Genesis Energy LP (GEL) 2013 Q4 法說會逐字稿

Welcome to the 2013 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, sourcing, 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, Wyoming, 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 the Securities and 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 L.P. Mr. Sims will be joined by Steve Nathanson, President and COO; Bob Deere, Chief Financial Officer; and Karen Pape, Chief Accounting Officer.

Good morning, and welcome to everyone. This morning we reported available cash before reserves of $48.4 million, providing 1.02 times coverage of the distribution we paid last Friday. That distribution of $0.535 per unit represented the 34th consecutive increase in the quarterly distribution, 29 of which have been greater than 10% over the prior year's quarter, and none of which have been less than 8.7%. In the fourth quarter of 2013, certain items in our pipeline supply and logistics operations, which we will discuss in greater detail, negatively impacted available cash before reserves. Excluding the effect of these items, pro forma available cash before reserves for the fourth quarter of 2013 would've been approximately $53.2 million, and would've provided pro forma coverage of 1.12 times the distribution pay.

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

The items in the quarter that negatively impacted our reported results were due to lower volumes on the Free State CO2 Pipeline due to repairs to the pipeline; certain customer field activities; Oregon transportation revenues on our Texas pipeline system due to final tie-in of our new facilities; transition costs incurred in our offshore marine transportation acquisition; and continued challenges in our fuel oil business. All of these issues, with the exception of the challenges in our fuel oil business, have been substantially resolved. While certain conditions in our fuel oil business that gave rise to challenges beginning in the third quarter 2013 have somewhat ameliorated, the level of activity relative to our past years of experience is not fully recovered, resulting in lower volumes handled at reduced margins.

We continue to monitor developments in the market for these products, and will endeavor to transition our business accordingly. However, given these changes in fundamentals, our operations are having to transition from a level and structured designed to operate within historical market conditions, in terms of cost, size, and type of activity.

As a result of this changing operating environment, our segment margin has been negatively impacted for the last two quarters. We expect this negative impact to continue at least through the first quarter of 2014, during which either market fundamentals return to more historical norms or we transition our scale cost structure and type of activity to adapt to newly defined market fundamentals.

We have substantially integrated our August acquisition of our offshore marine transportation business, consisting of nine barges and mated tugboats principally serving refineries and storage terminals along the Gulf Coast, Eastern Seaboard, Great Lakes, and Caribbean. These oceangoing vessels have allowed us to expand our marine transportation capabilities, complementing our inland waterway operations as well as our other crude and refined product assets.

Ahead of schedule, we should finalize the asset integration in the first quarter of 2014, and begin realizing the full financial contribution in future periods. We continue to anticipate that we'll realize an increasing contribution in 2014 from the combined effects of our recent acquisition and our organic projects.

Our two largest projects scheduled for completion in 2014 -- our SEKCO joint venture with Enterprise Products, and our Scenic Station project around ExxonMobil's Baton Rouge refinery complex -- should begin contributing in the second half of 2014 and accelerate into 2015. We believe we are well positioned, given the current available capacity in our offshore oil pipelines and our Gulf Coast infrastructure, to benefit in the latter part of this decade from the dramatically accelerating level of development activities in the deepwater Gulf of Mexico.

Our available opportunities continue to be reflective of the need for new infrastructure to respond to changing fundamentals in North American crude oil production and refining. This morning, we announced a project to construct a new crude oil, intermediates, and refined products import/export terminal in Baton Rouge, Louisiana. This facility will initially include approximately 1.1 million barrels of storage and will be pipeline-connected to the Port of Greater Baton Rouge's existing Deepwater docks on the Mississippi River. Our Baton Rouge Terminal will also be pipeline-connected to ExxonMobil's Anchorage tank farm, which interconnects both ExxonMobil's Baton Rouge Refinery and to Genesis Energy's previously announced Scenic Station unit train-capable rail facility. Projected to be operational by the end of the second quarter of 2015, the Baton Rouge terminal will provide shippers to Scenic Station the ability to access other attractive refining markets in addition to the local Baton Rouge market. The scope changes to Port Hudson and Scenic Station, to reflect expansion and integration with our new terminal in support of Baton Rouge, we expect to spend a total of some $300 million to $325 million on this important new infrastructure.

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 believe we have ample committed debt capacity to complete all of our announced organic projects.

As a result, we believe we are well positioned to continue to achieve our goals of delivering low-double-digit growth in distribution, 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'll turn it over to Steve.

Thanks, Grant. As you can see, refinery services had another strong quarter. We exited the fourth quarter with high customer demand; and continue to believe, based upon our customers' forecasts, we will exit 2014 at an annualized run rate of approximately 160,000 dry short tons of NaHS sales.

