Genesis Energy LP (GEL) 2004 Q3 法說會逐字稿

Welcome, ladies and gentlemen, to the third-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 call will be recorded.

Genesis Energy LP operates crude oil common carrier pipelines and is an independent gathering 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 of the Securities Exchange Act of 1934. Although management believes that its expectations are based on reasonable assumption, no assurances can be made at its 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 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.

Welcome to all of you who have dialed in or connected through the Internet. We are conducting this conference call to discuss third-quarter 2004 earnings. Joining me are Ross Benavides, our Chief Financial Officer and General Counsel, and Karen Pape, our Vice President and Controller.

Although we recorded a loss for the quarter, that loss was due largely to non-cash charges. We were pleased that we generated available cash before reserves of $1,975,000 or 20 cents per unit. This exceeded our distribution for the quarter of $1,426,000 or 15 cents per unit.

The performance of our crude oil pipeline and CO2 operations segments was good during the quarter. We were able to increase margins by reducing cost in the pipeline segment. The CO2 business benefited from expected positive seasonal variances. During the third quarter of 2004 we purchased an interest in 33 billion cubic feet of CO2 under a second volumetric production payment plus certain marketing rights to enable us to expand our wholesale CO2 marketing operations. These assets were purchased from Denbury Resources, the owner of our general partner for $4,700,000 in cash.

The industrial customers treat the CO2 and transport to their own customers. The primary industrial applications 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 contract include minimum take-or-pay volumes and maximum delivery quantities through at least 2015.

We expect to generate approximately $900,000 of additional annual segment margin excluding amortization from this acquisition during the first 5 years. This transaction with Denbury further increases the integration of our operations with Denbury. We are making steady progress replacing the Mississippi crude oil pipeline system in a condition to handle Denbury's increased oil 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.

During the third quarter we made substantial progress toward completing construction of a new 10 mile, 12 inch CO2 pipeline expansion from Denbury's existing CO2 pipeline to the Brookhaven field in western Mississippi. We also made progress in constructing a 10 mile, 8 inch crude oil pipeline to deliver the increased crude oil production from Brookhaven field to our existing crude oil pipeline in western Mississippi. Both pipelines are expected to be completed and placed in service in the fourth quarter of 2004. We expect to derive the full benefit of these projects during 2005.

Denbury has announced plans for construction of an 84 mile, 20 inch CO2 pipeline to deliver carbon dioxide from its CO2 reserves at Jackson Dome to its production fields in eastern Mississippi. While no assurances can be made, we hope to construct, own and operate that pipeline and to provide carbon dioxide transportation services to Denbury's east Mississippi field by 2006.

At this time I would like to review our results for the third quarter of 2004. We recorded a net loss for the quarter of $394,000 or 4 cents per unit. This compares to a net loss for the quarter ended September 30, 2003 of $1,213,000 or 14 cents per unit. Continuing operations generated a loss of $359,000 or 4 cents per unit for the 2004 quarter and $1,565,000 or 18 cents per unit for 2003.

The loss from discontinued operations for the 2004 period was $35,000. Income from discontinued operations for the comparable period of 2003 was $352,000 or 4 cents per unit. Segment margin from continuing crude oil gathering and marketing operations was $948,000 for the quarter ended September 30, 2004 as compared to $1,203,000 for the quarter ended September 30, 2003.

The primary factor decreasing segment margins between the two periods was an increase in field costs of $700,000. Offsetting the higher field cost was an 11 percent increase in volume which added $500,000 to segment margin. The higher field costs were caused by higher prices for fuel to run our truck fleet and increased driver payroll and fleet repair costs.

Continuing crude oil pipeline segment margin was $2,601,000 for the quarter ended September 30, 2004 as compared to $200,000 for the third quarter of 2003. The increase in continuing pipeline segment margin is primarily attributable to a decrease in pipeline operating cost. Decreasing costs for regulatory testing and repairs combined with the change in the accrual to remove an offshore pipeline were the principle reasons for the cost decrease in the 2004 period. Also contributing to the improved segment margins were higher tariff revenues and increased revenues from the sale of volumetric gains due to higher crude oil prices. We are pleased with the performance of the crude oil pipeline segment during this quarter.

CO2 wholesale marketing segment margin was $1,543,000 for the quarter ended September 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. In September of 2004 we acquired the second volumetric production payment of 33 billion cubic feet. This segment performance during the quarter of 2004 was better than its performance in the first or second quarters of 2004 which was expected due to the normal seasonality in this business.

General and administrative expenses were $2,639,000 for the 3 months ended September 30, 2004 which was an increase of $701,000 from the 2003 period. The 2004 quarter included an increase of $400,000 for professional services to comply with SEC regulations mandated by the Sarbanes-Oxley act.

Depreciation and amortization in the 2004 quarter increased by $1,656,000 when compared to the 2003 period due to the acquisition of the CO2 assets during 2003 and the write-down of a segment of pipeline that had been out of service since 2002. Interest expense increased $50,000 due to variances in outstanding debt, differences in rates, and an increase in the facility commitment beginning in June of 2004. The loss from discontinued operations for the third quarter of 2004 was $35,000. This compared to $352,000 of income from discontinued operations for the same period of 2003.

