Genesis Energy LP (GEL) 2003 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the second quarter 2003 earnings conference call for Genesis Energy, L.P. (CALLER INSTRUCTIONS) This conference call will be recorded. Genesis Energy, L.P. operates crude oil common carrier pipelines, and is an independent gatherer and marketer of crude oil in North America, with operations concentrated in Texas, Louisiana, Mississippi, Alabama and Florida.

At this time I would like to introduce Mark Gorman, President and CEO of Genesis Energy, L.P., who will be conducting this conference call. Mr. Gorman, you may begin.

Thank you and welcome to all of you who have dialed in or connected through the Internet. We're conducting this conference call to discuss second quarter 2003 earnings. Joining me are Ross Benavides, our Chief Financial Officer and General Counsel, and Karen Pape, our Vice President and Controller. During this conference call we may be making forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934.

Although we believe that are expectations are based on reasonable assumptions, no assurances can be made that our goals will be achieved. Important factors that could cause actual results to differ materially from the forward-looking statements made during this conference call include our ability to meet our stated business goals and other risks noted from time to time in our SEC filings. During this conference call we will be using a non-GAAP financial measure. We direct you to our earnings release for a reconciliation of that measure.

Yesterday we reported net income for the second quarter of $1,890,000 or 21 cents per unit. This compares to a net income for the second quarter of 2002 of $2,106,000 or 24 cents per unit. For the six months ended June 30th, 2003, net income was $2,769,000 or 31 cents per unit. The comparable amount for the 2002 period was $3,420,000 or 39 cents per unit.

We're making a regular quarterly distribution of 5 cents per common unit for the second quarter of 2003 on August 14th, 2003 to unit holders of record on July 31st, 2003. We continue to be confident that we will be able to sustain this level of distribution and look forward to growing it as soon as it is reasonable to do so.

In March, 2003, we entered into a $65 million three year credit facility with a group of banks, with Fleet National Bank as agent. The Fleet agreement has a sub limit for working capital loans in the amount of $25 million, with the remainder of the facility available for letters of credit. Under the Fleet agreement, distributions to unit holders can only be made if the borrowing base exceeds the use of the credit facility by at least $10 million plus the distribution measured once each month. We easily exceeded that requirement during the first and second quarters.

We generated available cash in the quarter of $1,963,000. This is more than enough to provide for our regular distribution of 5 cents per unit, or a total of $440,000. And to allow us to reserve the balance of available cash to build up liquidity to support future growth of the business, and to assure our ability to maintain and grow the regular quarterly distribution.

We continue to perform well under the business model we adopted in 2002. Under this business model we have substantially eliminated bulk purchase and exchange volumes from our marketing activities, allowing us to operate under a much smaller credit facility. We have focused on smaller volume, higher margin transactions in our gathering and marketing operations. We have taken steps to increase the profitability of our pipelines by increasing tariffs, rationalizing our pipeline operations, and implementing operational improvements.

We advanced our objective to fully integrate our business relationship with Denbury Resources, our general partner, by making solid progress toward placing our pipeline in a condition to handle Denbury's increased production around our Mississippi system. And we continue to aggressively implement our pipeline integrity management program in a manner that will support the safe and reliable operations of our pipeline systems.

At this time I would like to review our operating results for the second quarter of 2003. Gross margin from gathering and marketing operations was $4,200,000 for the second quarter of 2003, as compared to $3,600,000 for the second quarter of 2002. The factors resulting in the $600,000 increase in gross margin between years were an increase in gross margin of $2,300,000 due to price variance. This increase was offset by a 22 percent decrease in purchase volumes between 2002 and 2003, resulting in a $1,700,000 decrease in gross margin. Credit costs and field costs were flat between the two quarters.

Pipeline gross margin was $1,700,000 for the second quarter as compared to $2,600,000 for the second quarter of 2002. Factors affecting the $900,000 decrease in pipeline gross margin were an increase in revenues from recognition of pipeline loss allowance barrels of $400,000, primarily as a result of higher crude oil prices in the 2003 period; an increase of 10 percent in average tariffs resulting in an increase in revenues of $400,000; an increase of $1,500,000 in pipeline operating costs; and a 5 percent decrease in throughput resulting in a revenue decrease of $200,000.

The increased pipeline operating cost included the cost to add our pipelines' GPS data to the national pipeline mapping System; integrity testing of the pipelines; additional personnel; and other operating and maintenance costs, including insurance and corrosion control.

General and administrative expenses were $2,400,000 for the second quarter of 2003, which was an increase of $200,000 from the 2002 period. This increase was primarily attributable to small increases in audit and consulting fees, director fees, and increased premium for officers' and directors' liability insurance. Interest expense decreased $100,000 due to lower commitment fees in the 2003 period.

