It is really hard to process oil when crude deliveries stop.
Relationship with Genesis
We are party to a variety of contracts and agreements with Genesis and its affiliates that enable the purchase of crude oil and condensate, transportation of crude oil and condensate, and other services. (See “Part I, Financial Information, Item 1. Financial Statements – Note (19) Commitments and Contingencies – Genesis Agreements” for a summary of these agreements.) We currently have a contractual dispute with GEL related to these agreements. In connection with this dispute, for the three and six months ended June 30, 2016, GEL significantly under delivered crude oil and condensate to the Nixon Facility under the Crude Supply Agreement. This resulted in significant refinery downtime, specifically 27 out of 29 days, and a significant decrease in refinery throughput, refinery production, and refined petroleum product sales for the three and six months ended June 30, 2016. In July 2016, GEL resumed normal delivery of crude oil and condensate to the Nixon Facility. An adverse change in our relationship with Genesis could have a material adverse effect on our operations, liquidity, and financial condition.
Genesis Contractual Dispute
We are party to a variety of contracts and agreements with Genesis Energy, LLC “(Genesis”) and its affiliates, including GEL Tex Marketing, LLC (“GEL”) that enable the purchase of crude oil and condensate, transportation of crude oil and condensate, and other services.
In May 2016, GEL filed, in state district court in Harris County, Texas, a petition and application for a temporary restraining order, temporary injunction, and permanent injunction (the “Petition”) against LE and LEH. The Petition alleges that LE breached the Joint Marketing Agreement, and that LEH tortiously interfered with the Joint Marketing Agreement, in connection with an agreement by LEH to supply jet fuel acquired from LE to a customer. The Petition primarily sought temporary and permanent injunctions related to sales of product from the Nixon Facility to this customer. In June 2016, the court issued a temporary injunction against LE and LEH as requested by GEL. LE believes that GEL’s claims in the Petition are without merit and intends to defend the matter vigorously.
In a matter separate from the above referenced Petition, LE filed a demand for arbitration in June 2016, pursuant to the terms of the Dispute Resolution Agreement between the parties (the “Arbitration”). The Arbitration alleges that GEL breached the Crude Supply Agreement related to:
(i) failure to provide crude oil and condensate at cost as defined in the Crude Supply Agreement, and
(ii) significant under delivery of crude oil and condensate, resulting in significant refinery downtime and a significant decrease in refinery throughput, refinery production, and refined petroleum product sales for the three and six months ended June 30, 2016.
With regard to the Petition, the next hearing date and a trial date have been set for August 22, 2016 and December 5, 2016, respectively, although the parties may elect arbitration. With respect to the Arbitration, a hearing date has not yet been set. We do not expect the temporary injunction issued by the court to have a material effect on our results of operations or financial condition. However, we are unable to predict the outcome of these proceedings or their ultimate impact, if any, on our business, financial condition or results of operations and, accordingly, have not recorded a liability on our consolidated balance sheet as of June 30, 2016.
