Genesis Energy LP (GEL) 2004 Q4 法說會逐字稿

Welcome ladies and gentlemen to the 2004 Yearend 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 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.

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 assumptions, no assurances can be made that 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.

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 2004 earnings. Joining me are Ross Benavides, our CFO and General Counsel, and Karen Pape, our Vice President and Controller.

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. I would like to start with the highlights of 2004.

During the year, we generated available cash before reserves of $6.282 million or $0.66 per unit, which exceeded our distributions of $5.700 million or $0.60 per unit for the year.

In June 2004, we expanded our bank credit facility. Under the new credit facility, we will have a 50 million revolving line of credit for acquisitions, and a 50 million working capital revolving credit facility. The facility matures in June 2008. This facility replaced our existing 65 million credit facility. The new credit facility places us in a position to make accretive acquisitions and developed growth capital projects.

During the third quarter of 2004, we purchased an interest in 33 billion cubic feet of CO2 under a second volumetric production payment with certain marketing rights. This acquisition enabled us to expand our wholesale CO2 marketing operation. These assets were purchased from Denbury Resources, the owner of our general partner, for $4.7 million in cash. The industrial customers treat the CO2 and transport it 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 contracts 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 for the 2004 acquisition in the first 5 years.

During 2004, we constructed a 10-mile CO2 pipeline in Mississippi that connects to a CO2 pipeline owned by Denbury. Denbury will use this pipeline to transport CO2 to the Brookhaven Field in Mississippi for tertiary recovery of crude oil. We also constructed a crude oil pipeline to carry the crude oil from the Brookhaven Field to our existing Mississippi system. The crude oil pipeline will begin operations in January 2005.

We constructed a third pipeline, a 5-mile crude oil pipeline connecting our existing Mississippi System to Denbury's McComb Field. In total we spent $7.447 million on the construction of these pipelines and other related growth capital projects in Mississippi during 2004. We expect these 3 pipelines to add approximately $1 million to available cash in 2005.

Results for the fourth quarter, in contrast, were disappointing. We generated available cash before reserves during the third quarter of $871,000 or $0.09 per unit, which was $555,000 or $0.06 per unit less than our distribution of $1.426 million or $0.15 per unit for the quarter.

In a factor in the fourth quarter, we consumed much of the available cash reserves that were built up in the first 3 quarters of 2004. Our crude oil pipeline segment and CO2 wholesale distribution segment performed well during the quarter.

However, our gathering and marketing segment did not perform well due to higher field costs and volatility in marketing margins. We also incurred significant general administrative costs for compliance with the Sarbanes-Oxley Act during the quarter.

In 2005, we've gotten off to a fair start in making acquisitions. In January 2005, we announced an acquisition for Multifuels Energy Asset Group, LP of 14 natural gas pipelines and gathering systems located in Texas, Louisiana, and Oklahoma¸ encompassing approximately 60 miles of pipeline related assets. The purchase price is $3.100 million in cash, and we financed it through our credit facility with Bank of America.

Based on currently available information, we expect that this transaction to be immediately accretive and to generate approximately $500,000 of segment margin in 2005. This is our first natural gas asset acquisition. We're looking for opportunities to expand this operation in the future.

In February 2005, we announced that we entered into a definitive agreement with a subsidiary of ChevronTexaco to purchase its 50% partnership interest in T&P Syngas Supply Company for $13.5 million subject to normal closing conditions.

The acquisition is subject to our right of first refusal held by Praxair Hydrogen Supply Inc, which holds the other partnership 50% interest. T&P Syngas is a partnership that owns the Syngas manufacturing facility located in Texas City, Texas. The facility processes natural gas to produce Syngas and high-pressure steam.

All of the Syngas and steam produced by the facility was sold to Praxair under a long-term processing agreement. Based on currently available information, we expect the transaction to be immediately accretive to distributable cash flow and to generate approximately $1.4 million of additional segment margin during 2005. The acquisition, if concluded, will be financed through our existing credit facility.

We will now review the results of operations for 2004. Today, we reported a net loss for 2004 of $1.412 million or $0.15 per unit. This compares to net income for 2003 of $13.322 million or $1.50 per unit. Our loss from continuing operations was $949,000 or $0.10 per unit for 2004 and $419,000 or $0.05 per unit for 2003.

Loss from discontinued operations for 2004 was $463,000 or $0.05 per unit. Income from discontinued operations for 2003, including a gain of $13.028 million and the sale of portions of the Texas pipeline system was $13.741 million or $1.55 per unit.

