.....................................47
ITEM 4. Controls and Procedures........................................................................48
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..............................................................................49
ITEM 2. Changes in Securities and Use of Proceeds......................................................49
ITEM 3. Defaults Upon Senior Securities................................................................49
ITEM 6. Exhibits and Reports on Form 8-K...............................................................49
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Unit Amounts)
(Unaudited)
SUCCESSOR COMPANY | PREDECESSOR COMPANY
----------------- | ----------------------------------
ONE MONTH | TWO MONTHS THREE MONTHS
ENDED | ENDED ENDED
MARCH 31, 2003 | FEBRUARY 28, 2003 MARCH 31, 2002
-------------- | ----------------- --------------
|
|
Operating Revenue...................................... $ 28,774 | $ 77,887 $ 99,734
|
Cost of Sales.......................................... 14,247 | 43,827 37,677
Operating Expenses..................................... 12,121 | 19,116 32,349
Depreciation and Amortization- operating............... 1,924 | 5,041 8,337
-------------- | ------------- -------------
|
Gross Profit........................................... 482 | 9,903 21,371
-------------- | ------------- -------------
|
Selling, General and Administrative Expenses........... 3,993 | 7,069 12,675
Depreciation and Amortization- corporate & other....... 1 | 519 820
Other (Income) Expense................................. (139) | 42 (928)
-------------- | ------------- -------------
|
Operating Income (Loss)................................ (3,373) | 2,273 8,804
|
Interest Expense and Related Charges................... (3,301) | (5,645) (11,240)
Interest Income........................................ 23 | 58 18
Other, net............................................. 1 | 98 73
-------------- | ------------- -------------
|
Income (Loss) Before Reorganization Items, Net Gain on |
Discharge of Debt, Fresh Start Adjustments and |
Cumulative Effect of Accounting Changes............. (6,650) | (3,216) (2,345)
Reorganization Items (Note 2).......................... - | (7,330) -
Net Gain on Discharge of Debt (Note 2)................. - | 131,560 -
Fresh Start Adjustments (Note 3)....................... - | (56,771) -
-------------- | ------------- -------------
|
Income (Loss) Before Cumulative |
Effect of Accounting Changes........................ (6,650) | 64,243 (2,345)
Cumulative Effect of Accounting Changes (Note 9)....... - | (3,976) -
-------------- | ------------- -------------
|
Net Income (Loss)...................................... $ (6,650) | $ 60,267 $ (2,345)
============== | ============= =============
|
|
Basic Net Income (Loss) Per Unit (Note 6) |
Common Unit......................................... N/A | $ 0.12 $ (0.03)
============== | ============= =============
Subordinated Unit................................... N/A | $ - $ (0.19)
============== | ============= =============
|
LLC Unit............................................ $ (0.54) | N/A N/A
=============== | ============= =============
|
Diluted Net Income (Loss) Per Unit (Note 6)............ $ (0.54) | $ 0.08 $ (0.08)
=============== | ============= =============
|
Average Units Outstanding for Diluted Computation 12,317 | 27,476 27,476
============== | ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
1
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
SUCCESSOR | PREDECESSOR
COMPANY | COMPANY
------------- | -------------
MARCH 31, | DECEMBER 31,
2003 | 2002
------------- | -------------
|
ASSETS |
|
Current Assets |
Cash and cash equivalents................................................. $ 14,377 | $ 16,432
Trade and other receivables, net of allowance for doubtful |
accounts of $1,210 and $1,210, respectively............................. 472,401 | 407,096
Inventories............................................................... 31,157 | 33,554
Other..................................................................... 13,586 | 23,888
------------- | -------------
Total current assets.................................................... 531,521 | 480,970
------------- | -------------
|
Property, Plant and Equipment................................................ 330,999 | 598,925
Less: Accumulated depreciation............................................ 1,925 | 217,967
------------- | -------------
Net property, plant and equipment....................................... 329,074 | 380,958
------------- | -------------
|
Goodwill..................................................................... - | 7,436
------------- | -------------
|
Other Assets................................................................. 8,130 | 4,070
------------- | -------------
|
Total Assets................................................................. $ 868,725 | $ 873,434
============= | =============
|
LIABILITIES AND MEMBERS'/PARTNERS' CAPITAL |
|
Current Liabilities |
Trade accounts payable ................................................... $ 499,431 | $ 389,346
Accrued taxes payable..................................................... 5,621 | 11,327
Term loans (Note 7)....................................................... - | 75,000
Commodity repurchase agreement (Note 7)................................... - | 75,000
Receivable financing (Note 7)............................................. 40,000 | 50,000
Other..................................................................... 20,680 | 23,274
------------- | -------------
Total current liabilities............................................... 565,732 | 623,947
------------- | -------------
|
Long-Term Liabilities |
9% senior notes (Note 7).................................................. 98,800 | -
Term loans (Note 7)....................................................... 75,000 | -
Commodity repurchase agreement (Note 7)................................... 75,000 | -
Note payable to Enron Corp................................................ 5,799 | 5,212
Other..................................................................... 18,357 | 10,605
------------- | -------------
Total long-term liabilities............................................. 272,956 | 15,817
------------- | -------------
|
Liabilities Subject to Compromise (Note 2)................................... - | 292,827
------------- | --------------
|
Commitments and Contingencies (Note 8) |
|
Additional Partnership Interests (Note 5).................................... - | 9,318
------------ | -------------
|
Members'/Partners' Capital (Deficit)......................................... 30,037 | (68,475)
------------- | -------------
|
Total Liabilities and Members'/Partners' Capital............................. $ 868,725 | $ 873,434
============= | =============
The accompanying notes are an integral part of these
consolidated financial statements.
2
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
SUCCESSOR COMPANY | PREDECESSOR COMPANY
--------------------- | ---------------------------------
ONE MONTH | TWO MONTHS THREE MONTHS
ENDED | ENDED ENDED
MARCH 31, 2003 | FEBRUARY 28, 2003 MARCH 31, 2002
--------------------- | ----------------- --------------
|
CASH FLOWS FROM OPERATING ACTIVITIES |
Reconciliation of net income (loss) to net cash provided |
by (used in) operating activities |
Net income (loss)............................................ $ (6,650) | $ 60,267 $ (2,345)
Depreciation and amortization................................ 1,925 | 5,560 9,157
Net unrealized change in crude oil trading activities........ (895) | (2,120) (549)
Gains on disposal of assets.................................. (103) | - (24)
Non-cash net gain for reorganization items and discharge |
of debt...................................................... - | (127,185) -
Fresh start adjustments...................................... - | 56,771 -
Changes in components of working capital - |
Receivables................................................ (33,040) | (32,177) 40,200
Inventories................................................ (4,547) | 7,617 5,223
Other current assets....................................... (3,073) | 2,428 5,855
Trade accounts payable..................................... 30,731 | 49,500 (52,665)
Accrued taxes payable...................................... 883 | 1,717 2,021
Other current liabilities.................................. (407) | (320) 1,225
Other assets and liabilities................................. (1,026) | 2,530 3,966
---------- | ------------ ----------
Net Cash Provided by (Used in) Operating Activities............ (16,202) | 24,588 12,064
---------- | ------------ ----------
|
CASH FLOWS FROM INVESTING ACTIVITIES |
Proceeds from sale of property, plant and equipment............ 103 | - 107
Additions to property, plant and equipment..................... (259) | (285) (17,283)
---------- | ------------ ----------
|
Net Cash Used In Investing Activities.......................... (156) | (285) (17,176)
---------- | ------------ ----------
|
CASH FLOWS FROM FINANCING ACTIVITIES |
Increase (decrease) in receivable financing.................... (10,000) | - 7,500
Distributions to unitholders................................... - | - (4,712)
---------- | ------------ ----------
Net Cash Provided by (Used in) Financing Activities............ (10,000) | - 2,788
---------- | ------------ ----------
|
Increase (Decrease) in Cash and Cash Equivalents.................. (26,358) | 24,303 (2,324)
Cash and Cash Equivalents Beginning of Period..................... 40,735 | 16,432 2,941
---------- | ------------ ----------
Cash and Cash Equivalents End of Period........................... $ 14,377 | $ 40,735 $ 617
========== | ============ ==========
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
Cash Paid for Interest......................................... $ 2,084 | $ 5,599 $ 2,123
========== | ============ ==========
Cash Paid for Reorganization Items............................. $ 1,637 | $ 2,867 $ -
========== | ============ ==========
|
SUPPLEMENTAL NON CASH INVESTING AND FINANCING INFORMATION |
Discharge of 11% Senior Notes, including accrued interest...... $ - | $ 248,481 $ -
---------- | ------------ ----------
Cancellation of additional partnership interests............... $ - | $ 9,318 $ -
---------- | ------------ ----------
Issuance of 9% Senior Notes.................................... $ - $ 104,000 $ -
---------- | ------------ ----------
Issuance of new equity of Successor Company.................... $ - | $ 36,687 $ -
---------- | ------------ ----------
The accompanying notes are an integral part of these
consolidated financial statements.
3
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF MEMBERS'/PARTNERS' CAPITAL
(In Thousands)
(Unaudited)
PARTNERS' CAPITAL
-------------------------------------------
COMMON SUBORDINATED GENERAL MEMBERS'
UNITHOLDERS UNITHOLDERS PARTNER CAPITAL TOTAL
------------ ------------ ------- -------- -----
Partners' Capital (Deficit) at December 31, 2002
(Predecessor Company)............................ $ (2,135) $ - $ (66,340) $ - $ (68,475)
Loss Before Reorganization Items, Net Gain on
Discharge of Debt and Fresh Start Accounting
Adjustments...................................... - - (7,192) - (7,192)
Reorganization Items and Net Gain on Discharge of
Debt............................................. 15,700 36,705 80,033 36,687 169,125
Fresh Start Adjustments............................ (13,565) (36,705) (6,501) - (56,771)
--------- ---------- ----------- ---------- ------------
Members' Capital at February 28, 2003
(Successor Company).............................. $ - $ - $ - $ 36,687 $ 36,687
========= ========== =========== ========== ============
_______________________________________________________________________________________________________________________________
Members' Capital at February 28, 2003
(Successor Company).............................. $ - $ - $ - $ 36,687 $ 36,687
Net Loss........................................... - - - (6,650) (6,650)
--------- ---------- ----------- ---------- ------------
Members' Capital at March 31, 2003
(Successor Company).............................. $ - $ - $ - $ 30,037 $ 30,037
========= ========== =========== ========== ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
We are a Delaware limited liability company that was formed on November
14, 2002 as EOTT Energy LLC ("EOTT LLC") in anticipation of assuming and
continuing the business formerly directly owned by EOTT Energy Partners, L.P.
(the "MLP"), which, as described in Note 2 below, filed for Chapter 11
reorganization with its wholly owned subsidiaries on October 8, 2002. We emerged
from bankruptcy and we became the successor registrant to the MLP on March 1,
2003, the effective date of the Third Amended Joint Chapter 11 Plan of
Reorganization, as supplemented ("Restructuring Plan"). We operate principally
through four affiliated operating limited partnerships, EOTT Energy Operating
Limited Partnership, EOTT Energy Canada Limited Partnership, EOTT Energy
Pipeline Limited Partnership, and EOTT Energy Liquids L.P., each of which is a
Delaware limited partnership. In 1999, EOTT Energy Finance Corp. was formed in
connection with a debt offering to facilitate certain investors' ability to
purchase our 11% senior notes. In 2001, we formed EOTT Energy General Partner,
L.L.C., which serves as the general partner for our four affiliated operating
limited partnerships. Until our emergence from bankruptcy, EOTT Energy Corp.
(the "General Partner"), a Delaware corporation and a wholly-owned subsidiary of
Enron Corp. ("Enron"), served as the general partner of the MLP and owned an
approximate 1.98% general partner interest in the MLP. The General Partner also
filed for bankruptcy on October 21, 2002. Unless the context otherwise requires,
the terms "we" and "EOTT" refer to EOTT Energy LLC and our four affiliated
operating limited partnerships, EOTT Energy Finance Corp., and EOTT Energy
General Partner, L.L.C. (the "Subsidiary Entities"), and for periods prior to
our emergence from bankruptcy in March 2003, "we" and "EOTT" refer to EOTT
Energy Partners, L.P. and its sole general partner EOTT Energy Corp., as well as
the Subsidiary Entities.
The financial statements presented herein have been prepared by EOTT in
accordance with generally accepted accounting principles in the United States
and the rules and regulations of the Securities and Exchange Commission. Interim
results are not necessarily indicative of results for a full year. The financial
information included herein has been prepared without audit. The condensed
consolidated balance sheet at December 31, 2002 has been derived from, but does
not include all the disclosures contained in the audited financial statements
for the year ended December 31, 2002. In the opinion of management, all of these
unaudited statements include all adjustments and accruals consisting only of
normal recurring adjustments, except for those relating to fresh start reporting
which are more fully discussed below, which are necessary for a fair
presentation of the results of the interim periods reported herein. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and accompanying notes included in our
Annual Report on Form 10-K for the year ended December 31, 2002.
As a result of the application of fresh start reporting under the American
Institute of Certified Public Accountants Statement of Position No. 90-7 ("SOP
90-7"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code," as of February 28, 2003 (the date chosen for accounting purposes), EOTT's
financial results for the quarter ended March 31, 2003 include two different
bases of accounting and accordingly, the financial condition, operating results
and cash flows of the Successor Company and the Predecessor Company have been
separately disclosed. For a further discussion of fresh start reporting, see
Note 3 to the Condensed Consolidated Financial Statements. For purposes of these
financial statements, references to the "Predecessor Company" are references to
EOTT for periods through February 28, 2003 (the last day of the calendar month
in which EOTT emerged from bankruptcy) and references to the "Successor Company"
are references to EOTT for periods subsequent to February 28, 2003. The
Successor Company's financial statements are not comparable to the Predecessor
Company's financial statements. See further discussion in Note 3.
As a limited liability company, we are generally treated like a
partnership for federal income tax purposes and like a corporation with limited
liability for state law and other non-tax purposes. In other words, for federal
income tax purposes, we do not pay tax on our income or gain, nor are we
entitled to a deduction for our losses, but such gains or losses are allocated
to each member in accordance with the member's interest
5
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
in us and the member will be responsible for paying the income tax applicable to
such membership interest. Our taxable income or loss, which may vary
substantially from the net income or net loss we report in our consolidated
statement of operations, is includable in the federal income tax returns of our
members. The aggregate difference in the basis of our net assets for financial
and tax reporting purposes cannot be readily determined as we do not have access
to information about each member's tax attributes in EOTT. Under our Limited
Liability Company Agreement (the "LLC Agreement"), the Board may, but is not
required, to make distributions to each interest holder, and in any event, our
credit facilities do not permit us to make any cash distributions. Members do
not share our liability the same way that shareholders do not share the
liability of a corporation. Under our LLC Agreement, members are also entitled
to certain information about the company; and to vote for directors and on
certain other matters. The holders of the majority of outstanding units have the
right to vote on mergers and the election or removal of directors. The holders
of two-thirds of the units have the right to approve additional issuances of
equity and certain amendments to the LLC Agreement. Members are not entitled to
participate in our management directly, but participate indirectly through the
election of our directors.
Certain reclassifications have been made to prior period amounts to
conform with the current period presentation. For all periods presented,
traditional net income (loss) and comprehensive income (loss) are the same.
2. BANKRUPTCY PROCEEDINGS AND RESTRUCTURING PLAN
On October 8, 2002 (the "Petition Date"), the MLP and the Subsidiary
Entities filed pre-negotiated voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code (the "EOTT Bankruptcy"). The
filing was made in the United States Bankruptcy Court for the Southern District
of Texas, Corpus Christi Division (the "EOTT Bankruptcy Court"). Additionally,
the General Partner filed a voluntary petition for reorganization under Chapter
11 on October 21, 2002 in the EOTT Bankruptcy Court in order to join in the
voluntary, pre-negotiated Restructuring Plan. On October 24, 2002, the EOTT
Bankruptcy Court administratively consolidated, for distribution purposes, the
General Partner's bankruptcy filing with the previously filed cases. We operated
as debtors-in-possession under the Bankruptcy Code, which means we continued to
remain in possession of our assets and properties and continued our day-to-day
operations. The EOTT Bankruptcy Court confirmed our Restructuring Plan on
February 18, 2003, and it became effective March 1, 2003.
We entered into an agreement, dated October 7, 2002, with Enron, Standard
Chartered Bank ("Standard Chartered"), Standard Chartered Trade Services
Corporation ("SCTS"), Lehman Commercial Paper Inc. ("Lehman Commercial") and
holders of approximately 66% of the outstanding principal amount of our 11%
senior notes (the "Restructuring Agreement"). Under this Restructuring
Agreement, Enron, Standard Chartered, SCTS, Lehman Commercial and approximately
66% of our 11% senior note holders agreed to vote in favor of the Restructuring
Plan, and to refrain from taking actions not in support of the Restructuring
Plan.
The Restructuring Plan, however, was subject to the approval of the EOTT
Bankruptcy Court, and the settlement agreement with Enron was subject to the
additional approval of the United States Bankruptcy Court for the Southern
District of New York (the "Enron Bankruptcy Court"), where Enron and certain of
its affiliates filed for Chapter 11 bankruptcy protection. The EOTT Bankruptcy
Court approved the settlement agreement with Enron on November 22, 2002, and the
Enron Bankruptcy Court approved the settlement agreement on December 5, 2002.
The major provisions of the Restructuring Plan, which became effective March 1,
2003, are as follows:
o Enron has no further affiliation with us. The General Partner
will be liquidated as soon as reasonably possible with no material
effect to EOTT.
6
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
o We consummated the settlement agreement with Enron effective
December 31, 2002.
o EOTT was converted to a limited liability company structure and
EOTT LLC became the successor registrant to the MLP. The MLP was
merged into EOTT Energy Operating Limited Partnership. EOTT LLC
manages the current operating limited partnerships.
o We are now managed by a seven-member Board of Directors. One of
the directors is the chief executive officer of EOTT LLC, and the
remaining six directors were selected by the former senior
noteholders, who signed the Restructuring Agreement.
o We cancelled our outstanding $235 million of 11% senior unsecured
notes. Our former senior unsecured noteholders and holders of
allowed general unsecured claims will receive a pro rata share of
$104 million of 9% senior unsecured notes and a pro rata share of
11,947,820 limited liability company units of EOTT LLC
representing 97% of the newly issued units. The $104 million
senior unsecured notes and 11,947,820 units are deemed to be
issued and outstanding for purposes of these financial statements.
