Genesis Energy LP (GEL) 2012 Q2 法說會逐字稿

Welcome to the 2012 Second Quarter Conference Call for Genesis Energy. Genesis has three business segments. The Pipeline Transportation Division is engaged in the pipeline transportation of crude oil and carbon dioxide. The Refinery Services Division primarily processes sour gas streams to remove sulfur at refining operations. The Supply and Logistics Division is engaged in the transportation, blending, storage and supply of energy products including crude oil, refined products and CO2. Genesis operations are primarily located in Texas, Louisiana, Arkansas, Mississippi, Alabama, Florida and the Gulf of Mexico.

During this conference call management may be making forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The law provides safe harbor protection to encourage companies to provide forward-looking information. Genesis intends to avail itself of those safe harbor provisions and directs you to its most recently filed and future filings with Securities Exchange Commission.

We also encourage you to visit our website at genesisenergy.com where a copy of the press release we issued today is located. The press release also presents a reconciliation of non-GAAP financial measures to the most comparable GAAP financial measures.

At this time I would like to introduce Grant Sims, CEO of Genesis Energy LP. Mr. Sims will be joined by Steve Nathanson, President and COO; Bob Deere, Chief Financial Officer and Karen Pape, Chief Accounting Officer.

Thank you and welcome to everyone. This quarter we were pleased to report yet another record of available cash of approximately $43.2 million, a 9% increase over last quarter and approximately 35% more than the year ago period. Our focus on identifying the right strategic opportunities, continuing to integrate those opportunities, building a business instead of a collection of assets and capitalizing on increasing demand for our services and capabilities has been the foundation for this growth in available cash.

While we'll go into a little more detail later, volumes handled across all of our segments with the general exception of one of our pipelines, which continue to see reduced throughput as a results of extended maintenance at two major production facilities dedicated to it. We anticipate such maintenance to end this quarter and return to throughput levels we experienced in the first quarter of 2011 and a resumption of development drilling, all of which should have meaning, should be meaningful to fourth quarter 2012 and 2013 financial performance.

This targeted focus on expansion of our service capabilities, integration and optimization, along with the relative insensitivity of our businesses to commodity price levels or volatility, has allowed us to increase our distribution for 28 consecutive quarters, 23 of which have been 10% or greater over the earlier quarter and never less than 8.7%.

Before I turn it over to Steve, I'd like to recognize our existing and new lenders that just recently agreed to increase their commitments to the partnership and extend the tenor of our revolving credit facility to July of 2017. With their continuing support we have significantly increased our committed financial flexibility to pursue organic opportunities as well as opportunistic acquisitions if they make sense to us, as we continue to build out our business and create long-term value for all of our constituents.

With that, I'll turn it over to Steve.

Thanks, Grant. During the second quarter of 2012 we benefited from continued integration and optimization of new assets with our existing portfolio of terminals, pipelines and refinery operations. We fully integrated the FMT fleet assets into Genesis Marine. The final step in the acquisition integration plan occurred in two parts.

First, the flexibility of our expanded fleet allowed us to optimize costs by enhanced alignment of proper horsepower boats and barge configuration. This also allowed us to be more responsive to strong customer demand.

Second, we improved our customer mix as a result of continued integration with our crude oil customer portfolio and refined products business. There has been a significant amount of press regarding the drought conditions in the country and, to a smaller degree, how this might affect Mississippi River barge traffic. The drought and river conditions have had no impact to date and little to none are expected in the future on Genesis Marine operations. The largest portion of Genesis barge traffic is between Corpus Christi, Texas and Mobile, Alabama. On the Mississippi and Illinois Rivers we are primarily running [AVS Certified] barges that always operate in a shallow draft mode.

North of St. Louis we currently only travel the Illinois River, not the Mississippi. Genesis runs two and three barge configurations, which mean we operate one barge wide, not the four to six wide configuration that the Coast Guard has stopped for shallow water conditions. All of our contracts allow us to collect daily charter rates in the event of low water stoppage or slowdown by the Coast Guard. Needless to say we will abide by all Coast Guard rules and advise.

