Genesis Energy, L.P. (NYSE:GEL) today announced its third
quarter results.
Certain highlights of our results for the quarter ended
September 30, 2017 included the following items:
We completed the $1.325 billion accretive acquisition of the
world's largest producer of natural soda ash. We funded that
acquisition and the related transaction costs with proceeds from a
$750 million private placement of convertible preferred units, a
$550 million public offering of notes, our revolving credit
facility, and cash on hand.
We announced a strategic reallocation of capital, allocating
more capital to debt repayments and growth opportunities (and less
to current distributions). As part of this, we declared a quarterly
distribution of $0.50 per common unit for the quarter ended
September 30, 2017, to be paid on November 14, 2017 to unitholders
of record at the close of business on October 31, 2017. From this
re-setting of our current quarterly distribution to common
unitholders, we have enhanced our balance sheet and financial
flexibility, facilitating our plan to:
- Increase our quarterly distribution by
at least $0.01 per quarter for each of the next twenty
quarters
- Increase our distribution coverage
ratio
- Reduce our leverage ratio
- Opportunistically pursue accretive
organic projects and acquisitions
We confirmed prior guidance and provided additional guidance
metrics, including:
- Projecting record net income, cash flow
from operations, Adjusted EBITDA and Available Cash before Reserves
in future periods
- Targeting distribution coverage of the
new distribution profile of 1.40 to 1.60 times on a cash basis, as
historically calculated and presented
- Targeting leverage ratios approaching
4.75, 4.25 and 3.75 times for year ends 2018, 2019 and 2020,
respectively, as historically calculated and presented
We generated the following financial results for the third
quarter of 2017:
- Net Income Attributable to Genesis
Energy, L.P. of $6.3 million generating $0.01 of net income per
common unit. Net income was negatively affected by approximately
$25.2 million, or $0.21 per unit, due to transaction and financing
expenses, as well as an increase in interest expense, primarily
driven by our acquisition of the Alkali Business during the
quarter.
- Cash Flows from Operating Activities of
$33.8 million. This result was negatively affected by certain
non-recurring costs described above as well as an increase in net
working capital that is not necessarily meaningful to the
underlying performance of the partnership’s businesses.
- Available Cash before Reserves of $91.8
million. Available Cash before Reserves provided 1.50 coverage for
the quarterly distribution of $0.50 per common unit attributable to
the third quarter. We will pay distributions on our convertible
preferred units in the form of 162,234 additional convertible
preferred units.
- Adjusted EBITDA of $140.1 million. Our
Adjusted Debt to Pro Forma EBITDA ratio is 5.28 as of September 30,
2017. These amounts are calculated and further discussed later in
this press release.
Grant Sims, CEO of Genesis Energy, said, “We recently made the
strategic decision to re-set our quarterly distribution and
provided guidance for visible, achievable long term distribution
growth and a clear path forward to deleveraging. These steps, along
with the future stable and repeatable cash flows from our recently
completed acquisition as well as the anticipated ramp from our
recent strategic investments, we believe further enhance our
financial flexibility to opportunistically pursue accretive organic
projects and acquisitions should they present themselves. In this
context, however, we would reiterate, we currently have no plans to
access the equity capital markets in the immediate future,
including under our 'at the market' equity program, which in fact
has never been used. Overall, we believe these actions to
strengthen our balance sheet and enhance our financial flexibility
are the best actions we can take to allow us to generate strong
total returns for our unitholders in the years ahead.
Our quarterly results were negatively impacted by a number of
events such as Hurricane Harvey (a 1,000-year hurricane), the
planned regulatory dry-docking of our M/T American Phoenix as
required every five years, some extended turnarounds at several
offshore hubs, and turnarounds at several facilities in Alberta.
Notwithstanding these negatives, our legacy businesses are
performing as expected, and we are seeing increased contributions
from our recently completed organic projects in the Baton Rouge
corridor, in and around Texas City and in Wyoming. Additionally,
the quarter reflects only one month of contribution from our
recently acquired soda ash operations, which performance is
exceeding our expectations. Even under these circumstances and
closing on a $1.325 billion acquisition, our leverage ratio
declined on a sequential quarterly basis, and our reported
distribution coverage of 1.50 times was exactly in the middle of
our recently announced targeted range.
The financial results for the quarter ended September 30, 2017,
in our opinion, should not be the focus. As we recently discussed,
we expect to report record net income, cash flows from operations,
Adjusted EBITDA and Available Cash before Reserves in future
periods. Even with some of the headwinds in certain of our legacy
businesses about which we have been very forthright and explicit,
we have built a company currently capable of generating EBITDA
approaching $700 million annually, with visible growth in front of
it and positively leveraged to cyclical recovery in certain of its
businesses.
