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GEL > SEC Filings for GEL > Form 10-K on 27-Feb-2014All Recent SEC Filings

Show all filings for GENESIS ENERGY LP

Form 10-K for GENESIS ENERGY LP


27-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
We are a growth-oriented master limited partnership formed in Delaware in 1996 and focused on the midstream segment of the oil and gas industry in the Gulf Coast region of the United States, primarily Texas, Louisiana, Arkansas, Mississippi, Alabama, Florida, Wyoming and in the Gulf of Mexico. We have a diverse portfolio of assets, including pipelines, refinery-related plants, storage tanks and terminals, railcars, rail loading and unloading facilities, barges and trucks. We provide an integrated suite of services to oil producers, refineries, and industrial and commercial enterprises that use NaHS and caustic soda. Our business activities are primarily focused on providing services around and within refinery complexes. We conduct our operations and own our operating assets through our subsidiaries and joint ventures.
Included in Management's Discussion and Analysis are the following sections:
Overview of 2013 Results

Acquisitions, Divestitures and Growth Initiatives

Results of Operations

Other Consolidated Results

Financial Measures

Liquidity and Capital Resources

Commitments and Off-Balance Sheet Arrangements

Critical Accounting Policies and Estimates

Recent Accounting Pronouncements

Overview of 2013 Results
We reported net income from continuing operations of $84 million, or $1.00 per common unit, in 2013 compared to net income from continuing operations of $97.3 million, or $1.24 per common unit, in 2012. The decline in net income in 2013 was primarily due to the reversal in 2012 of a provision for uncertain tax positions of $8.2 million combined with a $7.7 million increase in interest expense, a $4.1 million increase in general and administrative expenses related to growth capital expenditures and a $3.6 million increase in depreciation and amortization expense. Those decreases were partially offset by the overall increase in Segment Margin as discussed below.
Available Cash before Reserves increased $6.9 million in 2013 to $186.1 million as compared to 2012 Available Cash before Reserves of $179.2 million. See "Financial Measures" below for additional information on Available Cash before Reserves.
Segment Margin (as defined below in "Financial Measures") was $280.4 million in 2013, an increase of $18 million, or 7%, as compared to 2012. This increase primarily resulted from improvement in Segment Margin in our pipeline transportation segment of 13% and increases of 3% in both our refinery services and supply and logistics segments. Our Segment Margin attributable to our pipeline transportation and refinery services segments increased primarily due to increased pipeline throughput volumes and increased NaHS sales volumes, respectively. Our supply and logistics segment benefited from our acquisition of our offshore marine transportation business in August 2013, our recently completed crude-by-rail terminals and higher crude oil and petroleum products volumes handled by our expanded marine, trucking and rail fleets.


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Distribution Increase
In January 2014, we declared our thirty-fourth consecutive increase in our quarterly distribution to our common unitholders relative to the fourth quarter of 2013. Twenty-nine of those quarterly increases have been 10% or greater as compared to the same quarter in the preceding year. In February 2014, we paid a distribution of $0.5350 per unit related to the fourth quarter of 2013, representing a 10.3% increase from our distribution of $0.4850 per unit related to the fourth quarter of 2012.
Acquisitions, Divestitures and Growth Initiatives Acquisition of Additional Barges and Tug Boats On August 28, 2013, we completed the acquisition of substantially all of the assets of the downstream transportation business of Hornbeck Offshore Services, Inc. for approximately $230.9 million, which we refer to as our offshore marine transportation business and assets. The acquired business was primarily comprised of nine barges and nine tug boats that transport crude oil and refined petroleum products, principally serving refineries and storage terminals along the Gulf Coast, Eastern Seaboard, Great Lakes and Caribbean. That acquisition complements and further integrates certain of our existing operations, including our Genesis Marine inland barge business (comprised of 54 barges and 23 push/tow boats), our crude oil and heavy refined products storage and blending terminals as well as our crude oil pipeline systems.

Divestiture of Fuel Procurement Business

On December 31, 2013 we completed the sale of our vehicle fuel procurement and delivery logistics management services business for $1 million. The operating results of that business, previously reported within our supply and logistics segment, was reclassified as discontinued operations in our Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011.

