form10q.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

Form 10-Q

S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

OR

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-12295

GENESIS ENERGY, L.P.
(Exact name of registrant as specified in its charter)

Delaware
76-0513049
(State or other jurisdictions of  incorporation or organization)
(I.R.S. Employer  Identification No.)
   
500 Dallas, Suite 2500, Houston, TX
77002
(Address of principal executive offices)
(Zip code)

Registrant's telephone number, including area code:
(713) 860-2500

Securities registered pursuant to Section 12(g) of the Act:
 
NONE

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.

YesR   No £
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer £
Accelerated filer R
Non-accelerated filer £
Smaller reporting company £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2) of the Exchange Act).

Yes £   No R

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  Common Units outstanding as of August 8, 2008:  39,452,305
 


 
 

 

GENESIS ENERGY, L.P.

Form 10-Q

INDEX

 
PART I.  FINANCIAL INFORMATION

Item 1.
Financial Statements
Page
 
3
     
 
4
     
 
5
     
 
6
     
 
7
   
 
Item 2.
29
     
Item 3.
45
     
Item 4.
47
     
PART II.  OTHER INFORMATION
 
Item 1.
47
     
Item 1A.
47
     
Item 2.
48
     
Item 3.
48
     
Item 4.
48
     
Item 5.
48
     
Item 6.
48
   
 
50

-2-

 
GENESIS ENERGY, L.P.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands)

   
June 30,
   
December 31,
 
   
2008
   
2007
 
             
ASSETS
           
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 9,187     $ 11,851  
Accounts receivable - trade
    229,357       178,658  
Accounts receivable - related party
    5,872       1,441  
Inventories
    18,783       15,988  
Net investment in direct financing leases, net of unearned income - current portion - related party
    3,639       609  
Other
    5,807       5,693  
Total current assets
    272,645       214,240  
                 
FIXED ASSETS, at cost
    230,707       150,413  
Less:  Accumulated depreciation
    (56,265 )     (48,413 )
Net fixed assets
    174,442       102,000  
                 
NET INVESTMENT IN DIRECT FINANCING LEASES, net of unearned income - related party
    180,567       4,764  
CO2 ASSETS, net of amortization
    26,700       28,916  
JOINT VENTURES AND OTHER INVESTMENTS
    19,687       18,448  
INTANGIBLE ASSETS, net of amortization
    187,828       211,050  
GOODWILL
    325,045       320,708  
OTHER ASSETS, net of amortization
    12,328       8,397  
                 
TOTAL ASSETS
  $ 1,199,242     $ 908,523  
                 
LIABILITIES AND PARTNERS' CAPITAL
               
CURRENT LIABILITIES:
               
Accounts payable - trade
  $ 195,427     $ 154,614  
Accounts payable - related party
    2,024       2,647  
Accrued liabilities
    23,332       17,537  
Total current liabilities
    220,783       174,798  
                 
LONG-TERM DEBT
    319,000       80,000  
DEFERRED TAX LIABILITIES
    14,817       20,087  
OTHER LONG-TERM LIABILITIES
    1,290       1,264  
MINORITY INTERESTS
    574       570  
COMMITMENTS AND CONTINGENCIES (Note 16)
               
                 
PARTNERS' CAPITAL:
               
Common unitholders, 39,452 and 38,253 units, respectively, issued and outstanding
    625,932       615,265  
General partner
    16,846       16,539  
Total partners' capital
    642,778       631,804  
                 
TOTAL LIABILITIES AND PARTNERS' CAPITAL
  $ 1,199,242     $ 908,523  

The accompanying notes are an integral part of these consolidated financial statements.

-3-

 
GENESIS ENERGY, L.P.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit amounts)

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2008
   
2007
   
2008
   
2007
 
REVENUES:
                       
Supply and logistics:
                       
Unrelated parties
  $ 568,328     $ 190,293     $ 997,721     $ 363,136  
Related parties
    1,149       442       1,874       878  
Refinery services
    55,727       -       99,639       -  
Pipeline transportation, including natural gas sales:
                               
Transportation services - unrelated parties
    5,168       3,768       11,077       7,923  
Transportation services - related parties
    4,115       1,385       5,167       2,726  
Natural gas sales revenues
    1,603       1,182       2,927       2,474  
CO2 marketing revenues:
                               
Unrelated parties
    3,693       3,295       6,856       6,162  
Related parties
    757       651       1,464       1,281  
Total revenues
    640,540       201,016       1,126,725       384,580  
COSTS AND EXPENSES:
                               
Supply and logistics costs:
                               
Product costs - unrelated parties
    542,200       184,517       949,475       352,228  
Product costs - related parties
    -       18       -       29  
Operating costs
    17,785       4,773       34,367       8,731  
Refinery services operating costs
    38,111       -       68,435       -  
Pipeline transportation costs:
                               
Pipeline transportation operating costs
    2,490       2,996       4,846       5,681  
Natural gas purchases
    1,568       1,112       2,854       2,347  
CO2 marketing costs:
                               
Transportation costs - related party
    1,376       1,236       2,633       2,334  
Other costs
    15       45       30       91  
General and administrative
    9,166       5,600       17,690       8,928  
Depreciation and amortization
    16,721       2,046       33,510       3,974  
Net loss (gain) on disposal of surplus assets
    76       (8 )     94       (24 )
Total costs and expenses
    629,508       202,335       1,113,934       384,319  
OPERATING INCOME (LOSS)
    11,032       (1,319 )     12,791       261  
Equity in (losses) earnings of joint ventures
    (16 )     293       162       554  
Interest income
    117       34       234       78  
Interest expense
    (2,156 )     (355 )     (3,942 )     (625 )
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST
    8,977       (1,347 )     9,245       268  
Income tax expense
    (1,648 )     (25 )     (271 )     (55 )
Income (loss) before minority interest
    7,329       (1,372 )     8,974       213  
Minority interest
    (1 )     -       (1 )     -  
NET INCOME (LOSS)
  $ 7,328     $ (1,372 )   $ 8,973     $ 213  
                                 
NET INCOME (LOSS) PER COMMON UNIT BASIC AND DILUTED
  $ 0.17     $ (0.09 )   $ 0.21     $ 0.02  
                                 
WEIGHTED AVERAGE COMMON UNITS OUTSTANDING:
                               
BASIC
    38,675       13,784       38,464       13,784  
DILUTED
    38,731       13,784       38,514       13,784  

The accompanying notes are an integral part of these consolidated financial statements.

-4-

 
GENESIS ENERGY, L.P.
UNAUDITED CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(In thousands)

   
Partners' Capital
 
   
Number of
                   
   
Common
   
Common
   
General
       
   
Units
   
Unitholders
   
Partner
   
Total
 
                         
Partners' capital, January 1, 2008
    38,253     $ 615,265     $ 16,539     $ 631,804  
Net income
    -       8,045       928       8,973  
Cash contributions
            -       510       510  
Cash distributions
    -       (22,378 )     (1,131 )     (23,509 )
Issuance of units
    1,199       25,000       -       25,000  
Partners' capital, June 30, 2008
    39,452     $ 625,932     $ 16,846     $ 642,778  

The accompanying notes are an integral part of these consolidated financial statements.

-5-

 
GENESIS ENERGY, L.P.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

   
Six Months Ended June 30,
 
   
2008
   
2007
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 8,973     $ 213  
Adjustments to reconcile net income to net cash provided by operating activities -
               
Depreciation and amortization
    33,510       3,974  
Amortization of credit facility issuance costs
    535       273  
Amortization of unearned income and initial direct costs on direct financing leases
    (1,772 )     (315 )
Payments received under direct financing leases
    594       594  
Equity in earnings of investments in joint ventures
    (162 )     (554 )
Distributions from joint ventures - return on investment
    815       833  
Loss (gain) on disposal of assets
    94       (24 )
Non-cash effects of unit-based compensation plans
    (619 )     3,340  
Deferred and other tax liabilities
    (926 )     -  
Other non-cash items
    (112 )     (992 )
Changes in components of operating assets and liabilities -Accounts receivable
    (57,689 )     (379 )
Inventories
    (2,796 )     (6,105 )
Other current assets
    (76 )     952  
Accounts payable
    40,190       931  
Accrued liabilities and taxes payable
    2,137       314  
Net cash provided by operating activities
    22,696       3,055  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Payments to acquire fixed assets
    (9,543 )     (718 )
CO2 pipeline transactions and related costs
    (228,833 )     -  
Distributions from joint ventures - return of investment
    438       361  
Investment in joint ventures and other investments
    (2,210 )     -  
Proceeds from disposal of assets
    426       195  
Prepayment on purchase of Port Hudson assets
    -       (8,100 )
Other, net
    (1,272 )     (1,711 )
Net cash used in investing activities
    (240,994 )     (9,973 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Bank borrowings
    344,100       77,900  
Bank repayments
    (105,100 )     (63,100 )
Other, net
    (367 )     (319 )
General partner contributions
    510          
Distributions to common unitholders
    (22,378 )     (5,927 )
Distributions to general partner interest
    (1,131 )     (122 )
Net cash provided by financing activities
    215,634       8,432  
                 
Net (decrease) increase in cash and cash equivalents
    (2,664 )     1,514  
Cash and cash equivalents at beginning of period
    11,851       2,318  
                 
Cash and cash equivalents at end of period
  $ 9,187     $ 3,832  

The accompanying notes are an integral part of these consolidated financial statements.

-6-

 
GENESIS ENERGY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
1.
Organization and Basis of Presentation

Organization

We are a growth-oriented limited partnership focused on the midstream segment of the oil and gas industry in the Gulf Coast area of the United States.  We conduct our operations through our operating subsidiaries and joint ventures.  We manage our businesses through four divisions:

 
·
Pipeline transportation of crude oil, carbon dioxide (or CO2) and, to a lesser degree, natural gas;

 
·
Refinery services involving processing of high sulfur (or “sour”) gas streams for refineries to remove the sulfur, and sale of the related by-product, sodium hydrosulfide (or NaHS, commonly pronounced nash);

 
·
Industrial gas activities, including wholesale marketing of CO2 and processing of syngas through a joint venture; and

 
·
Supply and logistics services, which includes terminaling, blending, storing, marketing, and transporting by trucks of crude oil and petroleum products as well as dry goods.

