Genesis Energy LP (GEL) 2012 Q3 法說會逐字稿

Welcome to the 2012 Third 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 the safe harbor provision and directs you to its most recently filed and future filings with the 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 [Terrence Hade], Chief Accounting Officer.

Thank you and welcome to everyone. This quarter, we are pleased to report yet another record of available cash of approximately $45.9 million, a 6% increase over last quarter and approximately 24% more than the year-ago period.

Our results reflect the continuing impacts of our efforts to secure new opportunities, whether external or organic, for our partners to participate in the growing demand for our integrated services and capabilities. These new opportunities have created volume growth and critical operating metrics for us. This growth, complemented by low exposure to volatile commodity price levels, has resulted in consistently increasing available cash before reserves.

Our major and stable growth allowed us to increase our distribution to unit holders for the 29th consecutive quarter, 24 of which have been 10% or greater and never less than 8.7% over the year-earlier quarter.

Before I turn it over to Steve, I'd like to mention that subsequent to the end of the quarter, we've facilitated the orderly exit of several large unit holders who expressed an interest in selling their holdings in us. The important message in those transactions is that several of our largest unit holders in management actually significantly increased their ownership in the partnership.

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

Thanks, Grant.

In the third quarter of 2012, volume growth continued in our crude oil and refined products businesses as a result of our expanded trucking and barge fleets.

Our expanded crude oil trucking fleet continues to gather additional volumes in the Eagleford Shale and Permian Basin plays, while our barge fleet maintains high utilization rates.

Due to the expanded number of boats and barges, our size gives us the flexibility to be more responsive to customer demand.

On an overall basis, the increasing demand for our integrated suite of services is reflected in our customer portfolio as we continue to gain new energy companies of all sizes as customers across our business lines.

In August of 2012, we began receiving unit trains of crude oil at our previously announced rail pipeline terminal in Walnut Hill, Florida. We anticipate phase two of the terminal, which will provide us with 100,000 barrels of onsite crude oil storage, to be completed in the fourth quarter of 2012 and to be fully operational by the first quarter of 2013.

In addition to our Walnut Hill terminal, we commissioned a new crude oil rail loading facility in Wink, Texas just last month.

We are completing construction of our rail and terminal in Natchez, Mississippi. We expect to receive Western Canadian crude in the first quarter of 2013.

We look forward to further integrating these new rail operations in our expanding asset footprint and the existing suite of services that we offer to our producer customers and Gulf Coast refineries.

NaHS sales volumes in our Refinery Service segment increased slightly above the prior-year quarter due to the strengthening of the pulp and paper industry. However, total NaHS volumes were somewhat limited in the quarter due to the timing of NaHS shipments to South America and rail delays as a result of Hurricane Isaac.

Consistent with our prior quarterly outlook, we anticipate the continuing growth of NaHS sales due to the worldwide expansion of our new mine projects and the recent recovery of the pulp and paper industry.

Construction of our previously announced NaHS facility at HollyFrontier in Tulsa will be completed in Q4 and commissioned in Q1 2013, allowing us to be more cost-[effectively], reach existing markets, and be positioned to benefit from growth in NaHS demand.

With that, I'll turn the call back over 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 will continue to benefit us as we identify additional ways to create synergies and drive efficiencies across our core competencies and service 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 Deep Water Gulf of Mexico, and elsewhere across our footprint.

Before I turn it over to Bob to discuss our quarter 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 reliable operations, we continue to work together to deliver increasing long-term value to all of our unit holders.

Thank you, Grant.

In the third quarter of 2012, we again increased available cash before reserves to a record $45.9 million, representing an increase of $8.8 million, or 24%, over the third quarter of 2011.

Adjusted EBITDA also increased $11.4 million to $56.6 million, or 25% over the prior-year quarter.

The partnership reported net income for the quarter of $31.2 million, or $0.39 per unit, compared to $19.1 million, or $0.27 per unit, for the same period in 2011.

Net income for the 2012 quarter included an $8.2 million non-cash benefit from the one-time reversal of certain non-cash tax provisions. Without this benefit, net income would have been $23 million, representing an increase of $3.9 million over the year-earlier quarter.

Solid performance by all three of our reporting segments helped drive our third quarter results. Overall, total segment margin increased to $65.9 million, an increase of $13 million, or 25% over the prior-year period.

