Genesis Energy, L.P. — Q1 2013 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2013, compared with Q1 2012. Genesis is a Gulf Coast-focused midstream partnership operating pipeline transportation, refinery services, and supply and logistics businesses. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
- Revenue: $1,147.2, up 19% from $960.7. Supply and logistics accounted for $1,077.0 of revenue; the filing attributes the increase primarily to higher volumes. Crude oil and petroleum product prices averaged lower year over year.
- Profit: Operating income was $30.1, up 13% from $26.7; net income was $22.8, up 17% from $19.6. Net income per common unit was $0.28 versus $0.27. Operating margin was approximately 2.6%, compared with 2.8%.
- Segment Margin: $72.1, up 20% from $60.3. Supply and logistics rose to $28.9 from $17.7; refinery services increased to $18.0 from $17.2; pipeline transportation was $25.2 versus $25.3. Segment Margin is a company-defined non-GAAP measure.
- Cash flow: Operating cash flow was $38.8, compared with $19.9. Investing activities used $107.0, including $64.5 invested in the SEKCO joint venture; financing provided $72.9. Cash increased $4.7 to $16.0.
- Available Cash before Reserves: Company-defined distributable cash flow was $48.7, up 23% from $39.6. The filing cautions this non-GAAP measure is not a substitute for GAAP cash flow or earnings.
- Capital spending and distributions: Q1 capital expenditures totaled $102.6, including $64.5 for equity investees. Maintenance capital was $0.8. Distributions paid in the quarter were $39.4; the declared Q1 2013 distribution was $0.4975 per unit, totaling $40.4, payable May 15.
- Liquidity: Cash was $16.0; current assets were $482.3 and current liabilities $373.4. Working capital was approximately $108.9 and the current ratio approximately 1.29.
- Debt: Long-term debt was $971.9, up from $850.9 at year-end 2012. It included $271.0 drawn under the $1 billion revolving credit facility and $700.9 carrying value of unsecured notes. Available borrowing capacity was $711.8, including $17.2 of outstanding letters of credit. The partnership reported compliance with debt covenants.
Material changes versus Q1 2012
- Supply and logistics Segment Margin increased 64%, alongside a 28% increase in crude oil and petroleum product volumes. Genesis cited expanded West and South Texas gathering and marketing, a larger trucking fleet, and new rail operations.
- Pipeline Segment Margin was nearly flat: higher onshore tariffs and throughput were offset by lower pipeline loss allowance revenues and higher operating costs, including integrity testing and safety spending.
- Refinery services Segment Margin rose 4%, with higher NaHS sales volumes partly offset by pricing and input-cost effects.
- General and administrative expense increased $2.2, primarily due to higher equity-based compensation associated with the unit price increase. Net interest expense rose $0.8, while increased capitalized interest partly offset the impact of new notes.
- The $350 million issuance of 5.75% senior unsecured notes in February 2013 was used to repay credit-facility borrowings and for general partnership purposes. Facility borrowings declined from $500 million to $271 million, while total debt increased.
- Q1 2012 revenue and cost-of-sales figures were corrected to present certain transactions gross rather than net. The corrections did not affect operating income, net income, or Segment Margin.
Outlook, risks, and unusual items
- Management expected internally generated funds and credit-facility availability to meet ordinary-course capital needs, while noting future capital needs may require debt or equity financing and that access on satisfactory terms is not assured.
- Projects under construction were estimated at approximately $475 million in total, including prior-period spending, with approximately $305 million anticipated in 2013. Projects included Louisiana infrastructure, a Texas City pipeline loop, refinery services capacity in Tulsa, rail facilities, Wyoming pipelines, and SEKCO. Genesis expected to contribute approximately $125 million to SEKCO in 2013 and approximately $200 million through 2014 for its share of construction.
- Management reported 31 consecutive quarterly distribution increases. The announced $0.4975 distribution represented a 10.6% increase over the distribution for Q1 2012; future distributions and growth spending remain subject to cash generation and funding needs.
- Commodity derivatives were used to economically hedge inventory and purchase commitments; none were designated as accounting hedges. Derivatives generated a $3.5 loss in Q1 2013 versus a $10.7 loss in Q1 2012. Management noted timing differences can cause derivative gains or losses to appear in different periods from the hedged transactions.
- Risks highlighted include commodity prices and volumes, customer refinery outages, pipeline or marine service interruptions, construction execution and capital availability, environmental and safety events, competition, regulation, and customer or counterparty credit. The partnership is subject to environmental laws and ordinary-course litigation; management did not expect pending matters to materially affect its financial position, results, or cash flows. No material changes to market-risk disclosures or contractual obligations were reported.
Important facts for investors to verify
- Whether supply and logistics volume growth and higher Segment Margin are sustainable, and how the growth affects operating costs and working capital.
- Progress, timing, cost, and expected returns of the disclosed growth projects, particularly SEKCO and the Louisiana and rail investments.
- Distribution coverage and funding plans given the declared distribution, planned capital spending, and potential need for additional debt or equity.
- Debt capacity, covenant headroom, and the implications of the 2021 notes and revolving-credit borrowings.
- Exposure to commodity-hedge timing, margin deposits, environmental and operating risks, and the effect of the gross-presentation correction on comparisons with previously reported revenue.