Business context and reporting period
Genesis Energy, L.P. is a master limited partnership providing crude oil and natural gas transportation, storage, sulfur-removal and marine services, and producing natural soda ash. This Form 10-K covers the fiscal year ended December 31, 2017; fourth-quarter figures are identified separately below.
A major change was the September 1, 2017 acquisition of the Wyoming Alkali Business for approximately $1.325 billion in cash. The acquisition added natural soda ash production and is included in reported results for only four months of 2017, limiting direct year-over-year comparability.
Financial and operating highlights
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $2.028 billion | $1.712 billion |
| Operating income | $220.6 million | $206.4 million |
| Net income attributable to Genesis | $82.6 million | $113.2 million |
| Net income available to common unitholders; diluted EPS | $60.7 million; $0.50 | $113.2 million; $1.00 |
| Cash from operating activities | $338.9 million | $298.3 million |
| Segment Margin (non-GAAP) | $594.5 million | $569.6 million |
| Net interest expense | $176.8 million | $139.9 million |
Revenue grew 18%, reflecting the Alkali acquisition and higher crude oil and petroleum product prices; costs and expenses increased 20%. Operating margin was approximately 10.9%, while net income attributable to Genesis was approximately 4.1% of revenue. The 2017 results included $40.3 million of gains on asset sales, so reported operating income includes a material favorable non-core item.
Fourth-quarter 2017 revenue was $720.0 million, operating income $63.4 million, and net income attributable to Genesis $15.5 million. Net income available per common unit was a loss of $0.01. The quarterly table reports $15.4 million of net income before noncontrolling interests and preferred distributions.
Segment Margin increased 4% overall. Sodium minerals and sulfur services rose to $130.3 million from $79.5 million, principally due to the acquired Alkali Business. Onshore facilities and transportation increased to $96.4 million from $83.4 million. Offshore pipeline transportation declined to $317.5 million from $336.6 million, and marine transportation fell to $50.3 million from $70.1 million.
At year-end, total assets were $7.14 billion and total liabilities were $4.42 billion. Long-term debt, net of issuance costs, was $3.70 billion: $1.10 billion drawn on the revolving credit facility and $2.60 billion in unsecured notes. The partnership reported $599.8 million of remaining revolver availability and $9.0 million of cash. Current assets were $636.0 million versus current liabilities of $456.3 million. Operating cash flow exceeded 2016, while investing cash outflow was $1.475 billion, largely due to the acquisition.
Material changes, outlook and notable items
- Distribution reset: In October 2017, Genesis reduced its common-unit quarterly distribution from $0.71 to $0.50 to strengthen the balance sheet and support deleveraging. It paid $0.51 per unit in February 2018 for the fourth quarter. Management described a plan for sustainable distribution growth, but the filing does not provide a quantified growth schedule.
- Preferred units: The $750 million preferred-unit financing carries an 8.75% annual distribution. Genesis elected to pay 2017 preferred distributions in additional units; cash distributions are required for quarters after March 1, 2019 under the terms disclosed. The preferred units rank ahead of common units for distributions and liquidation.
- Debt and liquidity: Genesis issued $550 million of 6.50% notes due 2025 to help fund the acquisition and $450 million of 6.25% notes due 2026, using proceeds partly to refinance 2021 notes and repay revolver borrowings. It reported compliance with debt covenants at year-end. Variable-rate revolver debt exposes results to interest-rate increases.
- Projects and spending: Management expected approximately $100 million of 2018 growth capital spending for projects under construction. Baton Rouge expansion and a Powder River Basin gathering system were expected to enter service during 2018. The Houston-area and Raceland projects entered service in 2017.
- Operating conditions: Management cited Hurricane Harvey and Nate, offshore hub turnarounds, planned dry-docking of the M/T American Phoenix, rail capacity constraints and downstream operating issues as 2017 headwinds. Marine margins also suffered from lower day rates; management expected continued pressure on inland rates into 2018.
- Unusual items: 2017 included the $40.3 million asset-sale gain, a $12.6 million non-cash provision for leased railcars no longer in use, a $6.2 million loss on debt extinguishment, and a $45.2 million fair-value liability for the preferred units’ embedded rate-reset feature. Acquisition and financing costs also weighed on earnings.
- Control and integration: Management and the auditor excluded the recently acquired Alkali Business from the 2017 internal-control assessment because of the acquisition’s timing and scale; integration of its controls was expected to be completed in 2018. The auditor gave an unqualified opinion on the financial statements and on internal control within the assessed scope.
- Risks and contingencies: Key exposures include substantial indebtedness and refinancing needs, covenant restrictions, commodity-volume and customer demand changes, acquisition integration, weather and operational disruptions, environmental and safety obligations, and regulatory changes. The filing says pending legal matters were not expected to materially affect results; it reports an approximately $80 million reclamation bond and $198.2 million of asset-retirement obligations.
Important facts for investors to verify
- Whether the Alkali Business sustains its initial contribution and whether integration, purchase-price allocation and internal-control work were completed as planned.
- Progress on leverage reduction, revolver availability, covenant headroom and the cost and timing of debt maturities.
- Common-unit distribution policy and the ability to fund distributions alongside preferred-unit obligations and capital spending.
- Whether the announced projects entered service on schedule, met expected costs and generated the forecast cash flows.
- The durability of segment performance, particularly offshore throughput, soda ash demand and marine day rates, and the extent to which future earnings depend on asset-sale gains or other non-GAAP adjustments.