Genesis Energy LP (GEL) 2004 Q2 法說會逐字稿

Welcome, ladies and gentlemen, to the second-quarter 2004 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. Genesis Energy LP also operates a wholesale carbon dioxide marketing business.

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. Although management believes that its expectations are based on reasonable assumptions, no assurances can be made that its goals will be achieved. Important factors that could cause results to differ materially from the forward-looking statements made during this conference call include the ability of the partnership to meet its stated business goals and other risks noted from time to time in the partnership's Securities and Exchange Commission filings.

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 connected through the Internet. We are conducting this conference call to discuss second-quarter 2004 earnings. Joining me are Ross Benavides, our Chief Financial Officer and General Counsel, and Karen Pape, our Vice President and Controller.

Results for the second quarter were solid. We generated available cash before reserves for the quarter of $1.945 million, or 20 cents per unit, which is more than our distribution for the quarter of $1.426 million or 15 cents per unit.

As previously announced on June 1, 2004, we expanded our bank credit facility. Under the new credit facility, we will have a $50 million revolving line of credit for acquisition and a $50 million working capital revolving credit facility. The facility matures in June, 2008. This facility replaces our existing $65 million credit facility. The new credit facility places us in a position to make accretive acquisitions and develop growth capital projects.

A significant part of our growth plan will be devoted to integrating our business relationship with Denbury Resources, our general partner. We're making steady progress towards placing the Mississippi System in a condition to handle Denbury's increased production from its tertiary recovery program. We are working with Denbury to develop projects to expand Denbury's CO2 pipeline and our own crude oil pipeline infrastructure in Mississippi. We are also in discussions with Denbury regarding the purchase of a second CO2 volumetric production payment. While we cannot assure that we will complete these transactions, we're making steady and positive progress.

At this time, I would like to review our results for the second quarter of 2004. Net income for the quarter ended June 30, 2004 was $1.99 million, or 12 cents per unit. This compares to net income for the quarter ended June 30, 2003 of $1.890 million, or 21 cents per unit. We generated income from continuing operations of $1.160 million, or 12 cents per unit, for the 2004 quarter and income from continuing operations of $749,000, or 8 cents per unit, for 2003. The loss from discontinued operations for the 2004 period was $61,000. Income from discontinued operations for the comparable period of 2003 was $1.141 million, or 13 cents per unit.

Segment margin from continuing crude oil gathering and marketing operations was $1.944 million for the quarter ended June 30, 2004, as compared to $3.067 million for the quarter ended June 30, 2003. The primary factor decreasing segment margins between the two periods was a $1.6 million negative price variance. Partially offsetting this negative price variance was a 21 percent increase in purchase volumes, increasing segment margin by $1.2 million.

Fields costs were $500,000 higher in the 2004 period. The 2003 period also benefited from a reduction in inventory volumes at a time when prices were rising, that did not recur in 2004.

Continuing crude oil pipeline segment margin was $1.657 million for the quarter ended June 30, 2004, as compared to $1.194 million for the second quarter of 2003. The increase in continuing pipeline segment margin is primarily attributable to an increase in pipeline revenues. Higher tariffs and greater revenues from the sale of volumetric gains, due to higher crude oil prices, were the primary reasons for the increase in revenues in 2004. We are pleased with the performance of the crude oil pipeline segment during this quarter.

C02 wholesale marketing segment margin was $1.461 million for the quarter ended June 30, 2004. We commenced this operation with the acquisition of a 167.5 billion cubic feet volumetric production payment from Denbury in November of 2003. This segment's performance during the second quarter of 2004 was better than the first quarter of 2004 segment performance, which was expected.

General and Administrative expenses were $2.022 million for the three months ended June 30, 2004, which was a decrease of $337,000 from the 2003 period. The 2004 period included a credit in G&A expenses attributable to a non-cash credit of $512,000 for our long-term incentive compensation plan. In the first quarter of 2004, we recorded a charge of $1.104 million related to this plan. In 2004, the unit price increased in the first quarter by 27 percent from $9.80 to $12.45 at March 31 and then declined to $11.25 at June 30. This adjustment may impact our earnings in future periods if our unit price is volatile. We do not expect this adjustment to have an adverse impact on our ability to make or increase distributions to our unit-holders.

Excluding the benefit plant (ph) credit, General and Administrative expenses were $2.534 million for the 2004 second quarter, which was an increase of $175,000 from the prior year. The 2004 quarter included $400,000 of costs for professional (indiscernible) services related to the internal control documentation project.