Earlier this year, we announced and discussed our intent to
market certain non-strategic assets with targeted proceeds of
$50-$75 million. While not yet fully recognized in our reported
results, we have to date consummated sales for total cash proceeds
of approximately $76 million, representing in the aggregate a GAAP
gain of approximately $40 million and at an implied multiple to us
of in excess of 30 times, none of which directly flows through our
non-GAAP measures of EBITDA or Available Cash. We continue to
evaluate other non-strategic assets in our portfolio, although
there can be no assurances of additional transactions.
Finally, I want to recognize our professional and dedicated
employees and warmly welcome the some 900 plus that have recently
joined Genesis as a result of our recent acquisition. We will
continue to work together to drive value for all of our
stakeholders while never losing sight of our commitment to safe,
reliable and responsible operations."
Preferred Unit Distributions
With respect to our Class A Convertible Preferred Units, we have
declared a payment-in-kind ("PIK") of the quarterly distribution,
which will result in the issuance of an additional 162,234 Class A
Convertible Preferred Units. This PIK amount, as pro-rated based on
the period these units were outstanding, equates to a distribution
of $0.2458 per Class A Convertible Preferred Unit for the 2017
Quarter, or $2.9496 annualized. These distributions will be payable
on November 14, 2017 to unitholders holders of record at the close
of business on November 3, 2017.
Financial Results
Segment Margin
On September 1, 2017, we acquired Tronox Limited’s (“Tronox’s”)
trona and trona-based exploring, mining, processing, producing,
marketing and selling business (the "Alkali Business") for
approximately $1.325 billion. We funded that acquisition and the
related transaction costs with proceeds from a $750 million private
placement of convertible preferred units, a $550 million public
offering of notes, our revolving credit facility, and cash on hand.
At the closing, we entered into a transition service agreement to
facilitate a smooth transition of operations and uninterrupted
services for both employees and customers.
Beginning in the fourth quarter of 2016, we started reporting
our results on a comparative basis in four business segments. Due
to the increasingly integrated nature of our onshore operations,
the results of our onshore pipeline transportation segment,
formerly reported under its own segment, is now reported in our
onshore facilities and transportation segment. The onshore
facilities and transportation segment also now includes what was
formerly reported in our supply and logistics segment. This segment
was renamed in the second quarter of 2017 to more accurately
describe the nature of its operations. We will report the results
of the Alkali Business in our renamed sodium and sulfur services
segment, which will include the Alkali Business as well as our
historical refinery services operations.
Variances between the third quarter of 2017 (the “2017 Quarter”)
and the third quarter of 2016 (the “2016 Quarter”) in these
components are explained below.
Segment results for the 2017 Quarter and 2016 Quarter were as
follows:
Three Months Ended September 30, 2017
2016
(in thousands)
Offshore pipeline transportation $ 78,228 $ 86,557 Sodium minerals
and sulfur services 30,031 20,526 Onshore facilities and
transportation 25,606 17,560 Marine transportation 12,649
16,697 Total Segment Margin $ 146,514 $ 141,340
Offshore pipeline transportation Segment Margin for the 2017
Quarter decreased $8.3 million, or 9.6%, from the 2016 Quarter. The
2017 Quarter was negatively impacted by both anticipated and
unanticipated downtime at several major fields, including weather
related downtime, affecting certain of our deepwater Gulf of Mexico
customers and thus certain of our key crude oil and natural gas
assets, including our Poseidon pipeline and certain associated
laterals which we own. While such downtime was temporary, we expect
additional downtime relating to weather and maintenance involving
certain customers' fields during the fourth quarter of 2017. The
quarter also reflects the effects of a contractual step down to a
lower transportation rate for a certain lateral which we own that
will be in place going forward. In addition, the 2016 Quarter
benefited from the temporary diversion of certain natural gas
volumes from third party gas pipelines to one of our gas pipelines
and related facilities due to disruptions at onshore processing
facilities where such volumes typically flow.
Sodium minerals and sulfur services Segment Margin for the 2017
Quarter increased $9.5 million, or 46.3%. This increase is
principally due to the inclusion of one month's contribution from
the Alkali Business. This was partially offset by the results of
our refinery services business and related NaHS and caustic soda
activities. The 2017 Quarter results for these activities were in
line with our expectations and include the effects of previously
disclosed commercial discussions with certain of our host
refineries and several NaHS customers, which resulted in extending
the term and tenor of a large number of contractual
relationships.