Continuing gathering the marketing segment of margins decreased by $3.874 million to $4,034 million for 2004, when compared to 2003. Segment margin decreased between the 2 periods primarily due to a decrease in the margin on our crude oil sales and purchases and increased field costs.

In 2003, P-Plus prices increased in the first half of the year. We benefited significantly from this increase, as many of our purchases were at fixed bonuses, increasing our margins when the crude oil was sold at a higher P-Plus price.

In response to the decline in P-Plus prices in the latter half of 2003, we changed many of our fixed-bonus contracts to fluctuating bonuses based on P-Plus prices. As a result, we did not experience the same increases in margin when P-Plus prices increased in 2004. We have changed the contracts of fluctuating bonuses based on P-Plus prices to reduce the volatility in our crude oil gathering and marketing segment margin.

Field costs increased in 2004 by $2.382 million. This increase is attributable to several factors. The first factor is higher fuel costs to operate our tractor trailer fleet. The second factor was to increase employee compensation and benefit costs related to additional volumes.

Finally, higher insurance costs and vehicle maintenance costs also contributed to the higher field costs. Although, we reduced our operations in 2004 from 2003 levels, with the sale of a large part of our Texas operation, our insurance, safety, and other fixed costs did not decline proportionately.

Competitive pressures made it difficult to reduce crude oil purchase prices to offset increases of field operating costs. A 7% increase in purchase volumes partially offset these decreases in segment margin.

Pipeline segment margin from continuing operations increased 67% in 2004. Decreases in costs for regulatory testing and repairs combined with the change in the accrual to remove an offshore pipeline for the principal reasons for the cost decrease in the 2004 period. Also contributing to the improved segment margin were higher tariff revenues and increased revenues for the sale of volumetric gains due to higher crude-oil prices. We are very pleased with the improvement in this segment of our business.

2004 also included $5.762 million of segment margin from the wholesale CO2 marketing activities. We commenced this operation with the acquisition of 167.5 billion cubic feet volumetric production payment from Denbury in November of 2003. In September of 2004, we acquired a second volumetric production payment of 33 billion cubic feet.

The 2004 period included, in general and administrative expenses, a non-cash charge of $1.151 million for the effect of an increase in unit price on our stock appreciation rights plan. The stock appreciation rights program was put in place at the end of 2003, and a charge of $228,000 was recorded in that year. 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 distribution for our unit holders.

Excluding the stock appreciation rights plan charge, general and administrative expenses were $9.880 million for 2004, which was an increase of $1.340 million from the prior year. In 2004, we spent $1.300 million for professional services and audit fees related to the documentation and assessment of the partnerships' internal controls as required 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 increased by $2.700 million due to the CO2 as an acquisition during 2003 and the write-down of a segment of pipeline that is out of service. Interest expense decreased $60,000 due to variances in outstanding debt, differences in rates, and changes in the facility commitment beginning in June of 2004.

The loss from discontinued operations for 2004 was $463,000. This loss related primarily to the dismantlement of assets that we abandoned in 2003. We reported a loss from continuing operations for the fourth quarter of 2004 of $1.112 million or $0.12 per unit, compared to 2003 income from continuing operations of $15,000.

At this time, I would like to address our outlook for 2005. Results from our crude oil gathering and marketing segment have been volatile. We will continue to take steps to improve its performance. These steps include managing relationships with suppliers, improving inventory management, controlling field costs, and increasing the efficiency of field operations.

Additionally, we'll continue to evaluate opportunities to dispose of, or to make further investments in the components of this segment in order to improve its performance.

The performance of our pipeline segment improved significantly during 2004. In 2005, we expect to see continued improvement in our Mississippi System contribution to margin as volumes transport on our pipeline increase. Most of this increase in volume is attributable to increased production from Denbury. We restructured our tariffs on this system to provide additional return on the investments we have made and we'll continue to make in the Mississippi system.

The newly constructed pipeline segments to carry crude oil from Denbury all other Brookhaven Field and CO2 to Denbury's Brookhaven Field are expected to provide approximately $1 million additional available cash in 2005. Volumes on the Texas System declined 16% in 2004 from 2003 levels. We anticipate that volumes may continue to decline as refiners on the Texas Gulf Coast compete for crude oil with other markets connected in TEPPCO's pipeline system.

