Genesis Energy, L.P. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Genesis is a Gulf Coast and Gulf of Mexico midstream partnership operating offshore pipelines, sodium minerals and sulfur services, onshore facilities and transportation, and marine transportation. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance and liquidity
- Third-quarter revenue was $443.1 million, down 28.7% from $621.7 million a year earlier. Operating income fell to $4.0 million from $52.8 million. Net loss attributable to Genesis was $29.7 million versus net income of $17.6 million; loss available to common unitholders was $48.4 million, or $0.39 per unit, versus a loss of $1.1 million, or $0.01 per unit.
- Nine-month revenue was $1.372 billion, down from $1.876 billion. Operating loss was $215.0 million versus operating income of $201.8 million, and net loss attributable to Genesis was $331.5 million versus net income of $73.6 million. The 2020 result included $280.8 million of impairment expense.
- Segment margin was $161.9 million in Q3, down 8% year over year, and $470.5 million for nine months, down 12%. Q3 segment results: offshore pipelines $57.4 million (down 29%); sodium minerals and sulfur services $27.6 million (down 50%); onshore facilities and transportation $61.3 million (up from $24.8 million); marine transportation $15.6 million (up from $14.7 million). The onshore increase included a roughly $41 million cash collection after a customer defaulted on a long-term agreement.
- Cash flow from operations was $143.5 million in Q3 versus $136.1 million; for the first nine months it was $295.6 million versus $331.7 million. Nine-month investing cash use was $85.0 million, including $100.4 million of fixed and intangible asset purchases. Financing cash use was $223.0 million.
- Debt and liquidity: Debt carrying value was $3.359 billion at September 30, compared with $3.429 billion at December 31, 2019. This included $984.8 million drawn on the $1.7 billion revolving facility and $2.374 billion of senior unsecured notes. The company reported $714.1 million of remaining facility borrowing capacity, subject to covenant compliance, and $44.0 million of cash and restricted cash. It reported compliance with debt covenants.
- Distributions: The common-unit quarterly distribution was reduced from $0.55 to $0.15 per unit beginning in Q1 2020. The Q3 distribution declared for payment in November was $0.15 per common unit; preferred-unit cash distributions remained $0.7374 per unit for the quarter.
Changes, unusual items, and management commentary
- COVID-19-related demand weakness and lower commodity prices reduced volumes and revenues across businesses. Crude oil marketing revenue and costs both declined with lower prices and activity. Soda ash volumes and export pricing weakened; management noted signs of demand recovery late in Q3 and expected improvement into Q4 2020 and 2021, while cautioning that conditions remained uncertain.
- The partnership recorded a roughly $277 million second-quarter non-cash impairment of crude-by-rail logistics assets after rail became uneconomic for producers, plus $3.3 million in Q3 to write off a non-core offshore gas platform. Management warned that further deterioration could prompt additional asset impairment testing and charges.
- Hurricanes Laura and Marco caused offshore downtime, inspections and approximately $5 million of additional Q3 operating costs. CHOPS had been out of service since August 26 because of damage at a junction platform; volumes were diverted to Poseidon. Management expected other offshore volumes to normalize in Q4, but also reported further October downtime from Hurricanes Delta and Zeta.
- A direct-finance-lease customer defaulted during Q3. Genesis exercised a letter of credit and collected approximately $41 million; the $69.4 million present value of remaining lease receivables was classified as current. Separately, on October 30, Genesis agreed to transfer its remaining CO2 assets, including the NEJD and Free State pipelines, for $92.5 million: $22.5 million paid in Q4 and $70 million in quarterly installments during 2021. The filing anticipated a Q4 loss of approximately $21.5 million.
- Genesis issued $750 million of 7.75% notes due 2028, used proceeds in part to tender and redeem its 6.75% notes due 2022, and repurchased other notes. Note transactions included a $23.5 million loss on extinguishment and $20.5 million of cancellation-of-debt income for the nine-month period. Credit amendments temporarily relaxed certain leverage and interest-coverage covenant thresholds through March 31, 2021.
- The Granger soda ash expansion timeline was extended by one year, with completion anticipated in late 2023 and planned capacity growth of approximately 750,000 tons per year. Management said it intended to direct excess cash toward debt reduction and opportunistic note repurchases and did not anticipate material growth capital spending on individual projects during the rest of 2020, apart from the Granger project.
- Other notable items included approximately $13 million of Q2 restructuring and severance charges. Management described liquidity as adequate to meet obligations and continue deleveraging, but emphasized the uncertainty of pandemic duration, market recovery, capital access and future cash generation. No quantified earnings or cash-flow guidance was provided.
Most important facts for investors to verify
- Whether CHOPS and other Gulf assets returned to service as expected, and the effects of further hurricane disruptions and related repair costs.
- Whether soda ash, NaHS and marine transportation volumes and pricing recovered as management anticipated, and whether onshore minimum-volume commitments remain affected by customer credits and low rail volumes.
- Whether the $70 million remaining consideration for the CO2 asset transfer is collected as scheduled, and whether the expected $21.5 million loss is recorded.
- Debt covenant headroom, availability under the revolving facility, refinancing needs, and progress in reducing debt amid substantial interest expense.
- Whether the direct-finance-lease default leads to further impairment or collection shortfalls, and whether lower demand or commodity prices trigger additional asset impairment charges.