Genesis Energy, L.P. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited results. Genesis is a Gulf Coast-focused midstream master limited partnership operating onshore and offshore pipelines, refinery services, marine transportation, and supply and logistics businesses. Financial amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $656.3 | $1,015.0 | $1,183.2 | $2,034.8 |
| Operating income | $29.4 | $31.3 | $54.2 | $66.7 |
| Net income | $11.7 | $21.1 | $31.9 | $50.9 |
| Net income per unit, basic and diluted | $0.12 | $0.24 | $0.33 | $0.57 |
| Segment Margin (non-GAAP) | $98.6 | $82.7 | $192.7 | $160.0 |
| Available Cash before Reserves (non-GAAP) | $68.8 | $55.5 | Not stated | Not stated |
- Cash flow: Six-month operating cash flow was $71.1, down from $105.2 a year earlier, primarily reflecting higher working-capital needs. Investing cash outflow was $229.4; financing cash inflow was $157.6. Cash at June 30 was $8.7.
- Debt and liquidity: June 30 long-term debt was $1,685.2, comprising $585.2 under the secured credit facility and $1,100.0 of unsecured notes. The partnership reported $384.2 of remaining borrowing capacity on its $1 billion revolving facility and compliance with debt covenants. Current assets were $359.8 versus current liabilities of $342.1.
- Capital and distributions: April’s 4.6 million-unit offering generated approximately $197.7 net proceeds. The declared Q2 distribution was $0.625 per unit, totaling approximately $68.7 and payable August 14, 2015. Management reported a 10.6% increase from the Q2 2014 distribution per unit and a 40th consecutive quarterly increase.
Material changes and operating drivers
- Quarterly revenue declined 35%, largely because lower crude oil and petroleum-product prices reduced both supply-and-logistics revenue and product costs. WTI averaged $57.94 per barrel, down 44% from $103.00 a year earlier. Management said its fee-based contracts, back-to-back transactions, and hedges limit direct commodity-price effects on Segment Margin.
- Despite lower revenue, Q2 Segment Margin rose 19%. Offshore pipeline margin increased to $25.1 from $11.4, primarily as the SEKCO joint venture began throughput and earned minimum fees. Marine margin rose to $27.2 from $19.0, benefiting from the American Phoenix tanker, added barges, and higher rates on certain vessels.
- Offsets included lower onshore pipeline margin ($14.4 versus $16.5), refinery-services margin ($20.2 versus $21.6), and supply-and-logistics margin ($11.7 versus $14.1). Refinery services cited reduced NaHS volumes, including customer bankruptcy, a customer’s atypical ore seam, and processing-facility supply interruptions. Supply and logistics cited lower terminal unloading volumes.
- Net income fell despite higher Segment Margin. Q2 included a $19.2 loss on extinguishment of the 7.875% notes; depreciation and amortization rose to $28.2 from $20.5, and interest expense rose to $17.9 from $14.1. The partnership issued $400 million of 6.0% notes in May and redeemed its $350 million of 7.875% notes due 2018.
Outlook, transactions, and risks
- Post-quarter acquisition: In July 2015, Genesis acquired Enterprise Products Operating’s offshore pipeline and services business for approximately $1.5 billion, adding about 2,350 miles of offshore pipelines and six hub platforms. Management expected the transaction to be immediately accretive to Segment Margin and Available Cash before Reserves. The June 30 financial statements do not include the acquisition, and purchase-price allocation was incomplete when the filing was issued.
- Acquisition financing: July financing included 10.35 million common units yielding $437.2 net and $750 million principal amount of 6.75% notes due 2022 yielding $728.6 net. The added debt and integration of a substantially larger offshore business may pressure cash available for distributions and require management and operational resources.
- Capital projects: Estimated spending on projects under construction was approximately $580 million in 2015 and future periods, with about $320 million expected in 2015, including amounts already spent. Projects included a Wyoming crude pipeline, the Baton Rouge terminal, the Raceland rail facility, and marine fleet expansion. No specific earnings or distribution guidance was provided.
- Other risks: The filing highlights commodity and throughput exposure, service interruptions, marine accidents and pollution, customer and counterparty risks, access to capital, acquisition integration, environmental and regulatory matters, and potential changes to partnership tax rules. Management reported no material change in market-risk disclosures and no material developments in legal proceedings; it also stated there were no off-balance-sheet arrangements beyond previously disclosed commitments.
Key facts investors should verify
- Post-acquisition debt, leverage, interest costs, and remaining revolving-credit availability after the July acquisition and its financing.
- Whether the acquired offshore assets deliver the expected accretion and how the integration, transition services, and purchase-price allocation develop.
- Whether operating cash flow and Available Cash before Reserves support the increased distribution and planned capital spending; both cash flow and distributions are affected by working capital and discretionary capital decisions.
- Whether SEKCO throughput, refinery-services volumes, and terminal and rail-facility utilization improve as projects enter service.
- Potential effects of the proposed partnership tax regulations and the disclosed environmental, operational, and acquisition-related risks.