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| GEL > SEC Filings for GEL > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
Included in Management's Discussion and Analysis are the following sections:
· Overview
· Available Cash before Reserves
· Results of Operations
· Liquidity and Capital Resources
· Commitments and Off-Balance Sheet Arrangements
· New Accounting Pronouncements
In the discussions that follow, we will focus on two measures that we use to manage the business and to review the results of our operations. Those two measures are segment margin and Available Cash before Reserves. During the fourth quarter of 2008, we revised the manner in which we internally evaluate our segment performance. As a result, we changed our definition of segment margin to include within segment margin all costs that are directly associated with a business segment. Segment margin now includes costs such as general and administrative expenses that are directly incurred by a business segment. Segment margin also includes all payments received under direct financing leases. In order to improve comparability between periods, we exclude from segment margin the non-cash effects of our stock-based compensation plans which are impacted by changes in the market price for our common units. Previous periods have been retrospectively revised to conform to this segment presentation. We now define segment margin as revenues less cost of sales, operating expenses (excluding non-cash charges, such as depreciation and amortization), and segment general and administrative expenses, plus our equity in distributable cash generated by our joint ventures. In addition, our segment margin definition excludes the non-cash effects of our stock-based compensation plans, and includes the non-income portion of payments received under direct financing leases. 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 maintenance capital investment. A reconciliation of segment margin to income from before income taxes is included in our segment disclosures in Note 10 to the consolidated financial statements.
Available Cash before Reserves (a non-GAAP measure) is net income as adjusted for specific items, the most significant of which are the addition of non-cash expenses (such as depreciation), the substitution of cash generated by our joint ventures in lieu of our equity income attributable to such joint ventures, the elimination of gains and losses on asset sales (except those from the sale of surplus assets) and the subtraction of maintenance capital expenditures, which are expenditures that are necessary to sustain existing (but not to provide new sources of) cash flows. For additional information on Available Cash before Reserves and a reconciliation of this measure to cash flows from operations, see "Liquidity and Capital Resources - Non-GAAP Reconciliation" below.
Overview
In the second quarter of 2009, we reported net income of $4.5 million, or $0.13 per common unit. Non-cash expense related to our senior executive compensation arrangements totaling $2.4 million reduced net income during the second quarter. See additional discussion of our senior executive compensation expense in "Results of Operations - Other Costs, Interest and Income Taxes" below.
During the second quarter of 2009, we generated $22.2 million of Available Cash before Reserves, and we will distribute $15.3 million to holders of our common units and general partner for the second quarter. During the second quarter of 2009, cash provided by operating activities was $15.9 million.
Macroeconomic conditions have adversely affected business conditions in several of the industries that we service, and, consequently, us. Segment margin as compared to the second quarter of 2008, after consideration of the effects of acquisitions in 2008, declined for all of our segments. However, when compared to the first quarter of 2009, we have seen an increase in total segment margin of $1.0 million.
On July 15, 2009, we announced that our distribution to our common unitholders relative to the second quarter of 2009 will be $0.345 per unit (to be paid in August 2009). This distribution amount represents a 9.5% increase from our distribution of $0.315 per unit for the second quarter of 2008. During the second quarter of 2009, we paid a distribution of $0.3375 per unit related to the first quarter of 2009.
The current economic crisis has restricted the availability of credit and access to capital in our business environment. Despite efforts by U.S. Treasury and banking regulators to provide liquidity to the financial sector, certain components of the capital markets continue to remain constrained. While we anticipate that the challenging economic environment will continue for the foreseeable future, we believe that our current cash balances, future internally-generated funds and funds available under our credit facility will provide sufficient resources to meet our current working capital needs. The financial performance of our existing businesses and the fact that we do not need to access the capital markets (other than opportunistically), may allow us to take advantage of acquisition and/or growth opportunities that may develop.
Our ability to fund large new projects or make large acquisitions in the near term may be limited by the current conditions in the credit and equity markets which may impact our ability to issue new debt or equity financing. We may consider other arrangements to fund large growth projects and acquisitions such as private equity and joint venture arrangements.
