Genesis Energy, L.P.
Q2 2013 Earnings Call Transcript

Published: 1 Aug 2013

[Karen N. Pape:]

Welcome to the 2013 Second Quarter Conference Call for Genesis Energy. Genesis has 3 business segments

[Grant E. Sims:]

Good morning and welcome to everyone. This morning, we reported available cash before reserves of $45.7 million, a 6% increase over the prior year quarter and providing a coverage ratio of 1.08x. In the second quarter of 2013, the number of items which Bob will discuss in greater detail negatively impacted available cash before reserves. Pro forma available cash before reserves, excluding the effects of these items, for the second quarter of 2013 would've been $52.2 million, a 21% increase over the prior year quarter providing 1.23x coverage for our second quarter distribution, which is inclusive of the increase of our outstanding common units due to the conversion of our class 3 waiver units. Our growth has allowed us to increase distributions to our unitholders for the 32nd consecutive quarter, 27 of which had been 10% or greater over the year earlier quarter and 9 were less than 8.7%. In July, we agreed to acquire substantially all of the assets with the downstream transportation business at Hornbeck Offshore Transportation LLC for approximately $230 million. That business is primarily comprised of 9 barges and 9 tug boats, which transport crude oil and refined petroleum products, principally serving refineries and storage terminals along the Gulf Coast, Eastern Seaboard, Great Lakes and Caribbean. Those ocean-going vessels will allow us to expand our marine transportation capabilities, complementing our inland waterway as well as other crude oil and other heavy refined product assets. We have available and committed liquidity under our $1 billion revolving credit facility that affect that acquisition in addition to funding all of our organic growth capital requirements and we expect that transaction to close by the end of the third quarter of 2013. All our results were negatively impacted by a number of items this quarter, our underlying operations continued to perform solidly and consistent with our expectation. We're beginning to realize the impacts of our efforts to secure new opportunities for our partners to participate in the growing demand for our integrated services and capabilities. These new initiatives have created volume growth. This growth in combination with extremely low exposure to volatile commodity price levels has resulted in consistently growing our recurring operational cash flows. With that, I'll turn it over to Steve.

[Steven R. Nathanson:]

Thanks, Grant. From an operational point of view, the second quarter was quite good. Throughputs on our on-shore crude systems were up over 20% relative to last year, driven in large part by increased volumes on our Jay System, which delivers volumes from our Walnut Hill Rail facility. We're adding a second tank at Walnut Hill, expected to be operational in Q4, to increase our capabilities to handle more volumes, as well as different grades at that location and through our pipe. Our new line is the Texas City, previously targeted to be in service in July has slipped into September. This has been a difficult project given its routing and complex connections into the local refineries. In combination with some newly acquired tanks at Webster and the commissioning of our crude handling terminal in Texas City, we remain confident that our investment in and around the Webster to Texas City corridor will contribute increasing margin into the end of this year and 2014. Our volumes on offshore crude pipelines also increased over 20% on a year-over-year basis despite the downtime we experienced at certain connected fields and the shut-in of one of our pipelines because of issues on a downstream pipeline. Total volumes sold in our crude and refined product businesses increased almost 30% relative to a year ago, driven in large part by our increase in our crude oil trucking capabilities. Demand for our inland barges continues to be strong, resulting in high utilization and at attractive rates. We look forward to closing on the Hornbeck assets and integrating those assets and employees, who like us are dedicated to safe and responsible operations into our marine operations. 5 of the 9 vessels to be acquired are contracted with existing customers, from whom we already provide inland barge services. Relative to refinery services, we continue to see annualized volumes increasing some 10% to 15% by mid to end of next year as demand remains strong from our existing customers and as we meet the future contractor requirements, mainly around new and expanded mining operations. I'll now provide a quick update on our other organic projects. At Natchez, we began handling cars for a second customer in July and are on track to be able to efficiently handle 100 cars per day by the end of this year. At Wink, we continue construction -- are in discussions to interconnect that facility with 1 or more pipelines in the immediate vicinity. In Wyoming, we have just placed into service our pipeline extension into Casper and continued construction on our rail loading facility. When fully complete in Q4 of this year, we will be the only midstream company in the Powder River basin, providing integrated crude handling services from the wellhead, delivering to local refineries by pipeline and providing outbound rail service on both the Union Pacific and Burlington Northern railroads to both Gulf Coast and West Coast refineries. Our 2 largest projects in and around Baton Rouge and offshore in the Keithley Canyon remain on budget and on schedule for in-service in mid-2014 with financial results accelerating into 2015. With that, I'll turn it back over to Grant.

