Genesis Energy(GEL) - 2018 Q4 - Annual Report

Part I Business Genesis Energy, L.P. is a master limited partnership in midstream energy and a leading global producer of natural soda ash, operating across four segments - Genesis Energy provides integrated midstream services for crude oil and natural gas, and is a leading global producer of natural soda ash[27] - The company acquired its Alkali Business, a trona mining and soda ash production operation, for approximately $1.325 billion in cash on September 1, 2017[29] - Operations are managed through four reportable segments: offshore pipeline transportation, sodium minerals and sulfur services, onshore facilities and transportation, and marine transportation[33] - In October 2018, the company divested its Powder River Basin midstream assets, receiving approximately $300 million in net proceeds used for debt reduction[31][59] Description of Segments and Related Assets The company's assets are diversified across four key segments, including offshore and onshore pipelines, sodium minerals and sulfur services, and marine transportation Offshore Crude Oil Pipeline Assets (Operating) | Pipeline | System Miles | Design Capacity (Bbls/day) | Interest Owned | 2018 Throughput (Bbls/day, 100% basis) | | :--- | :--- | :--- | :--- | :--- | | Main Lines | | | | | | CHOPS | 380 | 500,000 | 100% | 202,121 | | Poseidon | 358 | 350,000 | 64% | 234,960 | | Odyssey | 120 | 200,000 | 29% | 115,239 | | Eugene Island & Other | 184 | 39,000 | 29% | 10,147 | | Total Main Lines | 1,042 | 1,089,000 | | 562,467 | Offshore Natural Gas Pipeline Assets (Operating) | Pipeline | System Miles | Design Capacity (MMcf/day) | Interest Owned | | :--- | :--- | :--- | :--- | | Independence Trail | 135 | 1,000 | 100% | | High Island Offshore System | 287 | 500 | 100% | | Anaconda Gathering System | 183 | 300 | 100% | | Manta Ray Offshore Gathering | 237 | 800 | 25.7% | | Nautilus System | 101 | 600 | 25.7% | | Total | 970 | 3,313 | | - The Alkali Business holds leases for approximately 88,000 acres in Wyoming, with an estimated 903 million metric tonnes of proved and probable trona ore reserves, providing over 100 years of reserve life[37] - The sulfur removal business serves ten refining operations with an average remaining contract term of four and a half years, marketing NaHS as the sole consideration[41][94] Onshore Crude Oil Pipeline Systems | System | Product | Design Capacity (Bbls/day) | 2018 Throughput (Bbls/day) | System Miles | | :--- | :--- | :--- | :--- | :--- | | Texas System | Crude Oil | 60,000 - 275,000 | 33,303 | 47 | | Jay System | Crude Oil | 150,000 | 14,036 | 135 | | Mississippi System | Crude Oil | 45,000 | 6,359 | 220 | | Louisiana System | Crude Oil / Intermediates | 350,000 | 159,754 | 51 | Marine Transportation Fleet | Fleet Type | Number of Barges | Number of Push/Tug Boats | Aggregate Capacity (Bbls) | | :--- | :--- | :--- | :--- | | Inland | 82 | 33 | 2,285,000 | | Offshore | 9 | 9 | 884,000 | | American Phoenix (Tanker) | 1 | - | 330,000 | Regulation The company's operations are subject to extensive federal and state regulations covering pipeline rates, maritime trade, mining, and environmental compliance - Interstate common carrier pipeline operations are regulated by FERC under the Interstate Commerce Act, requiring "just and reasonable" and non-discriminatory rates[134] - Marine transportation is restricted by the Jones Act, mandating U.S.-built, registered, owned, and manned vessels for U.S. coastwise trade[143] - Wyoming mining operations require permits from the WDEQ, imposing detailed reclamation obligations, with a reclamation bond of approximately $80 million as of December 31, 2018[151] - The company is subject to significant environmental regulations, including CERCLA, RCRA, the Clean Water Act, and the Clean Air Act[157][158][160][165] - Pipeline operations are subject to safety regulations by PHMSA, requiring integrity management programs for pipelines in High Consequence Areas[176][177] Reporting of Ore Reserve and Mineral Resources The company reports 902.7 million short tons of proven and probable trona ore reserves for its Alkali Business, sufficient for over 100 years of production Estimated In-Place Trona Ore Reserve (as of Dec 31, 2018) | Extraction Method | Reserve Category | Million Short Tons (dry weight) | Grade (% Trona) | | :--- | :--- | :--- | :--- | | Dry Mining | Proven | 298.3 | 89.7% | | | Probable | 158.4 | 89.1% | | | Total | 456.7 | 89.5% | | Solution Mining | Probable | 446.0 | 86.3% | | | Total | 446.0 | 86.3% | | Total Alkali | Total Reserves | 