Genesis Energy LP (GEL) 2006 Q3 法說會逐字稿

Welcome to the 2006 third quarters 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 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 you to visit our website at www.genesiscrudeoil.com where a copy of the press release we issued today is located. The press release also presents a reconciliation of non-GAAP financial measures to the most comparable GAAP.

At this time, I would like to introduce Grant Sims, CEO of Genesis Energy LP. Mr.Sims will be joined by Joe Blount, President and Chief Operating Officer; Brad Graves, Executive Vice President for Business Development; Ross Benavides, Chief Financial Officer; and Karen Pape, Vice President and Controller.

Thanks, Karen, and welcome to everyone.

I'd like the start with the highlights of the third quarter of 2006. This morning, we reported net income the third quarter of 2006 of $1.695 million or $0.12 per unit. We recorded transition costs related to the change in the senior management team totaling $1.293 million in the third quarter. Without these costs, net income would have been $2.988 million or $0.21 per unit. For 2005 third quarter, we reported a loss of 0.596 million or $0.06 per unit. We were obviously very pleased with these results.

During the third quarter of 2006, we generated available cash before reserves of $4.055 million or $0.29 per unit, and later this month we'll pay a distribution of $2.813 million or $0.20 per unit attributable to the third quarter of 2006. That distribution represents an increase of $0.01 per unit or 5.3% over our second quarter 2006 distribution, and an increase of $0.04 per unit or 25% over our third quarter of 2005 distribution. Excluding the effects of the transition costs, that I mentioned earlier, available cash before reserves would have been $0.38 per unit. This is the fifth consecutive quarter that we've increased our distribution by $0.01 per unit. Coverage of our distribution for the third quarter was 1.4 times. Excluding the transition cost, it would have been 1.9 times. We believe that our current run rate of available cash before reserves and our relatively conservative coverage ratios should be viewed as an indication of our potential to grow the distribution in future periods.

Operating results for the third quarter of 2006 were very solid. All of our business segments showed improved results compared to the third 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 G&A expense increases related to compensation and benefits, as well as accruals related to our stock appreciation rights, plans, as well as the transition costs mentioned earlier. We're currently in the process of completing documentation of a new credit facility that will replace our existing credit facility. This facility was subscribed to by a syndicate of 15 banks and positions us to execute our plan to make significant accretive investments to grow the partnership. The new facility with a maximum availability of 500 million will provide a committed amount of 125 million initially with the ability to increase to the maximum amount with lender approval of the pro forma EBITDA to be realized from prospective acquisitions.

Today, I'm presenting my first earnings conference call as the new CEO of Genesis. Joining me as part of the senior management team at Genesis are Joe Blount, former president and chief operating officer of Unocal Midstream & Trade, who serves as our partnership's President and Chief Operating Officer; and Brad Graves, former vice president of Enterprise Products Partners, LP, who serves as the Executive Vice President of Business Development. Ross Benavides, our CFO, will now review the financial results for the quarter and year-to-date periods.

Thank you, Grant.

For the 2006 third quarter, we generated net income of $1.695 million or $0.12 per unit. In the comparable period in 2005, we reported a loss of $0.596 million or $0.06 per unit. As Grant previously indicated, the 2006 third quarter net income would have been $1.293 million higher, but for the transition costs related to the change in the management team. Pipeline transportation segment margin was $3.458 million for the third quarter of 2006 as compared to 1.885 million for 2005 period. The period-to-period increase of $1.573 million was attributable to two factors. Increased revenue attributable to the sale of volumetric gains, most of which resulted from higher crude oil prices and lower pipeline operating costs. Volumes during the third quarter of 2006 increased by an average of 2446 barrels per day, although the volumes in the 2005 quarter were negatively impact by several hurricanes. Higher tariff rates on all of our systems also contributed to the improved segment margin. Pipeline operating costs in the 2006 quarter were $0.568 million lower than in the 2005 period. We substantially completed the first cycle of our required testing and repairs under our pipeline integrity management program during 2005, with a substantial portion of these costs incurred in the third quarter of 2005. Similar costs were not incurred or required in the third quarter of 2006.

