Genesis Energy's (GEL) CEO Grant Sims on Q2 2014 Results - Earnings Call Transcript

Aug. 3.14 | About: Genesis Energy, (GEL)

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

Q2 2014 Results Earnings Conference Call

July 31, 2014, 11:00 AM ET

Executives

Grant Sims - CEO

Bob Deere - CFO

Analysts

TJ Schultz - RBC Capital Markets

John Edwards - Credit Suisse

Jeffrey Birnbaum - UBS

Sameer Panjwani - Raymond James & Associates

Jason Ball - Robert W. Baird & Co.

Operator

Welcome to the 2014 Second 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, 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 direct you to its most recently filed and future filings with the Securities Exchange Commission.

We also encourage you to visit our website at genesisenergy.com, where a copy of the press release we issued today is located. The press release also presents a reconciliation of non-GAAP financial measures to the most comparable GAAP financial measures.

At this time, I would like to introduce Grant Sims, CEO of Genesis Energy, L.P. Mr. Sims will be joined by 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 $55.5 million, providing 1.11 times coverage of the distribution we will pay August 14th, 2014. That distribution of $0.565 per unit represents the 36th consecutive increase in the quarterly distribution, 31 of which have been greater than 10% over the year's prior quarter, and none of which have been less than 8.7%.

Favorable market conditions in crude oil and stellar performance from our refinery services segment by and large allowed us to overcome several of the challenges this quarter that we had previously discussed, including two of our inland marine barges being temporarily grounded in the Mississippi River, repairs on one of our NaHS tanks, and a turnaround in one of the major fields dedicated to the Cameron Highway Pipeline.

While the financial performance of our heavy fuel oil business improved, we believe we’ll continue to face certain challenging macro conditions for several more quarters as we transition in size and focus to new market reality. Despite these challenges, as well as those from increased employee compensation and net interest expenses, we were able to generate a record quarter of available cash before reserves.

The Southeast Keathley Canyon Pipeline, a joint venture with Enterprise Products in the deepwater Gulf of Mexico, was declared mechanically complete in June. As a result, we expect this project to contribute to our financial results in the third quarter and accelerate into the fourth, including the downstream transportation line and associated fees collected by our partially owned Poseidon Pipeline.

In addition to the completion of our pipeline connecting our Port Hudson barge terminal and the Mississippi River to the Exxon Mobile Baton Rouge refinery complex late in the first quarter, we have begun commissioning the startup of our scenic station unit train unloading facility. We anticipate a growing contribution in 2014 and into 2015 when certain minimum volume throughput commitments are contracted to start.

We also continue to move forward on our other projects in South Louisiana. Our crude oil intermediates and refined products import/export terminal at the Port of Greater Baton Rouge and our unit train unloading facility at Raceland to be complete and contribute in the second half of 2015.

These growth projects and the anticipated ramp-up in volumes on our other assets in Texas, Wyoming, Florida, and the Gulf of Mexico, should position us well to continue to achieve our goals of delivering low double-digit growth in distributions and investment grade leverage ratio and increasing coverage ratio, all without ever losing our cultural focus on our absolute commitment to safe, responsible, and reliable operations.

With that, I will now turn it over to Bob.

Bob Deere

Thank you, Grant. In the second quarter of 2014, we generated total available cash before reserves of $55.5 million, representing an increase of $9.8 million, or 21.4%, over the second quarter of 2013.

Adjusted EBITDA increased $11.1 million over the prior year quarter to $70.1 million, representing 18.9% year-over-year growth. Net income for the quarter was $21.1 million or $0.24 per unit, compared to $26.9 million or $0.32 per unit for the same period in 2013.

Reported results from our pipeline transportation segment increased $1.5 million or 6%, between the second quarter periods. The increase was primarily the result of higher volumes transported in our offshore pipelines due to additional wells being connected to the pipeline in the existing fields that they service.

In the second quarter of 2014, tariff revenues of onshore crude oil pipelines increased primarily due to upward tariff indexing of approximately 4.6% for our FERC-regulated pipelines. The increase in tariffs was effective in July 2013.

In addition, crude oil tariff revenues also increased as the result of higher throughput volumes, including those from our Louisiana pipeline system, which consists of our new 18-mile, 24-inch diameter crude oil pipeline connecting Port Hudson to the Baton Rouge Scenic Station and continuing downstream to the Anchorage Tank Farm.