As of March 31, 2003, the $104 million senior unsecured notes and
the 11,947,820 units had not been distributed. See further
discussion in Note 5 and Note 7.
o We cancelled the MLP's publicly traded common units, and the
former holders of the MLP's common units received 369,520 limited
liability company units of EOTT LLC representing 3% of newly
issued units and 957,981 warrants to purchase an additional 7% of
the new units. We cancelled the subordinated units and additional
partnership interests. See Note 5.
o We are authorized and the board has approved the development of a
management incentive plan. The incentive plan may reserve up to
approximately 10% of EOTT LLC's authorized units for issuance to
certain key employees and directors.
o We closed exit credit facilities with Standard Chartered, SCTS,
Lehman Brothers Inc. ("Lehman"), and other lenders on February 28,
2003. The Term Loan Agreement and Letter of Credit Agreement under
these facilities each have a term of 18 months post-bankruptcy
under substantially the same terms as the debtor in possession
facilities discussed in Note 7, with the inclusion of certain
additional financial covenants. The inventory repurchase and trade
receivables financing arrangements with SCTS under these exit
credit facilities each have an initial term of 6 months. We have
the option to extend these arrangements for an additional 12
months subject to the payment of extension fees in the amount of
1% per annum of the maximum commitment under these arrangements
and an increase in the interest rate of LIBOR plus 3% to LIBOR
plus 7%. See further discussion in Note 7.
As a result of the confirmation of our Restructuring Plan, the following
liabilities that were deemed subject to compromise were either discharged by the
EOTT Bankruptcy Court or retained as ongoing obligations of the Successor
Company. Estimated liabilities subject to compromise at December 31, 2002 were
as follows (in thousands):
7
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11% Senior Notes...................................................... $ 235,000
Interest payable - 11% Senior Notes................................... 13,481
Accounts payable and suspense payable................................. 34,876
Allowed claims for environmental settlements and contingencies........ 7,970
Other ................................................................ 1,500
------------
Total........................................................... $ 292,827
============
The following reorganization items and net gain on discharge of debt,
which were specifically related to the EOTT Bankruptcy, were recorded during the
two months ended February 28, 2003 (in thousands):
Reorganization items - legal and professional fees........... $ (7,330)
Net gain on discharge of 11% senior notes,
related accrued interest and other debt(1)............... $ 131,560
(1) The gain on discharge of debt was recorded net of the 9% senior
notes and limited liability units issued to the creditors upon
emergence from bankruptcy.
3. FRESH START REPORTING
As previously discussed, the unaudited condensed consolidated financial
statements reflect the adoption of fresh start reporting required by SOP 90-7
for periods subsequent to EOTT's emergence from bankruptcy. In accordance with
the principles of fresh start reporting, EOTT has adjusted its assets and
liabilities to their fair values as of February 28, 2003. The net effect of the
fresh start reporting adjustments was a loss of $56.8 million, which is
reflected in the results of operations of the Predecessor Company for the two
months ended February 28, 2003.
The enterprise value of EOTT on the effective date of the Restructuring
Plan was determined to be approximately $363 million. The enterprise value was
determined with the assistance of a third party financial advisor using
discounted cash flow, comparable transaction and capital market comparison
analyses, adjusted for the actual working capital as of the effective date of
the Restructuring Plan. The discounted cash flow analyses were based upon five
year projected financial results, including an assumption for terminal values
using cash flow multiples, discounted at EOTT's estimated post-restructuring
weighted-average cost of capital.
Pursuant to SOP 90-7, the reorganization value of EOTT on the effective
date of the Restructuring Plan was determined to be approximately $856 million,
which represented the enterprise value plus the fair value of current
liabilities exclusive of funded debt on February 28, 2003. We have allocated the
reorganization value as of February 28, 2003 to tangible and identifiable
intangible assets in conformity with SFAS No. 141, "Business Combinations",
using discounted cash flow and replacement cost valuation analyses, and
liabilities, including debt, were recorded at their net present values.
Independent third-party valuation specialists were used to determine the
allocation of the reorganization value to our tangible and identifiable
intangible assets and to determine the fair value of our long-term liabilities.
The valuations were based on a number of estimates and assumptions, which
are inherently subject to significant uncertainties and contingencies beyond our
control. Accordingly, there can be no assurance that the valuations will be
realized, and actual results could vary significantly. The determination of the
fair values are substantially complete; however, estimates of certain assets and
liabilities are based on preliminary information and are subject to revisions as
information is finalized. We do not believe that the final
8
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
determination of the fair values will have a material effect on our financial
position or future results of operations.
The effects of the reorganization pursuant to the Restructuring Plan and
the application of fresh start reporting on the Predecessor Company's
consolidated balance sheet as of February 28, 2003 are as follows:
Debt Discharge
Predecessor Company and Reclass Fresh Start Successor Company
February 28, 2003 Adjustments Adjustments February 28, 2003
------------------- -------------- ----------- -----------------
Assets
Current Assets
Cash and cash equivalents.............. $ 40,735 $ - $ - $ 40,735
Trade and other receivables............ 439,361 - - 439,361
Inventories............................ 25,860 - 750 (g) 26,610
Other.................................. 12,911 - (2,021)(h) 10,890
---------------- ------------ ------------- -------------
Total current assets............. 518,867 - (1,271) 517,596
---------------- ------------ ------------- -------------
Property, Plant and Equipment, at cost. 598,633 - (267,654)(i) 330,979
Less: Accumulated depreciation......... 223,188 - (223,188)(i) -
---------------- ------------ ------------- -------------
Net property, plant and equipment. 375,445 - (44,466) 330,979
---------------- ------------ ------------- -------------
Goodwill .............................. 7,436 - (7,436)(j) -
---------------- ------------ ------------- -------------
Other Assets........................... 10,762 - (2,880)(h) 7,882
---------------- ------------ ------------- -------------
Total Assets...................... $ 912,510 $ - $ (56,053) $ 856,457
================ ============ ============== =============
Liabilities and Members'/Partners' Capital
Current Liabilities
Trade and other accounts payable....... $ 451,294 $ 17,406(a) $ - $ 468,700
Accrued taxes payable.................. 13,045 (8,307)(b) - 4,738
Term loans............................. 75,000 (75,000)(c) - -
Repurchase agreement................... 75,000 (75,000)(c) - -
Receivable financing................... 50,000 - - 50,000
Other.................................. 19,226 2,815(a)(b) 318(k) 22,359
---------------- ------------ ------------- -------------
Total current liabilities......... 683,565 (138,086) 318 545,797
---------------- ------------ ------------- --------------
Long-Term Liabilities
9% Senior Notes........................ - 98,800(d) - 98,800
Term loans............................. - 75,000(c) - 75,000
Repurchase agreement................... - 75,000(c) - 75,000
Ad valorem tax liability............... - 6,992(b) - 6,992
Other.................................. 17,781 - 400(k) 18,181
---------------- ------------ ------------- --------------
Total long-term liabilities....... 17,781 255,792 400 273,973
---------------- ------------ ------------- --------------
Liabilities Subject to Compromise...... 284,843 (284,843)(a) - -
Additional Partnership Interests....... 9,318 (9,318)(e) - -
Member's/Partner's Capital (Deficit) .. (82,997) 176,455 (f) (56,771) 36,687
---------------- ------------ ------------- -------------
Total Liabilities and
Members'/Partners' Capital......... $ 912,510 $ - $ (56,053) $ 856,457
================ ============ ============= =============
Notes:
(a) Liabilities subject to compromise have been adjusted to reflect the
settlement of the claims and discharge of the 11% senior notes and
related accrued interest in connection with the Restructuring Plan. See
further discussion in Note 2.
(b) To reclassify current and long-term amounts due to taxing authorities
for accrued but unpaid ad valorem taxes in connection with the
Restructuring Plan.
(c) To reflect the refinancing on a long term basis of amounts outstanding
under the DIP Financing Facilities.
9
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(d) To reflect the issuance of 9% senior unsecured notes (face amount of
$104 million) to all former senior noteholders and general unsecured
creditors with allowed claims in connection with the Restructuring
Plan, recorded at fair value.
(e) To reflect the cancellation of the additional partnership interests in
connection with the Restructuring Plan.
(f) To reflect the issuance of limited liability units pursuant to the
Restructuring Plan and the net gain on extinguishment of debt.
(g) To adjust inventory to fair value.
(h) To reflect the elimination of deferred turnaround costs, which are
included in the fair value of property, plant and equipment of the
Successor Company.
(i) To adjust property, plant, and equipment to fair value.
(j) To reflect the elimination of goodwill resulting from the fair value
allocation.
(k) To reflect the Enron and Big Warrior notes at fair value.
4. PROPERTY, PLANT AND EQUIPMENT
As discussed in Note 3, property plant and equipment was adjusted to fair
value due to the adoption of fresh start reporting as required by SOP 90-7. The
components of gross property, plant and equipment and accumulated depreciation
at March 31, 2003 and December 31, 2002 are as follows (in thousands):
Successor | Predecessor
Company | Company
March 31, 2003 | December 31, 2002
-------------- | -----------------
|
Operating PP&E, including pipelines, storage tanks, etc. $ 283,229 | $ 494,849
Liquids hydrocarbon processing & storage facilities 35,980 | 33,416
Office PP&E, buildings and leasehold improvements 1,627 | 53,580
Tractors, trailers and other vehicles 2,881 | 11,694
Land 7,282 | 5,386
-------------- | --------------
330,999 | 598,925
Less: Accumulated Depreciation 1,925 | 217,967
-------------- | --------------
$ 329,074 | $ 380,958
=============== | ==============
As discussed in Note 3, the determination of fair values is substantially
complete; however, estimates of certain assets and liabilities are based on
preliminary information and are subject to revisions as information is
finalized.
5. CAPITAL
Prior to the confirmation of the Restructuring Plan, EOTT had 18,476,011
common units, 9,000,000 subordinated units and $9,318,213 of additional
partnership interests outstanding. As contemplated by the Restructuring Plan,
the common and subordinated units and the additional partnership interests were
cancelled.
As part of the Restructuring Plan, 14,475,321 new limited liability
company units ("LLC units") were authorized. Holders of common units received
369,520 LLC units and 957,981 warrants to purchase additional LLC units. The
warrants have a five year term and a strike price of $12.50 and a fair value of
$0.01 per warrant as of the effective date of the Restructuring Plan. Holders of
EOTT's former 11% senior notes and general unsecured creditors with allowed
claims will receive their pro rata allocation of 11,947,820 LLC units. The
11,947,820 LLC units are deemed to be issued and outstanding for purposes of
these financial statements; however, the allocation of the 11,947,820 LLC units
cannot be determined until the precise amount of each allowed claim is
determined. This process is underway in the EOTT Bankruptcy Court and is
expected to be completed no sooner than August 2003. Until the claims are fully
resolved, we cannot allocate the 11,947,820 LLC units issued to our creditors
under the Restructuring Plan. This will adversely affect our ability to seek
unitholder approval for any matters requiring such approval because until the
final allocation is made we will not know how many units each of our unitholders
is entitled to. In addition, 1.2 million LLC units have been reserved for a
management incentive plan and the board has approved the development of a plan.
10
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The LLC units and the warrants were issued pursuant to an exemption from
the registration requirements of the Securities Act of 1933, as amended (the
"Securities Act") and applicable state law, pursuant to the exemptions afforded
under Section 1145, Title 11 of the U.S. Bankruptcy Code. The LLC units and the
warrants have been registered pursuant to the Securities Exchange Act of 1934,
as amended (the "Exchange Act") pursuant to Section 12(g) and we are therefore a
reporting company under the Exchange Act. Neither the LLC units nor the warrants
are traded on any national exchange or pursuant to an automated quotation system
administered by the National Association of Securities Dealers ("NASD").
The LLC units issued pursuant to the Restructuring Plan are subject to the
terms of a Registration Rights Agreement effective March 1, 2003. Following
completion of the audit of our financial statements for the year ending December
31, 2003, the holders of at least 10% of the securities eligible for
registration under the terms of the Registration Rights Agreement will be
entitled to demand registration of their LLC units, subject to certain
conditions. The Registration Rights Agreement also provides for customary
piggyback registration rights entitling holders of LLC units to include their
units in any registration in which we may engage, subject to certain conditions.
We will be required to pay all registration expenses in connection with any such
registrations.
The LLC units are subject to the terms of an LLC Agreement, which, among
other things, restricts the issuance of additional equity interests in the LLC
without the approval of holders of at least two-thirds of the outstanding units.
6. EARNINGS PER UNIT
Basic earnings per unit includes the weighted average impact of
outstanding units of EOTT (i.e., it excludes unit equivalents). Diluted earnings
per unit considers the impact of all potentially dilutive securities.
Predecessor Company
Net income (loss) shown in the table below excludes the amount allocated
to the General Partner. Earnings (loss) per unit are calculated as follows (in
thousands, except per unit amounts):
11
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Two Months Ended February 28, 2003 Three Months Ended March 31, 2002
---------------------------------- ---------------------------------
Wtd. Wtd.
Net Average Per Net Average Per
Income Units Unit (Loss) Units Unit
----- ------- ------- -------- ------- --------
Basic: (1)
Common $ 2,135 18,476 $ 0.12 $ (553) 18,476 $ ( 0.03)
Subordinated $ - 9,000 $ - $ (1,688) 9,000 $ (0.19)
Diluted (2) $ 2,135 27,476 $ 0.08 $ (2,241) 27,476 $ (0.08)
(1) Net income (loss), excluding the approximate two percent General Partner
interest, has been apportioned to each class of unitholder based on the
ownership of total units outstanding in accordance with the Partnership
Agreement. Net losses are not allocated to the common and subordinated
unitholders to the extent that such allocations would cause a deficit
capital account balance or increase any existing deficit capital account
balance. Any remaining losses are allocated to the General Partner as a
result of the balances in the capital accounts of the common and
subordinated unitholders. Effective with the fourth quarter of 2002, all
losses were being allocated to the General Partner. The disproportionate
allocation of 2002 net losses among the unitholders and the General
Partner was recouped during the two months ended February 28, 2003.
(2) The diluted earnings (loss) per unit calculation assumes the conversion
of subordinated units into common units.
Successor Company
Basic and diluted net income (loss) per unit for the Successor Company is
a $0.54 loss for the one month ended March 31, 2003. The warrants outstanding
were determined to be antidilutive during the period.
7. CREDIT RESOURCES
Summary of Debtor in Possession ("DIP") Financing
On October 18, 2002, we entered into agreements with Standard Chartered,
SCTS, Lehman and other lending institutions for $575 million in DIP financing
facilities. The DIP facilities provided (i) $500 million of credit and financing
facilities through Standard Chartered and SCTS, which included up to $325
million for letters of credit and $175 million of inventory repurchase/accounts
receivable financing through SCTS, and (ii) $75 million of term loans through
Lehman and other lending institutions. The credit facilities were subject to a
borrowing base and were secured by a first-priority lien on all, or
substantially all, of our real and personal property. As of February 28, 2003,
we had outstanding approximately $313.1 million of letters of credit, $125.0
million of inventory repurchase/accounts receivable financing, and $75 million
of term loans. The DIP financing facilities contained certain restrictive
covenants that, among other things, limited distributions, other debt, and
certain asset sales. On February 28, 2003, the DIP financing facilities were
refinanced by the same institutions as we emerged from bankruptcy. The following
discussion provides an overview of our post-bankruptcy debt.
Summary of Exit Credit Facilities, Senior Notes, and Other Debt
EOTT LLC's emergence from bankruptcy as of March 1, 2003, was financed
through a combination of exit credit facilities, senior notes and other debt
associated with settlement of claims during our bankruptcy proceedings. The
table below provides a summary of these financing arrangements as of March 31,
2003.
12
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF FINANCING ARRANGEMENTS
(IN MILLIONS)
COMMITMENT/ AMOUNT
FACE AMOUNT OUTSTANDING MATURITY
------------ ------------ --------
Exit Credit Facilities:
Letter of Credit Facility $ 325.0 $ 313.5 August 30, 2004
Receivables Purchase Agreement 100.0* 40.0 August 30, 2003**
Commodity Repurchase Agreement 75.0 75.0 August 30, 2003**
Term Loans 75.0 75.0 August 30, 2004
Senior Notes 104.0 98.8 March 1, 2010***
Other Debt:
Enron Note 6.2 7.2 October 1, 2005***
Big Warrior Note 2.7 2.4 March 1, 2007***
Ad Valorem Tax Liability 8.3 8.3 March 1, 2009
* $50 million of this commitment is unavailable ten days each month.
** Renewable for 12 months at our option in exchange for an extension fee of
1%.
*** These notes were adjusted to fair value pursuant to the adoption of fresh
start reporting required by SOP 90-7.
The following is a summary of our debt maturities at March 31, 2003 (in
millions):
After
2003 2004 2005 2006 2007 2007 Total
-------- -------- -------- -------- -------- -------- ---------
9% Senior Notes.............. $ - $ - $ - $ - $ - $ 104.0 $ 104.0
Term Loans................... - 75.0 - - - - 75.0
Commodity Repurchase
Agreement(1).............. 75.0 - - - - - 75.0
Receivables Purchase
Agreement(1).............. 40.0 - - - - - 40.0
Enron Note................... 1.0 1.0 4.2 - - - 6.2
Big Warrior Note............. 0.2 0.3 0.4 0.4 1.4 - 2.7
Ad Valorem Tax Liability..... 1.0 1.4 1.5 1.5 1.6 1.3 8.3
-------- -------- -------- -------- -------- -------- ---------
$ 117.2 $ 77.7 $ 6.1 $ 1.9 $ 3.0 $ 105.3 $ 311.2
======== ======== ======== ======== ======== ======== =========
(1) We have the intent and ability to extend the maturity date to August 30,
2004.
Exit Credit Facilities
On February 11, 2003, we entered into our exit credit facilities with the
same lenders and under substantially the same terms in the DIP financing
facilities. These new facilities were closed on February 28, 2003 and $2.9
million of facility and extension fees were paid in connection with these new
facilities, which is being amortized as interest expense over the terms of the
facilities.
Letter of Credit Facility
The Letter of Credit Facility with Standard Chartered provides $325
million of financing until August 30, 2004 and is subject to defined borrowing
base limitations. The borrowing base is the sum of (i) cash equivalents,
specified percentages of eligible receivables, deliveries, fixed assets,
inventory, margin deposits and undrawn product purchase letters of credit, minus
(as of the date of determination) (ii) first purchase crude payables, other
13
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
priority claims, aggregate net amounts payable by the borrowers under all
hedging contracts and certain eligible receivables arising from future crude oil
obligations, minus (iii) the principal amount of loans outstanding and any
accrued and unpaid fees and expenses under the Term Loans, minus (iv) all
outstanding amounts under the Amended and Restated Commodity Repurchase
Agreement and the Amended and Restated Receivables Purchase Agreement ("SCTS
Purchase Agreements").
The Letter of Credit Facility required an upfront facility fee of $1.25
million that was paid at closing. An additional reduction fee of $2.5 million
will be payable on March 29, 2004, if Standard Chartered's exposure is not
reduced to $200 million or less by that date. Letter of credit fees range from
2.25% to 2.75% per annum depending on usage. The commitment fee is 0.5% per
annum of the unused portion of the Letter of Credit Facility. Additionally, we
agreed to a fronting fee, which is the greater of 0.25% per annum times the face
amount of the letter of credit or $250. An annual arrangement fee of 1% per
annum times the average daily maximum facility amount, as defined in the Letter
of Credit Facility, is payable on a monthly basis.