Onshore facilities and transportation Segment Margin increased
by $8.0 million, or 45.8%, between the two quarters. In the 2017
Quarter, this increase is primarily attributable to the ramp up in
volumes on our pipeline, terminal and rail infrastructure on our
infrastructure in the Baton Rouge corridor. In addition, relative
to the 2016 Quarter, we experienced an increase in volumes on our
Texas pipeline system as the repurposing of our Houston area crude
oil pipeline and expansion of our terminal infrastructure became
operational in the second quarter of 2017.
Marine transportation Segment Margin for the 2017 Quarter
decreased $4.0 million, or 24.2%, from the 2016 Quarter. The
decrease in Segment Margin is primarily due to lower day rates on
our inland and offshore fleets (which offset higher utilization as
adjusted for planned dry docking time). The M/T American Phoenix
was also undergoing regulatory dry docking inspections for
approximately one month during the 2017 Quarter, which negatively
impacted Segment Margin. In our inland fleet, weaker demand
continued to apply pressure on our rates, which we expect to
continue into the fourth quarter. In our offshore barge fleet, as a
number of our units have come off longer term contracts, we have
continued to choose to primarily place them in spot service or
short-term (less than a year) service, as we continue to believe
the day rates currently being offered by the market are at, or
approaching, cyclical lows.
Other Components of Net Income
In the 2017 Quarter, we recorded Net Income Attributable to
Genesis Energy, L.P. of $6.3 million compared to $32.1 million in
the 2016 Quarter. Impacting net income are increases in transaction
related third party financing, accounting and legal costs primarily
attributable to our acquisition of the Alkali Business, as well as
an increase in interest expense. These items had a combined effect
of $25.2 million. For the 2017 Quarter, our operating results
include one month of activity related to the Alkali Business for
the month of September.
Earnings Conference Call
We will broadcast our Earnings Conference Call on Friday,
November 3, 2017, at 8:00 a.m. Central time (9:00 a.m. Eastern
time). This call can be accessed at www.genesisenergy.com. Choose
the Investor Relations button. For those unable to attend the live
broadcast, a replay will be available beginning approximately one
hour after the event and remain available on our website for 30
days. There is no charge to access the event.
Genesis Energy, L.P. is a diversified midstream energy master
limited partnership headquartered in Houston, Texas. Genesis’
operations include offshore pipeline transportation, sodium
minerals and sulfur services, marine transportation and onshore
facilities and transportation. Genesis’ operations are primarily
located in Texas, Louisiana, Arkansas, Mississippi, Alabama,
Florida, Wyoming and the Gulf of Mexico.
GENESIS ENERGY, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS - UNAUDITED
(in thousands, except per unit
amounts)
Three Months Ended Nine Months Ended September
30, September 30, 2017 2016 2017 2016
REVENUES
$ 486,114 $ 460,050 $ 1,308,328 $ 1,284,440
COSTS AND
EXPENSES: Costs of sales and operating expenses 359,873 339,394
962,692 929,909 General and administrative expenses 19,409 11,212
38,723 34,716 Depreciation and amortization 63,732 54,265 176,453
156,800 Gain on sale of assets — — (26,684 ) —
OPERATING INCOME 43,100 55,179 157,144 163,015 Equity in
earnings of equity investees 13,044 12,488 34,805 35,362 Interest
expense (47,388 ) (34,735 ) (122,117 ) (104,657 ) Other expense
(2,276 ) — (2,276 ) —
INCOME BEFORE INCOME
TAXES 6,480 32,932 67,556 93,720 Income tax expense (320 ) (949
) (878 ) (2,959 )
NET INCOME 6,160 31,983 66,678 90,761 Net
loss attributable to noncontrolling interests 152 118
457 370
NET INCOME ATTRIBUTABLE TO GENESIS ENERGY,
L.P. $ 6,312 $ 32,101 $ 67,135 $ 91,131
Less: Accumulated distributions attributable to Series A
Convertible Preferred Units (5,469 ) — (5,469 ) —
NET INCOME AVAILABLE TO COMMON UNITHOLDERS $ 843 $
32,101 $ 61,666 $ 91,131
NET INCOME PER
COMMON UNIT: Basic and Diluted $
0.01 $ 0.28 $ 0.51 $ 0.81
WEIGHTED
AVERAGE OUTSTANDING COMMON UNITS: Basic and Diluted 122,579
115,718 121,198 111,906
GENESIS ENERGY, L.P.
