Genesis Energy, L.P. Reports Second Quarter 2015 Results

HOUSTON--()--Genesis Energy, L.P. (NYSE:GEL) today announced its second quarter results. Our results for the quarter ended June 30, 2015 included the following items:

  • We generated total Available Cash before Reserves of $68.8 million in the second quarter of 2015, an increase of $13.3 million, or 24%, from the second quarter of 2014. Adjusted EBITDA for the second quarter of 2015 was $87.3 million, an increase of $17.1 million, or 24%, over the prior year quarter. Available Cash before Reserves and Adjusted EBITDA are non-GAAP measures that are defined and reconciled later in this press release to the most directly comparable GAAP financial measure, net income.
  • We reported net income of $11.7 million, or $0.12 per unit, for the second quarter of 2015 compared to $21.1 million, or $0.24 per unit, for the same period in 2014.
  • On August 14, 2015, we will pay a total quarterly distribution of $68.7 million based on our quarterly declared distribution of $0.625 per unit attributable to our financial and operational results for the second quarter of 2015. Our Available Cash before Reserves provided 1.0 times coverage for this quarterly distribution. Excluding the effects from our common units issued in July 2015 to fund a portion of our acquisition of the Enterprise offshore pipeline and services business, Available Cash before Reserves would have provided 1.1 times coverage for our quarterly distribution.
  • We increased our distribution to all unitholders for the fortieth consecutive quarter, thirty-five of which have been 10% or greater over the prior year’s quarter and none less than 8.7%.

Grant Sims, CEO of Genesis Energy, said, "These are exciting times at Genesis on a number of levels. In consideration of the closing of our recently announced acquisition of Enterprise's offshore pipeline and services business, our delivery of another solid quarter generating a record amount of Available Cash before Reserves of $68.8 million, and the continued realization of the financial benefits from our various organic growth initiatives, we are excited about the results achieved to date and we believe we have positioned ourselves well for continued growth in the future.

"Last Friday, we closed our acquisition of Enterprise's offshore pipeline and services business. These offshore assets substantially enlarge our portfolio of strategic infrastructure in the Gulf of Mexico, allowing us to further enhance our support of the world-class oil developments of integrated and large independent energy companies operating in the Deepwater of the Gulf of Mexico. We believe the acquisition will be immediately accretive to our cash available for distribution per common unit and will improve our credit metrics over time, which should accelerate an increase in our credit ratings in the future. In addition, we look forward to welcoming to Genesis the world-class team that has been assembled by Enterprise to operate and manage these acquired assets. Since acquiring ownership interests in each of CHOPS, Poseidon and SEKCO, we have been impressed with this group and look forward to a seamless transition for them and the customers we serve.

"To finance that acquisition, in July, we sold 10,350,000 common units in a public offering that generated net proceeds of approximately $437 million and $750 million aggregate principal amount of 6.75% senior unsecured notes due 2022 that generated net proceeds of approximately $729 million. We funded the remainder of the purchase price of the offshore acquisition under our senior secured credit facility, which we recently amended to provide for a total $1.5 billion (or an increase of $500 million) of committed borrowing capacity to allow for further funding of working capital requirements and general partnership needs.

"With regards to our other growth initiatives, our second quarter results reflect the continuing contributions from our newest assets, our existing 50% interest in the SEKCO pipeline and our ownership of the M/T American Phoenix. Volume flow in the SEKCO pipeline continued to increase during the quarter, though this throughput only had a direct financial benefit to Poseidon until minimum volumes on SEKCO were achieved and exceeded. We anticipate the positive financial effect of these volumes on the SEKCO pipeline to impact our results in the second half of 2015. The M/T American Phoenix, which we acquired in November 2014, is now fully integrated into our offshore marine fleet and we are pleased with the results achieved to date from the operations of this vessel. When coupled with the additional new-build inland barges we have added to our marine fleet, we anticipate continued favorable comparisons of operating results from our marine transportation segment in the second half of 2015.

"We continue to progress on our refinery-centric projects in Louisiana, stretching from Port Hudson, through Baton Rouge, and south to Raceland, all designed to provide services for multiple refining complexes in Louisiana. Although a small portion of that infrastructure is in operation, we would not expect to see meaningful volumes until those facilities are completed in the second half of 2015.