Our share of the joint tariff on the Texas System declined in November of 2004, so we expect the tariff revenue on this system will decline and only be partially offset by changes to our tank lease arrangements.

Investments we made in natural gas gathering pipelines is expected to add $500,000 to annual pipeline segment margins. 2005 CO2 marketing operations are expected to provide approximately $6 million of annual segment margin. The addition of the second volumetric production payment of September 2004 is expected to provide the increase over 2004.

The wholesale CO2 business performed well for us in 2004. However, it is subject to some seasonality during the year. Excluding the effects of the stock appreciation rights plan, we expect General & Administrative costs for 2005 to decrease due to onetime costs to document our internal controls in 2004 that won't be repeated.

We expect our interest costs to increase in 2005. We will pay more interest, or commitment fees, in 2005 due to the increased size of our credit facility and increased utilization for working capital needs and acquisitions.

An important factor-affecting outlook for our distributions will be maintenance capital expenditures. For 2004, we spent $939,000 on maintenance capital expenditures. We currently anticipate on our maintenance capital expenditures 2005 will be approximately $2.4 million. These expenditures are expected to relate primarily to our Mississippi pipeline system, including corrosion control expenditures, facility improvements, and improvement of the pipeline resulting from expected integrity management test results. These improvements will enable us to handle even greater volumes in the future.

We continue to evaluate opportunities to dispose of, or to make further investments in our pipeline assets and to increase operating income by reducing nonessential expenditures. We will explore opportunities with respect to the Cullen Junction to Webster, and other idle segment assets on the Texas System, and the Liberty to Maryland Segment of the Mississippi System.

In summary the gathering and marketing segment is expected to be volatile. We expect pipeline gross margins to be approximately the same as in 2004 due to improvement from acquisitions and restructuring of the Mississippi tariffs offset by expected declines in segment margins in Texas.

CO2 segment margins are expected to increase because of the 2004 acquisition. General and Administrative costs will improve, after the completion of the first-year cost for the Sarbanes-Oxley compliance. Interest expense will increase due to larger credit facility and acquisitions. Maintenance capital costs will increase as a result of integrity management program testing scheduled for the Mississippi pipeline system during 2005.

Finally, we may have additional segment gross margin for the acquisition of the Syngas investment from Chevron Texaco. If Praxair does not exercise its option to purchase the partnership interest from Chevron Texaco.

Based on foregoing, we expect to be to sustain our quarterly distribution at $0.15 per unit for 2005. Our ability to increase distributions for 2005 may depend, in part, on our success in developing and executing growth capital projects and accretive acquisitions, the result of our pipeline integrity management testing program, and our ability to generate sustained improvement in the gathering and marketing segment.

That concludes our prepared remarks for this conference call. At this time, I will turn it over to the moderator to take any question from the audio. Steven?

Our first question comes from Kent Green of Boston America.

Yes. Just a little detail on this gathering and marketing -- you know, that is, that we have the volatility I assume if this is Texas assets declining volume. Is there a competitive alternative to the systems that you can't pass it through? Or, you know, at some point in time, would you have to leave this business or look elsewhere?

Certainly, we have a large presence in Texas, but we also have gathering operations in Louisiana, Mississippi, Alabama and Florida. In each of those markets, there are competitive alternatives for producers in the area -- that makes it difficult to pass through rising costs.

I think your assessment -- your question about whether we would have to look at disposing these assets, that is a distinct possibility if we can't generate satisfactory rates or return in the future. But, we also are looking for opportunities to expand the business at the same time.

And, as the criteria for expanding would be that you could buy out a competitor or something so that would give you a little more competitive position, even though...

That's correct.

Is that opportunity's available? Are these small competitors?

There are several small competitors in some of the areas that we operate, but opportunities -- there are also other companies that are looking to make acquisitions also. So, we have to look at what we would have to pay for those acquisitions.

Would it be appropo to say that your position in Mississippi is better because, particularly in the pipeline system and CO2s, because, you know, your general partner, obviously, is friendly towards you since they have a part of the revenues and these assets to give you a better competitive position in those markets?

I think that would be a fair assessment.

As I take it, this gathering and processing outside of the CO2 and the Mississippi operations, how much is that of your total operating revenue? Is it operating at a loss of the current time?

I think, we went through the numbers, and I think if you refer to the press release, you can get the details on it in that segment.

I guess that's the end of the questions. I''d like to thank everyone for joining us for the conference call today - and I look forward to speaking with you at the end of the first quarter. Have a good day. Goodbye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.