Genesis Energy LP (GEL) 2006 Q1 法說會逐字稿

Welcome to the 2006 first quarter earnings conference call for Genesis Energy. Genesis Energy LP operates crudes 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 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 Exchange Commission. We also encourage you to visit our website at 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, Chief Financial Officer; and Karen Pape, Vice President and Controller.

Thank you and welcome to everyone. I would like to start with highlights for the first quarter, 2006. This morning we reported net income for the first quarter of 2006 of $2,591,000 million or $0.18 per unit. For the 2005 first quarter Genesis had net income of $2,770,000 or $0.29 per unit. Results for the quarter were very solid. In the first quarter of 2006, we generated available cash before reserves of $5,015,000 or $0.36 per unit, and later this month we will pay a distribution of $2,532,000 or $0.18 per unit, attributable to the first quarter of 2006. This distribution represented an increase of $0.01 per unit or 5.9% over the fourth quarter of 2005 distribution and an increase of $0.03 per unit or 20% over the first quarter of 2005 distribution. Cash flow coverage during the first quarter was 2.0 times.

For the comparable 2005 period, we generated available cash before reserves of $3,201,000 or $0.34 per unit, which exceeded our distribution of $1,426,000 or $0.15 per unit for the 2005 quarter. Excluding $1,319,000 of nonrecurring proceeds from the sale of surplus assets, we generated available cash before reserves of $1,882,000 or $0.20 per unit for first quarter of 2005, reflecting cash flow coverage of 1.3 times. We believe that this growth in our distribution, available cash before reserves, and cash flow coverage should be viewed as an indication of our potential to grow the distribution going forward.

We are very pleased with our operational results for the first quarter of 2006. All of our business segments showed improved results compared to the first quarter of 2005. These improvements related either to obtaining the benefits of acquisitions made during 2005 or to improved operational execution. Offsetting the improved segment margin performance were general and administrative expense accruals related to our stock appreciation rights plan. Most of the stock appreciation rights plan accruals between periods were noncash items that did not affect our available cash before reserves.

Since the end of the first quarter of 2006, we completed the acquisition of a 50% interest in Sandhill Group LLC which owns a carbon dioxide processing facility. Sandhill produces food grade (CO)2 from (CO)2 supplied by us under a long-term supply contract we have with Sandhill. We paid $5 million for our interest in Sandhill.

We will now review the details of the results of operations for the first quarter. For the 2006 first quarter we generated net income of $2,591,000 or $0.18 per unit, including $2,561,000 or $0.18 per unit, attributable to continuing operations, and income of $30,000 from the cumulative effect of a new accounting change adoption. In the comparable period in 2005, we generated net income of $2,770,000 or $0.29 per unit, including income of $2,488,000 or $0.26 per unit, attributable to continuing operations in income of $282,000 or $0.03 per unit, attributable to discontinued operations.

Pipeline transportation segment margin was $2,802,000 for the first quarter of 2006, as compared to $2,443,000 for the 2005 period. The period-to-period increase of $359,000 was primarily attributable to an increase in revenues attributable to the sale of volumetric gains, most of which resulted from higher crude oil prices. Variations in volumes between our systems and higher tariffs on our Jay system than in the prior period also contributed to the improvement in segment margin. Operating costs in the 2006 period were approximately the same as in the 2005 quarter.

From 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 system. We believe these improvements will more than offset any reduced throughput from reduction declines that may occur on the Texas or Jay pipeline systems. Segment margin from industrial gas activities in the 2006 three-month period was $2,627,000 as compared to $1,525,000 for the three-month period in 2005. The acquisition of two long-term (CO)2 sales contracts with industrial customers along with the 80 billion cubic feet of (CO)2 in the form of volumetric production payments 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.

We expect improved performance from our industrial gas segment for 2006 for the T&P Syngas investment since we will 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 the full year in 2006. Segment margin from crude oil gathering and marketing activities were $1,728,000 for the 2006 first quarter. An increase of $840,000 from the 2005 period. The primary factors increasing segment margin between the two periods was decreased field operating costs and increased margin between purchase and sales of crude oil. We are particularly pleased with the improvements in the performance of the crude oil gathering and marketing segment over recent quarters. In the past, this segment has been subject to a great deal of volatility caused by market conditions and escalating costs such as diesel fuel and labor costs. If we are able to sustain recent improvements and performance of this segment, it will contribute greatly towards our ability to increase our distribution over time. We will continue our efforts to stabilize the performance of this business segment.

General and administrative expenses increased by $1,802,000 when comparing the 2006 first quarter to the 2005 period. In the 2005 quarter, we reduced our accrual for our stock appreciation rights plan, thereby decreasing our general and administrative expense. Under the accounting method used in 2005 for our plant, we determined the accrual needed based on the unit price at the end of the period. Since our stock price had fallen at March 31, 2005, we recorded a credit to expense of $1,329,000.

