Genesis Energy LP (GEL) 2005 Q1 法說會逐字稿

Welcome, ladies and gentlemen, to the 2005 first quarter earnings conference call for Genesis Energy, L.P.

(Operator Instructions)

Genesis Energy, L.P. 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, L.P. also operates a wholesale marketing business and a syngas processing 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 make during this conference call, include the ability of the partnership to meet its state and business goals and other risks noted from time to time in the partnership's Securities and Exchange filings.

At this time, I would like to introduce Mark Gorman, President and CEO of Genesis Energy, L.P., 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 2005 first quarter 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 to our earnings release for a reconciliation of that measure. I would like to start with some general comments regarding the first quarter of 2005.

During the quarter, we generated available cash before reserves of $3,201,000 or $0.34 per unit, which exceeded our distributions of $1,426,000 or $0.15 per unit for the quarter. Excluding the $1,319,000 of nonrecurring proceeds from the sale of surplus assets, we generated available cash of $1,882,000 or $0.20 per unit for the quarter. We also recorded earnings of $2,770,000 or $0.29 per unit.

The first quarter benefited from the increased segment margins from pipeline construction projects and other acquisitions we completed in the later half of 2004 and during the first quarter of 2005. Additionally, we sold idle assets during the quarter. Our pipeline segment performed very well in the first quarter.

We built three pipeline segments in the later half of 2004 that were all in service during the first quarter of 2005. Two of these segments are extensions of our existing Mississippi crude oil pipeline system the field that Danbury owns.

The third pipeline segment, also in Mississippi, and carries CO2 to the Brookhaven field fiduciary recovery. These three pipelines added to our segment margin.

In January 2005, we acquired 14 natural gas pipeline and gathering systems located in Texas, Louisiana and Oklahoma, encompassing approximately 60 miles of pipeline and related assets. The purchase price was $3,100,000 in cash and we financed it through our credit facility with Banc of America.

This acquisition contributed to the increase of pipeline segment margins for the first quarter of 2005. This is our first natural gas asset acquisition. We are looking for opportunities to expand this operation in the future.

The first quarter of 2005 also benefited from acquisitions in September 2004, of a second volume metric production payment, plus certain marketing rights. This acquisition enabled us to expand our wholesale CO2 marketing operation. Segment margins from our CO2 wholesale marketing operations increased over the first quarter of 2005, as a result of this acquisition.

We sold several assets during the first quarter of 2005 that had been out of service for more than a year. These assets were sold for $1,319,000, generating gains totaling $653,000. Results for the first quarter also increased, due to a reduction in our general and administrative expense related to our stock appreciation rights plant.

Our unit price decreased in the first quarter of 2005, resulting in a credit to expense $1,300,000. This non-cash credit had no affect on available cash.

On April 1, 2005, we closed on the acquisition of a 50% interest in T&P Syngas Supply from a subsidiary of Chevron Texaco. We paid $13,500,000 for this acquisition and financed it through our Banc of America credit facility. T&P Syngas is a partnership that owns a syngas manufacturing facility located in Texas City, Texas. The facility processes natural gas to produce syngas and high pressure steam for a subsidiary of Praxair on our long-term processing agreement. Praxair owns the other half interest in T&P Syngas.

Based on currently available information, we expect the transaction to be immediately accretive to distributable cash flow and to generate approximately $1,400,000 of additional segment margin during 2005.

We will now review the results of operations for the first quarter of 2005. Today, we reporte net income of $2,770,000 or $0.29 per unit for the first quarter. This compares to a loss for the 2004 first quarter of $1,005,000 or $0.11 per unit.

Income from continuing operations was $2,488,000 or $0.26 per unit for 2005. Income from discontinued operations was $282,000 or $0.03 per unit in the 2005 quarter. In the 2004 first quarter, loss from continuing operations was $782,000 or $0.09 per unit and a loss from discontinued operations was $223,000 or $0.02 per unit.

As I stated earlier, we are pleased with the results from our pipeline transportation segment. Pipeline segment margin from continuing operations increased 32% in the first quarter of 2005 as compared to the same period in 2004. This increase was due to increases in pipeline tariff and related revenues.

A 53% increase in volumes on the Mississippi system, along with the new tariff put in place in place in the third quarter of 2004 offset the effects of lower volumes and tariffs on the Texas system. The increases in Mississippi volumes are primarily attributable to Danbury's increased volumes from fields near our pipelines.

