Genesis Energy, L.P. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Genesis is a Gulf Coast and Gulf of Mexico midstream partnership with offshore pipeline, sodium minerals and sulfur services, onshore facilities and transportation, and marine transportation businesses. Dollar amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $388.5 | $634.8 | $928.4 | $1,254.8 |
| Operating income (loss) | $(278.2) | $86.9 | $(219.1) | $149.0 |
| Net income (loss) attributable to Genesis | $(326.7) | $40.1 | $(301.8) | $56.1 |
| Net income (loss) available to common unitholders | $(345.4) | $21.4 | $(339.2) | $19.0 |
| Loss per common unit | $(2.82) | $0.17 | $(2.77) | $0.15 |
| Segment Margin, a non-GAAP measure | $139.3 | $184.1 | $308.6 | $357.7 |
| Cash flow from operations | $62.6 | $81.6 | $152.2 | $195.6 |
Q2 included a $277.5 million non-cash impairment charge on rail logistics assets. Q2 general and administrative expense also included approximately $13 million of restructuring and severance costs. Six-month capital expenditures were $73.8 million.
- Debt: June 30 carrying value of long-term debt was $3.43 billion, including $1.053 billion drawn on the $1.7 billion secured revolving facility and $2.38 billion of unsecured notes. Approximately $645.9 million remained available under the facility, subject to covenants. Genesis reported covenant compliance at June 30.
- Liquidity: Cash and cash equivalents were $28.0 million and restricted cash was $17.5 million. Current assets were $472.8 million versus current liabilities of $303.7 million.
- Debt transactions: Genesis issued $750 million of 7.75% notes due 2028 and used proceeds in part to retire its 2022 notes. It also repurchased $86.2 million principal amount of notes for $67.7 million, recording $18.5 million of cancellation-of-debt income. The 2022 note refinancing resulted in a separate $23.5 million extinguishment loss in the first half.
- Distributions: The common-unit distribution was reduced from $0.55 to $0.15 per unit quarterly; the Q2 distribution was declared in July for payment in August. The preferred-unit quarterly distribution remained $0.7374 per unit.
Material changes and segment results
- Total revenue fell 39% year over year in Q2, while Segment Margin fell 24%. Lower crude oil prices reduced reported marketing revenue and costs; management said this generally has a more limited direct effect on Segment Margin because of fee-based contracts, matched transactions and hedging.
- Offshore pipelines: Q2 Segment Margin was $75.1 million, down 2%. Lower throughput from producer shut-ins, planned downtime and weather was largely offset by new Buckskin and Hadrian North production. First-half Segment Margin rose 5% to $160.4 million.
- Sodium minerals and sulfur services: Q2 Segment Margin fell 57% to $24.8 million; first-half margin fell 47% to $61.8 million. Lower soda ash export pricing and sales volumes, plus lower NaHS demand, drove the decline.
- Onshore facilities and transportation: Q2 Segment Margin decreased 41% to $21.2 million. Lower activity at Baton Rouge and Raceland, including uneconomic crude-by-rail volumes, contributed; the prior-year quarter included a $10 million cash payment resolving a crude supply agreement. Management expected Baton Rouge volumes to remain below minimum take-or-pay levels through 2020.
- Marine transportation: Q2 Segment Margin increased 30% to $18.1 million, supported by improved offshore rates and inland day rates, despite lower inland utilization. Management expected continued pressure on inland utilization and, to some extent, rates.
Outlook, risks and unusual items
- Management said COVID-19, reduced industrial activity, travel restrictions and volatile, low commodity prices had reduced demand and volumes. It expected near-term market weakness and lower soda ash volumes in coming quarters, with recovery dependent in part on easing global restrictions.
- Genesis cold-stacked its existing Granger soda ash facility, removing about 550,000 tons of annual capacity to align supply with weaker demand. It intended to keep the facility idled while pursuing an optimized expansion, with completion expected in mid-to-late 2023 and expanded capacity of about 750,000 additional tons per year. The construction timeline was extended by one year; Alkali preferred-unit distributions during the revised construction period are paid in kind.
- Management stated it believed liquidity was adequate and intended to continue deleveraging, directing substantial excess cash toward reducing revolver borrowings and opportunistic note repurchases. It did not provide specific earnings or cash-flow guidance.
- A July 24, 2020 credit-agreement amendment, after quarter-end, temporarily increased the maximum consolidated leverage ratio from 5.50x to 5.75x and reduced the minimum interest coverage ratio from 3.0x to 2.75x for September 30, 2020 through March 31, 2021; the prior limits then return.
- Management warned that further deterioration in economic or commodity conditions could trigger additional asset recoverability tests and potentially material impairment charges. The rail impairment relied primarily on Level 3 fair-value inputs and discounted cash-flow estimates.
- Other notable items include a $40.8 million Level 3 liability for the preferred-unit distribution-rate-reset feature, whose fair value can change materially with valuation assumptions, and a $3.7 million inventory valuation adjustment below cost. The filing reported no material change in disclosed risk factors and no material pending legal matters expected to affect financial position, results or cash flows.
Important facts for investors to verify
- Whether operating cash flow and available revolver capacity remain sufficient amid continued COVID-19 effects, working-capital swings and debt service.
- Progress against leverage and interest-coverage covenants, including the temporary limits under the July 2020 amendment.
- Whether the common-unit distribution remains supportable given reduced Segment Margin and management’s deleveraging priorities.
- Actual soda ash and NaHS demand, pricing, and the economics and timing of the Granger project; confirm whether the cold-stacked facility or project schedule changes.
- Whether weaker crude-by-rail activity or broader market conditions lead to further impairments, and how sensitive the preferred-unit derivative valuation is to its key assumptions.