"Our business strategies that we previously outlined, coupled with our complementary acquisitions and growth projects that will be ramping up throughout 2015 and into 2016, should position us well to continue to achieve our goals of delivering low double-digit growth in distributions, an increasing coverage ratio and an investment grade leverage ratio, all without ever losing our cultural focus on providing safe, responsible and reliable services."

Financial Results

Available Cash before Reserves was $68.8 million in the second quarter of 2015 (or "2015 Quarter"). The primary components impacting Available Cash before Reserves are Segment Margin, corporate general and administrative expenses (excluding certain non-cash charges), interest expense and maintenance capital utilized.

Variances from the second quarter of 2014 (or "2014 Quarter") in these components are explained as follows:

Segment Margin

Segment Margin (a non-GAAP measure) is defined below and reconciled later in this press release to income from continuing operations.

Segment results for the second quarters of 2015 and 2014 were as follows:

      Three Months Ended
June 30,
2015     2014
(in thousands)
Onshore pipeline transportation $ 14,363 $ 16,531
Offshore pipeline transportation 25,100 11,435
Refinery services 20,221 21,627
Marine transportation 27,225 18,978
Supply and logistics 11,658 14,110
Total Segment Margin (1) $ 98,567 $ 82,681
 
(1) We define Segment Margin, which is a "non-GAAP" measure because it is not contemplated by or referenced in accounting principles generally accepted in the U.S. (GAAP) as revenues less product costs, operating expenses (excluding non-cash charges, such as depreciation and amortization), and segment general and administrative expenses (excluding corporate general and administrative expenses), plus our equity in distributable cash generated by our equity investees. In addition, our Segment Margin definition excludes the non-cash effects of our stock appreciation rights plan and unrealized gains and losses on derivative transactions not designated as hedges for accounting purposes. Our Segment Margin definition includes the non-income portion of payments received under direct financing leases. A reconciliation of Segment Margin to net income is presented for periods presented in the table at the end of this release.
 

Onshore pipeline transportation Segment Margin decreased $2.2 million, or 13%, between the second quarter periods. That decrease was primarily the result of a decrease in revenue generated from the sale of pipeline loss allowance volumes, principally related to the decrease in the market price of crude oil between the respective periods.

Offshore pipeline transportation Segment Margin increased $13.7 million, or 120%, between the second quarter periods. That increase was primarily the result of the financial contribution of the minimum throughput requirements on our SEKCO pipeline, which was completed in July 2014. Upon completion of the SEKCO pipeline, we began earning certain minimum fees, with actual crude deliveries commencing in January 2015. While throughput has commenced on the SEKCO pipeline, throughput volumes did not exceed a level at which throughput revenues would exceed the monthly minimum payments until the midpoint of the quarter. Until that point, all such throughput benefited our Poseidon pipeline but not add additional contribution from SEKCO.

Refinery services Segment Margin decreased $1.4 million, or 7%, between the second quarter periods. That decrease primarily resulted from lower total volumes than the 2014 Quarter attributable to the bankruptcy of one mining customer, reduced sales to a major customer as they work through an atypical ore seam as a result of a landslide, and certain sales foregone as a result of supply interruptions at one of our major processing facilities. We were able to realize benefits from our favorable management of the purchasing (including economies of scale) and utilization of caustic soda in our (and our customers') operations and our logistics management capabilities, which somewhat offset the effects on Segment Margin of decreased NaHS sales volumes.

Marine transportation Segment Margin increased $8.2 million or 43%, between the second quarter periods. This increase is primarily due to a full quarter of operating results from the M/T American Phoenix product tanker (included as part of our offshore marine fleet), which we acquired in November 2014, two additional barges added to our inland fleet, and higher realized contract rates on several of our oceangoing barges.

Supply and logistics Segment Margin decreased by $2.5 million, or 17%, between the second quarter periods, primarily due to lower crude oil volumes unloaded at our Natchez Terminal and our Port Hudson terminal relative to the 2014 quarter, as we prepare for the increased utilization of different components of our Baton Rouge facilities.

