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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 9, 2006
GENESIS ENERGY, L.P.
(Exact name of registrant as specified in its charter)
Delaware 1-12295 76-0513049
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
500 Dallas, Suite 2500, Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 860-2500 (Registrant's
telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
___ Written communications pursuant to Rule 425 under the Securities
Act (17 CFR 230.425)
___ Soliciting material pursuant to Rule 14a-12 under the Exchange
Act (17 CFR 240-14a-12)
___ Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240-14d-2(b))
___ Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240-13e-4(c)
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Item 8.01. Other Events.
Set forth below is a consolidated set of our "risk factors." It consolidates in
one place management's current perception of our risk profile after taking into
consideration changes in our portfolio, markets and organizational structure -
as well as changes in the economy in general - that have occurred since we filed
our Annual Report on Form 10-K relating to the year ended December 31, 2004 and
our Periodic Reports on Form 8-K relating to calendar 2005. For example, it
includes management's perception of the material risks associated with the
syngas joint venture interest we acquired in 2005.
GENESIS ENERGY, L.P.
RISK FACTORS
RISKS RELATED TO OUR BUSINESS
WE MAY NOT HAVE SUFFICIENT CASH FROM OPERATIONS TO PAY THE CURRENT LEVEL
OF QUARTERLY DISTRIBUTION FOLLOWING THE ESTABLISHMENT OF CASH RESERVES
AND PAYMENT OF FEES AND EXPENSES, INCLUDING PAYMENTS TO OUR GENERAL PARTNER.
The amount of cash we distribute on our units principally depends upon
margins we generate from our crude oil gathering and marketing operations,
margins from the pipeline transportation operations and sales of CO2, which will
fluctuate from quarter to quarter based on, among other things:
o the prices at which we purchase and sell crude oil;
o the volumes of crude oil we transport;
o the volumes of CO2 we sell;
o the level of our operating costs;
o the level of our general and administrative costs; and
o prevailing economic conditions.
In addition, the actual amount of cash we will have available for
distribution will depend on other factors that include:
o the level of capital expenditures we make, including the cost
of acquisitions (if any);
o our debt service requirements;
o fluctuations in our working capital;
o restrictions on distributions contained in our debt
instruments;
o our ability to borrow under our working capital facility to
pay distributions; and
o the amount of cash reserves established by our general partner
in its sole discretion in the conduct of our business.
You should also be aware that our ability to pay quarterly
distributions each quarter depends primarily on our cash flow, including cash
flow from financial reserves and working capital borrowings, and is not solely a
function of profitability, which will be affected by non-cash items. As a
result, we may make cash distributions during periods when we record losses and
we may not make distributions during periods when we record net income.
OUR PROFITABILITY AND CASH FLOW IS DEPENDENT ON OUR ABILITY TO INCREASE OR,
AT A MINIMUM, MAINTAIN OUR CURRENT COMMODITY -- OIL, NATURAL GAS AND CO2 --
VOLUMES, WHICH OFTEN DEPENDS ON ACTIONS AND COMMITMENTS BY PARTIES BEYOND OUR
CONTROL.
Our profitability and cash flow is dependent on our ability to increase
or, at a minimum, maintain our current commodity--oil, natural gas and
CO2--volumes. We access commodity volumes through two sources, producers and
service providers (including gatherers, shippers, marketers and other
aggregators). Depending on the needs of each customer and the market in which it
operates, we can either provide a service for a fee (as in the case of our
pipeline transportation operations) or we can purchase the commodity from our
customer and resell it to another party (as in the case of oil marketing and CO2
operations).
Our source of volumes depends on successful exploration and development
of additional oil and natural gas reserves by others and other matters beyond
our control.
The oil, natural gas and other products available to us are derived
from reserves produced from existing wells, which reserves naturally decline
over time. In order to offset this natural decline, our energy infrastructure
assets must access additional reserves. Additionally, some of the projects we
have planned or recently completed are dependent on reserves that we expect to
be produced from newly discovered properties that producers are currently
developing.
Finding and developing new reserves is very expensive, requiring large
capital expenditures by producers for exploration and development drilling,
installing production facilities and constructing pipeline extensions to reach
the new wells. Many economic and business factors out of our control can
adversely affect the decision by any producer to explore for and develop new
reserves. These factors include the prevailing market price of the commodity,
the capital budgets of producers, the depletion rate of existing reservoirs, the
success of new wells drilled, environmental concerns, regulatory initiatives,
cost and availability of equipment, capital budget limitations or the lack of
available capital, and other matters beyond our control. Additional reserves, if
discovered, may not be developed in the near future or at all. We cannot assure
you that production will rise to sufficient levels to allow us to maintain or
increase the commodity volumes we are experiencing.
We face intense competition to obtain commodity volumes.
Our competitors--gatherers, transporters, marketers, brokers and other
aggregators--include independents and major integrated energy companies, as well
as their marketing affiliates, who vary widely in size, financial resources and
experience. Some of these competitors have capital resources many times greater
than ours and control substantially greater supplies of crude oil.
Even if reserves exist in the areas accessed by our facilities and are
ultimately produced, we may not be chosen by the producers to gather, transport,
store or otherwise handle any of these reserves. We compete with others for any
such volumes on the basis of many factors, including:
o geographic proximity to the production;
o costs of connection;
o available capacity;
o rates; and
o access to markets.