Our new Tulsa facility continues to add to our supply diversification, and our other existing facilities continue to perform well. As mentioned previously, pipeline segment margin was negatively affected by issues in our Texas system and one of our CO2 pipelines. These issues are largely behind us, and we would expect to see them return to or exceed historical levels of throughputs, especially as we ramp up deliveries to our Texas City Terminal which have been constrained to date because of volumes transported to our refinery customers. We're also pleased to see the resumption of development drilling at several large fields dedicated and connected to our CHOPS system.

We look forward to the mechanical completion of SEKCO, our joint venture with Enterprise, and the flow of oil through SEKCO and Poseidon later this year.

We report a number of activities in our supply and logistics segment. The demand for our barge capabilities, both inland and oceangoing, continues to be very strong. We can expect to take delivery of four additional inland black oil barges in the second quarter. Initially, these will be put to work using third-party push boats until late this year and early next year, as we take delivery of three new boats to mate up with our expanded inland barge fleet. Our recently acquired oceangoing fleet is performing at or above expectations. Our integration is ahead of schedule.

As we mentioned earlier, we believe the vast majority of our transition costs are behind us, and we will begin to realize the full contribution to margin. We are extraordinarily impressed with the new shoreside employees and mariners that have joined us.

Regarding rail, we are in various stages of completing work at all four of our -- quote, unquote -- operational rail loading/unloading facilities. While we have shipped or received barrels at each of these facilities, with Walnut Hill being the most fully operational, we are still in various stages of startup or commissioning. We anticipate most of this work to be completed in the first quarter of 2014, and look forward to handling increased volumes in future periods.

Construction activities are accelerating at our rail facility in Raceland, Louisiana, which is anticipated to be operational late this year. The integrated project between Port Hudson, Scenic Station and the Baton Rouge Terminal is by far the largest project we've undertaken to date, with various aspects to be completed in 2014, and full integrated operational capabilities expected in 2015.

We continue to focus on growing into our expanded crude truck and rail assets and efficiently using and maximizing the contribution from our expanded capabilities.

We continue to face challenges in our fuel oil business. Historical market channels to Asia and a shift in tanker shifting patterns have contributed to significantly less activities at severely challenged or negative margins. We are monitoring and taking steps to recalibrate our activities. Based on our longevity in this business, we believe markets will ultimately clear, but it will take some time and further near-term underperformance or negative performance to stabilize this portion of our business.

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

Thanks, Steve. The continuing performance of our business, in spite of certain challenges; the significant organic opportunities we are capturing; and our ability to execute on attractive bolt-on acquisitions, we believe combine to provide us with the opportunity to continue to create long-term value for our unitholders.

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 reliable operations, we continue to work together to deliver increasing long-term value to all of our stakeholders.

With that, I will turn it to Bob.

Thank, you Grant. In the fourth quarter of 2013, we generated total available cash before reserves of $48.4 million, representing a decrease of $2.1 million or 4% over the fourth quarter of 2012. Adjusted EBITDA increased $300,000 over the prior-year quarter to $62 million. Net income from continuing operations for the quarter was $16.7 million or $0.19 per unit, compared to $27 million or $0.34 per unit for the same period in 2012. The decline in net income from continuing operations between the quarterly periods was primarily due to the combination of an increase in unrealized losses on derivative transactions of $2.8 million; an increase in depreciation and amortization expense of $2.3 million; and an increase in interest expense of $2.1 million.

As Grant previously mentioned, in the 2013 quarter a number of items combined to negatively impact our pipeline transportation and supply and logistics segment margin. In our pipeline transportation segment, operating results were adversely affected by approximately $1.5 million due to, one, lower-than-expected throughput volumes on our Free State CO2 Pipeline, as a result of repairs to the pipeline on certain customer field activities; and, two, forgone transportation revenues on our Texas pipeline system due to final tie-in of our new facilities, both of which are largely behind us now.

In our supply and logistics segment, operating results were negatively impacted by approximately $3.3 million due to, one, transition costs incurred in our offshore marine transportation acquisition, which we expect to have no further such costs by the end of the first quarter of 2014; and, two, continued challenges in our fuel oil business, which we believe will continue at least through the first quarter of 2014.

Pro forma available cash before reserves for the fourth quarter of 2013, excluding the effect of those items discussed above, would have been approximately $53.2 million, and would have provided (technical difficulty) dollars, or 1%, between the fourth-quarter periods.