Other Components of Available Cash

Corporate general and administrative expenses included in the calculation of Available Cash before Reserves decreased by $1.3 million primarily due to decreases in equity-based compensation plan expense as a result of a smaller increase in the market price of our common units in the 2015 Quarter as compared to 2014.

Interest costs for the 2015 Quarter increased by $3.8 million from the 2014 Quarter primarily due to an increase in our average outstanding indebtedness from recently acquired and constructed assets. Interest costs, on an ongoing basis, are net of capitalized interest costs attributable to our growth capital expenditures.

Several adjustments to net income are required to calculate Available Cash before Reserves.

The calculation of Available Cash before Reserves for the quarters ended June 30, 2015 and 2014 was as follows:

     
Three Months Ended
June 30,
2015     2014
(in thousands)
Net income $ 11,665 $ 21,148
Depreciation and amortization 28,205 20,491
Cash received from direct financing leases not included in income 1,405 1,371
Cash effects of sales of certain assets 460 61
Effects of distributable cash generated by equity method investees not included in income 7,038 7,808
Cash effects of legacy stock appreciation rights plan (91 ) (127 )
Non-cash legacy stock appreciation rights plan expense (468 ) 322
Expenses related to acquiring or constructing growth capital assets 1,992 418
Unrealized gain (loss) on derivative transactions excluding fair value hedges, net of changes in inventory value 290 2,724
Maintenance capital utilized (1) (746 ) (178 )
Non-cash tax expense 642 512
Loss on debt extinguishment 19,225
Other items, net (831 ) 942  
Available Cash before Reserves $ 68,786   $ 55,492  
 
(1) Maintenance capital expenditures in the 2015 Quarter and 2014 Quarter were $13.6 million and $2.0 million, respectively.
 

Other Components of Net Income

In the 2015 Quarter, we recorded net income of $11.7 million compared to $21.1 million in the 2014 Quarter.

In addition to the factors impacting Available Cash before Reserves, depreciation and amortization expense increased $7.7 million between the quarterly periods primarily as a result of the effect of placing recently acquired and constructed assets in service during calendar 2014 and the early part of 2015. Our derivative positions (excluding the effects of changes in inventory values) resulted in a $0.2 million non-cash unrealized gain in the 2015 Quarter compared to a $2.7 million non-cash unrealized loss in the 2014 Quarter. In addition, we recognized a $19.2 million loss on debt extinguishment during the 2015 Quarter, relating to the early retirement of our $350 million 7.875% senior unsecured notes due 2018. A portion of these notes were tendered during May 2015, with the remainder being redeemed in June 2015.

Distributions

We have increased our quarterly distribution rate for the fortieth consecutive quarter. Thirty-five of those quarterly increases have been 10% or greater as compared to the same quarter in the preceding year. Over the last four quarters, we have increased the distribution rate on our common units by a total of $0.06 per unit, or 10.6%. Distributions attributable to each quarter of 2015 and 2014, are as follows:

         
Per Unit
Distribution For Date Paid Amount
2015
2nd Quarter August 14, 2015 $ 0.6250
1st Quarter May 15, 2015 $ 0.6100
2014
4th Quarter February 13, 2015 $ 0.5950
3rd Quarter November 14, 2014 $ 0.5800
2nd Quarter August 14, 2014 $ 0.5650
1st Quarter May 15, 2014 $ 0.5500
 

Earnings Conference Call

We will broadcast our Earnings Conference Call on Wednesday, July 29, 2015, at 9:00 a.m. Central time (10:00 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 onshore and offshore pipeline transportation, refinery services, marine transportation and supply and logistics. 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     Six Months Ended
June 30, June 30,
2015     2014 2015     2014
REVENUES $ 656,327 $ 1,015,049 $ 1,183,184 $ 2,034,768
 