ExxonMobil Baton Rouge Project
We are improving existing assets and developing new infrastructure in Louisiana, including connecting to Exxon Mobil Corporation's Baton Rouge refinery, one of the largest refinery complexes in North America, with more than 500,000 barrels per day of refining capacity. Our investment includes improving our existing terminal at Port Hudson, Louisiana, constructing a 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 and building a new crude oil unit train unload facility at Scenic Station. The Port Hudson upgrades and new crude oil pipeline are expected to be completed by the end of the first quarter of 2014, and Scenic Station is expected to be completed in the second quarter of 2014.
Baton Rouge Terminal
We recently announced plans to construct a new crude oil, intermediates and refined products import/export terminal in Baton Rouge. That terminal will be located near the Port of Greater Baton Rouge and will be pipeline-connected to that port's existing deepwater docks on the Mississippi River. We will initially construct approximately 1.1 million barrels of tankage for the storage of crude oil, intermediates and/or refined products with the capability to expand to provide additional terminaling services to our customers. Our Baton Rouge Terminal will also be pipeline-connected to ExxonMobil facilities in the area, as well as to Scenic Station. Shippers to Scenic Station will have access to both the local Baton Rouge refining market, as well as the ability to access other attractive refining markets via our Baton Rouge Terminal. The Baton Rouge Terminal is expected to be completed by the end of the second quarter of 2015. Deepwater Gulf of Mexico Pipeline Joint Venture Southeast Keathley Canyon Pipeline Company LLC, or SEKCO, our 50/50 joint venture with Enterprise Products Partners, L.P., expects to place in-service in mid-2014 its deepwater pipeline serving the Lucius oil and gas field in the southern Keathley Canyon area of the Gulf of Mexico. SEKCO has entered into crude oil transportation agreements with six Gulf of Mexico producers, including Anadarko U.S. Offshore Corporation, Apache Deepwater Development LLC, Exxon Mobil Corporation, Eni Petroleum US LLC, Petrobras America and Plains Offshore Operations, Inc. Those producers have dedicated their production from Lucius to the pipeline for the life of the reserves. We expect the pipeline to provide capacity for additional projects in the deepwater Gulf of Mexico. Enterprise Products serves as construction manager and will be the operator of the new pipeline.
The 149-mile, 18-inch diameter pipeline, designed to have a 115,000 barrel per day capacity, will connect the Lucius-truss spar floating production platform to an existing junction platform at South Marsh Island that is part of the Poseidon pipeline system, in which we own a 28% interest. See additional discussion regarding this project in Item 7.


