Genesis Energy LP (GEL) 2013 Q3 法說會逐字稿

Welcome to the 2013 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 the in 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 SEC 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 the SEC. We also encourage you to invite our website at www.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, CFO, and Karen Pape, Chief Accounting Officer.

Good morning and welcome to everyone. This morning we reported available cash before reserves of $43.3 million, a decrease of 6% over the prior-year quarter with a resulting calculated coverage ratio of .93. In the third quarter of 2013 a number of items, which Bob will discuss in greater detail, negatively impacted available cash before reserves.

Pro forma available cash before reserves for the third quarter of 2013, excluding the effect of those items discussed below, would have been approximately $51.6 million, and pro forma adjusted EBITDA, again, excluding those items, would have been $64.8 million.

In spite of the number of items that combined to negatively impact our reported results for the quarter, we remain confident in the fundamentals of our businesses and the positive impact a number of our announced organic opportunities will have, especially as we move through the second half of 2014 and continuing on into 2015 and beyond.

At the end of August 2013 we completed our acquisition of substantially all of the assets of the downstream transportation business of Hornbeck Offshore Services, Inc. for approximately $231 million, which we refer to as our offshore, or blue water marine transportation business and assets. That business is comprised of nine barges and muted tug boats, principally serving refineries and storage terminals along the Gulf Coast, Eastern Seaboard, Great Lakes and Caribbean. These ocean-going vessels have allowed us to expand or marine transportation capabilities complementing our inland waterway operations, as well as our other crude and refined products assets. We welcome on board the new employees, recognizing them for their commitment to safe and responsible operations, and look forward to finalizing the asset integration and realizing the full financial contribution in future periods.

In September, we issued an additional 5.75 million units in a public offering at a price of $47.51 per unit. We received net proceeds of approximately $264 million from the offering. Because of the equity raised, we have ample financial flexibility to complete our announced organic projects which will contribute in future periods.

The items in the quarter that combine to negatively impact our quarter results, we believe, are largely behind us, although several of our refinery customer turnarounds continued into mid to late October and the fourth quarter is typically the weakest for volumes of heavy fuel oil moved by our trucks and barges through our owned or leased terminals. We will have however realized a full (inaudible) partial quarter contribution from our recently acquired Blue Water Barges.

As I said earlier, we remain confident in the fundamentals of our business. Obviously, there is a "noise" in our calculated coverage ratio given we paid a full distribution on the new units issued in September, even though our results only reflected a little over a month's worthy of contribution from our recent acquisition.

We continue to anticipate that we will realize an increase in contribution in 2014 from the combined effects of our recent acquisition and our organic projects. Our two largest projects, our SEKCO joint venture with Enterprise Products and our project around ExxonMobil's Baton Rouge refinery complex, will begin contributing in the second half of 2014 and accelerate into 2015.

We believe we are well-positioned given the current available capacity and our offshore oil pipelines, to benefit in the latter part of this decade from the dramatically accelerating level of developments activities in the deep water Gulf of Mexico.

As a result, we believe we are well-positioned to continue to achieve our goals of delivering low double-digit growth in distributions, maintaining a better than investment grade leverage ratio and delivering an increasing coverage ratio, all without ever losing sight of our absolute commitment to safe, reliable and responsible operations. With that, I will turn it over to Steve.

Thank you, Grant. Despite a turnaround at one of our significant refinery locations which impacted our available volume per shipment, mass sales volumes increased 4.5% over the same quarter a year-ago. While the pulp and paper industry continues to show robust demand, our emphasis has been on addressing the growing needs of mining and specialty chemical customers with growing volumes and increased emphasis on our high grade quality products.

Last quarter we shared with you that our Tulsa refinery operations would begin commissioning in Q3. I am pleased to report we have been producing much needed (inaudible) for the last week. Our Tulsa operation only produces high grade quality products which will help us address the growing demand in fine chemicals and the precious metal segment.

Through-puts on our offshore pipeline exceeded the volume in Q2 2013, and the same period last year, primarily as a result of higher volumes on the chop system. Volumes increased overall by 4% over the previous quarter and 20% over the period a year-ago. Our offshore construction in Keathley Canyon remains on budget, and the schedule to commission service in mid-2014.

Onshore pipeline volumes increased approximately 18% over the previous year period. Our pipeline has been connected to our Pronghorn Rail facility, which is scheduled to ship our first trains in December.

Our 18-inch pipeline in Webster, Texas, to Texas City, was commissioned in September as we projected it would. We have connected to our dock at Texas City, but the connection to our primary customer has been delayed on their side due to their requirement to replace a short section which is scheduled for the first half of December.

