Genesis Energy, L.P. — 2015 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2015. Genesis is a Gulf Coast-focused midstream MLP operating five segments: offshore and onshore pipelines, refinery services, marine transportation, and supply and logistics. Results include the Enterprise offshore pipeline and services business from its July 24, 2015 acquisition.
Key financial metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $2.247 billion | $3.846 billion |
| Operating income | $156.9 million | $132.6 million |
| Net income attributable to Genesis | $422.5 million | $106.2 million |
| Diluted net income per common unit | $4.09 | $1.18 |
| Segment Margin (non-GAAP) | $476.6 million | $347.3 million |
| Available Cash before Reserves (non-GAAP) | $331.4 million | $232.6 million |
| Cash flow from operations | $289.5 million | $291.1 million |
| Capital expenditures, including acquisition | $2.010 billion | $647.1 million |
| Long-term debt, net carrying value | $2.922 billion | $1.581 billion |
Cash and cash equivalents were $10.9 million at year-end; current assets were $306.3 million and current liabilities $302.1 million. Genesis reported $374.3 million available under its $1.5 billion revolving credit facility. The quarterly distribution increased through the year from $0.595 to $0.640 per unit; the fourth-quarter distribution of $0.655 per unit was paid in February 2016.
Material changes versus 2014
- Revenue fell 42%, largely reflecting lower crude oil and petroleum product prices in the high-volume supply and logistics business; related product costs also fell substantially. Management said these price movements were not expected to have a comparable direct effect on segment margin.
- Segment Margin rose 37%, led by a $126 million increase in offshore pipeline transportation, primarily from the Enterprise acquisition. Marine transportation margin also increased, while refinery services, onshore pipelines, and supply and logistics margins declined.
- Net income attributable to Genesis increased sharply, but included a $332.4 million non-cash gain from remeasuring previously held CHOPS and SEKCO interests at fair value upon consolidation. It also included a $19.2 million loss on early retirement of the 7.875% notes.
- Operating cash flow was nearly flat despite the increase in accounting income. Debt and interest expense rose following the acquisition and related financing; net interest expense increased to $100.6 million from $66.6 million.
Outlook, management commentary, and risks
- Management reported that the Enterprise acquisition was immediately accretive to Segment Margin and Available Cash before Reserves, and said it expected the enlarged business to improve credit metrics over time. The filing provides no formal earnings or distribution guidance.
- Management expected about $250 million of 2016 spending on projects under construction, within approximately $880 million of total project costs including amounts spent through year-end 2015. Projects expected to enter service in 2016 included Houston-area pipeline and terminal expansions, the Baton Rouge terminal, and the Raceland rail facility.
- Management said leverage could decline after growth projects are completed if excess available cash is used to repay debt. This depends on project delivery, operating performance, and access to capital.
- Key risks include continued low commodity prices and reduced producer capital spending, potential declines in throughput, customer and counterparty credit exposure, floating-rate debt, covenant restrictions, construction and integration risks, and environmental, safety, weather, and regulatory exposures. Shell accounted for 12% of 2015 revenue; Phillips 66 supplied approximately 50% of refinery-services NaHS by-product volumes.
- Management considered disclosure controls and internal control over financial reporting effective. However, the Enterprise acquisition—about 40% of year-end assets and 6% of 2015 revenue—was excluded from management’s internal-control assessment because of its recent completion; integration of controls was expected to be completed in 2016.
- The filing says pending legal matters were not expected to have a material effect. The partnership also disclosed substantial asset-retirement obligations of $188.7 million at year-end.
Important facts for investors to verify
- How much of reported earnings growth is attributable to recurring operations versus the $332.4 million non-cash acquisition-related gain.
- Whether Available Cash before Reserves, a non-GAAP measure, continues to support distributions after maintenance needs, growth spending, and debt service; compare it with actual cash distributions and cash flow.
- Debt repayment capacity, covenant headroom, borrowing availability, and sensitivity to variable interest rates following the Enterprise acquisition.
- Actual commissioning, utilization, and returns of the announced 2016 growth projects, particularly amid lower producer spending and commodity prices.
- Integration of Enterprise controls and operations, and continued performance of key customer and volume commitments, including Shell exposure and the Phillips 66 refinery-services relationship.