As discussed earlier, operating results were adversely affected by reduced volumes on our Free State pipeline system due to repairs and certain customer field activities. However, pipeline transportation segment margin increased overall quarter-over-quarter due to an increased contribution from the Cameron Highway Oil Pipeline System, or CHOPS, as the completion of facility improvement work by producers at the connected production fields in 2012 resulted in higher volumes transported on CHOPS in the 2013 quarter.

Refinery services segment margin increased $200,000, or 1%, between the fourth-quarter periods as a result of an increase in NaHS sales volumes due to increased customer demand. Despite NaHS sales volumes increasing 8%, segment margin was adversely impacted due to extended downtime attributable to a turnaround at one of our significant refinery locations in the 2013 quarter.

Additionally, NaHS sales revenues were partially offset by a decrease in the average index prices for caustic soda, which is a component of our sales price, and the other components referenced below. 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, geographic region, and supply point. The mix of NaHS sales volumes, to which these adjustments were applied in the fourth quarter of 2013, reduced NaHS revenues.

Supply and logistics segment margin decreased $700,000 or 3% between the fourth-quarter periods. The decrease in segment margin is largely attributable to the challenges in our fuel oil business. Although the conditions in the third quarter of 2013 that resulted in a precipitous drop in the commodity margins for our refined products business have abated, market liquidity and prices have not fully returned to their previous levels.

We continue to monitor the progress of recovery in those markets, and will adjust our business operations accordingly. The overall decrease in segment margin was partially offset due to the recent acquisition of our offshore marine transportation business, and the early contribution from the startup of certain of our crude oil rail loading and unloading operations.

Interest cost; corporate, general, administrative expenses; maintenance capital expenditures; and income taxes to be paid in cash affect available cash before reserves. Interest costs for the fourth quarter of 2013 increased by $2.1 million from the fourth quarter of 2012, 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 capitalized interest costs attributable to our growth capital expenditures and investments in the SEKCO pipeline joint venture.

Corporate cash general and administrative expenses decreased by $500,000, substantially due to lower costs of our employee compensation programs. In addition to the factors impacting available cash before reserves, other components in net income included depreciation and amortization expense, which increased $2.3 million between the quarterly periods primarily as a result of our acquisition of our offshore marine assets and recently completed internal growth projects. In the 2013 quarter, our derivative positions resulted in a $4.1 million non-cash unrealized loss, compared to a $1.3 million non-cash unrealized loss in the 2012 quarter.

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

Thanks, Bob. Our underlying business fundamentals remain solid, although not without a few challenges here and there. Going forward, we expect to realize an increase in contribution from our organic projects as they become fully operational. Our two largest projects scheduled for completion in 2014 -- our SEKCO joint venture with Enterprise Products, and our project around ExxoMobil's Baton Rouge Refinery complex -- will contribute in 2014 and accelerate into 2015.

We believe that we are well-positioned, given the current available capacity in our offshore oil pipelines, to benefit in the latter part of this decade from the dramatically increasing level of development activity in the deepwater Gulf of Mexico.

And, finally, as evidenced by our announcement today of our newest project -- to construct a crude oil, intermediates, and refined products import/export terminal in Baton Rouge, scheduled to come into service in mid-2015 -- we believe that there are still opportunities arising from the changing fundamentals in North American crude oil production and refining.

As a result, we believe we are well positioned to continue to achieve our goals of, one, delivering low-double-digit growth and distribution, which we've increased for 34 consecutive quarters, 29 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; and, three, delivering an increasing coverage ratio, all without ever losing sight of our absolute commitment to safe, reliable, and responsible operations.

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

(Operator Instructions). TJ Schultz, RBC Capital Markets.

First on the Hornbeck acquisition, as you get through the integration efforts that you talked about, how should we view returns on that investment or contributions to the business, really since August, versus some of the cash flows that you expect once you get through the full integration? I think you had talked about a 7 times multiple moving to 5.5 to 6 times. Is that still consistent with the contributions you saw during fourth quarter, and then what you expect moving forward?

I think the once we get through the transition and don't have the transitioning costs and effectively realize the repricing of some older contracts into today's market, that we are still comfortable with a 5.5 to 6 times multiple.

Okay. What's the timing on those contracts? When do some of those roll off? And can you quantify what kind of impact just those repricings have?

Basically, we'll see the vast majority of it show up starting in the first quarter. There is one that goes through June of next year that is arguably 40% under current market. So that only one of the eight of the nine vessels, if you will, will be starting in the first quarter of this year, will be at current market rates, if you will.