Results from our pipeline transportation segment improved $7.3 million, or 45%, between the third quarter periods, primarily from the contribution of our interest in the Gulf of Mexico pipelines that we acquired in January 2012 and also from higher crude oil tariffs.

The acquired interest in the Gulf of Mexico pipelines added approximately 256,000 barrels per day of throughput and $7.7 million of segment margin.

The contribution to segment margin by CHOPS declined $1.1 million as ongoing improvements being made by producers at the connected fields were not substantially completed until late in the 2012 third quarter.

On average, CHOPS throughput volumes improved slightly by approximately 1,000 barrels per day, and we expect volumes to continue to increase into the fourth quarter of 2012.

Our onshore crude oil tariff revenues increased $1.5 million, primarily due to upward tariff indexing of approximately 8.6% for our FERC-regulated pipelines effective in July 2012.

Additionally, volumes on our onshore crude oil pipelines increased in our Texas system due to increased demand for crude oil from the Eagleford area and in our Jay System, primarily due to additional volumes transported on the pipeline as a result of the initiation of our Walnut Hill, Florida crude oil train unloading facility.

Onshore pipeline operating costs, excluding non-cash charges, offset these increases by $1.5 million due to pipeline integrity, maintenance, and employee compensation-related benefit cost.

Refinery services segment margin for the 2012 quarter increased $1 million, or 6%, to $19 million.

NaHS sales revenues increased $1.2 million, primarily due to an increase in the average index price for caustic soda and increased sales volumes.

The average index price for caustic soda rose 7% to $579 per dry sort ton.

The pricing in our sales contracts for NaHS included adjustments for fluctuation and commodity benchmark, freight, labor, energy costs, and government indexes. The frequency of which these adjustments are applied varies by contract, geographic region, and swap volume.

Our raw material costs related to NaHS increased corresponding to the rise in the average index price for caustic soda. However, operating efficiencies realized at several of our sour gas processing facilities, as well as favorable management of the acquisition and utilization of caustic soda in our and our customers' operations helped contribute to the increase in segment margin.

Our Supply and Logistics segment margin increased $4.7 million, or 25%, to $23.7 million in the third quarter of 2012. The increase in segment margin is primarily from the contribution of the [black oil barge] transportation assets that we acquired in August 2011 and February 2012, and increased volumes handled by our expanded trucking and barge fleets.

Our total volumes of crude oil and refined products increased by 30% to over 100,000 barrels per day as a result of these expansions.

Also, in August 2012, we completed construction of the first phase of a new crude by rail and loading terminal connected to our existing crude oil pipeline in Walnut Hill, Florida.

Interest cost, corporate, general, and administrative expenses, maintenance capital expenditures, and income taxes to be paid in cash affect available cash before reserves.

Interest costs increased in the third quarter of 2012 as compared to the third quarter of 2011 by $2.2 million primarily as a result of increased borrowings to fund our internal growth projects and acquisitions.

However, capitalized interest costs of $1.3 million attributable to our growth, capital expenditures, and investment in the SEKCO pipeline joint venture partially offset the increase in interest expense, resulting in a net increase in interest expense of $900,000.

Corporate cash, general, and administrative expenses increased by $1.6 million, primarily as a result of personnel additions and other costs to support the growth of our 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. As I previously mentioned, we recorded an $8.2 million non-cash benefit from the one-time reversal of certain tax provisions in the third quarter of 2012 as a result of tax audit settlements and the expiration of statute of limitations.

Additionally, net income also includes the effects of unrealized gains or losses on derivative contracts that are not included in available cash until they're realized. In the 2012 quarter, noncash unrealized gains totaled $100,000 compared to a noncash unrealized gain of $4.4 million in the 2011 quarter.

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

Thanks, Bob.

As we said in the release, looking forward to the fourth quarter and through 2013 and beyond, we would expect to see continuing sequential quarterly growth.

As we've discussed, Walnut Hill will be fully operational in the first quarter of 2013.

Our Natchez terminal should start ramping up in the first quarter, with volumes anticipated to grow throughout 2013.

Our new pipeline in Texas City should be commissioned late in the second quarter, which will give us the flexibility to fully utilize our new terminal there in the second half of the year.

We anticipate crude volumes by rail produced in the Permian Basin through our new rail facility in Wink, Texas to grow throughout 2013 with unit train capability by the end of the year.

We also anticipate booking sessions of our gathering system in Wyoming and service in the first quarter and would anticipate volumes growing over the course of next year.

