Genesis Energy LP (GEL) 2003 Q3 法說會逐字稿

Welcome, ladies and gentlemen, to the third quarter 2003 earnings conference call for Genesis Energy LP.

At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session with instructions given at that time. This conference will be recorded.

Genesis Energy LP 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'd like to introduce Mark Gorman, President and CEO of Genesis LP who will be conducting the conference call for today. Mr. Gorman, you may begin.

Thank you and welcome to all of you who have dialed in or connected through the Internet. We are conducting this conference call to discuss third quarter 2003 earnings.

Joining me are Ross Benavides, CFO and General Counsel, and Karen Pape, 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 of the Securities Exchange Act of 1934. Although we believe that our 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 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 call, we will be using a non-GAAP financial measure. We direct you to our earnings release for a reconciliation of that measure.

Today we reported a net loss for the third quarter of $1,213,000, or 14 cents per unit. This compares to net income for the third quarter of 2002 of $103,000 or 1 cent per unit. For the nine months ended September 30th, 2003, net income was $1,556,000, or 18 cents per unit. The comparable amount for the 2002 period was $3,523,000, or 40 cents per unit.

On October 15th, we announced that we had entered into two agreements. The first was for the sale of our Texas Gulf Coast operations for $21 million to TEPPCO. We closed that transaction on October 31st.

The second transaction was to commence a wholesale CO2 marketing business with the purchase of CO2 assets from Denbury. We expect to finalize this transaction during November. The combination of these two transactions will allow us to increase our distribution sooner than we previously expected. We will discuss more of the details of these transactions later in the conference call.

We are making a regular quarterly distribution of 5 cents per common unit for the third quarter of 2003 on November 14th, 2003 to unit holders of record on October 31st, 2003. We generated no available cash during the third quarter. We reduced reserves by $826,000 for a $386,000 deficit to available cash during the quarter, and to fund the third quarter distribution of $440,000.

The quarter was impacted by several infrequent charges totaling $1,100,000. Excluding these items, we would have generated $714,000 of available cash for the quarter. During the first three quarters of 2003, we generated available cash before reserves of $2,367,000. This is more than enough to provide for our three regular quarterly distributions of 5 cents per unit, or a total of $1,320,000.

We 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.

At this time, I would like to review our operating results for the third quarter of 2003.

Gross margin from gathering and marketing operations was $1,600,000 for the third quarter of 2003 as compared to $3,200,000 for the third quarter of 2002. The primary factors resulting in the decrease in gross margin between years were a 25% decrease in P-Plus sale prices from July to September 2003.

An increase in field costs due to termination benefits related to the Texas Gulf Coast operation sold to TEPPCO and costs related to water disposal and benefit received in the 2002 quarter from the sale of inventory that was no longer needed for efficient and uninterrupted operations. These decreases were slightly offset by a small increase in purchase volumes between 2002 and 2003.

Pipeline gross margin was $600,000 for the third quarter of 2003 as compared to $1,500,000 for the third quarter of 2002. Factors affecting the decrease in pipeline gross margin were, a decrease in revenues from recognition of pipeline loss allowance barrels primarily due to lower volume than the 2003 period, a 10% decrease in throughput and an increase in pipeline operating costs.

The increased pipeline operating costs included an asset retirement obligation related to an abandoned offshore pipeline, termination benefits for employees affected by the sale of the Texas Gulf Coast operations, costs to add our pipeline GPS data to the national pipeline mapping system, and integrity testing of the pipelines.

The decreases were partially offset by a 7% increase in the average tariff on shipments. Additionally in the 2002 period, we increased our accrual for fines and penalties for the Mississippi spill by $1,500,000. No such accrual occurred in the 2003 period.

General and administrative expense were $2 million for both third quarter periods. Interest expense was also flat between the periods.

Moving from the third quarter to our results for the nine-month period, net income for the first nine months of 2003 was $1,556,000 or 18 cents per unit. For the same period in 2002, net income was $3,523,000, or 40 cents per unit.

Gross margin from gathering and marketing operations was $9,300,000 for the first nine months of 2003 as compared to $11 million in the 2002 period. Gross margins decreased between the two periods primarily due to a 22% decrease in purchase volumes. During 2002, we eliminated volumes that were not generating sufficient margin to cover the higher costs under the new credit facility. Also reducing gross margin were increases in field operating costs and credit costs.

Partially offsetting these decreases was the increase in gross margin due to higher P-Plus sale prices. In the nine months of 2003, P-Plus prices averaged $4.26 per barrel, which was 34% higher than the average for the same period in 2002.