The Letter of Credit Facility includes the following monthly covenants:
(1) minimum earnings before interest, depreciation and amortization ("EBIDA");
(2) minimum interest coverage (EBIDA/cash interest expense); (3) minimum current
ratio (adjusted current assets/adjusted current liabilities); and (4) minimum
adjusted consolidated tangible net worth. The minimum EBIDA and interest
coverage tests are based on a rolling, cumulative four-month basis and measured
monthly. In addition, there are certain restrictive covenants that, among other
things, limit distributions, redemptions, other debt, certain asset sales,
mergers and change in control transactions. We do not expect to make
distributions to our unitholders in the foreseeable future due to restrictions
in our exit credit facilities.
SCTS Purchase Agreements
We have an agreement with SCTS similar to our pre-bankruptcy inventory
repurchase agreement, which provides for the financing of purchases of crude oil
inventory utilizing a forward commodity repurchase agreement ("Commodity
Repurchase Agreement"). The maximum commitment under the Commodity Repurchase
Agreement is $75 million. It required an upfront facility fee of approximately
$378,000 and carries an interest rate of LIBOR plus 3%. The Commodity Repurchase
Agreement has an initial term of six months to August 30, 2003, at which time we
have the option to extend for an additional twelve months. We intend to extend
the maturity date which will require the payment of an extension fee of $750,000
and the interest rate will increase to LIBOR plus 7%. As a result of our intent
and ability to extend the maturity, the amount outstanding has been classified
as long-term in the March 31, 2003 Condensed Consolidated Balance Sheet.
In addition, we also have an agreement with SCTS similar to our
pre-bankruptcy trade receivables agreement, which provides for the financing of
up to an aggregate amount of $100 million of certain trade receivables ("Trade
Receivables Agreement") outstanding at any one time. The discount fee is LIBOR
plus 3% and an upfront facility fee of approximately $504,000 was paid. The
Trade Receivables Agreement has an initial term of six months to August 30,
2003, at which time we have the option to extend for an additional twelve
months. We intend to extend the maturity date which will require the payment of
an extension fee of $1 million and the interest rate will increase to LIBOR plus
7%.
Term Loan Agreement
We entered into an agreement with Lehman Brothers Inc. ("Lehman"), as Term
Lender Agent, and other lenders (collectively, "Term Lenders"), which provides
for term loans in the aggregate amount of $75 million (the "Term Loans"). The
Term Loans mature on August 30, 2004.
The financing included two term notes. The Tier-A Term Note is for $50
million with a 9% per annum interest rate. The Tier-B Term Note is for $25
million with a 10% per annum interest rate. Interest is payable monthly on both
notes. An upfront fee of $750,000 was paid and we agreed to pay a deferred
financing fee in the
14
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
aggregate amount of $2 million on the maturity date of the Term Loans. This
latter fee was fully accrued as of February 28, 2003.
The Term Loans are collateralized and have certain repayment priorities
with respect to collateral proceeds pursuant to the Intercreditor and Security
Agreement that is discussed below. Under the Term Loan Agreement, term loan debt
outstanding is subject to a borrowing base as defined in the Letter of Credit
Agreement. Further, the Term Loan Agreement contains financial covenants that
mirror those outlined above in the discussion of the Letter of Credit Facility.
Intercreditor and Security Agreement
In connection with the Letter of Credit Facility, the Term Loans and the
SCTS Purchase Agreements, we entered into the Intercreditor and Security
Agreement ("Intercreditor Agreement") with Standard Chartered, Lehman, SCTS and
various other secured parties ("Secured Parties"). This agreement provides for
the sharing of collateral among the Secured Parties and prioritizes the
application of collateral proceeds which provides for repayment of the Tier-A
Term Note and the Standard Chartered letter of credit exposure above $300
million prior to other secured obligations.
In addition, to the extent that drawings are made on any letters of
credit, Standard Chartered, as collateral agent, may distribute funds from our
debt service payment account to itself (as letter of credit issuer agent on
behalf of the letter of credit issuer) as needed to allow EOTT LLC to reimburse
Standard Chartered, as letter of credit issuer, for such drawings.
Senior Notes
On October 1, 1999, we issued to the public $235 million of 11% senior
notes. The senior notes were due October 1, 2009, and interest was paid
semiannually on April 1 and October 1. The senior notes were fully and
unconditionally guaranteed by all of our operating limited partnerships but were
otherwise unsecured. On October 1, 2002, we did not make the interest payment of
$12.9 million on our $235 million 11% senior notes. These notes were cancelled
effective March 1, 2003 as a result of our Restructuring Plan and the holders of
these notes, along with our general unsecured creditors with allowed claims,
will receive a pro rata share of $104 million of 9% senior unsecured notes, plus
new EOTT LLC units.
EOTT LLC Senior Notes 2010
In February 2003, we issued $104 million of 9% senior unsecured notes
which will be allocated to former holders of the 11% senior notes described
above and our general unsecured creditors with allowed claims. However, the
exact pro rata allocation of the senior notes cannot be determined until the
precise amount of each allowed claim is determined. This process is underway in
the EOTT Bankruptcy Court as part of our Restructuring Plan and is expected to
be completed no sooner than August 2003. The senior notes are due in March 2010,
and interest will be paid semiannually on September 1 and March 1 with the first
payment on September 1, 2003. Under the terms of the indenture governing our
senior notes, we are allowed to pay interest payments in kind by issuing
additional senior notes on the first two interest payment dates. If we make
payments in kind, we must make the payments as if interest were being charged at
10% per annum instead of 9% per annum. We may not optionally redeem the notes.
The notes are subject to mandatory redemption or sinking fund payments if we
sell assets and use the money for certain purposes or if we have a change of
control. Provisions of the indenture could limit additional borrowings, sale and
lease back transactions, affiliate transactions, purchases of our own equity,
payments on debt subordinated to the senior notes, distributions to members,
certain merger, consolidation or change in control transactions, or sale of
assets if certain financial performance ratios are not met.
15
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Enron Note and Big Warrior Note
In connection with our settlement with Enron as part of the Restructuring
Plan, we executed a $6.2 million note payable to Enron ("Enron Note") that is
guaranteed by our subsidiaries. The Enron Note is secured by an irrevocable
letter of credit and bears interest at 10% per annum. Interest is paid
semiannually and we are allowed to pay interest payments in kind on the first
two interest payment dates. Principal payments of $1 million are payable in
October 2003 and October 2004 with the remaining principal due in October 2005.
In connection with a settlement with Big Warrior Corporation ("Big
Warrior") during our bankruptcy, we executed a $2.7 million note payable to Big
Warrior, which is secured by a second lien position in one of our Mississippi
pipelines. The four-year note is payable in quarterly installments, based on a
seven-year amortization schedule, at an interest rate of 6% per annum, with the
first payment to be made on June 1, 2003. A final balloon payment is due March
1, 2007.
Ad Valorem Tax Liability
In conjunction with our Restructuring Plan, we agreed to pay accrued but
unpaid ad valorem taxes over six years from the effective date of our
Restructuring Plan. This debt bears interest at 6% with quarterly principal and
interest payments starting June 1, 2003.
General
We anticipate that our cash requirements, including sustaining capital
expenditures for the foreseeable future, will be funded primarily from cash on
hand, cash generated from operations, and our exit credit facilities, including
the inventory repurchase agreement and receivables purchase agreement discussed
above.
Our ability to obtain letters of credit to support our purchases of crude
oil and feedstocks is fundamental to our crude oil gathering and marketing
activities and Liquids Operations. As a result of the Enron bankruptcy filing
and our subsequent bankruptcy filing, our trade creditors have been less willing
to extend credit to us on an unsecured basis and we have had to significantly
reduce our marketing activities due to the amount of credit support available to
us under our credit facilities. Although we emerged from bankruptcy on March 1,
2003, we remain highly leveraged with substantial financing costs. Therefore, we
can give no assurance that we will not be required to further reduce or restrict
our gathering and marketing activities because of continuing limitations on our
ability to obtain credit support and financing for our working capital needs.
Our ability to fund our liquidity and working capital requirements through
available cash, cash generated from operations and our exit credit facilities is
based on our ability to successfully implement our Restructuring Plan. Any
material decrease in our financial strength may make it difficult to meet our
debt covenants and, therefore, adversely affect our ability to fund our working
capital needs and obtain letters of credit, or may increase the cost thereof.
Additionally, we can give no assurance that our lenders will renew our
facilities when they mature on August 30, 2004.
Our ability to meet financial covenants in the future may be affected by
events beyond our control. While we currently expect to be in compliance with
the covenants going forward, there can be no assurance that we will be in
compliance with the covenants in the future or that we will be able to obtain
amendments to the exit credit facilities, if so needed.
16
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES
Operating Leases. There was no significant change in our commitments
related to operating leases as a result of the bankruptcy.
Litigation. We are, in the ordinary course of business, a defendant in
various lawsuits, some of which are covered in whole or in part by insurance. We
believe that the ultimate resolution of litigation, individually and in the
aggregate, will not have a materially adverse impact on our financial position
or results of operations. Generally, as a result of our bankruptcy, all pending
litigation against us was stayed while we continued our business operations as
debtors in possession. Several litigation claims were settled during the course
of the bankruptcy proceedings or are still being negotiated post confirmation.
Additionally, we agreed to lift the stay as to certain proceedings we permitted
to continue. How each matter was or is being handled is set forth in the summary
of each case. For matters where the parties negotiated a settlement during our
bankruptcy proceedings, the settlement amount was recorded at December 31, 2002
as an allowed general unsecured claim in "Other income (expense)" in the
Consolidated Statement of Operations. In connection with our Restructuring Plan,
general unsecured creditors with allowed claims will receive a pro rata share of
$104 million of 9% senior unsecured notes and a pro rata share of 11,947,820
EOTT LLC units. Prior to and since the commencement of our bankruptcy
proceedings, various legal actions arose in the ordinary course of business, the
most significant of which are discussed below.
Assessment for Crude Oil Production Tax from the Comptroller of Public
Accounts, State of Texas. We received a letter from the Comptroller's Office
dated October 9, 1998, assessing us for severance taxes the Comptroller's Office
alleges are due based on a difference the Comptroller's Office believes exists
between the market value of crude oil and the value reported on our crude oil
tax report for the period of September 1, 1994 through December 31, 1997. The
letter states that the action, based on a desk audit of our crude oil production
reports, is partly to preserve the statute of limitations where crude oil
severance tax may not have been paid on the true market price of the crude oil.
The letter further states that the Comptroller's position is similar to claims
made in several lawsuits, including a royalty suit brought by the State of
Texas, in which the Partnership is a defendant. The amount of the assessment,
including penalty and interest, is approximately $1.1 million. We believe we
should be without liability in this or related matters. There has been no action
on this matter since early 1999. The Comptroller's office filed a claim in our
bankruptcy proceedings but subsequently withdrew their claim. We have sent a
letter to the Comptroller's Office notifying them that we believe the original
assessment has been withdrawn due to the withdrawal of their claim in our
bankruptcy proceedings.
John H. Roam, et al. vs. Texas-New Mexico Pipe Line Company and EOTT
Energy Pipeline Limited Partnership, Cause No. CV43296, In the District Court of
Midland County, Texas, 238th Judicial District (Kniffen Estates Suit). The
Kniffen Estates Suit was filed on March 2, 2001, by certain residents of the
Kniffen Estates, a residential subdivision located outside of Midland, Texas.
The allegations in the petition state that free crude oil products were
discovered in water wells in the Kniffen Estates area, on or about October 3,
2000. The plaintiffs claim that the crude oil products are from a 1992 release
from a pipeline then owned by the Texas-New Mexico Pipe Line Company ("Tex-New
Mex"). We purchased that pipeline from Tex-New Mex in 1999. The plaintiffs have
alleged that Tex-New Mex was negligent, grossly negligent, and malicious in
failing to accurately report and remediate the spill. With respect to us, the
plaintiffs were seeking damages arising from any contamination of the soil or
groundwater since we acquired the pipeline in question. No specific amount of
money damages was claimed in the Kniffen Estate Suit, but the plaintiffs did
file proofs of claim in our bankruptcy proceeding totaling $62 million. In
response to the Kniffen Estates Suit, we filed a cross-claim against Tex-New
Mex. In the cross-claim, we claim that, in relation to the matters alleged by
the plaintiffs, Tex-New Mex breached the Purchase and Sale Agreement between the
parties dated May 1, 1999, by failing to disclose the 1992 release and by
failing to undertake the defense and handling of the toxic tort claims, fair
market value claims, and remediation claims arising from the release. On April
5, 2002, we filed
17
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
an amended cross-claim which alleges that Tex-New Mex defrauded us as part of
Tex-New Mex's sale of the pipeline systems to us in 1999. The amended
cross-claim also alleges that various practices employed by Tex-New Mex in the
operation of its pipelines constitute gross negligence and willful misconduct
and void our obligation to indemnify Tex-New Mex for remediation of releases
that occurred prior to May 1, 1999. In the Purchase and Sale Agreement, we
agreed to indemnify Tex-New Mex only for certain remediation obligations that
arose before May 1, 1999, unless these obligations were the result of the gross
negligence or willful misconduct of Tex-New Mex prior to May 1, 1999. EOTT
Energy Pipeline Limited Partnership ("PLP") and the plaintiffs agreed to a
settlement during our bankruptcy proceedings. The settlement provides for the
plaintiffs' release of their claims filed against PLP in this proceeding and in
the bankruptcy proceedings, in exchange for an allowed general unsecured claim
in our bankruptcy of $3,252,800 (as described above, the plaintiffs filed proofs
of claim in our bankruptcy proceedings totaling $62 million). The general
unsecured claim has been accrued at December 31, 2002. The plaintiffs and PLP
continue to pursue their claims against Tex-New Mex. On April 1, 2003, we filed
a second amended cross claim in this matter. In addition to the claims filed in
the previous cross claims, we requested (i) injunctive relief for Tex-New Mex's
refusal to honor its indemnity obligations; (ii) injunctive relief requiring
Tex-New Mex to identify, investigate and remediate sites where the conduct
alleged in our cross-claim occurred; and (iii) restitution damages of over
$125,000,000. Tex-New Mex filed a motion to compel arbitration of these issues.
The motion to compel arbitration was denied at a hearing held on April 11, 2003,
but Tex-New Mex has filed an application with the Court of Appeals for a Writ of
Mandamus that would compel the trial judge to grant Tex-New Mex's Motion to
Compel Arbitration. At the April 11, 2003 hearing, the court also severed into a
separate action EOTT's cross-claims against Tex-New Mex that extend beyond the
crude oil release and groundwater contamination in the Kniffen Estates
subdivision ("EOTT's Over-Arching Claim"). Our motion for summary judgment on
certain issues was denied at a hearing on May 5, 2003. Discovery is ongoing in
this matter. A trial date of June 9, 2003 is set for the plaintiff's claims
against Tex-New Mex and EOTT's original cross claim against Tex-New Mex arising
from their crude oil release and groundwater contamination in the Kniffen
Estates subdivision (the "Original Claims"). The court has indicated that it
will schedule a trial of EOTT's Over-Arching Claim after the Original Claims are
tried.
Bankruptcy Issues related to Claims Made by Texas-New Mexico Pipeline
Company and its affiliates. Tex-New Mex, Shell Oil Company and Equilon filed
proofs of claim in our bankruptcy, each filing the same claim in the amount of
$112 million. Equilon Pipeline Company LLC guaranteed, under certain
circumstances, the obligations of Tex-New Mex under the Purchase and Sale
Agreement dated May 1, 1999. According to Shell Oil Company's 2002 Annual
Report, in 2002, Shell became the sole owner of Equilon, which was merged into
Shell Oil Products US. The three claims filed each included the same supporting
information, consisting of indemnity claims under the Purchase and Sale
Agreement. In essence, there is only one claim of $112 million filed by three
entities and we have objected in the bankruptcy court to having the same claim
filed three times. The amount of the $112 million claim is equivalent to the sum
of the total amount of the proofs of claim filed in our bankruptcy proceedings
by owners of property on which the Tex-New Mex system is located and the
attorneys fees incurred by Tex-New Mex in defending the Kniffen Estates Suit and
other lawsuits (including our bankruptcy proceedings) with respect to the
Tex-New Mex system. The majority of these owners are plaintiffs in the Kniffen
Estates Suit and a group of New Mexico environmental claimants, with whom we
settled during our bankruptcy proceeding and accrued the allowed general
unsecured claim at December 31, 2002. A hearing on our objection to these claims
was scheduled for March 18, 2003, but the parties stipulated and agreed to delay
the hearing to allow the Kniffen Estates Suit to proceed. A final determination
of the extent of the allowance of this claim, if any, will be made after and
considering the outcome of this lawsuit.
Jerry W. Holmes and Barbara I. Holmes vs. EOTT Energy Pipeline Limited
Partnership and Texas-New Mexico Pipe Line Company, Cause No. CV43800, In the
District Court of Midland County, Texas, 385th Judicial District. This lawsuit
was filed on June 21, 2002. The plaintiffs in this suit are the owners of a home
in the Kniffen Estates who allege that their water well was contaminated by
crude oil. The plaintiffs claim that
18
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
the alleged crude oil contamination of their water well resulted from the 1992
crude oil release that is the subject of the Kniffen Estates Suit. The
plaintiffs claim $1,000,000 in damages. EOTT filed a motion to consolidate this
lawsuit with the Kniffen Estates Suit, which motion was granted on October 16,
2002. EOTT and the plaintiffs agreed to a settlement during our bankruptcy
proceedings. The settlement provided for the plaintiffs' release of their claims
against EOTT in exchange for an allowed general unsecured claim in our
bankruptcy in the amount of $300,000. The general unsecured claim amount was
accrued at December 31, 2002. This lawsuit will be dismissed as to EOTT and no
longer reported.
Bernard Lankford and Bette Lankford vs. Texas-New Mexico Pipe Line Company
and EOTT Energy Pipeline Limited Partnership Cause No. CC11176, In the County
Court at Law of Midland County, Texas. This lawsuit was filed on January 15,
2002. The plaintiffs in this lawsuit own property that is located to the north
of the Kniffen Estates subdivision. The plaintiff's allegations are virtually
identical to the allegations of the plaintiffs in the Kniffen Estates Suit. The
plaintiffs have asserted strict liability, nuisance, negligence, gross
negligence, trespass, and intentional infliction of emotional distress causes of
action. The plaintiffs are seeking unspecified actual damages and punitive
damages. The plaintiffs in this case joined in the settlement of the Kniffen
Estates Suit described above. That settlement provides for the plaintiff's
release of their claims against PLP and the allocation to the plaintiffs of a
portion of the general unsecured claim in our bankruptcy proceeding in the
amount of $3,252,800 that is discussed in the description of the Kniffen Estate
Suit. Once the settlement documents are finalized, this case will be dismissed
as to EOTT and no longer reported.
