Genesis Energy, L.P. — Q2 2018 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and six months ended June 30, 2018. Genesis is a diversified midstream partnership with offshore pipeline transportation, sodium minerals and sulfur services, onshore facilities and transportation, and marine transportation businesses. Comparisons with 2017 are affected by the September 2017 acquisition of the Alkali Business, whose results are included in 2018 but not the comparable 2017 periods.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $752.4 million | $406.7 million | $1,478.2 million | $822.2 million |
| Operating income | $60.9 million | $61.4 million | $120.0 million | $114.0 million |
| Net income attributable to Genesis | $11.0 million | $33.7 million | $19.0 million | $60.8 million |
| Net income (loss) available to common unitholders | $(6.3) million | $33.7 million | $(15.1) million | $60.8 million |
| Net income (loss) per common unit | $(0.05) | $0.28 | $(0.12) | $0.50 |
| Segment margin (non-GAAP) | $173.9 million | $134.0 million | $344.1 million | $272.6 million |
- Operating cash flow was $64.5 million in Q2, versus $115.3 million in Q2 2017; for the first half it was $150.8 million versus $176.3 million. Management cited working-capital outflows, including lower accounts payable and accrued liabilities.
- Q2 Available Cash before Reserves, a company-defined non-GAAP measure, was $101.0 million versus $99.3 million. Common-unit distributions were $0.53 per unit for Q2, approximately $65 million in total. Preferred distributions were paid in kind (PIK).
- At June 30, cash was $7.8 million; current assets were $575.7 million and current liabilities $384.2 million. Total assets were $7.06 billion.
- Debt principal was $3.81 billion: $1.31 billion drawn on the $1.7 billion revolving facility and $2.50 billion of senior unsecured notes. Remaining facility availability was $392.5 million. The partnership reported compliance with debt covenants.
- Net interest expense was $57.9 million in Q2 and $114.0 million for the first half, up from $38.0 million and $74.7 million, respectively. Higher average debt, LIBOR rates, and lower capitalized interest contributed to the increases.
- Fixed and intangible asset purchases were $111.0 million in the first half; maintenance and growth capital expenditures were reported separately as $32.2 million and $57.4 million. Cash distributions to common unitholders totaled $126.3 million in the first half.
Material changes versus comparable periods
- Q2 revenue rose 85%, principally reflecting the acquired Alkali Business and higher crude-oil-related sales values and volumes, which also increase associated product costs. Six-month revenue was up 80%.
- Segment margin increased 30% in Q2 and 26% for the first half. Sodium minerals and sulfur services contributed $64.5 million in Q2 versus $16.3 million, mainly because the Alkali Business was included in 2018. Management said Alkali performance had exceeded expectations.
- Offshore pipeline segment margin fell 8% in Q2 and 12% for the first half, mainly due to lower throughput and field underperformance. Marine segment margin fell 15% in both periods, reflecting short-term contracts and higher dry-docking costs. Onshore segment margin was broadly stable, up 2%.
- Operating income was nearly flat in Q2 despite substantially higher revenue. Q2 2017 included a $26.7 million gain on asset sales; 2018 also had higher depreciation and interest expense. The 2018 common-unit loss reflects $17.3 million of accumulated preferred distributions in the quarter; for the first half these distributions totaled $34.1 million.
Outlook, management commentary, risks and unusual items
- Management said distribution coverage was strong but deleveraging was slower than expected. It continued to target leverage of around 4x or less, while noting that reaching the target could take longer than originally anticipated. The filing does not provide a specific timetable or a clearly stated numerical leverage ratio for the period.
- Management expected strong Alkali Business performance to continue through 2018. It forecast approximately $20 million of remaining-2018 growth capital spending, primarily to complete Wyoming infrastructure, and intended to use excess cash to reduce revolving-credit borrowings.
- Offshore field underperformance was expected to reduce segment margin by about $5 million per quarter for each of two identified field issues until production improves; two subsea tie-backs were scheduled for 2019. Marine management did not expect meaningful improvement in industry fundamentals for several years, apart from the American Phoenix, contracted through September 2020.
- On August 7, 2018, Genesis granted a third party a time-limited option to buy certain non-core assets for a specified price, with a $30 million option payment credited against the purchase price. Management expected exercise and a Q3 closing, but exercise and closing were not assured; anticipated proceeds would reduce revolver debt.
- The partnership adopted ASC 606 using the modified retrospective method. Adoption reduced partners’ capital by $3.6 million at January 1, 2018 and affected reported revenue and operating costs, particularly in sodium minerals and sulfur services. For Q2, it increased reported revenue by $30.9 million and operating income by $2.2 million versus presentation without the new standard.
- Other items include a $3.3 million first-half loss on redemption of the remaining 2021 notes and a $49.4 million fair-value liability for the preferred units’ embedded rate-reset feature. The preferred units are senior to common units for distribution and liquidation rights; their quarterly distributions were PIK in 2018.
- Environmental releases, pipeline or marine operating incidents, commodity and interest-rate exposure, customer demand and throughput, capital-market access, and the ability to execute acquisitions and projects are among the disclosed risks. Management reported no material change in previously disclosed risk factors, no material legal-proceeding developments, and no material change in internal controls.
Important facts for investors to verify
- Whether Alkali’s strong contribution is sustainable, and how much reported growth reflects the acquisition, commodity-linked sales, and ASC 606 accounting changes.
- Offshore pipeline throughput and field recovery, including the timing and contribution of the planned 2019 tie-backs.
- Debt reduction progress, leverage against management’s approximately 4x-or-less target, interest costs, and available revolver capacity.
- Cash generation after working-capital movements and capital spending, and the basis for management’s distribution-coverage assessment, including the limitations of Available Cash before Reserves.
- Whether the non-core asset option is exercised and closes, and the net proceeds ultimately applied to debt.
- Preferred-unit PIK distributions, accumulated claims senior to common units, and the potential effects of the rate-reset provision.