COSTS AND EXPENSES:
Costs of sales 583,910 948,605 1,045,602 1,901,632
General and administrative expenses 14,832 14,696 28,053 26,706
Depreciation and amortization 28,205   20,491   55,330   39,771  
OPERATING INCOME 29,380 31,257 54,199 66,659
Equity in earnings of equity investees 18,661 4,922 34,180 12,740
Interest expense (17,905 ) (14,069 ) (37,120 ) (26,873 )
Other income/(expense), net (17,529 )   (17,529 )  
INCOME BEFORE INCOME TAXES 12,607 22,110 33,730 52,526
Income tax expense (942 ) (962 ) (1,850 ) (1,603 )
NET INCOME $ 11,665   $ 21,148   $ 31,880   $ 50,923  
NET INCOME PER COMMON UNIT:        
Basic and Diluted $ 0.12   $ 0.24   $ 0.33   $ 0.57  
WEIGHTED AVERAGE OUTSTANDING COMMON UNITS:
Basic and Diluted 99,174 88,691 97,113 88,691
 
 
GENESIS ENERGY, L.P.
OPERATING DATA - UNAUDITED
 
      Three Months Ended     Six Months Ended
June 30, June 30,
2015     2014 2015     2014
Onshore Pipeline Transportation Segment
Crude oil pipelines (barrels/day):
Texas 68,407 60,662 71,903 54,769
Jay 18,082 24,337 16,784 26,085
Mississippi 16,824 15,121 15,882 15,150
Louisiana (1) 10,178   22,435   19,975   13,574  
Onshore crude oil pipelines total 113,491   122,555   124,544   109,578  
CO2 pipeline (Mcf/day)
Free State 167,451   178,500   178,915   185,010  
 
Offshore Pipeline Transportation Segment
Crude oil pipelines (barrels/day):
CHOPS (2) 166,735 169,371 169,382 180,288
Poseidon (2) 274,517 201,190 251,913 206,074
Odyssey (2) 51,165 40,492 49,872 42,735
GOPL 18,709 4,197 12,493 5,814
SEKCO 70,422     46,265    
Offshore crude oil pipelines total 581,548   415,250   529,925   434,911  
 
Refinery Services Segment
NaHS (dry short tons sold) 32,503 37,607 64,933 78,509
NaOH (caustic soda dry short tons sold) 22,130 24,066 43,316 48,099
 
Marine Transportation Segment
Inland Fleet Utilization Percentage (3) 99.4 % 97.4 % 97.8 % 98.0 %
Offshore Fleet Utilization Percentage (3) 99.7 % 99.8 % 99.8 % 99.9 %
 
Supply and Logistics Segment
Crude oil and petroleum products sales (barrels/day) 100,054 96,443 97,148 98,631
Rail load/unload volumes (barrels/day) (4) 18,709 28,356 17,067 27,488
 
(1) Represents volumes per day from the period the pipeline began operations in the first quarter of 2014.
(2) Volumes for our equity method investees are presented on a 100% basis.
(3) Utilization rates are based on a 365 day year, as adjusted for planned downtime and drydocking.
(4) Indicates total barrels for which fees were charged for either loading or unloading at all rail facilities.
 
 
GENESIS ENERGY, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED

(in thousands, except number of units)

 
      June 30,     December 31,
2015 2014
ASSETS
Cash and cash equivalents $ 8,719 $ 9,462
Accounts receivable - trade, net 273,567 271,529
Inventories 54,566 46,829
Other current assets 22,918 27,546
Total current assets 359,770 355,366
Fixed assets, net 1,815,770 1,631,001
Investment in direct financing leases, net 142,919 145,959
Equity investees 614,409 628,780
Intangible assets, net 75,914 82,931
Goodwill 325,046 325,046
Other assets, net 70,453 61,291
Total assets $ 3,404,281 $ 3,230,374
LIABILITIES AND PARTNERS’ CAPITAL
Accounts payable - trade $ 235,758 $ 245,405
Accrued liabilities 106,360 117,740
Total current liabilities 342,118 363,145
Senior secured credit facility 585,200 550,400
Senior unsecured notes 1,100,000 1,050,639
Deferred tax liabilities 20,005 18,754
Other long-term liabilities 15,469 18,233
Partners' capital:
Common unitholders 1,341,489 1,229,203
Total liabilities and partners' capital $ 3,404,281 $ 3,230,374
 
Units Data:
Total common units outstanding 99,629,218 95,029,218
 
 
GENESIS ENERGY, L.P.
RECONCILIATION OF SEGMENT MARGIN TO NET INCOME - UNAUDITED

(in thousands)