We continue to expand and integrate our operations in the Powder River Basin and Niobrara regions in Wyoming, having increased production rates at our crude processing plant and we are progressing on schedule to reactivate strategic segments of the approximate 300 miles of pipeline acquired via our previously announced acquisition. Likewise, in the Eagle Ford Shale and Permian Basin plays in the second quarter we put our expanded crude truck fleet and a portion of our expanded crude rail fleet to work. All the aforementioned assets have started to benefit our operating results and available cash.

We are nearing completion on phase one of our previously announced rail to pipeline terminal in Walnut Hill, Florida. We will begin to receive unit trains of crude oil in the third quarter of this year with full operations expected in Q1 2013. Likewise, the expansion of our terminal in Natchez, Mississippi to receive Canadian bitumen will be completed in Q4 of this year. Both projects will contribute to our operating results and available cash in 2013.

Sales volumes in refinery service were slightly ahead of the same quarter last year, as we continue on pace to equal 2011 volumes for all of 2012. We did experience a decrease in segment margin due to planned maintenance turnaround at two of our large refinery operations. This resulted in increased cost incurred primarily from processing at less than optimal refinery locations. The strength of the Genesis refinery service system is the breadth of our production sites and supporting terminals. This ensures uninterrupted service to our customers and while segment margins are down, we did not miss or curtail any customer operations.

During the past quarter we also completed new or extended contracts of existing major customers in anticipation of their growing needs over the next five years. We anticipate our sales to grow, not only due to worldwide expansion of new mine projects but also the recent recovery of the pulp industry.

With that, I'll turn it back to Grant.

Thanks, Steve. We're extremely pleased with the contribution from our past initiatives and targeted acquisitions. These initiatives have been accretive to our results and we'll continue to benefit as we identify additional ways to create synergies and drive efficiencies across our core competencies and surface capabilities. We're also very excited about the new projects that we have identified and disclosed to capitalize on opportunities in Texas, Florida, Mississippi, the Rockies, the deepwater Gulf of Mexico and elsewhere across our footprint.

Before I turn it over to Bob to discuss our reported results in greater detail, I'd like to recognize the contribution of our folks here at Genesis. Because of their dedication to safe, responsible and efficient operations, we continue to work together to deliver increasing long-term value to all of our unitholders.

Thank you, Grant. I will discuss the key differences in our second quarter results for 2012 as compared to the second quarter of 2011 and then follow with a discussion on the year-to-date results. My discussion will focus on our segment margin as fluctuations in our revenues resulting from changes in the commodity price levels of crude oil petroleum products or chemicals like caustic soda do not have a corresponding impact on our earnings or available cash flow. I will also discuss our results in terms of our three reporting segments, Pipeline Transportation Services, Refinery Service and Supply and Logistics.

For the 2012 quarter we increased available cash before reserves to our record $43.2 million from $31.9 million in the 2011 quarter. Significant improvement in results from our Pipeline Transportation and Supply and Logistics segments through a combination of increased volumes, the impact of our acquisitions and our continuing integration of such since the second half of 2011 contributed to the available cash before reserves for this quarter.

Net income for the 2012 quarter was $18.6 million, or $0.23 per unit, as compared to net income of $17.4 million, or $0.27 per unit for the 2011 quarter.

Turning to our operating segments, results from our Pipeline Transportation segment improved $3.9 million, or 23%, to $20.8 million. Our segment margin from offshore crude oil pipelines increased $3.1 million during the 2012 quarter, reflecting the acquisition of interest in certain Gulf of Mexico pipeline systems in January 2012. These systems added approximately 269,000 barrels per day of throughput, and increased segment margin by $7 million. This increase was partially offset by the reduction in throughput volumes from CHOPS.

Ongoing maintenance on several dedicated fields connected to CHOPS significantly reduced throughput on the pipeline system. As a result, the contribution to segment margin from CHOPS decreased $3.8 million from the prior year quarter. From our onshore crude oil pipelines tariffs increased $1.4 million during the 2012 quarter. This increase was a result of higher crude oil tariff rates that went into effect in July of last year. Lower revenues from pipeline lost allowance volumes somewhat offset this increase.

Refinery Services segment margin for the 2012 quarter decreased slightly to $17.3 million from $18.9 million. Our NaHS sales volumes increased 9% between the quarters, primarily due to higher sales to South American customers in the 2012 quarter. Sales volumes between quarters to customers in South America can fluctuate due to timing of deliveries.