Available Cash before Reserves
Available Cash before Reserves was as follows (in thousands):
Three Months Ended Six Months Ended
June 30, 2009 June 30, 2008 June 30, 2009 June 30, 2008
Net income attributable to Genesis
Energy, L.P. $ 4,456 $ 7,328 $ 9,746 $ 8,973
Depreciation and amortization 16,133 16,721 31,552 33,510
Cash received from direct financing
leases not included in income 929 397 1,836 544
Cash effects of sales of certain assets 52 181 457 426
Effects of available cash generated by
equity method investees not included in
income 170 643 (1,119 ) 1,066
Cash effects of stock appreciation
rights plan (3 ) (113 ) (7 ) (271 )
Non-cash tax expense 627 700 1,087 (926 )
Earnings of DG Marine in excess of
distributable cash (904 ) - (2,874 ) -
Non-cash equity-based compensation
expense 3,165 406 5,994 (348 )
Other non-cash items, net (943 ) 130 (700 ) (18 )
Maintenance capital expenditures (1,474 ) (208 ) (2,422 ) (984 )
Available Cash before Reserves $ 22,208 $ 26,185 $ 43,550 $ 41,972
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We have reconciled Available Cash before Reserves (a non-GAAP measure) to cash flow from operating activities (the GAAP measure) for the three and six months ended June 30, 2009 and 2008 in "Liquidity and Capital Resources - Non-GAAP Reconciliation" below. For the three and six months ended June 30, 2009, cash flows provided by operating activities were $15.9 million and $19.1 million, respectively. For the three and six months ended June 30, 2008, cash flows provided by operating activities were $5.3 million and $22.7 million, respectively.
Results of Operations
The contribution of each of our segments to total segment margin in the three
and six month periods ended June 30, 2009 and 2008 was as follows:
Three Months Ended June 30, Six Months Ended June 30,
2009 2008 2009 2008
(in thousands) (in thousands)
Pipeline transportation $ 10,347 $ 7,261 $ 20,572 $ 11,922
Refinery services 13,190 16,279 25,949 28,709
Supply and logistics 6,600 7,780 12,556 11,841
Industrial gases 2,869 3,686 5,892 6,885
Total segment margin $ 33,006 $ 35,006 $ 64,969 $ 59,357
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Pipeline Transportation Segment
Operating results for our pipeline transportation segment were as follows:
Three Months Ended June 30 Six Months Ended June 30
Pipeline System 2009 2008 2009 2008
Mississippi-Bbls/day 24,159 24,873 24,758 23,864
Jay - Bbls/day 9,307 11,828 9,369 13,222
Texas - Bbls/day 25,069 30,733 27,435 29,647
Free State - Mcf/day 134,570 152,191 (1) 152,830 152,191 (1)
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(1) Represents the volume per day for one month we owned the pipeline in 2008 period.
Three Months Ended June 30, Six Months Ended June 30,
2009 2008 2009 2008
(in thousands) (in thousands)
Crude oil tariffs and revenues from
direct financing leases of crude oil
pipelines $ 3,997 $ 3,979 $ 7,950 $ 8,105
Non-income payments under direct
financing leases 929 397 1,836 544
Sales of crude oil pipeline loss
allowance volumes 1,406 2,868 2,205 5,326
CO2 tariffs and revenues from direct
financing leases of CO2 pipelines 6,376 2,245 13,120 2,323
Tank rental reimbursements and other
miscellaneous revenues 140 166 318 434
Revenues from natural gas tariffs and
sales 537 1,628 1,270 2,983
Natural gas purchases (470 ) (1,568 ) (1,124 ) (2,854 )
Pipeline operating costs, excluding
non-cash charges for our equity-based
compensation plans and other non-cash
charges (2,568 ) (2,454 ) (5,003 ) (4,939 )
Segment margin $ 10,347 $ 7,261 $ 20,572 $ 11,922
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Three Months Ended June 30, 2009 Compared with Three Months Ended June 30, 2008
Pipeline segment margin for the second quarter of 2009 increased $3.1 million as compared to the second quarter of 2008. The significant component of this change is an increase in revenues from CO2 financing leases and tariffs of $4.1 million and a related increase in non-income payments from the same financing leases of $0.5 million. Reducing the impact of this increase was a decrease in revenues from sales of pipeline loss allowance volumes of $1.5 million.
Although volumes on our crude oil pipelines declined between the two periods, differences in tariff rates offset the impact of the volumetric changes. The decreased volumes were principally due to a producer connected to our Jay System shutting in production in 2009. The impact of volume decreases on the Texas System on revenues is not very significant due to the relatively low tariffs on that system. Approximately 76% of the volume on that system in the second quarter was shipped on a tariff of $0.31 per barrel.
The decline in market prices for crude oil reduced the value of our pipeline loss allowance volumes and, accordingly, our loss allowance revenues. Average crude oil market prices decreased approximately $62 per barrel between the two quarters. Pipeline loss allowance volumes combined with net volumetric measurement gains were approximately 22,000 barrels in the each period
Revenues and payments related to CO2 pipelines increased by a total of $4.6 million between the two quarters, with $3.5 million attributable to the NEJD pipeline and $1.1 million to the Free State pipeline. The second quarter of 2008 included only one month of results related to these pipelines. The average volume transported on the Free State pipeline for the second quarter of 2009 was 135 MMcf per day, with the transportation fees and the minimum payments totaling $1.6 million and $0.3 million, respectively. Denbury has exclusive use of this pipeline and variations in its CO2 tertiary oil recovery activities create the fluctuations in the volumes transported on the Free State pipeline.
