Genesis Energy, L.P. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Genesis is a midstream energy partnership with offshore pipeline, sodium minerals and sulfur services, onshore facilities and transportation, and marine transportation businesses; it also operates a Wyoming soda ash business. Dollar amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $721.7 | $503.9 | $1,353.7 | $1,025.1 |
| Operating income | $96.6 | $25.5 | $148.3 | $53.6 |
| Net income (loss) | $69.5 | $(35.8) | $74.0 | $(65.2) |
| Net income (loss) attributable to Genesis | $35.3 | $(41.7) | $30.1 | $(75.9) |
| Net income (loss) attributable to common unitholders | $16.7 | $(60.4) | $(7.3) | $(113.3) |
| Net income (loss) per common unit | $0.14 | $(0.49) | $(0.06) | $(0.92) |
| Operating cash flow | $104.0 | $111.0 | $158.3 | $188.2 |
Q2 Segment Margin, a company-defined non-GAAP measure, was $219.3 million, up 44% from $152.1 million. Available Cash before Reserves was $121.2 million versus $49.6 million. These measures include adjustments and should not be treated as substitutes for GAAP earnings or operating cash flow.
At June 30, cash and cash equivalents were $10.1 million and restricted cash was $18.4 million. Current assets were $605.1 million and current liabilities $509.5 million. Long-term debt was $3,325.2 million net carrying value ($3,370.8 million principal); this comprised $34.6 million drawn on the revolving facility, $2,888.4 million of senior unsecured notes, and $402.2 million of Alkali secured notes. Revolver availability was $610.9 million, subject to covenants. Total liabilities were $4,290.8 million.
Capital expenditures for fixed and intangible assets were $165.4 million in the first half; including equity-investee spending, total capital expenditures were $168.4 million. The partnership paid common distributions of $0.15 per unit quarterly and declared the same amount for Q2. Preferred distributions were $0.7374 per unit quarterly.
Changes versus the prior comparable period
- Q2 revenue rose 43%; operating income and net income attributable to Genesis improved substantially, with common-unit earnings turning positive. First-half common-unit results nevertheless remained a loss.
- Q2 Segment Margin increased $67.1 million. The main contributors were stronger Alkali export pricing, improved offshore activity and contractual minimum-volume commitments, and higher marine utilization and rates. Onshore Segment Margin declined, largely because the prior-year quarter included $17.5 million of receipts from the previously owned NEJD pipeline.
- First-half operating cash flow fell $29.9 million, primarily due to working-capital changes, higher interest payments and inventory timing, partly offset by improved operating performance.
- Net interest expense declined in the first half, chiefly due to lower revolving-credit borrowings and higher capitalized interest, partly offset by interest on new notes.
Financing, outlook and risks
- In May, Genesis issued $425 million of 5.875% Alkali senior secured notes due 2042, secured by a 50-year overriding royalty interest in substantially all Alkali trona leases. Net proceeds were $408 million; $18.4 million was reserved for debt service. Proceeds funded redemption of $288.6 million of Alkali preferred units and repayment of revolving borrowings. Quarterly principal repayments start in 2024.
- Management said the refinancing simplified the capital structure, lowered the cost of capital relative to the redeemed preferred units, and increased revolver flexibility. It reported no scheduled long-term debt maturities before 2024 and said it remained focused on deleveraging.
- Management expected favorable soda ash pricing to continue through 2022 absent significant new supply. The original Granger facility, with about 500,000 tons of annual production, was planned to restart in Q1 2023; the 750,000-ton-per-year Granger Optimization Project was expected to begin production in Q3 2023.
- Genesis expects about $600 million of gross offshore growth spending (about $500 million net to its ownership) over three years to expand CHOPS and build the 100%-owned SYNC pipeline. First oil for the associated developments was expected in late 2024 or 2025. Management anticipated funding growth with revolver capacity and operating cash flow; these are plans, not guarantees.
- Offshore outlook includes King’s Quay ramping toward design capacity and Argos first oil expected in the second half of 2022. Marine rates and utilization improved, but contracts were generally short-term; the American Phoenix underwent a planned dry-dock and was contracted for four months from September at a meaningfully higher rate than Q2.
- Management cited continuing volatility from COVID-19, the Ukraine war, commodity prices, inflation and interest rates. Prolonged adverse conditions could reduce demand or prompt impairment testing. Other risks include operational interruptions, environmental and marine incidents, customer and counterparty exposure, financing and covenant constraints, and the ability to fund planned capital projects and distributions.
- A $40 million sale of the Independence Hub platform generated a $40 million accounting gain; $32 million was attributable to Genesis’s 80% ownership. The gain and cash proceeds are unusual and should be distinguished from recurring operations.
- Management identified a material weakness in internal control over financial reporting concerning accounting conclusions for certain Q2 revenue-contract amendments. The weakness did not result in a reported financial-statement misstatement, but management concluded disclosure controls were ineffective at quarter-end and described a remediation plan.
- No material change in risk factors was reported. The filing disclosed no material pending legal matter expected to affect financial position, results or cash flows.
Most important facts for investors to verify
- Whether Alkali pricing and demand, the Granger restart and optimization timetable, and projected production are tracking management’s expectations.
- Progress, total cost, financing and schedule for CHOPS expansion and the SYNC pipeline, including the development producers’ first-oil plans.
- Debt balances, revolver availability, covenant compliance, interest costs and the repayment schedule for the Alkali notes.
- Recurring cash generation and distribution coverage, separating working-capital swings, asset-sale proceeds, non-GAAP adjustments and preferred-unit claims.
- Remediation and testing of the revenue-contract accounting control weakness, and whether future filings report any related errors.
- Exposure to soda ash, crude oil and natural gas market conditions, operational downtime, environmental obligations and potential asset impairments.