Genesis Energy, L.P. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. Although the request identifies 2011 Q4, this filing reports full-year results and includes unaudited fourth-quarter data. Genesis is a Gulf Coast-focused midstream MLP operating in pipeline transportation, refinery services, and supply and logistics.
Key financial results and liquidity
- Revenue: $3.090 billion, up 47% from $2.101 billion in 2010. Supply and logistics contributed $2.826 billion; refinery services $201.7 million; pipeline transportation $62.2 million. Management attributed much of the revenue and cost increase to higher crude and petroleum-product prices, with limited effect on segment margin.
- Profit: Operating income was $82.5 million versus an operating loss of $27.4 million in 2010. Net income attributable to Genesis was $51.2 million, or $0.75 per unit, compared with a $48.5 million loss in 2010. The prior-year result included $76.9 million of non-cash compensation expense associated with the IDR restructuring.
- Segment margin: $202.5 million, up 35% from $149.6 million. Pipeline transportation margin was $67.9 million, refinery services $74.6 million, and supply and logistics $60.0 million. These are company-defined, non-GAAP measures.
- Cash flow: Net cash from operating activities was $58.3 million, down from $90.5 million. Higher receivables and inventories, partly associated with higher commodity prices, used cash. Management’s non-GAAP Available Cash before Reserves was $138.2 million, compared with $101.5 million in 2010.
- Debt and liquidity: Year-end debt totaled $659.3 million: $409.3 million drawn under the revolving credit facility and $250 million of 7.875% notes due 2018. The $775 million facility had $356.7 million of availability; Genesis reported compliance with debt covenants. Cash was $10.8 million, and current assets and current liabilities were $376.1 million and $249.4 million, respectively.
- Distributions: 2011 quarterly distributions paid rose from $0.4000 to $0.4275 per unit; the annual total was $1.65 per unit. The $0.44 distribution paid in February 2012 was the 26th consecutive quarterly increase. The filing cautions that future increases depend on performance and cash requirements.
- Fourth quarter: Revenue was $806.9 million, operating income $15.1 million, and net income attributable to Genesis $7.8 million, or $0.10 per unit.
Material changes versus prior year
- All three segments improved margin. Pipeline gains primarily reflected a full year of CHOPS distributions and higher onshore throughput; refinery services benefited from operating efficiencies and NaHS demand; supply and logistics benefited from greater volumes, commercial improvements, and the acquired barge business.
- Operating cash flow declined despite higher earnings, principally because of working-capital investment. Interest expense rose to $35.8 million from $22.9 million, reflecting the full-year cost of senior notes and higher average facility borrowings.
- General and administrative expense fell to $34.5 million from $113.4 million, largely because 2010 included the $76.9 million non-cash compensation charge.
- Genesis issued 7.35 million common units in July 2011 for approximately $185 million net, principally funding the $143.5 million FMT black-oil barge acquisition. It also acquired a 90% interest in a Wyoming refinery and related pipeline assets for $20 million.
Outlook, investment plans, risks, and unusual items
- Growth plans: Management expected approximately $80 million of spending on Texas, Florida, and Tulsa projects, primarily in 2012; an additional approximately $33 million was anticipated to upgrade the Wyoming assets. Maintenance capital expenditures for 2012 were estimated at $5–$6 million.
- SEKCO project: Genesis’s 50%-owned joint venture with Enterprise planned a 149-mile deepwater pipeline for expected service by mid-2014. Genesis estimated its share of construction costs at approximately $200 million through 2014, including about $80 million in 2012.
- Subsequent financing and acquisition: In January 2012, Genesis acquired Gulf of Mexico pipeline interests for $205.9 million, initially funded with its credit facility. In February 2012, it issued $100 million of additional 7.875% notes and used net proceeds to repay facility borrowings.
- Principal risks: Dependence on production and refinery activity, customer concentration, Gulf of Mexico drilling and weather disruptions, environmental and pipeline-safety liabilities, commodity and floating-rate exposure, and access to capital. Shell generated 16% of consolidated 2011 revenue; ConocoPhillips’ Westlake refinery accounted for approximately 65% of refinery-services NaHS by-product volume.
- Contingencies and controls: Genesis said pending claims were not expected to have a material adverse effect and reported no off-balance-sheet arrangements. Management and the auditor concluded internal control over financial reporting was effective. No goodwill impairment was recorded; goodwill was $325.0 million.
- Unusual accounting item: A change in estimated useful lives of supply-and-logistics trade names increased 2011 amortization by $7.7 million and reduced net income by about $0.11 per unit; management did not expect a material impact in future periods.
Important facts for investors to verify
- Whether working-capital needs and operating cash flow support distributions and planned capital spending; Available Cash before Reserves is non-GAAP and is not the same as operating cash flow.
- Actual financing, project costs, timing, and expected returns for the pipeline acquisition, SEKCO, and other growth projects.
- Throughput and producer commitments, particularly CHOPS volumes and the concentrated refinery-services NaHS supply relationship.
- Debt covenant headroom, variable-rate exposure, and post-year-end debt and facility balances after the acquisition and notes issuance.
- Distribution coverage and the potential effect of conversion of eligible Class 1 Waiver Units into common units.