Genesis Energy LP (GEL) 2003 Q4 法說會逐字稿

Welcome, ladies and gentlemen, to the 2003 year-end earnings conference call for Genesis Energy LP. (OPERATOR INSTRUCTIONS). Genesis Energy LP operates crude oil, common-carrier pipeline and is an independent gatherer and marketer of crude oil in North America, with operations concentrated in Texas, Louisiana, Mississippi, Alabama, and Florida. Genesis Energy LP also operates a wholesale CO2 marketing business.

At this time, I would like to introduce Mark Gorman, President and CEO of Genesis Energy LP, who will be conducting the conference call.

Thank you, and welcome to all of you who have dialed in or are connected through the Internet. We're conducting this conference call to discuss 2003 earnings. Joining me are Ross Benavides, our CFO and General Counsel, and Karen Pape, our Corporate Controller.

During this conference call, we may be making forward-looking statements within the meaning of the securities law. 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 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 call, we will be using a non-GAAP financial measures. We direct you to our earnings release for a reconciliation of that measure.

I would like to start with the highlights of 2003. As stated in our press release, we are pleased with the progress we made in meeting our goals in 2003. In addressing 2003, I would like to highlight four accomplishments. They were the disposal of the Texas Gulf Coast operations; the purchase of the CO2 production payment from Denbury; obtaining the credit facility from a group of banks led by Fleet Bank; and increasing the quarterly distribution from 5 cents to 15 cents per unit, with respect to the fourth quarter of 2003.

During the fourth quarter, we closed on the sale of portions of our Texas Gulf Coast operations to TEPPCO. We also sold portions of our Texas pipeline system to Blackhawk (ph) Pipeline LP, an affiliate of Multi Fuels, Inc. (ph), and we have banded in place other portions of the Texas system.

The sale of the Texas Gulf Coast operations to TEPPCO benefited both parties almost immediately. TEPPCO realized significant benefits from integrating these assets into their South Texas pipeline system. By selling the Texas Gulf Coast operations, we reduced 2004 projected maintenance CapEx requirements by $6,600,000. This reduction of maintenance capital expenditures allowed us to increase our regular quarterly distribution faster than we previously anticipated.

The sale of the Texas Gulf Coast operations was a result of an initiative we started in 2002 to evaluate our pipeline systems to determine which segments, if any, should be sold, idled, or abandoned to reduce costs or risk of operation, or which segments should be invested in for future growth. As a result of this evaluation, we determined that parts of our Texas Gulf Coast operation had more strategic value in the hands of TEPPCO than they did with us.

We also determined that other segments of the Texas Gulf Coast operations had little value and should be abandoned and placed (ph), or sold to reduce the cost of operation or avoid liabilities associated with continuing operations.

We sold four segments of the Texas pipeline system to TEPPCO -- Brian (ph) to Hern (ph); Conro (ph) to Satsuma; Filgee (ph) to West Columbia; and Withers (ph) to West Columbia. We expect to continue to provide capacity to transport crude oil from Colin (ph) Junction of West Columbia to Texas City in Houston until September of 2004. After September of 2004, we may continue to provide capacity to transport crude oil from Webster to Texas City and Houston. We are currently examining strategic opportunities to place the remaining segments and alternative service after the arrangement (ph) with TEPPCO expires.

TEPPCO also acquired our crude oil gathering business and marketing operation in a 40-county area surrounding the pipeline segments that purchased from us. We will not compete in the crude oil marketing or the pipeline business in these areas for the next five years.

In the fourth quarter of 2003, we sold three segments of the Texas pipeline system to Blackhawk Pipeline, LP, an affiliate of Multi Fuels, Inc. Blackhawk has indicated that it intends to convert the system to natural gas service during 2004. The three segments sold include Natchez to Satsuma; Racoon Bend (ph) to Satsuma; and a short portion of the Satsuma to Colin Junction segment.

We also abandoned and placed substantially the entire Satsuma to Colin Junction segment that was not sold to Blackhawk. By executing the Blackhawk sale and the abandonments prior to year-end, we were able to generate tax losses that offset some or all of the tax gain generated for our unitholders from the TEPPCO transaction.