The volumes that at our Natchez facility continue to ramp-up as we articulated to you during our last call. Our phase 2 construction is well advanced providing 60 additional rail offloading spots to the existing 40, and 350,000 barrels of additional storage managed to cross eight different tanks. All of which will be fully operational in early 2014. We have begun the pipe lay portion of our 18-mile, 24-inch line for the Baton Rouge project connecting our terminal and barge dock in Port Hudson, to the rail and terminal facility that will serve ExxonMobil and other refiners.

First deliveries to the ExxonMobil complex via barge and pipeline are scheduled for early 2014 and commissioning of the crude-by-rail portion in quarter two of 2014.

In Raceland, LA, we broke ground on the rail and terminal portion of our crude-by-rail to pipeline in October. We expect to receive cars in Q3 2014. Demand for our inland barges is strong. We have discussed that we would take delivery of two barges in late quarter 3 of our four barge order. Those barges were commissioned in late Q3 and are now working. The next barge was put into service in October and the last will be received next week. These last two barges have already been contracted. We have placed an order for four more barges to be delivered in Q1 and Q2 of 2014, and we are reviewing our push boat requirements.

The transition of the acquired offshore tank barges is well underway and on many fronts we believe is ahead of the pre-acquisition plan schedule. Although we have only owned the fleet a short time it is meeting all of our expectations for safety and operational excellence. We believe that by year-end we will be able to complete the full transition of these assets into Genesis Marine.

As Grant mentioned, we have had a few challenges of moving our hedged fuel oil volumes using our truck, barges and terminals at normal margins. We see ourselves transitioning through those challenges. We have grown our crude oil trucking operations and rail car fleets significantly over the last year or so. With that, has come significant increases in operating expenses and General and Administrative expenses outpacing, to date, our volume growth.

We are focused on operating and mechanically growing into our expand footprint of assets and increasing our efficiencies. With that, I will turn it back to Grant.

Thanks, Steve. The continuing solid performance of our business, the significant organic opportunities we're capturing, and our ability to execute on attractive (inaudible) acquisitions, we believe combines to provide us with the opportunity to continue to create long-term value for our unit holders. Before I turn it over to Bob to discuss our reported results in greater detail I would 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.

With that, I will turn it over to Bob.

Thank you, Grant. In the third quarter of 2013 we generated total available cash before reserves of $43.3 million representing a decrease of $2.6 million, or 6%, over the third quarter of 2012.

Adjusted EBITDA decreased $100,000 to $56.5 million over the prior-year quarter. Net income for the quarter was $18.5 million or $0.22 per unit,compared to $31.2 million or $0.39 per unit for the same period in 2012.

The decline in net income was due to the prior year reversal of a provision for uncertain tax positions of $8.2 million combined with a $2.7 million increase in interest expense, and an increase in current quarter expenses related to growth transactions of $3.1 million.

As Grant previously mentioned, in the third quarter of 2013 a number of items negatively impacted our results. In our Supply and Logistics segment, operating results were negatively impacted by approximately $6.6 million for several items which I will discuss further in addressing the supply and logistics segment performance.

In our Pipeline Transportation segment, operating results were adversely affected by $1.1 million due to one, reduced throughput volumes on our J pipeline system as a result of a scheduled turnaround at a connected shipper's refinery and, two, a reduction in distributions by CHOPS resulting from a once every ten year right of way pavement.

With respect to our Refinery Services segment, downtime attributable to a turnaround at one of our significant refinery locations, negatively impacted operating about $600,000 due to incremental costs incurred to meet our customer's demand.

Excluding these events, pro forma total segment margin would have been $73.1 million, pro forma adjusted EBITDA would have been $64.8 million and pro forma available cash before reserves would have been $51.6 million. The aforementioned pro forma performance measures represent 11%, 14% and 12% increases, respectively, over the as reported results of the prior-year quarter.

Reported results from our Pipeline Transportation segment increased $6.6 million or 28% between the third quarter periods. As discussed earlier, the operating results were adversely affected by approximately $1.1 million due to one, reduced throughput volumes on our J pipeline system as a result of a scheduled turnaround at a connected shipper's refinery and, two, a reduction in distribution by CHOPS resulting from a once every ten year right of way pavement. However, Pipeline Transportation segment margin increased overall on a quarter-over-quarter basis due to higher onshore crude oil tariff revenues, an increased contribution from CHOPS, and an increase in revenue from onshore pipeline loss allowance volumes.