Moving from the second quarter to our results for the six-month period, net income for the first half of 2003 was $2,769,000 or 31 cents per unit. For the same period in 2002, net income was $3,420,000 or 39 cents per unit. Gross margin from gathering and marketing operations was $7,700,000 for the first half of 2003, the same amount as in the 2002 period. Gross margin increased by $5,500,000 between the two periods due to price variances driven by positive volatility in crude gathering markets.

Factors offsetting this increase were a 31 percent decrease in purchase volumes between 2002 and 2003, resulting in a decrease in gross margin of $4,800,000; an increase of $200,000 in credit costs, primarily due to the use of letters of credit in 2003 at a higher cost than under the Salomon guarantees used during the first four months of 2002; a $300,000 increase in gross margin in the 2002 period from the sale of crude oil that was no longer needed to ensure efficient and uninterrupted operation; and an increase of $200,000 in field operating costs primarily from increased fuel costs and repairs to truck and loading stations.

During the first quarter of 2002, we reviewed our wellhead purchase contracts to determine whether margins under these contracts would support higher credit costs as we transitioned from the use of Salomon guarantees to commercial bank letters of credit. In some cases where contracts could not be renegotiated to improve margins after considering the higher cost of credit, contracts were canceled. During the same period we applied the same principles to exchange transactions to eliminate those transactions with insufficient margins. As a result of the transitional effect of these actions taken in the first quarter of 2002, average purchase volumes for the 2003 period were 37,000 barrels per day less than in the 2002 period.

Pipeline gross margin was $3,400,000 for the first half of 2003 as compared to $3,900,000 for the first half of 2002. Factors affecting the $500,000 decrease in pipeline gross margin were an 18 percent increase in average tariffs, resulting in an increase in revenue of $2 million; an increase in revenue from recognition of pipeline loss allowance barrels of $600,000, primarily as a result of higher crude oil prices and the sale of volumes in inventory at December 31st, 2002; a 5 percent decrease in throughput between the two periods, resulting in a revenue decrease of $400,000; and an increase in pipeline operating costs of $2,700,000 in the first half of 2003.

Personnel and benefit cost increased primarily as a result of additions to the operations and technical staff in Mississippi, as well as cost for transportation equipment for the new staff. Costs associated with right of way maintenance and testing under the pipeline integrity management regulations increased. Expenses for equipment maintenance also increase. We also incurred higher expenses for purging lines and increased safety training for our pipeline operations personnel.

During the third quarter of 2002, we undertook a project to add our pipelines' GPS data to the national mapping system, as required pursuant to pipeline safety regulations. Insurance costs increased due to the combination of the insurance market conditions and our loss history. Other operating and maintenance costs, including power costs and corrosion control increased.

General and administrative expenses were $4,800,000 for the six months ended June 30th, 2003, which was an increase of $500,000 from the 2002 period. The increase in general and administrative expenses is primarily attributable to the write-off of $200,000 of unamortized legal and consulting costs related to the Citicorp agreement, and an accrual of $300,000 related to the reinstatement of our bonus program. We experienced a reduction in salaries and benefit costs totaling $400,000 that was totally offset by increases in some recurring items such as audit and tax expenses, legal fees, directors' fees and insurance expenses.

Depreciation and amortization was the same in the 2003 six months as in the 2002 period. Depreciation increased during the 2003 period due to property additions made during the later half of 2002 and the first half of 2003. However, covenant not to compete was fully amortized at March 31st, 2003, so amortization expense in 2003 was less than in the prior year.

Interest expense was flat between the six-month periods. In the 2003 period we wrote off $400,000 of unamortized facility costs related to the Citicorp agreement that was replaced with the Fleet facility, in addition to the legal and consulting costs written off in general and administrative expenses. Differences in the facility size during the six-month period offset this increase due to higher commitment fees in the 2002 period. As a result of these differences, commitment fees were $200.000 greater in the 2002 period. Additionally, amortization of facility fees and interest expense, in total, were $200,000 more in 2002.

As a result of our review of contracts existing at June 30th, 2003, we determined that our contracts did not meet the requirements for treatment for derivative contracts under Financial Accounting Standard No. 133. The contracts were designated as normal purchases of sales under the provisions for that treatment in Financial Accounting Standard No. 133. The fair value of the Partnership's net asset for derivatives had decreased by $1,100,000 for the six months ended June 30th, 2002.

At this time, I would like to address our outlook for the remainder of 2003 and beyond. We expect the gathering and marketing business to continue to perform well through the remainder of 2003, although not as well as in the first six months of the year. Operations in the first half of 2003 benefited from unusually high peak plus market prices, and by the reduction in our inventory volumes during the period of higher market prices. Volatility in P plus (ph) during the remainder of 2003 is expected to reduce margin. Additionally, we expect our gathering and marketing activity to decline during the second half of the year, due to an expected decrease in the volume of crude oil to be gathered.