The decline on the Texas system was expected as Tepco integrated the parts of our Texas system that they acquired in 2003 into their existing systems. The acquisition of the natural gas pipelines in January 2005 also contributed to the increase in segment margin.

Increased revenues from the sale of volume-metric gains due to higher crude oil prices was another factor increasing pipeline segment margin. We are very pleased with the improvement in this segment of our business.

Segment margin from our wholesales CO2 marketing activities was higher by $285,000. The second volume metric production payment we acquired in September 2004 provided the majority of the increased margin. This business is somewhat seasonal, with the period between April and October generally being the period with the greatest sales.

Continuing gathering of marketing segment margins decreased by $118,000 to $888,000 for 2005 when compared to the first quarter of 2004. Segment margin decreased between the two periods, primarily due to increased field operating costs. Increases in fuel costs and personnel costs could not all be passed through to producers due to competition.

Average of fuel cost to operate our tractor trailer fleet increased by more than $0.60 per gallon between the first quarter of 2005 in the same period in 2004. Employee compensation increased, primarily due to a rise in benefit cost. Excess gathering capacity in the markets in which we operate meant that competition for declining volumes is strong.

Partially offsetting the effects of the field cost increase was an increase in revenues from volumes that we transport but did not purchase. Additionally, our average margins from the difference between the costs of the crude oil at a price at which we could sell it increased slightly.

The 2005 period included in general and administrative expenses, a non-cash credit of $1,329,000 for the effects of a decrease in the unit price on our stock appreciation rights plan. The stock appreciation rights program was put in place at the end of 2003 and fluctuations in the market price of our units determined the liability we record.

In the 2004 first quarter, we recorded a charge of $1,104,000 related to this plan.

Excluding the stock appreciation right plan sharks, general and administrative expenses were $2,187,000 for the first quarter of 2005, an increase of $127,000 over the 2004 first quarter. Interest expense increased $185,000 due to variances in outstanding debt, difference in weights and changes in the facility commitment, beginning in June of 2004.

Continuing operations also included a gain of $371,000 from the sales of surplus assets, mostly from a site we own in Homa, Louisiana.

Income from discontinued operations in 2005 consisted of the gain from the sale of segments of the Texas pipeline system that we ceased to use as a result of the sale of the West Columbia portion of that system to Tepco in 2003. We sold idle pipe to steel reclaimers, recognizing a gain of $282,000. The loss from discontinued operations for the 2004 first quarter was $223,000. This loss related primarily to the dismantlement of assets that we abandoned in 2003.

At this time, I would like to address our outlook for the remainder of 2005. We have been very pleased with the improvement and the performance of our pipeline segment. We will continue to look for opportunities to expand our pipeline operations, both through additions to our existing systems as well as acquisitions.

2005 will include the full effects of the changes made in 2004 to increase volumes in Mississippi and the tariff increases for that pipeline.

2005 CO2 marketing operations are expected to provide approximately $6 million of annual segment margins. The addition of the second volume metric production payment of September 2004 is expected to provide the increase over 2004.

We will continue to take steps to improve the performance of the crude oil gathering and marketing segment. These steps include managing relationships with suppliers, improving inventory management, controlling field costs and increasing the in efficiency of field operations.

Excluding the effects of the stock appreciation right plan, we expect general and administrative costs for 2005 to decrease due to one-time costs to document our internal controls during 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.

Additionally, market interest rates have risen in 2005. An important factor affecting the outlook for our distributions will be maintenance capital expenditures. During 2004, we spent $939,000 on maintenance capital expenditures. We currently anticipate that our maintenance capital expenditures for 2005 will be approximately $2,400,000. We spent $511,000 of this amount in the first quarter of 2005.

These expenditures are expected to relate primarily to our Mississippi pipeline system, including erosion control expenditures, facility improvements and improvements of the pipeline resulted from expected integrity management test results. These improvements will enable us to handle even greater volumes in the future.

In summary, we expect pipeline gross margins to be approximately the same as in 2004, due to improvements 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.

The gathering and marketing segment margin is expected to be somewhat less than in 2004. General and administrative costs are expected to improve after the completion of first-year costs for Sarbanes-Oxley compliance. Interest expense will increase due to the larger credit facility in acquisitions.

