Genesis Energy LP (GEL) 2005 Q4 法說會逐字稿

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Welcome to the 2005 fourth quarter and year-end earnings conference call for Genesis Energy. 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 an industrial gases business. During this conference call, management may be making forward-looking statements within the meaning of the Securities Exchange Act of 1933, and the Securities Exchange Act of 1934. The law provides Safe Harbor protection to encourage companies to provide forward-looking information. Genesis intends to avail itself of those Safe Harbor provisions and directs you to its most recently filed and future filings with the Securities and Exchange Commission. We also encourage to you visit our website, genesiscrudeoil.com, where a copy of the press release we issued today is located. The press release also presents a reconciliation of such non-GAAP financial measures to the most comparable GAAP financial measures. At this time, I would like to introduce Mark Gorman, President and CEO of Genesis Energy LP. Mr. Gorman will be joined by Ross Benavides, Genesis's Chief Financial Officer, and Karen Pape, Genesis's Vice President and Controller.

Thank you and welcome to everyone. I would like to start with the highlights of 2005. This morning we reported net income for 2005 of $3,415,000 or $0.35 per unit, and net income for the fourth quarter of 2005 of $498,000 or $0.05 per unit. For 2004, Genesis had a loss of $1,412,000 or $0.15 per unit. In the fourth quarter of 2004, Genesis had a loss of $1,112,000 or $0.12 per unit. This marked a substantial improvement in performance year-over-year. For 2005, we generated available cash before reserves of $11,136,000, which exceeded our distribution of $6,764,000. Our distribution coverage for 2005 was 1.6 times.

During the fourth quarter, we generated available cash before reserves of $4,073,000 or $0.29 per unit , and earlier this month paid a distribution of $2,391,000 or $0.17 per unit, attributable to the fourth quarter of 2005. That distribution represented an increase of $0.01 per unit, or 6.3% over our third quarter of 2005 distribution, and a $0.02 per unit or 13.3% over our fourth quarter of 2004 distribution. Cash flow coverage during the fourth quarter was 1.7 times. We are pleased with this distribution growth, and believe that the cash flow coverage during these periods should be viewed as an indication of our potential to grow the distribution going forward. We completed $31 million in acquisitions during 2005.

I would highlight that our acquisition of an additional volumetric production payment from Denbury Resources, the owner of our general partner in October for $14,400,000 and our acquisition of the 50% interest in T&P Syngas in April for $13,400,000 increased the size and scope of our industrial gas business and provided an increased diversity and stability for our available cash for distributions. Operationally during the third quarter, we completed a major component of our federally mandated pipeline integrity management program requirements, and have substantially completed our objective to place the Mississippi pipeline system in condition to handle expected future throughput growth. Having completed these projects, we believe that we have achieved significant increase in the stability of performance and growth potential for the Mississippi pipeline system.

We are proud of our pipeline operations personnel, having accomplished these results in a year when they dealt with three separate major hurricanes that affected our operations, as well as the shortages of human and other resources that occurred in the aftermath of those hurricanes. We are also pleased that we were able to successfully minimize the disruption of our operations from those hurricanes. In December, we raised $45 million of equity capital in connection with the public offering by issuing 4,100,000 new limited partner units.

This is our first time to access the equity markets since our formation. We used the proceeds of that offering to temporarily reduce the balance outstanding under our revolving credit facility. The success of this offering demonstrates our ability to access the equity market, which is essentially for any master limited partnership to grow its business and distribution. We will now review the results of operations.

For the 2005 fourth quarter, we generated net income of $498,000 or $0.05 per unit. Including $1,090,000 or $0.10 per unit, attributable to continuing operations, and a loss of $586,000 or $0.05 per unit from the cumulative effect of a new accounting change adoption. In the comparable period of 2004, we experienced a net loss of $1,112,000 or $0.12 per unit, including a loss of $968,000 or $0.10 per unit, attributable to continuing operations, and a loss of $144,000 or $0.02 per unit, attributable to discontinued operations. Pipeline transportation segment margin from continuing operations was $2,668,000 for the fourth quarter of 2005, as compared to $2,432,000 for the 2004 period. The period-to-period increase was primarily attributable to an increase in the average tariff per barrel and an increase in revenues attributable to the sale of volumetric gain, most of which resulted from higher crude oil prices. Additionally, the 2005 quarter included segment margin from natural gas gathering pipelines that we acquired in the first quarter of 2005. We also had a complete quarter of revenue from our CO2 pipeline segment which we placed in service in late 2004.