 Our 2% general partner interest is held by Genesis Energy, Inc., a Delaware corporation and an indirect, wholly-owned subsidiary of Denbury Resources Inc.  Denbury and its subsidiaries are hereafter referred to as Denbury.  Our general partner and its affiliates also own 10.2% of our outstanding common units.

Our general partner manages our operations and activities and employs our officers and personnel, who devote 100% of their efforts to our management.

Basis of Consolidation and Presentation

The accompanying unaudited consolidated financial statements and related notes present our consolidated financial position as of June 30, 2008 and December 31, 2007 and our results of operations for the three and six months ended June 30, 2008 and 2007, our cash flows for the six months ended June 30, 2008 and 2007 and changes in partners’ capital for the six months ended June 30, 2008.  All intercompany transactions have been eliminated.  The accompanying unaudited consolidated financial statements include Genesis Energy, L.P. and its operating subsidiaries, Genesis Crude Oil, L.P. and Genesis NEJD Holdings, LLC, and their subsidiaries.  Our general partner owns a 0.01% general partner interest in Genesis Crude Oil, L.P., which is reflected in our financial statements as a minority interest.

In July 2007, we acquired the energy-related businesses of the Davison family.  The results of the operations of these businesses have been included in our consolidated financial statements since August 1, 2007.

We own a 50% interest in T&P Syngas Supply Company and a 50% interest in Sandhill Group, LLC.  These investments are accounted for by the equity method, as we exercise significant influence over their operating and financial policies.  See Note 8.

Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end and the results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the fiscal year.  The consolidated financial statements included herein have been prepared by us without audit pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  Accordingly, they reflect all adjustments (which consist solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial results for interim periods.  Certain information and notes normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.  However, we believe that the disclosures are adequate to make the information presented not misleading when read in conjunction with the information contained in the periodic reports we file with the SEC pursuant to the Securities Exchange Act of 1934, including the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007.

-7-

 
GENESIS ENERGY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Except per Unit amounts, or as noted within the context of each footnote disclosure, the dollar amounts presented in the tabular data within these footnote disclosures are stated in thousands of dollars.

2.
Recent Accounting Developments

Implemented

SFAS 157

We adopted Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS 157), with respect to financial assets and financial liabilities that are regularly adjusted to fair value, as of January 1, 2008.  SFAS 157 provides a common fair value hierarchy to follow in determining fair value measurements in the preparation of financial statements and expands disclosure requirements relating to how such measurements were developed. SFAS 157 does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements.  On February 12, 2008 the Financial Accounting Standards Board (FASB) issued Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2) which amends SFAS 157 to delay the effective date for all non-financial assets and non-financial liabilities, except for those that are recognized at fair value in the financial statements on a recurring basis.  The partial adoption of SFAS 157 as described above had no material impact on us.  We have not yet determined the impact, if any, that the second phase of the adoption of SFAS 157 in 2009 will have relating to its fair value measurements of non-financial assets and non-financial liabilities.  See Note 18 for further information regarding fair-value measurements.

SFAS 159

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159).  This statement became effective for us as of January 1, 2008. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. We did not elect to utilize voluntary fair value measurements as permitted by the standard.

Pending

SFAS 141(R)

In December 2007, the FASB issued SFAS No. 141(R) “Business Combinations” (SFAS 141(R)).  SFAS 141(R) replaces FASB Statement No. 141, “Business Combinations.”  This statement retains the purchase method of accounting used in business combinations but replaces SFAS 141 by establishing principles and requirements for the recognition and measurement of assets, liabilities and goodwill, including the requirement that most transaction costs and restructuring costs be charged to expense as incurred.  In addition, the statement requires disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  SFAS 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  We will adopt SFAS 141(R) on January 1, 2009 for acquisitions on or after that date.

SFAS 160

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51” (SFAS 160). This statement establishes accounting and reporting standards for noncontrolling interests, which have been referred to as minority interests in prior literature.  A noncontrolling interest is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent company.  This new standard requires, among other things, that (i) ownership interests of noncontrolling interests be presented as a component of equity on the balance sheet (i.e. elimination of the mezzanine “minority interest” category); (ii) elimination of minority interest expense as a line item on the statement of operations and, as a result, that net income be allocated between the parent and the noncontrolling interests on the face of the statement of operations; and (iii) enhanced disclosures regarding noncontrolling interests.  SFAS 160 is effective for fiscal years beginning after December 15, 2008.  We will adopt SFAS 160 on January 1, 2009.  We are assessing the impact of this statement on our financial statements and expect it to impact the presentation of the minority interest in Genesis Crude Oil, L.P. held by our general partner.

-8-

 
GENESIS ENERGY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SFAS 161

 In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No.133” (SFAS 161). This Statement requires enhanced disclosures about our derivative and hedging activities. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We will adopt SFAS No. 161 beginning January 1, 2009. We are currently evaluating the impact, if any, that the standard will have on our consolidated financial statements.

EITF 07-4

In March 2008, the FASB ratified the consensus reached by the Emerging Issues Task Force (or EITF) of the FASB in issue EITF 07-4, “Application of the Two-Class Method under FASB Statement No. 128, Earnings per Share, to Master Limited Partnerships.”  Under this consensus, the computation of earnings per unit will be affected by the incentive distribution rights (“IDRs”) we are contractually obligated to distribute at the end of the current reporting period.  In periods when earnings are in excess of cash distributions, we will reduce net income or loss for the current reporting period by the amount of available cash that will be distributed to our limited partners and general partner for its general partner interest and incentive distribution rights for the reporting period, and the remainder will be allocated to the limited partner and general partner in accordance with their ownership interests.  When cash distributions exceed current-period earnings, net income or loss will be reduced (or increased) by cash distributions, and the resulting excess of distributions over earnings will be allocated to the general partner and limited partner based on their respective sharing of losses.  EITF 07-4 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.  We are currently evaluating the impact of EITF 07-4; however we expect it to have an impact on our presentation of earnings per unit beginning in 2009.  For additional information on our incentive distribution rights, see Note 10.

FASB Staff Position No. 142-3

In April 2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (FSP 142-3).  This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of an intangible asset under Statement of Financial Accounting Standards No. 142, “Goodwill and other Intangible Assets.” The purpose of this FSP is to develop consistency between the useful life assigned to intangible assets and the cash flows from those assets.  FSP 142-3 is effective for fiscal years beginning after December 31, 2008.  We are currently evaluating the impact, if any, that the standard will have on our consolidated financial statements.

3.
Acquisitions

2008 Denbury Drop-Down Transactions

On May 30, 2008, we completed two “drop-down” transactions with Denbury Onshore LLC, (Denbury Onshore), a wholly-owned subsidiary of Denbury Resources Inc., the indirect owner of our general partner.

NEJD Pipeline System

We entered into a twenty-year financing lease transaction with Denbury Onshore and acquired certain security interests in Denbury’s North East Jackson Dome (NEJD) Pipeline System for which we paid $175 million.  Under the terms of the agreement, Denbury Onshore will make quarterly rent payments beginning August 30, 2008.  These quarterly rent payments are fixed at $5,166,943 per quarter or approximately $20.7 million per year during the lease term at an interest rate of 10.25%.  At the end of the lease term, we will reassign to Denbury Onshore all of our interests in the NEJD Pipeline for a nominal payment.

The NEJD Pipeline System is a 183-mile, 20” CO2 pipeline extending from the Jackson Dome, near Jackson, Mississippi, to near Donaldson, Louisiana, currently being used by Denbury for its tertiary operations in southwest Mississippi.  Denbury has the rights to exclusive use of the NEJD Pipeline System, will be responsible for all operations and maintenance on that system, and will bear and assume all obligations and liabilities with respect to that system.  The NEJD transaction was funded with borrowings under our credit facility.

See additional discussion of this direct financing lease in Note 6.

-9-

 
GENESIS ENERGY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Free State Pipeline System

We purchased Denbury’s Free State Pipeline for $75 million, consisting of $50 million in cash, which we borrowed under our credit facility, and $25 million in the form of 1,199,041 of our common units.  The number of common units issued was based on the average closing price of our common units from May 28, 2008 through June 3, 2008.

The Free State Pipeline is an 86-mile, 20” pipeline that extends from Denbury’s CO2 source fields at the Jackson Dome, near Jackson, Mississippi, to Denbury’s oil fields in east Mississippi.  We entered into a twenty-year transportation services agreement to deliver CO2 on the Free State pipeline for Denbury’s use in its tertiary recovery operations.    Under the terms of the transportation services agreement, we are responsible for owning, operating, maintaining and making improvements to that pipeline.  Denbury has rights to exclusive use of that pipeline and is required to use that pipeline to supply CO2 to its current and certain of its other tertiary operations in east Mississippi.  The transportation services agreement provides for a $100,000 per month minimum payment, which is accounted for as an operating lease, plus a tariff based on throughput. Denbury has two renewal options, each for five years on similar terms. Any sale by us of the Free State Pipeline and related assets or of our ownership interest in our subsidiary that holds such assets would be subject to a right of first refusal purchase option in favor of Denbury.

2007 Davison Businesses Acquisition

On July 25, 2007, we acquired five energy-related businesses from several entities owned and controlled by the Davison family of Ruston, Louisiana (the “Davison Acquisition”) for total consideration of $623 million (including cash and common units), net of cash acquired and direct transaction costs totaling $8.9 million.  The businesses include the operations that comprise our refinery services division, and other operations included in our supply and logistics division, which transport, store, procure, and market petroleum products and other bulk commodities.  The assets acquired in this transaction provide us with opportunities to expand our services to energy companies in the areas in which we operate.

In connection with the finalization of our valuation procedures with respect to certain fixed assets acquired in the Davison Acquisition, we reallocated $3.3 million of the purchase price from fixed assets to goodwill.  In addition, the purchase price was adjusted by $1.0 million during the first half of 2008 for differences in working capital and fixed assets acquired.  See additional information on intangible assets and goodwill in Note 7.