OPERATING DATA - UNAUDITED Three Months Ended
Nine Months Ended September 30, September 30, 2017
2016 2017 2016
Offshore Pipeline Transportation
Segment Crude oil pipelines (barrels/day unless otherwise
noted): CHOPS 203,697 190,613 220,374 200,753 Poseidon (1) 257,093
263,519 258,031 259,446 Odyssey (1) 135,787 107,252 122,433 106,622
GOPL 8,317 6,287 8,166 5,839 Offshore
crude oil pipelines total 604,894 567,671 609,004
572,660 Natural gas transportation volumes
(MMbtus/d) (1) 467,095 775,546 516,974 656,452
Sodium
Minerals and Sulfur Services Segment NaHS (dry short tons sold)
30,381 34,299 95,575 96,116 Soda Ash volumes (short tons sold) (2)
336,000 — 336,000 — NaOH (caustic soda) volumes (dry short tons
sold) (3) 21,746 19,653 55,962 59,802
Onshore Facilities
and Transportation Segment Crude oil pipelines (barrels/day):
Texas 45,329 11,529 28,418 41,708 Jay 13,716 15,119 14,480 14,494
Mississippi 8,104 9,503 8,478 10,607 Louisiana (4) 130,862 30,814
115,436 26,865 Wyoming 22,204 9,772 19,816
10,003 Onshore crude oil pipelines total 220,215
76,737 186,628 103,677 Free State- CO2
Pipeline (Mcf/day) 68,363 88,026 73,042 101,157 Crude oil
and petroleum products sales (barrels/day) 52,082 64,292 49,255
66,725 Rail load/unload volumes (barrels/day) (5) 42,221
13,091 55,010 13,344
Marine Transportation Segment
Inland Fleet Utilization Percentage (6) 90.8 % 87.6 % 90.5 % 91.4 %
Offshore Fleet Utilization Percentage (6) 99.3 % 96.2 % 98.4 % 91.2
%
(1) Volumes for our equity method
investees are presented on a 100% basis.
(2) Includes sales volumes from September
1, 2017, the date on which we acquired the Alkali Business.
(3) Caustic soda sales volumes also
include volumes sold for the month of September from our new Alkali
Business.
(4) Total daily volume for the three
months and nine months ended September 30, 2017 includes 66,048 and
54,974 barrels per day respectively of intermediate refined
products associated with our Port of Baton Rouge Terminal pipelines
which became operational in the fourth quarter of 2016.
Additionally, this includes 19,574 and 6,925 barrels per day for
the three months and nine months ended September 30, 2017
respectively of crude oil associated with our new Raceland Pipeline
which became fully operational in the second quarter of 2017.
(5) Indicates total barrels for which fees
were charged for either loading or unloading at all rail
facilities.
(6) Utilization rates are based on a 365
day year, as adjusted for planned downtime and dry-docking.
GENESIS ENERGY, L.P. CONDENSED CONSOLIDATED
BALANCE SHEETS - UNAUDITED
(in thousands, except number of units)
September 30,
December 31, 2017 2016
ASSETS Cash and cash equivalents $
9,694 $ 7,029 Accounts receivable - trade, net 437,039 224,682
Inventories 98,558 98,587 Other current assets 45,533 29,271
Total current assets
590,824 359,569 Fixed assets, net 4,840,392 4,214,864 Mineral
leaseholds, net 622,756 — Investment in direct financing leases,
net 127,248 132,859 Equity investees 383,191 408,756 Intangible
assets, net 187,441 204,887 Goodwill 325,046 325,046 Other assets,
net 60,736 56,611
Total assets $ 7,137,634
$ 5,702,592
LIABILITIES AND CAPITAL Accounts
payable - trade $ 203,717 $ 119,841 Accrued liabilities 160,294
140,962
Total current liabilities 364,011
260,803 Senior secured credit facility 1,372,500 1,278,200 Senior
unsecured notes, net of debt issuance costs 2,358,049 1,813,169
Deferred tax liabilities 26,399 25,889 Other long-term liabilities
256,462 204,481
Total liabilities 4,377,421
3,582,542 Mezzanine capital: Series A convertible
preferred units 691,708 — Partners' capital: Common
unitholders 2,077,393 2,130,331
Noncontrolling interests
(8,888 ) (10,281 )
Total partners' capital
2,068,505 2,120,050
Total liabilities, mezzanine
capital and partners' capital $ 7,137,634 $ 5,702,592
Common Units Data: Total common units
outstanding 122,579,218 117,979,218
GENESIS ENERGY, L.P. RECONCILIATION OF SEGMENT MARGIN AND
ADJUSTED EBITDA TO NET INCOME - UNAUDITED
(in thousands)
Three Months Ended September 30, 2017 2016
Total Segment Margin (1) $ 146,514 $ 141,340 Corporate general and
administrative expenses (18,230 ) (10,420 ) Non-cash items included
in general and administrative costs 1,212 614 Cash expenditures not
included in Adjusted EBITDA 10,595 363 Cash expenditures not
included in net income (6 ) (86 ) Adjusted EBITDA 140,085 131,811
Depreciation, depletion, amortization and accretion (66,436 )
(57,103 ) Interest expense, net (47,388 ) (34,735 ) Cash
expenditures not included in Adjusted EBITDA (10,589 ) (277 )
Adjustment to exclude distributable cash generated by equity
investees not included in income and include equity in investees
net income (7,136 ) (9,063 ) Differences in timing of cash receipts
for certain contractual arrangements (2) 5,847 3,624 Other non-cash
items (7,751 ) (1,207 ) Income tax expense (320 ) (949 ) Net income
attributable to Genesis Energy, L.P. $ 6,312 $ 32,101
(1) See definition of Segment Margin later
in this press release.