[Grant E. Sims:]

Thank you, Steve. The continuing solid performance of our business, the significant organic opportunities we're capturing and our ability to execute our attractive bolt-on acquisitions, we believe, combined to provide us with the opportunity to continue 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 contributions 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 unitholders. With that, I'll now turn it over to Bob.

[Robert V. Deere:]

Thank you, Grant. In the second quarter of 2013, we generated total available cash before reserves of $45.7 million, representing an increase of $2.5 million or 6% over the second quarter of 2012. Adjusted EBITDA increased $4.7 million to $59 million, a 9% increase over the prior year quarter. Net income for the quarter was $26.9 million or $0.33 per unit compared to $18.6 million or $0.23 per unit for the same period in 2012. As Grant previously mentioned, in the second quarter of 2013, a number of items negatively impacted our results. In our pipeline transportation segment, operating results from our offshore crude oil pipelines were adversely affected by approximately $2.5 million due to production variations at connected fields and unplanned downtime on the Eugene Island system. In our supply and logistics segment, operating results were negatively impacted by approximately $2.9 million for several items, which I will discuss further in addressing the Supply and Logistics segment performance. Our adjusted EBITDA and available cash before reserves in the 2013 quarter was also negatively affected by approximately $1.1 million of equity-based compensation cost, related to the increase in the market price of our common units. The market price of our common units at June 30, 2013, increased approximately 7% from March 31, 2013. Excluding these events, pro forma total segment margin would have been $75.8 million, pro forma adjusted EBITDA would have been $65.5 million, and pro forma available cash before reserves would have been $52.2 million. Each of these pro forma performance measures represent a 21% increase over the as reported results of the prior year quarter. Reported results from our pipeline transportation segment increased $5.7 million or 27% between the second quarter periods. As discussed earlier, operating results from our offshore and crude oil pipelines were adversely affected by approximately $2.5 million, due to production variation at connected fields and unplanned downtime on the Eugene Island system. Pipeline transportation segment margin increased overall on a quarter-over-quarter basis due to higher onshore crude oil tariffs and increased contribution from CHOPS and an increase in revenues from onshore pipeline loss allowance volumes. Onshore crude oil tariff revenue increased primarily due to increases in total throughput volumes, primarily on our Jay Pipeline System as a result of additional barrels received at our crude-by-rail unloading terminal at Walnut Hill, Florida and the upward tariff indexing on our FERC-regulated by pints. The contribution from CHOPS increased as ongoing improvement by producers at the connected production fields resulted in lower volumes transported on CHOPS in the 2012 quarter. Pipeline loss allowance revenues increased as a result of an increase in barrels sold in the 2013 quarter as compared to the 2012 quarter. These increases were partially offset by increased onshore pipeline operating cost, excluding non-cash charges due to increased employee compensation and related benefit costs and generally increases in operating cost inclusive of increased safety program cost. Supply and logistics segment margin, as reported, increased by $500,000 or 2% between the second quarter periods. As discussed earlier, our operating results were negatively impacted by approximately $2.9 million for several items, including

[Grant E. Sims:]

Thanks, Bob. While our financial results were negatively impacted by a number of items that we experienced in this quarter, our underlying business fundamentals remain solid. We saw increasing volumes across virtually all of our assets and operations and began to realize the benefits from some of our recently completed initiatives such as our unloading facility at Walnut Hill. We continue to expect to realize an increasing contribution in 2013 and '14 from our announced organic projects. Our 2 largest growth projects announced to date, our SEKCO joint venture with Enterprise Products and our project around ExxonMobil's Baton Rouge refinery complex, will contribute in the latter half of 2014 and accelerated into 2015. We believe that we are well positioned given current available capacity in our offshore oil pipelines to benefit in the latter part of this decade from the dramatically increasing level development activity in the deepwater Gulf of Mexico. We continue to evaluate and pursue opportunities that we have identified that fit our core competences. Our recently announced acquisition of additional marine assets will benefit us immediately upon closing of the transaction. As a result, we believe we are very well positioned to continue to achieve our goals of delivering low double-digit distribution -- growth in distributions, having a nice coverage ratio and maintaining a better than investment grade leverage 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. Thank you.

