Genesis Energy, L.P. — Q3 2019 Form 10-Q
Business and period: Unaudited results for the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Genesis is a Gulf Coast and Gulf of Mexico midstream partnership with offshore pipeline, sodium minerals and sulfur services, onshore facilities and transportation, and marine transportation businesses. Dollar amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $621.7 | $745.3 | $1,876.5 | $2,223.5 |
| Operating income | $52.8 | $46.1 | $201.8 | $166.1 |
| Net income (loss) attributable to Genesis | $17.6 | $(0.3) | $73.6 | $18.7 |
| Net income (loss) available to common unitholders | $(1.1) | $(18.0) | $17.8 | $(33.1) |
| Basic and diluted earnings (loss) per common unit | $(0.01) | $(0.15) | $0.15 | $(0.27) |
| Operating cash flow | $136.1 | $156.7 | $331.7 | $307.6 |
| Segment Margin (non-GAAP) | $175.8 | $183.2 | $533.5 | $527.3 |
| Available Cash before Reserves (non-GAAP) | $82.5 | $112.7 | Not stated here | Not stated here |
- Margins: GAAP operating margin was approximately 8.5% in Q3 2019 versus 6.2% in Q3 2018, and 10.8% versus 7.5% for the nine-month periods, calculated from reported revenue and operating income. Segment Margin declined 4% in Q3 but rose about 1% for the nine months.
- Cash flow and investment: Nine-month investing cash outflow was $90.4; fixed and intangible asset payments were $109.6. Cash increased to $56.6 at September 30 from $10.3 at year-end 2018.
- Debt and liquidity: Long-term debt had a net carrying value of $3.415 billion, comprising $947 million drawn on the revolving credit facility and $2.468 billion of senior notes. The partnership reported $751.9 million of remaining revolver availability and compliance with debt covenants. Current assets were $517.7 and current liabilities $413.9.
- Distributions: The partnership declared a common-unit distribution of $0.55 per unit for Q3, payable November 14, 2019. Preferred distributions were declared at $0.7374 per unit quarterly, or $2.9496 annualized.
Material changes and operating drivers
- Q3 revenue fell 17%, largely reflecting lower crude-oil and petroleum-product prices and lower sales volumes in onshore marketing; management said the associated cost changes generally offset much of the revenue decline.
- Offshore Segment Margin increased 14% in Q3 to $81.1, mainly on higher crude pipeline volumes, including ramp-up from Buckskin and Hadrian North. Hurricane Barry caused some unplanned downtime.
- Sodium minerals and sulfur services Segment Margin declined 14% in Q3 to $55.3. Lower NaHS volumes reflected customer supply-chain disruptions and refinery production issues; soda ash volumes benefited from maintenance timing. For the first nine months, this segment’s margin declined 11%, with planned maintenance and other production interruptions affecting soda ash volumes.
- Onshore Segment Margin declined 31% in Q3 to $24.8, primarily from lower pipeline and rail-unload volumes, including the 2018 divestiture of Powder River Basin assets and Canadian production curtailments. Nine-month margin was up 3%, including a $10 million cash payment resolving a crude-oil supply agreement.
- Marine Segment Margin rose 21% in Q3 to $14.7, supported by higher day rates; higher dry-docking costs partly offset the benefit. Management described market day rates as near cyclical lows and continued to favor short-term contracts.
- Q3 net income attributable to Genesis benefited from an $8.0 million unrealized gain on the preferred-unit embedded derivative, lower interest expense, lower D&A, and lower G&A. The prior-year quarter included a $3.4 million asset-sale gain.
Outlook, financing, and risks
- No specific earnings or cash-flow guidance was provided. Management said it expects operating cash generation and available credit to meet ordinary-course capital needs and plans to direct a substantial portion of excess cash flow toward reducing revolver borrowings.
- The Granger Optimization Project is expected to be completed in Q4 2022 and increase production capacity by approximately 750,000 tons per year. Funds affiliated with GSO committed to purchase up to $350 million of Alkali Holdings preferred units to fund up to 100% of anticipated expansion costs; $55 million had been issued by September 30. These preferred securities carry a 10% annual distribution and have redemption, make-whole, and potential governance provisions.
- Genesis designated the Alkali Business as unrestricted subsidiaries under its note indentures in connection with the expansion. Alkali subsidiaries no longer guarantee the senior unsecured notes, and their assets generally are not available to satisfy partnership debt, subject to disclosed exceptions.
- Key risks include commodity and product demand and pricing, customer throughput and refinery activity, operating interruptions and weather, environmental and marine hazards, access to capital, debt covenant constraints, and the ability to execute the Granger expansion. The filing reports no material change in previously disclosed risk factors and no material expected effect from pending legal or regulatory matters.
- Asset retirement obligations declined to $196.3 million from $239.9 million at year-end, including $36.0 million of settlements and a $14.4 million reduction from revised abandonment estimates for certain non-operating offshore gas assets.
Investor verification priorities
- Track segment-level volumes and margins, particularly soda ash and NaHS recovery, offshore pipeline throughput, and onshore customer commitments and curtailments.
- Verify Granger project cost, schedule, production ramp, and the terms and funding status of the GSO preferred commitment, including redemption and governance conditions.
- Assess leverage, revolver usage, covenant headroom, interest costs, and the effect of the Alkali Business’s removal as a note guarantor.
- Compare cash available for distributions with actual cash needs: Q3 Available Cash before Reserves was $82.5 million, but this non-GAAP measure was down 26.8% year over year and is not equivalent to GAAP operating cash flow.
- Monitor asset-retirement obligations, environmental exposure, and derivative valuation. The preferred-unit rate-reset embedded derivative was a $42.2 million Level 3 liability at September 30; its valuation depends on significant management estimates.