Six Months Ended June 30, 2009 Compared with Six Months Ended June 30, 2008
Pipeline segment margin between the six month periods increased $8.7 million. The significant component of this change is an increase in revenues from CO2 financing leases and tariffs of $10.8 million and a related increase in non-income payments from the same financing leases of $1.3 million. The six-month period in 2008 only included results from the NEJD and Free State CO2 pipelines for a one-month period while the 2009 period included six months of results.
Partially offsetting these increases was a decrease in revenues from sales of pipeline loss allowance volumes of $3.1 million related almost exclusively to the significant decline (an average of $58 per barrel) in crude oil prices between the two periods.
Refinery Services Segment
Operating results for our refinery services segment were as follows:
Three Months Ended June 30, Six Months Ended June 30,
2009 2008 2009 2008
NaHS volumes (Dry short tons "DST") 20,908 46,655 47,137 88,397
NaOH volumes (DST) 19,763 16,758 36,663 32,663
Total 40,671 63,413 83,800 121,060
NaHS revenues $ 20,903 $ 44,384 $ 52,202 $ 78,100
NaOH revenues 11,552 9,481 27,136 17,574
Other revenues 2,139 1,862 3,550 3,965
Total revenues $ 34,594 $ 55,727 $ 82,888 $ 99,639
Segment margin $ 13,190 $ 16,279 $ 25,949 $ 28,709
Average index price for NaOH per DST (1) $ 450 $ 547 $ 640 $ 502
Raw material and processing costs as %
of segment revenues 47 % 55 % 54 % 53 %
Delivery costs as a % of segment
revenues 11 % 16 % 11 % 17 %
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(1) Source: Harriman Chemsult Ltd.
Three Months Ended June 30, 2009 Compared with Three Months Ended June 30, 2008
Refinery services segment margin for the second quarter of 2009 was $13.2 million, a decrease of $3.1 million, or 19%, from the comparative period in 2008. The significant components of this fluctuation were as follows:
· A decline in NaHS volumes of 55%. Macroeconomic conditions have negatively impacted the demand for NaHS, primarily in mining and industrial activities. As market prices and demand for copper and molybdenum improve, we would expect demand for NaHS to increase. Similarly, improvements in industrial activities including the paper and pulp and tanning industries are expected to improve NaHS demand.
· An increase in NaOH sales volumes of 18%. NaOH (or caustic soda) is a key component in the provision of our services for which we receive the by-product NaHS. We are a very large consumer of caustic soda, and our economies of scale and logistics capabilities allow us to effectively market caustic soda to third parties.
· Volatile caustic prices. Market prices for caustic soda increased throughout 2008 to a high of approximately $1,000 per DST in the fourth quarter of 2008. Since that time market prices of caustic soda have decreased to approximately $325 per DST. This volatility affects both the cost of caustic soda used to provide our services as well as the price at which we sell NaHS.
· Aggressive management of production costs. Raw material and processing costs related to providing our refinery services and supplying caustic soda as a percentage of our segment revenues declined 8% between the periods. The key component in the provision of our refinery services is caustic soda. In addition, as discussed above, we also market caustic soda. As the market price of caustic soda has fluctuated in 2008 and 2009, we have managed our acquisition costs by managing the timing of our purchases and our logistics costs. We have also taken steps to reduce processing costs.
· Lower logistics costs. The costs of delivering NaHS and caustic soda to our customers declined as a percentage of segment revenues by 5% between the two quarterly periods. Freight demand and fuel prices declined in the 2009 period as economic conditions reduced transportation needs in the market and the decline in crude oil prices reduced the cost of fuel used in transporting these products. We also adjusted the modes of transportation being used to transport NaHS and caustic soda between rail, barge and truck to improve logistics costs.
Six Months Ended June 30, 2009 Compared with Six Months Ended June 30, 2008
Segment margin for our refinery services decreased $2.8 million between the six months ended June 30, 2009 and the same period in 2008. The reasons for this decline were similar to the quarterly comparison as follows:
· NaHS volumes declined 47%, as a result of macroeconomic conditions.
· Caustic soda sales volumes increased 12% partly offsetting the impact of the decline in NaHS activity.
· Revenues only decreased 17% as market prices for caustic soda in the six months ended June 30, 2009 ranged from approximately $1,000 per DST to $325 per DST as compared to a range of approximately $400 to $600 per DST in 2008. As the majority of our NaHS sales prices fluctuate with the market price of caustic soda, revenues did not decline as significantly as volumes.
· Raw material and processing costs as a percentage of segment revenues remained relatively constant between periods.
· Delivery costs declined due to freight demand in the market and fuel prices.