[Operator:]

[Operator Instructions] Our first question comes from Jeff Birnbaum with UBS.

[Jeffrey Birnbaum:]

So Grant, on the Hornbeck acquisition, is there any color you can provide on unexpected, maybe, run rate EBITDA from those asset? And is there going to be any CapEx necessary to -- or any work to ownerships [ph] ?

[Grant E. Sims:]

I think Hornbeck announced their earnings after the market closed yesterday and had their earnings call this morning. So it's -- we haven't had time to totally scrub it, but I think they reported adjusted EBITDA with -- for the quarter of about $8.6 million for their downstream division. Obviously, we don't -- since that's kind of a non-GAAP measure, we don't know if that's exactly how we would do it. On the other hand, we do view it at current market rates and anticipated cost during the transition period that it is slightly less than an 8x multiple, we believe, based upon our knowledge of some of the contracts which are being entered into once we get through a transition period, that we think that we can cut that down the 6- or 7-type multiple. Obviously, critical to that is the employee base at Hornbeck, which is, as we mentioned, has the same commitment to safe, responsible, reliable operations that we hope a large percentage of them will come into Genesis, but they obviously have continuing opportunities at Hornbeck. But importantly, we -- everybody's going to be offered a job, and we look forward to efficiently, after a period of transition of efficiently melding those into our great -- our marine operations currently.

[Jeffrey Birnbaum:]

All right, great. That's really helpful. And then one more for me, is there anything you can add in terms of the ineffectiveness of some of the crude hedges in the supply and logistics business? Just kind of what drove that?

[Grant E. Sims:]

Yes, the -- we had some barrels that were purchased on an LL basis that were, we believe, were sold on a back-to-back basis on an LL basis and convenient for our refinery customer and inconveniently for us, they did not load 2 barges, one out of Port Hudson and one out of Texas City. As a result, we were forced, under our hedging -- internal hedging policies to roll that product into a severely backward-dated market. And as a result, we -- the hedge, the margin that we made on the cash barrel did not accurately reflect the amount of -- that we lost on the hedge.

[Operator:]

Our next question comes from TJ Schultz with RBC Capital Markets.

[TJ Schultz:]

Grant, I guess just a first, big picture kind of question, you have several growth projects focused obviously on rail loading and unloading. Given lower differentials here, obviously, how does this impact your view on potential volume ramps through some of those facilities or, generally, your view for ongoing demand for rail?

[Grant E. Sims:]

I think that we believe that markets clear, it is item 1. Item 2, we anticipate and we've seen in July and August and would anticipate in September for a planned turnaround of one of the crude units at one of our refinery customers served by Walnut Hill that we've seen no decline in anticipated volumes associated with the "collapse of the differentials." The barrels -- the right barrel has to get to the right refinery, which can't always be served by pipelines and go from point A to point B unless there's a whole lot of refineries at point B. So we think that rail will continue to provide a long-term solution of getting the right barrels to the right refinery locations.

[TJ Schultz:]

Okay, and then more specifically, I guess, at Walnut Hill, last time we talked you indicated plans under that current expectations for maybe 10 trains per month through debt facilities, so it sounds like you still see that type of throughput. And then secondly, what does the second tank that you're putting in there mean for potential volumes through Walnut Hill?

[Grant E. Sims:]

I think we actually handled 13 trains in July, and our anticipation in August is equivalent to that, and I mentioned that we are aware of a planned turnaround at one of the crude units, so we would -- September will be somewhat lower than that anticipated because of that. But we're putting in the second tank to give us the flexibility to, A, either handle more volumes, or B, handle a different grade of potentially via rail at that same location because, as you are aware, we've reactivated our interconnect with the facilities of [indiscernible] American at the 10-mile station. They are building a new pipeline down to the Chevron Pascagoula refinery in Mississippi from that location to be in service at the end of the -- end of this year. That would allow us the flexibility to handle 2 separate types of crude oil for the 2 refineries that will be pipe connected too by the end of this year.

