Genesis Energy LP (GEL) 2012 Q4 法說會逐字稿

Welcome to the 2012 fourth 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 its those Safe Harbor provisions and directs you to its most recent 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 like to introduce Grant Sims, CEO of Genesis Energy LP. Mr. Sims will be joined by Bob Deere, Chief Financial Officer and Karen Pape, Chief Accounting Officer.

Thank you, and welcome to everyone. This quarter we are pleased to report yet another record of available cash of approximately $50.5 million, a 10% increase over last quarter, and approximately 35% more than the year ago period.

Our results reflect the continuing impacts of our efforts to identify and secure new opportunities for our partners to participate in the growing demand for integrated services and capabilities. These new opportunities have created volume growth, probably the most critical operating metric for us.

This growth, in combination with extremely low exposure to volatile commodity price levels, whether absolute or relative, has resulted in consistently increasing available cash before reserves. Our measured stable growth allowed us to increase our distribution to unit holders for the 30th consecutive quarter, 25 of which have been 10% or greater over the prior year quarter and, none were less than 8.7%.

Over the last year, we integrated an approximate 50% expansion of our crude oil trucking fleet. We continue to work to safely and responsibly optimize the use of those assets.

We fully integrated the FMT Marine assets we acquired in 2011. Our $205 million acquisition of offshore crude oil pipelines from Marathon Oil in January of 2012 was done at a first-year multiple of less than seven times.

Production from several fields dedicated to our Cameron Highway pipeline in the offshore Gulf of Mexico began to ramp back up in August 2012 after an extended period of maintenance on certain third-party operated surface and subsheet production facilities. In total, crude [puck] on the pipeline have returned to levels last seen in the first quarter of 2011.

We continue to receive unit trains of crude oil at Walnut Hill, Florida for further delivery on our Jay Pipeline System, and we anticipate our new tank and related facilities to be fully operational in March of 2013, following a planned four-week turnaround at our primary customer's refinery.

At our new crude oil -- loading facility outside of Wink, Texas in the Permian basin, we continued to support manifest service of crude oil volumes over the last several months, and in early February, loaded our first full unit train. Construction of our tanks and expanded trucking capabilities remains on track to be fully operational by late in third quarter, early fourth quarter of 2013.

At our terminal in Natchez, Mississippi, we have seen and unloaded into tanks the first railcars loaded with Bitumen dilbit, originating in Alberta, Canada. As volumes to continue to ramp up, we have begun loading barges for further shipment to our refinery customers along the Mississippi River.

We have taken delivery of our first 100 crude oil rail cars, and anticipate receiving another 400 by the end of the third quarter of 2013, which we use to support our loading and unloading rail facilities. We have commissioned our new crude oil terminal and barge dock in Texas City.

We would expect the terminal and barge dock to see increasing levels crude put in the latter half of 2013, upon the completion of our new 18-inch pipeline from Webster to Texas City in the late second quarter, early third quarter of this year. We have placed an order for four new build asphalt and crude capable barges to support our expanding capabilities at our Natchez and Texas City terminals.

Along with either a new boat or a major refurbishment of one of our exiting boats, this $20 million to $25 million integrated investment should contribute in late 2013 and into 2014. We have entered into an agreement with the local refinery in Wyoming, which will support our investment to expand and place into service certain segments of our crude oil gathering system in the Niobrara Shale Development in Wyoming. The start-up operation is expected in the second quarter of 2013.

Construction has commenced on the SEKCO lateral in the area Keith Lake Canyon area of the deepwater Gulf of Mexico, and we expect significant contribution from this investment beginning July 2014. We believe, given the current available capacity in our portfolio of offshore oil pipelines, that we are well-positioned to benefit from the dramatically increasing levels of development activity in the deepwater Gulf of Mexico.

Last week, we announced plans to invest approximately $125 million to improve existing assets and develop new infrastructure in Louisiana,connecting to ExxonMobil Corporation's Baton Rouge refinery, one of the largest refinery complexes in North America, with more than 500,000 barrels per day of refining capacity.