Turning now to the 9-month results, net loss for the 9 months ended September 30, 2004 was $300,000 or 3 cents per unit. This compares to net income for the same period in 2003 of $1,556,000 or 18 cents per unit. We generated income from continuing operations of $19,000 for the 2004 period and a loss from continuing operations of $434,000 or 5 cents per unit for 2003.

The loss from discontinued operations for the 2004 period was $319,000 or 3 cents per unit. Income from discontinued operations for the comparable period of 2003 was $1,990,000 or 23 cents per unit. Segment margin for crude oil gathering and marketing activities was $3,898,000 in 2004 compared to $7,060,000 in 2003. A decrease in the average difference between purchase and sale prices for crude oil combined with higher field costs resulted in most of the decrease in segment margin. A sale of inventory in the 2003 period contributed over $1 million to the 2003 period that did not recur in 2004. Offsetting the negative factors was an increase in volumes.

Pipeline segment margin more than doubled in the 2004 period as compared to the 2003 period. In 2003 pipeline segment margin was $2,905,000 and in 2004 it was $6,111,000. Decreases in operating cost contributed $2,100,000 in the improvement. A portion of the reduced cost resulted from reversals of the offshore accrual with the majority from reductions in other cost. Increased revenues provided the remaining improvement.

2004 also included segment margin of $4,244,000 from wholesale CO2 marketing activities. The wholesale CO2 marketing segment was not formed during the first 9 months of 2003. The 2004 period included general and administrative expenses, a non-cash charge of $564,000 for the effects of an increase in the unit price on our stock depreciation rights plan.

The stock depreciation rights program was not in place during the first 9 months of 2003. 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 our increased distributions to our unit holders.

Excluding this benefit plan charge, general and administrative expenses were $7,261,000 for the 2004 9 months which was an increase of $687,000 from the prior year. In 2004 we have spent $900,000 for consultant services for projects to comply with SEC regulations mandated by the Sarbanes-Oxley act. In the 2003 period we recorded a charge for unamortized legal and consultant costs for a credit facility that was replaced.

Depreciation and amortization for the 9-month period was $2,700,000 greater in 2004 than in 2003 due to the acquisition of the CO2 assets during 2003 and the write-down of a segment of pipeline that is out of service.

At this time I would like to address our outlook for the remainder of 2004 and beyond. During 2003 annual continuing crude oil and marketing segment margins were $7,908,000. We continue to expect this part of the business to be volatile. We expect the continuing gathering of marketing segments to generate less than $6 million for 2004. We expect 2004 crude oil pipeline segment margin from continuing operations to be between $7 and $8 million. This is better than the 2003 continuing segment margin of $5,108,000. We expect that increased revenues from Denbury related throughput increases will offset increased pipeline operating cost. We expect to incur some additional cost during 2004 related to discontinued operations.

2004 CO2 marketing operations are expected to be more than the annualized 2003 segment margin of $4,344,000 due to seasonally lower volumes during the last 2 months of 2003 and due to the second volumetric production payment acquisition. The CO2 business is expected to generate slightly less than $6 million of gross margin during 2004. The contracts with industrial customers are subject to maximum volume and minimum take-or-pay provisions that unlikely 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 8,768,000 level in 2003 due to cost increases for insurance and other cost to comply with SEC regulations not mandated by the Sarbanes-Oxley Act. Interest expense is expected to increase somewhat from the 2003 level of $1,020,000. We will pay more interest or commitment fees in 2004 due to the increased size of our credit facility and increased utilization for working capital needs and acquisitions.

An important factor affecting our outlook will be capital expenditures. As a result of the sale of the Texas Gulf Coast operations to TEPPCO in 2003 we expect -- we reduce our expected 2004 maintenance capital expenditures by $6,600,000. During 2004 we expect to reduce the projected 2004 maintenance capital expenditures to less than $2 million.

Through September 30th we expended $4,600,000 on pipeline construction projects in Mississippi to further integrate our operations with Denbury's tertiary recovery program. We expect to complete all of these projects and place them in service during the fourth quarter of 2004. We expect to obtain the full benefit of these projects during 2005.

We continue to evaluate opportunities to dispose of or to make further investment in our existing assets and increase our operating income by reducing nonessential expenditures. We will explore strategic opportunities with respect to the Cullen Junction to Webster and West Columbia to Webster segments in the Texas pipeline system and the Liberty to Maryland segments 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. We expect to be able to increase our distribution during 2005. However, our ability to restore the distribution to the targeted minimum quarterly distribution level of 20 cents per quarter may depend in part on our success in developing and executing growth capital projects and making accretive acquisitions.

Our focus will be on capital projects and acquisitions that deliver steady cash flows to smooth out the volatility of the crude oil gathering business. That concludes our prepared remarks for this conference call. At this time I'll return to the moderator to take any questions. Donna?

(OPERATOR INSTRUCTIONS) I am showing no questions at this time.

Thank you, Donna. And I'd like to thank everyone again for joining us for our conference call and I look forward to speaking with you at the end of next quarter. Thank you, goodbye.

Ladies and gentlemen, that now concludes today's conference. Thank you all for participating, you may disconnect. Have a great day.