(2) Certain cash payments received from
customers under certain of our minimum payment obligation contracts
are not recognized as revenue under GAAP in the period in which
such payments are received.
GENESIS ENERGY, L.P.
RECONCILIATIONS OF NET INCOME AND NET
CASH FLOWS FROM OPERATING ACTIVITIES TO
AVAILABLE CASH BEFORE RESERVES-
UNAUDITED
(in thousands)
Three Months Ended September 30, 2017 2016
(in thousands)
Net income attributable to Genesis Energy, L.P. $ 6,312 $ 32,101
Depreciation, depletion, amortization and accretion 66,436 57,103
Cash received from direct financing leases not included in income
1,751 1,586 Cash effects of sales of certain assets 967 120 Effects
of distributable cash generated by equity method investees not
included in income 7,136 9,063 Expenses related to acquiring or
constructing growth capital assets 10,595 363 Unrealized (gain)
loss on derivative transactions excluding fair value hedges, net of
changes in inventory value 2,168 (571 ) Maintenance capital
utilized (1) (3,375 ) (1,885 ) Non-cash tax expense 150 649
Differences in timing of cash receipts for certain contractual
arrangements (2) (5,847 ) (3,624 ) Other items, net 5,514
107 Available Cash before Reserves $ 91,807 $ 95,012
(1) Maintenance capital expenditures in
the 2017 Quarter and 2016 Quarter were $10.8 million and $7.9
million, respectively.
(2) Certain cash payments received from
customers under certain of our minimum payment obligation contracts
are not recognized as revenue under GAAP in the period in which
such payments are received.
Three Months Ended September 30, 2017 2016 (in thousands)
Cash Flows from Operating Activities $ 33,836 $ 124,725 Maintenance
capital utilized (1) (3,375 ) (1,885 ) Proceeds from asset sales
967 120 Amortization of debt issuance costs and discount (2,894 )
(2,571 ) Effects of available cash from joint ventures not included
in operating cash flows 4,194 4,801 Net effect of changes in
components of operating assets and liabilities not included in
calculation of Available Cash before Reserves 34,575 (26,834 )
Non-cash effect of equity based compensation expense 3,566 (2,047 )
Expenses related to acquiring or constructing growth capital assets
10,595 363 Differences in timing of cash receipts for certain
contractual arrangements (2) (5,847 ) (3,624 ) Other items
affecting available cash 16,190 1,964 Available Cash
before Reserves $ 91,807 $ 95,012
(1) Maintenance capital expenditures in
the 2017 Quarter and 2016 Quarter were $10.8 million and $7.9
million, respectively.
(2) Certain cash payments received from
customers under certain of our minimum payment obligation contracts
are not recognized as revenue under GAAP in the period in which
such payments are received.
GENESIS ENERGY, L.P.
RECONCILIATION OF NET CASH FLOWS FROM
OPERATING ACTIVITIES TO ADJUSTED EBITDA -
UNAUDITED
(in thousands)
Three Months Ended September 30, 2017 2016
Cash Flows from Operating Activities $ 33,836 $ 124,725 Interest
Expense 47,388 34,735 Amortization of debt issuance costs and
discount (2,894 ) (2,571 ) Effects of available cash from equity
method investees not included in operating cash flows 4,194 4,801
Net effect of changes in components of operating assets and
liabilities not included in calculation of Adjusted EBITDA 34,575
(26,834 ) Non-cash effect of equity based compensation expense
3,566 (2,047 ) Expenses related to acquiring or constructing growth
capital assets 10,595 363 Differences in timing of cash receipts
for certain contractual arrangements (1) (5,847 ) (3,624 ) Other
items, net 14,672 2,263 Adjusted EBITDA $ 140,085
$ 131,811
(1) Certain cash payments received from
customers under certain of our minimum payment obligation contracts
are not recognized as revenue under GAAP in the period in which
such payments are received.