Onshore crude oil tariff revenue increased primarily due to increases in total throughput volumes primarily on our J pipeline system, as a result of additional barrels received at our crude-by-rail unloading terminal at Walnut Hill, FL, and upward tariff indexing on our FERC regulated pipelines.

The contribution from CHOPS increased as facility improvements worked by producers at the connected production fields, resulted in lower volumes transported on CHOPS in the 2012 prior-year quarter.

Pipeline loss allowance volumes collected and sold, increased as a result of an increase in barrels transported in the 2013 quarter as compared to the 2012 quarter.

Refinery Services segment margin increased $200,000, or 1%, between the third quarter periods.

As discussed earlier, downtime attributable to a turnaround at one of our significant refinery locations negatively impacted operating results by $600,000 due to incremental costs compared to meet our customer's demand. The decline in segment margin from that turnaround was more than offset from increased NaHS sales volumes. Other significant components contributing to the fluctuation in segment margin, were higher revenues resulting from increases in the average index prices for caustic soda, which is a component of our sales price,offset by other pricing components.

The pricing in our sales contracts for NaHS includes adjustments for fluctuations in commodity benchmarks, freight labor, energy costs and government indexes. The frequency at which these adjustments are applied varies by contract, geographical region and supply point.

The mix of NaHS sales volumes to which these adjustments applied, reduced NaHS revenues in the 2013 quarter. Supply and logistics segment margin as reported decreased $7.9 million,or 33%, between the third and quarter periods.

As discussed earlier, our operating results were negatively impacted by approximately $6.6 million for several items including one, a decline in railcar's unloaded at our Walnut Hill crude-by-rail unloading terminal, as a result of the scheduled turnaround at a connected shipper's refinery, two, railcar rental and storage costs incurred in advance of completion dates on certain of our rail projects and, three, a decision to delay sales related to certain refined product volumes due to adverse market conditions.

In addition to foregoing the sale of the product, the delay resulted in the recognition of hedge losses through the end of the quarter. The volumes will continue to be hedged until sold.

The current quarter segment margin included the initial month's operations of our recently acquired offshore Marine Transportation business. Interest costs, corporate G&A expenses, maintenance capital expenditures and income tax paid in cash affect available cash before reserves.

Interest cost increased in the third quarter of 2013 as compared to the third quarter of 2012 by $22.7 million, primarily as a result of increased borrowings for acquisitions and other growth projects. A portion of which were financed with our issuance in the first quarter of 2013 of $350 million of senior unsecured notes bearing interest at 5.75% per annum. This increase was net of increased capitalized interest costs attributable to our growth capital expenditures and investments in the SEKCO pipeline joint venture.

Corporate cash, G&A expenses decreased by $1 million substantially due to lower cost of our employee compensation programs.

In addition to the factors impacting available cash before reserves other components of net income included non-cash income tax expense of $400,000 in the 2013 quarter compared to a non-cash income tax benefit of $8.7 million in the 2012 quarter.

The non-cash income tax benefit in the 2012 quarter was primarily due to the reversal of uncertain tax positions as a result of tax audit settlements and the expiration of statutes of limitations.

Expenses related to acquiring our constructing assets that provide new sources of cash flow increased $3.1 million between the quarterly periods due to increases in third-party costs related to business and growth transactions.

Depreciation and amortization expense increased $1.2 million between the quarterly periods, primarily as a result of our acquisition, essentially all the assets of the downstream transportation business of Hornbeck, and recently completed internal growth projects.

In the 2013 quarter we recorded a non-cash expense related to our legacy stock depreciation rights plan of $200,000. In the 2012 quarter we recorded a non-cash benefit of $2 million. Fluctuations in the market price of our common units were the reasons for the difference.

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

Thanks, Bob. All our financial results were negatively impacted about I a number of items that we experienced in this quarter we believe that the impact of these items are largely behind us. Our underlying business fundamentals remain solid.

Going forward we will realize contribution from the offshore marine assets that were purchased this quarter and from some of our recently, or soon-to-be completed initiatives. We continue to realize an increase in contribution from our announced organic projects.

Our two largest projects, our SEKCO joint venture with Enterprise, and our projects around ExxonMobil Baton Rouge refinery will contribute in 2014, and accelerate into 2015. We believe, as I mentioned earlier, that we are well positioned given the current available capacity in our offshore pipelines to benefit in the latter part of this decade from the dramatically increasing levels of development activity in the deep water Gulf of Mexico.

As a result, we believe we are well positioned to continue to achieve our goals of one, delivering low double digit growth in distributions, which we have increased for 33 consecutive quarters, 28 of which have been 10% or greater over the prior-year period and none less than 8.7%, two, maintaining a better than investment grade leverage ratio, which is less than 3.3 times as enter our senior secured lenders calculate it, and three, having a strong coverage ratio which will improve next quarter and grow from there. All without ever losing sight of our absolute commitment to safe, reliable and responsible operations.