2007 Port Hudson Assets Acquisition

Effective July 1, 2007, we paid $8.1 million for BP Pipelines (North America) Inc.’s Port Hudson crude oil truck terminal, marine terminal, and marine dock on the Mississippi River, which includes 215,000 barrels of tankage, a pipeline and other related assets in East Baton Rouge Parish, Louisiana.  The purchase price was allocated to the assets acquired based on estimated fair values.  See additional information on goodwill in Note 7.

4.
Inventories

Inventories are valued at the lower of cost or market.  The costs of inventories did not exceed market values at June 30, 2008 and December 31, 2007.  The major components of inventories were as follows:

   
June 30, 2008
   
December 31, 2007
 
             
Crude oil
  $ 5,016     $ 3,710  
Petroleum products
    5,120       6,527  
Caustic soda
    2,749       1,998  
NaHS
    5,739       3,557  
Other
    159       196  
Total inventories
  $ 18,783     $ 15,988  
 
-10-

 
GENESIS ENERGY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
   
5.
Fixed Assets and Asset Retirement Obligations

Fixed assets consisted of the following:

   
June 30, 2008
   
December 31, 2007
 
             
Land, buildings and improvements
  $ 12,417     $ 11,978  
Pipelines and related assets
    139,184       63,169  
Machinery and equipment
    22,303       25,097  
Transportation equipment
    32,908       32,906  
Office equipment, furniture and fixtures
    3,548       2,759  
Construction in progress
    8,626       7,102  
Other
    11,721       7,402  
Subtotal
    230,707       150,413  
Accumulated depreciation
    (56,265 )     (48,413 )
Total
  $ 174,442     $ 102,000  


Asset Retirement Obligations

In general, our future asset retirement obligations relate to future costs associated with the removal of our oil, natural gas and CO2 pipelines, removal of equipment and facilities from leased acreage and land restoration. The fair value of a liability for an asset retirement obligation is recorded in the period in which it is incurred, discounted to its present value using our credit adjusted risk-free interest rate, and a corresponding amount capitalized by increasing the carrying amount of the related long-lived asset. The capitalized cost is depreciated over the useful life of the related asset.  Accretion of the discount increases the liability and is recorded to expense.

The following table summarizes the changes in our asset retirement obligations for the six months ended June 30, 2008.

Asset retirement obligations as of December 31, 2007
  $ 1,173  
Accretion expense
    43  
Asset retirement obligations as of June 30, 2008
  $ 1,216  


At June 30, 2008, $0.1 million of our asset retirement obligation was classified in “Accrued liabilities” under current liabilities in our Unaudited Consolidated Balance Sheets.  Certain of our unconsolidated affiliates have asset retirement obligations recorded at June 30, 2008 and December 31, 2007 relating to contractual agreements.  These amounts are immaterial to our financial statements.

6.
Direct Financing Leases

In the fourth quarter of 2004, we constructed two segments of crude oil pipeline and a CO2 pipeline segment to transport crude oil from and CO2 to producing fields operated by Denbury.  Denbury pays us a minimum payment each month for the right to use these pipeline segments.  Those arrangements have been accounted for as direct financing leases.  As discussed in Note 3, we entered into a lease arrangement with Denbury related to the NEJD Pipeline in May 2008 that is being accounted for as a direct financing lease.  Denbury will pay us a fixed payment of $5.2 million per quarter beginning in August 2008.

-11-

 
GENESIS ENERGY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
The following table lists the components of the net investment in direct financing leases at June 30, 2008 and December 31, 2007 (in thousands):

   
June 30, 2008
   
December 31, 2007
 
             
Total minimum lease payments to be received
  $ 419,802     $ 7,039  
Estimated residual values of leased property (unguaranteed)
    1,287       1,287  
Unamortized initial direct costs
    2,637          
Less unearned income
    (239,520 )     (2,953 )
Net investment in direct financing leases
  $ 184,206     $ 5,373  
 
 
At June 30, 2008, minimum lease payments to be received for the remainder of 2008 are $10.9 million.  Minimum lease payments to be received for each of the five succeeding fiscal years are $21.9 million per year for 2009 through 2011, $21.8 million for 2012 and $21.3 million for 2013.
 
7.
Intangible Assets and Goodwill

Intangible Assets

In connection with the Davison acquisition (See Note 3), we allocated a portion of the purchase price to intangible assets based on their fair values.  The following table reflects the components of intangible assets being amortized at the dates indicated:

         
June 30, 2008
   
December 31, 2007
 
   
Weighted Amortization Period in Years
   
Gross Carrying Amount
   
Accumulated Amortization
   
Carrying Value
   
Gross Carrying Amount
   
Accumulated Amortization
   
Carrying Value
 
                                           
Refinery services customer relationships
 
3
    $ 94,654     $ 17,698     $ 76,956     $ 94,654     $ 9,380     $ 85,274  
Supply and logistics customer relationships
 
5
      34,630       6,655       27,975       34,630       3,287       31,343  
Refinery services supplier relationships
 
2
      36,469       16,881       19,588       36,469       9,241       27,228  
Refinery services licensing agreements
 
6
      38,678       4,697       33,981       38,678       2,218       36,460  
Supply and logistics trade name
 
7
      17,988       1,995       15,993       17,988       930       17,058  
Supply and logistics favorable lease
 
15
      13,260       434       12,826       13,260       197       13,063  
Other
 
3
      722       213       509       721       97       624  
Total
 
5
    $ 236,401     $ 48,573     $ 187,828     $ 236,400     $ 25,350     $ 211,050  


The licensing agreements referred to in the table above relate to the agreements we have with refiners to provide services.  The trade name is the Davison name, which we retained the right to use in our operations.  The favorable lease relates to a lease of a terminal facility in Shreveport, Louisiana.

We are recording amortization of our intangible assets based on the period over which the asset is expected to contribute to our future cash flows.  Generally, the contribution to our cash flows of the customer and supplier relationships, licensing agreements and trade name intangible assets is expected to decline over time, such that greater value is attributable to the periods shortly after the acquisition was made.  The favorable lease and other intangible assets are being amortized on a straight-line basis.  Amortization expense on intangible assets was $11.6 million and $23.2 million for the three and six months ended June 30, 2008, respectively.

-12-


GENESIS ENERGY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Estimated amortization expense for each of the five subsequent fiscal years is expected to be as follows:

Year Ended December 31
 
Amortization Expense to be Recorded
 
Remainder of 2008
  $ 23,143  
2009
  $ 32,176  
2010
  $ 25,575  
2011
  $ 20,943  
2012
  $ 17,511  
2013
  $ 14,107  
         


Goodwill

In connection with the Davison and Port Hudson acquisitions (see Note 3), the residual of the purchase price over the fair values of the net tangible and identifiable intangible assets acquired was allocated to goodwill.  The carrying amount of goodwill by business segment at June 30, 2008 was $301.9 million to refinery services and $23.1 million to supply and logistics.

8.
Joint Ventures and Other Investments

T&P Syngas Supply Company

We own a 50% interest in T&P Syngas Supply Company (“T&P Syngas”), a Delaware general partnership.  Praxair Hydrogen Supply Inc. (“Praxair”) owns the remaining 50% partnership interest in T&P Syngas.  T&P Syngas is a partnership that owns a syngas manufacturing facility located in Texas City, Texas.  That facility processes natural gas to produce syngas (a combination of carbon monoxide and hydrogen) and high pressure steam.  Praxair provides the raw materials to be processed and receives the syngas and steam produced by the facility under a long-term processing agreement.  T&P Syngas receives a processing fee for its services.  Praxair operates the facility.  We are accounting for our 50% ownership in T&P Syngas under the equity method of accounting.  We received distributions from T&P Syngas of $1.1 million during each of the six months ended June 30, 2008 and 2007.

Sandhill Group, LLC

We own a 50% interest in Sandhill Group, LLC (“Sandhill”).  At June 30, 2008, Reliant Processing Ltd. held the other 50% interest in Sandhill.  Sandhill owns a CO2 processing facility located in Brandon, Mississippi. Sandhill is engaged in the production and distribution of liquid carbon dioxide for use in the food, beverage, chemical and oil industries. The facility acquires CO2 from us under a long-term supply contract that we acquired in 2005 from Denbury.   We are accounting for our 50% ownership in Sandhill under the equity method of accounting. We received distributions from Sandhill of $124,000 and $60,000 during the six months ended June 30, 2008 and 2007, respectively.

Other Projects

We have invested $4.6 million in the Faustina Project, a petroleum coke to ammonia project that is in the development stage.  All of our investment may later be redeemed, with a return, or converted to equity after the project has obtained construction financing.  The funds we have invested are being used for project development activities, which include the negotiation of off-take agreements for the products and by-products of the plant to be constructed, securing permits and securing financing for the construction phase of the plant.  We have recorded our investment in this debt security at cost and classified it as held-to-maturity, since we have the intent and ability to hold it until it is redeemed.

No events or changes in circumstances have occurred that indicate a significant adverse effect on the fair value of our investment at June 30, 2008, therefore our investment is included in our Unaudited Consolidated Balance Sheet at cost. 

-13-

 
GENESIS ENERGY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
9.
Debt

Our credit facility, with a maximum facility amount of $500 million, of which $100 million can be used for letters of credit, is with a group of banks led by Fortis Capital Corp. and Deutsche Bank Securities Inc.  The maximum facility amount represents the amount the banks have committed to fund pursuant to the terms of the credit agreement.  The borrowing base is recalculated quarterly and at the time of material acquisitions.  The borrowing base represents the amount that can be borrowed or utilized for letters of credit from a credit standpoint based on our EBITDA (earnings before interest, taxes, depreciation and amortization), computed in accordance with the provisions of our credit facility.

The borrowing base may be increased to the extent of pro forma additional EBITDA, (as defined in the credit agreement), attributable to acquisitions or internal growth projects with approval of the lenders.  Our borrowing base as of June 30, 2008 was $447 million.

At June 30, 2008, we had $319 million borrowed under our credit facility and we had $8 million in letters of credit outstanding.  Our debt increased at June 30, 2008 from the December 31, 2007 level as a result of funding our CO2 pipeline transactions with Denbury.  Due to the revolving nature of loans under our credit facility, additional borrowings and periodic repayments and re-borrowings may be made until the maturity date of November 15, 2011.  The total amount available for borrowings at June 30, 2008 was $120 million under our credit facility.  Effective with the submission to banks of our quarterly compliance certificate for the quarter ended June 30, 2008, our borrowing base will increase to the maximum facility amount of $500 million.