Pipeline gross margin should generally be consistent in the second half of 2003 with the first half of the year. Volume declines are expected to be offset by the benefit of tariff increases in 2002 and 2003. Continued testing under pipeline integrity regulations, and testing of tanks and other maintenance projects are expected to keep costs at the same level in the second half of 2003 as the first half.

For the remainder of 2003, we expect our capital expenditures to be approximately $2,400,000. We expect to expend 1,600,000 for capital improvements to our pipeline systems as a result of the integrity assessments. We expect to expend the remainder for other pipeline improvement such as equipment upgrades for pipeline monitoring and corrosion control.

In the first six months of 2003, we expended 3,500,000 on capital expenditures. With $2,900,000 of that amount for maintenance capital expenditures, and $600,000 to acquire a common state storage facility in Texas. For 2004, we expect to make capital expenditures of $9,500,000. After 2004, capital expenditures are expected to return to our normal pattern of approximately $1,500,000 to $2,500,000 per year.

To increase the effectiveness of the Danbury related strategic opportunities, we will continue to evaluate opportunities to dispose of underperforming assets and increase operating income by reducing nonessential expenditures. Since we believe that our most significant growth opportunities will revolve around our Mississippi pipeline system, most of our asset optimization analysis is currently focused on the Texas System and the Jay System.

We're reviewing strategic opportunities for the Texas System. While tariff increases in 2002 have improved the outlook for this system, we continue to examine the economic prospects of each segment to determine if it should be retained, sold or idled. If we sell or idle portions of the Texas System, it could materially reduce the expected level of capital expenditures to be made during 2004, and improve our outlook for increasing the distribution sooner than we have indicated.

We previously stated that it was (inaudible) for us to replace the Citicorp credit facility with a 65 million three year credit facility led by Fleet National Bank. The Fleet facility provides us a source of funding and credit for a longer-term, and provides us access to a group of financial institutions that may make access to debt capital easier as we grow.

As for the prospects for distribution growth, we're cautiously optimistic. In 2003 we restored the regular quarterly distribution of 5 cents per quarter. We have generated more than enough available cash in each of the first two quarters to make those distributions. And had easily met the covenant on our credit facility requiring a $10 million cushion in our borrowing base. However, based on our current expectations for capital expenditure requirements, and other existing conditions that impair our ability to sustain the distribution at a higher level, we maintain our guidance that we may not be able to restore the distribution to the target minimum of quarterly distribution level of 20 cents per quarter until 2005.

At the same time, if we are able to implement strategic opportunities for the Texas System that could reduce the capital expenditure requirements, or make accretive acquisitions that place us in a position to sustain distribution growth, we may be able to restore the distribution sooner. We continue to work towards that end. At this time however, we have no comment on the status of any potential transaction that may accomplish this result.

That concludes our prepared remarks for this conference call. At this time, I will turn to the moderator to take any questions. Paula?

(CALLER INSTRUCTIONS) David Snow of Energy Equities.

I'm wondering how much -- what percent of your line system have you now completed testing?

We still have completed less than 50 percent of the total system.

But you have to start with the worst 50 percent, so that is a pretty big chunk?

Yes, it is.

In the fourth quarter of last year there was a seasonal increase in repair expenses or testing expenses. Do you expect that to be kind of level this year, or what is the outlook there?

As we said, we expect the level to be -- we expect to be fairly level second half of the year versus the first half of this year. But based on our current projections, we expect the level of expenditures in 2004 to be about $9.5 million.

Okay. And I'm wondering, you had previously idled 338 miles in Texas. Is that going to be abandoned, or do you have any buyers for it? What are you going to do with that?

At the present time, our current plans are that it will be in an idle state.

At some point if you abandon it, you eliminate the cost out. So as long as you idle it, you continue to incur the costs. At what point will you abandon it?

I think we would make that decision once we concluded that there aren't any other business development opportunities for this system.

Are there any further tariff increase possibilities in the Texas System, or have you pretty well gotten what you can there?

I think relative to our competitive position in other pipeline systems, there is not, at least at the present time, an opportunity to increase tariffs further.

On the credit facility, do you feel like you are developing a pretty good relationship to expand it, if you want to for acquisitions?

Yes.

I was just wondering, you had mentioned you had very comfortably met the 10 million cushion. In the second quarter you actually could have, theoretically, paid the 20 cent distribution per quarter had you wanted to do. Would there have been enough room in the cushion in your credit facility to do that, if you had wanted to?

Yes.

(CALLER INSTRUCTIONS) This concludes the question-and-answer session. Mr. Gorman, I will like to turn the conference back to you.

Again, I would like to thank everyone for joining us again today. And I look forward to speaking with you next quarter. Have a good day. Goodbye.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may disconnect at this time. And have a great day.

(CONFERENCE CALL CONCLUDED)