This pipeline was operational for the entirety of the 2014 quarter. The increased crude oil tariff revenues were substantially offset by the increase in onshore crude oil pipeline operating costs associated with the higher throughput volumes and related activity on our new Louisiana pipeline system.

Refinery Services segment margin increased $2.9 million or 16%, between the second quarter periods, principally attributable to a 3% increase in NaHS sales volumes to a total of 37,600 dry shore tons for the quarter.

NaHS sales revenues increased primarily as a function of the increase in NaHS sales volumes. Such increase was partially offset by a decrease in the average index price for caustic soda, which is a component of our sales price and other components as follows. The pricing in our sales contracts for NaHS includes adjustments for fluctuations in commodity benchmarks, freight, labor, energy costs, and government indexes.

The frequency of which these adjustments are applied varies by contract, geographic region, and supply point. The mix of NaHS sales volumes to which these adjustment apply varies between periods.

Our raw material costs related to NaHS decreased correspondingly to the decrease in the average index price for caustic soda. We were able to realize benefits from operating efficiencies at several of our facilities. Our results also benefited from favorable management of the acquisition utilization of caustic soda in our operations, and from our logistic management capabilities.

Supply and Logistics segment margin increased by $7.8 million or 31% between the second quarter periods. In the second quarter of 2014, the increase in our segment margin resulted primarily from the contribution of our offshore marine transportation business, which we acquired in August 2013, as well as contributions from our new and expanded assets at our Port Hudson facility, which were completed during the first half of 2014.

In addition, we continue to transition our refined products operations to a level and structure designed to operate within current market conditions in terms of cost size and type of activity.

Interest cost, corporate, general and administrative expenses, maintenance capital utilized, and income taxes to be paid in cash affect available cash before reserves. Interest costs for the second quarter of 2014 increased by $1.8 million from the second quarter of 2013, primarily as a result of our new senior unsecured notes issued May 2014.

The increase was net of capitalized interest costs attributable to our growth capital expenditures. Corporate, general, and administrative expenses included in the calculation of available cash increased $1.1 million, primarily due to higher employee compensation expenses.

In addition to the factors impacting available cash before reserves, other components of net income included depreciation and amortization expense, which increased $4.8 million between the quarterly periods, primarily as a result of our acquisition of our offshore marine transportation assets and recently completed internal growth projects.

Also in the 2014 quarter, our derivative positions resulted in a $2.7 million, non-cash unrealized loss, compared to a $2 million non-cash unrealized gain in the 2013 quarter. The combination of the increase in depreciation and amortization expense in the 2014 quarter as compared to the 2013 quarter, as well as the unrealized loss on derivative transactions in the 2014, as compared to unrealized gains on derivative transactions during the 2013 resulted in a decrease in net income per common unit of $0.11 between quarterly periods.

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

Grant Sims

Thanks Bob. Our underlying business fundamentals remain solid and going forward, we expect to realize an increase in contribution from our organic projects as they become fully operational and experience increasing volumes.

Our two largest projects scheduled for completion in 2014, our SEKCO joint venture with Enterprise Products, which became mechanically complete in June, and our project around Exxon Mobile's Baton Rouge refinery complex, will contribute in 2014 and accelerate into 2015.

We believe that we’re well-positioned given the current availability-- 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, we believe that there are still opportunities arising from changing fundamentals in North American crude oil production and refining. As a result, we believe we’re well-positioned to continue to achieve our goals of, one, delivery and low double-digit growth in distributions.

Again, we have increased for 36 consecutive quarters, 31 of which have been 10% or greater over the prior year period and none less than 8.7%, 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 back to the moderator for any questions.

Question-and-Answer session

Operator

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. Please proceed with your question.

TJ Schultz - RBC Capital Markets

Hey, guys. Good morning. Can you quantify the fuel oil drag on cash flow maybe year-over-year what the current conditions provided versus where you were last year? Then how long these conditions persist and if you could expand on how you’re adjusting or transitioning the focus there.

Grant Sims

TJ, we don't really break it out. It's reported in consolidated Supply and Logistics. But as we said, it improved relative to the first quarter. It is clearly still behind the year ago periods in terms of performance.

Basically, on the--to right-size it, as we have mentioned a little bit, based upon what we've perceived to be current market realities and the go-forward realities, involve the ability to get out of some tank leases that we -- to recalibrate our size of our activity and we can't do that until the end of this year.

