Genesis Energy, L.P. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; quarterly figures below refer to the fourth quarter. Genesis is a Gulf Coast-focused midstream master limited partnership operating in onshore and offshore pipelines, refinery services, marine transportation, and supply and logistics. Prior-period segment results were recast following a fourth-quarter 2014 reporting reorganization.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $3.846 billion | $4.135 billion |
| Operating income | $132.6 million | $110.8 million |
| Income from continuing operations | $106.2 million; $1.18 per unit | $84.0 million; $1.00 per unit |
| Operating cash flow | $291.1 million | $138.4 million |
| Segment Margin (non-GAAP) | $347.3 million | $280.4 million |
| Available Cash before Reserves (non-GAAP) | $232.6 million | $186.1 million |
- Annual revenue declined 7%, principally reflecting lower crude oil and petroleum-product prices, which reduced both supply-and-logistics sales and related product costs. Management said these price changes were expected to have limited effect on segment margin.
- Segment Margin rose 24%. Offshore pipelines contributed $71.6 million (up $27.1 million), marine transportation $86.2 million (up $38.5 million), refinery services $84.9 million (up $9.5 million), onshore pipelines $61.2 million (down $3.1 million), and supply and logistics $43.3 million (down $5.0 million).
- Profit growth was partly offset by net interest expense rising to $66.6 million from $48.6 million and depreciation and amortization increasing to $90.9 million from $64.8 million, as newly acquired and constructed assets entered service.
- Fourth-quarter 2014 revenue was $847.3 million versus $961.0 million in fourth-quarter 2013; continuing-operations income was $26.2 million versus $16.7 million. Fourth-quarter 2014 net income per unit was $0.28.
- Operating cash flow improved partly because of higher cash earnings and lower working-capital needs. Investing activities used $624.0 million; financing activities provided $333.5 million. Capital expenditures and acquisitions totaled $647.1 million.
- Year-end cash was $9.5 million. Current assets of $355.4 million were below current liabilities of $363.1 million. Long-term debt totaled $1.601 billion: $550.4 million drawn on the secured revolver and $1.051 billion of unsecured notes. The partnership reported $438.8 million of remaining revolver borrowing capacity and compliance with debt covenants.
- Net debt funding increased during the year: Genesis issued $350 million of 5.625% notes due 2024 and, in September, raised $225.7 million net from a common-unit offering. The $1 billion revolving credit facility was extended to July 2019, with an accordion feature allowing up to $1.5 billion subject to lender consent.
Material changes, outlook, and risks
- Genesis acquired the Jones Act-qualified M/T American Phoenix for $157 million in November 2014. Its marine fleet expansion and the 2013 offshore marine acquisition contributed to segment growth.
- The SEKCO deepwater pipeline was completed in June 2014; customers began paying minimum fees on completion, with crude deliveries starting in the first quarter of 2015. Management estimated approximately $480 million of total spending on projects under construction, including amounts already spent, with about $250 million expected in 2015.
- The Baton Rouge terminal, initially planned for about 1.1 million barrels of storage, was expected to begin operations by the end of the third quarter of 2015. The Raceland rail facility was expected to start operating in the second half of 2015. These are management expectations, not guarantees.
- Supply-and-logistics margin was pressured by approximately $5 million of charges to exit or reduce certain heavy-fuel-oil terminal arrangements; Genesis expected to leave certain third-party facilities in early 2015. Crude oil and natural-gas prices fell significantly in the second half of 2014, creating risk to producer activity, volumes, and asset utilization.
- Customer and operating concentrations warrant attention: Shell generated 12% of 2014 revenue, and Phillips 66’s Westlake refinery accounted for approximately 60% of refinery-services NaHS by-product volumes. Refinery utilization, contract performance and renewal, and demand for NaHS can affect results.
- Other key risks include substantial debt and capital needs, variable-rate borrowing costs, commodity and counterparty exposure, environmental and pipeline or marine incidents, Gulf Coast severe weather, Jones Act requirements, and possible underutilization of leased assets. The partnership also disclosed uncertainty about whether certain marine time-charter income qualifies for partnership tax treatment; outside tax counsel’s opinion standard had changed from “will” to “should.”
- Genesis declared $2.23 of distributions per common unit for 2014, up from $2.015 in 2013, and reported 38 consecutive quarterly increases. The fourth-quarter 2014 distribution, paid in February 2015, was $0.595 per unit. Future increases depend on operating performance, cash needs, and capital access.
- Inventory was written down by approximately $6.6 million at year-end because market value was below recorded cost. Management reported no material pending legal or environmental contingency and assessed internal control over financial reporting as effective; Deloitte issued an unqualified audit opinion.
Important facts for investors to verify
- Whether 2015 project spending, schedules, and expected returns—especially the Baton Rouge terminal, Raceland facility, and SEKCO—were achieved.
- Whether weaker oil prices affected producer activity, pipeline throughput, customer credit, and leased-asset utilization after year-end.
- Whether operating cash flow and available cash support distributions after maintenance needs, growth spending, debt service, and working-capital changes.
- Debt covenant headroom, revolver availability, refinancing requirements, and sensitivity to interest-rate increases.
- Phillips 66 and Shell exposure, refinery-services contract renewals, and the sustainability of marine and supply-and-logistics margins.
- The tax treatment of marine time charters and any subsequent developments affecting the partnership’s tax status.