902.7 | 87.9% | - Total proven and probable trona ore reserves of 902.7 million short tons are estimated to sustain production for over 100 years at current rates[206] - Mineral rights for trona operations are secured through leases covering 88,342 acres from the Federal government, the State of Wyoming, and Anadarko Petroleum[198] Risk Factors The company faces significant risks from high indebtedness, commodity volume dependence, environmental regulations, and potential adverse partnership tax treatment - As of December 31, 2018, the company had approximately $1.0 billion in senior secured and $2.5 billion in senior unsecured indebtedness, with restrictive covenants[209] - Profitability depends on maintaining or increasing commodity volumes (crude oil, natural gas, soda ash, NaHS), influenced by external factors like producer capital expenditures and global demand[227][228] - The company faces risks from climate change legislation and regulations, potentially decreasing demand for transported products and increasing operating costs through GHG emission controls[253][258] - The company's partnership tax treatment requires at least 90% "qualifying income"; failure could result in corporate taxation, substantially reducing cash for distributions[292][293][294] - The Davison family collectively owns 10.3% of Class A and 77.0% of Class B Common Units, enabling significant influence, including electing a majority of the board, potentially leading to conflicts of interest[280] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[312] Properties Information regarding the company's properties is detailed in Item 1, "Business" - Details on the company's properties are provided in the 'Business' section (Item 1) of the report[313] Legal Proceedings The company is involved in various incidental claims and lawsuits, but management does not expect a material adverse effect on its financial condition - The company states that pending legal proceedings are not expected to have a material adverse effect on its financial condition[314] Mine Safety Disclosures Information concerning mine safety and other regulatory actions at the Green River, Wyoming mine is provided in Exhibit 95 of the Form 10-K - Mine safety disclosures for the Green River, Wyoming mine are included in Exhibit 95 to this Form 10-K[315] Part II Market for Registrant's Common Equity, Related Unitholder Matters and Issuer Purchases of Equity Securities Genesis Energy, L.P.'s Class A common units are traded on the NYSE under "GEL," with 122.5 million units outstanding as of February 28, 2019 - The company's Class A common units are listed on the NYSE under the symbol "GEL"[318] - As of February 28, 2019, there were 122,539,221 Class A common units and 39,997 Class B Common Units outstanding[5] Selected Financial Data This section provides a five-year summary of selected financial and operational data, highlighting a net loss of $6.1 million in 2018 compared to net income in 2017 Selected Financial Data (2018 vs. 2017) | Metric (in thousands, except per unit data) | 2018 | 2017 | | :--- | :--- | :--- | | Total revenues | $2,912,770 | $2,028,377 | | Net income (loss) attributable to Genesis Energy, L.P. | $(6,075) | $82,647 | | Net income (loss) per Common Unit (Basic and Diluted) | $(0.62) | $0.50 | | Cash distributions declared per Common Unit | $2.1000 | $2.6525 | | Total assets (at end of period) | $6,479,071 | $7,137,481 | | Long-term liabilities (at end of period) | $3,704,237 | $3,966,602 | Selected Operational Volumes (2018 vs. 2017) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Offshore crude oil pipeline (barrels per day) | 562,467 | 591,667 | | Onshore crude oil pipeline (barrels per day) | 247,409 | 212,768 | | Soda Ash volumes (short tons sold) | 3,669,206 | 1,274,421 | | NaHS sales (DST) | 150,671 | 133,404 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2018, Genesis Energy reported a net loss of $6.1 million, primarily due to impairment and higher costs, despite a 20% increase in Segment Margin driven by the Alkali Business - Reported a Net Loss Attributable to Genesis Energy, L.P. of $6.1 million in 2018, down from a Net Income of $82.6 million in 2017, mainly due to a $126.3 million impairment expense and increased depreciation and interest costs[331] - Segment Margin increased by $118.2 million (20%) to $712.8 million in 2018, primarily due to a full twelve months of contribution from the Alkali Business[335] - Available Cash before Reserves (a non-GAAP measure) increased by $77.1 million to $466.1 million in 2018[334] - As of December 31, 2018, the