The key terms for rates under our credit facility are as follows:

 
·
The interest rate on borrowings may be based on the prime rate or the LIBOR rate, at our option.  The interest rate on prime rate loans can range from the prime rate plus 0.50% to the prime rate plus 1.875%.  The interest rate for LIBOR-based loans can range from the LIBOR rate plus 1.50% to the LIBOR rate plus 2.875%.  The rate is based on our leverage ratio as computed under the credit facility.  Our leverage ratio is recalculated quarterly and in connection with each material acquisition.   At June 30, 2008, our borrowing rates were the prime rate plus 0.50% or the LIBOR rate plus 1.50%.

 
·
Letter of credit fees will range from 1.50% to 2.875% based on our leverage ratio as computed under the credit facility.  The rate can fluctuate quarterly.  At June 30, 2008, our letter of credit rate was 1.50%.

 
·
We pay a commitment fee on the unused portion of the $500 million maximum facility amount.  The commitment fee will range from 0.30% to 0.50% based on our leverage ratio as computed under the credit facility.  The rate can fluctuate quarterly.  At June 30, 2008, the commitment fee rate was 0.30%.

Collateral under the credit facility consists of substantially all our assets, excluding our security interest in the NEJD and our ownership interest in the Free State pipelines. While our general partner is jointly and severally liable for all of our obligations unless and except to the extent those obligations provide that they are non-recourse to our general partner, our credit facility expressly provides that it is non-recourse to our general partner (except to the extent of its pledge of its general partner interest in certain of our subsidiaries), as well as to Denbury and its other subsidiaries.

Our credit facility contains customary covenants (affirmative, negative and financial) that limit the manner in which we may conduct our business.  Our credit facility contains three primary financial covenants - a debt service coverage ratio, leverage ratio and funded indebtedness to capitalization ratio – that require us to achieve specific minimum financial metrics.  In general, our debt service coverage ratio calculation compares EBITDA (as defined and adjusted in accordance with the credit facility) to interest expense.  Our leverage ratio calculation compares our consolidated funded debt (as calculated in accordance with our credit facility) to EBITDA (as adjusted).  Our funded indebtedness ratio compares outstanding debt to the sum of our consolidated total funded debt plus our consolidated net worth.

-14-

 
GENESIS ENERGY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
Financial Covenant
   
Requirement
   
Required Ratio through June 30, 2008
   
Actual Ratio as of June 30, 2008
                   
Debt Service Coverage Ratio
   
Minimum
   
2.75 to 1.0
   
5.05 to 1.0
Leverage Ratio
   
Maximum
   
6.0 to 1.0
   
2.9 to 1.0
Funded Indebtedness Ratio
   
Maximum
   
0.8 to 1.0
   
0.3 to 1.0


Our credit facility includes provisions for the temporary adjustment of the required ratios following material acquisitions and with lender approval.  The ratios in the table above are the required ratios for the period following a material acquisition.  If we meet these financial metrics and are not otherwise in default under our credit facility, we may make quarterly distributions; however, the amount of such distributions may not exceed the sum of the distributable cash generated by us for the eight most recent quarters, less the sum of the distributions made with respect to those quarters.  At June 30, 2008, the excess of distributable cash over distributions under this provision of the credit facility was $31.3 million.

The carrying value of our debt under our credit facility approximates fair value primarily because interest rates fluctuate with prevailing market rates, and the applicable margin on outstanding borrowings reflect what we believe is market.

10.
Partners’ Capital and Distributions

Partners’ Capital

Partner’s capital at June 30, 2008 consists of 39,452,305 common units, including 4,028,096 units owned by our general partner and its affiliates, representing a 98% aggregate ownership interest in the Partnership and its subsidiaries (after giving affect to the general partner interest), and a 2% general partner interest.

Our general partner owns all of our general partner interest, including incentive distribution rights, all of the 0.01% general partner interest in Genesis Crude Oil, L.P. (which is reflected as a minority interest in the Unaudited Consolidated Balance Sheet at June 30, 2008) and operates our business.

Our partnership agreement authorizes our general partner to cause us to issue additional limited partner interests and other equity securities, the proceeds from which could be used to provide additional funds for acquisitions or other needs.

Distributions

Generally, we will distribute 100% of our available cash (as defined by our partnership agreement) within 45 days after the end of each quarter to unitholders of record and to our general partner.  Available cash consists generally of all of our cash receipts less cash disbursements adjusted for net changes to reserves.  As discussed in Note 9, our credit facility limits the amount of distributions we may pay in any quarter.

Pursuant to our partnership agreement, our general partner receives incremental incentive cash distributions when unitholders’ cash distributions exceed certain target thresholds, in addition to its 2% general partner interest.  The allocations of distributions between our common unitholders and our general partner, including the incentive distribution rights is as follows:

   
Unitholders
   
General
Partner
 
Quarterly Cash Distribution per Common Unit:
           
Up to and including $0.25 per Unit
 
98.00%
   
2.00%
 
First Target - $0.251 per Unit up to and including $0.28 per Unit
 
84.74%
   
15.26%
 
Second Target - $0.281 per Unit up to and including $0.33 per Unit
 
74.26%
   
25.74%
 
Over Second Target - Cash distributions greater than $0.33 per Unit
 
49.02%
   
50.98%
 

-15-


GENESIS ENERGY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
We paid or will pay the following distributions in 2007 and 2008:

Distribution For
   
Date Paid
   
Per Unit Amount
   
Limited Partner Interests Amount
   
General Partner Interest Amount
   
General Partner Incentive Distribution Amount
   
Total Amount
 
                     
First quarter 2007
   
May 2007
    $ 0.220     $ 3,032     $ 62     $ -     $ 3,094  
Second quarter 2007
   
August 2007
    $ 0.230     $ 3,170 (1)   $ 65     $ -     $ 3,235 (1)
Third quarter 2007
   
November 2007
    $ 0.270     $ 7,646     $ 156     $ 90     $ 7,892  
Fourth quarter 2007
   
February 2008
    $ 0.285     $ 10,903     $ 222     $ 245     $ 11,370  
First quarter 2008
   
May 2008
    $ 0.300     $ 11,476     $ 234     $ 429     $ 12,139  
Second quarter 2008
   
August 2008 (2)
    $ 0.315     $ 12,427     $ 254     $ 633     $ 13,314  


(1)  The distribution paid on August 14, 2007 to holders of our common units is net of the amounts payable with respect to the common units issued in connection with the Davison transaction.  The Davison unitholders and our general partner waived their rights to receive such distributions, instead receiving purchase price adjustments with us.

(2)  This distribution will be paid on August 14, 2008 to the general partner and unitholders of record as of August 7, 2008.

Net Income (Loss) Per Common Unit

Subject to the applicability of Emerging Issues Task Force Issue No. 03-6 (“EITF 03-6”), Participating Securities and the Two-Class Method under Financial Accounting Standards Board Statement No. 128,” as discussed below, our net income is first allocated to the general partner based on the amount of incentive distributions.  The remainder is then allocated 98% to the limited partners and 2% to the general partner.  Basic net income per limited partner unit is determined by dividing net income attributable to limited partners by the weighted average number of outstanding limited partner units during the period.  Diluted net income per common unit is calculated in the same manner, but also considers the impact to common units for the potential dilution from phantom units outstanding.

In a period of net operating losses, incremental phantom units are excluded from the calculation of diluted earnings per unit due to their anti-dilutive effect. During 2008, we have reported net income; therefore incremental phantom units have been included in the calculation of diluted earnings per unit.

EITF 03-6 addresses the computation of earnings per share by entities that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the entity when, and if, it declares dividends on its common stock (or partnership distributions to unitholders).  EITF 03-06 applies to any accounting period where our aggregate net income exceeds our aggregate distribution.  In such periods, we are required to present earnings per unit as if all of the earnings for the periods were distributed, regardless of the pro forma nature of this allocation and whether those earnings would actually be distributed from an economic or practical perspective.  EITF 03-6 does not impact our overall net income or other financial results; however, for periods in which aggregate net income exceeds our aggregate distributions for such period, it will have the impact of reducing the earnings per limited partner units.  This result occurs as a larger portion of our aggregate earnings is allocated (as if distributed) to our general partner, even though we make cash distributions on the basis of cash available for distributions, not earnings, in any given period.  Our aggregate net earnings have not exceeded our aggregate distributions; therefore EITF 03-6 has not had an impact on our calculation of earnings per unit.  EITF 07-4, which will be effective for us beginning in 2009, will change the allocation of net income among our general partner and limited partners as described in Note 2.

-16-

 
GENESIS ENERGY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


The following table sets forth the computation of basic net income per common unit.

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2008
   
2007
   
2008
   
2007
 
Numerators for basic and diluted net income per common unit:
                       
Net income (loss)
  $ 7,328     $ (1,372 )   $ 8,973     $ 213  
Less:  General partner's incentive distribution paid
    (429 )     -       (674 )     -  
Subtotal
    6,899       (1,372 )     8,299       213  
Less general partner 2% ownership
    (138 )     27       (166 )     (4 )
Net income (loss) available for common unitholders
  $ 6,761     $ (1,345 )   $ 8,133     $ 209  
                                 
Denominator for basic per common unit:
                               
Common Units
    38,675       13,784       38,464       13,784  
                                 
Denominator for diluted per common unit:
                               
Common Units
    38,675       13,784       38,464       13,784  
Phantom Units
    56       -       50       -  
      38,731       13,784       38,514       13,784  
                                 
Basic and diluted net income (loss) per common unit
  $ 0.17     $ (0.09 )   $ 0.21     $ 0.02  


11.
Business Segment Information

Our operations consist of four operating segments:  (1) Pipeline Transportation – interstate and intrastate crude oil, and to a lesser extent, natural gas and CO2 pipeline transportation; (2) Refinery Services – processing high sulfur (or “sour”) gas streams as part of refining operations to remove the sulfur and sale of the related by-product; (3) Industrial Gases – the sale of CO2 acquired under volumetric production payments to industrial customers and our investment in a syngas processing facility, and (4) Supply and Logistics – terminaling, blending, storing, marketing, gathering, and transporting by truck crude oil and petroleum products and other dry goods.  Our Supply and Logistics segment was previously known as Crude Oil Gathering and Marketing.  With the Davison acquisition, we expanded our operations into petroleum products and other transportation services, and combined these operations due to their similarities and our approach to managing these operations. Our chief operating decision maker (our Chief Executive Officer) evaluates segment performance based on a variety of measures, including segment margin, segment volumes where relevant and maintenance capital investment.  The tables below reflect our segment information as though the current segment designations had existed in all periods presented.

