Genesis Energy, L.P. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Genesis is a Gulf Coast-focused midstream partnership operating offshore pipelines, sodium minerals and refinery services, onshore facilities and transportation, and marine transportation. Results include the Alkali Business acquired September 1, 2017, so year-over-year comparisons reflect a major change in business scope.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $725.8 million | $415.5 million |
| Operating income | $59.1 million | $52.6 million |
| Net income attributable to Genesis | $8.0 million | $27.1 million |
| Net income (loss) available to common unitholders | $(8.9) million; $(0.07) per unit | $27.1 million; $0.23 per unit |
| Operating cash flow | $86.3 million | $61.0 million |
| Available Cash before Reserves (non-GAAP) | $101.6 million | $92.0 million |
| Segment Margin (non-GAAP) | $170.2 million | $138.6 million |
Operating margin was approximately 8.1%, versus 12.7% a year earlier; the increase in revenue was largely acquisition-related and accompanied by substantially higher costs. Net income attributable to Genesis fell despite higher operating income, principally amid higher interest and depreciation, preferred-unit distributions, and unusual charges. Cash-flow improvement primarily reflected favorable working-capital effects. The filing does not provide a consolidated EBITDA figure.
At March 31, cash was $16.1 million, current assets $580.1 million and current liabilities $415.7 million. Long-term debt principal was $3.779 billion: $1.279 billion drawn on the $1.7 billion revolving facility and $2.5 billion of unsecured notes. Facility availability was $419.8 million, including the stated treatment of letters of credit. Total debt principal rose from $3.744 billion at year-end 2017. The partnership reported compliance with debt covenants.
Capital expenditures for fixed and intangible assets were $46.9 million, including $10.0 million of maintenance and $37.0 million of growth spending. Common distributions paid during the quarter were $62.5 million. A $0.52-per-unit common distribution for Q1 was declared for payment in May; preferred distributions were paid in kind.
Material changes versus prior comparable period
- Revenue increased 75%, primarily because Q1 2018 included three months of the Alkali Business; it contributed $208.5 million of revenue and $31.7 million of net income. Sodium minerals and sulfur services Segment Margin rose to $64.4 million from $17.5 million.
- Total Segment Margin rose 23% to $170.2 million. Offshore pipeline Segment Margin fell 16% to $73.2 million, chiefly from lower throughput associated with customer field downtime and lower reservation fees. Marine Segment Margin fell 15% to $11.0 million; onshore Segment Margin increased 3% to $21.7 million.
- Interest expense increased $19.4 million to $56.1 million, mainly reflecting acquisition-related borrowing and lower capitalized interest. Depreciation, depletion and amortization increased $19.1 million to $75.3 million, largely due to acquired and newly placed-in-service assets.
- Genesis redeemed its remaining 5.75% notes due 2021 in February and recorded a $3.3 million loss on extinguishment. It adopted ASC 606 using the modified retrospective method: Q1 revenue was $21.1 million higher than under prior guidance, but operating income was $3.0 million lower. Prior-year results were not restated.
Outlook, commentary and risks
- Management said Alkali Business performance exceeded expectations and expected that performance level to continue through the rest of 2018. The filing does not provide specific full-year earnings or cash-flow guidance.
- Management anticipated approximately $60 million of additional 2018 spending, including capitalized interest, for projects then under construction. Baton Rouge-area tankage and infrastructure expansion was expected to become fully operational in Q2 2018.
- Management described a strategic shift toward debt repayment and growth opportunities and away from current distributions. It said it had no immediate plans to access equity markets, including its unused at-the-market program. Future capital access and growth execution are not assured.
- Management expected further customer-field maintenance downtime to affect offshore volumes in Q2 2018 and weaker inland marine day rates to continue into Q2. It viewed current offshore spot rates as near cyclical lows and was using short-term contracts.
- Key risks include throughput and customer demand, commodity and product-market conditions, service interruptions, refinery or customer shutdowns, integration of the Alkali Business, access to capital and covenant restrictions, environmental and marine operating hazards, and the ability to sustain distributions. Management reported no material change in previously disclosed risk factors, legal proceedings, or market-risk disclosures.
- The filing identified a $48.1 million Level 3 liability for the preferred-unit distribution rate-reset feature; its valuation depends on judgmental inputs. Environmental releases remain a potential risk, although management did not expect currently pending legal or regulatory matters to materially affect results.
Important facts for investors to verify
- Whether Alkali Business performance and integration progress support management’s expectation for the remainder of 2018, and how much of reported growth is acquisition-driven.
- Whether offshore downtime, lower pipeline volumes and marine rates persist, and the resulting effect on Segment Margin and cash generation.
- Debt reduction, borrowing availability, interest costs and covenant headroom, particularly given the increased credit-facility balance.
- The sustainability of common-unit distributions relative to operating cash flow, capital spending and the preferred units’ accumulating distributions.
- The effect of ASC 606 contract accounting and the Level 3 preferred-unit rate-reset valuation on reported results and capital.