Additionally, third-party shippers do not have long-term contractual
commitments to ship crude oil on our pipelines. A decision by a shipper to
substantially reduce or cease to ship volumes of crude oil on our pipelines
could cause a significant decline in our revenues. In Mississippi, we are
dependent on interconnections with other pipelines to provide shippers with a
market for their crude oil, and in Texas, we are dependent on interconnections
with other pipelines to provide shippers with transportation to our pipeline.
Any reduction of throughput available to our shippers on these interconnecting
pipelines as a result of testing, pipeline repair, reduced operating pressures
or other causes could result in reduced throughput on our pipelines that would
adversely affect our cash flows and results of operations.
Fluctuations in demand for crude oil, such as those caused by refinery
downtime or shutdowns, can negatively affect our operating results. Reduced
demand in areas we service with our pipelines can result in less demand for our
transportation services. In addition, certain of our field and pipeline
operating costs and expenses are fixed and do not vary with the volumes we
gather and transport. These costs and expenses may not decrease ratably or at
all should we experience a reduction in our volumes gathered by truck or
transmitted by our pipelines. As a result, we may experience declines in our
margin and profitability if our volumes decrease.
FLUCTUATIONS IN COMMODITY PRICES COULD ADVERSELY AFFECT OUR BUSINESS.
Oil, natural gas, other petroleum product and CO2 prices are volatile
and could have an adverse effect on a portion of our profits and cash flow. Our
operations are affected by price reductions. Price reductions can materially
reduce the level of exploration, production and development operations, as well
as pipeline and marketing volumes.
Prices for commodities can fluctuate in response to changes in supply,
market uncertainty and a variety of additional factors that are beyond our
control.
OUR OPERATIONS ARE DEPENDENT UPON DEMAND FOR CRUDE OIL BY REFINERS IN THE
MIDWEST AND ON THE GULF COAST.
Any decrease in this demand for crude oil by the refineries or
connecting carriers to which we deliver could adversely affect our business.
Those refineries' need for crude oil also is dependent on the competition from
other refineries, the impact of future economic conditions, fuel conservation
measures, alternative fuel requirements, government regulation or technological
advances in fuel economy and energy generation devices, all of which could
reduce demand for our services.
WE ARE EXPOSED TO THE CREDIT RISK OF OUR CUSTOMERS IN THE ORDINARY COURSE OF
OUR CRUDE OIL GATHERING AND MARKETING ACTIVITIES.
When we market crude oil, we must determine the amount, if any, of the
line of credit we will extend to any given customer. Since typical sales
transactions can involve tens of thousands of barrels of crude oil, the risk of
nonpayment and nonperformance by customers is an important consideration in our
business. In those cases where we provide division order services for crude oil
purchased at the wellhead, we may be responsible for distribution of proceeds to
all parties. In other cases, we pay all of or a portion of the production
proceeds to an operator who distributes these proceeds to the various interest
owners. These arrangements expose us to operator credit risk. As a result, we
must determine that operators have sufficient financial resources to make such
payments and distributions and to indemnify and defend us in case of a protest,
action or complaint. Even if our credit review and analysis mechanisms work
properly, there can be no assurance that we will not experience losses in
dealings with other parties.
OUR INDEBTEDNESS COULD ADVERSELY RESTRICT OUR ABILITY TO OPERATE, AFFECT OUR
FINANCIAL CONDITION AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER OUR
DEBT INSTRUMENTS AND MAKING DISTRIBUTIONS.
We have outstanding indebtedness and the ability to incur more
indebtedness. As of December 31, 2004, we had approximately $15.3 million
outstanding of senior secured indebtedness and approximately $75.4 million
outstanding of accounts payable.
We and all of our subsidiaries must comply with various affirmative and
negative covenants contained in our credit facilities. Among other things, these
covenants limit the ability of us and our subsidiaries to:
o incur additional indebtedness or liens;
o make payments in respect of or redeem or acquire any debt or
equity issued by us;
o sell assets;
o make loans or investments;
o extend credit;
o acquire or be acquired by other companies; and
o amend some of our contracts.
The restrictions under our indebtedness may prevent us from engaging in
certain transactions which might otherwise be considered beneficial to us and
could have other important consequences to you. For example, they could:
o increase our vulnerability to general adverse economic and
industry conditions;
o limit our ability to make distributions to unitholders; to
fund future working capital, capital expenditures and other
general partnership requirements; to engage in future
acquisitions, construction or development activities; or to
otherwise fully realize the value of our assets and
opportunities because of the need to dedicate a substantial
portion of our cash flow from operations to payments on our
indebtedness or to comply with any restrictive terms of our
indebtedness;
o limit our flexibility in planning for, or reacting to, changes
in our businesses and the industries in which we operate; and
o place us at a competitive disadvantage as compared to our
competitors that have less debt.
