Genesis Energy LP (GEL) 2005 Q2 法說會逐字稿

Welcome, ladies and gentlemen, to the 2005 second quarter earnings conference call for Genesis Energy, L.P. 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, 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 CO2 marketing business and syngas processing 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 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 goal 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, 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 second 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 you to our earnings release for a reconciliation of that measure.

I would like to start with some general comments regarding the second quarter of 2005. During the quarter we generated available cash before reserves of $2,697,000, or $0.28 per unit, which exceeded our distributions of $1,427,000, or $0.15 per unit, for the quarter. We recorded earnings of $743,000, or $0.08 per unit. Second quarter benefited from an increased segment margin from pipeline construction projects and other acquisitions totaling $24 million that we completed in the later half of 2004 and during the first quarter of 2005. On April 1st, 2005, the first day of the quarter, we closed on the acquisition of a 50% interest in T&P Syngas Supply from a subsidiary of ChevronTexaco. 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 the 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 under a long-term processing agreement. Praxair owns the other half interest in T&P Syngas. During the second quarter our net equity in the earnings of T&P Syngas added $252,000 to net income. This investment added $313,000 to available cash before reserves.

We will now review the results of operations for the second quarter of 2005 in more detail. Today we reported net income of $743,000, or $0.08 per unit, for the second quarter. This compares to net income for the 2004 second quarter of $1,099,000, or $0.12 per unit. Income from continuing operations was $752,000, or $0.08 per unit, for 2005. We had a loss from discontinued operations of $9,000 in the 2005 quarter. In the 2004 second quarter income from continuing operations was $1,160,000, or $0.12 per unit, and the loss from discontinued operations was $61,000.

Pipeline segment margin from continuing operations increased 69%, to $2,808,000 in the second quarter of 2005 as compared to the same period in 2004. This increase was primarily -- this increase was due, primarily, to increases in pipeline tariff and related revenues. A 31% increase in volumes on the Mississippi System, along with the new tariff put into 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 Denbury's increased production from fields near our pipeline. Decline on the Texas System was expected as TEPPCO integrated the parts of our Texas System that they had acquired in 2003 into their existing pipeline 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 pipeline loss allowance gains, due to higher crude oil prices, was another factor increasing pipeline segment margin. We are very pleased with the improvement this segment of our business.

Segment margin from our wholesale CO2 sales activities increased by $296,000, to $1,757,000. The second volumetric 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 greater sales. Continuing gathering and marking segment margins decreased by $1,494,000, to $450,000 for 2005 when compared to the second quarter of 2004. Segment margin decreased between the two periods, primarily, due to increased field operating costs. We recorded a reserve of $380,000 for our share of the expected cost for the environmental remediation of a site in Florida that we previously used as a truck unload facility.

Fuel costs have increased over $0.60 per gallon since the 2004 quarter, which increased the cost to operate our trucks significantly. Employee compensation increased, primarily, due to a rise in benefit costs. Increased lease costs from the addition of five trucks to our fleet last fall also added to field operating costs. Excess gathering capacity in the markets in which we operate meant that competition for declining volumes is strong. This situation made it difficult to pass our increased cost to -- through to the producers.

The 2005 period included, in general and administrative expenses, a non-cash charge of $43,000 for the effects of an increase in the unit price on our stock appreciation rights plan. The stock appreciations rights program was put in place at the end of 2003, and fluctuations in the market price of our units determine the liability we record. In the 2004 second quarter we recorded a credit of $512,000 related to this plan. Excluding the stock appreciation rights plan charge, general and administrative expenses were $2,425,000 for the second quarter of 2005, a decrease of $109,000 from the 2004 second quarter.

As I previously stated, we made an investment at the beginning of the second quarter in T&P Syngas Supply Company. Our share of the earnings of T&P was $339,000 for the quarter, which was offset by $87,000 of amortization, or the excess of the price we paid for our interest in T&P over our share of the equity of T&P at the time of the acquisition. This resulted in net earnings from this investment for the quarter of $252,000. Net interest expense increased $178,000, to $506,000, due to variances in outstanding debt, differences in rates, and changes in the facility commitment beginning in June of 2004.

Continuing operations also included a gain of $27,000 from the sale of surplus assets. The loss from discontinued operations in 2005 of $9,000 related to the sale of assets in the Texas Pipeline System that we ceased to use as a result of the sale of the West Columbia portion of that system to TEPPCO in 2003. The loss from discontinued operations for the 2004 second quarter was $61,000. This loss related, primarily, to the dismantlement of assets that we abandoned in 2003.

Turning now to the six-month results, net income for the six months ended June 30th, 2005 was $3,513,000, or $0.37 per unit. This compares to net income for the same period in 2004 of $94,000, or $0.01 per unit. We generated income from continuing operations of $3,240,000, or $0.34 per unit, for the 2005 period, and income from continuing operations of $378,000, or $0.04 per unit, for 2004. Income from discontinued operations for the 2005 period was $273,000, or $0.03 per unit. The loss from discontinued operations for the comparable period of 2004 was $284,000, or $0.03 per unit.