With that I will turn it back over to the moderator for any questions.

Thank you. (Operator Instructions). One moment, please, while we poll for questions. Thank you. Our first question is from the line of Cory Garcia, with Raymond James. Please proceed with your question.

I was hoping to dig a little bit into the S&L business, recognizing that there is a $6 million plus negative hit this quarter. You have still seen a pretty gradual slide in the segment margins throughout the year, maybe not all that surprising given the contraction we've seen in the spread, but curious where do you guys see the fixed fee baseline run-rate component of that business today?

I'm not sure that we have thought about that because we report marine operations in the Supply and Logistics segment so obviously, as we have mentioned several times in the presentation, instead of having one month we have two months of that in the fourth quarter. The lion's share of the noise, if you will, in the segment reported for the quarter ending 9/30 was in the fuel oil business and our decision to preserve long-term values as opposed to trying to manage the inventory in a very sloppy market.

Right. Right. I completely understand that. So if I'm thinking about it correctly in the Hornbeck contribution for the quarter, have you provided any figure on that recognizing that it's still a month of contribution and still hasn't been fully integrated into the system. Trying to back in to what the business looks like and how we should think about modeling the fourth quarter going forward.

Yes. We said at the time that we announced it, or discussed it, on the previous call that we thought it was around a seven times deal and that after we get through the transition period and fully integrated as well as have a couple of the legacy contracts roll-off and be repriced into current market, we thought that we could drive that multiple to 5.5 to 6 times.

Okay. Very helpful. Appreciate it, guys.

Thank you. Our next question is coming from the line of TJ Schultz, with RBC Capital Markets. Please proceed with your question.

Hey, guys. So the refine issue, or decision to delay sales I guess you're transitioning through, how long do you view that transition process or if you could provide a little more insight on timing there to realize some of the value?

As we also said in the prepared remarks, fourth quarter is seasonally the weakest quarter for moving heavy fuel oil primarily as a result of strange behavior in December to avoid (inaudible) with inventories, but the volumes remain hedged. We realized hedge losses by rolling it, in fact, an eight, if you will, the (inaudible) that existed because we felt that we could work this off. We've managed this business for seven years and the Davidson family had managed it for 50 years prior to that so, we hope to be able to realize some of the deferred margin. Certainly in the fourth quarter, but it's going to be a function of how much we actually move through our system and how many pounds we turn our tanks in the fourth quarter.

Okay. The Texas City pipe that was connected, sounds like some delay there on the customer side. If you could just provide a little bit of detail, maybe how long you expect the delay?I think you said it would begin addressing the issue in December but what is the ultimate impact on your ability to connect there?

Basically we hurried up and got operational and right before we were stepping into the primary customer's existing facility they came to the determination that they needed to replace certain parts of their in-refinery piping, if you will, and they are scheduled to do that in the in the first two weeks of December.

Okay. Thanks. Then Walnut Hill, I guess you're past the refinery turnaround, how many trains are you seeing now and what are your expectations there given you have capabilities to unload unit trains?

The normal operations for the one refinery customer is order of magnitude plus or minus 11 trains a month. We anticipate being at that rate in all of November and December and periods going forward. As we have said, there is the likelihood of another pipeline interconnect down to another refinery customer being in-service towards the end of this year, early in 2014, in which case we would have the opportunity to potentially move additional trains through there.

Could you provide an update on phase 2?I think that gets you to the ability to load 140 cars. What is your expectation for demand out of west Texas? Whether to move volumes to the West Coast, or the Gulf Coast?

I think that we still anticipate being fully unit train capable towards the end of this year or certainly early in the first quarter of 2014. As we've seen increasing level of drilling activity in and around in the Permian Basin as a general proposition, that we feel quite confident that given our existing trucking operations out there that we will see some activity accelerating in 2014.

Okay. Thanks. Lastly, can you quantify the CHOPS right of way payment you all made this quarter?

I think we mentioned our half was approximately $700,000.

Okay. Thanks, Grant.

Thank you. The next question is coming from the line of John Edwards, with Credit Suisse. Please proceed with your question.

Yes. Good morning, everybody.

Morning, John.

Grant, follow up on TJ's question on inventory. How much of that will come back to you in margin? You rolled it into a buckets of $6.6 million in aggregate. I'm just curious if you have an idea of that piece of it?