-17-


GENESIS ENERGY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
We evaluate segment performance based on segment margin.  We calculate segment margin as revenues less costs of sales and operating expenses, and we include income from investments in joint ventures. We do not deduct depreciation and amortization.  All of our revenues are derived from, and all of our assets are located in, the United States.  The pipeline transportation segment information includes the revenue, segment margin and assets of our direct financing leases.

   
Pipeline
   
Refinery
   
Industrial
   
Supply &
       
   
Transportation
   
Services
   
Gases (a)
   
Logistics
   
Total
 
       
Three Months Ended June 30, 2008
                             
Segment margin excluding depreciation and amortization (b)
  $ 6,828     $ 17,616     $ 3,043     $ 9,492     $ 36,979  
                                         
Capital expenditures
  $ 77,246     $ 559     $ -     $ -     $ 77,805  
Maintenance capital expenditures
  $ -     $ 208     $ -     $ -     $ 208  
                                         
Revenues:
                                       
External customers
  $ 8,885     $ 55,727     $ 4,450     $ 569,477     $ 638,539  
Intersegment (d)
    2,001       -       -       -       2,001  
Total revenues of reportable segments
  $ 10,886     $ 55,727     $ 4,450     $ 569,477     $ 640,540  
                                         
Three Months Ended June 30, 2007
                                       
Segment margin excluding depreciation and amortization (b)
  $ 2,227     $ -     $ 2,958     $ 1,427     $ 6,612  
                                         
Capital expenditures
  $ 337     $ -     $ -     $ 42     $ 379  
Maintenance capital expenditures
  $ 337     $ -     $ -     $ 42     $ 379  
                                         
Revenues:
                                       
External customers
  $ 5,347     $ -     $ 3,946     $ 190,735     $ 200,028  
Intersegment (d)
    988       -       -       -       988  
Total revenues of reportable segments
  $ 6,335     $ -     $ 3,946     $ 190,735     $ 201,016  

-18-

 
GENESIS ENERGY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
   
Pipeline
   
Refinery
   
Industrial
   
Supply &
       
   
Transportation
   
Services
   
Gases (a)
   
Logistics
   
Total
 
                               
Six Months Ended June 30, 2008
                             
Segment margin excluding depreciation and amortization (b)
  $ 11,471     $ 31,204     $ 5,819     $ 15,753     $ 64,247  
                                         
Capital expenditures
  $ 78,524     $ 1,710     $ 2,210     $ 4,603     $ 87,047  
Maintenance capital expenditures
  $ 165     $ 489     $ -     $ 330     $ 984  
Net fixed and other long-term assets (c)
  $ 286,593     $ 449,637     $ 46,387     $ 143,980     $ 926,597  
                                         
Revenues:
                                       
External customers
  $ 15,673     $ 99,639     $ 8,320     $ 999,595     $ 1,123,227  
Intersegment (d)
    3,498       -       -       -       3,498  
Total revenues of reportable segments
  $ 19,171     $ 99,639     $ 8,320     $ 999,595     $ 1,126,725  
                                         
Six Months Ended June 30, 2007
                                       
Segment margin excluding depreciation and amortization (b)
  $ 5,095     $ -     $ 5,572     $ 3,026     $ 13,693  
                                         
Capital expenditures
  $ 559     $ -     $ -     $ 135     $ 694  
Maintenance capital expenditures
  $ 559     $ -     $ -     $ 135     $ 694  
Net fixed and other long-term assets (c)
  $ 38,964     $ -     $ 48,970     $ 8,309     $ 96,243  
                                         
Revenues:
                                       
External customers
  $ 11,007     $ -     $ 7,443     $ 364,014     $ 382,464  
Intersegment (d)
    2,116       -       -       -       2,116  
Total revenues of reportable segments
  $ 13,123       -     $ 7,443     $ 364,014     $ 384,580  

-19-


GENESIS ENERGY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
 
a)
Industrial gases includes our CO2 marketing operations and our equity income from our investments in T&P Syngas and Sandhill.

 
b)
Segment margin was calculated as revenues less cost of sales and operating expenses, excluding depreciation and amortization.  It includes our share of the operating income of equity joint ventures.  A reconciliation of segment margin to income before income taxes and minority interest for the periods presented is as follows:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2008
   
2007
   
2008
   
2007
 
             
Segment margin excluding depreciation and amortization
  $ 36,979     $ 6,612     $ 64,247     $ 13,693  
General and administrative expenses
    (9,166 )     (5,600 )     (17,690 )     (8,928 )
Depreciation and amortization expense
    (16,721 )     (2,046 )     (33,510 )     (3,974 )
Net (loss) gain on disposal of surplus assets
    (76 )     8       (94 )     24  
Interest expense, net
    (2,039 )     (321 )     (3,708 )     (547 )
Income (loss) before income taxes and minority interest
  $ 8,977     $ (1,347 )   $ 9,245     $ 268  

 
c)
Net fixed and other long-term assets are the measure used by management in evaluating the results of its operations on a segment basis.  Current assets are not allocated to segments as the amounts are shared by the segments or are not meaningful in evaluating the success of the segment’s operations.

 
d)
Intersegment sales were conducted on an arm’s length basis.

-20-

 
GENESIS ENERGY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

12.
Transactions with Related Parties

Sales, purchases and other transactions with affiliated companies, in the opinion of management, are conducted under terms no more or less favorable than then-existing market conditions.  The transactions with related parties were as follows:

   
Six Months Ended June 30,
 
   
2008
   
2007
 
             
Truck transportation services provided to Denbury
  $ 1,220     $ 878  
Pipeline transportation services provided to Denbury
  $ 3,314     $ 2,494  
Payments received under direct financing leases from Denbury
  $ 594     $ 594  
Pipeline transportation income portion of direct financing lease fees with Denbury
  $ 1,798     $ 318  
Pipeline monitoring services provided to Denbury
  $ 48     $ 60  
Directors' fees paid to Denbury
  $ 101     $ 74  
CO2 transportation services provided by Denbury
  $ 2,632     $ 2,334  
Crude oil purchases from Denbury
  $ -     $ 29  
Operations, general and administrative services provided by our general partner
  $ 25,789     $ 10,772  
Distributions to our general partner on its limited partner units and general partner interest
  $ 2,786     $ 559  
Sales of CO2 to Sandhill
  $ 1,464     $ 1,281  
Petroleum products sales to Davison family businesses
  $ 654     $ -  
 
 
Transportation Services

We provide truck transportation services to Denbury to move their crude oil from the wellhead to our Mississippi pipeline.  Denbury pays us a fee for this trucking service that varies with the distance the crude oil is trucked.  These fees are reflected in the statement of operations as supply and logistics revenues.

Denbury is the only shipper on our Mississippi pipeline other than us, and we earn tariffs for transporting their oil.  We also earned fees from Denbury under the direct financing lease arrangements for the Olive and Brookhaven crude oil pipelines and the Brookhaven CO2 pipeline and recorded pipeline transportation income from these arrangements.

We also provide pipeline monitoring services to Denbury.  This revenue is included in pipeline revenues in the unaudited statements of operations.

Directors’ Fees

We paid Denbury for the services of each of four of Denbury’s officers who serve as directors of our general partner, at an annual rate that is $10,000 per person less than the rate at which our independent directors were paid.

CO2 Operations and Transportation

Denbury charges us a transportation fee of $0.16 per Mcf (adjusted for inflation) to deliver CO2 for us to our customers.   In the first half of 2008, the inflation-adjusted transportation fee averaged $0.1895 per Mcf.

Operations, General and Administrative Services

We do not directly employ any persons to manage or operate our business.  Those functions are provided by our general partner.  We reimburse the general partner for all direct and indirect costs of these services.

Amounts due to and from Related Parties

At June 30, 2008 and December 31, 2007, we owed Denbury $1.0 million, respectively, for purchases of crude oil and CO2 transportation charges.  Denbury owed us $1.7 million and $0.9 million for transportation services at June 30, 2008 and December 31, 2007, respectively.  We owed our general partner $1.0 million and $0.7 million for administrative services at June 30, 2008 and December 31, 2007, respectively.  At June 30, 2008 and December 31, 2007, Sandhill owed us $0.8 and $0.5 million for purchases of CO2, respectively.  At December 31, 2007, we owed the Davison family entities $0.8 million for reimbursement of costs paid primarily related to employee transition services.

-21-

 
GENESIS ENERGY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Drop-down transactions

On May 30, 2008, we entered into a $175 million financing lease arrangement with Denbury Onshore for its NEJD Pipeline System, and acquired its Free State CO2 pipeline system for $75 million, consisting of $50 million cash and $25 million of our common units.  See Note 3.

Financing

Our general partner, a wholly owned subsidiary of Denbury, guarantees our obligations under our credit facility.  Our general partner’s principal assets are its general and limited partnership interests in us.  Our credit agreement obligations are not guaranteed by Denbury or any of its other subsidiaries.  Our credit facility is non-recourse to our general partner, except to the extent of its pledge of its 0.01% general partner interest in Genesis Crude Oil, L.P.

We guarantee 50% of the obligation of Sandhill to a bank.  At June 30, 2008, the total amount of Sandhill’s obligation to the bank was $3.6 million; therefore, our guarantee was for $1.8 million.