Segment margin from industrial gas activities in the 2006 third quarter was 3.155 million as compared to $1.688 million for the three-month period in 2005. The acquisition of an 80 billion cubic feet CO2 volumetric production payment from Denbury in the fourth quarter of 2005 provided 0.985 million of this margin increase. Volumes of CO2 sold were 60% greater in the 2006 period, as sales prices were 6% higher due to inflation adjustments in the contracts and variations in the volume sold under each of the contracts. This -- the contribution to earnings from our industrial gas joint ventures also improved by 0.259 million in the 2006 quarter, mostly due to our T&P Syngas supply company joint venture performing a turnaround in the third quarter of 2005.

Segment margin from crude oil gathering and marketing activities was $1.999 million for the 2006 third quarter, an increase of $0.946 million over the 2005 period. The primary factor increasing segment margin between the two periods was decreased field operating costs. We adjusted the size of our fleet of tractor-trailers at the end of 2005 to better match the volumes being purchased. In connection with that fleet reduction, we also eliminated gathering and marking volumes not providing sufficient margin, and we added more profitable volume.

General and administrative expenses increased by $1.329 million when compared to the 2006 third quarter to -- when comparing the 2006 third quarter to the 2005 period. This increase is attributable to transition costs we recorded as a result of the change in our senior management team. Otherwise, a decrease in the expense for our stock appreciation rights plan was offset by increased employee costs. Depreciation and amortization expense increased by $0.506 million between 2005 and the 2006 third quarter. Amortization related to CO2 assets increased in 2006 as a result of the acquisition of the third volumetric production payment. Interest costs were $0.280 million less in the 2006 quarter due to lower debt. In the third quarter of 2005, we had a higher debt balance due to acquisitions and capital expenditures related to our existing assets. We use proceeds from our December 2005 equity offering to temporarily retire debt under our revolving credit facility. Our average daily borrowing since the equity offering were substantially less than in the prior-year period. Offsetting the effect of lower indebtedness, interest rates increased slightly during the quarter as compared to the prior-year quarter.

Now, I will turn to the nine-month period. The improved performance in the third quarter, combined with our results for the first half of 2006, resulted in a $4.813 million or 165% improvement in net income for the nine months of 2006 as compared to the 2005 period. Net income for 2006 nine-month period was $7.730 million or $0.55 per unit. That net income included $7.700 million or $0.55 per unit attributable to continuing operations and income 30,000 from the cumulative effect of a new accounting change adoption. In 2005, net income was $2.917 million or $0.31 per unit. The improvement over the 2005 nine-month period are attributable to many of the same factors that contributed to the improvement for the third quarter. Additionally, without the transition costs, net income for 2006 nine-month period would have been over $9 million.

As in the third quarter, our improvement in pipeline transportation segment margin of $2.726 million was primarily attributable to an increase in revenues of $1.608 million, attributable to the sale of volumetric gains, most of which resulted from higher crude oil prices. We also benefited from higher volumes and tariffs in 2006 which added $0.563 million as well as a reduction in pipeline operating costs of $0.355 million. For the nine-month period our industrial gas segment reported improved segment margin of $3.586 million. Increased CO2 sales volumes were the primary source of improvement with sales under contracts acquired in 2005 providing approximately $2.700 million of the improvement. Our equity and earnings of joint ventures also increased segment margin by $0.659 million, with most of that relating to owning our investment in T&P Syngas for nine months in 2006 as compared to six months in 2005.

Crude oil gathering and marketing segment margin showed remarkable improvement, with an increase between the nine-month periods of $3.683 million or 154%. A reduction in field operating costs of $1.627 million contributed much of the improvement. Eliminating less profitable volumes and increasing profitability on the volumes retained provided the remaining increase. Additionally, while we've been in the Contango crude oil price market for most 2005 and 2006, the contribution to segment margin from out inventory hedges was greater in the 2006 period.