So, we've addressed a number of things, but we still have a cost basis in terms of our existing infrastructure that has historically been used to support that business that doesn't jive with our kind of recalibrated expectations for the business.

TJ Schultz - RBC Capital Markets

Okay. But the tank leases thus far -- largely by year end, that is something that you can get out of it sounds like.

Grant Sims

In 2015 going forward. Yes.

TJ Schultz - RBC Capital Markets

Okay. On SEKCO or SEKCO Pipeline -- and I guess that began generating revenue given the contracts earlier this month. But when would you expect the volumes to meaningfully kind of knock on downstream for the additional fees at Poseidon?

Grant Sims

I believe that the operator, which is Anadarko Petroleum, announced earlier this week that they expect first flows in the -- by the -- in the fourth quarter, I think in 2014. So, what that means we're not exactly sure.

But clearly, we would anticipate initial volumes coming in in the fourth quarter consistent with that announcement and accelerating as they ramp-up to the design capacity of the installed facility early in 2015.

TJ Schultz - RBC Capital Markets

Okay. Jay volumes looked down sequentially. Can you just provide some color on train activity into Walnut Hill and your expectations there going forward?

Grant Sims

Yes. I think due to a number of operating and -- conditions and market conditions, volumes were -- at Walnut Hill, which both affects supply and logistics in terms of the rail unloading as well as pipeline margin, because it is pumped through on the Jay Pipeline System, we're below our expectations in the second quarter.

We believe that the third quarter based upon July activity and anticipated activity in the next couple of months that we would see a return to kind of historical levels, if not exceeding historical levels of handling rail barrels at Walnut Hill and getting the downstream transportation on the Jay System.

TJ Schultz - RBC Capital Markets

Okay. All right. Just lastly, at Raceland, is the expectation that train activity there starts providing cash flow in the second half of next year, or does this come earlier? I thought the facility was due for completion maybe later this year, is that correct?

Grant Sims

We would anticipate that it should be done sometime in the late fourth quarter or first quarter of 2015. But that would expect a gradual ramp-up in activity around then, accelerating into the back half of 2015.

TJ Schultz - RBC Capital Markets

Okay. Thanks, Grant.

Grant Sims

Thank you.

Operator

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

John Edwards - Credit Suisse

Yeah, good morning, everybody. Just could you talk a little bit about the volumes on your NaHS volumes, it looks like they were down sequentially. Was that just a timing issue or do you expect that to come back up say north of 40 where you were in the first quarter?

Grant Sims

A bit of it is timing. A number of our sales primarily to South America are done on an FOB basis. So, depending upon when we load a ship, that's where title transfer and it recognizes -- we recognize the sale associated with that. So, I wouldn't read anything into kind of noise from quarter-to-quarter.

The third quarter primarily driven by operating practices in the pulp and paper industry to the extent that there is any annual seasonality tends to be the slightly slowest quarter. But we would -- I think we would expect that we're firmly in the 160,000 plus ton on an annual basis kind of world based upon our contracted book of business.

John Edwards - Credit Suisse

Okay. That's helpful. And then, just the volumes on the Louisiana line. I mean, it's a little bit lower than what we were expecting. I mean, is that -- are you expecting that to ramp-up here pretty quickly?

Grant Sims

Yes, that's primarily just barge barrels that are coming into the Port Hudson facility, some of which actually started our Natchez unloading facility. But as we referenced, we've begun start up operations at Scenic Station, which will start unloading trains. And again, those would be ramping up. And as we mentioned in our prepared remarks we have certain levels of take or pay that actually don't even kick in until mid-2015 associated with it. But we would see -- expect to see growing sequential throughput reported on our Louisiana pipelines.

John Edwards - Credit Suisse

Okay. That's really helpful. All right. Thank you. That's all I had.

Operator

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

Jeffrey Birnbaum - UBS

Good morning, guys.

Grant Sims

Good morning, Jeff.

Jeffrey Birnbaum - UBS

As we move past the turnaround in the field seating shops that you guys mentioned in the last call, any color you can give on kind of an exit rate on that pipeline at the end of the quarter? And any update on kind of the outlook over the next 12 to 18 months on that?

Grant Sims

We -- I think nothing that we have seen is inconsistent with what we discussed on the last call as I recall, and that is that we can see 250,000 to 350,000 barrels a day by the end of 2015 would be our reasonable expectation as we get all of these turnarounds behind us and resumption of development drilling for the installed production handling capability at the dedicated fields.