Jimmie B. Cooper and Shryl S. Cooper vs. Texas-New Mexico Pipeline
Company, Inc., EOTT Energy Pipeline Limited Partnership and Amerada Hess
Corporation, Case No. CIV 01-1321 M/JHG, In the United States District Court for
the District of New Mexico. Plaintiffs in this lawsuit, filed on October 5,
2001, are surface interest owners of certain property located in Lea County, New
Mexico. The plaintiffs allege that aquifers underlying their property and water
wells located on their property have been contaminated as a result of spills and
leaks from a pipeline running across their property that is or was owned by
Tex-New Mex and us. The plaintiffs also allege that oil and gas operations
conducted by Amerada Hess Corporation resulted in leaks or spills of pollutants
that ultimately contaminated the plaintiffs' aquifers and water wells. Our
initial investigation of this matter indicated that the alleged contamination of
the aquifers underlying the plaintiffs' property was not caused by leaks from
the pipeline now owned by us that traverses the plaintiffs' property. EOTT and
the plaintiffs have agreed to the terms of a settlement, whereby the plaintiffs
will release their claims against EOTT and receive an allowed general unsecured
claim in our bankruptcy in the amount of $300,000. The general unsecured claim
has been accrued at December 31, 2002. Once the settlement documents are
finalized, this case will be dismissed as to EOTT and no longer reported.
Jimmie T. Cooper and Betty P. Cooper vs. Texas-New Mexico Pipeline
Company, Inc., EOTT Energy Pipeline Limited Partnership, and EOTT Energy Corp.,
Case No. D-0101-CV-2002-02122, In the 1st Judicial District Court, Santa Fe
County, New Mexico. This lawsuit was filed on October 1, 2002. The plaintiffs in
this lawsuit are surface interest owners of certain property located in Lea
County, New Mexico. The plaintiffs are alleging that aquifers underlying their
property and water wells located on their property have been contaminated as a
result of spills and leaks from a pipeline running across their property that is
or was owned by Tex-New Mex and PLP. The plaintiffs do not specify when the
alleged spills and leaks occurred. The plaintiffs are seeking payment of costs
that would be incurred in investigating and remediating the alleged crude oil
releases and replacing water supplies from aquifers that have allegedly been
contaminated. The plaintiffs are also seeking damages in an unspecified amount
arising from the plaintiffs' alleged fear of exposure to carcinogens and the
alleged interference with the plaintiffs' quiet enjoyment of their property. The
plaintiffs are also seeking an unspecified amount of punitive damages. PLP and
the plaintiffs agreed to the terms of a settlement, whereby the plaintiffs will
release their claims against PLP and will receive an allowed general unsecured
claim in our bankruptcy in the amount of $1,027,000. The general unsecured claim
has been accrued at December 31, 2002. Once the settlement documents are
finalized, this case will be dismissed as to EOTT and no longer reported.
19
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Richard D. Warden and Nancy J. Warden v. EOTT Energy Pipeline Limited
Partnership and EOTT Energy Corp., Case No. CIV-02-370 L, In the United States
District Court for the Western District of Oklahoma. In this lawsuit, filed on
February 28, 2002, the plaintiffs are landowners, seeking damages allegedly
arising from a release of crude oil from a pipeline owned by us. Although we
undertook extensive remediation efforts with respect to the crude oil release
that is the subject of this lawsuit, plaintiffs allege that we did not properly
remediate the crude oil release and claim causes of action for negligence, gross
negligence, unjust enrichment, and nuisance. The plaintiffs filed a proof of
claim in our bankruptcy proceedings claiming damages of $500,000. This matter is
being evaluated in the claims reconciliation process in our bankruptcy. We do
not believe that we are liable for the damages asserted by the Plaintiffs and
therefore we have not recorded a contingent liability.
David A. Huettner, et al v. EOTT Energy Partners, L.P., et al, Case No.
1:02 CV-917, In the United States District Court, Northern District of Ohio,
Eastern Division ("Securities Suit"). This lawsuit was filed on May 15, 2002,
for alleged violations of the Securities and Exchange Act of 1934 and common law
fraud. The suit was brought by three of our former unitholders who claim that
the General Partner, certain of the officers and directors of Enron and the
General Partner and our previous independent accountants were aware of material
misstatements or omissions of information within various press releases, SEC
filings and other public statements, and failed to correct the alleged material
misstatements or omissions. Plaintiffs maintain that they were misled by our
press releases, SEC filings, and other public statements when purchasing our
common units and were financially damaged thereby. On June 28, 2002, the
Judicial Panel on Multidistrict Litigation issued a Conditional Transfer Order
that provides for the transfer of this case to the Southern District of Texas
for consolidated pretrial proceedings with other lawsuits asserting securities
claims against Enron and Arthur Andersen. On September 20, 2002, EOTT Energy
Partners, L.P. filed a motion to dismiss on the basis of the plaintiff's failure
to state a claim upon which relief can be granted. EOTT Energy Corp. joined in
that motion on October 11, 2002. The plaintiffs filed a motion to lift the stay,
which was denied by the bankruptcy court judge. Additionally, the plaintiffs
filed proofs of claim in the amount of $500,000 each. We filed objections to
these proofs of claim on February 21, 2003. Based on management's current
knowledge, we believe the allegations are without merit and therefore, we have
not recorded a contingent liability. We can provide no assurances regarding the
outcome of this lawsuit, but will continue to gather and analyze new information
as it becomes available.
In re EOTT Energy Partners, L.P., Case No. 02-21730, EOTT Energy Finance
Corp., Case No. 02-21731, EOTT Energy General Partner, L.L.C., Case No.
02-21732, EOTT Energy Operating Limited Partnership, Case No. 02-21733, EOTT
Energy Canada Limited Partnership, Case No. 02-21734, EOTT Energy Liquids, L.P.,
Case No. 02-21736, EOTT Energy Corp., Case No. 02-21788, Debtors (Jointly
Administered under Case No. 02-21730), In the United States Bankruptcy Court for
the Southern District of Texas, Corpus Christi Division. On October 8, 2002, we
and all of our subsidiaries filed voluntary petitions for relief under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court
for the Southern District of Texas (the "EOTT Bankruptcy Court") to facilitate
reorganization of our business and financial affairs for the benefit of us, our
creditors and other interested parties. Additionally, the General Partner filed
its voluntary petition for reorganization under Chapter 11 on October 21, 2002
in the EOTT Bankruptcy Court. The General Partner filed in order to join in our
voluntary, pre-negotiated restructuring plan filed on October 8, 2002. On
October 24, 2002, the EOTT Bankruptcy Court administratively consolidated, for
distribution purposes, the General Partner's bankruptcy filing with our
previously filed cases. Pursuant to the automatic stay provisions of the
Bankruptcy Code, all actions to collect pre-petition claims from us and to
interfere with our business as well as most other pending litigation against us,
were stayed. In addition, as debtor-in-possession, we had the right, subject to
the approval of the EOTT Bankruptcy Court, to assume or reject any pre-petition
executory contracts or unexpired leases. The EOTT Bankruptcy Court approved
payment of certain pre-petition liabilities, such as employee wages and
benefits, trust fund taxes in the ordinary course of business and certain
pre-petition claims of crude oil suppliers, critical vendors and foreign
vendors. In
20
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
addition, the EOTT Bankruptcy Court allowed for the payment of the certain
bankruptcy professionals and retention of the professionals in the ordinary
course of business. Finally, the EOTT Bankruptcy Court extended the time within
which we must assume or reject any unexpired leases of nonresidential property.
Our Restructuring Plan was confirmed on February 18, 2003 and became effective
on March 1, 2003. The provisions of the Restructuring Plan are further described
in Note 2. Shell and Tex-New Mex filed a notice of appeal to our plan
confirmation on February 24, 2003. The Record on Appeal is being assembled. We
intend to file a motion to dismiss the appeal as being moot. The bankruptcy
remains open while we resolve the remaining outstanding claims. Until the claims
are fully resolved, we cannot allocate the 11,947,820 LLC units issued to our
creditors under the Restructuring Plan. This will adversely affect our ability
to seek unitholder approval for any matters requiring such approval because
until the final allocation is made we will not know how many units each of our
unitholders is entitled to. See Note 5.
EPA Section 308 Request. Enron received a request for information from the
Environmental Protection Agency ("EPA") under Section 308 of the Clean Water
Act, requesting information regarding certain spills and releases from oil
pipelines owned or operated by Enron and its affiliated companies for the time
period July 1, 1998 to July 11, 2001. The only domestic crude oil pipelines
owned or operated by Enron at the time of the request were our pipelines. Our
pipelines were operated by either the General Partner, a wholly-owned subsidiary
of Enron, or EPSC, also an Enron subsidiary, for the time period in question. At
the time the EPA issued the Section 308 request to Enron, EPSC operated our
pipelines. The General Partner and EPSC retain operator liability for the time
period at issue. Enron responded to the EPA's Section 308 request in its
capacity as the operator of the pipelines actually owned by us. We retain all
liability for the pipelines for which an owner would be responsible. In addition
to the retention of ownership liability, we may also be required to indemnify
the General Partner and its Affiliates with regard to any environmental charges.
Under the terms of the Partnership Agreement, we are obligated to indemnify the
General Partner and its Affiliates (including Enron) for all losses associated
with activities undertaken on our behalf. This indemnification obligation is
limited to actions undertaken in good faith, and may only be satisfied from our
assets. Neither our bankruptcy nor Enron's bankruptcy affects our liability as
owner of the pipelines, nor does it affect our indemnification obligations under
the Partnership Agreement. While we cannot predict the outcome of the EPA's
Section 308 review, the EPA could seek to impose liability on us with respect to
the matters being reviewed. The outcome of the EPA 308 request is not yet known,
and we are unaware of any potential liability of us, Enron, or its affiliates.
However, we assume that we are fully responsible as owner for any environmental
claims or fines in relation to the pipelines (subject to insurance claims or
other third party claims to which we may be entitled). Our bankruptcy
proceedings did not relieve us from potential environmental liability.
Consequently, we do not believe either our bankruptcy or Enron's bankruptcy has
had material impact on our environmental liability.
Environmental. We are subject to extensive federal, state and local laws
and regulations covering the discharge of materials into the environment, or
otherwise relating to the protection of the environment, and which require
expenditures for remediation at various operating facilities and waste disposal
sites, as well as expenditures in connection with the construction of new
facilities. At the federal level, such laws include, among others, the Clean Air
Act ("CAA"), the Clean Water Act, the Oil Pollution Act, the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act, and the National Environmental Policy Act, as
each may be amended from time to time. Failure to comply with these laws and
regulations may result in the assessment of administrative, civil, and criminal
penalties or the imposition of injunctive relief.
Methyl tertiary butyl ether ("MTBE") is produced by us at our Morgan's
Point Facility. MTBE is used as an additive in gasoline. See "Management
Discussion and Analysis Results of Operations - Overview". The governor of
California ordered a ban on the use of MTBE as a gasoline additive due to health
concerns. This ban has been extended until December 31, 2003. Further, Congress
has considered legislation which would ban MTBE on a nationwide basis. If a
nationwide ban on the use of MTBE was enacted, it would materially reduce demand
for MTBE which could have a material adverse effect on our financial results. If
MTBE were
21
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
to be restricted or banned throughout the United States, we could modify the
Morgan's Point Facility to produce other products. We believe that modifying our
existing Morgan's Point Facility to produce other gasoline blendstocks such as
alkylates would require a substantial capital investment and as a result of our
restructuring, we may not have the resources available to effect such a
conversion. Further, we cannot predict whether legislation regarding MTBE will
be passed, whether the federal government will take steps to reverse
California's ban as of December 31, 2003 on the use of MTBE as a gasoline
component, or if the federal government will provide monetary assistance for
conversion.
In 2001, expenses incurred for spill clean up and remediation costs related
to the assets purchased from Tex-New Mex increased significantly. Based on our
experience with these assets, we filed an amended cross-claim against Tex-New
Mex alleging contingent claims for potential remediation issues not yet known to
us. We allege that Tex-New Mex failed to report spills, underreported spills,
failed to properly respond to leaks in the pipeline and engaged in other
activities with regard to the pipeline that may result in future remediation
liabilities. We obtained $20 million in insurance coverage in connection with
the acquisition from Tex-New Mex believing that amount would be sufficient to
cover our remediation requirements along the pipeline for a ten-year period.
After three years into the term of the insurance policy, we have completely
exhausted the amount of insurance coverage.
In addition to costs associated with the assets acquired from Tex-New Mex,
we have also incurred spill clean up and remediation costs in connection with
other properties it owns in various locations throughout the United States. We
have also acquired insurance coverage to cover clean up and remediation costs
that may be incurred in connection with properties not acquired from Tex-New
Mex.
22
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following are summaries of environmental remediation expense,
estimated environmental liabilities, and amounts receivable under insurance
policies for the indicated periods (in thousands):
Successor Company | Predecessor Company
----------------- | -----------------------------------
One Month | Two Months Three Months
Ended | Ended Ended
March 31, | February 28, March 31,
2003 | 2003 2002
---------------- | --------------- --------------
|
Gross remediation expense................. $ 926 | $ 1,979 $ 2,768
Less: Estimated insurance recoveries...... - | (79) (652)
---------------- | --------------- --------------
Total remediation expense................. $ 926 | $ 1,900 $ 2,116
================ | =============== ==============
| Predecessor
Successor Company | Company
----------------- | --------------
One Month | Two Months
Ended | Ended
March 31, | February 28,
2003 | 2003
--------------- | --------------
|
Environmental Liability at Beginning of |
Period................................................... $ 13,440 | $ 13,440
Gross remediation expense................................... 926 | 1,979
Cash expenditures........................................... (1,176) | (1,979)
--------------- | --------------
Environmental Liability at End of Period.................... $ 13,190 | $ 13,440
=============== | ==============
| Predecessor
Successor Company | Company
----------------- | --------------
One Month | Two Months
Ended | Ended
March 31, | February 28,
2003 | 2003
--------------- | --------------
|
Environmental Insurance Receivable at |
Beginning of Period...................................... $ 8,837 | $ 8,803
Estimated recoveries........................................ - | 79
Cash receipts............................................... (1,780) | (45)
--------------- | --------------
Environmental Insurance Receivable at |
End of Period............................................ $ 7,057 | $ 8,837
=============== | ==============
The environmental liability was classified in Other Current and Other
Long-Term Liabilities and the insurance receivable was classified in Trade and
Other Receivables at March 31, 2003 and December 31, 2002.
We may experience future releases of crude oil into the environment or
discover releases that were previously unidentified. While an inspection program
is maintained on our pipelines to prevent and detect such releases, and
operational safeguards and contingency plans are in place for the operation of
our processing facilities, damages and liabilities incurred due to any future
environmental releases could affect our business. We believe that our operations
and facilities are in substantial compliance with applicable environmental laws
and regulations and that there are no outstanding potential liabilities or
claims relating to safety and environmental matters that we are currently aware
of the resolution of which, individually or in the aggregate, would have a
materially adverse effect on our financial position or results of operations.
However,
23
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
we could be significantly adversely impacted by additional repair or remediation
costs related to the pipeline assets we acquired from Tex-New Mex if the need
for any additional repairs or remediation arises and we do not obtain
reimbursement for any such costs as a result of the pending litigation
concerning those assets. Our environmental expenditures include amounts spent on
permitting, compliance and response plans, monitoring and spill cleanup and
other remediation costs. In addition, we could be required to spend substantial
sums to ensure the integrity of our pipeline systems, and in some cases, we may
take pipelines out of service if we believe the costs of upgrades will exceed
the value of the pipelines.
No assurance can be given as to the amount or timing of future
expenditures for environmental remediation or compliance, and actual future
expenditures may be different from the amounts currently estimated. In the event
of future increases in costs, we may be unable to pass on those increases to our
customers.
9. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations." This statement requires entities to record the
fair value of a liability for legal obligations associated with the retirement
obligations of tangible long-lived assets in the period in which it is incurred.
When the liability is initially recorded, a corresponding increase in the
carrying value of the related long-lived asset would be recorded. Over time,
accretion of the liability is recognized each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss on settlement. We adopted the accounting principle
required by the new statement effective January 1, 2003. Determination of the
fair value of the retirement obligation is based on numerous estimates and
assumptions including estimated future third-party costs, future inflation rates
and the future timing of settlement of the obligations.
Our long-lived assets consist primarily of our crude oil gathering and
transmission pipelines and associated field storage tanks, our liquids
processing and handling facilities at Morgan's Point, our underground storage
facility and associated pipeline grid system, and transportation facilities at
Mont Belvieu and our gas processing and fractionation plant and related storage
and distribution facilities on the West Coast.
We identified asset retirement obligations that are within the scope of
the new statement, including contractual obligations included in certain
right-of-way agreements, easements and surface leases associated with our crude
oil gathering, transportation and storage assets and obligations imposed by
certain state regulatory requirements pertaining to closure and/or removal of
facilities and other assets associated with our Morgan's Point, Mont Belvieu and
West Coast facilities. We have estimated the fair value of asset retirement
obligations based on contractual requirements where the settlement date is
reasonably determinable. We cannot currently make reasonable estimates of the
fair values of certain retirement obligations, principally those associated with
certain right-of-way agreements and easements for our pipelines, our Morgan's
Point, Mont Belvieu and West Coast facilities, because the settlement dates for
the retirement obligations cannot be reasonably determined. We will record
retirement obligations associated with these assets in the period in which
sufficient information exists to reasonably estimate the settlement dates of the
respective retirement obligations.
As a result of the adoption of SFAS 143 on January 1, 2003, we recorded a
liability of $1.7 million, property, plant and equipment, net of accumulated
depreciation of $0.1 million and a cumulative effect of a change in accounting
principle of $1.6 million. The effect of adoption of the new accounting
principle was not material to the results of operations for the one month ended
March 31, 2003, the two months ended February 28, 2003 nor would it have had a
material impact on our net income for the three months ended
24
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002. During the periods presented, no asset retirement obligations
were incurred or settled. The asset retirement obligation as of January 1, 2002
was not material.
In October 2002, the Emerging Issues Task Force ("EITF") reached a
consensus in EITF Issue 02-03, "Issues Involved in Accounting for Derivative
Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and
Risk Management Activities." The EITF reached a consensus to rescind Issue
98-10, and related interpretive guidance, and preclude mark to market accounting
for energy trading contracts that are not derivative instruments pursuant to
SFAS 133. The consensus requires that gains and losses (realized and unrealized)
on all derivative instruments held for trading purposes be shown net in the
income statement, whether or not the instrument is settled physically. The
consensus to rescind Issue 98-10 eliminated EOTT's basis for recognizing
physical inventories at fair value. The consensus to rescind Issue 98-10 was
effective for all new contracts entered into (and physical inventory purchased)
after October 25, 2002. For energy trading contracts and physical inventories
that existed on or before October 25, 2002, that remained at December 31, 2002,
the consensus was effective January 1, 2003 and was reported as a cumulative
effect of a change in accounting principle. The cumulative effect of the
accounting change on January 1, 2003 was a loss of $2.4 million. With the
rescission of Issue 98-10, inventories purchased after October 25, 2002 have
been valued at average cost.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This statement
establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The statement will be implemented by
reporting the cumulative effect of a change in accounting principle for
financial instruments created before the issuance date of the statement and
still existing at the beginning of the period of adoption. Although we are still
in the process of reviewing the new statement, we do not expect the adoption of
this statement to have any material impact on our financial statements.