[TJ Schultz:]

Okay, helpful. I guess last thing for me, just on the offshore, maybe on the volumes. I think it was a $2.5 million impact you discussed on the segment this quarter. Just so I understand, was this related to some of the downtime that we had talked about in March from some of the connected fields that lagged and to the payment to the second quarter? And maybe if you could just discuss how some of those production variations have turned it back up or your outlook for the CHOPS volumes to get back to levels we've seen?

[Grant E. Sims:]

All right, yes. We've mentioned this on the first quarter calls, which, I guess, occurred in early May, that there was some extended maintenance going on in a couple of the fields attached to CHOPS. And as we've also kind of pointed out that, that we, as -- in terms of our presentation of cash available for distribution, we look at -- we backed out the equity in earnings from the joint ventures and replace it with the actual cash distributed, which is a practical matter, occurs on a 1-month lag. So even though, I think, for CHOPS, for the 3 calendar months ending June 30, we reported, to the 100% interest, 126 [indiscernible] ABD of crude, the cash distribution actually was derived by March, April, May activity, which averaged right at 100,000 barrels a day. We have -- the component of the $2.5 million that Bob has mentioned, and that we mentioned in the press release, would -- is reflective of what we would have expected as a distribution out of CHOPS, given the flow rates that we saw in June, which was really the first move -- first month, in which they came out of the turnaround. So we think that will be reflective, which was in excess of 150,000 barrels a day. So we think that, that will be more reflective of the distribution we would anticipate in the -- for the third quarter.

[Operator:]

Our next question comes from Darren Horowitz with Raymond James.

[Darren Horowitz:]

Grant, I've got 2 questions for you with regard to the supply and logistics segment. The first in Natchez with the expected ramp on back hauling, a the lot of that Gulf Coast drilling went back up to Canada. How do you think about expanding beyond that 60 rail cars spot that you guys have outlined and can possibly also the ability to handle condensate?

[Grant E. Sims:]

We have 40 slots currently available, and we're expanding that to an additional 60 slots for a total of 100 rail car slots to handle. We have -- we're doing some work at our existing heated tanks to convert them over from VGO/caustic service and the crude service, primarily what's required is the installation of internal floaters to appropriately safely handle the vapors associated with handling crude oil. All of that work should be done by the end of the year, the conversion of those tanks and the installation and in-service of the additional rail facilities, unloading facilities. We have the ability -- we have have built in the ability to -- in our -- potentially anticipating, although we haven't done any yet, being able to use the flexibility of our tanks and the loading capability -- loading the empty dilbit/bitumen cars with [indiscernible] you hope to go back to round trip to Canada.

[Darren Horowitz:]

Okay. And also at that facility, any opportunities to expand the barge capacity there? And maybe to move barrels up the Mississippi River? Or possible additional movements to refiners?

[Grant E. Sims:]

Well, it all is loaded on barge at that facility for distribution. Primarily at this point, it is going to refiners downstream, that point on the lower Mississippi River. And in fact, the new customer that we referenced has started bringing cars in July, we have, in essence, a bundled service. We unload the cars move it through tanks, and they've contracted with us to provide -- use our barges to load at Natchez and take it to their refineries. So as Steve likes to call it, the Genesis mall of integrated service capabilities to get these barrels to their right location, and we have the logistical assets in place to do that.

[Darren Horowitz:]

And then last question for me. Just around the comments that you made in the Powder River basin, specifically with regards to that Pronghorn Rail facility. How do you guys envision the scale of that facility increasing? And more importantly, how much of a capital commitment do you think could be necessary in order to handle producer volumes as that Niobrara production increases over the next couple of years?

[Grant E. Sims:]

From a design point of view, we will be able to comfortably load 1 train -- 1 unit train a day based upon initial design, which could be expanded to up to 2. I think that we've said that, previously, that the order of magnitude investment in that facility in Converse County is around $75 million, kind of all-in, so we anticipate having the ability to handle up to 70,000 barrels a day comfortably with very easy expansion capabilities, which were really -- we're putting in enough track , if you will, in our route designs that handle 3 trains a day. But with the addition of additional package and the truck receiving and potentially pipe receiving barrels into that location, we could easily get it up to 2 trains a day.