General and administrative expenses increased by $3.912 million; however, $1.293 million of that increase related to transition costs and $1.457 million related to non-cash accruals for our stock appreciation rights plan. The change in accounting for this plan from the method used in 2005 and prior periods to the method required under the new accounting pronouncements should result in less volatility in the expense we record each period from our plan. The remaining increase in general and administrative expenses was due to other employee-related costs.

Interest costs were $0.756 million lower in the 2006 nine-month period than in 2005. As in the quarterly comparison, lower debt balances through much of the 2006 period was the reason for this decline. Offsetting lower debt balances, interest rates have increased in 2006 over 2005 and may continue to increase in 2006 and 2007. In the first nine months of 2005, we disposed of assets generating $0.800 million of gain. The assets sold included pipelines that were idled in 2002 and 2003. $0.318 million of this gain was reflected in discontinued operations in 2005.

That will cover it for results. I'll turn it back over the Grant.

Thanks, Ross.

I want to visit a little bit about our strategy for growth. The credit facility we've obtained and expect to close within the next two weeks is a really important step to position us to make acquisitions that would have a material impact on Genesis. We're very pleased with the commitments we received from 15 banks to participate in this facility. We're now positioned to make more significant accretive acquisitions and develop internal growth projects. We're pursuing accretive acquisitions and projects involving transportation, gathering, terminalling or storage assets and related midstream businesses, some of which may be outside the scope of our historical operations. We also expect our existing businesses to show improved segment margin for the remainder of 2006 and into 2007. Pipeline segment margin should continue to improve now that we have substantially completed the first round of our required integrity management program. We also expect Denbury's tertiary recovery efforts to bring more through-put to our Mississippi pipeline. Industrial gases should provide us with a steady source of cash flow, both from sales under our carbon dioxide contracts and from our joint ventures. While we do experience some seasonality in the demand for CO2, overall, this business is fairly stable.

In discussing our key investment considerations over the last year, we tried to emphasize our demonstrated ability to grow by acquiring and developing assets, our relationship with Denbury Resources, the strategic advantage of our size and current status of our general partners' incentive distribution rights, our financial flexibility to fund growth, and our strong total unit cash distribution coverage. With our new senior executive team on board and our new credit facility, we're now ready to take Genesis to the next level. As we make significant accretive acquisitions with third parties, we expect that Denbury will sell and lease back certain of its existing and planned midstream assets to us, providing another source of growth for the partnership.

That concludes our prepared remarks for the conference call. At this time, I'd turn it back to Everett to take questions from the audience.

[OPERATOR INSTRUCTIONS]. Ronald Londe. A.G. Edwards & Sons.

Thank you. Just curious if could you elaborate on timing of possibly some acquisitions in the near -- in the future?

Ron, I don't think we're really in a position to discuss timing. We -- I'm very satisfied with the amount of opportunities that we've identified in the 10 weeks that we've been here. But in terms of when we get anything signed, sealed, and delivered, I'm not really at this -- willing to commit at this point.

10 weeks, it seems longer.

I don't disagree.

Also looking at your volumetric data on your press release, Texas pipeline system barrels were down about 8%. We were looking for a few higher barrels than the 30,000 that you reported. Was there any -- anything going on there that was out of the ordinary?

No. There's a certain a fluctuation. It's clearly a matter of the demand by the two major refinery facilities off of that delivery system. So -- but there's nothing that we've identified that there's any issues associated with. It's just kind of reflecting their demand.

The big jump in the volumes on the Jay pipeline, were they hurricane-related?

To a large extent, yes. As well as there's been a fair amount of additional development activity in and around that system, and so that's -- I think portends well for the future performance of the Jay system.

Okay. Can you give us a feel for what the maintenance capital spending might be for the fourth quarter?