Jeffrey Birnbaum - UBS

Okay. Thanks. And then, just in terms of the Wyoming crude pipeline open season, any color there just kind of on the potential for that project going forward? Any feedback you got during that open season?

Grant Sims

I think we got -- it's fair to say that we got a significant amount of interest in it, complicated by the capacity rights on the Express system, which is -- was the -- out of Canada. And until there is some clarity on the capacity rights on Express, we have kind of put the project on hold to determine ultimate allocations of kind of back-to-back capacity from Canada through Express into what we call the Casper Express over at our Pronghorn facility.

Jeffrey Birnbaum - UBS

Okay. Great. And then, last one for me. I understand why you've made the change you made in reporting maintenance CapEx, and I very much appreciate that you guys are still reporting maintenance CapEx incurred as well as the CapEx utilized. Is there any color you can give on some of the drivers behind the higher maintenance CapEx incurred the last few quarters? Is that all the barge fleet, or is this something else starting that?

Grant Sims

A substantial portion of it is the barge fleet or some large ticket items in and around some of our existing tanks and/or pipelines. But, I mean, again, from a conceptual point of view, if you spend $1 million on a blue water vessel doing for five-year regulatory compliance purposes, it makes more intellectual sense to us to recognize that over the period under which that capital effectively is utilized and matches up with the revenues associated with that regulatory capital expended.

Jeffrey Birnbaum - UBS

Okay. Thanks, Grant.

Grant Sims

Thank you.

Operator

And our next question comes from the line of Sameer Panjwani of Raymond James. Please proceed with your question.

Sameer Panjwani - Raymond James & Associates

Hi, guys. Good morning. So when I am looking at your onshore pipeline asset base, it seems like there's a great opportunity to maybe build out a pipeline to transport (inaudible) oversupplied Houston markets and Louisiana refineries. So I am kind of wondering do you guys have any projects related to that in the works, and would you consider any projects like that?

Grant Sims

Basically, I think that we -- and it is kind of consistent with what we are doing from an infrastructure point of view in the Texas City area that we recognize that the Houston Texas City area is getting long -- certain qualities of crude oil and that the most efficient way to alleviate that situation short-term is to be able to load barges and/or ships and take it to refinery locations elsewhere in the U.S. that want that quality of crude oil. But we're not looking at any kind of massive pipeline from Texas to Louisiana.

Sameer Panjwani - Raymond James & Associates

Okay. Great. Then you just kind of mentioned your Marine infrastructure on the Texas coast. Would those facilities be able to accommodate a condensate export vessel like Aframax size or something like that, or is it more focused towards smaller barges?

Grant Sims

Well, we don't really deal in condensate at all because our primary focus is on the existing refineries in pad two and pad three, none of which want the condensate for the refining value of it. So we are really focused on providing the logistical capability to get the right crude oil barrel to the right location.

Sameer Panjwani - Raymond James & Associates

Okay. Thank you.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of Jason Ball with Robert W. Baird. Please proceed with your question.

Jason Ball - Robert W. Baird & Co.

Yeah, hi. Good morning, guys. Thanks for taking the question. Just a couple of housekeeping issues with regard to modeling. I think your previous CapEx guidance was about $310 million. Can you just talk about where you are in terms of that spend and how you see the second half unfolding from here.

Grant Sims

We would anticipate probably because of our desires to go ahead and get things in service that we would anticipate the 2014 expenditures to be more than that number. We are working on that as we kind of -- and probably by the time that the third quarter rolls around, we'll be able to update that a bit.

Jason Ball - Robert W. Baird & Co.

Okay. Fair enough. Thanks for that. And then just lastly, last quarter you talked a little bit about discussions with operators in the Tuscaloosa Marine Shale. Have there been any updates or can you talk about the evolution of those discussions and maybe your overall outlook down there?

Grant Sims

I think it is safe to say that we are basically under CAs with virtually all of the operators there and I would prefer that you kind of direct those questions or see some of the stuff that has been put out by them as a go-forward in their delineation of the resource there.

Jason Ball - Robert W. Baird & Co.

Okay. Great. I will do. Thanks a lot. That's all for me.

Grant Sims

Thank you.

Operator

Thank you. And it seems that we have no further questions at this time. I would like to turn the floor back to management for closing remarks.

Grant Sims

Okay. Well, thank you very much. And we look forward to speaking to you again in three months. Thanks.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!