Genesis Energy, L.P. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Unaudited results. Genesis is a Gulf Coast-focused midstream partnership operating offshore and onshore pipelines, refinery services, marine transportation, and supply and logistics businesses.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $460.1 million | $572.3 million | $1,284.4 million | $1,755.5 million |
| Operating income | $55.2 million | $44.8 million | $163.0 million | $99.0 million |
| Net income attributable to Genesis | $32.1 million | $363.2 million | $91.1 million | $395.1 million |
| Net income per common unit | $0.28 | $3.38 | $0.81 | $3.93 |
| Segment Margin (non-GAAP) | $141.3 million | $140.7 million | $428.7 million | $333.4 million |
| Available Cash before Reserves (non-GAAP) | $95.0 million | $96.3 million | Not stated in the supplied filing text | Not stated in the supplied filing text |
- Q3 operating margin was approximately 12.0%, compared with 7.8% a year earlier. The filing does not present a defined gross-margin percentage.
- Cash from operations was $228.4 million for the first nine months, versus $192.1 million in 2015. Q3 cash from operations was $124.7 million versus $121.0 million.
- Nine-month investing cash outflow was $356.3 million, primarily reflecting $363.2 million in fixed and intangible asset spending. Financing provided $120.4 million. Cash ended the period at $3.4 million, down from $10.9 million at year-end 2015.
- At September 30, total debt was approximately $3.0 billion: $1.167 billion under the secured facility and $1.812 billion in unsecured notes. The balance sheet reports $3.0 billion of debt net of discounts and issuance costs. Facility availability was $527 million; $6 million of letters of credit was outstanding. The Partnership reported compliance with debt covenants.
- Current assets were $311.8 million and current liabilities $242.2 million. The quarterly distribution was raised to $0.70 per unit, payable in November 2016.
Changes versus comparable periods
- Q3 revenue fell 20% year over year, while costs and expenses fell 23%. Management attributed the change largely to lower crude and petroleum product prices and lower supply-and-logistics volumes; it said these price movements generally affect revenue and costs together and have a smaller direct effect on Segment Margin.
- Q3 Segment Margin was nearly flat, up 0.4%. Offshore Pipeline Transportation rose to $86.6 million from $70.9 million, primarily reflecting the Enterprise offshore assets acquired in July 2015. Marine Transportation fell to $16.7 million from $26.6 million; onshore pipeline margin declined to $10.6 million from $15.0 million. Refinery Services and Supply and Logistics were broadly steady.
- Q3 net income was sharply lower than reported in 2015 because the prior-year quarter included a $335.3 million non-cash gain from remeasuring historical CHOPS and SEKCO interests in the Enterprise acquisition. Excluding that gain, Q3 2015 net income was approximately $28.0 million, versus $32.1 million in Q3 2016.
- Higher depreciation and interest expense reflected acquired and newly placed-in-service assets. Nine-month 2015 earnings also included a $19.2 million debt-extinguishment loss.
- Onshore crude pipeline volumes weakened, particularly on the Texas system; management said reduced volumes from certain historical customers were expected to persist. Marine fleet utilization and day rates were lower than in 2015, with management describing market rates as near cyclical lows.
Outlook, risks, and unusual items
- Management expected sequentially higher net income and Available Cash before Reserves, citing increasing deepwater Gulf of Mexico volumes, refinery turnarounds ending, and organic projects beginning service and ramping through the end of 2017. It described a reasonably clear view of volume growth over the next four to six quarters. These are expectations, not quantified earnings guidance.
- Management forecast approximately $65 million of spending during the remainder of 2016 on projects under construction. Houston-area crude infrastructure and the Raceland rail facility were expected to be operational by year-end; the Baton Rouge Terminal entered service early in Q4. Delivery of new inland barges and push boats was expected to continue through 2016 and 2017.
- Genesis raised $298 million net through an 8-million-unit public offering in July 2016 and used the proceeds to repay revolving-credit borrowings. Management said equity issuance and slower future distribution growth, separately or together, could improve financial flexibility. An at-the-market program permits up to $400 million of securities, but no units had been issued under it by September 30.
- Key risks identified include commodity-market and customer-demand changes, throughput and refinery activity, project execution and capital availability, debt covenant access, marine accidents and pollution, environmental and regulatory requirements, Gulf of Mexico production disruptions, and the ability to sustain distributions. Management said pending legal and regulatory matters were not expected to have a material effect; environmental releases could still materially affect the business.
- There was no material change in disclosed risk factors, market-risk disclosures, legal proceedings, or internal controls during the quarter. The filing states no material changes to contractual obligations and no off-balance-sheet arrangements beyond those previously disclosed.
Important facts for investors to verify
- Whether offshore volume growth and project start-ups occur on schedule and produce the expected cash contribution.
- Whether the $527 million of revolving capacity and covenant headroom remain adequate given approximately $3.0 billion of debt, capital spending, and distributions; the filing does not provide a clear current consolidated leverage ratio.
- How much of Available Cash before Reserves is available for distributions after reserves and maintenance needs; this is a non-GAAP measure and was $95.0 million in Q3 versus $96.3 million a year earlier.
- Whether weaker onshore pipeline volumes and marine utilization/day rates stabilize, and whether management’s expected refinery-related volume recovery materializes.
- The ongoing effects of equity issuance and distribution growth decisions on per-unit cash generation and investor dilution.