Business context and reporting period
Genesis Energy, L.P. is a Gulf Coast-focused midstream partnership operating pipeline transportation, refinery services, and supply and logistics businesses. This unaudited Form 10-Q covers the three months ended March 31, 2014, compared with the same period in 2013; balance-sheet figures are compared with December 31, 2013.
Comparability reflects the August 2013 acquisition of substantially all of Hornbeck Offshore’s downstream transportation business, included in supply and logistics, and the December 2013 sale of the vehicle fuel procurement and delivery business, reported as discontinued operations in the 2013 comparison. The acquired business contributed $24.9 million of 2014-quarter revenue and $6.5 million of net income.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $1,019.7 million | $1,014.8 million; up 0.5% |
| Operating income | $35.4 million | $30.0 million |
| Net income | $29.8 million | $22.8 million |
| Net income per common unit | $0.34 | $0.28 |
| Segment Margin (non-GAAP) | $77.4 million | $72.1 million; up 7% |
| Net cash from operating activities | $106.1 million | $38.8 million |
| Capital expenditures, including equity investee contributions | $102.9 million | $102.6 million |
| Cash and cash equivalents at March 31 | $11.7 million | $8.9 million at December 31, 2013 |
| Total long-term debt at March 31 | $1,341.2 million | $1,283.6 million at December 31, 2013 |
Operating cash flow benefited from working-capital changes, including a $52.9 million net cash benefit from operating asset and liability movements, versus a $10.2 million use in Q1 2013. At March 31, the $1 billion revolving credit facility had $640.5 million drawn and $347.1 million of borrowing capacity available; $12.4 million of letters of credit was outstanding. The partnership reported compliance with debt covenants. Current assets were $454.3 million and current liabilities $401.4 million.
Segment Margin was $28.1 million in pipeline transportation (up 11%), $20.9 million in refinery services (up 16%), and $28.4 million in supply and logistics (down 2%). The filing reports no consolidated gross-margin percentage. Net interest expense increased to $12.8 million from $11.4 million; depreciation and amortization rose to $19.3 million from $15.0 million, primarily reflecting acquired and newly completed assets. Q1 2014 net income included a $3.9 million unrealized derivative gain, compared with a $0.1 million gain in Q1 2013.
Material changes versus prior period
- Higher pipeline and refinery services results drove the increase in Segment Margin; offshore pipeline contribution rose, including higher CHOPS throughput, and refinery-services product volumes increased.
- Supply and logistics sales volumes from continuing operations increased 5%, but Segment Margin declined amid continued pressure from dislocations in refined-products prices and margins. Management said operations had been resized and restructured for current market conditions.
- Operating cash flow increased substantially, primarily from lower working-capital needs and higher cash earnings. Capital spending remained significant, with growth expenditures of $90.3 million and maintenance expenditures of $2.3 million, excluding equity investee contributions.
- Debt increased by $57.7 million from year-end, principally reflected in higher credit-facility borrowings. Interest expense also rose, partly offset by higher capitalized interest.
Outlook, commentary, risks, and contingencies
Management said internally generated funds and available credit were expected to meet ordinary-course capital needs, while noting that funding future capital requirements depends on access to debt and equity markets and successful execution of its growth strategy. Projects under construction were estimated at approximately $500 million in total, including prior-period spending, with approximately $260 million expected to be spent in 2014. Management expected the Scenic Station facility to be completed in Q2 2014; the Baton Rouge terminal by the end of Q2 2015; the Raceland rail facility late in Q4 2014; and the SEKCO deepwater pipeline to enter service in mid-2014.
The partnership declared a Q1 2014 distribution of $0.55 per unit, totaling approximately $48.8 million, payable May 15, 2014. Management described this as its 35th consecutive quarterly distribution increase. Available Cash before Reserves, a non-GAAP measure, was $53.4 million versus $48.7 million a year earlier; it is not equivalent to GAAP operating cash flow.
Key risks identified include commodity supply, demand and price movements; throughput and tariff changes; refinery shutdowns; project execution and access to capital; indebtedness; marine and pipeline operating hazards, including environmental releases; competition; and the potential effect of hedging activities. The filing reported no material changes to previously disclosed risk factors or market-risk disclosures. Management did not expect pending lawsuits, tax matters, or regulatory examinations to materially affect financial position, results, or cash flows; no material legal-proceeding developments were reported. No material changes to contractual obligations were reported, and the filing stated there were no off-balance-sheet arrangements beyond those previously disclosed. Disclosure controls were assessed as effective, with no material change to internal control over financial reporting reported.
Important facts for investors to verify
- Whether project schedules and the approximately $260 million expected 2014 spend remain on track, and whether further cost or financing requirements emerge.
- Whether operating cash flow and distribution coverage are sustainable after separating working-capital timing effects from recurring cash generation.
- How the refined-products margin environment affects supply and logistics results and whether management’s cost and activity adjustments are sufficient.
- Debt growth, facility availability, covenant compliance, and the funding needs of planned capital projects and distributions.
- Actual performance of the acquired marine business and completion, utilization, and returns of major pipeline, terminal, and rail projects.
- Commodity derivative impacts: contracts were not designated as accounting hedges, so reported gains and losses may occur in periods different from the related inventory transactions.