Our investment includes improving our existing terminal at Port Hudson, Louisiana, constructing a new 18-mile, 20-inch diameter crude oil pipeline connecting Port Hudson to the Baton Rouge-Maryland terminal and continuing downstream to the Anchorage Tank Farm, and building a new crude oil unit train unloading facility at the Maryland terminal.

The Port Hudson upgrades and new crude oil pipeline are expected to be completed by the end of 2013, and the Maryland terminal completion is scheduled for the second quarter of 2014. We believe all of these initiatives and endeavors will contribute to our ability to generate increasing amounts of available cash in the coming years.

With that, I will now turn to Bob to discuss our reported results in greater detail.

Thank you, Grant. In the fourth quarter of 2012, we again increased available cash before reserves to a record $50.5 million, representing an increase of $13.1 million or 35% over the fourth quarter of 2011.

Adjusted EBITDA also increased $16.5 million to $61.8 million, or 36%, over the prior year quarter.

The partnership reported net income for the quarter of $26.9 million, or $0.34 per unit, compared to $7.8 million, or $0.10 per unit, for the same period in 2011.

Increases in our Pipeline Transportation and Supply and Logistics segments helped drive our fourth quarter results. Overall, total segment margin increased to $73.3 million, an increase of $20.6 million, or 39%, over the prior-year period.

Results from our pipeline transportation segment improved $9.8 million, or 57%, between the fourth quarter periods, primarily from the contribution of our interest in the Gulf of Mexico pipelines that we acquired in January of 2012. The acquired interest in the Gulf of Mexico pipelines added approximately 272,000 barrels per day of throughput.

The contribution of the Cameron Highway Oil Pipeline System, or CHOPS, increased its ongoing improvements being made by producers at the connected fields, were substantially completed late in the 2012 third quarter. Our onshore pipeline contribution grew as a result of a combination of increased volumes on our Texas System due to increased demand from our primary customer, Marathon's Texas City refinery.

Additional volumes transported on our Jay System, primarily as a result of the initiation in August of 2012 of our Walnut Hill, Florida crude oil train unloading facility. Tariff increases on our [Perk] regulated crude oil lines, and increased volumes on our three state CO2 pipe line.

Our supply and logistics segment margin increased $11.1 million, or 70%, to $28.6 million inthe fourth 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, as well as increased volumes handled by our expanded trucking and barge fleets.

Our total volumes of crude oil and refined products increased by 48% to over 100,000 barrels per day, due in large part to these expansions. Refinery Services Segment margin for the 2012 quarter decreased $400,000, or 2%, primarily due to the timing of NaHS sales to South American customers.

In late 2011, we experienced a high volume of sales to these customers. Sales volumes to customers in South America can fluctuate due to the scheduling of shipments. NaHS sales revenues decreased $3.7 million, primarily due to decrease in the sales volumes.

This is partially offset by an increase in the average index price of caustic soda. The average index price for caustic rose 5% to $603 per dry short ton. The pricing in our sales contracts for NaHS include adjustments for fluctuations in commodity benchmarks, freight, labor, energy costs and government indexes.

The frequency at which these adjustments are applied varies by contract, geographic region and supply point. 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 offset the overall decrease in segment margin. 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 decreased in the fourth quarter of 2012 as compared to the fourth quarter of 2011. I'm sorry, interest costs increased in the fourth quarter of 2012, as compared to the fourth quarter of 2011, by $2.5 million, primarily as a result of increased borrowings to fund our internal growth projects and acquisitions, and the issuance of $100 million of additional notes in February 2012.

However, capitalized interest costs of $1.4 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 recognized in our presentation of available cash of $1.1 million.

Corporate cash general and administrative expenses increased by $4.1 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, and the number of equity-based awards outstanding, due to the growth in the number of our employees, affected expenses related to our equity-based compensation plans.