Depreciation and Amortization in the 2004 quarter increased by $629,000 when compared to the 2003 period due to the acquisition of the CO2 assets during 2003. Interest expense increased $170,000 due to variances in outstanding debt, differences in rates and an increase in facility commitment. The loss from discontinued operations for the second quarter of 2004 was $61,000. This compared to $1.141 million of income from discontinued operations during the same period of 2003.

Turning now to the six-month results, net income for the six months ended June 30, 2004 was $94,000, or 1 cent per unit. This compares to net income for the same period in 2003 of $2.769 million, or 31 cents per unit. We generated income from continuing operations of $378,000 or 4 cents per unit, for the 2004 period and income from continuing operations of $1.131 million, or 12 cents per unit, for 2003. The loss from discontinued operations for the 2004 period was $284,000, or 3 cents per unit. Income from discontinued operations for the comparable period of 2003 was $1.638 million, or 19 cents per unit.

Segment margin for crude oil gathering and marketing activities was $2.950 million in 2004, compared to $5.857 million in 2003. The same factors that affected the difference in the quarter contributed to the difference in the six-month period for this segment.

The sale of inventory in the 2003 period contributed over $1 million to the 2003 period that did not recur in 2004.

Pipeline segment margin increased in the 2004 period, as compared to the 2003 period. In 2003, pipeline segment margin was $2.705 million and in 2004, it was $3.510 million. Increased revenues accounted for this change. 2004 also included segment margin of $2.701 million from CO2 activities. The period included, in general -- the 2004 period included, in General and Administrative expenses, a charge of $592,000 for the effects of an increase in the unit price on our stock appreciation rights plan. Overall, General and Administrative expenses increased by $550,000 in the 2004 period.

At this time, I would like to address our outlook for the remainder of 2004 and beyond. We expect the continuing gathering and marketing segment to remain volatile during 2004. During 2003, annual continuing crude oil gathering and marketing segment margins were $7.908 million. 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. We did not expect the continuing gathering and marketing segment to perform better in 2004 than in 2003.

We expect 2004 crude oil pipeline segment margin from continuing operations to be better than the 2003 continuing segment margin of $5.108 million. We expect that increased revenues from Denbury related to throughput increases will offset increased pipeline operating costs. We expect to incur some additional costs during 2004 related to discontinued operations.

2004 CO2 marketing operations are expected to be more than the annualized 2003 segment margin of $4.344 million due to seasonally lower volumes during the last two months of 2003. 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 earnings volatility for Genesis.

At the same time, the wholesale CO2 business is subject to some seasonality during the year. General and administrative costs for 2004 are expected to increase from the $8.768 million level in 2003, due to cost increases for insurance and other costs to comply with SEC regulations mandated by the Sarbanes-Oxley Act.

Interest expense is expected to increase slightly from the 2003 level of $1.020 million. We will pay more interest or commitment fees in 2004 due to the increased size of our credit facility.

A form factor affecting our outlook will be capital expenditures. As a result of the sale of the Texas Gulf Coast operations to Tefco in 2003, we reduce our expected 2004 maintenance capital expenditures by $6.6 million. During 2004, we expect to reduce the projected 2004 maintenance capital expenditures to less than $2 million.

Through June 30, we expended $1 million on pipeline construction projects in Mississippi to further integrate our operations with Denbury's tertiary recovery program. In addition to these pipeline projects, we are also in discussions to acquire another CO2 production payment, an industrial sales contract from Denbury.

We continue to evaluate our opportunities to dispose of or to make further investments in our existing assets and to increase our operating income by reducing nonessential expenditures. During 2004, we will explore strategic opportunities with respect to the Cullen Junction at Webster and West Columbia to Webster segments at the Texas System and the Liberty-to-Maryland system of the Mississippi System.

Based on the foregoing, we expect to be able to sustain our quarterly distribution at 15 cents per unit for the remainder of 2004. Based on existing conditions, we do not expect to be able to restore our distribution to the targeted minimum quarterly distribution level of 20 cents per quarter until 2005. At the same time, our outlook for being able to grow the distribution is dependent in some part on our ability to identify and execute growth capital projects and to make accretive acquisitions.

Our focus will be on capital projects and acquisitions that deliver steady cash flows to smooth the volatility of the crude-oil gathering business.

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

(OPERATOR INSTRUCTIONS). I'm not showing any questions at this time.

Again, I'd like to thank everybody for joining us for our second-quarter conference call and I look forward to chatting with you for the third quarter. Have a good day. Good-bye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now all disconnect. Have a great day.