Pipeline gross margin was $4 million for the first nine months of 2003 as compared to $5,500,000 for the same period in 2002. The most significant factor affecting this decrease in pipeline gross margin was an increase in pipeline operating costs during the 2003 period. The increased costs included a charge related to an asset retirement obligation, termination benefits, right-of-way maintenance costs, and costs related to adding our pipelines to the national pipeline mapping system.

Revenue increases due to higher tariffs in the 2003 period were partially offset by a 7% throughput decline. The 2002 period also included an increase in our accrual for fines and penalties for the Mississippi spill.

General and administrative expenses were $6,800,000 for the nine months ended September 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 unamortized legal and consultant costs related to the Citicorp agreement and an accrual related to the reinstatement of a bonus program.

Depreciation and amortization was the same in the 2003 nine months as in the 2002 period.

Interest expense was flat between the nine-month periods.

The sale of the Texas Gulf Coast operations and the formation of the CO2 wholesale marketing business with assets purchased from Denbury are very important transactions for Genesis. First some comments about the TEPPCO transaction that closed on October 31st. The sale of the Texas Gulf Coast operation to TEPPCO will benefit both parties immediately. TEPPCO expects to realize significant benefits from integrating these assets into their South Texas pipeline system.

We expect the benefit from redeploying the proceeds of this sale to acquire the CO2 assets from Denbury. This will advance our plan to develop strategic opportunities with Denbury that will create high quality stable sources of cash flow for our unit holders.

We sold four segments of the Texas pipeline system to TEPPCO. (inaudible) and Withers to West Columbia.

We will continue to provide capacity to transport crude oil from Colin Junction and West Columbia to Texas City in Houston until September 2004. After September 2004, we will continue to provide capacity to the transport crude oil from west of the Texas City and to Houston.

During 2003, we expect to dispose of several segments of pipeline that are currently idle. TEPPCO also acquired our gathering/marketing operation in a 40-county area surrounding the pipeline segments they purchased from us. We will not compete in the crude oil marketing or pipeline business in these areas for five years from the date of the sale.

By selling the Texas Gulf Coast operations, we expect to reduce 2004 projected maintenance CAPEX requirements by $6,600,000. This reduction of maintenance capital expenditures will allow us to increase our regular quarterly distribution faster than we previously anticipated.

Now I'd like to comment on the CO2 business to be acquired from Denbury. Denbury owns 1.7 trillion cubic feet of estimated proved reserves of CO2 in the Jackson ((Bell)) field near Jackson, Mississippi.

Denbury has generated approximately 6 to $7 million in annual operating income from sales of CO2 to industrial customers. Under this transaction, Denbury is assigning to us three of their existing long term CO2 supply agreements with industrial customers, which represent approximately 60% of Denbury's current industrial CO2 sales revenue.

The industrial customers treat and transport the CO2 to their own customers. The primary industrial applications of CO2 include beverage carbonation and food chilling and freezing.

We have entered into a letter of intent to buy 167.5 billion cubic feet of CO2 from Denbury for approximately $24 million under a volume metric production payment. The transaction is expected to close during November. Denbury will also provide processing and transportation services for a fee in connection with delivering the CO2 to the industrial customers.

The terms of the industrial sales contracts include minimum take or pay volumes and maximum delivery quantities through at least 2015. Denbury also agreed to purchase an estimated 689,000 Genesis common units for $7.15 per unit, or an aggregate purchase price of $4,925,000. This represents approximately 8% of Genesis' total outstanding common units.

With the purchase of the CO2 assets from Denbury, we expect to form a business that will generate a high quality stable source of cash flow for our unit holders. We expect to generate approximately $5 million of annual gross margin excluding depreciation from this business during the first five years.

We will generate approximately $12 million of gain on the sale of the Texas Gulf Coast operations. That gain combined with the estimated $5 million issuance of new units to Denbury reduced by expected charges for discontinued operations of approximately $1 million is expected to increase partners equity by approximately $16 million or more than 40%.

After these transactions, Genesis will have a stronger balance sheet.

At this time, I would like to address our outlook. For the fourth quarter of 2003, we expect gross margin from the CO2 business and the termination of the Texas Gulf Coast operations to generally offset each other. We continue to expect pressure on gathering and marketing gross margins from volatility and P-Plus prices during the last quarter of 2003.

However, we do not expect the impact of that volatility to be as bad as it was during the third quarter of 2003.

