Genesis Energy, L.P. — Q2 2019 Form 10-Q
Business context and period. This unaudited report covers the quarter and six months ended June 30, 2019. Genesis is a Gulf Coast and Gulf of Mexico midstream partnership with four segments: offshore pipeline transportation, sodium minerals and sulfur services, onshore facilities and transportation, and marine transportation. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $634.8 | $752.4 | $1,254.8 | $1,478.2 |
| Operating income | $86.9 | $60.9 | $149.0 | $120.0 |
| Net income attributable to Genesis | $40.1 | $11.0 | $56.1 | $19.0 |
| Net income (loss) available to common unitholders | $21.4 | ($6.3) | $19.0 | ($15.1) |
| Basic and diluted earnings (loss) per common unit | $0.17 | ($0.05) | $0.15 | ($0.12) |
| Segment Margin (non-GAAP) | $184.1 | $173.9 | $357.7 | $344.1 |
| Cash provided by operating activities | $81.6 | $64.5 | $195.6 | $150.8 |
Q2 revenue declined 16%, principally reflecting lower crude and petroleum product prices and sales volumes in onshore marketing; management said these movements generally affect revenue and costs together. Q2 operating income improved despite lower revenue. Available Cash before Reserves, a company-defined non-GAAP measure, was $93.5 million, down 7.5% from $101.0 million in Q2 2018.
At June 30, cash was $9.6 million, current assets were $436.4 million and current liabilities were $353.0 million. Long-term debt had a net carrying value of $3.433 billion, including $967 million drawn on the $1.7 billion revolving facility; stated remaining borrowing capacity was $731.9 million. Total liabilities were $4.197 billion. The partnership reported $790.1 million of Class A convertible preferred units in mezzanine capital. The common-unit distribution was maintained at $0.55 per unit; the Q2 distribution was scheduled for payment August 14, 2019. Preferred cash distributions were declared at $0.7374 per unit for Q2.
Material changes and operating drivers
- Offshore pipelines: Q2 Segment Margin rose to $76.5 million from $71.6 million, mainly on higher crude throughput on CHOPS and Poseidon and initial late-quarter production from Buckskin and Hadrian North. Management expected those fields’ contributions to build in the remainder of 2019 and beyond.
- Sodium minerals and sulfur services: Q2 Segment Margin declined to $57.7 million from $64.5 million. Soda ash sales were affected by longer-than-expected mine downtime for hoist work and a longwall-machine move; lower NaHS demand also weighed on volumes. Management said Alkali Business contributions continued to exceed expectations.
- Onshore facilities and transportation: Q2 Segment Margin increased to $35.9 million from $25.7 million. Drivers included higher rail-facility volumes and a $10 million cash payment resolving a crude-oil supply agreement. Prior-year results included assets sold in late 2018.
- Marine transportation: Q2 Segment Margin rose to $14.0 million from $12.0 million, supported by higher barge utilization and day rates, partly offset by increased dry-docking costs. Management described market day rates as near cyclical lows and continued to favor short-term contracts.
For the first six months, operating cash flow increased to $195.6 million from $150.8 million, while cash used in investing was $57.0 million versus $92.3 million. Capital expenditures for fixed and intangible assets were $74.4 million, including $43.3 million of maintenance and $31.2 million of growth spending. Management said it did not anticipate material growth capital expenditures on individual projects for the rest of 2019 and expected to direct substantial excess cash flow toward reducing revolver borrowings.
Outlook, unusual items and risks
- Q2 net income benefited from a $15.7 million reduction in estimated abandonment costs for certain non-operating offshore gas assets, higher segment margin, and increased equity-investee earnings. The abandonment estimate change reduced reported offshore operating costs.
- Q2 included a $4.7 million unrealized loss on the embedded preferred-unit distribution-rate-reset derivative; its fair-value liability was $50.2 million at June 30. Fair value depends on model inputs and management estimates.
- Management cited the potential for higher offshore volumes as Buckskin and Hadrian North ramp up. No specific full-year earnings or cash-flow guidance is provided in the filing text.
- The partnership identified commodity demand and prices, throughput, customer/refinery activity, mining or pipeline interruptions, marine operating and environmental incidents, access to capital, debt covenants, interest rates, and its ability to sustain cash generation and distributions among relevant risks. It reported compliance with debt covenants at June 30 and no material change to previously disclosed risk factors.
- Environmental laws and potential releases remain relevant exposures; management did not expect pending lawsuits or regulatory examinations to materially affect financial position, results, or cash flows. No material changes to contractual commitments or off-balance-sheet arrangements were reported.
- Adoption of lease accounting in January 2019 resulted in recognition of approximately $209 million of operating lease right-of-use assets and corresponding liabilities at transition. The June 30 lease liability was $187.7 million.
Investor facts to verify
- Whether Buckskin and Hadrian North throughput increased as expected, and the resulting contribution to offshore margin.
- Whether Alkali mine maintenance and equipment issues were resolved and soda ash volumes recovered.
- The sustainability and cash coverage of common and preferred distributions, especially given Q2 Available Cash before Reserves declined year over year.
- Progress in reducing the revolver balance, liquidity headroom, and compliance with debt covenants.
- The assumptions behind the $15.7 million abandonment-cost estimate reduction and the valuation sensitivity of the preferred-unit reset derivative.
- How much of onshore margin depended on the one-time $10 million settlement and customer prepaid transportation credits.