Pipeline segment margin increase in the 2005 period as compared to the 2004 period. In 2004, pipeline segment margin was $3,510,000 and in 2005 it was $5,251,000. Increased revenues accounted for this change. Just like in the quarterly comparison, the addition of a second volumetric production payment in December 2004 resulted in higher segment margin from our CO2 sales operations. CO2 segment margin increased from $2,701,000 in the 2004 period to $3,282,000 for the 2005 six-month period.

Segment margin for crude oil gathering and marking activities was $1,338,000 in 2005, compared to $2,950,000 in 2004. The same factors that affected the difference in the quarters contributed to the difference for the six-month periods for this segment. The 2005 six-month period included general and administrative expenses, a non-cash credit of $1,286,000 for the effects of a decrease in the unit price on our stock appreciation rights plan. In the first -- in the 2004 first half, we recorded a charge of $592,000 related to this plan. Excluding the stock appreciation rights plans charge, general and administrative expenses were approximately $4,600,000 for both six-month periods.

Our T&P Syngas investment added the same amount for the six-month period as it did in the quarter. Net interest expense was higher, due to variances in average debt balances, rates, and a larger facility, which increased commitment fees. Continuing operations also included a gain of $398,000 for the sale of surplus assets, mostly from a site we own in Houma, 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 TEPPCO in 2003. We sold idle pipe to steel reclaimers, recognizing a gain of $273,000. The loss from discontinued operations for the 2004 first half was $284,000. 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 in the performance of our pipeline segment in the first half of 2005. We will continue to look for opportunities to expand our pipeline operations, both through additions to our existing systems as well as acquisitions. 2005 revenues will include the full effects of the changes made in 2004, to increased volumes in Mississippi, and the tariff increase for that pipeline.

During the second half of 2005, we expect major repair projects related to the integrity management program to reduce segment margin from the level in the first six months. Expenditures on testing and repairs in the third or fourth quarters are anticipated to be approximately $1,700,000 as compared to less than $300,000 in the first half. 2005 CO2 sales operations are expected to provide approximately $6 million of annual segment margin. The addition of the second volumetric production payment in September 2004 is expected to provide the increase over 2004. We hope to continue to grow this business during 2005.

We will continue to take steps to improve the performance of the crude oil gathering and marketing segment. We expect the results for this segment for 2005 to be less than the results for 2004. Excluding the effects of the stock appreciation rights plan, we expect general and administrative costs for 2005 to decrease, due to one-time costs to document our internal controls from 2004. We expect our investment in T&P Syngas to be accretive to available cash before reserves for 2005, after taking into account increased interest expense from borrowings to make the acquisition.

We expect our interest cost to increase in 2005. We will pay more commitment fees in 2005, due to the increased size of our credit facility, and more interest, due to our increased utilization of the credit facility for working capital needs and acquisitions. Additionally, market interest rates have risen during 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 $1,750,000. We spent $711,000 of this amount during the first half of 2005. These expenditures are expected to relate, primarily, to our Mississippi pipeline system, including corrosion control expenditures, facility improvements, and improvements to the pipeline. 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, and increased repair costs related to integrity management testing. CO2 segment margins are expected to increase because of the 2004 acquisition. Gathering and market segment margins are expected to be less than in 2004. The T&P Syngas investment will be accretive to available cash before reserves for 2005. General and administrative costs are expected to improve after the completion of the first-year costs for Sarbanes-Oxley compliance. Interest expense will increase, due to the larger credit facility and acquisitions. Maintenance capital costs will increase to make improvements to the Mississippi Pipeline that were identified during the integrity management program testing.

Based on the foregoing, we expect to be able to sustain our quarterly distribution at $0.15 per unit for 2005. As for the potential for our increasing the distribution during 2005, we are encouraged by the fact that we generated available cash of $4,538,000, or $0.47 per unit, for the first half of 2005, excluding the $1,360,000 of non-recurring proceeds from the sale of surplus assets. As a result of the solid first half performance and the sale of surplus assets, we increased our available cash reserve by $3,047,000 during the first half of 2005. We also completed the Syngas transaction, and are hopeful to complete more accretive acquisitions during the remainder of the year.

At this time, we are cautiously optimistic about forecasting increased distributions during 2005. There remains significant uncertainties associated with the major repair projects and maintenance capital expenditures required as a result of our pipeline integrity management program testing during the first half of 2005.

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. Derek?

[OPERATOR INSTRUCTIONS.] There are no questions on the line at this time.

Thank you, Derek. Again, I would like to thank everyone for joining us today, and I look forward to talking to you next quarter. Have a good day. Good-bye.

This concludes today's presentation. You may now disconnect. Thank you, and have a great day.