Genesis Energy, L.P. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2017. Financial statements are unaudited. Genesis is a Gulf Coast, Wyoming and Gulf of Mexico midstream partnership operating offshore pipelines, refinery services, marine transportation, and onshore facilities and transportation.
Key financial results
Unless otherwise noted, amounts are in millions of dollars. Comparisons are with the corresponding 2016 period.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $406.7 | $446.0 | $822.2 | $824.4 |
| Operating income | $61.4 | $48.0 | $114.0 | $107.8 |
| Net income attributable to Genesis | $33.7 | $23.7 | $60.8 | $59.0 |
| Net income per common unit | $0.28 | $0.22 | $0.50 | $0.54 |
| Segment Margin | $134.0 | $142.5 | $272.6 | $287.4 |
| Available Cash before Reserves | $90.2 | $96.0 | Not stated | Not stated |
| Cash from operating activities | $119.3 | $62.6 | $184.0 | $103.7 |
- Margins and earnings quality: Q2 operating income included a $26.7 million non-cash gain on the sale of non-core Gulf of Mexico assets and was reduced by a $12.6 million non-cash provision for leased railcars no longer in use. Net income increased year over year, while Segment Margin and Available Cash before Reserves declined. The filing does not provide a single consolidated GAAP operating-margin figure.
- Cash flow and investment: First-half cash used in investing was $78.7 million, including $126.6 million of fixed and intangible asset purchases and $38.2 million of asset-sale proceeds. First-half distributions to common unitholders were $172.0 million.
- Balance sheet and liquidity at June 30: Cash was $10.1 million; current assets were $327.7 million and current liabilities $237.2 million. Long-term debt was $3.0 billion: $1.211 billion under the secured revolver and approximately $1.816 billion of senior unsecured notes. Revolver availability was $488.0 million. Genesis reported compliance with debt covenants.
Changes versus prior comparable periods
- Q2 revenue fell 8.8%, principally as crude oil and petroleum-product sales volumes declined; costs also fell, largely reflecting lower sales volumes. Management said direct commodity-price exposure is limited by fee-based contracts, back-to-back arrangements and hedging, though prolonged price changes can indirectly affect demand.
- Q2 Segment Margin fell 6.0%. Offshore margin declined 7%, amid planned and unplanned Gulf of Mexico field downtime; management expected some effects to continue into Q3. Onshore margin rose 25% as new Baton Rouge-area infrastructure ramped up, partly offset by weaker crude-oil marketing activity.
- Refinery-services margin decreased 18% in both Q2 and the first half. Marine-transportation margin decreased 22% in Q2 and 27% in the first half, reflecting weaker inland demand and lower day rates.
- First-half operating cash flow increased to $184.0 million from $103.7 million, primarily because working-capital needs decreased. First-half capital expenditures were $117.2 million, compared with $220.6 million for fixed and intangible assets in the prior-year period.
- Net interest expense rose to $38.0 million in Q2 from $35.5 million and to $74.7 million in the first half from $69.9 million, mainly due to higher average debt. The March 2017 public offering issued 4.6 million common units and raised approximately $140.5 million net.
Outlook, transactions and risks
- Management said most capital spending was behind the partnership and expected increased contributions from recently completed projects, supporting a goal of reducing leverage. It anticipated approximately $75 million of growth spending during the remainder of 2017 on projects then under construction.
- On August 2, 2017, Genesis agreed to acquire Tronox’s trona and trona-based alkali business for approximately $1.325 billion in cash, with closing expected in the second half of 2017. The company described the deal as a diversification and growth opportunity and estimated the acquired business’s last-twelve-month adjusted EBITDA at $166 million. The filing states this is management’s estimate, not a guarantee of results.
- Genesis disclosed binding commitments for approximately $750 million of 8.75% convertible preferred units from KKR- and GSO-affiliated investment vehicles. It expected to fund the remaining purchase price and transaction costs with a notes offering and/or revolver borrowings, as well as cash on hand. The transaction had not closed as of the filing.
- The credit facility was amended in May 2017: maturity generally extended to May 2022, but could move to November 2020 if the 2021 notes are not refinanced or repaid by November 15, 2020. Maximum leverage-covenant thresholds step down over time, reaching 5.00-to-1.00 from Q1 2021.
- Genesis declared a quarterly distribution of $0.7225 per unit, payable August 14, 2017, its 48th consecutive quarterly increase. Management cautioned that future distributions depend on operating cash flow and access to capital.
- Risks include acquisition financing, integration and realization of expected benefits; Gulf of Mexico production interruptions and field downtime; weaker inland marine demand and rates; commodity-market and customer-demand changes; environmental, safety and operational incidents; and access to debt and equity markets. The company said pending legal matters were not expected to materially affect its financial position, results or cash flows. No material change in market-risk disclosures was reported.
Important facts for investors to verify
- Whether the Tronox alkali-business acquisition closed, its final financing mix and terms, and the resulting leverage and preferred-unit dilution.
- Whether the $26.7 million asset-sale gain and $12.6 million railcar provision obscure underlying earnings trends; assess cash flow and Segment Margin alongside reported net income.
- Whether Gulf of Mexico downtime persisted into Q3 and whether new onshore projects delivered the expected volume and margin ramp-up.
- Whether marine utilization and day rates recovered, particularly in the inland fleet, and how much further growth or maintenance capital is required.
- Capacity to service approximately $3.0 billion of debt, meet the declining leverage-covenant limits, fund distributions and manage the 2021 notes refinancing condition.