Proceeds from the sales of surplus assets decreased $1.9 millions for the fourth quarter 2012 over the comparable 2011 period. 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 decreased $3.4 million

between quarterly periods, corresponding to the decline in our net unamortized balance of intangible assets. 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 $1.3 million, compared to non-cash unrealized losses of $5.4 million in the 2011 quarter. In addition, income tax benefit decreased $1.2 million between the quarterly periods.

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

Thanks, Bob.

As we have discussed in the is release, last week we completed an offering of $350 million of senior unsecured notes and used the proceeds to pay down borrowings under our revolving credit facility and for general partnership purposes, giving us approximately $800 million of availability under our revolving credit facility to comfortably be able to complete all of our announced projects without having to issue equity.

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

As always, we're proud of our opportunity to work with a great group of folks and their immeasurable contributions. With that, I'll turn it back to the moderator for any questions.

Thank you. (Operator Instructions). Our first question comes from the line of TJ Schultz with RBC capital. Please proceed with your question.

Hi, guys, good morning. Good quarter. First, Walnut Hill, if you can tell us how many unit trains per week you're receiving now and then just give a little bit more color on your capabilities once some of the takes and storage are set, and the timing of the customer turnaround that you talked about. I guess it sounds like most of this will be basically set to go into the second quarter; is that right?

The turnaround is in the first quarter, which is from mid-February through mid-March, so both Walnut Hill and the Florida system will be, in essence, down during that turnaround period, but we use that opportunity to tie in our tanks and fully integrate the Walnut Hill with our Florida pipeline operations. We would reasonably expect kind of a minimum run rate once they come back up, call it two to three trains a week.

But we're working on some other things. We have the capability ultimately to handle up to a train a day. Just the day before yesterday we reactivated our interconnect with the facilities of Plains All American over in that corner of the world, and we would have the opportunity, we think, to potentially provide rail service to some of the customers downstream on the system.

Okay, thanks. Just moving to the Natchez terminals. I guess you've unloaded the thrush rail cars here.

A couple of questions. First, can you give any indication of initial volumes and any kind of expectations going forward? Then, do you have any firm agreements right now for use of your barges, or backhauling, (inaudible) if that is dependent on some of the new built barges you're talking about, if there's anything the interim?

The loggings are expected to ramp up to 20 cars a day, and given the weight of the dilbit, it's probably closer to 550 to 600 drills per car by sometime in the third quarter, based upon the production from our anchor tenant, which is a Canadian producer. We have not yet, at this point, attempted or loaded the rail cars with [Biluin], although we have that capability to backhaul Biluin into the Biluin pool in Canada. Our barges are basically used to move; we're unloading the rail cars into tanks and then loading it on to barges to move the dilbit down to refinery customers.

Those are your barges? I think you said four new-build barges, is that correct? And that's the $20 million to $25 million spend by late 2013?

That includes the cost of either acquiring a new boat or a major refurbishment of one of our existing boats. We have loaded our own barges' attaches at this point.

Okay, thanks. Lastly on your distributions. You guys have been very consistent with the year-over-year increases between 10% and 11% over the past few years.

Moving forward, given a lot of these projects that you have in front of you and some of the Gulf volumes coming back, do you have any comfort level to look at an uptick on this type of range? I know you said low double digits. Or are you comfortable with keeping it in the 10% to 11% range and building some coverage while you have some of these opportunities to reinvest?

I think we view 10% to 11% as a good long-term stable target, and to the extent that our coverage ratio increases as a result of the performance of our businesses, we use that excess coverage as equity capital for purposes of funding our portfolio of organic opportunities, which we believe just create value in the out years to be able to continue to meet those financial goals of delivering that physical distribution growth.

Thanks, Grant.

Thank you. Our next question comes from the line of Paul Jacobs with Raymond James. Please proceed with your question.

Good morning, guys.

Good morning.