13.
Major Customers and Credit Risk

Due to the nature of our supply and logistics operations, a disproportionate percentage of our trade receivables consists of obligations of oil companies.  This industry concentration has the potential to impact our overall exposure to credit risk, either positively or negatively, in that our customers could be affected by similar changes in economic, industry or other conditions.  However, we believe that the credit risk posed by this industry concentration is offset by the creditworthiness of our customer base.  Our portfolio of accounts receivable is comprised in large part of integrated and large independent energy companies with stable payment experience.  The credit risk related to contracts which are traded on the NYMEX is limited due to the daily cash settlement procedures and other NYMEX requirements.

We have established various procedures to manage our credit exposure, including initial credit approvals, credit limits, collateral requirements and rights of offset.  Letters of credit, prepayments and guarantees are also utilized to limit credit risk to ensure that our established credit criteria are met.

Shell Oil Company accounted for 17% of total revenues in the first half of 2008.  Shell Oil Company, Occidental Energy Marketing, Inc., and Calumet Specialty Products Partners, L.P. accounted for 24%, 19% and 12% of total revenues in the first half of 2007, respectively.  The majority of the revenues from these customers in both periods relate to our crude oil supply and logistics operations.

14.
Supplemental Cash Flow Information

Cash received by us for interest for the six months ended June 30, 2008 and 2007 was $94,000 and $42,000, respectively.  Payments of interest and commitment fees were $3,883,000 and $204,000 for the six months ended June 30, 2008 and 2007, respectively.

Cash paid for income taxes during the six months ended June 30, 2008 was $376,000.

At June 30, 2008, we had incurred liabilities for fixed asset and other asset additions totaling $1.5 million that had not been paid at the end of the second quarter, and, therefore, are not included in the caption “Payments to acquire fixed assets” and “Other, net” under investing activities on the Unaudited Consolidated Statements of Cash Flows.  At June 30, 2007, we had incurred $0.1 million of liabilities that had not been paid at that date and are not included in “Payments to acquire fixed assets” under investing activities.

In May 2008, we issued common units with a value of $25 million as part of the consideration for the acquisition of the Free State Pipeline from Denbury.  This common unit issuance is a non-cash transaction and the value of the assets acquired is not included in investing activities and the issuance of the common units is not reflected under financing activities in our Unaudited Consolidated Statements of Cash Flows.

-22-

 
GENESIS ENERGY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
15.
Derivatives

Our market risk in the purchase and sale of crude oil and petroleum products contracts is the potential loss that can be caused by a change in the market value of the asset or commitment.  In order to hedge our exposure to such market fluctuations, we may enter into various financial contracts, including futures, options and swaps.  Historically, any contracts we have used to hedge market risk were less than one year in duration, although we have the flexibility to enter into arrangements with a longer term.

We may utilize crude oil futures contracts and other financial derivatives to reduce our exposure to unfavorable changes in crude oil, fuel oil and petroleum products prices.  Every derivative instrument (including certain derivative instruments embedded in other contracts) must be recorded in the balance sheet as either an asset or liability measured at its fair value.  Changes in the derivative’s fair value must be recognized currently in earnings unless specific hedge accounting criteria are met.  Special accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the income statement.  Companies must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting.

We mark to fair value our derivative instruments at each period end, with changes in the fair value of derivatives that are not designated as hedges being recorded as unrealized gains or losses.  Such unrealized gains or losses will change, based on prevailing market prices, at each balance sheet date prior to the period in which the transaction actually occurs.  The effective portion of unrealized gains or losses on derivative transactions qualifying as cash flow hedges are reflected in other comprehensive income.  Derivative transactions qualifying as fair value hedges are evaluated for hedge effectiveness and the resulting hedge ineffectiveness is recorded as a gain or loss in the consolidated statements of operations.

We review our contracts to determine if the contracts meet the definition of derivatives pursuant to SFAS 133, “Accounting for Derivative Instruments and Hedging Activities.”  At June 30, 2008, we had futures contracts that were considered free-standing derivatives that are accounted for at fair value.  The fair value of these contracts was determined based on the closing price for such contracts on June 30, 2008.  We marked these contracts to fair value at June 30, 2008.  During the three and six months ended June 30, 2008, we recorded losses of $3.0 million and $4.0 million, respectively, related to derivative transactions, which are included in the Unaudited Consolidated Statements of Operations under the caption “Supply and logistics costs.”  We did not utilize any derivatives that were accounted for as hedges during the three and six months ended June 30, 2008.

The consolidated balance sheet at June 30, 2008 includes a decrease in other current assets of $0.8 million as a result of these derivative transactions.  The consolidated balance sheet at December 31, 2007 included a decrease in other current assets of $0.7 million as a result of derivative transactions.

We determined that the remainder of our derivative contracts qualified for the normal purchase and sale exemption and were designated and documented as such at June 30, 2008 and December 31, 2007.

16.
Contingencies

Guarantees

We guaranteed $1.2 million of residual value related to the leases of trailers from a lessor.  We believe the likelihood that we would be required to perform or otherwise incur any significant losses associated with this guarantee is remote.

We guaranteed 50% of the obligations of Sandhill under a credit facility with a bank.  At June 30, 2008, Sandhill owed $3.6 million; therefore our guaranty was $1.8 million.  Sandhill makes principal payments for this obligation totaling $0.6 million per year.

Pennzoil Litigation

We were named a defendant in a complaint filed on January 11, 2001, in the 125th District Court of Harris County, Texas, Cause No. 2001-01176.  Pennzoil-Quaker State Company, or PQS, was seeking from us property damages, loss of use and business interruption suffered as a result of a fire and explosion that occurred at the Pennzoil Quaker State refinery in Shreveport, Louisiana, on January 18, 2000.  PQS claimed the fire and explosion were caused, in part, by crude oil we sold to PQS that was contaminated with organic chlorides.  In December 2003, our insurance carriers settled this litigation for $12.8 million.

-23-

 
GENESIS ENERGY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

PQS is also a defendant in five consolidated class action/mass tort actions brought by neighbors living in the vicinity of the PQS Shreveport, Louisiana refinery in the First Judicial District Court, Caddo Parish, Louisiana, Cause Nos. 455,647-A, 455,658-B, 455,655-A, 456,574-A, and 458,379-C.  PQS has brought third party claims against us for indemnity with respect to the fire and explosion of January 18, 2000.  We believe that the demand against us is without merit and intend to vigorously defend ourselves in this matter.  We currently believe that this matter will not have a material financial effect on our financial position, results of operations, or cash flows.

Environmental

In 1992, Howell Crude Oil Company (“Howell”) entered into a sublease with Koch Industries, Inc. (“Koch”), covering a one acre tract of land located in Santa Rosa County, Florida to operate a crude oil trucking station, known as Jay Station.  The sublease provided that Howell would indemnify Koch for environmental contamination on the property under certain circumstances.  Howell operated the Jay Station from 1992 until December of 1996 when this operation was sold to us by Howell.  We operated the Jay Station as a crude oil trucking station until 2003.   Koch has indicated that it has incurred certain investigative and/or other costs, for which Koch alleges some or all should be reimbursed by us, under the indemnification provisions of the sublease for environmental contamination on the site and surrounding areas.  Koch has also alleged that we are responsible for future environmental obligations relating to the Jay Station.

Howell was acquired by Anadarko Petroleum Corporation (“Anadarko”) in 2002.  In 2005, we entered into a joint defense and cost allocation agreement with Anadarko.  Under the terms of the joint allocation agreement, we agreed to reasonably cooperate with each other to address any liabilities or defense costs with respect to the Jay Station.  Additionally under the joint allocation agreement, Anadarko will be responsible for sixty percent of the costs related to any liabilities or defense costs incurred with respect to contamination at the Jay Station.

We were formed in 1996 by the sale and contribution of assets from Howell and Basis Petroleum, Inc. (“Basis”).  Anadarko's liability with respect to the Jay Station is derived largely from contractual obligations entered into upon our formation.  We believe that Basis has contractual obligations under the same formation agreements.  We intend to seek recovery of Basis' share of potential liabilities and defense costs with respect to Jay Station.

We have developed a plan of remediation for affected soil and groundwater at Jay Station which has been approved by appropriate state regulatory agencies.  We have accrued an estimate of our share of liability for this matter in the amount of $0.8 million.  The time period over which our liability would be paid is uncertain and could be several years.  This liability may decrease if indemnification and/or cost reimbursement is obtained by us for Basis' potential liabilities with respect to this matter.  At this time, our estimate of potential obligations does not assume any specific amount contributed on behalf of the Basis obligations, although we believe that Basis is responsible for a significant part of these potential obligations.

We are subject to various environmental laws and regulations.  Policies and procedures are in place to monitor compliance and to detect and address any releases of crude oil from our pipelines or other facilities; however, no assurance can be made that such environmental releases may not substantially affect our business.

In connection with the sale of pipeline assets in Texas in the fourth quarter of 2003, we retained responsibility for environmental matters related to the operations of those pipelines in the periods prior to the date of the sales, subject to certain conditions.  On the majority of the pipelines sold, our responsibility for any environmental claim will not exceed an aggregate total of $2 million.  Our responsibility for indemnification related to these sales will cease in 2013.

Other Matters

Our facilities and operations may experience damage as a result of an accident or natural disaster.  These hazards can cause personal injury or loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage and suspension of operations.  We maintain insurance that we consider adequate to cover our operations and properties, in amounts we consider reasonable.  Our insurance does not cover every potential risk associated with operating our facilities, including the potential loss of significant revenues.  The occurrence of a significant event that is not fully-insured could materially and adversely affect our results of operations.  We believe we are adequately insured for public liability and property damage to others and that our coverage is similar to other companies with operations similar to ours.  No assurance can be made that we will be able to maintain adequate insurance in the future at premium rates that we consider reasonable.

-24-

 

 
GENESIS ENERGY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
We are subject to lawsuits in the normal course of business and examination by tax and other regulatory authorities.  We do not expect such matters presently pending to have a material adverse effect on our financial position, results of operations, or cash flows.

