Genesis Energy, L.P. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited consolidated results. Genesis is a midstream energy partnership operating offshore pipelines, sodium minerals and sulfur services, onshore facilities and transportation, and marine transportation.
Business context and major transaction
On September 1, 2017, Genesis acquired Tronox’s Alkali Business for approximately $1.325 billion, including approximately $100 million of working capital. The business produces natural soda ash and is included in the sodium minerals and sulfur services segment from the acquisition date; reported results therefore include only one month of its operations. The purchase-price allocation was preliminary at quarter-end.
Financial results
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $486.1 million | $460.1 million | $1,308.3 million | $1,284.4 million |
| Operating income | $43.1 million | $55.2 million | $157.1 million | $163.0 million |
| Net income | $6.2 million | $32.0 million | $66.7 million | $90.8 million |
| Net income attributable to Genesis | $6.3 million | $32.1 million | $67.1 million | $91.1 million |
| Net income available to common unitholders | $0.8 million | $32.1 million | $61.7 million | $91.1 million |
| Basic and diluted earnings per common unit | $0.01 | $0.28 | $0.51 | $0.81 |
| Net interest expense | $47.4 million | $34.7 million | $122.1 million | $104.7 million |
Q3 revenue increased 5.7%, while operating income and earnings per unit declined. Management attributed approximately $25.2 million of the year-over-year decline in quarterly net income to transaction and financing expenses and higher interest expense, primarily related to the acquisition. Preferred-unit distributions also reduced Q3 earnings available to common unitholders.
Segment Margin (a company-defined non-GAAP measure) was $146.5 million in Q3, up 3.7% from $141.3 million; for the first nine months it was $419.2 million, down from $428.7 million. Q3 segment results were: offshore pipeline $78.2 million; sodium minerals and sulfur services $30.0 million; onshore facilities and transportation $25.6 million; and marine transportation $12.6 million.
Cash flow and liquidity: Operating cash flow was $33.8 million in Q3 versus $124.7 million a year earlier, affected by non-recurring costs and working-capital movements. For nine months, operating cash flow was $217.8 million versus $228.4 million. Nine-month investing cash use was $1.455 billion, principally reflecting the Alkali acquisition; financing cash provided was $1.239 billion. Cash at September 30 was $9.7 million. Current assets were $590.8 million and current liabilities $364.0 million.
Management reported Q3 Available Cash before Reserves of $91.8 million, down 3.4% year over year. This is a non-GAAP measure and is not the same as operating cash flow or cash available for distribution.
Debt, capital structure and distributions
At September 30, total debt principal was $3.773 billion: $1.373 billion under the $1.7 billion senior secured revolving facility and $2.4 billion of senior unsecured notes. Facility availability was $314.7 million, including outstanding letters of credit. The partnership reported compliance with debt covenants. Debt increased from $3.128 billion at December 31, 2016.
Acquisition financing included a $550 million offering of 6.50% notes due 2025, a $750 million private placement of convertible preferred units, revolving-credit borrowings and cash on hand. Preferred units carry an 8.75% annual distribution rate, rank senior to common units for distributions and liquidation, and may be paid in kind through quarters ending on or before March 1, 2019. Genesis paid the Q3 preferred distribution in additional units.
Genesis reset its common-unit distribution to $0.50 per unit for Q3, payable November 14, 2017, versus $0.7225 per unit for Q2 2017. Management said capital allocation would shift toward debt repayment and growth opportunities and away from current distributions. It stated it had no immediate plans to access equity markets, including its unused at-the-market program.
Changes, outlook and risks
- Q3 Segment Margin improved in sodium services, principally from one month of Alkali Business contribution, and in onshore facilities, as new Baton Rouge, Texas City and Raceland infrastructure ramped up. Offshore Segment Margin declined 10%, while marine Segment Margin declined 24%.
- Q3 results were affected by Hurricane Harvey, planned dry-docking of the M/T American Phoenix, offshore hub turnarounds and turnarounds at Alberta facilities. Management expected further weather- and maintenance-related offshore downtime in Q4 and continued pressure on inland marine rates into Q4.
- Crude oil and petroleum product sales volumes declined 19% year over year in Q3. Management said direct commodity-price exposure is moderated by fee-based contracts, back-to-back arrangements and hedging, but prolonged price changes may affect service demand and volumes.
- Management reported approximately $76 million of completed non-strategic asset sales, with an approximately $40 million GAAP gain in aggregate; the gain does not directly flow through its EBITDA or Available Cash measures. Further sales were under evaluation, with no assurance of additional transactions.
- Genesis anticipated approximately $45 million of spending during the remainder of 2017 for projects under construction. The Baton Rouge expansion was expected to become operational in Q1 2018. No specific earnings or full-year distribution-growth guidance was provided.
- Environmental laws and potential releases, pipeline and marine operating hazards, customer/refinery outages, weather, commodity and demand changes, access to capital, debt covenants, acquisition integration, and distribution obligations are among the disclosed risks. Management said pending legal and regulatory matters were not expected to have a material effect; no material developments in legal proceedings were reported.
Most important facts for investors to verify
- Final Alkali Business purchase-price allocation, integration progress, and whether its cash flows meet management’s expectations.
- Post-acquisition leverage, interest burden, revolving-facility availability and progress toward management’s stated deleveraging objective.
- Sustainability of the reset $0.50 common-unit distribution relative to operating cash flow, capital requirements and preferred distributions.
- Whether offshore downtime, marine rate weakness and lower crude-related volumes persist, and the resulting effect on Segment Margin and cash generation.
- Effects of the preferred units’ 8.75% distribution, payment-in-kind terms, conversion features and embedded rate-reset derivative on future common-unit economics.
- Execution and returns from growth projects and any additional non-core asset sales; reported segment and cash measures include non-GAAP definitions that should be reconciled with GAAP results.