We may incur additional indebtedness (public or private) in the future,
either under our existing credit facilities, by issuing debt instruments, under
new credit agreements, under joint venture credit agreements, under capital
leases or synthetic leases, on a project finance or other basis, or a
combination of any of these. If we incur additional indebtedness in the future,
it likely would be under our existing credit facility or under arrangements
which may have terms and conditions at least as restrictive as those contained
in our existing credit facilities. Failure to comply with the terms and
conditions of any existing or future indebtedness would constitute an event of
default. If an event of default occurs, the lenders will have the right to
accelerate the maturity of such indebtedness and foreclose upon the collateral,
if any, securing that indebtedness. If an event of default occurs under our
joint ventures' credit facilities, we may be required to repay amounts
previously distributed to us and our subsidiaries. In addition, if there is a
change of control as described in our credit facility, that would be an event of
default, unless our creditors agreed otherwise, under our credit facility. Any
such event could limit our ability to fulfill our obligations under our debt
instruments and to make cash distributions to unitholders which could adversely
affect the market price of our securities.
OUR OPERATIONS ARE SUBJECT TO FEDERAL AND STATE ENVIRONMENTAL AND SAFETY
REGULATIONS AND LAWS RELATED TO ENVIRONMENTAL PROTECTION AND OPERATIONAL SAFETY.
Our gathering and pipeline operations are subject to the risk of
incurring substantial environmental and safety related costs and liabilities.
These costs and liabilities could rise under increasingly strict environmental
and safety laws, including regulations and enforcement policies, or claims for
damages to property or persons resulting from our operations. If we are unable
to recover such resulting costs through increased rates or insurance
reimbursements, our cash flows and distributions to our unitholders could be
materially affected.
The transportation and storage of crude oil involves a risk that crude
oil and related hydrocarbons may be suddenly or gradually released into the
environment, which may result in substantial expenditures for a response action,
significant government penalties, liability to government agencies for natural
resources damages, liability to private parties for personal injury or property
damages, and significant business interruption.
OUR CO2 OPERATIONS PRIMARILY RELATE TO OUR VOLUMETRIC PRODUCTION PAYMENT
INTERESTS, WHICH ARE A FINITE RESOURCE AND PROJECTED TO DEPLETE AROUND 2015.
The cash flow from our CO2 operations primarily relates to our
volumetric production payment, which is projected to terminate around 2015.
Unless we are able to obtain a replacement supply of CO2 and enter into sales
arrangements that generate substantially similar economics, our cash flow could
decline significantly around 2015.
OUR CO2 OPERATIONS ARE EXPOSED TO RISKS RELATED TO DENBURY'S OPERATION OF
THEIR CO2 FIELDS, EQUIPMENT AND PIPELINE.
Because Denbury Resources produces the CO2 and transports the CO2 to
our customers, any major failure of its operations could have an impact on our
ability to meet our obligations to our CO2 customers. We have no other supply of
CO2 or method to transport it to our customers.
The CO2 supplied by Denbury Resources to us for our sale to our
customers could fail to meet the quality standards in the contracts due to
impurities or water vapor content. If the CO2 were below specifications, we
could be contractually obligated to provide compensation to our customers for
the costs incurred in raising the CO2 quality to serviceable levels required by
our contracts.
FLUCTUATIONS IN DEMAND FOR CO2 BY OUR INDUSTRIAL CUSTOMERS COULD MATERIALLY
IMPACT OUR PROFITABILITY.
Our customers are not obligated to purchase volumes in excess of
specified minimum amounts in our contracts. As a result, fluctuations in our
customers' demand due to market forces or operational problems could result in a
reduction in our revenues from our sales of CO2.
OUR WHOLESALE CO2 INDUSTRIAL OPERATIONS ARE DEPENDENT ON FIVE CUSTOMERS.
If one or more of those customers experience financial difficulties
such that they fail to purchase their required minimum take-or-pay volumes, our
cash flows could be adversely affected. We believe these five customers are
credit worthy, but we cannot assure you that an unanticipated deterioration in
their ability to meet their obligations to us might not occur.
WE MAY NOT BE ABLE TO FULLY EXECUTE OUR GROWTH STRATEGY IF WE ENCOUNTER TIGHT
CAPITAL MARKETS OR INCREASED COMPETITION FOR QUALIFIED ASSETS.
Our strategy contemplates substantial growth through the development
and acquisition of a wide range of midstream and other energy infrastructure
assets while maintaining a strong balance sheet. This strategy includes
constructing and acquiring additional assets and businesses to enhance our
ability to compete effectively, diversify our asset portfolio and, thereby,
provide more stable cash flow. We regularly consider and enter into discussions
regarding, and are currently contemplating, additional potential joint ventures,
stand-alone projects and other transactions that we believe will present
opportunities to realize synergies, expand our role in the energy infrastructure
business, and increase our market position and, ultimately, increase
distributions to unitholders.
We will need new capital to finance the future development and
acquisition of assets and businesses. Limitations on our access to capital will
impair our ability to execute this strategy. Expensive capital will limit our
ability to develop or acquire accretive assets. Although we intend to continue
to expand our business, this strategy may require substantial capital, and we
may not be able to raise the necessary funds on satisfactory terms, if at all.
In addition, we are experiencing increased competition for the assets
we purchase or contemplate purchasing. Increased competition for a limited pool
of assets could result in our not being the successful bidder more often or our
acquiring assets at a higher relative price than that which we have paid
historically. Either occurrence would limit our ability to fully execute our
growth strategy. Our ability to execute our growth strategy may impact the
market price of our securities.