17.
Unit-Based Compensation Plans

Stock Appreciation Rights Plan

The adjustment of the liability for our stock appreciation rights plan to its fair value at June 30, 2008 resulted in a net credit to expense for the six months ended June 30, 2008 of $0.6 million, with $0.5 million, $0.1 million and $0.1 million included in general and administrative expenses, pipeline operating costs, and supply and logistics operating costs, respectively. Expense of $0.1 million was recorded to refinery services operating costs related to grants awarded in the first quarter of 2008.  The decrease in our common unit market price from December 31, 2007 to June 30, 2008 of $5.05 reduced the accrual for the plan, providing a credit to the expense we recorded under our plan during the six months ended June 30, 2008.  For the three months ended June 30, 2008, we recorded $0.2 million of expense for our stock appreciation rights plan, with $0.1 million included in each of general and administrative expenses and supply and logistics costs.

The adjustment of the liability to its fair value at June 30, 2007, resulted in expense for the six months ended June 30, 2007 of $4.3 million, with $2.8 million, $0.8 million and $0.7 million included in general and administrative expenses, supply and logistics operating costs, and pipeline operating costs, respectively.  For the three months ended June 30, 2007, the expense we recorded totaled $3.7 million, with $2.5 million, $0.6 million and $0.6 million included in general and administrative expenses, supply and logistics operating costs, and pipeline operating costs, respectively.

The following table reflects rights activity under our plan during the six months ended June 30, 2008:

Stock Appreciation Rights
 
Rights
   
Weighted Average Exercise Price
   
Weighted Average Contractual Remaining Term (Yrs)
   
Aggregate Intrinsic Value
 
                         
Outstanding at January 1, 2008
    593,458     $ 15.45              
Granted
    536,308     $ 20.83              
Exercised
    (25,563 )   $ 20.48              
Forfeited or expired
    (45,833 )   $ 20.90              
Outstanding at June 30, 2008
    1,058,370     $ 18.07       8.4     $ 2,547  
Exercisable at June 30, 2008
    310,324     $ 14.59       6.6     $ 1,600  
 
 
The weighted-average fair value at June 30, 2008 of rights granted during the first half of 2008 was $3.03 per right, determined using the following assumptions:

Assumptions Used for Fair Value of Rights
 
Granted in 2008
 
Expected life of rights (in years)
    5.75 - 6.50  
Risk-free interest rate
    3.58% - 3.67 %
Expected unit price volatility
    33.85 %
Expected future distribution yield
    6.00 %


-25-

 
GENESIS ENERGY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
The total intrinsic value of rights exercised during the first six months of 2008 was $0.3 million, which was paid in cash to the participants.

At June 30, 2008, there was $1.4 million of total unrecognized compensation cost related to rights that we expect will vest under the plan.  This amount was calculated as the fair value at June 30, 2008 multiplied by those rights for which compensation cost has not been recognized, adjusted for estimated forfeitures.  This unrecognized cost will be recalculated at each balance sheet date until the rights are exercised, forfeited, or expire.  For the awards outstanding at June 30, 2008, the remaining cost will be recognized over a weighted average period of 1.0 year.

2007 Long Term Incentive Plan

Subject to adjustment as provided in the 2007 LTIP, awards up to an aggregate of 1,000,000 units may be granted under the 2007 LTIP, of which 928,472 remain authorized for issuance at June 30, 2008.  In February 2008, 9,166 Phantom Units were granted with vesting at the end of three years.  The aggregate grant date fair value of these Phantom Unit awards was $0.2 million based on the grant date market price of our common units of $17.89 per unit, adjusted for distributions that holders of phantom units will not receive during the vesting period.  In June 2008, 23,000 Phantom Units were granted with vesting at the end of one year.  The aggregate grant date fair value of these Phantom Unit awards was $0.5 million based on the grant date market price of our common units of $20.12 per unit, adjusted for distributions that holders of phantom units will not receive during the vesting period.

As of June 30, 2008, there was $1.2 million of unrecognized compensation expense related to these units.  This unrecognized compensation cost is expected to be recognized over a weighted-average period of 1.4 years.

The following table summarizes information regarding our non-vested Phantom Unit grants as of June 30, 2008:

Non-vested Phantom Unit Grants
 
Number of Units
   
Weighted Average Grant-Date Fair Value
 
             
Non-vested at January 1, 2008
    39,362     $ 21.92  
Granted
    32,166     $ 19.48  
Non-vested at June 30, 2008
    71,528     $ 20.82  


18.  Fair-Value Measurements

As discussed in Note 2, we partially adopted SFAS 157 effective January 1, 2008 which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.  SFAS 157 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value.  This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs.  The three levels of inputs used to measure fair value are as follows:

 
Level 1:
Quoted prices in active markets for identical, unrestricted assets or liabilities.

 
Level 2:
Unobservable market-based inputs or unobservable inputs that are corroborated by market data.

 
Level 3:
Unobservable inputs that are not corroborated by market data, which require us to develop our own assumptions.  These inputs include certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

Our derivative contracts are exchange-traded futures and exchange-traded option contracts.  The fair value of these exchange-traded derivative contracts is based on unadjusted quoted prices in active markets and is, therefore, included in Level 1.  See Note 15 for additional information on our derivative instruments.

We generally apply fair value techniques on a non-recurring basis associated with (1) valuing the potential impairment loss related to goodwill pursuant to SFAS 142, and (2) valuing potential impairment loss related to long-lived assets accounted for pursuant to SFAS 144.

-26-

 
GENESIS ENERGY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):

   
Carrying
Amount
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Crude oil and petroleum products derivative instruments (based on quoted market prices on NYMEX)
  $ (9,042 )   $ 9,042     $ -     $ -  


19.
Income Taxes

We are not a taxable entity for federal income tax purposes.  As such, we do not directly pay federal income taxes.  Our taxable income or loss is includible in the federal income tax returns of each of our partners.

A portion of the operations we acquired in the Davison transaction are owned by wholly-owned corporate subsidiaries that are taxable as corporations.  We pay federal and state income taxes on these operations.  The income taxes associated with these operations are accounted for in accordance with SFAS 109 “Accounting for Income Taxes.”

In May 2006, the State of Texas enacted a law which will require us to pay a tax of 0.5% on our “margin,” as defined in the law, beginning in 2008 based on our 2007 results.  The “margin” to which the tax rate will be applied generally will be calculated as our revenues (for federal income tax purposes) less the cost of the products sold (for federal income tax purposes), in the State of Texas.

For the three and six months ended June 30, 2008, we have provided current tax expense in the amount of $5.3 million and $5.5 million, respectively, as the estimate of the taxes that will be owed on our income for the period, and a deferred tax benefit of $3.6 million and $5.2 million, respectively, related to temporary differences, related primarily to differences between amortization of intangible assets for financial reporting and tax purposes.  We recorded an increase of $4.3 million in the liability for uncertain tax benefits during the six months ended June 30, 2008.  This increase was attributable to uncertain tax positions associated with deferred tax liabilities and goodwill.

20.
Subsequent Event – Investment in DG Marine Transportation, LLC

On July 18, 2008, we completed the acquisition of the inland marine transportation business of Grifco Transportation, Ltd. (“Grifco”) and two of Grifco’s affiliates through a joint venture with TD Marine, LLC, an entity formed by members of the Davison family. TD Marine will own (indirectly) an effective 51% economic interest in the joint venture,  DG Marine Transportation, LLC (“DG Marine”), and we will own (directly and indirectly) an effective 49% economic interest.

Grifco received initial purchase consideration of approximately $80 million, comprised of $63.3 million in cash and $16.7 million, or 837,690, of our common units.  A portion of the units are subject to certain lock-up restrictions. DG Marine acquired substantially all of Grifco’s assets, including twelve barges, seven push boats, certain commercial agreements, and office space.  Additionally, DG Marine and/or  its subsidiaries acquired the rights and assumed the obligations to take delivery of four new barges in late third quarter of 2008 and four additional new barges early in first quarter of 2009 (at a total price of approximately $27 million). Upon delivery of the eight new barges, the acquisition of three additional push boats (at an estimated cost of approximately $6 million), and after placing the barges and push boats into commercial operations, DG Marine will be obligated to pay Grifco an additional $12 million in cash as additional purchase consideration, bringing the total value of the joint investment to approximately $125 million.

The acquisition and related closing costs were funded with equity contributions from TD Marine and us of $25.5 million and $24.5 million, respectively, and with borrowings of $32.9 million under a new DG Marine $75 million, which is non-recourse to us and TD Marine (other than with respect to our initial investments).  Although DG Marine’s debt is non-recourse to us, our ownership interest in DG Marine is pledged to secure that indebtedness.

-27-

 
GENESIS ENERGY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

We have entered into a subordinated loan agreement with DG Marine whereby we may (at our sole discretion) lend up to $25 million to DG Marine.  The loan agreement provides for DG Marine to pay us interest on any loans at the rate at which we borrowed funds under our credit facility plus 1%.  Those loans will mature on January 31, 2012.  Under that subordinated loan agreement, DG Marine is required to make monthly payments to us of principal and interest to the extent DG Marine has any available cash that otherwise would have been distributed to the owners of DG Marine in respect of their equity interest.  DG Marine’s revolving credit facility includes restrictions on DG Marine’s ability to make payments under the subordinated loan agreement.

In connection with the DG Marine investment, we redeemed 837,690 common units from the Davison family for a cash value of $16.7 million, and we issued 837,690 common units to Grifco valued at $16.7 million as a portion of our initial equity contribution in DG Marine.  Our total number of outstanding common units did not change as a result of that investment.

-28-

 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Included in Management’s Discussion and Analysis are the following sections:

 
·
Overview

 
·
Drop-down Transactions

 
·
Investment in DG Marine Transportation, LLC

 
·
Liquidity and Capital Resources

 
·
Commitments and Off-Balance Sheet Arrangements

 
·
Results of Operations

 
·
New Accounting Pronouncements

In the discussions that follow, we will focus on two measures that we use to manage our business and to review the results of our operations.  Those two measures are segment margin and Available Cash before Reserves.  Our profitability depends to a significant extent upon our ability to maximize segment margin.  Segment margin is revenues less cost of sales and operating expenses (excluding depreciation and amortization) plus our equity in the operating income of joint ventures.  A reconciliation of segment margin to income from continuing operations is included in our segment disclosures in Note 11 to the consolidated financial statements.