10. BUSINESS SEGMENT INFORMATION
We have four reportable segments, which management reviews in order to
make decisions about resources to be allocated and assess its performance: North
American Crude Oil - East of Rockies, Pipeline Operations, Liquids Operations
and West Coast Operations. The North American Crude Oil - East of Rockies
segment is organized into five operating regions and primarily purchases,
gathers, transports and markets crude oil. For segment reporting purposes, these
five operating regions have been aggregated as one reportable segment due to
similarities in their operations as allowed by SFAS No. 131. The Pipeline
Operations segment operates approximately 7,200 miles of active common carrier
pipelines in 12 states. The Liquids Operations includes the Morgan's Point
Facility and the Mont Belvieu Facility. The West Coast Operations includes
refined products marketing and a natural gas liquids business. Effective June 1,
2002, we sold our West Coast refined products marketing operations.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies as discussed in Note 2 included
in our Annual Report on Form 10-K for the year ended December 31, 2002. We
evaluate performance based on operating income (loss).
We account for intersegment revenue and transfers between North American
Crude Oil - East of Rockies and West Coast Operations as if the sales or
transfers were to third parties, that is, at current market prices. Intersegment
revenues for Pipeline Operations are based on published pipeline tariffs.
25
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL INFORMATION BY BUSINESS SEGMENT
(IN THOUSANDS)
NORTH
AMERICAN WEST CORPORATE
CRUDE OIL PIPELINE COAST AND
- EOR OPERATIONS OPERATIONS LIQUIDS OTHER(A) CONSOLIDATED
------------ ---------- ----------- ------- --------- ------------
ONE MONTH ENDED MARCH 31, 2003
(SUCCESSOR COMPANY)
Revenue from external customers......... $ 16,768 $ 547 $ 2,934 $ 8,525 $ - $ 28,774
Intersegment revenue (b)............... (2,913) 8,568 - - (5,655) -
------------ ----------- ----------- ----------- ---------- ----------
Total operating revenue ............. 13,855 9,115 2,934 8,525 (5,655) 28,774
------------ ----------- ----------- ----------- ---------- ----------
Gross profit............................ 3,852 4,225 317 (7,912) - 482
------------ ----------- ----------- ------------ ---------- ----------
Operating income (loss)................. 3,313 3,247 248 (7,950) (2,231) (3,373)
Other expense........................... - - - - (3,277) (3,277)
------------ ----------- ----------- ----------- ---------- ----------
Net income (loss) before cumulative
effect of accounting changes........ 3,313 3,247 248 (7,950) (5,508) (6,650)
------------ ----------- ----------- ------------ ---------- -----------
Total assets............................ 548,441 221,785 14,229 64,549 19,721 868,725
------------ ----------- ----------- ----------- ---------- -----------
Depreciation and amortization........... 376 1,331 43 174 1 1,925
------------ ----------- ----------- ----------- ---------- -----------
NORTH
AMERICAN WEST CORPORATE
CRUDE OIL PIPELINE COAST AND
- EOR OPERATIONS OPERATIONS LIQUIDS OTHER(A) CONSOLIDATED
------------ ---------- ----------- ------- --------- ------------
TWO MONTHS ENDED FEBRUARY 28, 2003
(PREDECESSOR COMPANY)
Revenue from external customers......... $ 27,692 $ 4,287 $ 5,571 $ 40,337 - $ 77,887
Intersegment revenue (b)............... (1,768) 11,828 - - (10,060) -
------------ ------------ ----------- ----------- ---------- ----------
Total operating revenue............... 25,924 16,115 5,571 40,337 (10,060) 77,887
------------ ----------- ----------- ----------- ---------- ----------
Gross profit............................ 4,231 5,450 597 (375) - 9,903
------------ ----------- ----------- ----------- ---------- ----------
Operating income (loss)................. 2,844 3,492 395 (446) (4,012) 2,273
Other income (c)........................ - - - - 61,970 61,970
------------ ----------- ----------- ----------- ---------- ----------
Net income (loss) before cumulative
effect of accounting changes........ 2,844 3,492 395 (446) 57,958 64,243
------------ ----------- ----------- ----------- ---------- ----------
Total assets............................ 506,443 226,656 13,979 64,983 44,396 856,457
------------ ----------- ----------- ----------- ---------- ----------
Depreciation and amortization........... 837 3,286 225 693 519 5,560
------------ ----------- ----------- ----------- ---------- ----------
26
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NORTH
AMERICAN WEST CORPORATE
CRUDE OIL PIPELINE COAST AND
- EOR OPERATIONS OPERATIONS LIQUIDS OTHER(A) CONSOLIDATED
------------ ---------- ----------- ------- --------- ------------
THREE MONTHS ENDED MARCH 31, 2002
(PREDECESSOR COMPANY)
Revenue from external customers......... $ 48,992 $ 5,968 $ 8,375 $ 36,399 $ - $ 99,734
Intersegment revenue (b)............... (5,435) 22,339 - - (16,904) -
------------ ----------- ----------- ----------- ----------- ----------
Total operating revenue.............. 43,557 28,307 8,375 36,399 (16,904) 99,734
------------ ----------- ----------- ----------- ----------- ----------
Gross profit............................ 4,603 12,528 349 3,891 - 21,371
------------ ----------- ----------- ----------- ----------- ----------
Operating income (loss)................. 250 10,808 (225) 3,598 (5,627) 8,804
Other expense........................... - - - - (11,149) (11,149)
------------- ----------- ----------- ------------ ------------ ----------
Net income (loss)....................... 250 10,808 (225) 3,598 (16,776) (2,345)
------------ ----------- ----------- ----------- ----------- ----------
Total assets............................ 586,921 285,623 44,567 101,838 40,381 1,059,330
------------ ----------- ----------- ----------- ----------- ----------
Depreciation and amortization........... 1,452 5,204 421 1,260 820 9,157
------------ ----------- ----------- ----------- ----------- ----------
- ----------------
(a) Corporate and Other also includes intersegment eliminations.
(b) Intersegment sales for North American Crude Oil - EOR and West Coast
Operations are made at prices comparable to those received from
external customers. Intersegment sales for Pipeline Operations are
based on published pipeline tariffs.
(c) Includes a loss from reorganization items of $7.3 million, a net gain
on the discharge of debt of $131.6 million and a loss from fresh start
adjustments of $56.8 million.
27
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
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
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes contained in this report and the
consolidated financial statements, notes and Management's Discussion and
Analysis contained in our Annual Report on Form 10-K for the year ended December
31, 2002.
INFORMATION REGARDING FORWARD-LOOKING INFORMATION
The statements in this 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. Such
forward-looking statements include the discussions in "Management's Discussion
and Analysis of Financial Condition and Results of Operations." Any
forward-looking statements are not guarantees of future performance and involve
significant risks and uncertainties, and actual results may vary materially from
those in the forward-looking statements as a result of various factors. These
risks, uncertainties and other factors include, among others, the risk factors
described in our Annual Report on Form 10-K for the year ended December 31,
2002, filed with the Securities and Exchange Commission as well as other risks
described in this Form 10-Q. See in this section, "Bankruptcy Proceedings and
Restructuring Plan," and "Liquidity and Capital Resources" for statements
regarding important factors that could cause actual results to differ materially
from those in the forward-looking statements herein. Although we believe that
our expectations regarding future events are based on reasonable assumptions, we
can give no assurance that these are all the factors that could cause actual
results to vary materially or that our expectations regarding future
developments will prove to be correct.
BANKRUPTCY PROCEEDINGS AND RESTRUCTURING PLAN
On October 8, 2002, EOTT Energy Partners, L.P. (the "MLP") and our four
affiliated operating limited partnerships, EOTT Energy Finance Corp. and EOTT
Energy General Partner, L.L.C. (the "Subsidiary Entities") filed pre-negotiated
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code (the "EOTT Bankruptcy"). The filing was made in the United
States Bankruptcy Court for the Southern District of Texas, Corpus Christi
Division (the "EOTT Bankruptcy Court"). Additionally, EOTT Energy Corp. (the
"General Partner") filed a voluntary petition for reorganization under Chapter
11 on October 21, 2002 in the EOTT Bankruptcy Court in order to join in the
voluntary, pre-negotiated Joint Chapter 11 Plan of Reorganization filed on
October 8, 2002. On October 24, 2002, the EOTT Bankruptcy Court administratively
consolidated for distribution purposes the General Partner's bankruptcy filing
with the previously filed cases. We operated as debtors-in-possession under the
Bankruptcy Code, which means we continued to remain in possession of our assets
and properties and continued our day-to-day operations.
The EOTT Bankruptcy Court confirmed our Third Amended Joint Chapter 11 Plan
of Reorganization, as supplemented ("Restructuring Plan") on February 18, 2003,
and it became effective on March 1, 2003. We emerged from bankruptcy as a
limited liability company structure and EOTT Energy LLC ("EOTT LLC") became the
successor registrant to the MLP. The consummation of our Restructuring Plan and
the level of success of our Restructuring Plan will materially affect matters
described in this report.
As a result of the application of fresh start reporting under the American
Institute of Certified Public Accountants Statement of Position No. 90-7 ("SOP
90-7"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code," as of February 28, 2003 (the date chosen for accounting purposes), EOTT's
financial results for the quarter ended March 31, 2003 include two different
bases of accounting and accordingly, the financial condition, operating results
and cash flows of the Successor Company and the Predecessor Company have been
separately disclosed. For purposes of this Management's Discussion and Analysis
and the financial statements contained elsewhere herein, references to the
"Predecessor Company" are references to EOTT for periods through February 28,
2003 (the last day of the calendar month in which EOTT emerged from bankruptcy)
and references to the "Successor
28
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company" are references to EOTT for periods subsequent to February 28, 2003. The
Successor Company's financial statements are not comparable in total to the
Predecessor Company's financial statements; however operating revenues, gross
profit and operating income (loss)(excluding changes in depreciation and
amortization discussed herein) and interest and financing costs (except where
discussed herein) are comparable.
Restructuring Plan
We entered into an agreement, dated October 7, 2002, with Enron Corp.
("Enron"), Standard Chartered Bank ("Standard Chartered"), Standard Chartered
Trade Services Corporation ("SCTS"), Lehman Commercial Paper Inc. ("Lehman
Commercial") and holders of approximately 66% of the outstanding principal
amount of our 11% senior notes (the "Restructuring Agreement"). Under this
Restructuring Agreement, Enron, Standard Chartered, SCTS, Lehman Commercial and
approximately 66% of our 11% senior note holders agreed to vote in favor of the
Restructuring Plan, and to refrain from taking actions not in support of the
Restructuring Plan.
The Restructuring Plan, however, was subject to the approval of the EOTT
Bankruptcy Court, and the settlement agreement with Enron was subject to the
additional approval of the United States Bankruptcy Court for the Southern
District of New York (the "Enron Bankruptcy Court"), where Enron and certain of
its affiliates filed for Chapter 11 bankruptcy protection. The EOTT Bankruptcy
Court approved the settlement agreement with Enron on November 22, 2002, and the
Enron Bankruptcy Court approved the settlement agreement on December 5, 2002.
The major provisions of the Restructuring Plan, which became effective March 1,
2003, are as follows:
o Enron has no further affiliation with us. The General Partner will
be liquidated as soon as reasonably possible with no material
effect to EOTT.
o We consummated the settlement agreement with Enron effective
December 31, 2002.
o EOTT was converted to a limited liability company structure and
EOTT LLC became the successor registrant to the MLP. The MLP was
merged into EOTT Energy Operating Limited Partnership. EOTT LLC
owns and manages the current operating limited partnerships.
o We are now managed by a seven-member Board of Directors. One of
the directors is the chief executive officer of EOTT LLC, and the
remaining six directors were selected by the former senior
noteholders who signed the Restructuring Agreement.
o We cancelled our outstanding $235 million of 11% senior unsecured
notes. Our former senior unsecured noteholders and holders of
allowed general unsecured claims will receive a pro rata share of
$104 million of 9% senior unsecured notes and a pro rata share of
11,947,820 limited liability company units of EOTT LLC
representing 97% of the newly issued units. The $104 million
senior unsecured notes and 11,947,820 units are deemed to be
issued and outstanding for purposes of the financial statements
contained elsewhere herein. As of March 31, 2003, the $104 million
senior unsecured notes and the 11,947,820 units had not been
distributed. See "Working Capital and Credit Resources - EOTT LLC
Senior Notes 2010."
o We cancelled the MLP's publicly traded common units, and the
former holders of the MLP's common units received 369,520 limited
liability company units of EOTT LLC representing 3% of newly
issued units and 957,981 warrants to purchase an additional 7% of
the new units. We cancelled the subordinated units and additional
partnership interests. See "Working Capital and Credit Resources -
EOTT LLC Equity Units and Warrants".
o We are authorized to implement and the board has approved the
development of a management incentive plan. The incentive plan may
reserve up to approximately 10% of EOTT LLC's authorized units for
issuance to certain key employees and directors.
29
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
o We closed exit credit facilities with Standard Chartered, SCTS,
Lehman Brothers Inc. ("Lehman") and other lenders on February 28,
2003. The Term Loan Agreement and Letter of Credit Agreement under
these facilities each have a term of 18 months post-bankruptcy
under substantially the same terms as the debtor in possession
facilities, with the inclusion of certain additional financial
covenants. The inventory repurchase and trade receivables
financing arrangements with SCTS under these exit credit
facilities each have an initial term of 6 months. We have the
option to extend these arrangements for an additional 12 months
subject to the payment of extension fees in the amount of 1% per
annum of the maximum commitment under these arrangements and an
increase in the interest rate from LIBOR plus 3% to LIBOR plus 7%.
See further discussion in Note 7 to our Condensed Consolidated
Financial Statements.
Following the restructuring, the ownership of EOTT LLC is as follows:
PERCENTAGE OWNERSHIP
----------------------------------------------
AFTER
AFTER LLC ISSUANCE OF
NUMBER OF AFTER WARRANT MANAGEMENT
HOLDER NEW LLC UNITS RESTRUCTURING EXERCISE Units(1)
- ---------------------------------------- ------------- ------------- ---------- -----------
Holders of Common Units................ 369,520(2) 3.0% 10.0%(3) 9.17%(3)
General Unsecured Creditors with Allowed
Claims............................. 11,947,820 97.0% 90.0% 82.5%
Management of EOTT LLC................. 1,200,000(1) - - 8.29%
(1) Assumes a management incentive plan with 1,200,000 New LLC Units is
approved by the board of directors of EOTT LLC. The board has approved the
development of a management incentive plan; however, such units have not
been issued.
(2) Does not include up to 957,981 LLC Units to be issued if LLC Warrants are
exercised.
(3) Includes 957,981 LLC Units that may be issued upon exercise of the
LLC Warrants.
As of February 28, 2003 (the date chosen for accounting purposes), we
adopted fresh start reporting in accordance with Statement of Position 90-7
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7"). Under fresh start reporting, EOTT has adjusted its assets and
liabilities to their fair values as of February 28, 2003. See Note 3 to our
Condensed Consolidated Financial Statements.
The reorganization value of EOTT of approximately $856 million was
determined based on discounted cash flow, comparable transaction and capital
market comparison analyses. The valuation was based upon a number of estimates
and assumptions, which are inherently subject to significant uncertainties and
contingencies beyond our control. Accordingly, there can be no assurance that
the valuations will be realized, and actual results could vary significantly.
OVERVIEW
Through our four operating limited partnerships, EOTT Energy Operating
Limited Partnership, EOTT Energy Canada Limited Partnership, EOTT Energy
Pipeline Limited Partnership, and EOTT Energy Liquids, L.P., we purchase,
gather, transport, store, process and resell crude oil, refined petroleum
products, natural gas liquids ("NGL") and other related products. Our principal
business segments are our North American Crude Oil - East of Rockies Operations,
our Pipeline Operations, our Liquids Operations and our West Coast Operations.
See Note 10 to our Consolidated Financial Statements for certain financial
information by business segment.
30
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gathering, Marketing and Trading Operations
Gross profit from gathering, marketing and trading operations varies from
period-to-period, depending to a significant extent upon changes in the supply
and demand of crude oil and the resulting changes in United States crude oil
inventory levels. The gross profit 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 gathering and transportation, field operating costs and depreciation
and amortization. In addition to purchasing crude oil at field gathering
locations, we purchase crude oil in bulk at major pipeline terminal points and
major marketing points and enter into exchange transactions with third parties.
These bulk and exchange transactions are characterized by large volume and
narrow profit margins on purchase and sale transactions, and the absolute price
levels for crude oil do not necessarily bear a relationship to gross profit.
Our operating results are sensitive to a number of factors including:
grades or types of crude oil, variability in lease crude oil barrels produced,
individual refinery demand for specific grades of crude oil, area market price
structures for the different grades of crude oil, location of customers,
availability of transportation facilities, and timing and costs (including
storage) involved in delivering crude oil to the appropriate customer.
In general, as we purchase crude oil, we establish a margin by selling
crude oil for physical delivery to third party users, such as independent
refiners or major oil companies, or by entering into future delivery obligations
with respect to futures contracts on the New York Mercantile Exchange (the
"NYMEX"), thereby minimizing or reducing exposure to price fluctuations. Through
these transactions, we seek to maintain positions that are substantially
balanced between crude oil purchases and sales or future delivery obligations.
However, depending on market conditions, positions may be taken subject to
established price risk management position limits. As a result, changes in the
absolute price level for crude oil do not necessarily impact the margin from
gathering and marketing.
Throughout the marketing process, we seek to maintain a substantially
balanced risk position. We do have certain risks that cannot be completely
hedged, such as a portion of certain basis risks. Basis risk arises when crude
oil is acquired by a purchase or exchange that does not meet the specifications
of the crude oil we are contractually obligated to deliver, whether in terms of
geographic location, grade or delivery schedule. In accordance with our risk
management policy, we seek to limit price risk and maintain margins through a
combination of physical sales, NYMEX hedging activities and exchanges of crude
oil with third parties.
We operate the business differently as market conditions change. During
periods when the demand for crude oil is weak, the market for crude oil is often
in "contango," meaning that the price of crude oil in a given month is less than
the price of crude oil in a subsequent month. In a contango market, storing
crude oil is favorable, because storage owners at major trading locations can
simultaneously purchase production at low current prices for storage and sell at
higher prices for future delivery. When there is a higher demand than supply of
crude oil in the near term, the market is "backwardated," meaning that the price
of crude oil in the prompt month exceeds the price of crude oil in a subsequent
month. A backwardated market has a positive impact on marketing margins because
crude oil gatherers can capture a premium for prompt deliveries.