GENESIS ENERGY, L.P. ADJUSTED DEBT-TO-PRO
FORMA EBITDA RATIO - UNAUDITED
(in thousands)
September 30, 2017 Senior secured credit facility $
1,372,500 Senior unsecured notes 2,358,049 Less: Outstanding
inventory financing sublimit borrowings (38,700 ) Less: Cash and
cash equivalents (9,694 ) Adjusted Debt (1) $ 3,682,155
Pro Forma LTM September 30, 2017 LTM Adjusted EBITDA (as
reported) (2) $ 530,997 Acquisitions and material projects EBITDA
adjustment (3) 166,902 Pro Forma EBITDA $ 697,899
Adjusted Debt-to-Pro Forma EBITDA 5.28 x
(1) We define Adjusted Debt as the amounts
outstanding under our senior secured credit facility and senior
unsecured notes (including any unamortized premiums or discounts)
less the amount outstanding under our inventory financing sublimit,
less cash and cash equivalents on hand at the end of the
period.
(2) Last twelve months ("LTM") Adjusted
EBITDA. The most comparable GAAP measure to Adjusted EBITDA, Net
Income Attributable to Genesis Energy L.P., was $29.6 million for
the fourth quarter of 2016, $27.1 million for the first quarter of
2017 , $33.7 million for the second quarter of 2017, and $6.3
million for the third quarter of 2017. Reconciliations of Adjusted
EBITDA to net income for all periods presented are available on our
website at www.genesisenergy.com.
(3) This amount reflects the adjustment we
are permitted to make under our senior secured credit facility for
purposes of calculating compliance with our leverage ratio. It
includes a pro rata portion of projected future annual EBITDA from
material projects (i.e. organic growth) and includes Adjusted
EBITDA (using historical amounts and other permitted amounts) since
the beginning of the calculation period attributable to each
acquisition completed during such calculation period, regardless of
the date on which such acquisition was actually completed. This
adjustment may not be indicative of future results.
This press release includes forward-looking statements as
defined under federal law. Although we believe that our
expectations are based upon reasonable assumptions, we can give no
assurance that our goals will be achieved. Actual results may vary
materially. All statements, other than statements of historical
facts, included in this press release that address activities,
events or developments that we expect, believe or anticipate will
or may occur in the future are forward-looking statements, and
historical performance is not necessarily indicative of future
performance. Those forward-looking statements rely on a number of
assumptions concerning future events and are subject to a number of
uncertainties, factors and risks, many of which are outside our
control, that could cause results to differ materially from those
expected by management. Such risks and uncertainties include, but
are not limited to, weather, political, economic and market
conditions, including a decline in the price and market demand for
products, the timing and success of business development efforts
and other uncertainties. Those and other applicable uncertainties,
factors and risks that may affect those forward-looking statements
are described more fully in our Annual Report on Form 10-K for the
year ended December 31, 2016 filed with the Securities and
Exchange Commission and other filings, including our Current
Reports on Form 8-K and Quarterly Reports on Form 10-Q. We
undertake no obligation to publicly update or revise any
forward-looking statement.
NON-GAAP MEASURES
This press release and the accompanying schedules include
non-generally accepted accounting principle (non-GAAP) financial
measures of Adjusted EBITDA and total Available Cash before
Reserves. In this press release, we also present total Segment
Margin as if it were a non-GAAP measure. Our Non-GAAP measures may
not be comparable to similarly titled measures of other companies
because such measures may include or exclude other specified items.
The accompanying schedules provide reconciliations of these
non-GAAP financial measures to their most directly comparable
financial measures calculated in accordance with generally accepted
accounting principles in the United States of America (GAAP). Our
non-GAAP financial measures should not be considered (i) as
alternatives to GAAP measures of liquidity or financial performance
or (ii) as being singularly important in any particular context;
they should be considered in a broad context with other
quantitative and qualitative information. Our Available Cash before
Reserves, Adjusted EBITDA and total Segment Margin measures are
just three of the relevant data points considered from time to
time.
When evaluating our performance and making decisions regarding
our future direction and actions (including making discretionary
payments, such as quarterly distributions) our board of directors
and management team has access to a wide range of historical and
forecasted qualitative and quantitative information, such as our
financial statements; operational information; various non-GAAP
measures; internal forecasts; credit metrics; analyst opinions;
performance, liquidity and similar measures; income; cash flow; and
expectations for us, and certain information regarding some of our
peers. Additionally, our board of directors and management team
analyze, and place different weight on, various factors from time
to time. We believe that investors benefit from having access to
the same financial measures being utilized by management, lenders,
analysts and other market participants. We attempt to provide
adequate information to allow each individual investor and other
external user to reach her/his own conclusions regarding our
actions without providing so much information as to overwhelm or
confuse such investor or other external user.