Okay, thanks. And then moving to the import/export terminal and the other facilities around there -- what percent of capacity there is committed to Exxon; and then, what type of cash flow multiple for those projects? I think you said $300 million or $325 million in total should we be thinking about.

Well, we can't discuss in detail the commercial arrangements. But suffice it to say that it's less than all is quote, unquote, contracted by Exxon. But we would anticipate that out of the bat that these would be in the aggregate, in the once fully operational, in the 7 to 8 type multiple; with substantial upside to drive it down to 5 to 6 times multiple.

Okay, thanks. SEKCO, if you could just give a general update on timing there. Should we expect some impact in 2014? When is that online, or is it really more of an impact to 2015 forward?

The contractual arrangements that SEKCO joint venture has with the shippers is that the series of minimum builds, if you will, both on SEKCO as well as Poseidon start July 1 of 2014, regardless of when first oil flows. So we would anticipate the contribution starting in the third quarter results, at whatever point volumes actually flow from the anchor tenant production facility, which is Lucius, then that will add to the contribution on top of the minimum build levels.

Okay, thanks. Just lastly, at Walnut Hill, if you can provide an update on train activity running there on a monthly basis. And then, you discussed the potential for a pipeline interconnect to another refinery customer that would allow additional trains. So just any update on the interconnect? Thanks.

We actually -- in the fourth quarter, we actually handled fewer trains than we did in the third quarter of 2013, primarily as a result the continuing turnaround of the primary refinery customer that lasted into October; and then behavior associated with ad valorem tax inventory management by the end of the year. They are going through a short turnaround this quarter, expected to last only a couple of weeks. So we would anticipate probably first-quarter activity to be greater than fourth quarter, but not quite up to third quarter; but certainly by second quarter, kind of activity consistent with what we saw in the third quarter last year.

Relative to the others, it's a third-party pipeline that to our knowledge is not yet in service. It was targeted to be in service down from a junction that we interconnect with in Alabama down into a refinery in eastern Mississippi, and that pipeline is not yet complete. But once it is complete, we will have the ability to unload trains, take it through our pipe, deliver it into another pipe, and take it into that refinery.

Cory Garcia, Raymond James.

Was hoping to get a quick updated picture on spending in 2014, recognizing that you're wrapping up several large projects, and now layering in this Baton Rouge terminal. Any thoughts on where that budget could shake out for this year?

We continue to look at our capital spend on kind of a project-by-project basis. So as far as having a budget, we typically do not budget for the expenditures in that. We would -- yes -- we estimate, at this point, given the status of the projects that we've publicly announced, that the 2014 spend would be about $300 million. And that excludes the contributions to the SEKCO pipeline that we have to finish up to get the pipeline completely operational. But that -- so that is what we anticipate now, given the recent announcement that we made this morning.

Okay, yes. That's a perfect snapshot. Thank you. And then also turning to your Natchez terminal, could you guys give any update on volumes into that facility last quarter? I'm just trying to reconcile the fact that obviously there's clear customer demand to get those heavy barrels down to the market, given the wider spread. But we've been hearing a slow ramp of onloading capacity out of the Canadian market. So just wondering if your customers have the need to fully utilize that facility, or should we be thinking of that layering on more late 2014 and 2015 for a full utilization?

We are seeing very strong customer demand for Natchez, as we kind of referenced in our prepared remarks of, quote unquote, fully operational is -- we are trying to handle a lot of volumes while we are still bringing on expanded car capability and tank modifications to handle stuff.

So, we would -- and as we also said, we hope to have all of that lined out by the end of this quarter. And I think that you know certainly it is designed to be an unloading facility for primarily manifest service for non-pipeline quality production coming out of isolated areas and in Canada.

Our Scenic Station, which is at the Baton Rouge area, and now interconnected with our Baton Rouge -- or will be interconnected with our Baton Rouge Terminal -- is really designed to be the unit train receipt point for pipeline quality barrels that are loaded onto railcars and brought to the Gulf Coast.

So, it's -- we are providing, if you will, the -- or attempting to provide and, getting strong customer interest and shipper interest -- to access the facilities; ones specifically designed to handle smaller manifest loads from multiple customers at Natchez of non-pipeline quality production out of Alberta; and, clearly, Scenic for unit train, large floating pipeline quality, which we think is going -- to by the end of 2014 or 2015, certainly the loading capabilities in Canada will match up with the timing of us coming on.

Sure. Okay. Appreciate the color, guys.

(Operator Instructions). It seems we have no further questions at this time. I would like to turn the floor back over to management for closing comments.

Okay. Well, thank you very much for dialing in. And we'll talk to you in 90 days, 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.