Business context and reporting period
Genesis Energy, L.P. is a Gulf Coast-focused midstream master limited partnership with offshore and onshore pipelines, refinery services, marine transportation, and supply and logistics operations. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016; comparisons are with the same 2015 periods. Unless noted, dollar amounts below are in millions.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $446.0 | $656.3 | $824.4 | $1,183.2 |
| Operating income | $48.0 | $29.4 | $107.8 | $54.2 |
| Net income attributable to Genesis | $23.7 | $11.7 | $59.0 | $31.9 |
| Net income per common unit | $0.22 | $0.12 | $0.54 | $0.33 |
| Segment Margin, a non-GAAP measure | $142.5 | $98.6 | $287.4 | $192.7 |
| Available Cash before Reserves, a non-GAAP measure | $96.0 | $68.8 | Not stated here | Not stated here |
| Operating cash flow | $62.6 | $8.6 | $103.7 | $71.1 |
Lower crude and petroleum product prices reduced both revenue and related costs; management said commodity-price movements generally have a more limited effect on Segment Margin because of fee-based contracts, back-to-back transactions, and hedging. Average WTI was $45.59 per barrel in Q2 2016, down 21% from $57.94 a year earlier. Q2 operating margin was approximately 10.8% versus 4.5%; net margin was approximately 5.3% versus 1.8%.
At June 30, cash was $8.6, current assets $372.5, and current liabilities $267.6. Long-term debt carried at $3,215.9, including $1,405.8 drawn on the secured credit facility and $1,810.1 of unsecured notes. The $1.7 billion revolving facility had $281.9 of borrowing capacity remaining; $12.3 of letters of credit were outstanding. The April amendment increased facility commitments from $1.5 billion and permanently relaxed the maximum consolidated leverage ratio to 5.5:1. The partnership reported compliance with debt covenants.
Six-month capital spending for fixed and intangible assets was $220.6, including $204.4 of growth expenditures; total capital expenditures including acquisition and equity-investee items were $247.9. Net cash used in investing was $249.9. Cash distributions to unitholders were $146.0 for the six months. The quarterly distribution increased to $0.69 per unit, payable in August.
Material changes versus prior comparable periods
- Q2 revenue fell 32% and six-month revenue fell 30%, primarily reflecting lower commodity prices and lower supply-and-logistics activity.
- Operating income, net income, and Segment Margin rose substantially, mainly because of the July 2015 Enterprise offshore pipeline acquisition. The acquired business contributed $58.8 of Q2 revenue and $28.5 of Q2 net income; its results were not included in 2015 reported comparisons.
- Offshore Segment Margin increased $59.2 in Q2 and $112.6 for the six months. Other segments were weaker in Q2: marine transportation Segment Margin declined 34%, onshore pipeline declined 16%, refinery services declined 2%, and supply and logistics declined 30%.
- Interest expense increased to $35.5 in Q2 from $17.9 and to $69.9 for the six months from $37.1, principally due to acquisition-related and project financing. Depreciation and amortization also increased as acquired and constructed assets entered service.
- Operating cash flow improved year over year, but working-capital changes used $90.2 in the first half, versus $35.0 a year earlier. Cash and partners’ capital were lower than at year-end 2015, while debt increased.
Outlook, commentary, risks, and unusual items
Management expected sequentially higher net income and Available Cash before Reserves, citing anticipated deepwater Gulf of Mexico volume growth, the end of certain refinery turnarounds, and new organic projects expected to ramp up through the end of 2017. It described commercial operations as relatively stable and saw a line of sight to volume growth over the next four to six quarters, while acknowledging energy-sector and capital-market uncertainty. Approximately $125 million of spending, including capitalized interest, was anticipated for projects under construction during the remainder of 2016.
On July 27, 2016, after quarter-end, Genesis issued 8.0 million Class A units for net proceeds of $298.0 and used the proceeds to repay revolving-credit borrowings. The offering improved liquidity but diluted existing unitholders; the underwriter also received a 30-day option for up to 1.2 million additional units. Management said it may use further equity issuance, lower future distribution growth, or both to strengthen financial flexibility. It also reported its 44th consecutive quarterly distribution increase.
Key operational pressures included lower offshore marine barge rates and utilization, reduced onshore Texas pipeline volumes, and weaker crude gathering competition. Turnarounds were expected to affect certain Louisiana pipeline and rail volumes, with recovery anticipated from Q3. Commodity derivatives generated a $13.4 loss for the first half. Asset retirement obligations were $217.2 at June 30. The partnership disclosed environmental and other ordinary-course legal and regulatory exposures, but did not expect currently pending matters to materially affect its financial position, results, or cash flows. It reported no material change in previously disclosed risk factors and no material change in market-risk disclosures.
Important facts for investors to verify
- Whether acquired offshore assets sustain expected throughput and cash contributions, and whether management’s projected volume growth materializes.
- Whether marine rate and utilization pressures, refinery turnarounds, and weaker supply-and-logistics activity persist or improve as management anticipated.
- Debt, leverage, covenant headroom, and actual post-offering facility availability after the $298 million equity proceeds were applied; the filing reports $579.9 of pro forma capacity after the offering.
- The sustainability of distributions relative to cash generation, maintenance needs, and the partnership’s non-GAAP Available Cash before Reserves measure.
- Completion, cost, and timing of major growth projects, including Houston-area infrastructure and the Baton Rouge and Raceland facilities.
- Final purchase-price allocation for the Enterprise acquisition, environmental and asset-retirement obligations, and exposure to commodity, customer, operational, and capital-market risks.