NaHS revenues increased approximately 10% in the 2012 quarter due to higher sales volumes and increases in average product prices. The average index price for caustic soda rose 11% to $548 per dry short ton. However, the pricing in our sale contracts for NaHS include adjustments for fluctuations in commodity benchmarks, freight labor, energy cost and government indexes. The frequency at which these adjustments are applied varies by contract, geographical region and supply point.

Our raw material costs related to NaHS increased correspondingly to the rise in the average index price for caustic soda. In addition, in the second quarter of 2012 longer than anticipated refinery turnarounds at some of our largest refinery service locations resulted in increased cost as a results of processing at less efficient locations to ensure uninterrupted supplies to our customers. Caustic soda sales volumes decreased 44%, primarily due to turnarounds at some of our refinery customers. Although caustic sales volumes may fluctuate, the contribution to segment margin from these sales is not a significant portion of our refinery services activities.

Our Supply and Logistics segment margin increased $13 million, or 110%, to $24.8 million in the 2012 quarter from $11.8 million in the 2011 quarter. The increase in segment margin resulted primarily from the acquisition of the Black Oil Barge Transportation assets, both in August of 2011 and February 2012, as well as from significantly higher volumes. During the 2012 second quarter we increased our volumes by 30% from the 2011 quarter, as a result of increased volumes in our Alabama and Florida regions as well as expanded logistical assets benefiting from the increased industry activity in the Eagle Ford and Niobrara shale areas.

Interest costs, corporate, general and administrative expenses, maintenance capital expenditures and income taxes to be paid in cash affect available cash before reserves. Interest costs increased for the second quarter of 2012 as compared to the second quarter of 2011 by $2 million, primarily as a result of increased borrowings to fund our internal growth projects and acquisitions. Capitalized interest costs of $800,000 attributable primarily to our investment into SEKCO Pipeline joint venture, partially offset the increase in interest expense resulting in a net increase in interest expense of $1.2 million.

Corporate cash, general administrative expenses increased by $1.6 million, primarily as a result of personnel additions and other costs to support the growth of the partnership. Additionally, increases in the market price of our common units affected expenses related to our equity based compensation plans.

In addition to the factors impacting available cash before reserves, net income included the effect of several non-cash charges and credits. Depreciation and amortization expense totaled $15.4 million for the second quarter, an increase of $1.1 million between the quarterly periods, reflecting the increase in assets resulting from our acquisitions. Additionally, net income also includes the effects of unrealized gains or losses on derivative contracts that are not included in available cash until they are realized. In the 2012 quarter non-cash unrealized losses totaled $800,000 compared to non-cash unrealized gains of $7 million in the 2011 quarter.

I will now discuss the principal differences between the first six months of 2012 and 2011. For the first six months of 2012 we reported net income of $38.2 million, or $0.50 per unit, as compared to net income of $24.4 million, or $0.38 per unit, for the first six months of 2011. Available cash before reserves generated during the first half of 2012 was $82.8 million compared with $63.8 million for the same period in 2011, an increase of 30%.

Segment margin for the first half of 2012 was $123.1 million, an increase of $26.3 million when compared to the same period in 2011. Results from our Pipeline Transportation segment improved $11.5 million, or 33%, between the six months period. The significant components of this change included a $14.5 million contribution from our recently acquired interest in certain Gulf of Mexico crude oil pipeline systems offset by a $6.4 million decrease in the contribution to segment margin by CHOPS. As previously discussed, ongoing maintenance on several dedicated fields connected to CHOPS significantly reduced throughput on the pipeline system.

Crude oil tariff revenues from our onshore crude oil pipelines increased $2.9 million, primarily due to higher crude oil tariff rates that went into effect in July of last year. Revenues from sales of pipeline loss allowance volumes improved segment margin by $1.2 million due to an increase of approximately 7,000 barrels sold in the first half of 2012 compared to the same period in 2011. The increases in our Pipeline Transportation segment margin were slightly offset by $1.2 million increase in onshore pipeline operating costs. Excluding non-cash these were as a result of increased variable operating cost and employees' compensation and related benefit cost.

Segment margin from our Refinery Services segment increased $2.4 million to $34.5 million. NaHS revenues increased $3.89 million, primarily due to increases in average product prices as NaHS sales volumes were comparable period to period. The average index price for caustic soda rose 19% to $559 per dry short ton.