Those segment margin improvements were partially offset by an increase in pipeline operating costs, primarily related to expenditures for pipeline integrity repairs. Segment margin from industrial gas activities in the 2005 three-month period was $2,932,000, as compared to $1,518,000 for the three-month period in 2004. The acquisition of two long-term CO2 sales contracts with industrial customers along with the 80 billion cubic feet of CO2 in the form of a volumetric production payment from Denbury in the fourth quarter of 2005, and the earnings from our 50% investment in T&P Syngas supply in the second quarter of 2005 provided most of this margin increase.

Segment margin from continuing crude oil gathering and marketing activities was $1,270,000 for the 2005 fourth quarter, an increase of $1,134,000 from the 2004 period. The primary factor increasing segment margin between the two periods was increased margins between purchases and sales of crude oil. Decreased field operating costs also improve the segment margin. General and administrative expenses decreased by $86,000 during the 2005 fourth quarter, as compared to the 2004 period. Increased accruals for the employee bonus plan were offset by decreases in accruals on our stock appreciations rights plan and audit and internal control assessment fees.

Now we will review the results for the year 2005. We recorded net income for 2005 of $3,415,000 or $0.35 per unit, compared to a loss for 2004 of $1,412,000 or $0.15 per unit. Our income from continuing operations for 2005 was $3,689,000 or $0,38 per unit, and our income from discontinued operations from 2005 was $312,000 or $0.03 per unit. The cumulative effects of a new accounting pronouncement reduced net income by $586,000 or $0.06 per unit. For the 2004 period, continuing operations resulted in the loss of $949,000 or $0.10 per unit, and discontinued operations resulted in a loss of $463,000 or $0.05 per unit. Segment margin from our pipeline operations increased $1,261,000 in 2005, as compared to 2004.

Higher tariffs in Mississippi, combined with increased volumes on that system, added to segment margin, as did increased revenues from volumetric gains most of which resulted from higher crude oil market prices. Our CO2 pipeline segment contributed to the segment margin, as did our natural gas gathering pipelines. Partially offsetting the revenue gain was an increase in pipeline operating costs of $1,604,000, primarily related to increased expenditures for pipeline integrity testing and repairs. Denbury has become the largest producer of crude oil in Mississippi, based on average barrels produced per day. Our Mississippi system is adjacent to several of Denbury's existing and prospective oil fields. As Denbury continues to acquire and develop old fields, using CO2-based tertiary recovery operations, Denbury expects to add crude oil gathering and CO2-supply infrastructure to these fields. Further, that redevelopment of older fields and any related increases in production could create increased demand for crude oil transportation services.

In the fourth quarter of 2004, we constructed two segments of crude oil pipeline to connect producing fields operated by Denbury to our Mississippi system. One of those segments was placed in service in [2,4] and the other began operations in the first quarter of 2005. Denbury pays us a minimum payment each month for the right to use these pipelines. The Jay pipeline system in Florida, Alabama ships crude oil from fields with relatively short remaining production lives. Volumes have declined from an average of 15,128 barrels per day in 2003, to 14,440 barrels per day in 2004, to 13,725 barrels per day in 2005, although part of the decline of 2004 and 2005 can be attributed to hurricanes that passed near the Panhandle of Florida.

New production in the areas surrounding the Jay system has offset some of the declining production curves of the older producing fields in the area. However, we do not know if this new production will be sufficient to continue to offset declining production from existing wells in the area. One of the larger, older fields has been unable to return to its production levels before the hurricanes of 2005. We do not know if they will be successful in returning to those levels.

Our Texas system is dependent on the connecting carriers for supply, and on two refineries for demand for our services. Volumes on the Texas system have declined since the sale of TEPPCO as a result of changes in the supply available for the two refineries to acquire and ship on our pipeline, and changes TEPPCO made to the operations of the pipeline segments it acquired from us. Volumes on the Texas system may continue to fluctuate as refiners on the Texas Gulf Coast compete for crude oil with other markets connected to TEPPCO's pipeline system.