During the fourth quarter of 2003, we purchased an interest in 167.5 million cubic feet of CO2 under a volumetric production payment, plus certain marketing rights to enable us to commence a wholesale sale (ph) to marketing operations. These assets were purchase from Denbury Resources, the owner of our general partner. Denbury owns 1.7 trillion cubic feet of estimated crude reserves of CO2 in the Jackson Dome (ph) Field near Jackson, Mississippi.

Denbury has generated approximately 6 to $7 million in annual operating income before depletion, from sale of CO2 to industrial customers. Under this transaction, Denbury assigned to us three of their existing long-term CO2 agreements with industrial customers, which represented approximately 60 percent of Denbury's industrial CO2 sales. The industrial customers treat the CO2 and transport it to their own customers. The primary industrial application of CO2 by these customers include beverage carbonation and food chilling and freezing.

Denbury provides 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.

In connection with this transaction, we issued to Denbury approximately 689,000 Genesis common units for $7.15 per unit, or an aggregate purchase price of $4,925,000. This represents approximately 8 percent of our total outstanding common units. These funds, with the proceeds from the Texas system sale, were used to purchase the CO2 assets.

We expect to generate approximately $5 million of annual gross margin, excluding amortization, from this business in the first five years. The formation of the wholesale CO2 marketing operation provides us with diversity in our asset base, and a stable, long-term source of cash flow that will improve our ability to deliver a sustainable distribution.

The wholesale CO2 marketing business will provide balance for our existing crude oil gathering and marketing and pipeline transportation business. We expect CO2 to generate approximately one-fourth of our total gross margin during 2004, and hope to increase the proportionate share of gross margin from this business by way of acquisitions.

This transaction with Denbury also increased the integration of our operations with Denbury. The purchase of the CO2 volumetric production payment is the first of what we hope will be several more transactions where we either purchase from Denbury, or construct for their use, midstream infrastructure to support the development and production of Denbury's oil and gas operations in the Mississippi area.

Pursuant to our partnership agreement, we have established procedures to ensure that the transactions are structured for the mutual benefit of Denbury and Genesis. A committee of independent directors of both Denbury and Genesis approved the purchase of the production payment, and will approve future transactions. Genesis committee of independent directors is advised by their own legal counsel and by financial advisers opining as to the fairness of each transaction to Genesis unitholders.

We generated $13,100,000 of gain on the disposable of the Texas Gulf Coast operations. That gain, combined with the issuance of $5 million of new units to Denbury, increased partner's equity by approximately $16 million, or more than 40 percent. After these transactions, Genesis has a much stronger balance sheet.

In the first quarter of 2003, we replace the credit facility from Citicorp North America Inc. with a three-year $65 million revolving loan, a letter of credit facility with Fleet National Bank as agent. The new facility establishes an important platform for us to be able to meet our trade credit needs, and to be able to make small acquisitions. Further, this new facility, combined with a stronger balance sheet and improved financial metrics, after the 2003 transactions, should also improve our access to capital for growth.

The credit facility continues to restrict our ability to make distributions. Under the Fleet facility, the borrowing base must exceed the some of working capital borrowings, outstanding letters of credit, and the amount of the distribution by $10 million, as measured once each month. We are comfortable with our ability to meet this restriction, and make distributions for the foreseeable future.

As a result of the transactions we have described, we increased our regular quarterly distributions from 5 cents to 15 cents per unit, beginning with the 2003 fourth-quarter distribution made on February 13, 2004. We were able to increase the distribution at this time for two reasons.

First, the sale of the Texas Gulf Coast operations to TEPPCO allowed us to avoid approximately $6,600,000 in 2004 capital expenditures. Second, the purchase of the volumetric production payment from Denbury and the formation of the wholesale CO2 marketing business provided sustainable cash flow from which to increase the distribution. During 2003, we generated available cash, before reserves, of $3,700,000, and made distributions with respect to 2003 of $2,700,000.

We will now review the results of operations for 2003 (ph). Today, we reported net income for 2003 of $13,322,000, or $1.50 per unit. This compares to net income for 2002 of $5,092,000, or 58 cents per unit.

The 2003 earnings included income from discontinued operations of $13,741,000, or $1.55 per unit, which included gain on disposable of portions of the Texas Gulf Coast operations of $13,028,000, or $1.47 per unit.

