Genesis Energy, L.P. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; unaudited. Genesis is a midstream energy partnership with four reportable segments: offshore pipeline transportation, sodium minerals and sulfur services, onshore facilities and transportation, and marine transportation.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $721.2 million | $518.8 million | $2,074.9 million | $1,543.9 million |
| Operating income | $75.1 million | $34.5 million | $223.4 million | $88.1 million |
| Net income (loss) | $8.6 million | $(13.8) million | $82.5 million | $(79.0) million |
| Net income (loss) attributable to Genesis | $3.4 million | $(20.9) million | $33.5 million | $(96.8) million |
| Net loss attributable to common unitholders | $(15.3) million | $(39.6) million | $(22.6) million | $(152.9) million |
| Segment Margin (non-GAAP) | $196.2 million | $153.9 million | $572.9 million | $462.1 million |
Q3 revenue increased 39% and Segment Margin increased 28% year over year. Common-unit loss per unit was $0.12 versus $0.32 in Q3 2021. Segment Margin and Available Cash before Reserves are non-GAAP measures and should not be treated as substitutes for GAAP results.
Cash flow and investment: Operating cash flow was $94.3 million in Q3 2022 versus $54.2 million in Q3 2021. For the first nine months, operating cash flow was $252.6 million versus $242.4 million. Nine-month investing cash outflow was $254.2 million; cash paid for fixed and intangible assets was $303.8 million. Total capital expenditures, including accrued additions and equity-investee spending, were $325.4 million, up from $233.9 million. Available Cash before Reserves was $92.6 million for Q3, compared with $48.2 million.
Balance sheet and debt at September 30, 2022: Cash was $5.8 million and restricted cash was $18.6 million. Current assets were $726.4 million and current liabilities were $645.3 million. Long-term debt had a net carrying value of $3.38 billion: $120.2 million under the revolving credit facility, $2.85 billion of senior unsecured notes, and $402.3 million of Alkali senior secured notes. Revolver availability was $525.3 million, subject to covenant compliance. Partners’ capital was $866.3 million; Class A Convertible Preferred Units were $891.9 million in mezzanine capital.
The unsecured notes mature from 2024 through 2028; the revolving credit facility matures March 2024, with conditional extension options. The $425 million Alkali notes carry a 5.875% coupon, mature in 2042, and are secured by an overriding royalty interest in Alkali mineral leases. Quarterly principal repayments begin in 2024. Restricted cash of $18.6 million is held in the notes’ liquidity reserve account.
Material changes and operating drivers
- Offshore: Q3 Segment Margin rose 20% to $91.4 million. Higher throughput and revenues followed first oil at King’s Quay in April 2022 and ramp-up thereafter; Argos minimum-volume commitments also contributed. The prior-year quarter had more Hurricane Ida downtime. Genesis’s CHOPS ownership fell from 100% to 64% after a 2021 sale.
- Sodium minerals and sulfur services: Q3 Segment Margin more than doubled to $80.1 million. Management cited stronger soda ash export pricing and volumes, and higher NaHS volumes and pricing. The segment benefited from demand and pricing conditions that management expected to remain favorable through the rest of 2022.
- Onshore facilities and transportation: Q3 Segment Margin declined 68% to $9.4 million. The prior-year quarter included $17.5 million of receipts from the previously owned NEJD pipeline and a one-time contractual billing of approximately $10 million. Higher 2022 pipeline, terminal, and rail activity partly offset the decline.
- Marine transportation: Q3 Segment Margin increased 69% to $15.3 million, reflecting higher utilization and day rates. The American Phoenix was in planned dry-dock from July 21 to September 16, then returned to service under contract through year-end.
- For the first nine months, the company recorded a $40 million gain on the Independence Hub platform sale; $32 million was attributable to Genesis’s 80% interest. The sale generated $40 million of proceeds, including $32 million net to Genesis.
Outlook, risks and unusual items
- Management expected to restart the original Granger facility, with approximately 500,000 tons of annual production, in Q1 2023. The Granger Optimization Project was expected to add approximately 750,000 tons annually, with first production anticipated in Q3 2023.
- Genesis expected to spend approximately $600 million gross, or $500 million net to its interests, over three years on CHOPS expansion and the new SYNC pipeline. First oil for the associated developments was expected in late 2024 or 2025. Management planned to fund growth spending through revolver capacity and operating cash flow; these plans are forward-looking and subject to execution and financing risks.
- Management cited continued uncertainty from COVID-19, the Ukraine war, inflation, possible recession, commodity-price volatility, and capital-market conditions. These factors could affect demand, prices, financing, and asset valuations; impairment charges could result if conditions deteriorate.
- Preferred unitholders elected a distribution-rate reset in September. The annual rate increased from 8.75% to 11.24%, effective for distributions beginning with the quarter ending December 31, 2022. The Q3 declared distribution remained $0.7374 per preferred unit; common distributions were $0.15 per unit.
- Q3 results included a $25.0 million noncash loss on the preferred-unit embedded derivative. The 2022 nine-month results also included $8.6 million of cancellation-of-debt income from open-market note repurchases and the $40 million asset-sale gain. Alkali Holdings preferred units were fully redeemed for $288.6 million in May 2022 using part of the Alkali notes’ proceeds.
- Management reported a material weakness in internal control over financial reporting identified in Q2 2022. It had added review procedures and training but said disclosure controls were not effective while remediation was monitored. The weakness did not result in a reported financial-statement misstatement; management expected to conclude remediation by year-end 2022.
- The filing reports exposure to environmental regulation, operational interruptions, marine accidents and pollutant releases, customer and market changes, covenant restrictions, and refinancing and capital-access risks. Management did not expect currently pending legal or regulatory matters to materially affect results; no material environmental proceedings meeting the stated disclosure threshold were reported.
Key facts for investors to verify
- Whether King’s Quay and Argos volumes, Granger restarts and expansion, and the SYNC/CHOPS projects meet stated timing, production, and cost expectations.
- Whether operating cash flow and revolver availability are sufficient for planned growth capital, debt service, and distributions, particularly as working-capital needs fluctuate.
- Debt maturities, covenant headroom, and the implications of the 2024 revolver maturity and the Alkali notes’ amortization beginning in 2024.
- The effect of the preferred distribution reset to 11.24% on cash available for common unitholders and future distributions.
- Progress toward remediating the material weakness and management’s eventual conclusion on control effectiveness.
- Exposure to soda ash and energy-market conditions, refinery turnarounds, offshore downtime, and potential environmental or asset-impairment costs.