For 2006, we expect pipeline segment margin to improve, as a result of reduced expenditures for pipeline integrity testing and repairs, as well as increased throughput on the Mississippi pipeline system. We believe these improvements will more than offset any reduced throughput from production declines on the Texas or Jay pipeline systems. Segment margin from industrial gas activities in 2005 was $8,154,000, as compared to $5,762,000 for 2004. The CO2 sales contracts with industrial customers in associated volumetric production payments acquired from Denbury in the fourth quarter of 2005 and the earnings from our 50% investment in T&P Syngas supply provided most of this margin increase. For the nine months of 2005 during which we owned an interest in T&P Syngas, our share of the operating earnings net of the amortization of our purchase price over our share of the equity of T&P Syngas was $501,000.

We expect improved performance from our industrial gas segment for 2006, from the T&P Syngas investment, since we'll obtain a full year performance and do not expect to perform a turnaround as we did in the third quarter of 2005. Further, we will have the benefit of the third volumetric production payment for a full year in 2006, rather than for one quarter in 2005. Segment margin from crude oil gathering and marketing decreased $373,000 in 2005, as compared with the prior period.

Reduced segment margin in 2005 was due primarily to an increase in field costs of $2,112,000, increases of fuel costs and personnel costs, a $435,000 accrual for our share of the expected costs for the environmental remediation of the Jay station that we no longer operate, and the addition in the third quarter of 2004, of five more leased vehicles caused the increase for the year. Those increased costs were partially offset by credit cost reductions and increased margins for purchasing and transporting crude oil.

General and administrative expenses decreased by $1,375,000 during the 2005 annual period, as compared to the 2004 period. principally related to changes in the accrual related to our stock appreciation rights plan. In the 2004 period, our unit price increased requiring us to record a charge of $1,151,000. In 2005, the decrease in our unit price resulted in a credit to general and administrative expenses of $482,000. Note that we have increased industrial gas and pipeline segment margin without any significant increase in general and administrative expenses.

Depreciation, amortization and impairment expense decreased $577,000 between 2004 and 2005. 2004 included a charge of $933,000 to write down the value of the segment of our Mississippi system, from Liberty to Baton Rouge to its estimated salvage value. Although amortization related to CO2 assets increased in 2005, this increase was offset by the cessation of depreciation on assets that were fully depreciated during 2003 and 2004. In 2005, we disposed of idle assets for $1,585,000, generating $791,000 of gains. The assets sold included pipelines that were idle in 2002 and 2003. $312,000 of this gain is reflected as discontinued operations. Interest costs were $1,106,000 more in 2005, due to increased debt associated with our acquisition. Additionally, interest rates were higher in 2005 than in 2004; however, because we used the proceeds from our December equity offering to temporarily retire indebtedness, we had no balances outstanding at December 31st, 2005, under our revolving credit facility.

During 2006, we will continue to amortize facility fees and we'll pay commitment fees on the unutilized portion of our credit facility. Additionally, market interest rates may also increase in 2006. Debt obligations under our credit facility bear interest at variable rates based on market interest rates. Upon adoption at December 31st, 2005 of a new accounting pronouncement, Genesis recorded a non-cash charge of $586,000 for the cumulative effect of the accounting change. The accounting change related to estimates of conditional future asset retirement obligations. Based on the foregoing, we believe we have established a foundation for growing the business and distribution.

We have demonstrated access to debt and equity capital. We made accretive acquisitions and are continually seeking opportunities to make additional acquisitions of assets that are complementary to our existing assets and skill sets. Operationally, we have successfully completed all of the major components of our pipeline integrity management program, and have placed the Mississippi pipeline system in condition to handle increased throughput that is expected to result from Denbury's tertiary recovery program. Further we have steadily increased our distribution over the last two quarters and believe we can continue to provide similar growth in the future. That concludes our prepared remarks for this conference call. At this time I'll turn to the moderator to take any questions from the audience. [Colby]?

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Ron Londe with AG Edwards. Please proceed.