Supply and Logistics Segment
Operating results from our supply and logistics segment were as follows:
Three Months Ended June 30, Six Months Ended June 30,
2009 2008 2009 2008
(in thousands) (in thousands)
Supply and logistics revenue $ 291,364 $ 569,477 $ 480,426 $ 999,595
Crude oil and products costs, excluding
unrealized gains and losses from
derivative transactions (266,631 ) (542,200 ) (431,948 ) (949,475 )
Operating and segment general and
administrative costs, excluding non-cash
charges for stock-based compensation and
other non-cash expenses (18,133 ) (19,497 ) (35,922 ) (38,279 )
Segment margin $ 6,600 $ 7,780 $ 12,556 $ 11,841
Volumes of crude oil and petroleum
products -average barrels per day 47,941 47,757 45,257 47,611
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Three Months Ended June 30, 2009 as Compared to Three Months Ended June 30, 2008
Although our segment margin declined by $1.2 million, or 15.2%, comparatively between the second quarters of 2009 and 2008, the market prices of crude oil and petroleum declined by more than $60 per barrel, or approximately 50%. That price volatility had a limited impact on our segment margin.
The key factors affecting the two quarters were as follows:
- Acquisition of inland marine transportation operations of Grifco in third quarter of 2008 (increased segment margin by $2.5 million);
- Crude oil contango market conditions (increased segment margin by $0.9 million); and
- Reduction in opportunities for us to take advantage of purchasing and blending of crude oil and products (reduced segment margin by $4.6 million).
The inland marine transportation operations of Grifco Transportation, acquired by DG Marine in the third quarter of 2008, added $2.5 million to segment margin in the second quarter of 2009. These operations provided us with an additional capability to provide transportation services of petroleum products by barge.
During the second quarter of 2009, crude oil markets were in contango (oil prices for future deliveries are higher than for current deliveries), providing an opportunity for us to purchase and store crude oil as inventory for delivery in future months. The crude oil markets were not in contango in the second quarter of 2008. During the second quarter of 2009, we held an average of approximately 226,000 barrels of crude oil in our storage tanks and hedged this volume with futures contracts on the NYMEX. We are accounting for the effects of this inventory position and related derivative contracts as a fair value hedge under financial accounting rules. The effect on segment margin for the amount excluded from effectiveness testing related to this fair value hedge was a $0.9 million gain in the second quarter of 2009.
Offsetting these improvements in segment margin was a decrease in the margins from our crude oil gathering and petroleum products marketing operations. In 2009, we experienced some reductions in volumes as a result of crude oil producers' choices to reduce operating expenses or postpone development expenditures that could have maintained or enhanced their existing production levels. As a consequence of the reductions in volumes, our segment margin from crude oil gathering declined between the quarterly periods by $1.5 million. Also, market inefficiencies developed in heavy-end refined products in the 2008 quarter as crude oil and light-end refined products experienced sharp price increases. Due to our logistics equipment, we were able to benefit from improved blending economics in 2008. In the second quarter of 2009, demand for gasoline declined significantly and refiners reduced their production rates. Our blending economics narrowed as volatility in prices declined in correlation to decreased demand. Somewhat offsetting these declines were the additional opportunities to handle volumes from the heavy end of the refined barrel due to our access to additional leased heavy products storage capacity and to barge transportation capabilities through DG Marine. However, as a result of these factors, our segment margin decreased by $3.1 million related to petroleum products and related activities.
Segment margin for the six month period in 2009 was affected by the same factors as in the second quarter, although the result was slight increase in segment margin of $0.7 million. For the six-month periods, the key factors described above had an impact as follows:
- Acquisition of inland marine transportation operations of Grifco in third quarter of 2008 (increased segment margin by $5.6 million);
- Reduction in opportunities for us to take advantage of purchasing and blending of crude oil and petroleum products (reduced segment margin by $6.3 million); and
- Crude oil contango market conditions (increased segment margin by $1.4 million).
Industrial Gases Segment
Our industrial gases segment includes the results of our CO2 sales to industrial customers and our share of the operating income of our 50% joint venture interests in T&P Syngas and Sandhill.
CO2 - Industrial Customers - We supply CO2 to industrial customers under seven long-term CO2 sales contracts. The sales contracts contain provisions for adjustments for inflation to sales prices based on the Producer Price Index, with a minimum price.
Our industrial customers treat the CO2 and transport it to their customers. The primary industrial applications of CO2 by those customers include beverage carbonation and food chilling and freezing. Based on historical data for 2004 through the first quarter of 2009, we can expect some seasonality in our sales of CO2. The dominant months for beverage carbonation and freezing food are from April to October, when warm weather increases demand for beverages and the approaching holidays increase demand for frozen foods. Our industrial customers also provide CO2 to companies engaged in tertiary oil recovery activities.
Operating Results - Operating results from our industrial gases segment were as follows:
Three Months Ended June 30, Six Months Ended June 30,
. . .
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