Genesis Energy's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Genesis Energy, (GEL)

Genesis Energy, L.P. (NYSE:GEL)

Q4 2013 Earnings Conference Call

February 18, 2014 09:30 AM ET


Grant Sims – Chief Executive Officer

Steve Nathanson – President & Chief Operating Officer

Bob Deere – Chief Financial Officer

Karen Pape – Senior Vice President & Controller


TJ Schultz – RBC Capital Markets

Cory Garcia – Raymond James


Welcome to the Q4 2013 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, 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 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 Paper, Chief Accounting Officer.

Grant Sims

Good morning and welcome to everyone. This morning we reported available cash before reserves of $48.4 million providing 1.02x 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 10.0% over the prior year’s quarter and none of which have been less than 8.7%.

In Q4 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 Q4 2013 would have been approximately $53.2 million and would have provided pro forma coverage of 1.12x the distribution paid.

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 and certain customer field activities; foregone 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 Q3 2013 have somewhat ameliorated the level of activity relative to our past years’ of experience has 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 changing fundamentals our operations are having to transition from a level and structure 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 Q1 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 ocean-going 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 Q1 2014 and begin realizing the full financial contribution in future periods.

We continue to anticipate that we will 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 on 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 in storage and will be pipeline connected to the Port of Greater Baton Rouge 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 to 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 Q2 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.

With scope changes to Port Hudson and Scenic Station to reflect expansion and integration with our new terminal at the Port 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 deliver 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.

Steve Nathanson

Thanks, Grant. As you can see, Refinery Services had another strong quarter. We exited Q4 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 on 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 are 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 reported 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 expect to take delivery of four additional inland black oil barges in Q2. 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 meet 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 shore side employees and mariners that have joined us.

Regarding rail, we are in various stages of completing work at all four of our “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 Q1 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 abilities 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 shipping 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 for the near term, underperformance or negative performance to stabilize this portion of our business.

With that I’ll turn it back over to Grant.

Grant Sims

Thanks, Steve. The continuing performance of our business in spite of certain challenges, the significant organic opportunities we’re 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 unit holders.

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.

Bob Deere

Thank you, Grant. In Q4 2013 we generated total available cash before reserves of $48.4 million, representing a decrease of $2.1 million or 4% over Q4 2012. Adjusted EBITDA increased $300,000 over the prior-year quarter to $62.0 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 margins. 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 three-state CO2 pipeline as a result of repairs to the pipeline and certain customer field activities; and two, foregone 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 Q1 2014; and two, continued challenges in our fuel oil business which we believe will continue at least through Q1 2014.

Pro forma available cash before reserves for Q4 2013 excluding the effect of those items discussed above would have been approximately $53.2 million and would have provided pro forma coverage of 1.12x the distribution paid.

Reported results from our Pipeline Transportation Segment increased $300,000 or 1% between the Q4 periods. As discussed earlier, operating results were adversely affected by reduced volumes on our three-state pipeline system due to pipeline 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 Q4 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 Q4 2013 reduced NaHS revenues.

Supply and Logistics Segment margin decreased $700,000 or 3% between the Q4 periods. The decrease in segment margin is largely attributable to the challenges in our fuel oil business. Although the conditions in Q3 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 costs, corporate, general and administrative expenses, maintenance, capital expenditures and income taxes to be paid in cash affect available cash before reserves. Interest costs for Q4 2013 increased by $2.1 million from Q4 2012, primarily as a result of increased borrowings for acquisitions and other growth projects, a portion of which were financed by our issuance in Q4 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 the lower costs of our employee compensation programs.

In addition to the factors impacting available cash before reserves, other components of 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.

Grant Sims

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 ExxonMobil’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 in distribution which we have 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.

Question-and-Answer Session


Thank you. We will now be conducting a question-and-answer session. (Operator instructions.) And our first question comes from the line of TJ Schultz with RBC Capital Markets. Please proceed with your question.