Pipeline Operations
Pipeline revenues and gross profit 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. Transporting crude oil at published pipeline tariffs for our North
American Crude Oil - East of Rockies business segment, generates a majority of
our pipeline revenues. Approximately 81% of the revenues of our Pipeline
Operations business segment for the three months ended March 31, 2003 were
generated from tariffs charged to our North American Crude Oil - East of Rockies
business segment and sales of crude oil inventory to
31
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
our North American Crude Oil - East of Rockies business segment. Changes in
revenues and pipeline operating costs are relevant to the analysis of financial
results of the Pipeline Operations business segment and are addressed in the
following discussions of the Pipeline Operations business segment.
Liquids Operations
Through our Liquids Operations, we process, store and transport gasoline
blendstocks, petrochemical feedstocks and natural gas liquids in the Gulf Coast
region. In addition, we store and transport natural gas liquids and
petrochemicals using our 10 million barrels of underground storage capacity at
Mont Belvieu and our 120 mile transportation grid interconnecting a number of
refineries, fractionators and petrochemical plants located in the Houston Ship
Channel area.
In June 2001, we purchased the Morgan's Point Facility and Mont Belvieu
Facility and concurrently entered into ten-year toll conversion and storage
agreements with Enron Gas Liquids, Inc. Subsequent to the filing of Enron Gas
Liquids Inc.'s bankruptcy as part of the Enron Bankruptcy, we began conducting
commercial supply and marketing activities at the Morgan's Point Facility. Under
our commercial liquids operations, gross profit from this business is driven by
the difference between the purchase price of feedstocks and the price of methyl
tertiary butyl ether ("MTBE"), isobutylene and other products at the point of
sale minus any transportation costs, fixed and variable costs of operating the
facility and the depreciation and amortization related to the facility.
On April 2, 2002, the Enron Bankruptcy Court entered the Stipulation
rejecting the Toll Conversion and Storage Agreements, which became final and
non-appealable on April 12, 2002. Until the Storage Agreement was rejected, we
could not enter into any third party spot or term contracts for storage at the
Mont Belvieu Facility. As a result, we could only charge a daily administrative
fee to EGLI for the use of the Mont Belvieu Facility, until April 12, 2002. We
are currently in the process of building our customer base, and have recaptured
approximately half of historically normal storage and throughput volumes. Since
the Enron bankruptcy, we have been exploring various alternatives for these
facilities.
RESULTS OF OPERATIONS
The following review of our results of operations and financial condition
should be read in conjunction with our Condensed Consolidated Financial
Statements and Notes thereto. As is more fully discussed in Notes 2 and 3 to the
Condensed Consolidated Financial Statements, EOTT emerged from bankruptcy and
adopted fresh start reporting pursuant to SOP 90-7 effective as of February 28,
2003. Accordingly, the financial statements of the Successor Company and
Predecessor Company are not comparable in total; however operating revenues,
gross profit and operating income (loss) (excluding changes in depreciation and
amortization where noted) and interest and financing costs (except where noted)
are comparable. For purposes of this Management's Discussion and Analysis, we
have combined actual operating results for the Successor Company for the one
month ended March 31, 2003 and for the Predecessor Company for the two months
ended February 28, 2003 in order to facilitate a comparative analysis to the
operating results of the prior fiscal quarter. Variations resulting from
reorganization items, net gain on discharge of debt and fresh start adjustments
will be discussed separately where significant.
We reported a net loss of $6.6 million for the one month ended March 31,
2003, which was primarily related to operating losses from our Liquids
Operations. The operating losses of $7.9 million from our Liquids Operations
were primarily attributable to: (1) higher feedstock costs; (2) operational
problems at our Morgan's Point Facility, which required unanticipated downtime
and additional repair expenses of approximately $1.9 million; and (3) a lower of
cost or market adjustment of approximately $3.0 million due to the volatility of
the market and the higher than normal levels of inventory as a result of the
unanticipated downtime. In addition, we reported $6.6 million of operating
income from our crude oil marketing and transportation activities and interest
and related charges of $3.3 million.
We reported net income of $60.3 million for the two months ended February
28, 2003. Net income for the two months ended February 28, 2003 is primarily
attributable to: (1) reorganization expenses of $7.3 million related to legal
and professional fees related to the bankruptcy proceedings; (2) a net gain on
the discharge of debt of $131.6 million in connection with the Restructuring
Plan; (3) fresh start adjustments of $56.8 million resulting from adjusting
assets and liabilities to fair value in accordance with SOP 90-7; (4) losses
from the cumulative effect of accounting changes related to the adoption of EITF
02-03 and SFAS 143; (5) operating losses of $0.5 million from our Liquids
Operations primarily due to higher prices for normal butane and methanol
feedstocks as well as lower MTBE prices; (6) operating income of $6.3 million
from our crude oil marketing and transportation activities; and (7) interest and
related charges of $5.6 million.
32
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selected financial data for our business is summarized below, in millions:
Three Months Ended Three Months Ended
March 31, 2003(1) March 31, 2002
------------------ ------------------
Operating Revenues:
N. A. Crude Oil - East of Rockies............... $ 39.8 $ 43.5
Pipeline Operations............................. 25.2 28.3
Liquids Operations.............................. 48.9 36.4
West Coast Operations........................... 8.5 8.4
Intersegment eliminations....................... (15.7) (16.9)
-------------- --------------
Total......................................... $ 106.7 $ 99.7
============== ==============
Gross Profit:
N. A. Crude Oil - East of Rockies (2)........... $ 8.1 $ 4.6
Pipeline Operations............................. 9.7 12.5
Liquids Operations.............................. (8.3) 3.9
West Coast Operations........................... 0.9 0.4
-------------- --------------
Total......................................... $ 10.4 $ 21.4
============== ==============
Operating Income (Loss):
N. A. Crude Oil - East of Rockies............... $ 6.2 $ 0.2
Pipeline Operations............................. 6.7 10.8
Liquids Operations.............................. (8.4) 3.6
West Coast Operations........................... 0.6 (0.2)
Corporate and Other............................. (6.2) (5.6)
-------------- --------------
Total........................................... $ (1.1) $ 8.8
============== ==============
Interest and Financing Costs......................... $ 8.9 $ 11.2
============== ==============
Reorganization Items, Net Gain on Discharge of
Debt and Fresh Start Adjustments................... $ 67.5 $ -
============== ==============
Cumulative Effect of Accounting Change............... $ (4.0) $ -
============== ==============
(1) We have combined actual operating results for the Successor Company
for the one month ended March 31, 2003 and for the Predecessor
Company for the two months ended February 28, 2003 in order to
facilitate a comparative analysis to the prior fiscal quarter.
(2) Includes intersegment transportation costs from our Pipeline
Operations segment for the transport of crude oil at published
pipeline tariffs and purchases of crude oil inventory from our
Pipeline Operations segment. Intersegment transportation costs and
net purchases of crude oil inventory from our Pipeline Operations
segment were $20.4 million and $22.3 million for the three months
ended March 31, 2003, and 2002, respectively.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Operating loss was $1.1 million in the first three months of 2003 compared
to operating income of $8.8 million for the same period in 2002. Interest and
financing costs decreased $2.3 million as compared to 2002. The following will
detail the primary factors affecting operating income, interest and financing
costs, reorganization and fresh start adjustments and the cumulative effect of
accounting changes.
33
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
North American Crude Oil - East of Rockies
Operating income from our North American Crude Oil - East of Rockies
business segment was $6.2 million in the first quarter of 2003 compared to
operating income of $0.2 million for the same period in 2002. The primary
factors affecting gross profit and operating income in this segment are:
o P+ averaged $4.13 per barrel in 2003 compared to $2.79 per barrel
in 2002. P+ is the forward price spread between field postings and
liquid market locations, which generally affects the profitability
of our crude oil marketing.
o Crude oil lease volumes averaged 246,000 barrels per day ("bpd")
in the first quarter of 2003 compared to 309,000 bpd in the first
quarter of 2002. Total sales volumes averaged 441,000 bpd in the
first quarter of 2003 compared to 642,000 bpd in the first quarter
of 2002. The reduction in marketing activities and lease volumes
purchased reflects the loss of certain lease and spot barrels as a
result of increased requests for credit from our suppliers and
other factors resulting from Enron's bankruptcy and our bankruptcy
as well as the overall credit environment in the energy industry.
Although the average crude oil lease volumes purchased in the
first quarter of 2003 decreased as compared to the first quarter
of 2002, since our emergence from bankruptcy, we have been able to
increase the amount of lease crude oil volumes being purchased to
over 255,000 bpd for April 2003.
o Average margins per lease barrel increased in the first quarter of
2003 due to low margin per barrel contracts being renegotiated or
terminated during 2002 and 2003 as a part of our restructuring
plan initiatives.
o Total expenses decreased approximately $3.2 million due to lower
employee related expenses of $2.0 million, and lower operating
expenses of $0.8 million (primarily due to the significant decline
in lease volumes transported by our fleet operations), lower
environmental expenses of $0.3 million and lower depreciation of
$0.2 million. The decrease in depreciation is attributable to the
reduction in carrying value of assets resulting from fresh start
reporting.
Pipeline Operations
Operating income from our Pipeline Operations was $6.7 million in the first
quarter of 2003 compared to operating income of $10.8 million for the same
period in 2002. The primary factors affecting this business are as follows:
o Revenues from our Pipeline Operations decreased $3.1 million
reflecting reduced lease volumes transported by our North American
Crude Oil - East of Rockies business segment. Average volumes
transported in the first quarter of 2003 were 397,000 bpd compared
to 439,000 bpd in the first quarter of 2002. Revenue per barrel
was $0.71 per barrel in the first quarter of 2003 compared to
$0.72 per barrel in the first quarter of 2002.
o Total expenses for our Pipeline Operations increased approximately
$1.0 million primarily reflecting higher costs of sales of $1.2
million due to higher losses for unaccounted crude oil volumes,
higher environmental costs of $0.9 million offset by lower
depreciation of $0.6 million. The decrease in depreciation is
attributable to the reduction in carrying value of assets
resulting from fresh start reporting.
34
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquids Operations
Operating losses from our Liquids Operations were $8.4 million in the first
three months of 2003 compared to operating income of $3.6 million in the same
period in 2002. The primary factors affecting our Liquids Operations are:
o MTBE equivalent product margin per gallon declined from $0.34 per
gallon in the first quarter of 2002 to $0.15 per gallon in the
first quarter of 2003 due to higher prices for normal butane and
methanol feedstocks. Our feedstock prices increased due to upward
pressure from crude oil and natural gas markets, while the price
for MTBE was under pressure due to the phase out of MTBE by
certain California refiners.
o MTBE sales volume in the first quarter of 2003 was 10,385 bpd,
slightly higher than the first quarter of 2002 sales of 10,176
bpd. Production in both years was curtailed due to facility
maintenance normally conducted in the first quarter of the year.
In 2003, we discovered operational problems that required
additional repair expenses and unanticipated downtime.
o Total expenses from Liquids Operations increased approximately
$1.1 million primarily due to $1.9 million of additional repair
expenses incurred related to the unanticipated downtime in March
2003 and higher insurance cost by $0.3 million. These increased
expenses were partially offset by lower depreciation and
amortization costs and $0.3 million of lower employee related
costs, as compared to the first quarter of 2002. The decrease in
depreciation and amortization is attributable to the fourth
quarter 2002 impairment.
o Also during March 2003, the unexpected downtime resulted in a
build of feedstock inventories beyond our operational
requirements. Due to the volatility in the market and the higher
than normal levels of inventory, we recorded a lower of cost or
market adjustment of approximately $3.0 million at the end of the
first quarter of 2003.
West Coast Operations
Operating income from our West Coast Operations was $0.6 million in the
first quarter of 2003 compared to an operating loss of $0.2 million in the first
quarter of 2002. The improvement is primarily related to increased business
activities from our natural gas liquids operations due to the major upgrade of
these facilities completed in 2002 offset by a decrease in total expenses of
$0.1 million.
Corporate and Other
Corporate and other costs increased approximately $0.6 million, which
principally reflects higher insurance costs of $0.4 million.
Reorganization Items, Net Gain on Discharge of Debt and Fresh Start Adjustments
The reorganization items of $7.3 million are primarily comprised of legal
and professional fees related to the bankruptcy proceedings. The net gain on the
discharge of debt of $131.6 million was recorded net of the 9% senior notes and
limited liability units issued to the creditors upon emergence from bankruptcy.
The fresh start adjustments of $56.8 million result from adjusting assets and
liabilities to fair value.
35
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest and Financing Costs
The primary factors affecting interest and financing costs are as follows:
o Facility fees on the credit facilities and term loan with Standard
Chartered, SCTS and Lehman were $0.4 million lower during the
first quarter of 2003 compared to the first quarter 2002.
o Interest on working capital loans was virtually unchanged. Amounts
outstanding under financing facilities were $190.0 million and
$190.0 million at March 31, 2003 and 2002, respectively. Borrowing
rates under the SCTS financing facilities range from LIBOR plus 75
basis points (prior to the bankruptcy) to LIBOR plus 300 basis
points under the DIP Facilities and exit facilities.
o Letter of credit costs were $2.1 million in the first quarter of
2003 under the credit facilities with Standard Chartered as
compared to $0.9 million for the first quarter 2002. Higher letter
of credit usage resulted from our bankruptcy and higher crude oil
prices. Letter of credit fees averaged 3.0%.
o Interest on the Term Loan totaled $2.5 million in the first
quarter of 2003. The Term Loan was entered into in connection with
our DIP Facilities in October 2002 and refinanced under the exit
credit facilities in February 2003.
o Interest on the 11% senior notes was $6.5 million in first quarter
2002. In 2003, there was no accrual on the 11% senior notes for
the Predecessor Company during the bankruptcy. There is a one
month accrual in March 2003 of $0.9 million on the 9% senior notes
for the Successor Company.
Cumulative Effect of Accounting Changes
The EITF reached a consensus in EITF Issue 02-03 to rescind EITF 98-10
effective January 1, 2003. The cumulative effect of the accounting change on
January 1, 2003, was a loss of $2.4 million. See further discussion in Note 9 to
the Condensed Consolidated Financial Statements. In addition, we adopted
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations", on January 1, 2003. In connection with the
adoption of SFAS 143, we recorded a $1.6 million loss as a cumulative effect of
an accounting change. See further discussion in Note 9 to the Condensed
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
General
We anticipate that our cash requirements, including sustaining capital
expenditures for the foreseeable future, will be funded primarily from cash on
hand, cash generated from operations, and our exit credit facilities, including
the inventory repurchase agreement and receivables purchase agreement discussed
below.
Our ability to obtain letters of credit to support our purchases of crude
oil and feedstocks is fundamental to our crude oil gathering and marketing
activities and Liquids Operations. As a result of the Enron bankruptcy filing
and our subsequent bankruptcy filing, our trade creditors have been less willing
to extend credit to us on an unsecured basis and we have had to significantly
reduce our marketing activities due to the amount of credit support available to
us under our credit facilities. We believe that our exit credit facilities
discussed below will be sufficient to permit us to return to a profitable level
of business activity. Although we emerged from bankruptcy on March 1, 2003, we
remain highly leveraged with substantial financing costs. Therefore, we can give
no assurance that we will not be required to further reduce or restrict our
gathering and marketing activities because of continuing limitations on our
ability to obtain credit support and financing for our working capital needs.
36
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our ability to fund our liquidity and working capital requirements through
available cash, cash generated from operations and our exit credit facilities is
based on our ability to successfully implement our Restructuring Plan. Any
material decrease in our financial strength may make it difficult to meet our
debt covenants and, therefore, adversely affect our ability to fund our working
capital needs and obtain letters of credit, or may increase the cost thereof.
Additionally, we can give no assurance that our lenders will renew our
facilities when they mature on August 30, 2004. In addition, we are limited in
our ability to raise funds through the issuance of additional equity unless
holders of at least two-thirds of the outstanding units approve such issuance.
Our ability to meet financial covenants in the future may be affected by
events beyond our control. While we currently expect to be in compliance with
the covenants going forward, there can be no assurance that we will be in
compliance with the covenants in the future or that we will be able to obtain
amendments to the exit credit facilities, if so needed.
Cash Flows From Operating Activities
Net cash provided by operating activities totaled $8.4 million in the first
quarter of 2003 compared to $12.1 million in the first quarter of 2002. Cash
from operations in the first quarter of 2003 reflects a net increase of
approximately $6.5 million attributable to two buy/sell contracts with a single
customer involving settlement of cash across year end 2002 and the end of the
first quarter 2003 as well as a decline in general inventory levels from year
end 2002. Cash from operations in the first quarter of 2002 reflects increased
interest payable as well as reduced deposit requirements in connection with
futures and derivative activities.
Cash Flows From Investing Activities
Net cash used in investing activities totaled $0.4 million in the first
quarter of 2003 compared to $17.2 million in the first quarter of 2002. Cash
additions to property, plant, and equipment of $17.3 million in the first
quarter of 2002 primarily include $8.6 million related to expansion capital
projects and $6.3 million related to the turnaround of the Morgan's Point
Facility. Proceeds from asset sales were $0.1 million in 2003 and 2002.
We estimate that capital expenditures necessary to maintain the existing
asset base at current operating levels will be approximately $10 million to $13
million each year. The level of additional capital expenditures by us will vary
depending upon cash from operations, availability of financing, prevailing
energy markets, general economic conditions and the current regulatory
environment. Our credit facilities prohibit us from making capital expenditures
outside of our present businesses, and further place monetary limitations on
capital expenditures.
Cash Flows From Financing Activities
Net cash used in financing activities totaled $10.0 million in the first
quarter of 2003 as compared to cash provided by financing activities of $2.8
million in the first quarter of 2002. The 2003 amount represents a decrease in
the amount outstanding under our receivables financing. The 2002 amount
represents an increase in receivable financing, offset by distributions to
unitholders. Cash distributions paid to unitholders were $4.7 million in 2002.
We suspended distribution payments to unitholders in April 2002 and are
prohibited from making any cash distributions to unitholders pursuant to the
terms of our credit facilities and the indenture governing our 9% senior notes.
WORKING CAPITAL AND CREDIT RESOURCES
Summary of Debtor in Possession ("DIP") Financing
On October 18, 2002, we entered into agreements with Standard Chartered,
SCTS, Lehman and other lending institutions for $575 million in DIP financing
facilities. The DIP facilities provided (i) $500 million of credit and
37
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
financing facilities through Standard Chartered and SCTS, which included up to
$325 million for letters of credit and $175 million of inventory
repurchase/accounts receivable financing through SCTS, and (ii) $75 million of
term loans through Lehman and other lending institutions. The credit facilities
were subject to a borrowing base and were secured by a first-priority lien on
all, or substantially all, of our real and personal property. As of February 28,
2003, we had outstanding approximately $313.1 million of letters of credit,
$125.0 million of inventory repurchase/accounts receivable financing, and $75
million of term loans. The DIP financing facilities contained certain
restrictive covenants that, among other things, limited distributions, other
debt, and certain asset sales. On February 28, 2003, the DIP financing
facilities were refinanced by the same institutions as we emerged from
bankruptcy. The following discussion provides an overview of our post-bankruptcy
debt.
