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Edited Transcript of GEL earnings conference call or presentation 6-Nov-19 2:30pm GMT

Q3 2019 Genesis Energy LP Earnings Call

Houston Nov 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Genesis Energy LP earnings conference call or presentation Wednesday, November 6, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Grant E. Sims

Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC

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Conference Call Participants

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* Ethan Heyward Bellamy

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Shneur Z. Gershuni

UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst

* Torrey Joseph Schultz

RBC Capital Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Welcome to the 2019 Third Quarter Conference Call for Genesis Energy. Genesis has 4 business segments. The Offshore Pipeline Transportation Segment is engaged in providing the critical infrastructure to move oil produced from the long-lived world-class reservoirs from the deepwater Gulf of Mexico to onshore refining centers. The Sodium Minerals and Sulfur Services segment includes trona and trona-based exploring, mining, processing, producing, marketing and selling activities as well as the processing of sour gas streams to remove sulfur at refining operations. The Onshore Facilities and Transportation segment is engaged in the transportation, handling, blending, storage and supply of energy products, including crude oil and refined products. The Marine Transportation segment is engaged in the maritime transportation of primarily refined petroleum products. Genesis operations are primarily located in Wyoming, the Gulf Coast states and the Gulf of Mexico.

During this conference call, management may be making forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The law provides safe harbor protection to encourage companies to provide forward-looking information. Genesis intends to avail itself of those safe harbor provisions and directs you to its most recently filed and future filings with the Securities and Exchange Commission.

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

At this time, I would like to introduce Grant Sims, CEO of Genesis Energy, L.P. Mr. Sims will be joined by Bob Deere, Chief Financial Officer; and Ryan Sims, Senior Vice President, Finance and Corporate Development.

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [2]

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Good morning. And again, apologies for the technical difficulties. We provided a significant amount of detail around this quarter in this morning's earnings release. I thought it might -- it would be more helpful to provide more detail on the macro themes and encouraging dynamics around each of our market-leading business segments as we look towards 2020 and beyond.

In the Gulf of Mexico, which, according to some, was a dead and declining basin as of a few years ago, we continue to see robust activity which should drive production growth in the coming years. According to the EIA, at the end of 2018, deepwater Gulf of Mexico production had grown approximately 24% from 2015. Furthermore, as of October 2019, the EIA is forecasting total Gulf of Mexico production to grow to roughly 2 million barrels a day in 2020 or approximately 33% higher than 2015 and approximately 15% higher just since the end of 2018.

Specific to our footprint as compared to the first 9 months of 2019, volumes on our main pipelines to shore, CHOPS and Poseidon have increased 13% since 2015 and are up approximately 12% since the end of 2018. These volumes, along with the continued development drilling in various recently sanctioned developments, further provides evidence that Gulf of Mexico is not dead and will drive significant volume growth in our Offshore Pipeline Transportation segment in the coming years ahead.

As mentioned in this morning's release, we have recently entered into agreements to move 40,000 barrels per day on our CHOPS system and 20,000 per day on our Poseidon. They're delivered to us by a third-party pipeline that has insufficient capacity to deliver such volumes all the way to shore. The agreements include shipper pay provisions, have terms as long as 5 years and require no capital on our part. Most of these volumes were flowing in the third quarter and the terms for 5 years is indicative that the producing community views the third-party pipeline will have extended capacity issues to shore.

We are finalizing agreements to move a total of what is anticipated to be 25,000 to 35,000 barrels per day of incremental production on Poseidon. These are brand-new lease dedications from several new tieback developments with 5,000 to 10,000 per day anticipated by the end of this year and 20,000 to 25,000 barrels per day anticipated in mid-2020. The volumes expected mid-next year will actually flow through one of our wholly owned laterals that connects subsea into Poseidon. No capital will be required by us to provide any of these movements.