OUR GROWTH STRATEGY MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS IF WE DO
NOT SUCCESSFULLY INTEGRATE THE BUSINESSES THAT WE ACQUIRE OR IF WE SUBSTANTIALLY
INCREASE OUR INDEBTEDNESS AND CONTINGENT LIABILITIES TO MAKE ACQUISITIONS.
We may be unable to integrate successfully businesses we acquire. We
may incur substantial expenses, delays or other problems in connection with our
growth strategy that could negatively impact our results of operations.
Moreover, acquisitions and business expansions involve numerous risks,
including:
o difficulties in the assimilation of the operations,
technologies, services and products of the acquired companies
or business segments;
o inefficiencies and complexities that can arise because of
unfamiliarity with new assets and the businesses associated
with them, including unfamiliarity with their markets; and
o diversion of the attention of management and other personnel
from day-to-day business to the development or acquisition of
new businesses and other business opportunities.
If consummated, any acquisition or investment also likely would result
in the incurrence of indebtedness and contingent liabilities and an increase in
interest expense and depreciation, depletion and amortization expenses. A
substantial increase in our indebtedness and contingent liabilities could have a
material adverse effect on our business, as discussed above.
OUR ACTUAL CONSTRUCTION, DEVELOPMENT AND ACQUISITION COSTS COULD EXCEED OUR
FORECAST, AND OUR CASH FLOW FROM CONSTRUCTION AND DEVELOPMENT PROJECTS MAY NOT
BE IMMEDIATE.
Our forecast contemplates significant expenditures for the development,
construction or other acquisition of energy infrastructure assets, including
some construction and development projects with technological challenges. We may
not be able to complete our projects at the costs currently estimated. If we
experience material cost overruns, we will have to finance these overruns using
one or more of the following methods:
o using cash from operations;
o delaying other planned projects;
o incurring additional indebtedness; or
o issuing additional debt or equity.
Any or all of these methods may not be available when needed or may
adversely affect our future results of operations.
FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR BUSINESS.
In addition to our exposure to commodity prices, we also have exposure
to movements in interest rates. The interest rates on our indebtedness
outstanding on the date of this prospectus, like our credit facility, are
variable. Our results of operations and our cash flow, as well as our access to
future capital and our ability to fund our growth strategy, could be adversely
affected by significant increases or decreases in interest rates.
OUR USE OF DERIVATIVE FINANCIAL INSTRUMENTS COULD RESULT IN FINANCIAL LOSSES.
We use financial derivative instruments and other hedging mechanisms
from time to time to limit a portion of the adverse effects resulting from
changes in commodity prices, although there are times when we do not have any
hedging mechanisms in place. To the extent we hedge our commodity price
exposure, we forego the benefits we would otherwise experience if commodity
prices were to increase. In addition, we could experience losses resulting from
our hedging and other derivative positions. Such losses could occur under
various circumstances, including if our counterparty does not perform its
obligations under the hedge arrangement, our hedge is imperfect, or our hedging
policies and procedures are not followed.
A NATURAL DISASTER, CATASTROPHE OR OTHER INTERRUPTION EVENT INVOLVING US
COULD RESULT IN SEVERE PERSONAL INJURY, PROPERTY DAMAGE AND ENVIRONMENTAL
DAMAGE, WHICH COULD CURTAIL OUR OPERATIONS AND OTHERWISE ADVERSELY AFFECT OUR
ASSETS AND CASH FLOW.
Some of our operations involve higher risks of severe personal injury,
property damage and environmental damage, any of which could curtail our
operations and otherwise expose us to liability and adversely affect our cash
flow. Virtually all of our operations are exposed to the elements, including
tornadoes, storms, floods and earthquakes.
If one or more facilities that are owned by us or that connect to us is
damaged or otherwise affected by severe weather or any other disaster, accident,
catastrophe or event, our operations could be significantly interrupted. Similar
interruptions could result from damage to production or other facilities that
supply our facilities or other stoppages arising from factors beyond our
control. These interruptions might involve significant damage to people,
property or the environment, and repairs might take from a week or less for a
minor incident to six months or more for a major interruption. Any event that
interrupts the fees generated by our energy infrastructure assets, or which
causes us to make significant expenditures not covered by insurance, could
reduce our cash available for paying our interest obligations as well as
unitholder distributions and, accordingly, adversely impact the market price of
our securities. Additionally, the proceeds of any property insurance maintained
by us may not be paid in a timely manner or be in an amount sufficient to meet
our needs if such an event were to occur, and we may not be able to renew it or
obtain other desirable insurance on commercially reasonable terms, if at all.
FERC REGULATION AND A CHANGING REGULATORY ENVIRONMENT COULD AFFECT OUR CASH
FLOW.
The FERC extensively regulates certain of our energy infrastructure
assets. This regulation extends to such matters as:
o rate structures;
o rates of return on equity;
o recovery of costs;
o the services that our regulated assets are permitted to
perform;
o the acquisition, construction and disposition of assets; and
o to an extent, the level of competition in that regulated
industry.
Given the extent of this regulation, the extensive changes in FERC
policy over the last several years, the evolving nature of regulation and the
possibility for additional changes, the current regulatory regime may change and
affect our financial position, results of operations or cash flows.
TERRORIST ATTACKS AIMED AT THE PARTNERSHIP'S FACILITIES COULD ADVERSELY
AFFECT THE BUSINESS.