Income in 2003 from operations that were discontinued were $713,000, or 8 cents per unit. This compares to 2002 income from discontinued operations of $4,082,000, or 47 cents per unit.

We reported a loss from continuing operations for 2003 of $419,000, or 5 cents per unit, compared to 2002 income from continuing operations of $1,010,000, or 12 cents per unit.

Continuing gathering and marketing gross margin decreased by $3,300,000 to $7,900,000 for 2003, as compared to $11,200,000 for 2002. Gross margin decreased between the two periods, primarily due to a 23 percent decrease in purchase volumes. Most of this decrease occurred in the first half of 2002 when we eliminated volumes that were not generating sufficient margin to cover higher credit costs under our new credit facility. Also reducing gathering and marketing gross margin were increases in fuel operating costs and credit costs.

Partially offsetting these decreases was an increase in gross margin due to higher P-Plus prices. In 2003, P-Plus priced $4.07 per barrel, which was 25 percent higher than the average for the same period of 2002.

Pipeline gross margin from containing operations was $5,108,000 for 2003, as compared to $5,409,000 for 2002. The most significant factor affecting this decrease of pipeline gross margin was an increase of pipeline operating cost during the 2003 period. The increased cost included right-of-way maintenance costs and accrual for costs to remove an out-of-service offshore pipeline, 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 an 8 percent throughput to clients. The 2002 period also included an increase in our accrual for fines and penalties for the Mississippi spill (ph), which was reflected in other earnings -- in other operating charges.

General and administrative expenses were $8,800,000 for 2003, which was an increase of $900,000 from the 2002 period. The increase in general and administrative expenses is primarily attributable to the write-off of the unamortized legal and consulting costs related to the Citicorp credit agreement.

Depreciation and amortization from continuing operations was the same in 2003 as in the 2002 period. Interest expense decreased by $100,000 between periods.

We reported 2003 fourth-quarter earnings of $11,800,000, or $1.28 cents per unit, as compared to $1,600,000, or 18 cents per unit, for the 2002 period.

The 2003 earnings included income from discontinued operations of $11,751,000, or $1.28 per unit, which included gain on disposable of portions of the Texas Gulf Coast operations of $12,054,000, or $1.28 per unit.

2003 fourth-quarter results from discontinued operations, excluding the gain from the disposal, was a loss of $1,202,000, or a loss of 13 cents per unit. This compares to the 2002 fourth-quarter income from discontinued operations of $481,000, or 6 cents per unit.

We reported income from containing operations for the fourth quarter of 2003 of $15,000, compared to 2002 income from continuing operations of 1,088,000, or 12 cents per unit.

At this time, I would like to address our outlook for 2004 and beyond. We believe we have successfully changed our business model for our crude oil gathering and marketing activities to consume less credit support and working capital. We expect the gathering and marketing business to perform better during 2004 than the continuing business performed during 2003. During 2003, the gathering and marketing business performed above expectations during the first half of the year, and below expectations during the later half of the year.

We continue to expect this part of the business to be subject to volatility; however, we do not believe it would be reasonable to expect P-Plus prices to drop as precipitously, or otherwise have as negative an effect on our gross margin as they did during the later half of 2003.

Pipeline gross margins from containing operations for 2004 should be approximately the same as 2003. Improvements in gross margin for the Mississippi and Florida systems are expected to substantially offset the reduction in gross margin from the sales of parts of the Texas system. We expect to incur some continuing costs during 2004 related to discontinued operations.

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 provisions that are likely to result in less cash flow and earning volatility for Genesis. At the same time, the wholesale CO2 business is subject to some seasonal volatility throughout the year.

General and administrative expenses are expected to increase from 2003 to 2004. Offsetting permanent cost reductions, from the reduction of the size of our operation, will be cost increases for insurance and other costs that comply with SEC regulations, mandated by the Sarbanes-Oxley Act.

Interest expense is expected to increase slightly for part of the first and second quarters. We expect to increase our borrowings by approximately $7 million from temporarily funding a settlement of the Pennzoil litigation that will be reimbursed by the insurance underwriters.