Additionally, we are finalizing agreements with the operator of a new deepwater floating production unit designed to exploit local reserves and serve as a production hub for subsea tieback opportunities. The total design capacity of the new unit is 80,000 barrels of oil per day and 100 million cubic feet of gas. No capital will be required by us as the producers are obligated to build to our existing facility for downstream transportation. The oil will be 100% dedicated to one of our wholly owned laterals and split almost evenly for transportation to shore on our CHOPS and Poseidon pipelines. The gas will be 100% dedicated to our Anaconda gas pipeline. The agreements will contain shipper pay provisions, dedicate all known and future production through and across the facility to us and have a term coincident with the useful life of the floating production unit, which is designed for a minimum of 40 years.

First deliveries of oil and gas from this new development into our facilities is anticipated in mid-2022. I might also point out our rates are actually increasing on these new dedications and term contracts, and we are including escalators in virtually all new contracts.

Finally, we continue to anticipate first deliveries from Argos, which was formerly Mad Dog 2, of up to 140,000 barrels a day into our CHOPS system in late 2021 if not earlier that year. This is new production from leases that have been dedicated contractually to CHOPS since 2005.

Turning to our Sodium Minerals and Sulfur Services segment. We are starting to see signs of some potential slowdown in demand growth globally, particularly in Asia, which we believe is tied to the ongoing economic uncertainty related to the U.S.-China trade war. The near-term manifestation appears to be a reduction in inventory as our customers and their customers take a more cautious approach into the end of the year in light of the uncertainty.

Specifically for soda ash, the medium- and long-term growth trend is still positive and the market fundamentals continue to point to global demand growth without corresponding supply growth until 2022. We remain confident in our decision to expand our Granger facility as expansion will not only bring new low-cost tons to the market, but it will also lower the operating cost for the Granger facility, making it one of the lowest-cost plants in the world and further enhancing Genesis alkali's cost position globally. With only approximately 26% of global soda ash demand supplied by low-cost natural production worldwide, we remain confident that our global leading cost position will allow us to navigate the next few years and be well positioned to capture market share currently supplied by synthetic production and incremental global demand growth between now and 2022.

Based on this long-term outlook, on September 23, we announced our final investment decision to expand our Granger soda ash facilities by approximately 750,000 tons per year. The expansion, through a combination of the incremental tons and margin improvement on the existing production, the fixed-cost absorption is expected to generate approximately $60 million incremental annual EBITDA beginning in mid- to late 2022 for a total anticipated capital expenditure of $330 million, including contingency to be spent over the next 3 years. We estimate that Granger production facility, as expanded to approximately 1.3 million tons per year, has a minimum reserve life of well in excess of 125 years.

In conjunction with such decision, we entered into agreements with funds affiliated with GSO Capital Partners for the purchase of up to $350 million of fully redeemable preferred interest on all of our soda ash operations, thereby, providing an external source for all of the anticipated capital expenditures of the expansion project. The structure of the financing arrangement is credit neutral to Genesis, requires no cash outlays or payments by us during the anticipated 36-month construction period.

After exhaustive evaluations, we concluded this was the best way to pursue such an accretive opportunity given the current state of capital markets and allow Genesis to maintain its position as North America's largest producer of natural soda ash. We believe the structure provides Genesis with significant optionality over the construction period to use excess cash flow to pay down borrowings under our senior secured credit facility or internally fund any future attractive opportunities, which currently there are none identified, across our diverse and market-leading business segments.

Our Marine Transportation segment continues to perform as expected as segment margin increased slightly for the seventh quarter in a row. We experienced steady utilization in our brown water fleet, in particular, in our blue water fleet. With IMO 2020 upon us, we remain optimistic that we have seen the bottom for the quarterly segment contribution from our entire fleet of assets and recent strength in near-term day rates and utilization rates is a reflective of an improving market.

Turning to our Onshore Facilities and Transportation segment. On October 23, the provincial government of -- sorry, on October 31, the provincial government of Alberta announced that beginning in December, curtailment relief will be granted to operators for incremental production that are shipped by rail. We view this as a potential catalyst going into 2020 as certain of our customers have incremental rail capacity and the ability to increase production that otherwise would not get produced. We are seeing a slight [up] in volumes scheduled for November and December due to the widening of differentials, and we believe we can see incremental volumes on top of this in December due to the curtailment relief.

