Genesis Energy, L.P. — Q3 2015 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and nine months ended September 30, 2015. Genesis is a Gulf Coast-focused midstream partnership operating onshore and offshore pipelines, refinery services, marine transportation, and supply and logistics businesses. On July 24, 2015, it acquired Enterprise Products Partners’ offshore pipeline and services business for approximately $1.5 billion, significantly expanding its offshore operations.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $572.3 million | $964.1 million | $1,755.5 million | $2,998.9 million |
| Operating income | $44.8 million | $35.3 million | $99.0 million | $101.9 million |
| Net income attributable to Genesis | $363.2 million | $29.1 million | $395.1 million | $80.0 million |
| Net income per common unit | $3.38 | $0.33 | $3.93 | $0.90 |
| Segment Margin | $140.7 million | $94.8 million | $333.4 million | $254.8 million |
| Available Cash before Reserves | $96.3 million | $60.8 million | Not stated in the provided filing text | Not stated in the provided filing text |
Cash flow and liquidity. Operating cash flow for the nine months was $192.1 million, down from $208.1 million, which management attributed primarily to increased working-capital needs. Investing activities used $1.86 billion, including $1.52 billion for the Enterprise acquisition; financing activities provided $1.67 billion. Cash was $15.6 million at September 30, 2015. Current assets were $345.4 million and current liabilities $326.1 million.
Debt. Long-term debt was $2.85 billion at September 30, 2015, compared with $1.60 billion at year-end 2014. This comprised $1.01 billion drawn on the secured credit facility and approximately $1.84 billion of unsecured notes. The $1.5 billion revolving facility had $469.3 million of borrowing capacity available, after outstanding borrowings and letters of credit. Genesis reported compliance with its debt covenants.
Material changes and drivers
- Q3 revenue fell 41% year over year, primarily reflecting lower crude oil and petroleum product prices and lower supply-and-logistics activity. Management noted WTI averaged $46.43 per barrel, down 52% from $97.17.
- The $335.3 million Q3 gain from remeasuring Genesis’s previously held CHOPS and SEKCO interests at fair value drove much of the increase in reported net income. It was non-cash and is not a recurring operating contribution.
- Q3 Segment Margin increased 48%, principally due to the acquired offshore assets. Offshore segment margin rose to $70.9 million from $21.7 million; marine transportation also improved, while supply and logistics, refinery services, and onshore pipelines declined.
- The acquisition added approximately 2,350 miles of offshore pipelines and six hub platforms. Genesis increased its ownership in CHOPS and SEKCO to 100% and Poseidon to 64%, among other interests. Acquired operations contributed $44.7 million of revenue and $24.5 million of net income in the reported period after closing.
- Higher debt, acquisition-related costs, and increased depreciation and interest expense weighed on results. Nine-month results also included a $19.2 million loss on early retirement of 7.875% notes.
Outlook, risks, and unusual items
- Management said the Enterprise acquisition was immediately accretive to Segment Margin and Available Cash before Reserves in Q3. It stated that operating cash flow and credit-facility availability were expected to support ordinary-course capital needs, while noting future capital access and growth execution were not assured.
- Genesis estimated approximately $900 million of total spending on projects under construction in 2015 and future periods, including amounts already spent; approximately $440 million was expected in 2015. Projects included Houston-area crude-oil infrastructure, Wyoming pipelines, a Baton Rouge terminal, and a Raceland rail facility, with several expected to enter service in 2016.
- Genesis declared a Q3 distribution of $0.64 per unit, payable November 13, 2015. Management described this as the 41st consecutive quarterly increase. The filing does not provide a formal earnings or cash-flow forecast.
- Key risks include commodity-market and volume changes, customer demand and refinery activity, pipeline or marine service interruptions and accidents, environmental exposure, competition, acquisition integration, access to capital, and the ability to sustain distributions. Management said no material changes had occurred in previously disclosed risk factors.
- The company recorded preliminary acquisition-related asset retirement obligations of $158.1 million; total ARO liabilities were $177.3 million at quarter-end. Management said pending ordinary-course lawsuits and regulatory examinations were not expected to materially affect financial position, results, or cash flows.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It also revised certain consolidating-information presentations for affiliate advances; the filing states these revisions did not affect consolidated financial statements.
Most important facts for investors to verify
- How much of reported earnings and per-unit income reflects the one-time $335.3 million non-cash step-up gain, versus recurring cash-generating operations.
- Post-acquisition offshore performance, including throughput, minimum-volume commitments, distributions from equity investees, and integration progress.
- Debt levels, interest costs, covenant headroom, and remaining borrowing capacity after acquisition financing and planned capital spending.
- Whether operating cash flow and Available Cash before Reserves can support distributions and maintenance needs; the latter is a non-GAAP measure and not equivalent to operating cash flow.
- Execution, spending, and commissioning progress for major growth projects, and exposure to commodity prices, customer volumes, and environmental or operational contingencies.