Genesis Energy, L.P. — Q1 2020 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2020. Genesis is a Gulf Coast-focused midstream MLP with offshore pipelines, sodium minerals and sulfur services, onshore facilities and transportation, and marine transportation businesses. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $539.9 | $620.0 |
| Operating income | $59.2 | $62.0 |
| Net income | $29.0 | $15.9 |
| Net income attributable to Genesis | $24.9 | $16.0 |
| Net income (loss) available to common unitholders | $6.2 | $(2.5) |
| Basic and diluted earnings (loss) per common unit | $0.05 | $(0.02) |
| Operating cash flow | $89.6 | $114.0 |
| Segment Margin, non-GAAP | $169.3 | $173.6 |
| Available Cash before Reserves, non-GAAP | $81.8 | $95.9 |
- Revenue declined 13% and total costs and expenses declined 14%. Operating margin was approximately 11.0%, compared with 10.0% in Q1 2019.
- Operating cash flow fell $24.5 million, which management primarily attributed to transaction costs related to tendering and redeeming 2022 notes.
- At March 31, cash and cash equivalents were $18.1 million and restricted cash was $23.4 million. The $1.7 billion revolving facility had $977.4 million drawn and $721.5 million available, subject to covenants.
- Long-term debt had a $3.44 billion carrying value ($3.47 billion principal). Total liabilities were $4.14 billion. Genesis reported compliance with debt covenants.
- Cash distributions declared for Q1 2020 were reduced to $0.15 per common unit, versus $0.55 per unit for each 2019 quarter. Preferred-unit cash distributions remained $0.7374 per unit for the quarter.
Changes versus the prior-year quarter
- Segment Margin decreased $4.3 million, or 2%. Offshore pipeline margin rose $8.9 million (12%) on higher throughput; marine margin increased $6.1 million (47%) on improved rates; and onshore margin rose $2.5 million (10%) on higher pipeline volumes. These gains were more than offset by a $21.7 million (37%) decline in sodium minerals and sulfur services margin.
- Sodium minerals results weakened with lower soda ash export pricing and volumes, lower domestic soda ash sales, and lower NaHS volumes. Revenue declines in onshore facilities were also driven by lower crude and petroleum-product prices and, to an extent, sales volumes.
- Net income attributable to Genesis increased year over year, but included a $32.5 million unrealized gain on the preferred-unit rate-reset derivative. It also included a $23.5 million loss on extinguishment of 2022 notes. The derivative gain and debt-refinancing loss are significant non-operating items.
- In January and February, Genesis issued $750 million of 7.75% notes due 2028 and tendered or redeemed all $750 million of 6.75% notes due 2022. The refinancing extended maturities but replaced lower-coupon debt with higher-coupon notes.
- Inventories included a $3.5 million reduction to net realizable value at quarter-end; no such adjustment was recorded at December 31, 2019.
Outlook, commentary and risks
- Management said operations continued as essential services and reported no material adverse pandemic effect on Q1 results beyond general macroeconomic conditions. It warned that COVID-19, reduced travel and industrial activity, and oil-market volatility could reduce demand and affect future operations and results; duration and impact were uncertain.
- Management expected low and volatile commodity prices to persist in the near term or longer. It said crude-price changes generally affect crude marketing revenue and costs proportionately, limiting direct margin exposure, but prolonged price declines can reduce demand for some services and products.
- Management expected lower soda ash sales volumes in coming quarters due to COVID-19 and anticipated that weak export pricing could continue through 2020. Offshore pipeline volumes were expected to benefit from projects ramping up and new developments scheduled to come online during 2020, subject to downtime and maintenance.
- Genesis expected Baton Rouge throughput to remain below minimum take-or-pay levels for the rest of 2020, while anticipating recognition of minimum-volume commitments in segment margin. It also saw potential crude-storage and contango opportunities in April 2020.
- The Granger soda ash expansion timeline was extended by up to one year under an April 2020 amendment, with completion then expected in mid-to-late 2023. The project was expected to add approximately 750,000 tons of annual production. GSO had committed to purchase up to approximately $350 million of Alkali Holdings preferred units; $130 million had been issued by March 31.
- Management said it intended to focus excess cash on reducing revolving-credit borrowings and opportunistically repurchasing unsecured notes, pursue cost reductions, and reduce the common distribution. No specific earnings or cash-flow guidance was provided.
- The March 2020 credit-agreement amendment set a maximum consolidated senior secured leverage ratio of 3.25 to 1.00 for the remaining facility term and permitted certain unsecured-note purchases, subject to conditions. The filing cautions that access to capital and ability to meet future needs are not assured.
- Environmental laws, potential releases, marine operating risks, customer and market demand, and the pandemic were identified as risks. The partnership said pending ordinary-course legal and regulatory matters were not expected to materially affect its financial position, results or cash flows; no material legal-proceeding developments were reported.
Important facts for investors to verify
- Whether the reduced common-unit distribution is sustainable given lower Available Cash before Reserves, operating cash flow, debt service and planned capital spending; note that Available Cash before Reserves is a non-GAAP measure.
- How much and how quickly COVID-19 and weak industrial, energy and soda ash demand affect volumes, pricing, and segment margins after Q1.
- Revolver availability, covenant headroom and leverage following the refinancing, including the effect of the 7.75% 2028 notes and any note repurchases.
- Progress, revised costs and funding of the Granger expansion, including the terms and redemption economics of Alkali Holdings preferred units.
- The effect of the $32.5 million noncash preferred-derivative gain and the $23.5 million debt-extinguishment loss when assessing recurring earnings and cash generation.