Available Cash before Reserves (a non-GAAP measure) is net income as adjusted for specific items, the most significant of which are the elimination of gains and losses on asset sales (except those from the sale of surplus assets), the addition of non-cash expenses (such as depreciation), the substitution of cash generated by our joint ventures in lieu of our equity income attributable to our joint ventures, and the subtraction of maintenance capital expenditures, which are expenditures that are necessary to sustain existing (but not to provide new sources of) cash flows.   For additional information on Available Cash before Reserves and a reconciliation of this measure to cash flows from operations, see “Liquidity and Capital Resources - Non-GAAP Financial Measure” below.

Overview

The second quarter of 2008 was the third full quarter that included the operations acquired from the Davison family in July 2007.  The increases in Available Cash before Reserves resulting from this acquisition enabled us to declare our twelfth consecutive increase in our quarterly distribution.  On July 28, 2008, we announced that our distribution to our common unitholders relative to the second quarter of 2008 will be $0.315 per unit (to be paid in August 2008), which is an increase of 5% relative to the distribution for the first quarter of 2008.   This distribution amount represents a 37% increase from our distribution of $0.23 per unit for the second quarter of 2007.  During the second quarter of 2008, we paid a distribution of $0.30 per unit related to the first quarter of 2008.

During the second quarter of 2008, we generated $26.2 million of Available Cash before Reserves, and we will distribute $13.3 million to holders of our common units and general partner for the second quarter.  During the second quarter of 2008, cash provided by operating activities was $5.3 million.

In the second quarter of 2008, we reported net income of $7.3 million, or $0.17 per common unit.  Non-cash depreciation and amortization totaling $16.7 million reduced net income during the second quarter.

For the six months ended June 30, 2008, we generated net income of $9.0 million, or $0.21 per common unit, with $0.6 million of that income attributable to a reduction in the accrual we recorded for our stock appreciation rights plan.  The decrease in our common unit market price from December 31, 2007 to June 30, 2008 of $5.05 reduced the accrual for the plan, providing a credit to the expense we recorded under our plan during the six months ended June 30, 2008.

Drop-down Transactions

We completed two “drop-down” transactions with Denbury involving two of their existing CO2 pipelines - the NEJD and Free State CO2 pipelines. We paid for these pipeline assets with $225 million in cash and 1,199,041 common units valued at $25 million based on the average closing price of our units for the five trading days surrounding the closing date of the transaction. We expect to receive approximately $30 million per annum, in the aggregate, under the lease agreement for the NEJD pipeline and the Free State pipeline transportation services agreement.  Future payments for the NEJD pipeline are fixed at $20.7 million per year during the term of the financing lease, and the payments related to the Free State pipeline are dependent on the volumes of CO2 transported therein, with a minimum monthly payment of $0.1 million.

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On August 5, 2008, Denbury announced that the economic impact of an approved tax accounting method change providing for an acceleration of tax deductions will likely affect certain types of future asset “drop-downs” to us.  Transactions which are not sales for tax purposes for Denbury, such as the lease arrangement for the NEJD pipeline, would not be affected provided the transactions meet other tax structuring criteria for Denbury and us.  Transactions which constitute a sale for tax purposes for Denbury, like the Free State pipeline transaction, are likely to be discontinued.  While Denbury has also stated it would consider other options and ways to use us as a financing vehicle, there can be no assurances as to the amount, or timing, of any potential future asset “drop-downs” from Denbury to us.

Investment in DG Marine Transportation, LLC

On July 18, 2008, we invested $24.5 million in DG Marine Transportation, LLC, a joint venture in which we hold (directly and indirectly) a 49% interest.  The remaining 51% interest is owned (indirectly) by TD Marine, LLC, an entity formed by members of the Davison family. DG Marine acquired the inland marine transportation business of Grifco Transportation, Ltd.  Grifco received initial purchase consideration of approximately $80 million, comprised of $63.3 million in cash and $16.7 million of our common units.  A portion of the units are subject to certain lock-up restrictions. DG Marine acquired substantially all of Grifco’s assets, including twelve barges, seven push boats, certain commercial agreements, and office space.  Additionally, DG Marine and/or  its subsidiaries acquired the rights and assumed the obligations to take delivery of four new barges in late third quarter of 2008 and four additional new barges early in first quarter of 2009 (at a total price of approximately $27 million). Upon delivery of the eight new barges, the acquisition of three additional push boats (at an estimated cost of approximately $6 million), and after placing the barges and push boats into commercial operations, DG Marine will be obligated to pay Grifco an additional $12 million in cash as additional purchase consideration, bringing the total value of the joint investment to approximately $125 million.

The acquisition and related closing costs were funded with $50 million of aggregate equity contributions from TD Marine and us, in proportion to our ownership percentages, and with borrowings of $32.9 million under a new DG Marine $75 million revolving credit facility, which is non-recourse to us and TD Marine (other than with respect to our initial investments).  Although DG Marine’s debt is non-recourse to us, our ownership interest in DG Marine is pledged to secure that indebtedness.

We have entered into a subordinated loan agreement with DG Marine whereby we may (at our sole discretion) lend up to $25 million to DG Marine.  The loan agreement provides for DG Marine to pay us interest on any loans at the rate at which we borrowed funds under our credit facility plus 1%.  Those loans will mature on January 31, 2012.  Under that subordinated loan agreement, DG Marine is required to make monthly payments to us of principal and interest to the extent DG Marine has any available cash that otherwise would have been distributed to the owners of DG Marine in respect of their equity interest. DG Marine’s revolving credit facility includes restrictions on DG Marine’s ability to make payments under the subordinated loan agreement.

In connection with the DG Marine investment, we redeemed 837,690 common units from the Davison family for a cash value of $16.7 million, and we issued 837,690 common units to Grifco valued at $16.7 million as a portion of our initial equity contribution in DG Marine.  Our total number of outstanding common units did not change as a result of that investment.

Liquidity and Capital Resources

Capital Resources/Sources of Cash

We anticipate that cash generated from our operations will be the primary source of cash used to fund our distributions and our maintenance capital expenditures.  For the six months ended June 30, 2008, cash generated from our operations was $22.7 million.  We periodically utilize our existing credit facility to fund working capital needs.  We also expect to utilize our existing credit facility to fund internal growth projects.   Our credit facility has a maximum facility amount of $500 million, of which up to $100 million may be used for letters of credit.  The borrowing base under the facility at June 30, 2008 was approximately $447 million, and is recalculated quarterly and at the time of acquisitions.  When we provide our lenders with our second quarter compliance data in mid-August, our borrowing base will increase to the maximum facility amount of $500 million, providing approximately $175 million of remaining availability.

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In the last two years, we have adopted a growth strategy that has dramatically increased our cash requirements.  Our existing credit facility gives us $175 million of growth capital.  To the extent any of our possible growth initiatives requires a greater amount of capital, we would have to access new sources of capital, including public and private debt and equity markets.  Conditions in the capital markets for debt and equity may make the terms related to the cost of credit or equity prohibitive in relation to the economics of an acquisition.  Additionally, availability of capital may be limited while financial institutions and investors assess their liquidity positions.  Accordingly, no assurance can be made that we will be able to raise the necessary funds on satisfactory terms to execute our growth strategy.  If we are unable to raise the necessary funds, we may be required to defer our growth plans until such time as funds become available.

The terms of our credit facility also effectively limit the amount of distributions that we may pay to our general partner and holders of common units.  Such distributions may not exceed the sum of the distributable cash generated for the eight most recent quarters, less the sum of the distributions made with respect to those quarters. See Note 9 of the Notes to the Unaudited Consolidated Financial Statements.

Uses of Cash

Our cash requirements include funding day-to-day operations, maintenance and expansion capital projects, debt service, refinancings, and distributions on our common units and other equity interests.  We expect to use cash flows from operating activities to fund cash distributions and maintenance capital expenditures needed to sustain existing operations.  Future expansion capital – acquisitions or capital projects – will require funding through various financing arrangements, as more particularly described under “Liquidity and Capital Resources – Capital Resources/Sources of Cash” above.

Operating.  Our operating cash flows are affected significantly by changes in items of working capital.  The timing of capital expenditures and the related effect on our recorded liabilities affects operating cash flows.

The majority of the accounts receivable reflected on our consolidated balance sheets relate to our crude oil operations.  These accounts receivable settle monthly and collection delays generally relate only to discrepancies or disputes as to the appropriate price, volume or quality of crude oil delivered.  Accounts receivable in our fuel procurement business also settle within 30 days of delivery.  Over 80% of the $235.2 million aggregate receivables on our consolidated balance sheet at June 30, 2008 relate to our crude oil and fuel procurement businesses.

Investing.  We utilized some of our cash flow for capital expenditures and other investing activities.  We paid $238.4 million for capital expenditures and CO2 pipeline transactions and received $0.4 million from the sale of surplus assets.  We received distributions of $0.4 million from our T&P Syngas joint venture that exceeded our share of the earnings of T&P Syngas during the first six months of 2008.  We also invested an additional $3.5 million in other investments.

Financing.  Net cash of $215.6 million was provided by financing activities.  Our net borrowings under our credit facility were $239 million, primarily as a result of the $225 million borrowed to fund the drop-down transactions with Denbury. We paid distributions totaling $23.5 million to our limited partners and our general partner during the six month period, and received $0.1 million from other financing activities.

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Capital Expenditures.  A summary of our capital expenditures, in the six months ended June 30, 2008 and 2007 is as follows:

   
Six Months Ended June 30,
 
   
2008
   
2007
 
   
(in thousands)
 
Capital expenditures for asset purchases:
           
Free State Pipeline acquisition
    75,000       -  
Total asset purchases
    75,000       -  
                 
Capital expenditures for property, plant and equipment:
               
Maintenance capital expenditures:
               
Pipeline transportation assets
    165       559  
Supply and logistics assets
    304       112  
Refinery services assets
    489       -  
Administrative and other assets
    26       23  
Total maintenance capital expenditures
    984       694  
                 
Growth capital expenditures:
               
Pipeline transportation assets
    3,359       -  
Supply and logistics assets
    4,273       -  
Refinery services assets
    1,221       -  
Total growth capital expenditures
    8,853       -  
Total
    9,837       694