On September 11, 2001, the United States was the target of terrorist
attacks of unprecedented scale. Since the September 11 attacks, the U.S.
government has issued warnings that energy assets, specifically the nation's
pipeline infrastructure, may be the future targets of terrorist organizations.
These developments have subjected our operations to increased risks. Any future
terrorist attack at our facilities, those of our customers and, in some cases,
those of other pipelines, could have a material adverse effect on our business.
DENBURY IS THE ONLY SHIPPER (OTHER THAN US) ON OUR MISSISSIPPI SYSTEM.
Denbury Resources is our only customer on the Mississippi System. This
relationship may subject our operations to increased risks. Any adverse
developments concerning Denbury Resources could have a material adverse effect
on our Mississippi System business. Neither our partnership agreement nor any
other agreement requires Denbury Resources to pursue a business strategy that
favors us or utilizes our Mississippi System. Denbury Resources may compete with
us and may manage their transportation system in a manner that could adversely
affect our Mississippi System business.
WE CANNOT CAUSE OUR JOINT VENTURES TO TAKE OR NOT TO TAKE CERTAIN ACTIONS
UNLESS SOME OR ALL OF THE JOINT VENTURE PARTICIPANTS AGREE.
Due to the nature of joint ventures, each participant (including us) in
our joint venture, T & P Syngas Supply Company, has made substantial investments
(including contributions and other commitments) in that joint venture and,
accordingly, has required that the relevant charter documents contain certain
features designed to provide each participant with the opportunity to
participate in the management of the joint venture and to protect its investment
in that joint venture, as well as any other assets which may be substantially
dependent on or otherwise affected by the activities of that joint venture.
These participation and protective features include a corporate governance
structure that consists of a management committee composed of four members, only
two of which are appointed by us. In addition, Praxair, the other 50% owner,
operates the joint venture facilities. Thus, without the concurrence of the
other joint venture participant, we cannot cause our joint venture to take or
not to take certain actions, even though those actions may be in the best
interest of the joint venture or us. As of April 1, 2005, our aggregate
investment in T & P Syngas Supply Company totaled $13.5 million.
OUR SYNGAS OPERATIONS ARE DEPENDENT ON ONE CUSTOMER.
Our syngas joint venture has dedicated 100% of its syngas processing
capacity to one customer pursuant to a processing contract. The contract term
expires in 2016, unless our customer elects to extend the contract for two
additional five year terms. If our customer reduces or discontinues its business
with us, or if we are not able to successfully negotiate a replacement contract
with our sole customer after the expiration of such contract, or if the
replacement contract is on less favorable terms, the effect on us will be
adverse. In addition, if our sole customer for syngas processing were to
experience financial difficulties such that it failed to provide volumes to
process, our cash flow from the syngas joint venture could be adversely
affected. We believe this customer is creditworthy, but we cannot assure you
that unanticipated deterioration of their abilities to meet their obligations to
the syngas joint venture might not occur.
RISKS RELATED TO OUR PARTNERSHIP STRUCTURE
DENBURY AND ITS AFFILIATES HAVE CONFLICTS OF INTEREST WITH US AND LIMITED
FIDUCIARY RESPONSIBILITIES, WHICH MAY PERMIT THEM TO FAVOR THEIR OWN INTERESTS
TO YOUR DETRIMENT.
Denbury Resources indirectly owns and controls our general partner.
Conflicts of interest may arise between Denbury Resources and its affiliates,
including our general partner, on the one hand, and us and our unitholders, on
the other hand. As a result of these conflicts, our general partner may favor
its own interest and the interest of its affiliates or others over the interest
of our unitholders. These conflicts include, among others, the following
situations:
o neither our partnership agreement nor any other agreement
requires Denbury Resources to pursue a business strategy that
favors us or utilizes our assets. Denbury Resources' directors
and officers have a fiduciary duty to make these decisions in
the best interest of the stockholders of Denbury Resources;
o Denbury Resources may compete with us. Denbury Resources owns
the largest reserves of CO2 used for tertiary oil recovery east
of the Mississippi River and may manage these reserves in a
manner that could adversely affect our CO2 business;
o our general partner is allowed to take into account the
interest of parties other than us, such as Denbury Resources,
in resolving conflicts of interest;
o our general partner may limit its liability and reduce its
fiduciary duties, while also restricting the remedies available
to our unitholders for actions that, without the limitations,
might constitute breaches of fiduciary duty;
o our general partner determines the amount and timing of asset
purchases and sales, capital expenditures, borrowings,
including for incentive distributions, issuance of additional
partnership securities, reimbursements and enforcement of
obligations to the general partner and its affiliates,
retention of counsel, accountants and service providers, and
cash reserves, each of which can also affect the amount of cash
that is distributed to our unitholders;
o our general partner determines which costs incurred by it and
its affiliates are reimbursable by us and the reimbursement of
these costs and of any services provided by our general partner
could adversely affect our ability to pay cash distributions to
our unitholders;
o our general partner controls the enforcement of obligations
owed to us by our general partner and its affiliates;
o our general partner decides whether to retain separate counsel,
accountants or others to perform services for us; and
o in some instances, our general partner may cause us to borrow
funds in order to permit the payment of distributions even if
the purpose or effect of the borrowing is to make incentive
distributions.