Our raw material cost related to NaHS increased correspondingly to the rise in the average index price for caustic soda. In addition, longer than anticipated refinery turnaround in some of our largest refinery service locations resulted in increased costs as a result of processing at less efficient locations to ensure uninterrupted supplies to our customers.

Caustic soda sales volumes decreased 30%, primarily due to turnarounds at some of our refinery customers. As discussed earlier, although caustic sales volumes may fluctuate, the contribution to segment margin from these sales is not a significant portion of our refinery services activities. Our supply and Logistics segment margin improved $17.1 million, or 68% between the six month periods primarily from the contribution of the Black Oil Barge Transportation assets acquired both in August 2011 and February 2012, as well as from increased volumes in our Alabama and Florida regions coupled with our expanded logistical assets benefitting from increased industry activity in the Eagle Ford and Niobrara shale areas.

Also affecting available cash before reserves interest cost increase for the first half of 2012 of $4.2 million, primarily as a result of increased borrowings to fund our internal growth projects and acquisitions. Capitalized interest cost of $1.1 million, primarily attributable to our investments in the SEKCO Pipeline joint venture, partially offset the increase in interest expense resulting in a net increase in interest expense of $3.1 million. Corporate cash and general and administrative expenses increased by $3 million, primarily as a result of personnel additions and other cost to support the growth of the partnership.

Additionally, increases in the market price of our common units affected expense related to our equity based compensation plans. In addition to the factors impacting available cash before reserves, net income included the effect of several non-cash charges and credits. Depreciation and amortization expense increased $3.1 million to $20.8 million for the first half of 2012 reflecting the increase in assets resulting from our acquisitions.

Additionally, net income also includes the effects of unrealized gains or losses on derivative contracts that are not included in available cash until they are realized. Net income for the six months ended June 30, 2012 and 2011 included non-cash unrealized gains on derivative positions of $1.2 million and $300,000 respectively.

Grant will now provide some concluding remarks to our prepared comments.

Thanks, Bob. We said in the release we look forward to the rest of the year and through 2013 and on into 2014 to continue achieving our goals of delivering double-digit annual growth in distribution and increasing coverage ratio in a better than investment grade leverage ratio, while never compromising our commitment to safe, responsible and reliable operations. We believe we've laid the foundation to achieve those goals already with our announced initiatives and have the luxury and committed capital of looking into future periods to identify ways to continue to achieve those goals.

We view the process of building sustainable long-term value as a marathon and not as a sprint. In the six years since this team started to come together the enterprise value for Genesis has grown from less than $200 million to approximately $3.3 billion today. We've accomplished this by navigating through some of the most difficult and volatile periods in the world's economic history. Yet we have maintained a conservative balance sheet with pro forma bank recognized leverage ratio at June 30th of 3.4 turns.

Additionally, we have delivered 28 consecutive increases in our quarterly distribution, 23 of which have been 10% or greater on a year-over-year basis. As always, we're proud of the opportunity to work with a great group of folks, their immeasurable contributions and their commitment to providing safe, responsible and efficient services to our customers. The ability of our people to identify great opportunities and execute on and integrate those successfully has been and will be key to our continuing success.

With that, I'll turn it back to the moderator for any questions.

Our first question is coming from Dave Moreen of Bank of America Merrill Lynch.

Quick question if I could just on chops in the Gulf of Mexico although I know that BP had said they were bringing those fields back up, I mean just in terms of impacts to third or fourth quarter do you expect to see some of those volumes actually show in the third quarter or is it more going to be a fourth quarter thing? And then just in terms of the (inaudible) on the volumes to those fields, is that something that's I won't say instantaneous but is it kind of an on/off switch or is that going to build over the course of the several weeks and months?

Well, let me take them in reverse order. I think the first thing is it's -- it certainly was an on/off switch when they went down but we're not privy to their plans. The only thing I'll say is that they announced in their release on Monday and discussed in their conference call that it is their intent that over the next several weeks that Atlantis and Mad Dog come back on to production. The practical matter of the way chops works the basically with our cash distribution out of it we'd be based on June, July and August performance. Therefore, we will pick up a little bit of increased performance relative to August, assuming that they stay on schedule to start bringing it back up but the full effects will be felt more in fourth quarter.