Summary of Exit Credit Facilities, Senior Notes, and Other Debt
EOTT LLC's emergence from bankruptcy as of March 1, 2003, was financed
through a combination of exit credit facilities, senior notes and other debt
associated with settlement of claims during our bankruptcy proceedings. The
table below provides a summary of these financing arrangements as of March 31,
2003.
SUMMARY OF FINANCING ARRANGEMENTS
(IN MILLIONS)
COMMITMENT/ AMOUNT
FACE AMOUNT OUTSTANDING MATURITY
----------- ----------- --------
Exit Credit Facilities:
Letter of Credit Facility $ 325.0 $ 313.5 August 30, 2004
Receivables Purchase Agreement 100.0* 40.0 August 30, 2003**
Commodity Repurchase Agreement 75.0 75.0 August 30, 2003**
Term Loans 75.0 75.0 August 30, 2004
Senior Notes: 104.0 98.8 March 1, 2010***
Other Debt:
Enron Note 6.2 7.2 October 1, 2005***
Big Warrior Note 2.7 2.4 March 1, 2007***
Ad Valorem Tax Liability 8.3 8.3 March 1, 2009
* $50 million of this commitment is unavailable ten days each month.
** Renewable for 12 months at our option in exchange for an extension fee
of 1%.
*** These notes were adjusted to fair value pursuant to the adoption of
fresh start reporting required by SOP 90-7.
38
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a summary of certain contractual obligations at March 31,
2003 (in millions):
After
2003 2004 2005 2006 2007 2007 Total
------- -------- -------- -------- -------- -------- ---------
Operating Leases............. $ 6.0 $ 4.7 $ 3.6 $ 2.7 $ 0.5 $ 0.6 $ 18.1
9% Senior Notes.............. - - - - - 104.0 104.0
Term Loans................... - 75.0 - - - - 75.0
Commodity Repurchase
Agreement(1).............. 75.0 - - - - - 75.0
Receivables Purchase
Agreement(1).............. 40.0 - - - - - 40.0
Enron Note................... 1.0 1.0 4.2 - - - 6.2
Big Warrior Note............. 0.2 0.3 0.4 0.4 1.4 - 2.7
Ad Valorem Tax Liability..... 1.0 1.4 1.5 1.5 1.6 1.3 8.3
------- -------- -------- -------- -------- -------- ---------
$ 123.2 $ 82.4 $ 9.7 $ 4.6 $ 3.5 $ 105.9 $ 329.3
======== ======== ======== ======== ======== ======== =========
(1) We have the intent and ability to extend the maturity date to
August 30, 2004.
We provide certain purchasers with irrevocable letters of credit to secure
our obligations to purchase crude oil or feedstocks for our crude oil or liquids
marketing activities. Liabilities with respect to these purchase obligations are
recorded in accounts payable on our balance sheet in the month the crude oil or
feedstock is purchased. These letters of credit are generally issued for up to
sixty day periods and are canceled upon the payment of the purchase obligation.
At March 31, 2003, we had outstanding letters of credit of approximately $313.5
million.
Exit Credit Facilities
On February 11, 2003, we entered into our exit credit facilities with the
same lenders and under substantially the same terms in the DIP financing
facilities. These new facilities were closed on February 28, 2003 and $2.9
million of facility and extension fees were paid in connection with these new
facilities, which is being amortized as interest expense over the terms of the
facilities.
Letter of Credit Facility
The Letter of Credit Facility with Standard Chartered provides $325 million
of financing until August 30, 2004 and is subject to defined borrowing base
limitations. The borrowing base is the sum of (i) cash equivalents, specified
percentages of eligible receivables, deliveries, fixed assets, inventory, margin
deposits and undrawn product purchase letters of credit, minus (as of the date
of determination) (ii) first purchase crude payables, other priority claims,
aggregate net amounts payable by the borrowers under all hedging contracts and
certain eligible receivables arising from future crude oil obligations, minus
(iii) the principal amount of loans outstanding and any accrued and unpaid fees
and expenses under the Term Loans, minus (iv) all outstanding amounts under the
Amended and Restated Commodity Repurchase Agreement and the Amended and Restated
Receivables Purchase Agreement ("SCTS Purchase Agreements").
The Letter of Credit Facility required an upfront facility fee of $1.25
million that was paid at closing. An additional reduction fee of $2.5 million
will be payable on March 29, 2004, if Standard Chartered's exposure is not
reduced to $200 million or less by that date. Letter of credit fees range from
2.25% to 2.75% per annum depending on usage. The commitment fee is 0.5% per
annum of the unused portion of the Letter of Credit Facility. Additionally, we
agreed to a fronting fee, which is the greater of 0.25% per annum times the face
amount of the letter of credit or $250. An annual arrangement fee of 1% per
annum times the average daily maximum facility amount, as defined in the Letter
of Credit Facility, is payable on a monthly basis.
The Letter of Credit Facility includes the following monthly covenants: (1)
minimum earnings before interest, depreciation and amortization ("EBIDA"); (2)
minimum interest coverage (EBIDA/cash interest expense); (3) minimum current
ratio (adjusted current assets/adjusted current liabilities); and (4) minimum
adjusted consolidated tangible net worth. The minimum EBIDA and interest
coverage tests are based on a rolling, cumulative four-month basis and measured
monthly. In addition, there are certain restrictive covenants that, among other
things, limit distributions, redemptions, other debt, certain asset sales,
mergers and change in control transactions.
39
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SCTS Purchase Agreements
We have an agreement with SCTS similar to our pre-bankruptcy inventory
repurchase agreement, which provides for the financing of purchases of crude oil
inventory utilizing a forward commodity repurchase agreement ("Commodity
Repurchase Agreement"). The maximum commitment under the Commodity Repurchase
Agreement is $75 million. It required an upfront facility fee of approximately
$378,000 and carries an interest rate of LIBOR plus 3%. The Commodity Repurchase
Agreement has an initial term of six months to August 30, 2003, at which time we
have the option to extend for an additional twelve months. We intend to extend
the maturity date which will require the payment of an extension fee of $750,000
and the interest rate will increase to LIBOR plus 7%. As a result of our intent
and ability to extend the maturity, the amount outstanding has been classified
as long-term in the March 31, 2003 Condensed Consolidated Balance Sheet.
In addition, we also have an agreement with SCTS similar to our
pre-bankruptcy trade receivables agreement, which provides for the financing of
up to an aggregate amount of $100 million of certain trade receivables ("Trade
Receivables Agreement") outstanding at any one time. The discount fee is LIBOR
plus 3% and an upfront facility fee of approximately $504,000 was paid. The
Trade Receivables Agreement has an initial term of six months to August 30,
2003, at which time we have the option to extend for an additional twelve
months. We intend to extend the maturity date which will require the payment of
an extension fee of $1 million and the interest rate will increase to LIBOR plus
7%.
Term Loan Agreement
We entered into an agreement with Lehman Brothers Inc. ("Lehman"), as Term
Lender Agent, and other lenders (collectively, "Term Lenders"), which provides
for term loans in the aggregate amount of $75 million (the "Term Loans"). The
Term Loans mature on August 30, 2004.
The financing included two term notes. The Tier-A Term Note is for $50
million with a 9% per annum interest rate. The Tier-B Term Note is for $25
million with a 10% per annum interest rate. Interest is payable monthly on both
notes. An upfront fee of $750,000 was paid and we agreed to pay a deferred
financing fee in the aggregate amount of $2 million on the maturity date of the
Term Loans. This latter fee was fully accrued as of February 28, 2003.
The Term Loans are collateralized and have certain repayment priorities
with respect to collateral proceeds pursuant to the Intercreditor and Security
Agreement that is discussed below. Under the Term Loan Agreement, term loan debt
outstanding is subject to a borrowing base as defined in the Letter of Credit
Agreement. Further, the Term Loan Agreement contains financial covenants that
mirror those outlined above in the discussion of the Letter of Credit Facility.
Intercreditor and Security Agreement
In connection with the Letter of Credit Facility, the Term Loans and the
SCTS Purchase Agreements, we entered into the Intercreditor and Security
Agreement ("Intercreditor Agreement"), with Standard Chartered, Lehman, SCTS and
various other secured parties ("Secured Parties"). This agreement provides for
the sharing of collateral among the Secured Parties and prioritizes the
application of collateral proceeds which provides for repayment of the Tier-A
Term Note and the Standard Chartered Letter of Credit exposure above $300
million prior to other secured obligations.
In addition, to the extent that drawings are made on any letters of credit,
Standard Chartered, as collateral agent, may distribute funds from our debt
service payment account to itself (as letter of credit issuer agent on behalf of
the letter of credit issuer) as needed to allow EOTT LLC to reimburse Standard
Chartered, as letter of credit issuer, for such drawings.
40
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Senior Notes
On October 1, 1999, we issued to the public $235 million of 11% senior
notes. The senior notes were due October 1, 2009, and interest was paid
semiannually on April 1 and October 1. The senior notes were fully and
unconditionally guaranteed by all of our operating limited partnerships but were
otherwise unsecured. On October 1, 2002, we did not make the interest payment of
$12.9 million on our $235 million 11% senior notes. These notes were cancelled
effective March 1, 2003 as a result of our Restructuring Plan and the holders of
these notes, along with our general unsecured creditors with allowed claims,
will receive a pro rata share of $104 million of 9% senior unsecured notes, plus
new EOTT LLC units as discussed below.
EOTT LLC Senior Notes 2010
The $104 million of 9% senior unsecured notes will be allocated to former
holders of the 11% senior notes described above and our general unsecured
creditors with allowed claims. However, the exact pro rata allocation of the
senior notes cannot be determined until the precise amount of each allowed claim
is determined. This process is underway in the EOTT Bankruptcy Court as part of
our Restructuring Plan and is expected to be completed no sooner than August
2003. The senior notes are due in March 2010, and interest will be paid
semiannually on September 1 and March 1. Under the terms of the indenture
governing our senior notes, we are allowed to pay interest payments in kind by
issuing additional senior notes on the first two interest payment dates. If we
make payments in kind, we must make the payments as if interest were being
charged at 10% per annum instead of 9% per annum. We may not optionally redeem
the notes. The notes are subject to mandatory redemption or sinking fund
payments if we sell assets and use the money for certain purposes or if we have
a change of control. Provisions of the indenture could limit additional
borrowings, sale and lease back transactions, affiliate transactions, purchases
of our own equity, payments on debt subordinated to the senior notes,
distributions to members, sale of assets if certain financial performance ratios
are not met, or certain merger, consolidation or change in control transactions.
Enron Note and Big Warrior Note
In connection with our settlement with Enron as part of the Restructuring
Plan, we executed a $6.2 million note payable to Enron ("Enron Note") that is
guaranteed by our subsidiaries. The Enron Note is secured by an irrevocable
letter of credit and bears interest at 10% per annum. Interest is paid
semiannually and we are allowed to pay interest payments in kind on the first
two interest payment dates. Principal payments of $1 million are payable in
October 2003 and October 2004 with the remaining principal due in October 2005.
In connection with a settlement with Big Warrior Corporation ("Big
Warrior") during our bankruptcy, we executed a $2.7 million note payable to Big
Warrior, which is secured by a second lien position in one of our Mississippi
pipelines. The four-year note is payable in quarterly installments, based on a
seven-year amortization schedule, at an interest rate of 6% per annum, with the
first payment to be made on June 1, 2003. A final balloon payment is due March
1, 2007.
Ad Valorem Tax Liability
In conjunction with our Restructuring Plan, we agreed to pay accrued but
unpaid 2002 ad valorem taxes over six years from the effective date of our
Restructuring Plan. This debt bears interest at 6% with quarterly principal and
interest payments starting June 1, 2003.
EOTT LLC Equity Units and Warrants
Under our Restructuring Plan, the MLP's common units were eliminated. We
issued 12,317,340 new EOTT LLC units to be allocated to former equity holders,
former noteholders, and holders of allowed general unsecured claims. We also
issued to former equity holders 957,981 warrants to purchase additional EOTT LLC
units. See
41
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Table of EOTT LLC Ownership under "Bankruptcy Proceedings and Restructuring
Plan" above. As with the issuance of our 9% senior notes, the allocation of
11,947,820 of these new LLC units to former noteholders and holders of allowed
general unsecured claims cannot be determined until the precise amount of each
allowed claim is determined, which process is expected to be completed no sooner
than August 2003. This will adversely affect our ability to seek unitholder
approval for any matters requiring such approval because until allocation is
made we will not know how many units each of our unitholders is entitled to. We
do not expect to make distributions to our unitholders in the foreseeable future
due to restrictions in our exit credit facilities.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations." This statement requires entities to record the
fair value of a liability for legal obligations associated with the retirement
obligations of tangible long-lived assets in the period in which it is incurred.
When the liability is initially recorded, a corresponding increase in the
carrying value of the related long-lived asset would be recorded. Over time,
accretion of the liability is recognized each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss on settlement. We adopted the accounting principle
required by the new statement effective January 1, 2003. Determination of the
fair value of the retirement obligation is based on numerous estimates and
assumptions including estimated future third-party costs, future inflation rates
and the future timing of settlement of the obligations.
Our long-lived assets consist primarily of our crude oil gathering and
transmission pipelines and associated field storage tanks, our liquids
processing and facilities at Morgan's Point, our underground storage facility
and associated pipeline grid system, handling and transportation facilities at
Mont Belvieu and our gas processing and fractionation plant and related storage
and distribution facilities on the West Coast.
We identified asset retirement obligations that are within the scope of the
new statement, including contractual obligations included in certain
right-of-way agreements, easements and surface leases associated with our crude
oil gathering, transportation and storage assets and obligations imposed by
certain state regulatory requirements pertaining to closure and/or removal of
facilities and other assets associated with our Morgan's Point, Mont Belvieu and
West Coast facilities. We have estimated the fair value of asset retirement
obligations based on contractual requirements where the settlement date is
reasonably determinable. We cannot currently make reasonable estimates of the
fair values of certain retirement obligations, principally those associated with
certain right-of-way agreements and easements for our pipelines, our Morgan's
Point, Mont Belvieu and West Coast facilities, because the settlement dates for
the retirement obligations cannot be reasonably determined. We will record
retirement obligations associated with these assets in the period in which
sufficient information exists to reasonably estimate the settlement dates of the
respective retirement obligations.
As a result of the adoption of SFAS 143 on January 1, 2003, we recorded a
liability of $ 1.7 million, property, plant and equipment, net of accumulated
depreciation of $0.1 million and a cumulative effect of a change in accounting
principle of $1.6 million. The effect of adoption of the new accounting
principle was not material to the results of operations for the one month ended
March 31, 2003, the two months ended February 28, 2003 nor would it have had a
material impact on our net income for the three months ended March 31, 2002.
During the periods presented, no asset retirement obligations were incurred or
settled. The asset retirement obligation as of January 1, 2002 was not material.
In October 2002, the Emerging Issues Task Force ("EITF") reached a
consensus in EITF Issue 02-03, "Issues Involved in Accounting for Derivative
Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and
Risk Management Activities." The EITF reached a consensus to rescind Issue
98-10, and related interpretive guidance, and preclude mark to market accounting
for energy trading contracts that are not derivative instruments pursuant to
SFAS 133. The consensus requires that gains and losses (realized and unrealized)
on all
42
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
derivative instruments held for trading purposes be shown net in the income
statement, whether or not the instrument is settled physically. The consensus to
rescind Issue 98-10 eliminated EOTT's basis for recognizing physical inventories
at fair value. The consensus to rescind Issue 98-10 was effective for all new
contracts entered into (and physical inventory purchased) after October 25,
2002. For energy trading contracts and physical inventories that existed on or
before October 25, 2002, that remained at December 31, 2002, the consensus was
effective January 1, 2003 and was reported as a cumulative effect of a change in
accounting principle. The cumulative effect of the accounting change on January
1, 2003 was a loss of approximately $2.4 million. With the rescission of Issue
98-10, inventories purchased after October 25, 2002, have been valued at average
cost.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. The new statement is effective for contracts entered into or modified after
June 30, 2003 (with certain exceptions) and for hedging relationships designated
after June 30, 2003. The accounting guidance in the new statement is to be
applied prospectively. Although we are still in the process of reviewing the new
statement, we do not expect that application of the guidance will have a
material effect on our financial condition or results of operations.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This statement
establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The statement will be implemented by
reporting the cumulative effect of a change in accounting principle for
financial instruments created before the issuance date of the statement and
still existing at the beginning of the period of adoption. Although we are still
in the process of reviewing the new statement, we do not expect the adoption of
this statement to have any material impact on our financial statements.
CERTAIN LITIGATION AND ENVIRONMENTAL MATTERS
We are subject to federal, state and local laws and regulations governing
the discharge of materials into the environment or otherwise relating to
environmental protection. At the federal level, such laws include, among others,
the Clean Air Act, the Clean Water Act, the Oil Pollution Act, the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act, and the National Environmental Policy Act, as
each may be amended from time to time. Failure to comply with these laws and
regulations may result in the assessment of administrative, civil, and criminal
penalties or the imposition of an injunctive relief. Moreover, compliance with
such laws and regulations in the future could prove to be costly, and there can
be no assurance that we will not incur such costs in material amounts.
Environmental laws and regulations have changed substantially and rapidly over
the last 20 years, and we anticipate that there will be continuing changes. The
clear trend in environmental regulation is to place more restrictions and
limitations on activities that may impact the environment, such as emissions of
pollutants, generation and disposal of wastes and use and handling of chemical
substances. Increasingly strict environmental restrictions and limitations have
resulted in increased operating costs for us and other businesses throughout the
United States, and it is possible that the costs of compliance with
environmental laws and regulations will continue to increase. We will attempt to
anticipate future regulatory requirements that might be imposed and to plan
accordingly in order to remain in compliance with changing environmental laws
and regulations and to minimize the costs of such compliance.
Enron received a request for information from the EPA under Section 308 of
the Clean Water Act requesting information regarding certain discharges and
releases from oil pipelines owned or operated by Enron and its affiliates for
the time period July 1, 1998 to July 11, 2001. Because we were the only Enron
affiliated entity with domestic crude oil pipelines owned or operated by Enron,
Enron responded for itself and on behalf of us to the
43
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EPA's request on January 29, 2002. At this time, we are not able to predict the
outcome of the response made to the EPA's Section 308 request.
In connection with extensive asset purchases in 1998 and 1999, we
instituted a pipeline integrity management program in 1999. This program was
expanded in December of 2001 with a pipeline integrity assurance program to
comply with certain regulatory and legislative changes. Under this program, the
integrity of a pipeline is evaluated to avoid operating a pipeline that poses
significant risk of crude oil spills. Our written EOTT Pipeline Integrity
Program, which was intended to comply with the new Office of Pipeline Safety
("OPS") Integrity Management regulations, was formally implemented in January
2002 and further expanded in January 2003. Anticipated operating expenses and
capital expenditures to comply with that program are budgeted annually; however,
actual future expenditures may be different from the amounts currently
anticipated.