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"Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Texas City Projects
In December 2013, we placed in-service an 18-inch diameter loop of our existing crude oil pipeline into Texas City, supported by a term contract with one of our refining customers, which we expect will allow us to significantly expand our total service capabilities into the Texas City area. Previously, we had acquired three above-ground storage tanks located in Texas City, Texas and an existing barge dock at the same location, all approximately 1.5 miles from our existing Texas pipeline system. We also constructed a truck station and tankage in West Columbia, Texas to provide incremental transportation service for the Eagle Ford Shale and other Texas production through our pipeline system to refining markets in the greater Houston/Texas City area. We are able to handle approximately 40,000 barrels per day of crude oil through the Texas City terminal. Rail Projects
Walnut Hill - In the first quarter of 2013, we completed construction on the second phase of our crude-by-rail unloading terminal at Walnut Hill, Florida, which includes a 100,000 barrel storage tank and related equipment and connections to our Jay System. This facility provides the capability of handling unit train shipments for direct deliveries to an existing refinery customer and indirect deliveries (through third-party common carriers) to multiple other markets in the Southeast at the option of the shippers. We have commenced construction on an additional tank at that site with 110,000 barrels of capacity, which will allow us to handle increased rail and pipeline demand. We estimate this tank will be fully operational by the end of the first quarter of 2014.
Wink - In 2012, we completed the initial phase construction of a crude oil rail loading facility in Wink, Texas, which was designed to move crude oil from West Texas to other markets and to give us the capability to load Genesis and third party railcars. Construction on the second phase of that facility, which we estimate will be operational by the end of the first quarter of 2014, will allow us to more efficiently load full unit trains.
Natchez - In the third quarter of 2013, we completed construction on a crude oil rail unloading/loading facility at our existing terminal located in Natchez, Mississippi, which is designed to facilitate the movement of Canadian bitumen/dilbit to Gulf Coast markets. That facility has the capability to unload bitumen/dilbit as well as load diluent for backhauls to Canada. We have initiated construction on the second phase of the Natchez facility, which will provide an additional 60 railcar spots and additional heated tanks. We expect to complete that rail unloading/loading facility expansion by the end of the first quarter of 2014.
Raceland - In the fourth quarter of 2013, we began construction on a new crude oil unit train unloading facility capable of unloading up to two unit trains per day, which is located in Raceland, Louisiana. The Raceland Rail Facility will be connected to existing midstream infrastructure that will provide direct pipeline access to refineries from the Baton Rouge area to the Gulf of Mexico and is expected to be operational in the fourth quarter of 2014.
Pronghorn - In December of 2013, we placed in-service a new unit train loading facility in the Powder River Basin of the Niobrara Shale Play. That facility is tied-in to our existing gathering system in that region. Results of Operations
In the discussions that follow, we will focus on our revenues, expenses and net income, as well as two measures that we use to manage the business and to review the results of our operations--Segment Margin and Available Cash before Reserves. Segment Margin and Available Cash before Reserves are defined in the "Financial Measures" section below.
Revenues, Costs and Expenses and Net Income Our revenues from continuing operations for the year ended December 31, 2013 increased $767.5 million, or 23% from 2012. Additionally, our costs and expenses from continuing operations increased $771.4 million or 24% between the two periods. The majority of our revenues and our costs are derived from the purchase and sale of crude oil and petroleum products. The significant increase in our revenues and costs between 2013 and 2012 is primarily attributable to increased volumes from our continuing operations, our recently completed acquisitions and internal growth projects and slight increases in the market prices for crude oil and petroleum products as described below. Volumes from our continuing operations in 2013 increased in our supply and logistics segment by 26% from 2012, as explained in our supply and logistics Segment Margin discussion below. The average closing prices for West Texas Intermediate ("WTI") crude oil on the New York Mercantile Exchange ("NYMEX") increased 4% to $97.97 per barrel in 2013, as compared to $94.21 per barrel in 2012.
Net income from continuing operations decreased $13.3 million in 2013 from 2012. See "Overview of 2013 Results" above for additional discussion.


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Revenues from continuing operations in 2012 increased $929.6 million, or 38% from 2011. Additionally, our costs and expenses from continuing operations increased $897.4 million or 38% between the two periods. The significant increase in our revenues and costs between 2012 and 2011 is primarily attributable to increased volumes from our continuing operations and our acquisitions, partially offset by slight decreases in the market prices for crude oil and petroleum products. Volumes from continuing operations increased in our supply and logistics segment in 2012 by 39% from 2012, as explained in our supply and logistics Segment Margin discussion below. The average closing prices for WTI crude oil on the NYMEX were consistent, decreasing 1% to $94.21 per barrel in 2012, as compared to $95.12 per barrel in 2011. Net income from continuing operations increased $46 million in 2012 to $97.3 million from $51.4 million in 2011. The increase in net income during 2012 primarily reflects improved Segment Margin results primarily due to our acquisitions and increased volumes. Our income tax expense decreased due to the reversal of uncertain tax positions as a result of tax audit settlements and the expiration of statutes of limitations. These increases to net income were partially offset by increases in general and administrative expenses and interest costs.
Included below is additional detailed discussion of the results of our operations focusing on Segment Margin and other costs including general and administrative expenses, depreciation and amortization, interest and income taxes.
Segment Margin
The contribution of each of our segments to total Segment Margin in each of the last three years was as follows:

                              Year Ended December 31,
                           2013         2012         2011
                                   (in thousands)
Pipeline transportation $ 108,879    $  96,539    $  67,908
Refinery services          75,361       72,883       74,618
Supply and logistics       96,120       92,911       59,975
Total Segment Margin    $ 280,360    $ 262,333    $ 202,501


