Genesis Energy, L.P. — Q1 2017 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2017, compared with Q1 2016. Genesis is a Gulf Coast-, Wyoming- and Gulf of Mexico-focused midstream master limited partnership operating in offshore pipeline transportation, refinery services, marine transportation, and supply and logistics. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $415.5 | $378.4; up 10% |
| Operating income | $52.6 | $59.8; down 12% |
| Operating margin | 12.7% | 15.8% |
| Net income attributable to Genesis | $27.1 | $35.3; down 23% |
| Diluted net income per common unit | $0.23 | $0.32 |
| Segment Margin (non-GAAP) | $138.6 | $144.9; down 4% |
| Available Cash before Reserves (non-GAAP) | $93.0 | $97.8; down 5% |
| Cash from operating activities | $64.6 | $41.1 |
| Capital spending on fixed and intangible assets | $59.2 | $104.0 |
Revenue and product costs both rose substantially, largely reflecting higher market prices for crude oil and petroleum products; management said these largely offset and had limited direct impact on Segment Margin. Average WTI was $51.91 per barrel versus $33.45. Crude oil and petroleum-product sales volumes fell 33% year over year. Higher depreciation from assets placed in service and lower Segment Margin were the main factors behind lower earnings; reduced G&A, including the absence of prior-year severance and restructuring costs, partly offset the decline.
| Segment Margin | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Offshore pipeline transportation | $87.1 | $78.6 | Up 11% |
| Refinery services | $17.5 | $21.2 | Down 17% |
| Marine transportation | $13.0 | $18.9 | Down 31% |
| Supply and logistics | $21.1 | $26.1 | Down 19% |
Offshore growth reflected new production near existing infrastructure. Refinery services faced the effects of customer contract negotiations and extensions. Marine results were hurt by lower inland utilization and day rates and lower offshore day rates. Supply and logistics was affected by an indefinite decline in legacy southbound pipeline volumes to Texas City and weaker buy/sell crude marketing, partly offset by ramping Baton Rouge rail and infrastructure activity.
Debt, liquidity and distributions
- At March 31, 2017, principal debt was $3.06 billion: $1.21 billion drawn on the $1.7 billion secured revolving facility and $1.85 billion of senior notes. Cash was $10.8 million. The filing reports $481.3 million of remaining facility borrowing capacity, including $8.7 million of letters of credit outstanding.
- Current assets were $352.6 million and current liabilities were $231.5 million. The partnership reported compliance with debt covenants.
- Net interest expense rose to $36.7 million from $34.4 million, mainly due to higher average borrowings. Cash interest and commitment-fee payments, net of capitalized amounts, were $46.7 million.
- Cash distributions paid during the quarter were $83.8 million, relating to the Q4 2016 distribution. The Q1 2017 distribution was declared at $0.72 per unit, totaling approximately $88.3 million and payable May 15, 2017. Management described it as the 47th consecutive quarterly increase.
- On March 24, Genesis issued 4.6 million Class A units for net proceeds of approximately $140.5 million.
Outlook, management commentary and risks
- Management expected growth projects to contribute more as they reached full operating capability and described some base businesses as potentially bottoming. It cited higher offshore crude volumes, increasing Baton Rouge and Wyoming activity, and improving marine utilization.
- Management anticipated approximately $125 million of additional spending during the remainder of 2017 on projects then under construction. Baton Rouge expansions were expected to enter service in Q1 2018; Houston-area facilities and Raceland were expected to become operational in Q2 2017. The filing also said expanded Texas capabilities were fully operational and would begin contributing May 1.
- The partnership identified additional contracted organic growth opportunities, particularly around Baton Rouge, with minimum commitments supporting the investment. No specific full-year earnings or cash-flow guidance was provided.
- Risks include commodity-price-related indirect demand changes, throughput and customer/refinery activity, project execution and capital availability, competition, pipeline or marine disruptions, environmental releases, and the ability to sustain distributions. Management said pending legal, tax and regulatory matters were not expected to materially affect financial position, results or cash flows; environmental incidents could nevertheless materially affect the business.
- Management reported no material changes in risk factors, market-risk disclosures, legal proceedings, or internal control over financial reporting during the period. It stated disclosure controls were effective.
Important facts for investors to verify
- Confirm execution, commissioning and customer ramp-up of the Baton Rouge, Texas and Raceland projects, including actual costs, timing and contracted volumes.
- Assess whether operating cash generation and available cash can support the distribution, maintenance needs and planned growth spending while managing approximately $3.06 billion of principal debt.
- Track the sustainability of offshore growth against continued weakness in marine, refinery-services and supply-and-logistics margins.
- Reconcile the filing’s differing descriptions of the extended Westlake refinery-services agreement: the overview cites a term through 2028, while the segment discussion cites an extension through 2026.
- Review the definitions and reconciliations of Segment Margin and Available Cash before Reserves, which are non-GAAP measures and are not equivalent to GAAP net income or operating cash flow.