Maintenance capital costs will increase as a result of integrity management program testing scheduled for the Mississippi pipeline system during 2005. Finally, we expect to have additional segment gross margin from the acquisition of the Syngas investment from Chevron Texaco.

Based on the foregoing, we expect to be able to sustain our quarterly distribution of $0.15 per unit for 2005. As for the potential for our increase in the distribution during 2005, we are encouraged by the fact that we generated available cash of $1,882,000 or $0.20 per unit for the first quarter of 2005, excluding the $1,319,000 of nonrecurring proceeds from the sale of surplus assets.

As a result of the solid first quarter performance in the sale of surplus assets, we increased our available cash reserve by $1,775,000 during the first quarter. We also completed the Syngas transaction and are hopeful to complete more accretive acquisitions through the remainder of this year.

At the same time, we currently are cautious about forecasting increased distributions during 2005. There remains significant uncertainties associated with maintenance capital expenditures required as a result of our pipeline integrity management program testing during 2005.

Further, we want to see progress in our ability to generate sustained improvements in the gathering and marketing segment, which is still subject to adverse market conditions under our business model.

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.

Kayle?

(Operator Instructions) Your first question from Gabriel Hammond of Alerian Capital.

Good morning.

Good morning. How are you today?

Good. Thanks. Just starting on the pipeline transportation segment, you talk in the press release about the higher crude oil prices contributing to volumetric gains there, and if you could you know kind of characterized the sensitivity there to crude oil prices in that business, and also the shape of the curve you know as we move...

Well, where crude oil prices impact that part of the business, in our tariff structure we deduct a small percentage of the volumes we ship from the shippers. If we actually don't lose that volume to evaporation or measurement losses, that production is then available for sale, which adds revenue to the pipeline side of our business.

As crude oil prices have increased over the past year, we've been able to generate more revenues from that part of the business.

Great, and also if you could talk about the Syngas plant acquisition, how that came to you, what the process was there, and then also perhaps more generally about how you guys look for acquisitions, what kind of hurdle rates and then criteria you have.

I think, you know, basically the Syngas opportunity was a good opportunity for us. Chevron Texaco approached us, they were looking at disposing of the business, it wasn't core to their operations, and they thought it was a piece of business that might fit well into our portfolio of assets, and we negotiated the transaction with them over a several month period.

I think as a general rule, we're fairly wide open in terms of the type of acquisitions that we're looking for. I think as a general rule we are approaching from the acquisition side, looking at more fee-based businesses as opposed to marketing assets is the general emphasis we're trying to build going forward this year.

Great, and also could you give us a little more detail on is your comfort level with maintenance capital expenditures and the range that we could see beyond 2005/2006, as you think about the risks there and the type of pipeline integrity?

Sure. That is by far the toughest thing for us to predict that the present time. We are in the second half of our integrity management program. During the last two years we've gone through the testing of our highest risk; 50% of the system. We're now in the lower risk segment, but we have to base our budget, the information we provided for you in terms of maintenance capital this year, is just really based on the results of what we saw in the testing during the past two years.

We've run the pigs on the Mississippi system. We don't have the test results back. We would expect to get those late May or June and after we evaluate them will have a -- be able to perhaps give a better estimate of what the cost would be at the next conference call. It could be significantly more, it could be significantly less, then what we're estimating at the current time.

Okay. And lastly, just as far as future developments and thinking along the work that Denberry's (ph) doing, for example you know the Brookhaven facility installation and your opportunities there, if you just talk a little bit more about the relationship there and your plans as Denberry network is not expanding its C02 business in West Mississippi.

We work very closely with Denberry on the Brookhaven C02 flood (ph). We've already constructed in our 2004 project two pipelines associated with Brookhaven. We built the C02 line to bring C02 off of Denberry's mainline, off to their injection facility, and at the same time we constructed a gathering system to bring crude oil out of the field back to our existing trunk line system.

I would say in terms of a model how we would like to work with Denberry, Brookhaven was a great example on how we were able to work with them to structure a win-win situation by putting both pipelines in at the same time.

Great, thank you very much.

You're welcome.

[Operator Instructions]

Mr. Gorman, sir, I'll hand the call back to you as that was the final question.

Thank you very much everyone that joined us today, and I look forward to talking with you next quarter. Have a good day, bye-bye.

Ladies and gentlemen that concludes your conference call. You may now disconnect.