AVAILABLE CASH BEFORE RESERVES
Purposes, Uses and Definition
Available Cash before Reserves, also referred to as
distributable cash flow, is a quantitative standard used throughout
the investment community with respect to publicly traded
partnerships and is commonly used as a supplemental financial
measure by management and by external users of financial statements
such as investors, commercial banks, research analysts and rating
agencies, to aid in assessing, among other things:
(1) the financial performance of our
assets;
(2) our operating performance;
(3) the viability of potential projects,
including our cash and overall return on alternative capital
investments as compared to those of other companies in the
midstream energy industry;
(4) the ability of our assets to generate
cash sufficient to satisfy certain non-discretionary cash
requirements, including interest payments and certain maintenance
capital requirements; and
(5) our ability to make certain discretionary
payments, such as distributions on our units, growth capital
expenditures, certain maintenance capital expenditures and early
payments of indebtedness.
We define Available Cash before Reserves as net income as
adjusted for certain items, some of the most significant of which
tend to be (a) the elimination of certain non-cash revenues,
expenses, gains, losses or charges (such as depreciation and
amortization, unrealized gain or loss on derivative transactions
not designated as hedges for accounting purposes, gain or loss on
sale of non-surplus assets and equity compensation expense that is
not settled in cash), (b) the substitution of distributable cash
generated by our equity investees in lieu of our equity income
attributable to our equity investees (includes distributions
attributable to the quarter and received during or promptly
following such quarter), (c) the elimination of expenses related to
acquiring or constructing assets that provide new sources of cash
flows, (d) certain litigation expenses that are not deducted in
determining our Pro Forma Adjusted EBITDA under our senior secured
credit facility, and (e) the subtraction of maintenance capital
utilized, which is described in detail below.
Disclosure Format Relating to Maintenance Capital
We use a modified format relating to maintenance capital
requirements because our maintenance capital expenditures vary
materially in nature (discretionary vs. non-discretionary), timing
and amount from time to time. We believe that, without such
modified disclosure, such changes in our maintenance capital
expenditures could be confusing and potentially misleading to users
of our financial information, particularly in the context of the
nature and purposes of our Available Cash before Reserves measure.
Our modified disclosure format provides those users with
information in the form of our maintenance capital utilized measure
(which we deduct to arrive at Available Cash before Reserves). Our
maintenance capital utilized measure constitutes a proxy for
non-discretionary maintenance capital expenditures and it takes
into consideration the relationship among maintenance capital
expenditures, operating expenses and depreciation from period to
period.
Maintenance Capital Requirements
Maintenance Capital Expenditures
Maintenance capital expenditures are capitalized costs that are
necessary to maintain the service capability of our existing
assets, including the replacement of any system component or
equipment which is worn out or obsolete. Maintenance capital
expenditures can be discretionary or non-discretionary, depending
on the facts and circumstances.
Initially, substantially all of our maintenance capital
expenditures were (a) related to our pipeline assets and similar
infrastructure, (b) non-discretionary in nature and (c) immaterial
in amount as compared to our Available Cash before Reserves
measure. Those historical expenditures were non-discretionary (or
mandatory) in nature because we had very little (if any) discretion
as to whether or when we incurred them. We had to incur them in
order to continue to operate the related pipelines in a safe and
reliable manner and consistently with past practices. If we had not
made those expenditures, we would not have been able to continue to
operate all or portions of those pipelines, which would not have
been economically feasible. An example of a non-discretionary (or
mandatory) maintenance capital expenditure would be replacing a
segment of an old pipeline because one can no longer operate that
pipeline safely, legally and/or economically in the absence of such
replacement.
As we exist today, a substantial amount of our maintenance
capital expenditures from time to time will be (a) related to our
assets other than pipelines, such as our marine vessels, trucks and
similar assets, (b) discretionary in nature and (c) potentially
material in amount as compared to our Available Cash before
Reserves measure. Those expenditures will be discretionary (or
non-mandatory) in nature because we will have significant
discretion as to whether or when we incur them. We will not be
forced to incur them in order to continue to operate the related
assets in a safe and reliable manner. If we chose not make those
expenditures, we would be able to continue to operate those assets
economically, although in lieu of maintenance capital expenditures,
we would incur increased operating expenses, including maintenance
expenses. An example of a discretionary (or non-mandatory)
maintenance capital expenditure would be replacing an older marine
vessel with a new marine vessel with substantially similar
specifications, even though one could continue to economically
operate the older vessel in spite of its increasing maintenance and
other operating expenses.