In 2006, we adopted a new accounting pronouncement related to the accounting for our plan which resulted in a cumulative effect income adjustment of $30,000 in expense for the first quarter of $152,000. Depreciation and amortization expense increased $338,000 between the 2005 and 2006 first quarters. Amortization related to (CO)2 assets increased in 2006 as a result of the third volumetric production payment. In the first quarter of 2005 we disposed of idle assets for $1,319,000, generating a $653,000 gain. The assets sold include our pipelines that were idle in 2002 and 2003. $282,000 of this gain is reflected as discontinued operations in 2005. Interest costs were $233,000 less in 2006 due to lower debt. We used proceeds from our December 2005 equity offering to temporarily retire indebtedness under our revolving credit facility, lowering our outstanding debt balance during the first quarter. Market interest rates increased slightly during the quarter. It may increase more in 2006. Debt obligations under our credit facility bear interest at variable rates based on market interest rates.

Overall, we had a solid quarter that contributed steady progress towards our objectives for 2006. We increased our distribution and available cash and maintained solid distribution coverage. We improved the performance of all business segments through acquisitions or operational execution. We continue to make acquisitions that are complementary to our existing assets and skill sets. We look forward to building on the foundation of our accomplishments from 2005 and the first quarter of 2006 to continue to provide growth for the future. That concludes our prepared remarks for this conference call. At this time, I will return to the moderator to take any questions from the audience.

[OPERATOR INSTRUCTIONS] Our first question comes from the line of Ron Londe of A.G. Edwards. Please proceed.

A couple of questions. Number one, Sandhill. You financed it I guess beginning of the second quarter. How did you fund that, the 5 million?

We had at the beginning of the quarter, we still had some proceeds left over in excess of the retirement of our debt from the equity offering that we did in December. And that was the -- the primary source of funds for the acquisition, Ron.

Okay. Also, on the gathering and marketing side of the business, which you said you had previously been pretty volatile, I mean, the margin was up about 91%. So I mean it's still pretty volatile. And it represented about 25% of your overall gross margin. You said costs were down and the margins were up in the business. Can you break that out a little bit? How much -- how you got a contribution from lower costs and what the characteristic was from higher margin?

Hold on one second. Karen -- Karen's looking up the number real quick for you. See if we have that breakout. But generally the lower cost, a lot of it was driven, Ron, by our -- 0.5 million of it was from cost. And so about 400,000 then from improved margin between the purchase and sale prices. A big part of the cost reduction is driven by a reduction of fleet size. The lease that we had in 2005 expired over the course of the third and fourth quarter. We reduced the amount of equipment we had out on lease. That resulted in some savings. Also with the new equipment coming in, we saw reductions in maintenance expense, and some improvement on our gas mileage on the fleet.

You said integrity costs in Texas and the Jay system were going to be materially lower. Can you give us a number on that.

No. I may have misspoke. If I did. We didn't have significant integrity costs on those systems in 2005. I think what we said or meant to say was that the reduction in integrity management costs, which was primarily on the Mississippi system would -- and increases on volume on the Mississippi system would more than offset any possible reductions in throughput on the Florida or the Texas system.

Oh, I see. Okay. Your volumes were off 24% on the Jay system. But you said tariffs were up. Can you give us an idea how much tariffs were up? And if you also could give us an idea of how low does the throughput on the Jay system have to go before you decide to do other things with that system.

The tariffs were up -- the increase in the tariffs was rather small. It was really just driven by the amount of the increase that we are allowed in mid year 2005 under the FERC escalators. So it would have been several percent. The volume on the Florida system has really been driven by declines out of two of the gas plants over there. That produced condensate. They never -- they had problems bringing them back up after the hurricane season last year. And then additionally they had some problems in the first quarter with their water disposal system. We do think that -- the information we have indicates that the water disposal issue is improving. We actually saw volumes increase in March of this year over the first two months of the quarter. So we're hoping -- we are not implying that we'll get back to where we were last year, but we expect second, third, and fourth-quarter volumes on the Jay system to be better than they were in the first quarter.

Okay. Can you give us a better feel for the performance of the (CO)2 business in the first quarter. I mean, it was up significantly. Can you break that out a little bit more? And it looked like it represented about 36% of the margin.

Yes. And I think it's -- going back, Ron, it's really taking a look at that, the drivers on it are twofold. One, if you take a look, if we compare it this year versus last year, the first thing you have in it is the first quarter of last year, we had not acquired our 50% interest in T&P Syngas yet. And that was about $300,000 in the first-quarter results this year that weren't in last year's results. And then if you take a look at the volume increase on our sales as a result of the addition of the third volumetric production payment, our average sales for the quarter went from about 48 million cubic feet a day last year to about 66 million cubic feet a day this year. So it's really the driver were those two acquisitions account for the vast majority of the increase in that segment margin between periods.

Okay. Okay. Thank you.

[OPERATOR INSTRUCTIONS] Ladies and gentlemen, this concludes the question-and-answer portion of today's conference. I will turn it back to management for any closing remarks.

I would just like to thank everybody for joining us in today's conference call. As I said, the first quarter was very solid for us, and it gives us a good platform for our performance over the balance of the year. Have a good day, and I look forward to speaking to you next quarter. Good-bye.

Thank you for your participation in today's conference. This does conclude the presentation, and you may now disconnect. Have a great day.