We haven't released that, but I did say that the lion's share of the $6.6 million is associated with the realized hedge losses and cash margin hung up on the balance sheet which we believe we have a reasonable chance of recovering all, or a portion of it, in future periods.

Okay. Alright. Thanks. I must have missed that. And then I'm just curious, can you quantify maybe how much of your supply and logistics was impacted by the rapidly changing spreads in the crude oil market?

We are not a significant participant in spreads. We really try to block and tackle. I think that Steve mentioned in his prepared remarks that we have really increased the number of trucks and rail cars and we're trying to catch up with our expanded footprint. We run a lease model, if you will, so that our rail cars are leased, our trucks are leased, so we recognize the expense as operating expense and so we're really a volume driven business and efficient operation that we can continue to focus our efforts on making more efficient.

Okay. So minimal. And then if you could comment on, I guess, sequentially the Texas pipeline volumes. Were those down because of the work you were doing to inter-connect to the refinery?

Yes. A function of the work as well as certain operating conditions at that post refinery.

Okay. And then, if you could comment, why were the Poseidon volumes down sequentially?

I mean it's basically primarily a function of maintenance turnarounds and well testing at various fields that are there. It's not any kind of massive decline of anything going.

Okay. Alright. That's helpful. Thank you very much.

Thank you. The next question is coming from the line of Jeff Birnbaum, with UBS. Please proceed with your question.

I guess this is another way of asking the question that John just asked, but in the Supply and Logistics business, how much of the quarter-over-quarter decline in volumes was from rail versus barge or other?

Jeff, the volumes that you see reported exclude the rail volumes in the Supply and Logistics segment. We consider that to be a fee basis and we're not showing volumes. Where you see the decline in the rail through-put volumes is on the pipeline volumes in Jay that were impacted by that.

Would have otherwise been higher.

Right.

Okay. Are you seeing any change in the fourth quarter to date versus third quarter rail volume?

Only to the extent of the completion of the turnaround that was a factor that impacted third quarter, and then, Grant had given an indication of what we expect then subsequent to that for November and December.

And then volumes continuing to incrementally ramp at Natchez will show up in fourth quarter.

Okay. Thanks. I'm not sure I missed this on CHOPS earlier, but I know you discussed in the past how, I guess, pardon the wording, how choppy the volume on CHOPS can be, but can you talk a little bit about what your seeing now there with a big volume uplift in the quarter that was driven and how you're viewing the sustainability of that?

There are two which we discussed in the past that are attached to CHOPS and for a variety of reasons they've been going through extended maintenance, permitting and safety testing, and it appears that we're entering a resumption of development. All of that is kind of past and so we would anticipate continued ramp-up of volumes there. As we've said in the past the install production capability at those two fills total is call it 285,000 barrels a day of total production handling capability and they're combined producing currently in the 140 range and simply by drilling development wells and filling up the production capability we anticipate that we will see the ramping of that in 2014.

Okay. Great. Thanks.

Thank you.

(Operator Instructions). Our next question is coming from the line of Michael Blum, with Wells Fargo. Please proceed with your question.

Hi. Good morning, guys. I think most have been covered but just I want to go back to the comments in the press release and the commentary about higher operating costs around adding new marine and truck fleets. Can you just talk about should we just consider this now leak a new run-rate? You alluded to the fact that you're going to try to take some measures to streamline that. Can you give a little more detail what your thoughts are on that?

Yes. I think what we were trying to say is our operating and G&A costs, our crude oil business and our refined products business are over the earlier quarter up 27% and yet our volumes are only up about 16%. We have expanded our asset footprint. All of which we're paying for both in terms of the leases associated with our expanding truck fleets, and the leases associated with our rail cars that we've added to our fleet on a year-over-year basis and we need to grow our volumes into our expanded footprint.

Okay. That's helpful. And then, last question. Can you talk about what the acquisition market looks like right now for you and what areas look interesting and are multiples being reasonable?

Obviously we did an acquisition that we understood and felt that we could quickly integrate it relative to the acquisition of the Hornbeck tank barges. We typically don't participate in big acquisitions other than those that we feel that we can add value to and successfully integrate into our system. Our focus really is continuing to identify what we perceive to be higher return organic opportunities and we are in the midst of, for a company our size, a very robust organic build-out. As we said several times in the prepared remarks, the two largest of which start contributing in the second half of 2014 and certainly accelerate into 2015.

Okay. Great. Thank you very much.

Thank you.

Thank you. It appears there are no further questions at this time. I would now like to turn the floor back over to management for any concluding comments.

Thank you very much and we'll talk to you in another 90 days or so, if not sooner. Thank you.

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