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Year Ended December 31, 2013 Compared with Year Ended December 31, 2012
Pipeline Transportation Segment
Operating results and volumetric data for our pipeline transportation segment
are presented below:
                                                               Year Ended December 31,
                                                                2013              2012
                                                                   (in thousands)
Crude oil tariffs and revenues from direct financing
leases-onshore crude oil pipelines                         $     39,627       $   31,931
Segment Margin from offshore crude oil pipelines,
including pro-rata share of distributable cash from equity
investees                                                        44,530           38,500
CO2 tariffs and revenues from direct financing leases of
CO2 pipelines                                                    26,342           26,603
Sales of onshore crude oil pipeline loss allowance volumes       11,526            9,165
Onshore pipeline operating costs, excluding non-cash
charges for equity-based compensation and other non-cash
expenses                                                        (19,217 )        (15,607 )
Payments received under direct financing leases not
included in income                                                5,110            5,016
Other                                                               961              931
Segment Margin                                             $    108,879       $   96,539

Volumetric Data (average barrels/day unless otherwise
noted):
Onshore crude oil pipelines:
Texas                                                            51,067           51,880
Jay                                                              34,933           22,306
Mississippi                                                      18,026           18,711
Onshore crude oil pipelines total                               104,026           92,897

Offshore crude oil pipelines:
CHOPS (1)                                                       143,854           96,664
Poseidon (1)                                                    207,372          211,375
Odyssey (1)                                                      44,978           36,157
GOPL                                                              8,583           15,191
Offshore crude oil pipelines total                              404,787          359,387

CO2 pipeline (average Mcf/day):
Free State                                                      190,274          186,479

(1) Volumes for our equity method investees are presented on a 100% basis.

Pipeline transportation Segment Margin for 2013 increased $12.3 million, or 13%, from 2012. The significant components of this change were as follows:
With respect to our onshore crude oil pipelines, tariff revenues increased $7.7 million, or 24%, primarily due to (1) upward tariff indexing of approximately 4.6% for our FERC-regulated pipelines effective in July 2013 and (2) a net increase in throughput volumes of 11,129 barrels per day (12%), primarily from our Jay pipeline system. Our Jay pipeline system volumes increased primarily from additional barrels received at our crude-by-rail unloading terminal at Walnut Hill, Florida.

Segment Margin from our offshore crude oil pipelines increased $6 million, or 16%, primarily reflecting an increased contribution from CHOPS. The completion of improvement facility work by producers at the connected production fields in 2012 resulted in higher volumes transported on CHOPS in 2013.

Onshore crude oil pipeline loss allowance volumes, collected and sold, increased Segment Margin by $2.4 million due to an increase in barrels transported in 2013 as compared to 2012.


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Onshore pipeline operating costs, excluding non-cash charges, increased $3.6 million due to pipeline integrity maintenance expenditures on our onshore pipelines, employee compensation and related benefit costs and general increases in operating costs inclusive of safety program costs.

Volumes on our Free State CO2 pipeline system increased 3,795 Mcf per day, or 2%. We provide transportation services on our Free State CO2 pipeline system through an "incentive" tariff which provides that the average rate per Mcf that we charge during any month decreases as our aggregate throughput for that month increases above specific thresholds. As a result of this "incentive" tariff, fluctuations in volumes on our Free State CO2 pipeline system have a limited impact on Segment Margin.

Refinery Services Segment
Operating results for our refinery services segment were as follows:
                                                              Year Ended December 31,
                                                                2013             2012
Volumes sold (in Dry short tons "DST"):
NaHS volumes                                                    147,297         142,712
NaOH (caustic soda) volumes                                      87,463          77,492
Total                                                           234,760         220,204

Revenues (in thousands):
NaHS revenues                                              $    159,125      $  153,689
NaOH (caustic soda) revenues                                     50,748          44,322
Other revenues                                                    6,987           7,099
Total external segment revenues                            $    216,860      $  205,110

Segment Margin (in thousands)                              $     75,361      $   72,883

Average index price for NaOH per DST (1)                   $        604      $      575
Raw material and processing costs as % of segment revenues           49 %            48 %

(1) Source: IHS Chemical

Refinery services Segment Margin for 2013 increased $2.5 million, or 3%, from 2012. The significant components of this fluctuation were as follows:
NaHS revenues increased primarily as a function of increased sales volumes and an increase in the average index price for caustic soda (which is a component of our sales price), partially offset by other components referenced below. In 2013, NaHS sales volumes increased 3% primarily due to increased demand from customers in the pulp and paper industry, however this increase was partially offset by a decrease in sales to South American customers (due to timing of bulk deliveries). 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 applied reduced NaHS revenues in 2013.