We expect to continue to enter into substantial transactions and other
activities with Denbury Resources and its subsidiaries because of the businesses
and areas in which we and Denbury Resources currently operate, as well as those
in which we plan to operate in the future. Some more recent transactions in
which we, on the one hand, and Denbury Resources and its subsidiaries, on the
other hand, had a conflict of interest include:
o transportation services
o pipeline monitoring services; and
o CO2 volumetric production payment.
In addition, Denbury Resources' beneficial ownership interest in our
outstanding partnership interests could have a substantial effect on the outcome
of some actions requiring partner approval. Accordingly, subject to legal
requirements, Denbury Resources makes the final determination regarding how any
particular conflict of interest is resolved.
EVEN IF UNITHOLDERS ARE DISSATISFIED, THEY CANNOT EASILY REMOVE OUR GENERAL
PARTNER.
Unlike the holders of common stock in a corporation, unitholders have
only limited voting rights on matters affecting our business and, therefore,
limited ability to influence management's decisions regarding our business.
Unitholders did not elect our general partner or its board of directors
and will have no right to elect our general partner or its board of directors on
an annual or other continuing basis. The board of directors of our general
partner is chosen by the stockholders of our general partner. In addition, if
the unitholders are dissatisfied with the performance of our general partner,
they will have little ability to remove our general partners. As a result of
these limitations, the price at which the common units trade could be diminished
because of the absence or reduction of a takeover premium in the trading price.
The vote of the holders of at least a majority of all outstanding units
(excluding any units held by our general partner and its affiliates) is required
to remove the general partner without cause. For the definition of "cause,"
please see "Description of Our Partnership Agreement" in this prospectus. If our
general partner is removed without cause, (i) Denbury Resources will have the
option to acquire a substantial portion of our Mississippi pipeline system at
110% of its then fair market value, and (ii) our general partner will have the
option to convert its interest in us (other than its common units) into common
units or to require our replacement general partner to purchase such interest
for cash at its then fair market value. In addition, unitholders' voting rights
are further restricted by our partnership agreement provision providing that any
units held by a person that owns 20% or more of any class of units then
outstanding, other than the general partner, its affiliates, their transferees,
and persons who acquired such units with the prior approval of the board of
directors of the general partner, cannot vote on any matter. Our partnership
agreement also contains provisions limiting the ability of unitholders to call
meetings or to acquire information about our operations, as well as other
provisions limiting the unitholders' ability to influence the manner of
direction of management.
As a result of these provisions, the price at which our common units
trade may be lower because of the absence or reduction of a takeover premium.
THE CONTROL OF OUR GENERAL PARTNER MAY BE TRANSFERRED TO A THIRD PARTY
WITHOUT UNITHOLDER CONSENT, WHICH COULD AFFECT OUR STRATEGIC DIRECTION AND
LIQUIDITY.
Our general partner may transfer its general partner interest to a
third party in a merger or in a sale of all or substantially all of its assets
without the consent of the unitholders. Furthermore, there is no restriction in
our partnership agreement on the ability of the owner of our general partner
from transferring its ownership interest in the general partner to a third
party. The new owner of the general partner would then be in a position to
replace the board of directors and officers of the general partner with its own
choices and to control the decisions taken by the board of directors and
officers.
In addition, unless our creditors agreed otherwise, we would be
required to repay the amounts outstanding under our credit facilities upon the
occurrence of any change of control described therein. We may not have
sufficient funds available or be permitted by our other debt instruments to
fulfill these obligations upon such occurrence. A change of control could have
other consequences to us depending on the agreements and other arrangements we
have in place from time to time, including employment compensation arrangements.
OUR GENERAL PARTNER AND ITS AFFILIATES MAY SELL UNITS OR OTHER LIMITED
PARTNER INTERESTS IN THE TRADING MARKET, WHICH COULD REDUCE THE MARKET PRICE OF
COMMON UNITS.
As of December 31, 2004, our general partner and its affiliates own
688,811 (approximately 7%) of our common units. In the future, they may acquire
additional interest or dispose of some or all of their interest. If they dispose
of a substantial portion of their interest in the trading markets, the sale
could reduce the market price of common units. Our partnership agreement, and
other agreements to which we are party, allow our general partner and certain of
its subsidiaries to cause us to register for sale the partnership interests held
by such persons, including common units. These registration rights allow our
general partner and its subsidiaries to request registration of those
partnership interests and to include any of those securities in a registration
of other capital securities by us.
OUR GENERAL PARTNER HAS ANTI-DILUTION RIGHTS.
Whenever we issue equity securities to any person other than our
general partner and its affiliates, our general partner and its affiliates have
the right to purchase an additional amount of those equity securities on the
same terms as they are issued to the other purchasers. This allows our general
partner and its affiliates to maintain their percentage partnership interest in
us. No other unitholder has a similar right. Therefore, only our general partner
may protect itself against dilution caused by the issuance of additional equity
securities.
DUE TO OUR SIGNIFICANT RELATIONSHIPS WITH DENBURY, ADVERSE DEVELOPMENTS
CONCERNING DENBURY COULD ADVERSELY AFFECT US, EVEN IF WE HAVE NOT SUFFERED ANY
SIMILAR DEVELOPMENTS.
Through its subsidiaries, Denbury Resources owns 100 percent of our
general partner and has historically, with its affiliates, employed the
personnel who operate our businesses. Denbury Resources is a significant
stakeholder in our limited partner interests, and as with many other energy
companies, is a significant customer of ours.
