Genesis Energy, L.P. — Q3 2012 Form 10-Q
Business context and period. This unaudited quarterly filing covers the three and nine months ended September 30, 2012. Genesis is a Gulf Coast-focused midstream partnership with pipeline transportation, refinery services, and supply and logistics businesses. Unless stated otherwise, financial amounts below are in millions.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $942.3 | $830.2 | $2,797.9 | $2,282.8 |
| Operating income | $29.1 | $28.6 | $83.5 | $67.4 |
| Net income | $31.2 | $19.1 | $69.4 | $43.5 |
| Net income per common unit | $0.39 | $0.27 | $0.90 | $0.65 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $142.9 | $39.1 |
| Capital expenditures and acquisitions | Not provided by quarter | Not provided by quarter | $381.0 | $157.5 |
Q3 revenue grew 14%, while net income rose 63%; nine-month revenue increased 23% and net income 60%. Revenue growth chiefly reflected higher supply-and-logistics volumes, acquisitions, and, to a lesser extent, higher commodity prices. Management’s non-GAAP Segment Margin was $65.9 million in Q3, up 25%, and $189.0 million for nine months, up 26%. Segment Margin is not equivalent to GAAP operating income.
Margins. GAAP operating margin was approximately 3.1% in Q3 2012 versus 3.4% in Q3 2011; net margin was approximately 3.3% versus 2.3%. Nine-month operating margin was approximately 3.0% versus 3.0%, and net margin approximately 2.5% versus 1.9%. Revenue includes substantial pass-through product sales and costs.
Balance sheet at September 30, 2012. Cash was $15.5 million; current assets $427.3 million and current liabilities $318.4 million, for a current ratio of approximately 1.34. Long-term debt totaled $833.9 million: $483.0 million under the secured credit facility and $350.9 million carrying value of unsecured notes. The partnership reported $927.9 million of partners’ capital. Credit-facility availability was $504.4 million, including outstanding letters of credit in the facility calculation. The partnership stated it was in compliance with debt covenants.
Operating cash flow improved from $39.1 million to $142.9 million for the nine-month period, reflecting higher cash earnings and working-capital effects. Investing used $368.8 million, led by acquisitions, asset spending, and equity-investee investments; financing provided $230.5 million. Cash rose to $15.5 million from $10.8 million at year-end 2011.
Material changes and operating drivers
- Pipeline transportation: Q3 Segment Margin rose 45% to $23.3 million; nine-month margin rose 37% to $69.4 million. The acquired Gulf of Mexico pipeline interests contributed, as did indexed onshore tariffs. CHOPS volumes and contribution were lower during producer field improvements, which management said were substantially completed late in Q3.
- Refinery services: Q3 Segment Margin rose 6% to $19.0 million, helped by higher NaHS sales and operating efficiencies. Nine-month margin declined 3% to $53.5 million, with management citing higher caustic-related costs and refinery turnarounds that reduced efficiency and caustic soda volumes.
- Supply and logistics: Q3 Segment Margin rose 25% to $23.7 million; nine-month margin rose 49% to $66.1 million. Crude oil and product volumes increased 30% in Q3 and 27% for nine months, supported by the acquired barge business and expanded trucking and barge fleets; operating costs also increased.
- In January 2012, Genesis paid $205.6 million for interests in Gulf of Mexico pipeline systems, including Poseidon, GOPL, and Odyssey. It also purchased seven previously subleased barges for $30.6 million in February.
Outlook, risks, and unusual items
- No formal earnings guidance was provided. Management said internally generated funds and credit-facility availability were expected to meet ordinary-course capital needs, while noting growth plans require substantial capital and future access to debt or equity financing is not assured.
- Projects underway included Texas City terminal and pipeline work, expected to enable about 40,000 barrels per day once completed; the Texas City pipeline loop was expected by Q2 2013. A Tulsa sour-gas facility was expected in Q1 2013. The second phase of the Walnut Hill crude-by-rail terminal was expected in Q4 2012. These are stated expectations, not guarantees.
- Genesis expected to spend about $200 million through 2014 for its share of the SEKCO pipeline project; about $57.1 million had been contributed in the first nine months of 2012. Anchor producers with long-term transportation agreements bear most cost-overrun and weather-delay costs, according to the filing.
- The Q3 income tax benefit included an $8.2 million reversal of uncertain tax positions following audit settlements and expiration of statutes of limitations. This materially boosted reported earnings; the benefit is not presented as recurring operating performance.
- Commodity derivatives were used to economically hedge inventory and purchase commitments, but none were designated as accounting hedges at quarter-end. Q3 derivative losses recognized in product costs were $5.8 million, versus gains of $2.6 million a year earlier; timing differences can cause reported results to differ from the economics of the hedged transactions.
- Risks identified include commodity and throughput changes, refinery shutdowns, pipeline or marine service interruptions and accidents, environmental and regulatory exposure, capital-market access, acquisition and project execution, and customer/counterparty condition. The filing highlighted the Davison family’s significant voting and governance influence and potential conflicts of interest. Management reported no material change in market-risk disclosures, no material developments in legal proceedings, and effective disclosure controls.
Genesis declared a Q3 distribution of $0.4725 per common unit, payable November 14, 2012, a 10.5% increase from the Q3 2011 distribution. Nine-month cash distributions were $104.0 million.
Important facts for investors to verify
- How much of earnings and distributable cash flow growth is sustainable after excluding the $8.2 million tax benefit and considering acquisition contributions?
- Whether the acquired Gulf of Mexico assets and growth projects meet expected throughput, completion, and return assumptions.
- Debt levels, covenant headroom, interest expense, and the amount of credit-facility capacity remaining as capital spending and distributions continue.
- Whether operating cash flow remains strong after working-capital timing effects; receivables increased substantially from year-end.
- Distribution coverage and the sustainability of distribution increases, using the partnership’s non-GAAP Available Cash before Reserves measure and its reconciliation to GAAP results.
- Exposure to controlling-holder conflicts, environmental and marine risks, and unhedged commodity/timing effects.