Business context and reporting period
Genesis Energy, L.P. is a Gulf Coast-focused midstream partnership with offshore and onshore pipelines, refinery services, marine transportation, and supply and logistics operations. This unaudited Form 10-Q covers the three months ended March 31, 2016; amounts below are in millions unless otherwise stated.
Year-over-year comparisons are significantly affected by the July 2015 acquisition of Enterprise’s offshore pipeline and services business, which contributed a full quarter of results in 2016 but none in reported first-quarter 2015 results.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Revenue | $378.4 | $526.9 |
| Operating income | $59.8 | $24.8 |
| Net income attributable to Genesis | $35.3 | $20.2 |
| Basic and diluted earnings per unit | $0.32 | $0.21 |
| Segment Margin (non-GAAP) | $144.9 | $94.1 |
| Available Cash before Reserves (non-GAAP) | $97.8 | $64.0 |
| Cash from operating activities | $41.1 | $62.5 |
| Capital expenditures and acquisition spending | $131.3 | $125.5 |
| Cash and cash equivalents at quarter-end | $12.3 | $10.9 at December 31, 2015 |
Revenue fell 28%, primarily reflecting lower crude oil and petroleum product prices and lower supply-and-logistics volumes; associated product costs also declined substantially. Operating income rose and the reported operating margin was approximately 15.8%, versus 4.7% a year earlier. Management attributed the improvement in earnings and Segment Margin principally to the acquired offshore assets.
Offshore Pipeline Transportation Segment Margin rose to $78.6 million from $25.2 million, largely due to the Enterprise acquisition and increased ownership interests. Other segment margins were: onshore pipelines $15.7 million (up from $14.3 million), refinery services $21.2 million (up from $19.2 million), marine transportation $18.9 million (down from $25.7 million), and supply and logistics $10.5 million (up from $9.7 million).
Operating cash flow declined by $21.4 million, mainly due to a $52.1 million working-capital cash outflow, compared with a $5.9 million inflow in Q1 2015. Net investing cash use was $134.6 million; financing provided $94.9 million. The partnership paid $72.1 million in distributions during the quarter.
At March 31, long-term debt was $3.13 billion in principal ($3.09 billion net carrying value), including $1.28 billion drawn on the secured revolving facility and $1.85 billion principal of unsecured notes. The $1.5 billion facility had $210.2 million of remaining borrowing capacity after letters of credit. In April, the facility commitment was increased to $1.7 billion, with a further $300 million increase subject to lender consent, and the maximum consolidated leverage ratio was permanently relaxed to 5.5-to-1.0. The partnership reported compliance with debt covenants at quarter-end.
Material changes, outlook, and risks
- Net interest expense increased to $34.4 million from $19.2 million, primarily because of higher average debt following the Enterprise acquisition and growth investment.
- Marine Segment Margin decreased 26%, reflecting pressure on offshore barge rates and utilization. Management cited new vessel capacity, lower Eagle Ford production, mild winter conditions, and storage economics associated with contango.
- Management estimated approximately $900 million of total spending on projects under construction in 2016 and future periods, including about $270 million expected to be spent in 2016, inclusive of spending through March 31. Projects include Houston-area crude infrastructure, Baton Rouge and Raceland facilities, and inland marine fleet additions. The Wyoming-to-Guernsey pipeline became operational in Q1; other projects were expected to enter service during 2016.
- In April 2016, the partnership declared a quarterly distribution of $0.6725 per unit, payable May 13, totaling approximately $74.0 million. Management described this as the 43rd consecutive quarterly increase; no formal earnings guidance is provided in the supplied filing text.
- Q1 included approximately $3.3 million of severance and restructuring expenses. The partnership also acquired the remaining 50% interest in Deepwater Gateway for approximately $26.2 million and began consolidating the entity.
- Environmental releases, marine and pipeline operating incidents, commodity and throughput changes, refinery activity, acquisition integration, capital availability and debt covenants are among the disclosed risks. The filing says pending litigation and regulatory matters were not expected to have a material effect; it reports no material change in previously disclosed risk factors or market-risk disclosures.
Important facts for investors to verify
- Assess the acquisition’s contribution and compare reported results with the filing’s illustrative Q1 2015 pro forma results: $604.6 million revenue and $30.9 million net income attributable to Genesis. The pro forma figures are unaudited and not necessarily indicative.
- Monitor borrowing capacity, leverage and covenant headroom after the April credit amendment, alongside the $3.13 billion debt balance and higher interest burden.
- Evaluate whether operating cash generation and available liquidity can support the distribution, working capital needs, and the stated construction program; Available Cash before Reserves is a non-GAAP measure, not operating cash flow.
- Track offshore project execution and marine utilization and rates, particularly given the decline in marine Segment Margin and the substantial planned capital spending.
- Review the final Enterprise acquisition purchase-price allocation, which remained preliminary, and the timing and costs of projects expected to become operational in 2016.