Genesis Energy, L.P. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results; amounts below are in U.S. dollars unless stated otherwise. Genesis is a Gulf Coast-focused midstream partnership with Pipeline Transportation, Refinery Services, and Supply and Logistics segments.
Financial performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $4,070.1 million | $3,089.7 million |
| Operating income | $113.7 million | $82.5 million |
| Net income attributable to Genesis | $96.3 million | $51.2 million |
| Net income per common unit, diluted | $1.23 | $0.75 |
| Operating cash flow | $189.3 million | $58.3 million |
| Capital expenditures, including acquisitions and equity investments | $427.9 million | $191.1 million |
| Segment Margin, a non-GAAP measure | $262.3 million | $202.5 million |
Fourth-quarter 2012 revenue was $1,054.1 million, operating income $30.2 million, net income attributable to Genesis $26.9 million, and diluted net income per unit $0.34. Annual operating margin was approximately 2.8%, compared with 2.7% in 2011; net margin was approximately 2.4%, compared with 1.7%. Revenue is dominated by crude oil and refined-product supply and resale, so the large revenue base should not be read as equivalent to high margins.
Segment Margin increased 30%. Pipeline Transportation contributed $96.5 million, up 42%; Supply and Logistics contributed $92.9 million, up 55%; and Refinery Services contributed $72.9 million, down 2%.
Balance sheet, debt, and liquidity
- At year-end, cash was $11.3 million, current assets $404.0 million, and current liabilities $312.7 million.
- Total debt was $850.9 million: $500.0 million under the senior secured credit facility and $350.9 million of 7.875% senior notes due 2018. The partnership reported $483.3 million of credit-facility borrowing availability and compliance with financial covenants.
- In February 2013, Genesis issued $350 million of 5.75% senior notes due 2021, using proceeds to repay credit-facility borrowings and for general partnership purposes. This subsequent financing is not included in year-end debt balances.
- Year-end total assets were $2,109.7 million and partners’ capital was $916.5 million.
Changes, outlook, and risks
- Revenue rose 32% year over year, primarily from higher volumes, acquisitions, and expanded logistics operations; average WTI crude prices were approximately 1% lower. Net income growth also reflected a $9.2 million income-tax benefit, mainly from reversal of $8.2 million in uncertain tax positions following tax audit settlements and statute expirations.
- Pipeline Margin benefited from the January 2012 acquisition of Gulf of Mexico pipeline interests for $205.6 million and higher onshore tariffs. Supply and Logistics growth reflected the acquired black-oil barge business and higher volumes from expanded trucking, rail, and barge fleets. Refinery Services margin weakened due to longer-than-expected customer refinery turnarounds and associated costs.
- Operating cash flow improved substantially, including from higher cash earnings and lower working-capital needs. Growth investment was significant: 2012 growth capital expenditures were $154.2 million, and the partnership also spent $205.6 million on pipeline acquisitions and invested $63.7 million in the SEKCO joint venture.
- Management estimated approximately $475 million of spending on projects under construction, including prior-period spending, with approximately $305 million expected in 2013. Projects included roughly $125 million of Louisiana Gulf Coast infrastructure, Texas City and rail expansions, and Genesis’s share of SEKCO construction costs. SEKCO was expected to enter service in mid-2014; completion dates and project returns remain subject to execution and market conditions.
- Management reported 30 consecutive quarterly distribution increases. The distribution paid in February 2013 was $0.485 per unit, 10.2% above the February 2012 payment. Future increases are not assured and depend on operating performance, cash requirements, and access to capital.
- Key risks include variable-rate debt, substantial planned capital spending and reliance on debt and equity markets; producer volumes and Gulf of Mexico field activity; refinery utilization and NaHS demand; customer concentration (Shell generated 14% of 2012 consolidated revenue, while one Phillips 66 refinery accounted for about 70% of refinery-services NaHS by-product volume); environmental, safety, weather, and regulatory exposure; and the partnership’s distribution and tax structure. Management said pending legal matters were not expected to have a material effect and reported no material contingencies known at year-end.
- The first three quarters’ 2012 revenue and product costs were restated to present certain sales gross rather than net. The change increased reported revenue and costs but did not affect operating income, net income, or Segment Margin. Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether operating cash generation and segment margins support distributions after maintenance needs, debt service, and the large 2013 project commitments.
- Project spending, schedule, contracted throughput, and expected returns for Gulf Coast infrastructure, rail facilities, and SEKCO.
- Debt and covenant headroom after the February 2013 notes issuance, including the resulting mix of secured and unsecured borrowings and interest costs.
- Continued throughput and customer commitments, especially concentration in Shell, Phillips 66, and Gulf of Mexico producers, and the recovery of CHOPS volumes after field maintenance.
- Distribution coverage and the conditions required for future increases; quarterly distribution history alone is not a guarantee of future payments.
- The effect of gross-versus-net revenue presentation when comparing 2012 quarterly revenue with earlier reported periods.