WE MAY ISSUE ADDITIONAL COMMON UNITS WITHOUT YOUR APPROVAL, WHICH WOULD
DILUTE YOUR OWNERSHIP INTERESTS.
We may issue an unlimited number of limited partners interests of any
type without the approval of our unitholders.
The issuance of additional common units or other equity securities of
equal or senior rank will have the following effects:
o our unitholders' proportionate ownership interest in us will
decrease;
o the amount of cash available for distribution on each unit may
decrease;
o the relative voting strength of each previously outstanding
unit may be diminished; and
o the market price of our common units may decline.
OUR GENERAL PARTNER HAS A LIMITED CALL RIGHT THAT MAY REQUIRE YOU TO SELL
YOUR COMMON UNITS AT AN UNDESIRABLE TIME OR PRICE.
If at any time our general partner and its affiliates own more than 80%
of the common units, our general partner will have the right, but not the
obligation, which it may assign to any of its affiliates or to us, to acquire
all, but not less than all, of the common units held by unaffiliated persons at
a price not less than their then-current market price. As a result, you may be
required to sell your common units at an undesirable time or price and may not
receive any return on your investment. You may also incur a tax liability upon a
sale of your units.
THE INTERRUPTION OF DISTRIBUTIONS TO US FROM OUR SUBSIDIARIES AND JOINT
VENTURES MAY AFFECT OUR ABILITY TO MAKE PAYMENTS ON INDEBTEDNESS OR CASH
DISTRIBUTIONS TO OUR UNITHOLDERS.
We are a holding company. As such, our primary assets are the equity
interests in our subsidiaries and joint ventures. Consequently, our ability to
fund our commitments (including payments on our indebtedness) and to make cash
distributions depends upon the earnings and cash flow of our subsidiaries and
joint ventures and the distribution of that cash to us. Distributions from our
joint ventures are subject to the discretion of their respective management
committees. Further, each joint venture's charter documents typically vest in
its management committee sole discretion regarding distributions. Accordingly,
our joint ventures may not continue to make distributions to us at current
levels or at all.
WE DO NOT HAVE THE SAME FLEXIBILITY AS OTHER TYPES OF ORGANIZATIONS TO
ACCUMULATE CASH AND EQUITY TO PROTECT AGAINST ILLIQUIDITY IN THE FUTURE.
Unlike a corporation, our partnership agreement requires us to make
quarterly distributions to our unitholders of all available cash reduced by any
amounts reserved for commitments and contingencies, including capital and
operating costs and debt service requirements. The value of our units and other
limited partner interests will decrease in direct correlation with decreases in
the amount we distribute per unit. Accordingly, if we experience a liquidity
problem in the future, we may not be able to issue more equity to recapitalize.
TAX RISKS TO COMMON UNITHOLDERS
THE IRS COULD TREAT US AS A CORPORATION FOR TAX PURPOSES, WHICH WOULD
SUBSTANTIALLY REDUCE THE CASH AVAILABLE FOR DISTRIBUTION TO YOU.
The after-tax economic benefit of an investment in the common units
depends largely on our being treated as a partnership for federal income tax
purposes. We have not requested, and do not plan to request, a ruling from the
IRS on this or any other tax matter affecting us.
If we were treated as a corporation for federal income tax purposes, we
would pay federal income tax on our income at the corporate tax rate, which is
currently a maximum of 35%. Distributions to you may be taxed again as corporate
dividends, and no income, gains, losses or deductions would flow through to you.
Because a tax would be imposed upon us as a corporation, our cash available for
distribution to you would be substantially reduced. If we were treated as a
corporation, there would be a material reduction in the after-tax return to the
unitholders, likely causing a substantial reduction in the value of our common
units.
Current law may change so as to cause us to be treated as a corporation
for federal income tax purposes or otherwise subject us to entity-level
taxation. In addition, because of widespread state budget deficits, several
states are evaluating ways to subject partnerships to entity-level taxation
through the imposition of state income, franchise or other forms of taxation. If
any state were to impose a tax upon us as an entity, the cash available for
distribution to you would be reduced. The partnership agreement provides that if
a law is enacted or existing law is modified or interpreted in a manner that
subjects us to taxation as a corporation or otherwise subjects us to
entity-level taxation for federal, state or local income tax purposes, the
minimum quarterly distribution amount and the target distribution amounts will
be adjusted to reflect the impact of that law on us.
A SUCCESSFUL IRS CONTEST OF THE FEDERAL INCOME TAX POSITIONS WE TAKE MAY
ADVERSELY AFFECT THE MARKET FOR OUR COMMON UNITS, AND THE COST OF ANY IRS
CONTEST WILL BE BORNE BY OUR UNITHOLDERS AND OUR GENERAL PARTNER.
We have not requested a ruling from the IRS with respect to our
treatment as a partnership for federal income tax purposes or any other matter
affecting us. The IRS may adopt positions that differ from the conclusions of
our counsel expressed in this prospectus or from the positions we take. It may
be necessary to resort to administrative or court proceedings to sustain some or
all of our counsel's conclusions or the positions we take. A court may not agree
with some or all of our counsel's conclusions or positions we take. Any contest
with the IRS may materially and adversely impact the market for our common units
and the price at which they trade. In addition, our costs of any contest with
the IRS will be borne indirectly by our unitholders and our general partner, and
these costs will reduce our cash available for distribution.
