Genesis Energy, L.P. — Q2 2012 Form 10-Q
Business context and period. Unaudited results for the quarter and six months ended June 30, 2012. Genesis operates crude-oil and CO₂ pipelines, refinery sulfur-removal services, and supply-and-logistics businesses, primarily in the Gulf Coast region.
Key financial results
Amounts in millions, except per-unit data. Comparisons are with the corresponding 2011 period.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $922.7 | $762.8 | $1,855.6 | $1,452.6 |
| Operating income | $27.7 | $25.9 | $54.4 | $38.8 |
| Net income | $18.6 | $17.4 | $38.2 | $24.4 |
| Net income per common unit, diluted | $0.23 | $0.27 | $0.50 | $0.38 |
| Segment Margin | $62.8 | $47.7 | $123.1 | $96.8 |
| Available Cash before Reserves (non-GAAP) | $43.2 | $31.9 | Not stated | Not stated |
| Operating cash flow | Not stated | Not stated | $99.3 | $9.4 |
- Q2 revenue grew 21%; six-month revenue grew 28%. Management attributed much of the increase to higher supply-and-logistics volumes and acquisitions; revenue and product costs both rose substantially.
- Q2 Segment Margin increased 32%, led by supply and logistics (+110%) and pipeline transportation (+23%); refinery services declined 9%. Six-month Segment Margin rose 27%.
- Q2 net income increased, but diluted earnings per unit fell as weighted-average units increased to 79.5 million from 64.6 million. Six-month per-unit earnings rose to $0.50 from $0.38.
Liquidity, debt and capital
- At June 30, cash was $15.0 million; current assets were $341.7 million and current liabilities $235.8 million.
- Total long-term debt was $796.0 million, up from $659.3 million at year-end 2011: $445 million under the secured facility and $351 million carrying value of 7.875% senior notes due 2018. The partnership reported compliance with debt covenants.
- Under the then-existing $775 million credit facility, $316.1 million was available at quarter-end. In July 2012, the facility was amended to $1 billion, with an accordion feature permitting expansion to $1.3 billion subject to terms; maturity moved to July 2017.
- Six-month investing cash outflow was $330.3 million, including the $205.6 million Gulf of Mexico pipeline acquisition, $51.4 million invested in the SEKCO joint venture, and $80.4 million for fixed and intangible assets. Financing cash inflow was $235.3 million; cash increased $4.2 million.
- Genesis issued $100 million of senior notes and raised $169.4 million net from a 5.75 million-unit offering during the period. Distributions paid in the first half totaled $67.4 million.
Material changes, outlook and risks
- Acquisition and growth. In January, Genesis bought interests in Poseidon, Odyssey and other Gulf of Mexico pipeline assets for $205.6 million. The acquired interests contributed $7.2 million of net income in the first half, including equity-method earnings. Supply-and-logistics volumes rose 30% in Q2, reflecting acquisitions and increased activity in operating areas.
- Operating conditions. Maintenance at connected production fields reduced CHOPS pipeline throughput; management expected the work to finish in Q3 2012. Longer-than-expected refinery turnarounds increased refinery-services costs, as processing shifted to less efficient locations.
- Projects and capital plans. Management expected several Texas, Florida and refinery projects to be completed between Q3 2012 and Q2 2013, with approximately $100 million total expected project costs and about $51 million spent since inception through the report date. Genesis expected to spend about $80 million on its SEKCO pipeline investment in 2012; $51.4 million had been invested in the first half. SEKCO service was expected by mid-2014.
- Distribution. The partnership declared a $0.46 per-unit Q2 distribution, payable in August, its 28th consecutive quarterly increase. Management said it expected operating cash generation and borrowing availability to support ordinary-course needs, while noting growth requires access to additional debt or equity capital.
- Unusual item and exposure. Q2 results included a $0.8 million unrealized derivative loss versus a $7.0 million unrealized gain in Q2 2011. Most commodity contracts were not designated as accounting hedges, so gains and losses may affect earnings in periods different from the hedged transactions. Inventory was written down by approximately $1.1 million to market at June 30.
- Risks and contingencies. Key stated risks include commodity supply and demand, throughput and tariff changes, acquisitions and project execution, refinery or pipeline interruptions, marine accidents and environmental releases, regulation, access to capital, and customer financial condition. The partnership reported no material changes to its risk factors, no material legal developments, and no material effect expected from pending routine legal, tax or regulatory matters. It cautioned that environmental releases could materially affect the business.
Most important facts for investors to verify
- Whether CHOPS maintenance ended as expected and whether offshore pipeline throughput and contribution recovered.
- Whether refinery turnaround-related costs normalized and refinery-services margins improved.
- How acquired pipeline interests and supply-and-logistics growth translated into recurring cash generation, not just higher revenue.
- Progress, spending and expected returns on SEKCO and the other expansion projects, including whether stated schedules and budgets were achieved.
- Debt, covenant headroom, borrowing availability and the ability to fund growth while sustaining distribution increases.
- The sustainability of distributable cash relative to distributions, considering maintenance capital needs and the partnership’s non-GAAP Available Cash before Reserves measure.