John H. Roam, et al. vs. Texas-New Mexico Pipe Line Company and EOTT Energy
Pipeline Limited Partnership, Cause No. CV43296, ("Kniffen Estates Suit") was
filed on March 2, 2001, in the District Court of Midland County, Texas, 238th
Judicial District by certain residents of the Kniffen Estates, a residential
subdivision located outside of Midland, Texas. The allegations in the petition
state that free crude oil products were discovered in water wells in the Kniffen
Estates area, on or about October 3, 2000. The plaintiffs claim that the crude
oil products are from a 1992 release from a pipeline then owned by the Texas-New
Mexico Pipe Line Company ("Tex-New Mex"). We purchased that pipeline from
Tex-New Mex in 1999. The plaintiffs have alleged that Tex-New Mex was negligent,
grossly negligent, and malicious in failing to accurately report and remediate
the spill. With respect to us, the plaintiffs were seeking damages arising from
any contamination of the soil or groundwater since we acquired the pipeline in
question. No specific amount of money damages was claimed in the Kniffen Estate
Suit, but the plaintiffs did file proofs of claim in our bankruptcy proceeding
totaling $62 million. In response to the Kniffen Estates Suit, we filed a
cross-claim against Tex-New Mex. In the cross-claim, we claim that, in relation
to the matters alleged by the plaintiffs, Tex-New Mex breached the Purchase and
Sale Agreement between the parties dated May 1, 1999, by failing to disclose the
1992 release and by failing to undertake the defense and handling of the toxic
tort claims, fair market value claims, and remediation claims arising from the
release. On April 5, 2002, we filed an amended cross-claim which alleges that
Tex-New Mex defrauded us as part of Tex-New Mex's sale of the pipeline systems
to us in 1999. The amended cross-claim also alleges that various practices
employed by Tex-New Mex in the operation of its pipelines constitute gross
negligence and willful misconduct and void our obligation to indemnify Tex-New
Mex for remediation of releases that occurred prior to May 1, 1999. In the
Purchase and Sale Agreement, we agreed to indemnify Tex-New Mex only for certain
remediation obligations that arose before May 1, 1999, unless these obligations
were the result of the gross negligence or willful misconduct of Tex-New Mex
prior to May 1, 1999. EOTT Energy Pipeline Limited Partnership ("PLP") and the
plaintiffs agreed to a settlement during our bankruptcy proceedings. The
settlement provides for the plaintiffs' release of their claims filed against
PLP in this proceeding and in the bankruptcy proceedings, in exchange for an
allowed general unsecured claim in our bankruptcy of $3,252,800 (as discussed
above, the plaintiffs filed proofs of claim in our bankruptcy proceedings
totaling $62 million). The general unsecured claim has been accrued at December
31, 2002. The plaintiffs and PLP continue to pursue their claims against Tex-New
Mex. On April 1, 2003, we filed a second amended cross-claim in this matter. In
addition to the claims filed in the previous cross-claims, EOTT requested (i)
injunctive relief for Tex-New Mex's refusal to honor its indemnity obligations;
(ii) injunctive relief requiring Tex-New Mex to identify, investigate and
remediate sites where the conduct alleged in our cross-claim occurred; and (iii)
restitution damages of over $125,000,000. Tex-New Mex filed a motion to compel
arbitration of these issues. The motion to compel arbitration was denied at a
hearing held on April 11, 2003, but Tex-New Mex has filed an application with
the Court of Appeals for a Writ of Mandamus that would compel the trial judge to
grant Tex-New Mex's Motion to Compel Arbitration. At the April 11, 2003 hearing,
the court severed into a separate action EOTT's cross-claims against Tex-New Mex
that extend beyond the crude oil release and groundwater contamination in the
Kniffen Estates subdivision ("EOTT's Over-Arching Claim"). Our motion for
summary judgment on certain issues is set for hearing on May 5, 2003. Discovery
is ongoing in this matter. A trial date of June 9, 2003 is set for the
plaintiff's claims against Tex-New
44
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Mex and EOTT's original cross-claim against Tex-New Mex arising from their crude
oil release and groundwater contamination in the Kniffen Estates subdivision
(the "Original Claims"). The court has indicated that it will schedule a trial
of EOTT's Over-Arching Claim after the Original Claims are tried.
Environmental Matters
In 2001, expenses incurred for spill clean up and remediation costs related
to the assets purchased from Tex-New Mex increased significantly. Based on our
experience with these assets, we filed an amended cross-claim against Tex-New
Mex, as previously discussed, alleging contingent claims for potential
remediation issues not yet known to us. We allege that Tex-New Mex failed to
report spills, underreported spills, failed to properly respond to leaks in the
pipeline and engaged in other activities with regard to the pipeline that may
result in future remediation liabilities. We obtained $20 million in insurance
coverage in connection with the acquisition from Tex-New Mex believing that
amount would be sufficient to cover remediation requirements along the pipeline
for a ten-year period. After three years into the term of the insurance policy,
we have completely exhausted the amount of insurance coverage.
In addition to costs associated with the assets acquired from Tex-New Mex,
EOTT has incurred spill clean up and remediation costs in connection with other
properties it owns in various locations throughout the United States. We have
acquired insurance coverage to cover clean up and remediation costs that may be
incurred in connection with properties not acquired from Tex-New Mex. We have
accrued current estimates for future remediation costs on all environmental
spills or releases which occurred prior to December 31, 2002; however, actual
future expenditures may be different than amounts currently anticipated. See
further discussion of the estimated environmental liability and amounts expected
to be recovered from insurance recorded at March 31, 2003 in Note 8 to the
Condensed Consolidated Financial Statements.
If MTBE were to be restricted or banned in Texas or throughout the United
States, we could modify the Morgan's Point Facility to produce other products.
We believe that modifying our existing Morgan's Point Facility to produce other
gasoline blendstocks such as alkylates would require a substantial capital
investment and as a result of our restructuring, we may not have the resources
available to effect such a conversion or that such conversion would be
economically viable. Further, we cannot predict whether the proposed Energy
Policy Act or other similar legislation may be passed or whether the federal
government will take steps to reverse California's ban on the use of MTBE as a
gasoline component, or if the federal government will provide monetary
assistance for conversion. If federal legislation is enacted regarding MTBE, the
ban in California becomes effective, or Texas bans the use of MTBE, we would
expect such ban to materially reduce MTBE demand, which would have a material
adverse effect on our financial results.
We may experience future releases of crude oil, MTBE or other substances
into the environment or discover releases that were previously unidentified.
While an inspection program is maintained on our pipelines to prevent and detect
such releases, and operational safeguards and contingency plans are in place for
the operation of our processing facilities, damages and liabilities incurred due
to any future environmental releases could affect our business. We believe that
our operations and facilities are in substantial compliance with applicable
environmental laws and regulations and that there are no outstanding potential
liabilities or claims relating to safety and environmental matters that we are
currently aware of, the resolution of which, individually or in the aggregate,
would have a materially adverse effect on our financial position or results of
operations. However, we could be significantly adversely impacted by additional
repair or remediation costs related to the pipeline assets we acquired from
Tex-New Mex if the need for any additional repair or remediation arises and we
do not obtain reimbursement for any such costs as a result of the pending
litigation concerning those assets. Our environmental expenditures include
amounts spent on permitting, compliance and response plans, monitoring and spill
cleanup and other remediation costs. In addition, we could be required to spend
substantial sums to ensure the integrity of and upgrade our pipeline systems,
and in some cases, we may take pipelines out of service if we believe the cost
of upgrades will exceed the value of the pipelines.
45
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
No assurance can be given as to the ultimate amount or timing of future
expenditures for environmental remediation or compliance, and actual future
expenditures may be different from the amounts currently estimated. In the event
of future increases in costs, we may be unable to pass on those increases to our
customers.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP") requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of actual revenues
and expenses during the reporting period. Although we believe these estimates
are reasonable, actual results could differ from those estimates. The
significant accounting policies summarized in Note 2 to the Consolidated
Financial Statements included in our Annual Report on Form 10-K for the year
ended December 31, 2002 were:
o Revenues and Expenses;
o Depreciation and Amortization;
o Impairment of Assets; and
o Contingencies.
Additional critical accounting policies or changes to existing policies
that occurred in the first quarter of 2003 are discussed below.
Fresh Start Reporting
We adopted fresh start reporting required by SOP 90-7 as of February
28, 2003 (the date chosen for accounting purposes). In accordance with the
principles of fresh start reporting, we have adjusted our assets and liabilities
to their fair values. We used independent third party financial advisors and
valuation specialists to assist in the determination of the enterprise value of
EOTT, the allocation of our reorganization value to our tangible and
identifiable intangible assets and the fair value of our long-term liabilities.
The valuations were based on a number of estimates and assumptions such as
annual volumes and cash flows, terminal values and discount rates, which are
inherently subject to significant uncertainties and contingencies beyond our
control. Accordingly, there can be no assurance that the valuations will be
realized and actual results could vary significantly. The determination of the
fair values are substantially complete: however, estimates of certain assets and
liabilities are based on preliminary information and are subject to revisions as
information is finalized. We do not believe that the final determination of the
fair value will have a material effect on our financial position or results of
operations. See further discussion in Note 3 to our Condensed Consolidated
Financial Statements.
Energy Trading and Derivative Activities
Prior to the adoption of EITF 02-03, substantially all of our
gathering, marketing and trading activities were accounted for on a fair value
basis under EITF 98-10 or SFAS 133 with changes in fair value included in
earnings. EITF 02-03 precludes mark to market accounting for energy trading
contracts that are not derivative instruments pursuant to SFAS 133. See further
discussion in Note 9 to the Condensed Consolidated Financial Statements
regarding the impact of adopting EITF 02-03.
46
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in Item 3 should be read in conjunction with
information set forth in Part II, Item 7a in our Annual Report on Form 10-K for
the year ended December 31, 2002, in addition to the interim condensed
consolidated financial statements and accompanying notes presented in Part I.
COMMODITY PRICE RISK
We have performed a value at risk analysis of our financial derivative
commodity instruments. Value at risk incorporates numerous variables that could
impact the fair value of our investments, including commodity prices, as well as
correlation within and across these variables. We estimate value at risk
commodity exposures using a parametric model, which captures the exposure
related to open futures contracts. The value at risk method utilizes a one-day
holding period and a 95% confidence level.
The following table illustrates the value at risk for commodity price risk (in
millions):
MARCH 31, DECEMBER 31,
2003 2002
--------------- ---------------
Commodity price (1) (2).................... $ 0.1 $ -
(1) The above value at risk amount represents financial derivative
commodity instruments, primarily commodity futures contracts,
entered into to hedge future physical crude oil purchase and sale
commitments. The commitments to purchase and sell physical crude
oil have not been included in the above value at risk computation.
(2) At March 31, 2003, we had crude oil futures contracts to purchase
0.5 million barrels of crude oil and to sell 0.3 million barrels
of crude oil, with the majority of these contracts maturing in the
second quarter of 2003. At December 31, 2002, we had crude oil
future contracts to purchase 0.6 million barrels of crude oil and
to sell 0.6 million barrels of crude oil, with the majority of
these contracts maturing in the first quarter of 2003.
COMMODITY DERIVATIVE TRANSACTIONS ACCOUNTED FOR AT FAIR VALUE
Generally, as we purchase crude oil, we enter into corresponding sales
transactions involving physical delivery of crude oil to third party users or
corresponding sales transactions on the NYMEX. This process enables us to
minimize our exposure to price risk until we take physical delivery of the crude
oil. In 2002, substantially all of our crude oil and refined products marketing
and trading operations were accounted for on a fair value basis pursuant to SFAS
No. 133 or EITF Issue 98-10. Effective January 1, 2003, energy trading contracts
that are not derivative instruments pursuant to SFAS No. 133 are no longer
accounted for at fair value. Prior to the rescission of EITF 98-10, we accounted
for inventories used in our energy trading activities at fair value.
The following table indicates fair values and changes in fair value of our
commodity derivative transactions (in thousands):
47
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SUCCESSOR COMPANY | PREDECESSOR COMPANY
----------------- | ----------------------------
One Month | Two Months Three Months
Ended | Ended Ended
March 31, | February 28, March 31,
2003 | 2003 2002
-------------------| ----------- -----------
|
|
Fair value of contracts at beginning of period............. $ 1,254 | $ (844) $ (5,597)
Cumulative effect of accounting change..................... - | (2,389) -
Change in realized and unrealized value.................... (105) | 4,114 625
Fair value of new contracts entered into during the year... 1,098 | 373 (10,128)
--------------- | ----------- ----------
Fair value of contracts at end of period................... $ 2,247 | $ 1,254 $ (15,100)*
=============== | =========== ==========
*Approximately $13.0 million of the fair value loss at March 31, 2002 related to
physical sales transactions or sales transactions on the NYMEX entered into to
hedge physical inventory. The fair value of inventory is not included in the
table above.
FAIR VALUE OF COMMODITY DERIVATIVE INSTRUMENTS AT MARCH 31, 2003
MATURITY GREATER THAN
MATURITY OF 90 90 DAYS BUT LESS
SOURCE OF FAIR VALUE DAYS OR LESS THAN ONE YEAR TOTAL FAIR VALUE
-------------------- -------------- --------------------- ----------------
Prices Actively Quoted............... $ (584) $ (186) $ (770)
*Prices Provided by Other
External Source................... 2,993 24 3,017
-------------- -------------- ---------------
Total............................. $ 2,409 $ (162) $ 2,247
============== ============== ===============
*In determining the fair value of certain contracts, adjustments may be made
to published posting data, for location differentials and quality basis
adjustments.
ITEM 4. CONTROLS AND PROCEDURES
Our chief executive officer and chief financial officer have evaluated our
disclosure controls and procedures within 90 days prior to the date of filing of
this Quarterly Report on Form 10-Q for the period ending March 31, 2003. They
believe that our current internal controls and procedures are effective and
designed to ensure that information required to be disclosed by us in our
periodic reports is recorded, processed, summarized and reported, within the
appropriate time periods specified by the SEC and that such information is
accumulated and communicated to our chief executive officer and chief financial
officer as appropriate to allow timely decisions to be made regarding required
disclosure. Subsequent to the date of the evaluation, there were no significant
corrective actions taken by us or other changes made to these internal controls.
Management does not believe there were changes in other factors that could
significantly affect these controls subsequent to the date of the evaluation. We
will, however, formally evaluate the disclosure controls and procedures on no
less than a quarterly basis and will consider implementation of enhancements to
our disclosure controls and procedures as may be desirable or necessary from
time to time.
48
PART II. OTHER INFORMATION
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
ITEM 1. LEGAL PROCEEDINGS
See Part I. Item 1, Note 8 to the Condensed Consolidated Financial
Statements entitled "Commitments and Contingencies," which is incorporated
herein by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Pursuant to our Restructuring Plan, we cancelled the MLP's common units,
subordinated units, and additional partnership interests and we issued 369,520
limited liability company units and 957,981 warrants for limited liability
company units to the former holders of the MLP's common units, and 11,947,820
limited liability company units to be allocated to the holders of the MLP's
former 11% senior notes due 2009 and our general unsecured creditors with
allowed claims. See Note 5 to the Condensed Consolidated Financial Statements.
The LLC units and the warrants were issued without registration under the
Securities Act, or state law, in reliance on the exemptions provided for in
Section 1145 of Title 11 of the Bankruptcy Code. Our new LLC units and warrants
are, however, registered pursuant to Section 12(g) of the Securities Exchange
Act of 1934 and therefore subject to the reporting requirements under this act.
Our credit facilities restrict our ability to make cash distributions on
the LLC units during the term of the facilities. See further discussion in Note
6 to the Condensed Consolidated Financial Statements, and Part I, Item 2.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Working Capital and Credit
Resources." In addition, pursuant to the terms of our indenture governing our 9%
senior notes, the cash distributions on the LLC units will be limited due to the
existing restrictions of our ability to pay distributions under the credit
facilities and other debt instruments.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Our Chapter 11 filing on October 8, 2002 constituted an event of default
under our Credit Facility with Standard Chartered, our Receivables Purchase
Agreement with SCTS, our Inventory Repurchase Agreement with SCTS and our $235
million 11% senior notes due 2009. The amounts outstanding under the Credit
Facility, Receivables Purchase Agreement and Inventory Repurchase Purchase
Agreement transferred to our DIP Financing facilities are described in Note 7 of
our attached Condensed Consolidated Financial Statements. In addition, we did
not make the $12.9 million interest payment on our 11% senior notes which was
due on October 1, 2002. See Note 7 to the Condensed Consolidated Financial
Statements. Our disposition of these obligations is covered by our Restructuring
Plan. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Bankruptcy Proceedings and Restructuring Plan -
Restructuring Plan" and Note 2 to our Condensed Consolidated Financial
Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 10.1 Form of Administrative Services Agreement by and between
EOTT Energy LLC and EOTT Energy General Partner, L.L.C.,
effective January 1, 2003
Exhibit 99.1 Section 906 Certification of Thomas M. Matthews
Exhibit 99.2 Section 906 Certification of H. Keith Kaelber
49
EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
(b) Reports on Form 8-K.
Current Report on Form 8-K filed by EOTT Energy Partners, L.P. on
January 27, 2003 pursuant to Item 5. Other Events regarding its
press release dated January 27, 2003.
Current Report on Form 8-K filed by EOTT Energy Partners, L.P. on
March 4, 2003 pursuant to Item 1. Change of Control and Item 3.
Bankruptcy or Receivership regarding confirmation of our
reorganization plan.
Current Report on Form 8-K filed by EOTT Energy LLC on March 11,
2003 pursuant to Item 5. Other matters regarding our emergence
from Chapter 11 bankruptcy proceedings and registration under Rule
12g-3(a).
50
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.
EOTT ENERGY LLC
(A Delaware Limited Liability Company)
Date: May 20, 2003
/s/ H. KEITH KAELBER
-------------------------------------
H. Keith Kaelber
Executive Vice President and
Chief Financial Officer
51
CERTIFICATIONS
I, Thomas M. Matthews certify that:
1. I have reviewed this quarterly report on Form 10-Q of EOTT Energy LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 20, 2003
/s/ THOMAS M. MATTHEWS
------------------------------------------------
Thomas M. Matthews
Chairman of the Board and Chief Executive Officer
52
I, H. Keith Kaelber, certify that:
1. I have reviewed this quarterly report on Form 10-Q of EOTT Energy LLC.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 20, 2003
/s/ H. KEITH KAELBER
----------------------------------
H. Keith Kaelber
Executive Vice President and
Chief Financial Officer
53
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.1 Form of Administrative Services Agreement by and between
EOTT Energy LLC and EOTT Energy General Partner, L.L.C.,
effective January 1, 2003
99.1 Section 906 Certification of Thomas M. Matthews
99.2 Section 906 Certification of H. Keith Kaelber
54