YOU MAY BE REQUIRED TO PAY TAXES ON INCOME FROM US EVEN IF YOU DO NOT RECEIVE
ANY CASH DISTRIBUTIONS FROM US.
You will be required to pay any federal income taxes and, in some
cases, state and local income taxes on your share of our taxable income even if
you receive no cash distributions from us. You may not receive cash
distributions from us equal to your share of our taxable income or even the tax
liability that results from that income.
TAX GAIN OR LOSS ON DISPOSITION OF COMMON UNITS COULD BE DIFFERENT THAN
EXPECTED.
If you sell your common units, you will recognize a gain or loss equal
to the difference between the amount realized and your tax basis in those common
units. Prior distributions to you in excess of the total net taxable income you
were allocated for a common unit, which decreased your tax basis in that common
unit, will, in effect, become taxable income to you if the common unit is sold
at a price greater than your tax basis in that common unit, even if the price is
less than your original cost. A substantial portion of the amount realized,
whether or not representing gain, may be ordinary income. In addition, if you
sell your units, you may incur a tax liability in excess of the amount of cash
you receive from the sale.
TAX-EXEMPT ENTITIES, REGULATED INVESTMENT COMPANIES AND FOREIGN PERSONS FACE
UNIQUE TAX ISSUES FROM OWNING COMMON UNITS THAT MAY RESULT IN ADVERSE TAX
CONSEQUENCES TO THEM.
Investment in common units by tax-exempt entities, such as individual
retirement accounts (known as IRAs), regulated investment companies (known as
mutual funds) and non U.S. persons raises issues unique to them. For example, a
significant amount of our income allocated to organizations exempt from federal
income tax, including individual retirement accounts and other retirement plans,
may be unrelated business taxable income and will be taxable to such a
unitholder. Recent legislation treats net income derived from the ownership of
certain publicly traded partnerships (including us) as qualifying income to a
regulated investment company. However, this legislation is only effective for
taxable years beginning after October 22, 2004, the date of enactment. For
taxable years beginning prior to the date of enactment, very little of our
income will be qualifying income to a regulated investment company.
Distributions to non-U.S. persons will be reduced by withholding tax at the
highest effective tax rate applicable to individuals, and non U.S. unitholders
will be required to file federal income tax returns and pay tax on their share
of our taxable income.
WE ARE REGISTERED AS A TAX SHELTER. THIS MAY INCREASE THE RISK OF AN IRS
AUDIT OF US OR YOU.
We are registered with the IRS as a "tax shelter." Our tax shelter
registration number is 97043000153. The federal income tax laws require that
some types of entities, including some partnerships, register as tax shelters in
response to the perception that they claim tax benefits that may be unwarranted.
As a result, we may be audited by the IRS and tax adjustments may be made. Any
unitholder owning less than a 1% profit interest in us has very limited rights
to participate in the income tax audit process. Further, any adjustments in our
tax returns will lead to adjustments in your tax returns and may lead to audits
of your tax returns and adjustments of items unrelated to us. You would bear the
cost of any expense incurred in connection with an examination of your tax
return.
WE WILL TREAT EACH PURCHASER OF COMMON UNITS AS HAVING THE SAME TAX BENEFITS
WITHOUT REGARD TO THE UNITS PURCHASED. THE IRS MAY CHALLENGE THIS TREATMENT,
WHICH COULD ADVERSELY AFFECT THE VALUE OF OUR COMMON UNITS.
Because we cannot match transferors and transferees of common units, we
adopt depreciation and amortization positions that may not conform with all
aspects of applicable Treasury regulations. A successful IRS challenge to those
positions could adversely affect the amount of tax benefits available to a
common unitholder. It also could affect the timing of these tax benefits or the
amount of gain from a sale of common units and could have a negative impact on
the value of the common units or result in audit adjustments to the common
unitholder's tax returns.
YOU WILL LIKELY BE SUBJECT TO STATE AND LOCAL TAXES IN STATES WHERE YOU DO
NOT LIVE AS A RESULT OF AN INVESTMENT IN UNITS.
In addition to federal income taxes, you will likely be subject to
other taxes, including foreign, state and local taxes, unincorporated business
taxes and estate inheritance or intangible taxes that are imposed by the various
jurisdictions in which we do business or own property, even if you do not live
in any of those jurisdictions. You will likely be required to file foreign,
state and local income tax returns and pay state and local income taxes in some
or all of these jurisdictions. Further, you may be subject to penalties for
failure to comply with those requirements. We own assets and do business in
Texas, Louisiana, Mississippi, Alabama, Florida, and Oklahoma. Louisiana,
Mississippi, Alabama, Florida, and Oklahoma currently impose a personal income
tax. It is your responsibility to file all United States federal, foreign, state
and local tax returns. Our counsel has not rendered an opinion on the state or
local tax consequences of an investment in the common units.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENESIS ENERGY, L.P.
(A Delaware Limited Partnership)
By: GENESIS ENERGY, INC., as
General Partner
Date: January 9, 2006 By: /s/ ROSS A. BENAVIDES
----------------------------
Ross A. Benavides
Chief Financial Officer