Genesis Energy, L.P. — Q2 2014 Form 10-Q
Business context and reporting period. This unaudited report covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods. Genesis is a Gulf Coast-focused midstream partnership operating pipeline transportation, refinery services, and supply and logistics businesses. Amounts below are in millions of dollars except per-unit data.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $1,015.0 | $1,068.7 | $2,034.8 | $2,083.5 |
| Operating income | $31.3 | $33.4 | $66.7 | $63.4 |
| Net income | $21.1 | $26.9 | $50.9 | $49.7 |
| Net income per common unit | $0.24 | $0.33 | $0.57 | $0.61 |
| Segment Margin (non-GAAP) | $82.7 | $70.4 | $160.0 | $142.5 |
| Available Cash before Reserves (non-GAAP) | $55.5 | $45.7 | Not stated here | Not stated here |
- Q2 revenue declined 5%, while Segment Margin rose 17%. Management attributed higher segment contribution to improvements across all three segments. Q2 net income fell, with increased depreciation and amortization and a swing from a derivative gain in 2013 to a loss in 2014 among the factors weighing on results.
- For the first six months, revenue fell about 2%, but operating income rose about 5% and net income rose about 2%. Segment Margin increased about 12%.
- Six-month operating cash flow was $105.2, up from $95.8. Investing activities used $252.1, including $241.0 for fixed and intangible assets; financing provided $152.4. Cash ended June at $14.3, versus $8.9 at year-end 2013.
- At June 30, current assets were $519.8 and current liabilities $412.3. Total debt was $1,542.9, up from $1,283.6 at December 31; partners’ capital was $1,052.4, down from $1,097.7.
- Segment Margin Q2: pipeline transportation $28.0 (up 6%); refinery services $21.6 (up 16%); supply and logistics $33.1 (up 31%). These are management-defined non-GAAP measures, not substitutes for GAAP results.
Material developments and management commentary
- Supply and logistics revenue declined with a 9% year-over-year fall in continuing-operations sales volumes, reflecting a transition of refined-products operations to fit market conditions. Its Segment Margin improved, supported by the 2013 offshore marine transportation acquisition and Port Hudson expansion.
- Refinery services benefited from higher NaHS and caustic soda volumes, operating efficiencies, and lower raw-material costs. Pipeline Segment Margin benefited from higher offshore pipeline throughput and tariff increases; Free State CO2 volumes declined without a material Segment Margin effect.
- Capital expenditures for fixed and intangible assets were $230.6 for the first half, including $226.2 of growth spending and $4.3 of maintenance capital. Management estimated about $720 million of total spending on projects under construction, including prior-period spending, with approximately $400 million expected in 2014.
- Projects included the Baton Rouge terminal, expected to be completed by the end of Q2 2015; the Raceland rail facility, expected to operate in Q2 2015; and marine fleet expansion. Scenic Station became fully operational in July 2014. The SEKCO joint-venture pipeline was mechanically complete in June and available to serve the Lucius field.
- Genesis issued $350 million of 5.625% senior notes due 2024 in May. In June, it amended and extended its $1 billion revolving credit facility to July 25, 2019, and increased the accordion feature to $500 million, potentially expanding facility size to $1.5 billion subject to lender consent. At quarter-end, $492.2 was drawn, $19.9 of letters of credit was outstanding, and reported borrowing availability was $487.9. Genesis stated it was in compliance with debt covenants.
- The quarterly distribution was increased to $0.565 per unit, payable August 14, 2014, representing a 10.8% increase from the Q2 2013 distribution. Management reported 36 consecutive quarterly increases. The declared Q2 distribution totaled $50.1.
Outlook, risks, and unusual items
- Management said internally generated funds and credit-facility availability were expected to meet ordinary-course capital needs, while noting that funding growth may require additional debt or equity and that access on acceptable terms is not assured.
- Key stated risks include commodity supply, demand and prices; throughput and tariff changes; refinery or customer shutdowns; execution and funding of growth projects and acquisitions; marine accidents or pollution; environmental and regulatory matters; competition; insurance availability; counterparty credit; and indebtedness and distribution sustainability.
- Derivative positions are used to economically hedge commodity exposure, but none were designated as accounting hedges at June 30. Q2 2014 included a $2.7 million unrealized derivative loss, versus a $2.0 million gain in Q2 2013; these effects are excluded from Segment Margin. Management cautioned that hedge-accounting timing can cause period-to-period earnings volatility.
- Environmental laws and potential releases are identified as risks. The filing says pending lawsuits and tax or regulatory examinations were not expected to materially affect financial position, results, or cash flows; it reports no material change in legal proceedings or risk factors from the 2013 Form 10-K.
- The filing reports effective disclosure controls and no material change in internal control over financial reporting. The new revenue-recognition standard was under evaluation and was expected to apply beginning January 1, 2017.
Important facts for investors to verify
- Whether Available Cash before Reserves and distributable cash generation support the increased distribution after maintenance needs and planned growth spending.
- Progress, remaining costs, funding, and commissioning schedules for the Baton Rouge, Raceland, marine, and other growth projects, including the stated 2014 spending outlook.
- Whether refined-products activity and volumes stabilize after the operational transition, and whether supply-and-logistics margin gains persist.
- Debt growth, interest costs, covenant headroom, and actual liquidity after the 2024 notes issuance and facility amendment.
- Exposure to commodity and derivative volatility, environmental or marine incidents, and any material changes in customer, counterparty, or regulatory conditions.