company had $728.7 million of borrowing capacity available under its $1.7 billion senior secured revolving credit facility[412] Results of Operations Total Segment Margin increased by 20% in 2018, driven by the Sodium Minerals and Sulfur Services and Onshore Facilities segments, partially offset by decreases in Offshore Pipeline and Marine Transportation Segment Margin Contribution (2018 vs. 2017) | Segment (in thousands) | 2018 | 2017 | Change (%) | | :--- | :--- | :--- | :--- | | Offshore pipeline transportation | $285,014 | $317,540 | (10.2%) | | Sodium minerals and sulfur services | $260,488 | $130,333 | +100.0% | | Onshore facilities and transportation | $119,918 | $96,376 | +24.4% | | Marine transportation | $47,338 | $50,294 | (5.9%) | | Total Segment Margin | $712,758 | $594,543 | +19.9% | - Offshore Pipeline Transportation Segment Margin decreased by $32.5 million (10%) in 2018 due to lower volumes from scheduled and unscheduled downtime at several connected production facilities[356] - Sodium Minerals and Sulfur Services Segment Margin increased by $130.2 million (100%) in 2018, principally due to including a full twelve months of contributions from the Alkali Business[359] - Onshore Facilities and Transportation Segment Margin increased by $23.5 million (24%) in 2018, driven by increased volumes from recently completed infrastructure in the Baton Rouge corridor[366] - Marine Transportation Segment Margin decreased by $3.0 million (6%) in 2018, primarily due to offshore barges operating on short-term spot contracts at lower rates and increased dry-docking costs[369] Liquidity and Capital Resources As of December 31, 2018, Genesis maintained strong liquidity with $728.7 million available under its credit facility and increased net cash from operations, while significantly reducing capital expenditures - At December 31, 2018, total long-term debt was $3.4 billion, consisting of $1.0 billion under the credit facility and $2.5 billion in senior unsecured notes[416] - Net cash provided by operating activities increased to $390.0 million in 2018 from $323.6 million in 2017, primarily due to a $118.2 million increase in segment margin[432] Capital Expenditures (2018 vs. 2017) | Expenditure Type (in thousands) | 2018 | 2017 | | :--- | :--- | :--- | | Maintenance capital expenditures | $81,299 | $62,044 | | Growth capital expenditures | $82,870 | $194,329 | | Total capital expenditures for fixed assets | $164,169 | $256,373 | | Business combinations capital expenditures | $0 | $1,325,000 | | Total Capital Expenditures | $167,187 | $1,581,373 | - The quarterly distribution per common unit was increased sequentially throughout 2018, from $0.52 for Q1 to $0.55 for Q4[443] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from commodity price volatility and floating interest rates, which it mitigates using derivative instruments - The company utilizes NYMEX commodity-based futures and option contracts to hedge its exposure to market price fluctuations for crude oil and petroleum products[477] - The company is exposed to floating interest rates on its credit facility, with $1.0 billion of debt outstanding as of December 31, 2018; a 10% change in LIBOR would have impacted net income by approximately $5.9 million for 2018[483] Open Commodity Derivative Contracts (as of Dec 31, 2018) | Contract Type | Unit | Contract Volumes (in 000's) | Weighted Avg. Price | | :--- | :--- | :--- | :--- | | Sell (Short) Contracts | | | | | Crude Oil | Bbl | 349 | $51.48/Bbl | | Natural Gas Swaps | MMBTU | 502 | $0.62/MMBTU | | 6 Fuel Oil | Bbl | 382 | $51.41/Bbl | | Buy (Long) Contracts | | | | | Crude Oil | Bbl | 234 | $49.37/Bbl | | Natural Gas | MMBTU | 590 | $2.92/MMBTU | Financial Statements and Supplementary Data This section indicates that the required financial statements and supplementary data are included in the report - The required financial statements and supplementary data are included in the report as set forth in the "Index to Consolidated Financial Statements"[485] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018, with an unqualified attestation report from Ernst & Young LLP - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[486] - Management assessed the effectiveness of internal control over financial reporting as of December 31, 2018, and concluded it was effective based on the COSO 2013 framework[490] - Ernst & Young LLP issued an unqualified attestation report on the effectiveness of the Partnership's internal control over financial reporting[492] Part III Directors, Executive Officers and Corporate Governance