In addition to these incremental projects, we anticipate NAHS volumes to increase in 2013 and continue on into 2014.

Importantly, we've recently seen volumes on CHOPS return to those we last experienced in the first quarter of 2011, when our distribution from that joint venture was more than $4 million over that which we just received.

Also, we would expect a return to development activities at existing dedicated production platforms that could conceivably ramp up to an incremental 4 to $5 million a quarter net to our interests by the end of next year.

Our joint venture in the Gulf of Mexico with Enterprise is on track and on budget to become a significant contributor to us in the third quarter of 2014.

Taking all these things into consideration, we believe we are well positioned to achieve our goals of delivering double-digit growth and distributions and increasing coverage ratio and a better-than-investment-grade leverage ratio, all without every losing sight of our commitment to safe, reliable, and responsible operations.

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 operations 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.

We will now be conducting a question-and-answer session. (Operating instructions)

[Brian Thons], Barclays.

On CHOPS, I thought I heard you say that you're seeing volumes begin to return to the levels from early 2011. Can you tell us more about what kind of ramp you expect to see both on CHOPS and then what your outlook is on your other offshore systems?

I think in the first quarter of 2011, as I recall, we averaged about 170,000 barrels per day. That is the level that we've seen recently is the two major fields have come out of extended turnaround and maintenance.

What's important is that even at that level, we're using -- or the producers are using approximately 40% to 45% of their installed production-handling capability and so we would anticipate a return to development drilling, which could easily add another [100 to] 120,000 barrels a day if they stay on track with their development drilling through 2013.

On our other systems, in the Gulf of Mexico, obviously, Poseidon is doing better than expectations. Our joint venture with Enterprise is on track to add another approximately 100,000 barrels a day of throughput through the Poseidon system beginning in November of '14.

Our other systems were somewhat smaller, but there is development activity going on at each of them, and so we would anticipate continued increase in contribution [from those].

And then on your Wyoming gathering project, can you talk a little bit about what type of volumes you think you could see from that project?

Obviously, we have a 91% ownership in a small refining complex in Wyoming, and we're having interconnectivity with other refiners in Casper, Wyoming, and as a result, once we get the pipeline reactivated and initiated in crude oil service, we hope to see the volumes potentially ramp up to over the course of 2013 approaching 10,000 barrels a day.

And then what was the total CapEx in the third quarter?

The growth CapEx was 30.2 for the quarter.

Okay. And then last question for me is can you talk about your expectations for growth CapEx for 2013?

Basically, the vast majority of the additional growth dollars associated with our joint venture with Enterprise will be the same in 2013. That would be in the order of magnitude, $150 million. And then probably call it 50 to $75 million for other announced projects, all of which -- as you're aware, we increased the committed credit facility from our banks to fund all of that. We believe we can accomplish all of that prudently, and given where we're starting from, which is a 3.38 times the leverage ratio, that all of that growth can be accomplished without issuing any additional equity.

Thank you.

T.J. Schultz, RBC Capital Markets.

I guess just first on the supply and logistics segment looking at third quarter results versus second quarter, volumes were up sequentially but segment margin was down, I guess, about 5% sequentially. Can you just provide a little more color there on the sequential impact to the segment margin or if there was any impact from Hurricane Isaac there?

We did suffer some demurrage, primarily in our fuel oil blending business associated with Hurricane Isaac. We also had some quality issues of meeting the specifications on one large cargo that we had sold in the third quarter. Combined, that probably negatively affected reported margin of about $1.5 million for the quarter.

Okay, thanks. On the Natchez terminal project, is the scope (inaudible) still that you can handle the dilbit coming down, or have you expanded the scope to include utilizing any of your barges or for handling any of the return of diluent?

We're designed to bring dilbit in. We're designing to (inaudible) diluent, and given the existing barge facility that we have there, that we anticipate that we have the flexibility to utilize some of our barges for distributing the dilbit as it comes in to refining customers downstream on the Mississippi River.

Okay. The rail loading facility in Wink that you talked about, can you just expand on that particular project and how maybe you expect volumes to ramp until you have unit train capabilities there?

We currently are operational, as Steve mentioned, but we have two transloaders in service, transloaders pumping from truck directly into railcar. We're in the process of permitting to build tanks, as well as truck station, to allow us to gather volumes into that central location and more efficiently pump from tank into railcars.