Longer term, assuming the provincial government removes itself and lets free markets prevail, we believe that conditions exist for rail to play a fundamental role in transporting crude oil out of Canada.

At our Raceland terminal, we've successfully commissioned a new pipeline connection with ExxonMobil's South pipeline to move volumes north from our Raceland terminal, which receives offshore volumes directly from our Poseidon pipeline directly to Exxon's Baton Rouge refinery. This connection is consistent with our previously stated goals of further integrating our offshore pipelines and onshore terminals to help facilitate the movement of offshore production to additional onshore markets.

For the quarter, our business has generated financial results and provided 1.22x coverage of our common unit to our common unitholders inclusive of a full quarter of cash distributions paid to our preferred unitholders and a sequentially decreasing leverage ratio from 4.96x to 4.91x. Our target coverage ratio, including all preferred cash distribution, remains 1.4 to 1.6x, and we expect our quarterly distribution rate will remain at $0.55 per common unit for the foreseeable future.

As we near the end of 2019 and begin focusing on 2020 and beyond, the fundamentals of our businesses remain solid, and our prospects are exciting and increasingly clear as discussed earlier. We reasonably expect segment margin in our Offshore Pipeline Transportation segment to be up $20 million to $30 million year-over-year in 2020. With the production hiccups behind us and assuming no significant slowdown in economic activity, we would expect our Sodium Minerals and Sulfur Services segment to be stable to slightly up year-over-year. Likewise, we would expect stable to marginally improved performance in our Marine Transportation segment in 2020. We also believe, based on the curtailment relief I mentioned earlier, that we should average at least 1 train a day, less than half of our handling capability at our Scenic Station facility in Baton Rouge, which would increase segment margin on our onshore facilities by approximately $10 million in 2020 over 2019.

Outside of our Granger Expansion Project, which is fully committed to be funded by GSO, we do not currently anticipate any significant growth projects in 2020, and we expect our maintenance capital expenditures to be consistent with prior years.

Independent of achieving these results, we believe that in 2020, based on our current expected cash outflows, including all interest, cash distributions and capital expenditures, we will be cash flow positive. If some or all of the margin improvements above come to fruition. We'll have even stronger cash flow, higher coverage of our current cash distributions, and we'll be able to proceed more rapidly with deleveraging -- delevering our balance sheet towards our long-term leverage target of 4x.

As always, we intend to be prudent, diligent and intelligent in achieving and maintaining the financial flexibility to allow the partnership to opportunistically build long-term value for our stakeholders without ever losing our commitment to safe, reliable and responsible operations. As always we'd like to recognize the efforts and commitment of all of those with whom we are fortunate enough to work.

With that, I'll turn it back to the moderator for any questions. And again, I apologize for the technical difficulties in kicking the call off.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Shneur Gershuni with UBS.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [2]

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Just a few questions to start off. You just ended your prepared remarks talking about being cash flow positive next year and not seeing a lot of incremental CapEx along the lines or in view, I guess. And so your focus seems to be to get your leverage down as low as possible. At the same time, there's a lot of volatility in the markets and with your guidance, and we've obviously seen some volatility in your earnings as well, too. Is there an appetite to try and take down some of the balance on the credit facility and just term it out? Or do you see yourself getting all the way to 4x by the end of next year and there's absolutely no need for that?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [3]

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I don't think that there's a path to get to 4x by the end of next year because that's a leverage ratio on the basis of total funded debt, including senior unsecured. But I think that our view is that, again, the -- it's on an opportunistic basis that we would look at terming out some of the outstandings under the revolver. We do think that over the next several years, including within the existing term of the revolver, that we're a net payer down of outstandings. We've had a number of discussions with our large banks. We feel that for businesses as ours that the risk of renewing the credit facility beyond its current date -- and I think it's August of 2022, might be May or something, but we should have no problem of renewing that for another 4- or 5-year term.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [4]