[Operator:]

Our next question comes from Brian Zarahn with Barclays.

[Brian J. Zarahn:]

On the Hornbeck acquisition, can you talk a little bit about the contract structure?

[Grant E. Sims:]

The typical contracts that we're seeing are ranging initial term, possibly 1 year, potentially various options to extend that, the mutual agreement of the parties.

[Brian J. Zarahn:]

And then on the financing side of things, with flexibility of your revolver about -- can you talk maybe about the sort of mix of debt and equity that you anticipate?

[Robert V. Deere:]

We haven't really crossed that bridge, but based upon call it 6 to 8 multiple that it's wildly accretive even with 100% equity financing. But we don't have to do anything. We have a sufficient capacity at L-plus 200 under our committed facility to be opportunistic in terms of putting long-term capital underneath thats associated with the acquisition.

[Brian J. Zarahn:]

Then you anticipate intending to expand your marine transportation business through acquisition?

[Grant E. Sims:]

I think that we have -- we would anticipate, as we've already started in our inland barge business, that at this point, we believe that we can effectuate growth more efficiently via new build programs. We are taking delivery in the third and fourth quarter of 4 additional inland barges. We have -- we anticipate taking another or we have placed an order for an additional 4 barges, and we will also build some new boats. But comfortably, given our infrastructure and our customers and our level of activity, that we view that as an efficient way to continue to conservatively expand that capability for our refinery customers.

[Brian J. Zarahn:]

And finally for me, can you -- I'm not sure if I missed it, can you provide expansion CapEx from the second quarter? And any updates to your expectation for the full year?

[Grant E. Sims:]

Yes. I think at this point, I mean, there's no significant change to our expectations for the full year, which was approximately $400 million spend, out of the total of $575 million announced -- publicly announced projects, some of which was spent in 2012 and some will be spent in the latter stages of completion in 2014. Total capital -- growth capitals in the first 6 months was $180 million.

[Operator:]

Our next question comes from John Edwards with Credit Suisse.

[John Edwards:]

Just a couple of minor ones, maybe I missed it. On the new Texas City line you were talking about earlier, I think, it's a little bit delayed. Is there any budget overrun on that? Or is it still roughly on budget, just a little bit later in the installation?

[Grant E. Sims:]

It's roughly on budget. We've expanded it. We mentioned in the prepared remarks that we've acquired some existing tanks from the flexibility to do some -- to build some additional tanks at Webster. So we've kind of expanded the scope, but we believe that the commercial arrangements that we can derive from that additional investment are quite attractive.

[John Edwards:]

Okay. And then, just -- you're indicating that on your -- on the CHOPS lines you're running more recently, I think you said 150,000 barrels a day, and I'm just curious which is well above what came in average for the fourth quarter? Is -- if you can just give us some idea of kind of your expectations now and further ramping on that maybe this year or next?

[Robert V. Deere:]

We continued to anticipate that much all of this extended period of maintenance is behind that we anticipate [indiscernible] and certainly, 2014, that we would anticipate continually increasing volumes as a result of resumption of the development drilling at the 2 major fields, where all of the extended maintenance has been going on. So we would hope to see increasing volumes through 2014. We've also recently entered into contracts both at the Poseidon level as well as the CHOPS level to provide transportation services to shore under firm basis for the Heidelberg producers, which has anticipated first oil in 2016, so -- operated by Anadarko and kind of based upon their public announcements, very much a trend to Lucius review. So lots of activity going there, and as we continue to reference, that we think that it is a great thing to have available capacity under our -- in the 2 major joint ventures in which we participate. [indiscernible] provides available capacity as we see the dramatically increasing levels of activity in the Gulf of Mexico.

[Operator:]

[Operator Instructions] Gentlemen, there are no further questions at this time.

[Grant E. Sims:]

Well, I thank everyone very much for participating, and we'll talk to you soon. Thank you.

[Operator:]

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