Genesis Energy, L.P. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Genesis is a Gulf Coast-focused midstream partnership operating offshore pipelines, sodium minerals and sulfur services, onshore facilities and transportation, and marine transportation. Amounts below are USD millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Revenue | 620.0 | 725.8 |
| Operating income | 62.0 | 59.1 |
| Net income attributable to Genesis | 16.0 | 8.0 |
| Net loss available to common unitholders | (2.5), or $(0.02) per unit | (8.9), or $(0.07) per unit |
| Operating cash flow | 114.0 | 86.3 |
| Capital expenditures for fixed and intangible assets | 33.3 | 46.9 |
| Segment Margin (non-GAAP) | 173.6 | 170.2 |
| Available Cash before Reserves (non-GAAP) | 95.9 | 101.6 |
| Cash and cash equivalents | 11.2 | 10.3 at Dec. 31, 2018 |
| Total assets | 6,614.8 | 6,479.1 at Dec. 31, 2018 |
| Total debt, principal | 3,442.0 | 3,470.1 at Dec. 31, 2018 |
Q1 2019 segment margins: offshore pipelines 76.4; sodium minerals and sulfur services 58.6; onshore facilities and transportation 25.6; marine transportation 12.9. Current assets were 440.1 versus current liabilities of 403.0. The partnership reported 756.9 of remaining availability under its 1.7 billion revolving credit facility; it was in compliance with debt covenants at quarter-end.
Changes versus Q1 2018
- Revenue fell 18%, while total costs and expenses fell 22%. The largest revenue decline was in onshore facilities and transportation, reflecting lower crude and petroleum-product prices and, to some extent, lower sales volumes. Management said these price-driven revenue and cost movements generally have a much smaller direct effect on Segment Margin.
- Segment Margin increased 2%. Offshore margin rose 4% on higher crude pipeline volumes; marine margin rose 18% with higher utilization and improved day rates; and onshore margin rose 18%, partly on higher rail-unloading volumes.
- Sodium minerals and sulfur services margin declined 9%, primarily because maintenance timing and temporary electrical equipment failures reduced soda ash production and volumes. Soda ash sales were 870,529 tons versus 917,000 tons.
- Net income attributable to Genesis increased by 8.0, also benefiting from higher equity-investee earnings and the absence of the 3.3 debt-extinguishment loss recorded in Q1 2018. Higher depreciation, depletion and amortization partly offset those gains.
- Operating cash flow improved by 27.7, but Available Cash before Reserves decreased 5.6% to 95.9. Common-unit distributions paid in the quarter were 67.4.
Liquidity, debt, distributions and notable items
- Debt comprised 942.0 drawn on the secured facility and 2,500.0 principal of senior unsecured notes. The facility had 756.9 of availability at March 31; the filing does not state a consolidated leverage ratio.
- The quarterly common distribution was declared at $0.55 per unit, totaling approximately 67.4, payable May 15, 2019. Preferred-unit distributions were partly paid in kind: 364,180 preferred units were issued for the first two months, with cash payable for the final month. Preferred distributions accumulated against common-unit earnings were 18.4 for the quarter, leaving a loss available to common unitholders despite consolidated net income.
- Adoption of lease accounting on January 1, 2019 added an operating right-of-use asset of approximately 209.0 and a corresponding lease liability. At March 31, right-of-use assets were 200.8 and lease liabilities were 195.2; Q1 operating lease costs were 13.2.
- The preferred units’ distribution-rate-reset embedded derivative was a 44.8 liability at quarter-end, measured using Level 3 inputs. The filing reported 3.0 of other expense in Q1, including the fair-value effect of this feature.
- Asset-retirement obligations totaled 236.0, including 86.5 classified as current. Management reported no material changes to contractual commitments, off-balance-sheet arrangements, legal proceedings or previously disclosed risk factors.
Outlook, management commentary and risks
- Management anticipated several offshore pipeline tie-backs beginning in the second half of 2019, potentially adding 40–50 thousand barrels per day of throughput by year-end. It also expected Alkali Business performance to remain strong through the rest of 2019.
- The partnership did not anticipate material growth capital expenditures on any individual project during the remainder of 2019 and said it planned to allocate a substantial portion of excess cash flow to reducing revolving-credit borrowings.
- Management described liquidity as strong and expected operating funds and credit-facility availability to cover ordinary-course capital needs. It cautioned that access to future debt or equity capital and successful execution of its growth strategy are not assured.
- Key disclosed risks include commodity demand and price trends, throughput and tariff changes, refinery or customer shutdowns, pipeline or marine operating incidents, environmental and regulatory matters, access to capital, competition, counterparty credit, and the ability to sustain distributions. The company stated that crude-oil price changes can indirectly affect demand for certain services even though much of its direct price exposure is limited through fee-based contracts, back-to-back arrangements and hedges.
Important facts for investors to verify
- Whether forecast offshore tie-backs proceed on schedule and deliver the expected 40–50 thousand barrels per day of additional throughput.
- Whether Alkali production recovers from Q1 maintenance and electrical disruptions, and how soda ash volumes and margins develop.
- Whether operating cash generation and available credit remain sufficient to fund debt service, capital needs and distributions, particularly given Available Cash before Reserves declined year over year.
- The implications of preferred-unit distributions and the 44.8 Level 3 rate-reset derivative for future cash obligations, dilution and common-unit economics.
- How much of the Q1 onshore and marine margin improvement is sustainable, including the effects of customer transportation credits, dry-docking costs and market day rates.
- That Segment Margin and Available Cash before Reserves are non-GAAP measures; review their reconciliations and avoid treating them as substitutes for GAAP income or operating cash flow.