Genesis Energy, L.P. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Genesis is a Gulf Coast and Gulf of Mexico midstream partnership operating offshore pipelines, sodium minerals and sulfur services, onshore facilities and transportation, and marine transportation. Amounts below are in millions unless stated otherwise.
Financial performance and liquidity
- Q3 revenue: $745.3, up 53% from $486.1. Operating income was $46.1 versus $43.1. Net loss attributable to Genesis was $0.3 versus net income of $6.3; preferred distributions resulted in a $18.0 loss available to common unitholders, or $(0.15) per unit, versus $0.8 income, or $0.01 per unit.
- First nine months: Revenue was $2,223.5 versus $1,308.3; operating income was $166.1 versus $157.1. Net income attributable to Genesis was $18.7 versus $67.1. After preferred distributions, common unitholders had a $33.1 loss versus $61.7 income.
- Segment Margin, a non-GAAP measure: Q3 was $183.2, up 25% from $146.5; nine-month margin was $527.3 versus $419.2. Q3 operating margin was approximately 6.2%, compared with 8.9% a year earlier.
- Cash flow: Operating cash flow was $307.6 for the first nine months, compared with $206.4. Management reported Q3 operating cash flow of $156.7 versus $30.1, citing working-capital effects and higher Segment Margin. Cash and equivalents were $11.9 at quarter-end.
- Debt and liquidity: Long-term debt had a $3,720.7 principal balance and $3,681.2 net carrying value. The $1.7 billion revolving facility had $1,220.7 drawn and $478.1 available at September 30; Genesis reported compliance with debt covenants. Current assets were $761.4 and current liabilities $430.0.
- Capital and distributions: Nine-month capital expenditures were $132.7. Common-unit cash distributions were $191.2 in the period. The declared Q3 common distribution was $0.54 per unit; the preferred distribution was paid in kind, adding approximately 523,132 preferred units.
Material changes and drivers
- The Alkali Business, acquired September 1, 2017 for approximately $1.325 billion, contributed for three months in Q3 2018 versus one month in Q3 2017. It was the principal driver of higher sodium-minerals revenue and segment margin. The acquisition also makes year-over-year comparisons less like-for-like.
- Higher crude-oil prices increased onshore product revenues and costs; management said the direct effect on margin is limited by fee-based arrangements, back-to-back transactions and hedging. Adoption of ASC 606 increased reported nine-month revenue by $80.5 and operating income by $2.5; prior-year results were not restated.
- Offshore Segment Margin fell 9% in Q3, mainly on lower Poseidon volumes and production-facility downtime. Sodium minerals and sulfur services Segment Margin rose 113%, including the larger Alkali contribution and stronger NaHS volumes. Onshore Segment Margin rose 41% on increased Louisiana corridor throughput. Marine Segment Margin fell 4%, reflecting short-term contracts and higher dry-docking costs.
- Interest expense increased to $58.8 in Q3 from $47.4, and to $172.9 for nine months from $122.1, reflecting debt associated with acquired and constructed assets, higher LIBOR, and lower capitalized interest. Depreciation, depletion and amortization also increased.
Outlook, risks and unusual items
- Management said Alkali Business performance exceeded expectations and expected strong performance through the remainder of 2018 and into 2019. It anticipated no material growth capital expenditures on individual projects for the remainder of 2018 and intended to direct substantial excess cash toward reducing revolving-credit borrowings.
- Genesis completed the sale of its Powder River Basin midstream assets on October 11, 2018, receiving approximately $300 million net, including a $30 million option payment. It said proceeds were applied to the revolving credit facility.
- Management expected offshore capacity constraints on competing systems could benefit Genesis over time, while noting continuing downtime and underperforming fields; two subsea tie-backs were scheduled for 2019. It did not expect significant improvement in marine transportation fundamentals for several years, apart from the American Phoenix, under contract through September 2020.
- Key risks include commodity and product-market conditions, throughput and customer activity, pipeline or marine interruptions and accidents, environmental and regulatory matters, access to capital, debt covenants, and the ability to sustain cash flow and distributions. The filing reported no material change in previously disclosed risk factors, no material developments in litigation, and no material changes to contractual obligations or off-balance-sheet arrangements.
- Unusual items include a $3.3 loss on extinguishment of debt in the nine-month period and a $48.6 fair-value liability for the preferred-unit distribution-rate-reset feature. Management reported disclosure controls were effective and no material Q3 change to internal control over financial reporting.
Important facts for investors to verify
- Whether the post-quarter $300 million asset-sale proceeds reduced revolver borrowings as reported, and the resulting debt and liquidity position.
- Alkali Business margins, costs and cash generation, distinguishing operating growth from acquisition-related comparison effects and ASC 606 accounting changes.
- Offshore pipeline volumes, field performance, downtime, and timing of the two planned 2019 tie-backs.
- Cash available for common distributions after preferred-unit PIK distributions, maintenance capital needs, interest costs and planned debt reduction.
- Exposure to commodity-price changes, customer concentration and related-party/ANSAC transactions, as well as the assumptions underlying the preferred-unit reset valuation.