TJ Schultz – RBC Capital Markets

Thanks, good morning guys. I guess 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 I guess really since August versus some of the cash flow that you expect once you get through the full integration? I think you had talked about a 7.0x multiple moving to 5.5x to 6.0x. Is that still consistent with the contributions you saw during Q4 and then what you expect moving forward?

Grant Sims

I think that once we get through the transition and then have the transition costs and effectively realize the re-pricing of some older contracts into today’s market that we’re still comfortable with a 5.5x to 6.0x multiple.

TJ Schultz – RBC Capital Markets

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 re-pricings have?

Grant Sims

Basically we’ll see the vast majority of it show up starting in Q1. There’s one that goes through June of next year that is arguably 40% under current market so but eight of the nine vessels if you will, will be starting in Q1 this year will be at current market rates if you will.

TJ Schultz – RBC Capital Markets

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 to $325 million in total, what should we be thinking about?

Grant Sims

Well, we can’t discuss in detail the commercial arrangements but suffice it to say that it’s less than all is “contracted” by Exxon. But we would anticipate that kind of out of the bat that these would be in the aggregate and once fully operational in the 7x to 8x type multiple with substantial upside to drive it down to a 5x to 6x multiple.

TJ Schultz – RBC Capital Markets

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

Grant Sims

The contractual arrangements that SEKCO joint venture has with the shippers is that the series of minimum bills if you will, both on SEKCO as well as Poseidon, start July 1st, 2014, regardless of when first oil flows. So we would anticipate contribution starting in the Q3 results and 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 bill levels.

TJ Schultz – RBC Capital Markets

Okay, thanks. Just lastly, 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.

Grant Sims

We actually in Q4 handled fewer trains than we did in Q3 2013 primarily as a result of the continuing turnaround of the primary refinery customer that lasted into October and then the behavior associated with ad valorem tax inventory management by the end of the year. They’re going through a short turnaround this quarter, expected to last only a couple of weeks so we would anticipate probably Q1 activity to be greater than Q4 but not quite up to Q3; certainly by Q2 kind of activity consistent with what we saw in Q3 last year.

Relative to the others it’s a third-party pipeline that to our knowledge is not yet in service. It was starting up 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.


Thank you. And our next question comes from the line of Cory Garcia with Raymond James. Please proceed with your question.

Cory Garcia – Raymond James

Hi, thanks. Good morning, fellas. I 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?

Grant Sims

We continue to look at our capital spend on a project-by-project basis, so as far as having a budget, I mean we typically do not budget for the expenditures in that. 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. So that is what we anticipate now given the recent announcement we made this morning.

Cory Garcia – Raymond James

Oh yeah, that’s a perfect snapshot, thank you. And also turning to your NaHS terminal, can you guys give any update on volumes into that facility last quarter? I’m just trying to reconcile the fact that there’s clear customer demand to get those heavy barrels down to the market given the wider spread, but we’ve been hearing just a slow ramp of unloading capacity out of the Canadian market. So I’m just wondering if your customers have the means to sort of fully utilize that facility or should we be thinking of that layering on more late 2014-’15 for a full utilization?

Grant Sims

We are seeing very strong customer demand for NaHS. As we kind of referenced in our prepared remarks, “fully operational” is we’re trying to handle a lot of volumes while we’re still bringing on expanded cart capability and tank modifications to handle stuff. So as we also said we hope to have all of that lined out by the end of this quarter and I think that certainly it is designed to be an unloading facility for primarily manifest service for non-pipeline quality production coming out of isolated areas in Canada.

Our Scenic Station which is at the Baton Rouge area, now interconnected 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 we’re providing if you will, or attempting to provide and getting strong customer interest and shipper interest to access the facilities – one specifically designed to handle smaller manifest loads from multiple customers of NaHS of non-pipeline quality production out of Alberta, and then clearly Scenic for unit train, large loading of pipeline-quality which we think is going to, by the end of 2014-15 certainly the loading capabilities in Canada will match up whit the timing of us coming on.

Cory Garcia – Raymond James

Sure, okay. I appreciate the color, guys.


Thank you. (Operator instructions). And it seems we have no further questions at this time. I’d like to turn the floor back over to management for closing comments.

Grant Sims

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.

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