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Okay. Just shifting a little bit to the Granger transaction. If I remember at the time of the announcement, you talked about it being a mid-5 EBITDA multiple. But there was a financing agreement that was attached to it as well, too, with some, I think, if I remember correctly, an IRR component. When you sort of think about the cost of that, where do you think that project ultimately end up on an EBIT-EBITDA basis or project-EBITDA basis? Is it kind of like more of a 7x multiple or an 8x multiple? Just trying to understand the cost of that IRR component of the partner.

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [5]

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Yes. I mean I know and -- sure I know that I'm mixing metaphors and stuff. But we have no cash pay obligations during the construction period, and therefore, it's kind of capitalized and the implicit cost of the capital is capitalized into the overall project. We think that on a cumulative basis that, that kind of runs the -- in a flat static environment of taking that capitalized value instead of the raw $330 million, which includes a contingency that we're right at the 7x multiple.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [6]

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Okay. So pretty low IRR. Okay. Excellent. Just 2 more quick questions just with respect to your guidance. Can you talk about the volume growth that's assumed in the offshore segment? You're talking -- you're expecting, I believe, it's $20 million to $30 million of year-over-year growth.

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [7]

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Yes. I think that it's a function of the new volumes that I -- the new dedications, which are coming on, which I mentioned. It's a function of also continued infill development drilling that we haven't talked about, but that's just kind of a normal course of business that we think could net of any kind of declines still net to 20 or 30 kbd on average increase in 2020 over 2019. And then a full year of the Buckskin subsea development that is tied into the development drilling that occurred in and around the Lucius facility, which has restored that total production off of that facility from indigenous production as well as the subsea tiebacks to in excess of 80,000 barrels a day. So we think that that's a pretty conservative view of how we view the ramp in 2020 over 2019.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [8]

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Okay. And 1 final question. If you can give a little bit of color around the stable to slightly up year-over-year sulfur services and sodium minerals agreement guide, given the impacts that occurred in 2019, everything resolved. I'm just trying to understand kind of the stability in that guide.

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [9]

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As we mentioned, we are seeing a little bit of softness in the export pricing on the soda ash business, and we're taking a conservative view of that as we go into 2020. We get -- we did have production hiccups in the first and second quarter, which everything else the same, probably netted close to $10 million worth of unexpected negatives in 2019. Hopefully, that gets behind us. And so we're -- we hope that we're being conservative in discussing that we think that it's stable to marginally improve.

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Operator [10]

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Your next question comes from the line of TJ Schultz with RBC Capital Markets.

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Torrey Joseph Schultz, RBC Capital Markets, Research Division - Analyst [11]

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I think just 1 for me, an offshore question. Just trying to understand your need or outlook for potentially any meaningful capital projects to keep kind of your competitive position there. Or do you expect your existing footprint and the requirement of producers to spend to connect is sufficient to capture all the opportunities that, you kind of mentioned, are relatively cost-free to you all?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [12]

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Thanks, TJ. We have, in our view, adequate capacity on the main lines, if you will, to CHOPS and Poseidon to handle the choice set. There are certain scenarios developing that there might be some expansions in the 2021, '22, '23-type time frame required to or necessary to facilitate the hard pipe pathing of incremental production that we see coming on. But we would have incremental shipper pay agreements associated with that, that we think that those will be very extremely attractive. It could be easily financed under the revolver. But to the extent that they materialize, because of the mechanics of our revolver, we get, in essence, the proportional take-or-pay credit if we were to spend money on something. So if we fashion everything less than a 5x deal, it's basically a credit neutral to the extent that they come up.

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Torrey Joseph Schultz, RBC Capital Markets, Research Division - Analyst [13]

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Okay. But that -- is the kind of increased outlook in 2020 not -- that's not required for that outlook? There's nothing firm as far as...

