Genesis Energy, L.P. — Q3 2014 Form 10-Q
Business context and period. The partnership operates Gulf Coast-focused pipeline transportation, refinery services, and supply and logistics businesses. This unaudited filing covers the quarter and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods unless noted. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Q3 revenue: $964.1 million, down 11.6%; operating income was $35.3 million versus $24.1 million, and net income was $29.1 million versus $18.5 million. Net income per unit was $0.33 versus $0.22.
- Nine-month revenue and earnings: Revenue was $2,998.9 million, down 5.5%; operating income was $101.9 million versus $87.5 million, and net income was $80.0 million versus $68.2 million. Net income per unit was $0.90 versus $0.83.
- Margins: Q3 operating margin was approximately 3.7% versus 2.2%; net margin was approximately 3.0% versus 1.7%. Nine-month operating margin was approximately 3.4% versus 2.8%; net margin was approximately 2.7% versus 2.1%.
- Segment Margin, a non-GAAP measure: Q3 was $94.8 million, up 46%; nine-month total was $254.8 million, up 23%. Q3 segment contributions were pipeline $37.0 million, refinery services $21.9 million, and supply and logistics $35.9 million.
- Cash flow: Nine-month operating cash flow was $208.1 million versus $109.3 million. Investing used $369.7 million and financing provided $169.6 million; cash increased $8.1 million to $16.9 million. Q3 Available Cash before Reserves, a non-GAAP measure, was $60.8 million versus $43.3 million.
- Investment spending: Nine-month capital expenditures totaled $383.7 million, including $347.7 million for fixed and intangible assets and $36.1 million invested in equity investees. Fixed-asset and intangible-asset additions included $61.2 million of accrued but unpaid liabilities at quarter-end.
- Debt and liquidity: Long-term debt was $1,385.7 million, up from $1,283.6 million at year-end 2013. The balance included $335.0 million under the secured facility and $1,050.7 million of unsecured notes. Cash was $16.9 million; current assets were $469.3 million and current liabilities $433.9 million. Available revolving capacity was $651.8 million, including $13.2 million of letters of credit outstanding. The partnership reported compliance with debt covenants.
- Distributions and equity: Nine-month distributions were $146.4 million. A $0.58-per-unit Q3 distribution, totaling approximately $54.1 million, was scheduled for November 14, 2014. A September public offering of 4.6 million units generated net proceeds of approximately $225.6 million.
Material changes versus the prior period
- Q3 revenue and costs both fell, mainly reflecting lower supply-and-logistics volumes and lower crude-oil and petroleum-product prices; average WTI crude was $97.17 per barrel versus $105.83, an 8% decline. Management said price changes had limited impact on Segment Margin.
- Segment Margin growth came from all three segments. Pipeline gains included SEKCO minimum fees after mechanical completion in June 2014, despite no crude throughput to date, and higher offshore pipeline activity. Refinery services benefited from lower raw-material costs and operating efficiencies. Supply and logistics benefited from marine transportation, increased crude marketing and gathering, and improvement in refined products operations.
- Supply and logistics continuing-operations volumes declined 5% in Q3 and 4% for the nine-month comparison. The partnership said it was reshaping refined-products activity to fit current market conditions.
- Depreciation and amortization increased to $25.1 million in Q3 from $16.1 million, and to $64.9 million for nine months from $46.8 million, primarily because of acquired and newly completed assets. Net interest expense also rose, to $20.4 million in Q3 from $12.6 million and to $47.3 million for nine months from $36.3 million, reflecting higher average debt.
- The 2013 comparison includes the acquired offshore marine transportation business from its August 2013 acquisition date. The vehicle fuel procurement and delivery business sold at year-end 2013 is presented as discontinued operations in 2013.
Outlook, risks and notable items
- No specific earnings or cash-flow guidance was provided. Management said operating funds and credit-facility availability were expected to meet ordinary-course capital needs, while noting that future growth depends in part on access to additional capital.
- Projects under construction were estimated to require approximately $730 million in total, with approximately $470 million expected to be spent in 2014, including spending through September. The Baton Rouge terminal was expected to be completed by the end of Q2 2015; the Raceland rail facility was expected to be operational in Q2 2015. The partnership also ordered new barges and push boats, with deliveries expected periodically through 2016.
- On October 10, 2014, the partnership agreed to acquire the M/T American Phoenix and two related charters for approximately $157 million, subject to customary consents and approvals. The tanker is chartered into 2020.
- Material risks include commodity-price and volume changes, project execution and capital availability, debt levels and covenant restrictions, operational and marine-transportation hazards, environmental releases, and customer or counterparty risks. Management reported no material expected effect from pending lawsuits or regulatory examinations and no material change to previously disclosed contractual obligations.
- A highlighted tax risk concerns whether income from certain marine time charters qualifies for partnership tax treatment. In light of legal uncertainty, outside tax counsel changed its opinion standard from “will” to “should.” If the partnership were taxed as a corporation, cash available for unitholder distributions could be substantially reduced. Additional state-level entity taxes are also a risk.
- Inventory market value was approximately $1.8 million below recorded cost at September 30, 2014, and inventory was written down by that amount. Commodity derivatives were used for economic hedging; none were designated as accounting hedges. Derivative fair-value changes can cause period-to-period earnings volatility.
Important facts for investors to verify
- Whether project spending, including the 2014 capital-spending estimate, remains on schedule and is funded without undue pressure on leverage or unit issuance.
- Whether SEKCO begins throughput and earns fees as anticipated, and how new pipeline, terminal, rail, and marine assets contribute to cash generation.
- Whether Available Cash before Reserves supports distributions after maintenance capital needs and other cash requirements; this is a non-GAAP measure and may not be comparable across issuers.
- Debt, borrowing capacity, covenant compliance, and the effects of the recent note issuance and subsequent tanker acquisition.
- Developments in the tax qualification of marine charter income and any resulting impact on partnership status or distributions.
- Future supply-and-logistics volumes, refined-products performance, commodity-related working-capital requirements, and derivative-related earnings volatility.