Genesis Energy, L.P. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. Comparative period is the three months ended March 31, 2011. Financial figures below are in millions of dollars unless stated otherwise.
Business context
Genesis is a Gulf Coast-focused midstream energy limited partnership operating in pipeline transportation, refinery services, and supply and logistics. Its assets include crude oil pipelines, refinery-related facilities, storage and terminal assets, barges, and trucks.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Revenue | $932.9 | $689.8 |
| Operating income | $26.7 | $12.8 |
| Net income | $19.6 | $7.0 |
| Net income per common unit, basic and diluted | $0.27 | $0.11 |
| Segment Margin | $60.3 | $49.2 |
| Available Cash before Reserves, a non-GAAP measure | $39.6 | $31.9 |
| Cash from operating activities | $19.9 | $(2.1) |
| Cash used in investing activities | $(282.0) | $(3.4) |
| Cash from financing activities | $265.6 | $3.9 |
| Cash and cash equivalents at period end | $14.3 | $10.8 at Dec. 31, 2011 |
| Total long-term debt | $789.2 | $659.3 at Dec. 31, 2011 |
| Available credit facility borrowings | $331.9 | $775 million facility |
| Current assets / current liabilities | $442.1 / $294.9 | $376.1 / $249.4 at Dec. 31, 2011 |
Revenue increased approximately 35%, while net income rose to nearly 2.8 times the prior-year amount. Segment Margin increased about 23%. Operating cash flow improved, though working-capital changes remained a cash use. Investing outflows primarily reflected acquisitions, growth spending, and investment in an equity-method pipeline venture.
- Segment Margin: Pipeline transportation $25.3 million versus $17.7 million; refinery services $17.2 million versus $17.9 million; supply and logistics $17.7 million versus $13.5 million.
- Margins: Operating margin was approximately 2.9% versus 1.9%; net margin was approximately 2.1% versus 1.0%.
- Debt and financing: Debt increased primarily in connection with growth and acquisitions. The $438.2 million credit-facility balance included $75.6 million under the inventory sublimit. Genesis reported compliance with debt covenants.
- Distribution: The Q1 2012 distribution was declared at $0.45 per unit, payable May 15, 2012; this was reported as the 27th consecutive quarterly increase. The prior-quarter distribution paid in February was $0.44 per unit.
Material changes and notable items
- In January, Genesis acquired interests in Gulf of Mexico pipeline systems from Marathon Oil for $205.6 million: 28% of Poseidon, 100% of GOPL, and 29% of Odyssey. The acquired interests contributed $3.5 million of reported net income for the quarter. Poseidon and Odyssey are accounted for under the equity method.
- Pipeline Segment Margin benefited from the acquired interests, higher onshore tariffs, and increased pipeline-loss-allowance sales. Lower CHOPS throughput partially offset these gains.
- Supply and logistics Segment Margin improved with higher volumes and contributions from growth initiatives, including previously acquired barge assets. Segment volumes rose 23% year over year.
- Refinery services Segment Margin fell 4%, principally amid lower NaHS and caustic soda volumes; higher caustic soda prices lifted revenue but also affected costs.
- In March, Genesis issued 5.75 million Class A common units at $30.80 per unit, receiving $169.5 million net. In February, it issued an additional $100 million principal amount of 7.875% senior unsecured notes, using net proceeds to repay credit-facility borrowings.
- Q1 included a $2.0 million unrealized derivative gain, compared with a $6.5 million unrealized loss in Q1 2011. Derivatives were not designated as accounting hedges.
Outlook, commentary, and risks
Management said internally generated funds and available credit were expected to meet ordinary-course capital needs, while noting that the growth strategy requires substantial capital and future access to debt or equity financing is not assured. No specific earnings or full-year financial guidance is provided in the filing.
- Planned projects included Texas-area crude oil infrastructure, a Tulsa sour-gas processing facility, and a Walnut Hill, Florida crude-by-rail terminal. The filing estimated approximately $80 million of costs for these projects, with remaining spending expected primarily in 2012.
- Genesis expected to spend approximately $33 million on Wyoming refinery upgrades and related pipeline work. Its share of SEKCO pipeline construction was expected to total approximately $200 million through 2014, including approximately $80 million during 2012.
- Key disclosed risks include commodity supply, demand and price changes; throughput and tariff changes; acquisition and project execution; pipeline interruptions and marine accidents; environmental and regulatory matters, including Gulf of Mexico production and post-Macondo regulation; access to capital; and customer, litigation, insurance, and market risks.
- The partnership is subject to environmental laws and regulations; management stated that pending lawsuits and regulatory examinations were not expected to have a material effect. No material changes to previously disclosed risk factors or contractual obligations were reported.
Important facts for investors to verify
- Whether the acquired Gulf pipeline interests and planned growth projects deliver expected throughput, distributable cash, and returns.
- How working-capital needs and high supply-and-logistics activity affect operating cash flow and reliance on revolving credit.
- Debt levels, covenant compliance, remaining credit capacity, and the cost and availability of future financing.
- Distribution coverage using the partnership’s non-GAAP Available Cash before Reserves measure, including its definition and limitations.
- Exposure to CHOPS volume declines, commodity-price movements, derivative results, environmental liabilities, and Gulf of Mexico operating risks.