Relative to the reported volumes on the CHOPS system, would it be fair to say that, based on your guidance, that we could see another 20,000 barrels per day this quarter? How do you see volumes rounding out over the remainder of the year for your offshore systems?

Seems to have settled in around these numbers. There's still kind of ongoing work, which is really what we believe to be preparatory to a resumption of development drilling.

We can't give any specific guidance, if you will, on when that development drilling will resume, but as we've stated, these levels of flowed, or production coming off of the two major installed production facilities, we're using about 40% to 45% of their installed production handling capability, meaning that with the resumption of development drilling, that when that occurs, when it starts, and when it is recognized, we can't control the timing of.

The near-term we would expect towards the end of this year around certainly in 2014 to start seeing the effects of that, as BP as we know is the operator. They have designated Mad Dog and Atlantis, which are the two big fields dedicated to CHOPS as two of their four central development hubs for near-term increased production out of their deepwater portfolio.

Appreciate the color on that. When thinking about your early gathering system in the Powder River Basin, do you have contracted volumes there to take crude out of the area, and how do you think about the time frame for mobilizing crude to the Casper, perhaps the Trucker, rail volumes' alternative destinations?

I think we referenced in our prepared remarks that we have entered into an agreement with a refinery in Casper to extend our system to interconnect with their system.

We think that that will be operational in the second quarter of 2013, so we will have access to the Casper refining market as well as our small tea kettle refinery in Wyoming, which will allow us to initially get volumes on pipe and redeploy trucking assets to continue to gather, and depending upon we think it's a very good, kind of first-mover position up there, and we'll be able to see opportunity to evaluate other export-type opportunities beyond tying into the local refining market.

Last question for me is, can you guys just update us on the Wilson County refining project? Are you making any progress there or is that on hold right now?

Is there any opportunity toexpand off that asset to create gathering systems for perhaps a training hub?

I think the refinery is operational. We have an exclusive agreement with the refinery. We have an exclusive crude oil supply arrangement to the refinery.

Under certain conditions, we have the opportunity to participate in the hub-side from the tracking of the oil, so to speak. Our original hypothesis was that, yes, we would develop kind of a gathering marketing hub in and around that area.

By the time we evaluated where we were, we apparently were late to the party, so we are probably at this point going to play out the exclusive supply arrangement, which had an initial term of three years. I think there are two years left on it, as well as the participation and potential participation kind of in the after-payout tax credit.

Thanks, I appreciate it.

Thank you. Our next question comes from the line of Bryan Barron With Barclay's Capital. Please proceed with your question.

Good morning.

Good morning.

On the ExxonMobil project, can you give us a little color as to a range of expected returns?

Obviously, a lot of our commercial terms and conditions are very confidential, but I think that it's fair to say that organic opportunities, which is what we focus on, we target internally kind of mid single-digit multiples, and based upon what we perceive to be very legitimate upside opportunities that we can drive those multiples to below 4 or 5.

Would that be sort of a first year multiple or will there be a ramp-up period to get to that?

Probably be a gradual ramp up period. Maybe starting out first year in high single-digits is not a bad thought process.

In terms of the route terminal you're looking to build. What type of crude are you expecting? What regions are you expecting to rail crude from to Baton Rouge?

It can handle a variety of things, but the particular location at Maryland, among others, is on the Canadian national main line. Baton Rouge refinery is a very complex refinery, so we would be anticipating that a large amount of the rail barrels or a bitumen derivative Dilbit coming in from Canada.

Can you give us a sense of where you expect expansion maintenance CapEx to be in 2013?

Maintenances CapEx is basically $4 million to $5 million of what flows through to what we present as maintenance capital. We are quite aggressive in terms of expensing above the line on our maintenances and repairs.

Obviously, when we're running 300 trucks and 22 push boats and stuff, we have significantly more conventional maintenance and repair than the $4 million to $5 million a year that we expense out above the line. Typically, what comes down to maintenance capital would be, if we have to do significant capital improvements to terminals and kind of extend the useful life, that's what flows through to the maintenance.