 
      Three Months Ended
June 30,
2015     2014
Segment Margin (1) $ 98,567 $ 82,681
Corporate general and administrative expenses (13,953 ) (13,789 )
Non-cash items included in general and administrative costs 763 947
Cash expenditures not included in Adjusted EBITDA 1,992 418
Cash expenditures not included in net income (91 ) (127 )
Adjusted EBITDA 87,278 70,130
Depreciation and amortization (28,205 ) (20,491 )
Interest expense, net (17,905 ) (14,069 )
Cash expenditures not included in Adjusted EBITDA or net income (1,901 ) (291 )
Adjustment to exclude distributable cash generated by equity investees not included in income and include equity in investees net income (7,038 ) (7,808 )
Non-cash legacy stock appreciation rights plan expense 468 (322 )
Loss on debt extinguishment (19,225 )
Other non-cash items (865 ) (5,039 )
Income tax expense (942 ) (962 )
Net income $ 11,665   $ 21,148  
 
(1) Our reconciliation of Segment Margin to net income reflects that Segment Margin (as defined above) excludes corporate general and administrative expenses, depreciation and amortization, interest expense, certain non-cash items, the most significant of which are the non-cash effects of our stock appreciation rights plan and unrealized gains and losses on derivative transactions not designated as hedges for accounting purposes. Items in Segment Margin not included in net income are distributable cash generated by equity investees in excess of equity in earnings (or losses) and cash payments from direct financing leases in excess of earnings.
 
 
GENESIS ENERGY, L.P.
ADJUSTED DEBT-TO-PRO FORMA EBITDA RATIO - UNAUDITED

(in thousands)

 
      June 30, 2015
Senior secured credit facility $ 585,200
Senior unsecured notes 1,100,000
Less: Outstanding inventory financing sublimit borrowings (43,400 )
Less: Cash and cash equivalents (8,719 )
Adjusted Debt (1) $ 1,633,081  
 
Pro Forma LTM
June 30, 2015
LTM Adjusted EBITDA (as reported) (2) $ 333,961
Acquisitions and material projects EBITDA adjustment (3) 22,516  
Pro Forma EBITDA $ 356,477  
 
Adjusted Debt-to-Pro Forma EBITDA 4.58x
 
(1) We define Adjusted Debt as the amounts outstanding under our senior secured credit facility and senior unsecured notes (excluding 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, was $29.1 million for the third quarter of 2014, $26.2 million for the fourth quarter of 2014, $20.2 million for the first quarter of 2015 and $11.7 million for the second quarter of 2015. 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 credit agreement 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 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, 2014 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.

This press release and the accompanying schedules include non-generally accepted accounting principle (non-GAAP) financial measures of available cash and Adjusted EBITDA. 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 and Adjusted EBITDA measures are just two 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 specific items, the most significant of which are the addition of certain non-cash expenses (such as depreciation and amortization), 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), the elimination of gains and losses on asset sales (except those from the sale of surplus assets), unrealized gains and losses on derivative transactions not designated as hedges for accounting purposes, the elimination of expenses related to acquiring or constructing assets that provide new sources of cash flows and the subtraction of maintenance capital utilized, which is described in detail below.

Recent Change in Circumstances and Disclosure Format

We have implemented a modified format relating to maintenance capital requirements because of our expectation that our future maintenance capital expenditures may change 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 new 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.

Historically, substantially all of our maintenance capital expenditures have been (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.

Prospectively, we believe 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 future 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 new 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 have not historically used 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. Further, we do not have the actual comparable calculations for our prior periods, and we may not have the information necessary to make such calculations for such periods. And, even if we could locate and/or re-create the information necessary to make such calculations, we believe it would be unduly burdensome to do so in comparison to the benefits derived.

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, income taxes, depreciation and amortization plus other specific items, the most significant of which are the addition of cash received from direct financing leases not included in income, non-cash equity-based compensation expense, expenses related to acquiring assets that provide new sources of cash flow and the effects of available cash generated by equity method investees not included in income. We also exclude the effect on net income or loss of unrealized gains or losses on derivative transactions.

Contacts

Genesis Energy, L.P.
Bob Deere, 713-860-2516
Chief Financial Officer

Contacts

Genesis Energy, L.P.
Bob Deere, 713-860-2516
Chief Financial Officer