Genesis Energy, L.P. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. The unaudited partnership operates Gulf Coast midstream businesses in pipeline transportation, refinery services, and supply and logistics, including crude oil and petroleum product transportation, marketing and storage.
Key financial metrics
Amounts below are in millions, except per-unit data and where noted.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $830.2 | $576.0 | $2,282.8 | $1,499.1 |
| Operating income | $28.6 | $10.2 | $67.4 | $38.5 |
| Net income attributable to Genesis | $19.1 | $5.1 | $43.5 | $26.2 |
| Net income per common unit | $0.27 | $0.12 | $0.65 | $0.48 |
| Segment Margin | $52.9 | $39.4 | $149.8 | $107.9 |
| Cash provided by operating activities | $29.7 | $23.4 | $39.1 | $34.1 |
- Segment Margin by business, Q3 2011: Pipeline transportation $16.0 million; refinery services $18.0 million; supply and logistics $18.9 million. Segment Margin is a management-defined, non-GAAP measure.
- Liquidity at September 30: Cash was $4.4 million; current assets were $343.4 million and current liabilities $237.6 million. Trade receivables were $223.8 million and inventory $89.7 million.
- Debt: Long-term debt totaled $617.9 million: $367.9 million drawn on the senior secured revolving facility and $250 million of unsecured notes due in 2018. The notes’ estimated fair value was $235.3 million.
- Revolver availability: $402.8 million was available under the $775 million facility at quarter-end, after borrowings and letters of credit. The partnership reported covenant compliance.
- Cash distributions: $82.1 million was distributed to common unitholders during the first nine months. The announced Q3 distribution was $0.4275 per unit, payable November 14, 2011.
Material changes versus the prior comparable periods
- Q3 revenue rose 44%, while attributable net income rose 277%; for the first nine months, revenue increased 52% and attributable net income 66%. Management attributed the revenue and cost growth mainly to higher crude oil and petroleum product prices; it said price volatility had limited effect on supply and logistics Segment Margin.
- Q3 Segment Margin increased 34%. Management cited higher pipeline throughput and Cameron Highway distributions, refinery operating efficiencies, stronger supply and logistics volumes and commercial arrangements, and the contribution from the FMT barge business.
- Genesis acquired FMT’s black-oil barge transportation business in August for approximately $143.5 million, adding 30 barges and 14 push/tow boats. The acquisition contributed about $2.9 million to supply and logistics Segment Margin in both the quarter and nine-month period.
- In July, Genesis issued 7.35 million common units and received approximately $185 million net proceeds, primarily to fund the FMT acquisition. The common units outstanding increased from 64.6 million at year-end 2010 to 72.0 million at September 30, 2011.
- In August, Genesis expanded its revolving credit commitment from $525 million to $775 million, increased the accordion feature, and reduced applicable borrowing margins, subject to leverage ratios.
- Nine-month operating cash flow increased to $39.1 million, but was constrained by a $50.7 million net cash use from changes in operating assets and liabilities, including higher receivables and inventory. Investing cash outflow was $145.7 million, principally reflecting the FMT acquisition.
Outlook, commentary, and risks
- Management expected to close a $205.76 million acquisition of interests in Gulf of Mexico crude oil pipeline systems from Marathon Oil in Q4 2011, funded with the revolver. Closing depended on conditions including rights of first refusal; the seller also retained certain asset disposition rights. The stated purchase price included an estimated $29 million for line fill and was subject to customary adjustments.
- Genesis expected maintenance capital expenditures of approximately $4–$5 million in 2011 and a similar annual range in future years. Three Texas growth projects and a Tulsa refinery services facility were expected to cost less than $30 million in total; $5.7 million had been spent through September 30. Management anticipated the Texas City terminal work would be completed in Q1 2012 and the Tulsa facility no later than Q4 2012.
- Management noted that Cameron Highway throughput was reduced by producer field improvement work, expected to continue into Q4 because of delays; this could reduce the partnership’s share of joint-venture cash distributions in that quarter.
- Management said internally generated funds and revolver availability were expected to cover ordinary-course capital needs, but growth plans require substantial capital. It cautioned that additional financing might not be available on satisfactory terms and that growth plans could be deferred if funds cannot be raised.
- Risks include commodity supply, demand and price changes; throughput and refinery activity; acquisition closing and integration; marine accidents and pollution; environmental and regulatory requirements; Gulf of Mexico production and regulation; access to capital and covenant restrictions; interest rates, insurance, and customer credit. Genesis reported no material changes to previously disclosed risk factors and no material expected effect from pending litigation or regulatory matters. It is subject to environmental laws and cannot assure that releases will not materially affect its business.
- Q3 inventory was written down by approximately $1.6 million because recorded cost exceeded market value. A change in estimated useful lives of certain trade names reduced operating and net income by $1.4 million in Q3 and $4.3 million for the first nine months. The filing reported a $11.2 million nine-month loss on commodity derivatives not designated as accounting hedges; derivative valuation and inventory impacts should be considered together.
- Management reported effective disclosure controls. It also noted that the staged ERP implementation required changes to business processes and internal controls during 2011.
Important facts for investors to verify
- Whether the Marathon pipeline acquisition closed, on what final terms, and how it was funded; confirm the rights-of-first-refusal and other closing conditions.
- Whether Cameron Highway throughput and cash distributions recovered after producer field work, and the effect on Q4 results.
- Whether operating cash flow converts into distributable cash as working capital requirements fluctuate; review the partnership’s non-GAAP Available Cash before Reserves calculation and its reconciliation to GAAP cash flow.
- How the FMT fleet and Texas and Tulsa growth projects contribute to cash generation relative to acquisition, construction, maintenance, and financing costs.
- The effects of unit issuance and rising distributions on per-unit earnings, distribution coverage, and future financing needs.
- Commodity derivative exposures, inventory valuation, debt covenant headroom, and the execution of ERP-related control changes.