2004 maintenance capital expenditures are expected to be less than we incurred during 2003. Due to the sale of the Texas Gulf Coast operations to TEPPCO, we expect to reduce the projected 2004 maintenance capital expenditures to less than $2 million.

Based on the foregoing, we continue to be comfortable that we will be able to sustain our quarterly distribution at 15 cents per unit for the remainder of 2004. 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.

Our outlook for being able to grow the distribution is dependent, to some extent, on two conditions. That is, our ability to access the capital markets and our ability to identify and execute accretive acquisitions. Our focus will be on acquisitions that add steady cash flows to smooth the volatility of the crude oil gathering business.

During 2004, we will be taking action to expand our existing debt facility or obtain an additional debt facility to provide us access to capital for acquisitions. We will also take appropriate action to position Genesis to access the public equity markets.

In addition to addressing opportunities to purchase MLP Qualified Midstream Assets (ph) from other parties, we intend to focus much of this effort toward acquiring assets from Denbury that are in the interest of both companies. Denbury has more industrial CO2 contracts that could be sold or contributed to Genesis. There may be opportunities to purchase or expand Denbury's CO2 infrastructure and our own crude oil pipeline facilities in Mississippi.

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

(OPERATOR INSTRUCTIONS). Kent Greene (ph), Boston American Assessments (ph).

You have come a long way. I just have one clarifying area of the general administrative. I think you mentioned the $900,000 increase was a result of certain settlements under your credit agreement act -- may be wrong on there, but then you think there's going to be a further increase in that this year. Does that mean that part of it is going down, and then part of it is coming up at offsetting it? Because it was up about 11 percent last year, and I don't know if those are non-reoccurring items, or what?

Could you restate the question?

Yes. General and administrative expenses for the year were $8.768 million.

Right.

Up 900,000. I think in the comments that you talked about there were some charges in there for Citicorp credit agreement amortization?

Right. When we switched to the facility with Fleet, we wrote off charges that had been incurred when we obtained the Citicorp facility. And, so those occurred in 2003 and did not occur in 2002.

So, yet, in is coming year, you're still expecting it to be an increase over that, but that sounds like it was a non-reoccurring charge.

That was a non-reoccurring charge, but we do have additional items which we have indicated in the call -- were costs incurred for Sarbanes-Oxley compliance and just a few other expenditures that are increasing during this year.

And, therefore, they were a lot more than maybe what I had anticipated -- these other charges?

Yes. I mean, everyone is incurring costs associated with Sarbanes-Oxley compliance, as are we. And there are a few other expenditures that are increasing, that just occur in the normal course.

Okay.

Insurance costs was one example.

Right. And then a question on volumes. During the year, you had volumes down at continuing operations at all three -- wellhead, gathering and marketing, and pipeline. But in the fourth quarter, you reversed wellhead barrels, and then gathering and marketing, but the pipeline barrels volumes were still down. What is causing these volumes to be down in the pipeline? And, when will they be reversed?

Well, all three of our pipeline systems, basically, are set by production from local producing fields. We incur a decline on those volumes just about every year. I think that in the price environment we are in today, we could see increased levels of drilling activity that might stem the decline to some degree, but we expect to see continued declines on those pipeline throughputs.

Yes, is one of those pipelines coming from Denbury CO2 fields, down to Baton Rouge refinery?

Not down to the Baton Rouge refinery. That segment of pipe has been idled for the past two years. But, we do anticipate increases on that system as a result of additional CO2 flooding. And those volumes will move down our pipeline system to cap line at Liberty, Mississippi.

Okay, so that one will increase. Because I know they are increasing their production rapidly.

That's right.

This year. But, that would offset the other declines?

Potentially, but we would still expect to see declines on the Florida system and on the volumes that we receive off of the TEPPCO systems.

And, are these pipeline common carriers? And can you get tariff relief on lower volumes?

Yes, they are common carrier, and we have increased the tariffs on our system over the past several years on both the Texas system and the Florida system -- could be able to hit our target rates of returns.

Thank you. I'll let someone else ask some questions.

(OPERATOR INSTRUCTIONS). Mr. Gorman, I am showing no further questions at this time.

I appreciate everyone joining us for the conference call today, and I look forward to speaking with you again next quarter. Have a good day. Goodbye.