Got it and then just a bigger picture question and maybe it's one which it's just sort irrelevant but given the fact that there's all these live sweet crudes coming, popping up all over on shore, just wondering if that has an impact on the refinery services business to the extent you're looking at sweet or lighter crude, maybe some of your refineries that had been running heavier stuff. Does that impact refinery services at all or is there just there's enough to go around and the flexibility that it really doesn't matter?

No the refineries that we operate in are the flagships of the majors in their networks so they have three, four, five refineries. These are typically the largest, lowest refineries that they have and these are also what's known in the industry as complex refineries so they have to run sour and some sweet so they can't just run the sweeter crudes that we're seeing from the various shale plays.

I might also add that in most cases our sulfur handling capacity is a small percentage of the total sulfur handling capacity in any of the particular refinery locations and because of the sufficiencies of our operations versus their turning on, if you will, their SRUs we tend to be a base loaded sulfur handling processing facility inside the refinery (inaudible).

Great thanks. That's all I have for now. Thank you.

(Operator Instructions). [Keith Jashels]

Good morning, good quarter. I guess just first on the Texas City and West Columbia projects just looking for a little detail on where these are from a timing and cost standpoint and when you expect to see the full cash flow impact.

I think that we -- both West Columbia trucking facility as well as Texas City terminal should be operational this quarter. We are going to be limited, if you will, on our ability to access our capacity at Texas City terminal because of the extraordinary demands for the pipeline capacity by our refinery customers on our existing pipeline until probably second quarter of 2013 at which point our new pipeline from Webster down to Texas City should become operational.

Okay good, thanks. I guess just on the 300 miles of Wyoming pipe that you mentioned returning to oil service, I think before you had mentioned maybe a $5 million to $10 million cost here. Is that still the right ballpark? And then how long of a process to get this to oil service and what kind of return on that investment?

Well, that isn't a ballpark estimate of the capital and I said we were activating strategic portions so the first portion we're moving along on those. The first portion will be into our refinery. The second will be a connection to refineries in the area and the then the third to the announced logistics piece of movements in the area.

Okay thanks. I guess moving over to the Natchez Terminal opportunity, just any more detail on cost and return expectations as you get further into that project and then beyond the terminal opportunity, do you expect to utilize your barges here as well?

Again, I think because of our existing operations at that facility that certainly put us in a position where we could take advantage of the economies of scale of already having active operations at Natchez, so we -- we're not spending a whole lot of money, I think it's fair to say less than $10 million. As Steve said, we will be operational ready probably in the fourth quarter. Whether or not that exactly matches up with when the dedicated shipper is ready to start delivering bitumen at that point we don't know it's consistent with their time frame. Depending upon volume expectations we could expect a significant return on marginal capital invested.

I think part of the strategic value of them seeking us out was that we also have the barge capability to, once the bitumen or dilbit is unloaded off the rail, take it through our terminal facility, be able to load it on barges and distribute it to markets along the (inaudible). We have kind of the opportunity to provide an integrated suite of services to effect an economic value proposition for the producers in Canada.

Okay and would the expectation then also be able to move diluent back through the terminal for backhaul to Canada?

Yes we are designing the facilities to do exactly that, which is bring in dilbit via rail and backhaul diluent, which is a very effective transportation that's in essence in some respects it's free transportation of diluent back because otherwise the cars would go back empty.

Okay great thanks. I guess just lastly, on the Walnut Hill it sounds like second phase may be up and running first part of next year. Is there any guidance you could provide on what this may mean on Jay System volumes?

I think a little bit of it depends on ultimately the market obviously but we should be ready within the next couple of weeks to, as we call it phase one, to be able to handle two unit trains, which would be a week which would be about 140,000 barrels if all utilized at the design capacity at the point in time when the rest of the, at least our facilities, are in place. We'll be able to handle substantially more from a receiving point of view and obviously we -- the capacity on the Jay System is such that we could clearly potentially handle, again depending upon market conditions, up to a train a day.

Great thanks; that's all I've got.

(Operator Instructions). We're showing no further questions at this time. I would like to turn the floor back over to Mr. Sims for any additional or closing comments.

Well, thank you very much and we'll visit when 90 days is -- or approximately 90 days -- if not sooner, so thanks again for your participation.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.