Genesis Energy, L.P. is managed by its general partner, with a seven-member board elected by Class B Common Unitholders, where the Davison family holds significant influence - The board of directors of the general partner is elected by holders of Class B Common Units[496] - Members of the Davison family collectively own 77.0% of the Class B Common Units, giving them significant influence and the ability to elect at least a majority of the board[497] - Grant E. Sims serves as Chairman of the Board and Chief Executive Officer, while Kenneth M. Jastrow II serves as the lead independent director[501][502] - The board has determined that four of its seven directors are independent under NYSE rules: Sharilyn S. Gasaway, Kenneth M. Jastrow II, Conrad P. Albert, and Jack T. Taylor[499] Executive Compensation The executive compensation program aligns interests with unitholder value through base salary, annual bonuses, and cash-based long-term incentives tied to performance metrics, with CEO Grant E. Sims' total compensation at $843,201 in 2018 2018 Summary Compensation for Named Executive Officers (NEOs) | Name & Principal Position | Salary ($) | Bonus ($) | All Other Compensation ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Grant E. Sims, CEO | 650,000 | — | 193,201 | 843,201 | | Robert V. Deere, CFO | 450,000 | — | 137,864 | 587,864 | | Edward T. Flynn, EVP | 500,000 | 930,958 | 19,976 | 1,450,934 | | Richard R. Alexander, VP | 325,000 | 260,000 | 136,308 | 721,308 | | Chad A. Landry, VP | 325,000 | 178,750 | 46,106 | 549,856 | - In 2018, the G&C Committee, with input from independent consultant BDO, used a peer group of 17 energy companies to assess competitive compensation levels[538][540] - Following a distribution reset in 2017, the long-term incentive plan shifted in 2018 to cash-based awards, 80% performance-based, tied to metrics including Available Cash before Reserves, leverage ratios, and safety[557][559] - The CEO to median employee pay ratio for 2018 was 7:1, with the CEO's total compensation at $843,201 and the median employee's at $118,176[601] Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters This section details the beneficial ownership of the company's units as of February 28, 2019, highlighting significant holdings by institutional investors and the Davison family Beneficial Ownership of Common Units (as of Feb 28, 2019) | Name | Class A Common Units (%) | Class B Common Units (%) | | :--- | :--- | :--- | | Directors & Officers | | | | James E. Davison, Jr. | 4.3% | 34.1% | | James E. Davison | 2.8% | 23.6% | | Grant E. Sims (CEO) | 2.4% | 17.7% | | All directors & exec officers (as a group) | 10.8% | 80.8% | | 5%+ Owners | | | | OppenheimerFunds, Inc. | 13.5% | — | | Chickasaw Capital Management, LLC | 8.9% | — | | Alerian MLP ETF | 8.9% | — | | Clearbridge Investments, LLC | 8.0% | — | - Two entities, Rodeo Finance Aggregator LLC and GSO Rodeo Holdings LP, each beneficially own 12,486,299 Class A Convertible Preferred Units[606] Certain Relationships and Related Transactions, and Director Independence The company engages in certain related-party transactions, including aircraft use and employment of family members, and has determined four of its directors are independent - The company paid its CEO, Grant E. Sims, a total of $0.7 million in 2018 for the business use of his privately-owned aircraft[608] - Family members of CEO Grant E. Sims and director James E. Davison, Sr. are employed by the company, receiving aggregate W-2 compensation of less than $1.1 million in 2018[609] - The board of directors has determined that four of its members (Ms. Gasaway and Messrs. Jastrow, Albert, and Taylor) are independent under NYSE rules[611] Principal Accountant Fees and Services This section details the fees paid to the company's independent registered public accounting firms, totaling $3.0 million in 2018 and $4.2 million in 2017, all pre-approved by the audit committee Accountant Fees (in thousands) | Fee Category | 2018 | 2017 | | :--- | :--- | :--- | | Audit Fees | $2,977 | $2,867 | | Tax Fees | $0 | $1,308 | | All Other Fees | $8 | $4 | | Total | $2,985 | $4,179 | - All services provided by the independent auditors in 2018 and 2017 were pre-approved by the audit committee[616] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K, including key agreements and compensation plans - This section provides an index of all financial statements, schedules, and exhibits filed with the Form 10-K[620] Form 10-K Summary This item is not applicable to the filing - The Form 10-K Summary is not applicable[629]