While pipeline gross margins for the third quarter were adversely affected by infrequent items, we expect pipeline gross margins for the fourth quarter to be more consistent with the first two quarters of 2003.

Maintenance Capital expenditures are expected to be less during the fourth quarter than they averaged during the first three quarters of 2003.

For 2004, we would provide the following guidance. The CO2 business is expected to generate about $5 million of gross margin during 2004. The contracts with industrial customers are subject to maximum volume and minimum take or pay provision that are likely to result in less volatility for Genesis. At the same time the wholesale CO2 business is subject to some seasonal volatility throughout the year.

Gathering and marketing gross margin should be similar to 2003. There may be continued volatility from P-Plus price changes.

Pipeline gross margins for 2004 should be slightly lower than the 2003 gross margins after taking into account the sale to TEPPCO.

2004 maintenance capital expenditures are expected to be slightly less than we expected to incur during 2003. We previously indicated that we expect the maintenance capital expenditures during 2004 of approximately $9,700,000. Due to the sale of the Texas Gulf Coast operations to TEPPCO, we expect to reduce the projected 2004 maintenance capital expenditures by $6,600,000 to $3,100,000.

We are comfortable that we will be able to increase our distribution to 15 cents per unit per quarter during 2004.

As for the prospects for distribution growth beyond the 15-cent per unit level, we maintain our guidance that we do not expect to be able to restore the distribution to the targeted minimum quarterly distribution level of 20 cents per quarter until 2005.

At the same time, as we gain experience with the new asset base, as cost saving initiatives are implemented, and as opportunities to make accretive acquisitions are developed, we may be able to restore the targeted minimum quarterly distribution of 20 cents per unit during 2004.

We intend to continue to explore opportunities to acquire assets from Denbury that are in the interest of both companies. Denbury has more industrial CO2 contracts that we could acquire. There may be opportunities to acquire or expand Denbury's CO2 infrastructure in Mississippi. We continue to work toward that end.

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

Thank you. [operator instructions]

Our first question comes from the line of ((Kent Green from Boston AM Associate Management)). Your line is open.

Thank you. Just a question regarding, you know, whatever general and administrative expenses of the CO2 operations, that you have a partial sale of the contracts and then some of the other sale, are you taking over some of Denbury's G&A expenses over there or how were you going to allocate that?

No, we won't be assuming any additional G&A expenses as a result of the CO2 acquisition.

And then, you said there was additional assets, and obviously -- or additional contracts and you're interested in them. Would you at some time in the future consider issuing more shares to buy more assets?

I think that would certainly be a possible way to finance the acquisition of additional assets from Denbury.

And then a final question. Obviously Denbury has got a lot of other assets including the pipeline and proposed pipeline over to eastern Mississippi. Are you interested in, you know, those pipeline assets which are transporting CO2 to the oil fields?

Yes, we are.

Thank you.

[operator instructions]

Our next question comes from the line of David Snow from Energy Equities. Your line is open.

I believe you said your special charges were $1.1 million for the quarter. I was trying to read the language of the release and I thought it was indicating that you had a charge of $1.4 million in the pipeline area group. Was that -- am I reading that wrong?

Yes. We had basically, as I was saying, our total infrequent charges were about $1,100,000.

And just breaking those out for you, $700,000 of that was an accrual for removing a section of offshore pipeline system that we shut down in 1998, $300,000 was for termination benefits associated with the sale of the Texas Gulf Coast operations to TEPPCO, and $100,000 was to remove water from a terminal that we're planning to sell during the fourth quarter of this year.

Okay. So if I'm trying to take kind of an annualized basis, are there other non-recurring items? I noticed that pipeline revenues were down 10%. Is that -- year to year -- I mean the volumes were down. Is that an unusually high decline rate or is that about typical?

No, I think that's been typical of the type of decline rates we've been experiencing the last several years.

Were we to try to get a go-forward feel be -- to just take your distributed available cash of -- I think it was a minus figure before reserves and add 1.1 to that and that would be kind of a current annual rate at which to project going forward?

No, as I said, in looking at some of the other areas, the third quarter was a difficult quarter for the gathering of marketing business because of the severe decline in P-Plus prices. I would say that on a go-forward basis, we would anticipate that out of our gathering and marketing business and our pipeline business, they'd be more similar to earlier quarters in the year.

[operator instructions]

At this time, I'm showing no further questions. Mr. Gorman, I'd like to return the conference back to you.

Again, I'd like to thank everybody for joining us on our conference call today, and I look forward to speaking with you next quarter. Thank you. Goodbye.