Thank you. Hi, Mark. Can you give us an idea of some of the breakdown of the -- the continuing operations volumes for '05? The crude oil pipeline barrels per day, do those relate to the Mississippi line? Are there other pipelines that are involved there?

Well there's three pipeline systems involved, Ron, for 2005 in our pipeline transportation segment. Volumes on the Mississippi system averaged just a little over 16,000 barrels a day in 2005. That is an increase from 12,600 barrels a day in 2004. And as I said, as we noted our Jay system averaged about 13,700 barrels a day in 2005. That was a decline from about 14,400 barrels a day in 2004, and then finally our third system on the Texas system, we averaged just under 31,600 barrels a day in 2005, compared to 36,400 barrels a day in 2004.

Okay. Those declines, the declines in those volumes, I think you talked about the Jay system. The Texas system is -- is that just from natural decline curve or is that part of your strategy of moving away from that business?

No, no. What it is -- it may be partially related. On that particular system, we don't gather crude oil directly from producers in the field. We receive volumes off of two other connecting pipeline systems, and we deliver the crude then to two refiners. Some of it just relates from year-to-year on changes in the supply mix run by those refiners, and part of it relates to changes that TEPPCO has made to their pipeline system, and that allows them to move barrels out of the area to refiners in the Midwest, if they are willing to pay pore for the crude oil than the Gulf Coast refiners are.

Okay. And the improvement volumes in CO2 sales, can you give us some more insight into that?

Sure, it's -- part of it is again on the year-to-year change, and in the quarter-to-quarter change, is the difference in the volumetric production payments. As you may recall, and our overall volume increased from 2005. We're at about 56,800 mcf per day, compared to 45,300 mcf per day in 2004. In late 2004, we made our second volumetric production payment with Denbury. So we only had a partial- year effect on that in 2004 but a full-year effect in 2005, and then the 2005 fourth quarter also contains several months of the third volumetric production acquisition from Denbury. So it's partially -- it's some increase from our existing customers, but mainly it's the acquisition of the two additional product payments and the difference in timing between the two years.

Okay. And the crude oil wellhead barrels per day?

Our volumes, the crude oil volume side, on the wellhead barrels, we -- the outright purchases, we decreased from about 45,900 barrels a day in 2004, to about 39,200 barrels a day in 2005. We -- on our transport [inaudible], which are just truck barrels, we increased from 1,742 barrels a day, to 3,084 barrels a day. A big part of that change in the volumes between the two years, Ron, is a change in Mississippi. In the first nearly three quarters of 2004, we were -- we were purchasing Denbury's production, and then we made a change in our business model with them. Where starting in September 2004, they began -- became a shipper on our pipeline system, and sold directly to the refining customers going to the cap line.

Okay. And you mentioned that your average tariff on Mississippi line was up. Can you give us an idea of what it was before, and what is it now?

Well, it's -- It was about $0.65 a barrel in 2004. In 2005, we switched and it's a sliding scale volumetric or volume incentive tariff with different tiers in it, but it averaged about $0.76 a barrel for the year.

Okay. Good. Have you been able to capture any new CO2 customers during the fourth quarter?

Well, we picked up from the CO2 side, yes, we acquired it as part of that third volumetric production payment, we picked up two additional customers.

Okay. You know, Denbury recently announced their tertiary oil production for '06 was going to be up 40%. What is that going to mean to you? You know, what slice of pie are you going to get out of that?

Well, I think -- and I haven't seen totally the breakdown on what fields yet are in the 40% number, but I would suspect that based on the development plans, most of that will be increases in production associated with phase one of the flooding. All of that comes to -- to our Mississippi pipeline system.

Okay. One thing I doesn't see on the -- your statements was the fully diluted number of units that were outstanding. Do you have an '05 for -- average for '05 in year-end?

I would say the fully diluted is the same as the basic.

Okay. I just didn't see a number.

Oh, hold on. We'll get it for you. It's -- did you want the number of units, or did you want the amount per unit?

Total units outstanding.

Okay. Change -- hang on.

A little under 12 million units outstanding , but the weighted average is approximately [9 million 6] units.

Did you hear that, Ron?.

Yeah, [9 million 6] was the weighed average. What was it at the end of the year?