On growth capital, I think that with what has been announced to-date, including the barges that we just talked about today, between $300 million and $325 million for 2013 growth capital.

Thanks, Grant.

Thank you. Our next question comes from the line of John Edwards with Credit Suisse. Please proceed with your question.

Good morning, everybody.

Good morning.

Grant, just to clarify Bryan's question on the growth capital, the $300 million to $325 million for 2013. That includes your contributions to the JV --

SEKCO?

SEKCO, yes.

Yes, it does.

Okay, great. Just curious on, in terms of Refinery Services, the volumes coming in. Is this a good run rate here with these lines or can we expect that to tick up a bit more?

I think that it's difficult to look at the quarterly numbers. As Bob mentioned, the bobbles, if you will, quarter-to-quarter, are really reflective of the fact that when we make sales to South American mining operations, those are typically large sales.

In fact, to the extent we go to Peru, it's FOB, the US courts, so depending on the recognition of the timing of that, that causes the quarterly bottle in volumes.

We think that we're kind of 145,000, 150,000 ton annual run-rate. And as we talked previously, based upon contracted quantities that we have, assuming that those customers stay on track with the expansion and development of mines, both in North America and South America, that we could exit 2014 at 10% to 15% above that run rate number.

Okay, that's helpful. Just noticed the crude pipeline volumes were up quite a bit quarter over quarter for the most part. Your thoughts on go-forward volumes there?

Well, the reason that Texas is up is because Marathon's refinery in Texas City has a voracious appetite for light, sweet crude oil. In fact, it's the only pure, light sweet crude oil refinery left on the upper Texas coast. And their appetite to move those barrels through our pipeline is using the lion's share of the capacity on our existing system, which is why we've entered into a new three-year T&D agreement with them to loop our line with a new 18-inch line.

The volume growth that you see on the Florida system is because is because the Walnut Hill rail barrels unload into the Florida system and we get another coupon, so to speak, to move the barrels that are unloaded off the rail cars through our pipeline into our refinery customer.

So in terms of outlook, what should we be thinking about? Similar growth rates here? I'm just trying to get an idea what's good to plug into our models there.

That's why you get paid the big bucks. The Texas System is virtually running at capacity, which is why we can't move more barrels either through Marathon or to our Texas City terminal until we get our new pipeline in place and in service, which we anticipate to be late second quarter, early first quarter, so we can't grow Texas any more as a practical manner than what it's running at a practical 100% utilization.

Our volumes on our Florida system, as rail volumes increase, or assuming that they do increase, then we will see the corresponding, if we unload the train of 70,000 barrels, then it's got no place to go except to our pipeline, so it gets pumped down pipeline. So we can see growth on the Florida system consistent with the growth that we would expect to see at our Walnut Hill rail facility.

Great, fair enough.

Thanks, that's helpful.

Thank you. Our next question comes from the line of Ethan Bellamy with RW Baird. Please proceed with your questions.

Good morning. I just had one question here.

Can you outline how much time, if any, the partnership is spending on corporate M&A given the rich backdrop of internal growth opportunities you have at present? Thank you.

We don't actively participate in M&A activities.

I think the two largest third-party acquisitions that we've done in the last two years, which was the FMT Black Oil Gorge acquisition in July of 2011 for $140 million dollars, and the Marathon acquisition in January of 2012, both were non-marketed, negotiated arrangements which we believe were less than seven times deals. And as a result, given the portfolio of organic opportunities that we see that as we said in response to an earlier question, that typically we believe them to be in the mid single-digit type multiples with the potential to grow them into low single digit type multiples.

That's a much better area for us to focus our attention in participating in frothy marketed M&A market transactions.

Understood. Thank you.

Thank you.

(Operator Instructions). There appear to be no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thank you very much for your participation and we'll talk to you in 90 days or so if not sooner. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.