In summary, as we continue to expand certain non-pipeline
portions of our business, we are experiencing changes in the nature
(discretionary vs. non-discretionary), timing and amount of our
maintenance capital expenditures that merit a more detailed review
and analysis than was required historically. Management’s recently
increasing ability to determine if and when to incur certain
maintenance capital expenditures is relevant to the manner in which
we analyze aspects of our business relating to discretionary and
non-discretionary expenditures. We believe it would be
inappropriate to derive our Available Cash before Reserves measure
by deducting discretionary maintenance capital expenditures, which
we believe are similar in nature in this context to certain other
discretionary expenditures, such as growth capital expenditures,
distributions/dividends and equity buybacks. Unfortunately, not all
maintenance capital expenditures are clearly discretionary or
non-discretionary in nature. Therefore, we developed a measure,
maintenance capital utilized, that we believe is more useful in the
determination of Available Cash before Reserves. Our maintenance
capital utilized measure, which is described in more detail below,
constitutes a proxy for non-discretionary maintenance capital
expenditures and it takes into consideration the relationship among
maintenance capital expenditures, operating expenses and
depreciation from period to period.
Maintenance Capital Utilized
We believe our maintenance capital utilized measure is the most
useful quarterly maintenance capital requirements measure to use to
derive our Available Cash before Reserves measure. We define our
maintenance capital utilized measure as that portion of the amount
of previously incurred maintenance capital expenditures that we
utilize during the relevant quarter, which would be equal to the
sum of the maintenance capital expenditures we have incurred for
each project/component in prior quarters allocated ratably over the
useful lives of those projects/components.
Because we did not initially use our maintenance capital
utilized measure, our future maintenance capital utilized
calculations will reflect the utilization of solely those
maintenance capital expenditures incurred since December 31,
2013.
ADJUSTED EBITDA
Purposes, Uses and Definition
Adjusted EBITDA is commonly used as a supplemental financial
measure by management and by external users of financial statements
such as investors, commercial banks, research analysts and rating
agencies, to aid in assessing, among other things:
(1) the financial performance of our assets
without regard to financing methods, capital structures or
historical cost basis;
(2) our operating performance as compared to
those of other companies in the midstream energy industry, without
regard to financing and capital structure;
(3) the viability of potential projects,
including our cash and overall return on alternative capital
investments as compared to those of other companies in the
midstream energy industry;
(4) the ability of our assets to generate
cash sufficient to satisfy certain non-discretionary cash
requirements, including interest payments and certain maintenance
capital requirements; and
(5) our ability to make certain discretionary
payments, such as distributions on our units, growth capital
expenditures, certain maintenance capital expenditures and early
payments of indebtedness.
We define Adjusted EBITDA (“Adjusted EBITDA”) as net income or
loss plus net interest expense and income taxes, and eliminating
non-cash revenues, expenses, gains, losses and charges (such as
depreciation and amortization, unrealized gain or loss on
derivative transactions not designated as hedges for accounting
purposes, gain or loss on sale of non-surplus assets and equity
based compensation expense that is not settled in cash), plus or
minus certain other items, the most significant of which tend to be
(a) the substitution of distributable cash generated by our equity
investees in lieu of our equity income attributable to our equity
investees (includes distributions attributable to the quarter and
received during or promptly following such quarter), (b) the
elimination of expenses related to acquiring or constructing assets
that provide new sources of cash flows, and (c) the elimination of
certain litigation expenses that are not deducted to determine our
Pro Forma Adjusted EBITDA under our senior secured credit
facility.
SEGMENT MARGIN
Our chief operating decision maker (our Chief Executive Officer)
evaluates segment performance based on a variety of measures
including Segment Margin, segment volumes where relevant and
capital investment. We define Segment Margin as revenues less
product costs, operating expenses, and segment general and
administrative expenses, plus our equity in distributable cash
generated by our equity investees and certain litigation expenses
that are not deducted to determine our Pro Forma Adjusted EBITDA
under our senior secured credit facility. Our Segment Margin
definition also includes the non-income portion of payments
received under direct financing leases and eliminates non-cash
revenues, expenses, gains, losses and charges (such as depreciation
and amortization, unrealized gain or loss on derivative
transactions not designated as hedges for accounting purposes, gain
or loss on sale of non-surplus assets and equity based compensation
expense that is not settled in cash).
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version on businesswire.com: http://www.businesswire.com/news/home/20171103005215/en/
Genesis Energy, L.P.Bob Deere, 713-860-2516Chief Financial
Officer
Genesis Energy (NYSE:GEL)
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