Genesis Energy, L.P. — Q2 2011 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2011, compared with the same 2010 periods. Genesis is a Gulf Coast-focused midstream partnership with pipeline transportation, refinery services, and supply and logistics businesses. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $762.8 | $456.5 | $1,452.6 | $923.1 |
| Operating income | $25.9 | $18.3 | $38.8 | $28.3 |
| Net income attributable to Genesis | $17.4 | $14.2 | $24.4 | $21.1 |
| Net income per common unit | $0.27 | $0.29 | $0.38 | $0.36 |
| Segment margin | $47.7 | $37.8 | $96.8 | $68.5 |
- Q2 revenue increased 67% and first-half revenue 57%, largely reflecting higher crude oil and petroleum product prices. Management noted that price changes substantially affect revenue and costs but had limited impact on supply and logistics segment margin.
- Q2 segment margin rose 26%: pipeline transportation $16.9 million, refinery services $18.9 million, and supply and logistics $11.8 million. Each segment improved year over year.
- Q2 net income attributable to Genesis increased 22%, while earnings per unit declined from $0.29 to $0.27, principally amid a larger weighted-average unit count. First-half earnings per unit increased to $0.38 from $0.36.
- GAAP operating cash flow was $9.4 million for the first half, versus $10.7 million in 2010; Q2 operating cash flow was $11.5 million, compared with an outflow of $2.6 million a year earlier. Working-capital movements, including higher receivables and inventory, affected cash flow.
- Management’s non-GAAP Available Cash before Reserves was $31.9 million for Q2, up from $26.1 million. The stated Q2 distribution was $0.415 per unit, totaling $29.9 million; the ratio of these disclosed amounts is approximately 1.07x. This non-GAAP measure is not equivalent to GAAP operating cash flow.
- At June 30, cash was $5.4 million; current assets were $342.2 million and current liabilities $245.3 million. Long-term debt totaled $656 million: $406 million under a $525 million revolving credit facility and $250 million of unsecured notes. Facility availability was $113.1 million; the partnership reported covenant compliance. The credit facility matures June 30, 2015, and notes are due in 2018.
Material changes and significant developments
- First-half segment margin increased by $28.3 million. Pipeline margin benefited from Genesis’s 50% Cameron Highway interest, acquired in November 2010, and increased onshore pipeline volumes. Refinery services benefited from higher caustic soda prices, sales volumes, and operating efficiencies. Supply and logistics benefited from higher volumes and favorable product differentials.
- Interest expense rose to $9.0 million in Q2 from $3.8 million, and to $17.7 million in the first half from $7.0 million. The increase reflected higher average borrowings, higher average borrowing rates, and interest on $250 million of notes issued in November 2010.
- In July 2011, Genesis issued 7.35 million Class A units for net proceeds of approximately $185 million. It planned to use $141 million toward the acquisition of Florida Marine Transporters’ black-oil fleet, with remaining proceeds used for other purposes, including credit-facility repayment.
- The proposed fleet acquisition comprises 30 barges and 14 push/tow boats and was expected to close in Q3 2011. Genesis also described Texas crude-oil infrastructure projects and a Tulsa refinery sour-gas processing facility; combined project costs were expected to be below $30 million.
- The quarterly distribution had increased for 24 consecutive quarters. The $0.415 distribution for Q2 2011 was approximately 10.7% above the Q2 2010 rate.
Outlook, risks, and unusual items
- No specific earnings or cash-flow guidance is provided. Management expected the Florida Marine acquisition to close in Q3 2011 and described planned growth projects, subject to execution and financing.
- Planned producer work on offshore fields connected to Cameron Highway was expected to continue into Q3 and could temporarily reduce throughput and distributable cash from the joint venture, although management expected the work to support higher future volumes.
- Mississippi River flooding impaired petroleum-products marketing and marine transportation and increased idle-time costs during Q2. Refinery-services NaHS volumes also faced weakness from mining labor negotiations.
- Management cited exposure to commodity prices and derivatives, throughput and tariff changes, refinery shutdowns, acquisition and project execution, access to capital, interest rates, environmental and marine incidents, regulation, and insurance availability. Environmental releases cannot be ruled out; the partnership said pending legal and regulatory matters were not expected to have a material effect.
- A change in useful lives of certain supply and logistics trade names reduced Q2 operating and net income by $1.4 million, or $0.02 per unit, and first-half amounts by $2.9 million, or $0.04 per unit. The filing also reported commodity derivative losses recognized in earnings, with associated results subject to derivative and inventory accounting effects.
- Disclosure controls were assessed as effective. The company substantially completed a staged ERP implementation during the first half, requiring changes to business processes and internal controls.
Key facts for investors to verify
- Whether the Florida Marine fleet acquisition closed on the expected terms and how the new units and any related debt affected per-unit cash generation.
- Actual Cameron Highway throughput and distributions during the planned field work, and the timing of any recovery in volumes.
- Whether the Q2 Available Cash before Reserves measure converts to sustainable cash coverage after working-capital needs, maintenance capital, and growth spending.
- How much of the reported earnings and segment-margin improvement persists if commodity differentials, product demand, and crude prices change.
- Subsequent borrowing levels, remaining facility capacity, covenant headroom, and the funding requirements for announced projects and distributions.