At the very end of the year, the outstanding units were a little over 12 million.

Okay.

Counting the effect of the GP.

Right.

We'll get that.

Did I understand you correctly that the distribution coverage for the fourth quarter was 1.7 times --

That's correct.

-- where you calculated and 1.6 for the year?

Yes, sir.

Okay. Because I came up with a little higher number. I'm going to have to check on that. Okay.

All right.

That's all I had.

All right, thanks, Ron. Have a good day.

Your next question comes from the line of Kent Green with Boston American Asset Management. Please proceed.

Great quarters, finally.

Thank you very much.

Obviously repositioning the asset away from the declined contracts with TEPPCO and the oil away to Mississippi has allowed you to at least -- hold the line in those particular assets for a while. When will we see -- obviously those other two contracts look like they are going to continue to decline slowly over time, unless some major change occurs. And the volumes from Mississippi will pick up. When will they completely offset each other? Am I wrong on my assumptions?

Well, as I -- as we said in talking about the pipeline segments, certainly for -- looking at 2006, we anticipate that the volume increases on the Mississippi system will offset the declines on the -- on the Florida system and the Texas system. The Florida system is really in a state of flux. What we are seeing over there is the larger, older fields are in their declining years. They are in the later years of their productive lives. We are seeing steady declines out of those volumes. Now there is new drilling in the area that's north of our pipeline system. Those volumes offset a good chunk of the decline from the older fields this year. But we are not sure whether or not that drilling will be sufficient to fully offset the declines on the existing fields going forward.

Is there any other take-away for those new drillings?

No. In that particular area, the Florida/Alabama Panhandle, we are the only pipeline -- crude oil pipeline servicing that area. So it's -- the volumes -- it's a matter of success in new drilling that's going to dictate the volume on that system. The -- the Texas system, quite candidly, is a function of demand from our two refining customers on the system. To the extent that their margins are strong and they want to compete for supply, they could also move to the Midwest refiners. That's what really dictates the volumes on those systems.

Have you ever disclosed who those customers are?

No, we haven't and that's only because, quite candidly, on regulated systems, we can't disclose shippers or shipper information.

And you are subject to -- to closedowns on those two refineries also for maintenance?

Yeah.

And was there anything unusual this year on closedowns?

No, only to the extent that on -- on essentially all of our systems, because of the hurricanes, we were subject to shutdowns in some way, shape or form, beyond their normal turnaround. On the -- on the Florida system, there was a shutdown at the Shell refinery at Mobile Bay. On the Texas system, both Marathon and [Lyondell] were shut down during the Hurricane Rita, and on -- although the hurricanes didn't impact the Midwest refiners, [cap line], we had power problems and were down during those hurricanes.

Yeah, and was that shift to the Midwest pipelines based on price or just on hurricane shutdowns or both?

No, it was just on hurricane shutdowns.

Oh, okay. So those volumes as long as, refinery margins stay high, particularly in the -- in the Southwest, you will still have those volumes?

Yeah.

As far as looking at Denbury, your parent, I mean, they are moving to east Mississippi. The pipeline is now completed. I think it's going to start up pretty soon.

The CO2 line?

Yes.

Yes.

Is there any thought about getting into the CO2 lines -- pipeline business?

We would -- we would be interested in expanding in that direction.

How is your finances? I think that was -- if I remember right that was about $140 million?

No, it was -- you have to check with -- on the Denbury side but I think the construction costs in that system were closer to $50 million.

So that would be within your means.

Yeah.

Of your acquisition. What is your plan on either buying CO2 or take-away pipelines as far as wouldn't you want to buy them? Do you want to buy them after they ramp up to full production and have a more mature systems and then become a common carrier only?

Well, I don't think -- although it's difficult to say, because actually it's dependent to -- not just when we would like to acquire, but also if and when Denbury would like to sell. But certainly from an MLP perspective, it's preferable for us to acquire assets that are producing strong cash flow already.

At this time, there are no further questions in queue, so I will now turn the call over to Mr. Mark Gorman for closing remarks.

I would just like to thank everybody for joining us for the fourth quarter and year-end conference call, and I look forward to talking to you at the end of the first quarter. Have a good day. Good-bye.

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