The rail siding is in place so that we can handle 75 cars, which in that particular location would qualify for unit train rates. It's a great location to allocate trucking resources to not only to serve of the rail facility that we anticipate having fully operational by third quarter/fourth quarter of 2013, but we're also within a five or six-mile radius. We can have pipeline interconnectivity of several pipelines in the area.

Okay, great. Thanks.

(Operator instructions)

Michael Blum, Wells Fargo.

I think most of my questions were addressed. I guess the only thing I would ask you about is just what you're seeing in the acquisition market, how active you are there, and in terms of where valuations and multiples are, what you're seeing there.

We are not overly active in the large acquisition market. I think that we've demonstrated our ability to kind of identify 150, 200 million area of opportunities that [separate] multiples that we believe have growth to get down into the four and five-type ranges that are much more efficient than some of the transaction multiples for some of the larger assets and stuff, so -- and plus, as we've kind of, hopefully, demonstrated, as our footprint has gotten bigger, which clearly has been driven by historical acquisitions, that the opportunity set for organic projects, which are much higher return-type projects, has significantly increased for the partnership.

Great. Thank you.

John Edwards, Credit Suisse.

Grant, could you expand a little bit on the -- I mean you commented a lot on what's going on with the NaHS volumes. I mean where do you think now your volumes can get to? I mean you are indicating fairly significant growth there. If you could just give a little more detail on that?

I think I'll let Steve answer that.

Well, the growth over the years have been big bursts when they bring on the new mines or new mills, but if you average all that out, it grows at kind of a global GDP rate, but we're ready for another stepping up, if you will, as we look to the publicly announced projects, both in North America, Mexico -- Mexico is North America, and South America.

But we've also seen high demand, as we've reported, in the pulp and paper segment given global demand for pulp, and our pulp customers tell us that there's an ongoing shortage of pulp globally, and the US mills have gotten much more competitive due to lower energy rates and natural gas, and so I think we're going to see some sustainability this time around from the pulp side, as well.

Okay, so you're seeing more growth from the pulp and paper side now than in the mining side?

Well, mining continues to be the biggest segment of refinery services, so mining again is very chunky, if you will. It steps up and then it will maintain itself, so the large size of those projects will bring bigger volumes than the average sustainable growth of pulp and paper.

And I think we've seen, John, over the last three to six months or so that Freeport-McMoRan is committed to (inaudible) excess of $4 billion in their Peruvian mining operations, [Cadelco], in excess of $2 billion to expand their mining operations in Chile, all of which kind of were contracted customers for us, so those are quite lumpy in terms of being large volumes. They kind of come on more or less all at once.

Okay, so do you think -- I mean, obviously, the NaHS volumes were a little bit light this quarter, but are you thinking in a year or two we could see kind of mid-40s-type numbers?

I think we said either last quarter or even first quarter we kind of are solidly in the, call it, the 140 to 150,000-ton run rate and that assuming that all of the contracted business materializes based upon the expectations of our customers, that we said that could easily grow 10% to 15% on a run rate basis by the end of 2014.

Okay, that's helpful. Thank you very much.

Scott Fogleman, Credit Suisse.

I just need a quick clarification on the 2013 growth CapEx number that you just cited. You mentioned $150 million. Was that mostly -- is that for Keathley and then an additional 50 to 70 for other, or was the 150 the total?

It's about 150 remaining, some of which will actually go out in the fourth quarter of 2012 net to our -- in round terms, $200 million investment in Southeast Keathley Canyon, the joint venture with Enterprise, and then 50 to 75 to put all the other announced projects in service.

Okay, great. And just real quick, what percentage of the common units are now owned by management and the Davisons following the exit -- largely the exit of Quintana?

I would say somewhere between 20% and 25%, but I think we're going to check that out quickly.

All right.

I think the Davisons as a collective group were about 17.2%, and then management in the aggregate probably has 6% or 7%.

Okay, great. And just one final thing. When will you all be publishing the Q?

It's being filed today, Scott.

Great. Thank you so much.

Sure. Thank you.

There are no further questions at this time. I'd like to hand the floor back over to Mr. Grant Sims for closing comments.

We want to thank everybody for participating. Our thoughts go out to those, our friends in the New York, New Jersey, and other areas, whose lives have been and continue to be negatively affected by Sandy, but hope everything works out well, and we will talk to everyone in 90 days, if not sooner. So thank you very much.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.