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [14]

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Yes, we don't have to spend any money for that outlook that I gave for 2020.

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Operator [15]

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(Operator Instructions) Your next question comes from the line of Ethan Bellamy with Baird.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [16]

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One housekeeping question. On the GSO preferred, could you confirm that you're using 50-50 treatment on that in terms of your reported leverage and covenants?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [17]

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It doesn't. We're doing the 0-debt treatment for the calculation of our coverage. It's -- the calculation of our bank covenant has nothing to do with the -- it's not treated as debt.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [18]

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Okay. All right. That's helpful. And then, we've seen some trepidation in the markets, I think justifiably so, about comments from a little bit more and about potentially ending oil and gas leasing on federal lands, which I presume would mean the Gulf of Mexico. Have you guys thought through what the implications would be fundamentally if we had, let's say, a leasing ban in effect as of the first quarter of 2021? How long would something like that take to show up in your volume numbers considering how long the Gulf of Mexico project lead times are?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [19]

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I mean obviously, there's a lot of political rhetoric. And I think that we're necessarily going to weigh in on a lot of that. But the law, which governs activities in the Gulf of Mexico, the Outer Continental Shelf Lands Act, which requires the Department of Interior to maintain an oil and gas leasing program, thus, our opinion, and there's a lot of people -- and I'm not a lawyer, there's a lot of people researching it, but complete and permanent ban on all new leases in the Gulf of Mexico is not possible without Congress passing a law and changing the legislation. So I mean, I think that's the reality of the situation. Once -- as we're reminded by Madam Speaker, there are 3 branches of government, but the legislature has put the laws on the books. So a, I don't know that it can be done; b, I think that the existing leases, which are held by production and still under primary term, I think would be -- would generate a significant -- which is 10 years by the way, primary term from the date that it is leased. I think that taking, so to speak, a private property back, retaking by the government, would be a very difficult and expensive thing to do. So I don't know what else to weigh in on, on that. But we're certainly monitoring it. We think it is political rhetoric. And if that and fracking were somehow to come to pass, then I think there would be the equivalent of the largest tax increase and most regressive tax increase known in American history if it were to come to pass.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [20]

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Grant, I appreciate that context. One more question on Granger. If you guys are the low-cost producer and you have in excess of 100-year reserve life, what dictates or governs the size of the expansion that you guys are willing to do? Why not, say, 1.5 million tons, for example?

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [21]

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In particular, in Granger, Granger was a stand-alone facility. Our predecessor company, the FMC, purchased in the late '90s that have had historically produced 1.3 -- 1.2 million to 1.3 million tons a year with dry mining. The -- given its location, which is about 7 miles to the northeast of our Westvaco facility, which is our main facility where we produce about 3.5 million tons currently, it ran out of dry ore in the seam. There's 26 stack seams of trona there. It ran out of dry ore, and we converted it once we acquired it to secondary recovery or a solution mining facility. So long story short, the infrastructure, and this is why we referred to fixed-cost absorption, Ethan, in lowering the cost of the existing tons, the infrastructure exists to handle 1.2 million, 1.3 million tons. But we don't have, for lack of a better description, since it was a dry mining facility, and now we're converting it to a larger -- or putting it back to its nameplate capacity using solution mining, we have to add a [backward] capacity to get rid of the water, if you will, that we use to solution mine the soda. So it was a very cheap, cost-effective way to return the Granger facility to its nameplate capacity, 1.2 million to 1.3 million. And I would also point out that I mentioned a minimum of 125 years. That, in particular, in Granger, that assumes only -- that's the reserves of the 2 seams that we are currently solution mining. If you add in the other stack seams, it's probably 300 to 400 years.

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Operator [22]

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And there are no further questions at this time.

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Grant E. Sims, Genesis Energy, L.P. - Chairman & CEO of Genesis Energy LLC [23]

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Okay. Well, thanks, everyone, and we appreciate it. Again, I apologize for the start and the technical difficulties at the first, and we'll talk to you all soon. Thank you.