Our raw material costs related to NaHS increased correspondingly to the rise in the average index price for caustic soda, although we were able to partially offset our increased raw materials costs with operating efficiencies at several of our sour gas processing facilities, our favorable management of the acquisition (including economies of scale) and utilization of caustic soda in our (and our customers') operations, and our logistics management capabilities.

Caustic soda sales volumes increased 13%. Although caustic sales volumes may fluctuate, the contribution to Segment Margin from these sales is not a significant portion of our refinery services activities. Caustic soda is a key component in the provision of our sulfur-removal service, from which we receive the by-product NaHS. Consequently, we are a very large consumer of caustic soda. In addition, our economies of scale and logistics capabilities allow us to effectively purchase additional caustic soda for re-sale to third parties. Our ability to


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purchase caustic soda volumes is currently sufficient to meet the demands of our refinery services operations and third-party sales.
Average index prices for caustic soda increased to $604 per DST during 2013 compared to $575 per DST during 2012. Those price movements affect the revenues and costs related to our sulfur removal services as well as our caustic soda sales activities. However, generally changes in caustic soda prices do not materially affect Segment Margin attributable to our sulfur processing services because we usually pass those costs through to our NaHS sales customers. Additionally, our bulk purchase and storage capabilities related to caustic soda allow us to somewhat mitigate the effects of changes in index prices for caustic on our operating costs.

Supply and Logistics Segment
Our supply and logistics segment is focused on utilizing our knowledge of the crude oil and petroleum markets and our logistics capabilities from our terminals, railcars, rail loading and unloading facilities, trucks and barges to provide oil and gas producers, refineries and other customers with a full suite of services. These services include:
purchasing/selling and/or transporting crude oil from the wellhead to markets for ultimate use in refining;

supplying petroleum products (primarily fuel oil, asphalt and other heavy refined products) to wholesale markets and some end-users such as paper mills and utilities;

purchasing products from refiners, transporting the products to one of our terminals and blending the products to a quality that meets the requirements of our customers and selling those products;

utilizing our fleet of trucks and trailers, railcars, and barges to take advantage of logistical opportunities primarily in the Gulf Coast states and waterways;

railcar loading and unloading activities at our crude-by-rail terminals; and

industrial gas activities, including wholesale marketing of CO2 and processing of syngas through a joint venture.

We also use our terminal facilities to take advantage of contango market conditions for crude oil gathering and marketing and to capitalize on regional opportunities which arise from time to time for both crude oil and petroleum products.
Despite crude oil being considered a somewhat homogeneous commodity, many refiners are very particular about the quality of crude oil feedstock they process. Many U.S. refineries have distinct configurations and product slates that require crude oil with specific characteristics, such as gravity, sulfur content and metals content. The refineries evaluate the costs to obtain, transport and process their preferred feedstocks. That particularity provides us with opportunities to help the refineries in our areas of operation identify crude oil sources meeting their requirements and to purchase the crude oil and transport it to the refineries for sale. The imbalances and inefficiencies relative to meeting the refiners' requirements can provide opportunities for us to utilize our purchasing and logistical skills to meet their demands. The pricing in the majority of our purchase contracts contains a market price component and a deduction to cover the cost of transporting the crude oil and to provide us with a margin. Contracts sometimes contain a grade differential which considers the chemical composition of the crude oil and its appeal to different customers. Typically, the pricing in a contract to sell crude oil will consist of the market price components and the grade differentials. The margin on individual transactions is then dependent on our ability to manage our transportation costs and to capitalize on grade differentials.
In our petroleum products marketing operations, we supply primarily fuel oil, asphalt and other heavy refined products to wholesale markets and some end-users such as paper mills and utilities. We also provide a service to refineries by purchasing "heavier" petroleum products that are the residual fuels from gasoline production, transporting them to one of our terminals and blending them to a quality that meets the requirements of our customers.
We utilize our fleet of 300 trucks, 400 trailers, 580 railcars, 63 barges (54 . . .

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