It probably will be somewhere between 0.5 million and 1 million. I would say probably on the lower side.

Okay. Very good. Did -- since the end of the third quarter, has there been any change in oil price differentials that would negatively affect the fourth quarter versus the third?

There's nothing that we see as having a big impact on us at this point.

Okay. Okay. Thank you.

Kent Green, Boston American Asset Management.

Good quarter, pals. My question pertains to the credit facility at the -- the tranches you could take down. I think you indicated 125 first tranche. Does that mean that you would be limited to the size of an acquisition? In other words, if you took a tranche down and duplicated with equity, say 50/50 would be a -- say, a 250 acquisition, or could you make a bigger acquisition on the basis that it has a little flexibility in it?

We would try to build in a maximum amount of flexibility, Kent. As I alluded to, we can pro forma in the incremental EBITDA from an acquisition or major development project to increase the ultimate advance rate against the project or acquisition.

A lot of people have been discussing recently -- the acquisition market seems to be pretty active with all these MLPs that have been informed in the last -- formed in the last several years with subsequent GPs all coming public. With cap rates coming down and that kind of stuff. Are you seeing that on a preliminary basis, or are you geographically in a position where a lot of people aren't operating in some of your areas, particularly in Mississippi?

I don't know if it's necessarily a geographic advantage that we have, although that's clearly where we're focusing a lot of business development efforts in around the existing footprint. But what we're really trying to do is identify things that are kind of off the radar screen. We've actually passed on at least three acquisition opportunities that had already gotten to the flipbook stage because of our -- our belief that they would be non-long-term value propositions, given what some of the people are paying for some things. So it is a -- it's a highly bid market. But what we're really trying to do is get to things before they get to the bid process that make a lot of sense for us and that we think that we can add some incremental value to.

And considering our size --

And considering our size, smaller deals are meaningful to us, and -- or not really on the plate for some of the larger MLPs.

This is maybe a question more for Brad or -- I don't know if he's -- he's on the call or not. But you might -- I mean, there's a lot of different, say, joint ventures among MLPs going up where three or four are getting together either to do a development or to work out something with an [E&P] company or something like that. Is that -- with Brad and the rest of your background with a lot of assets -- different assets -- onshore, offshore, that kind of stuff -- is this also a way that you may pursue growth in the future?

I think that's clearly one of the options that we're considering. We have historically done a lot of things in joint venture structures. And we're certainly discussing that with industry partners.

Are you going to be available with Denbury's field trip activities next week?

No.

Okay. Thank you.

They won't take me anywhere.

Thank you.

[OPERATOR INSTRUCTIONS]. Kent Green, Boston American Asset Management.

I guess nobody else has one. I've got one about, say, the distributions. While I know it's a -- up to the directors of the corporation, I couldn't help but noticing, we hold this a dividend plus so that we look for the plus all the time, that you're increasing in it $0.01 per quarter for the last, I think, four quarters. Are you committed to any particular plan or policy, particularly in light of the fact that if you take out the special charges for the management transition team, your coverage ratios are very, very high on cash flow versus the dividend?

We're not committed to any set rate of growth. I think that clearly, we have the flexibility to, as I mentioned, because of the coverage ratios, to anticipate additional growth in future periods in the distribution rate. But we clearly want to -- we believe that we have some opportunities to significantly increase the long-term value of the partnership units and intend to try to reach a happy medium of maintaining financial flexibility and giving a substantially growing distribution growth to the LPs.

Have you established contact with a lot of these closed-end funds, Grant, to issue units if you need to make a big acquisition, as well as obviously going public with the units? Or would you avoid them -- their terms are not of your liking?

Well, clearly, I think they represent another source of equity capital, as well as the kind of traditional retail sales. We -- as you're aware, we have 205 million or so existing under a active S3 that was filed last fall, with which we pulled down around 45 million with the equity offering in the fall of 2005. So we have some registered securities available to us. But clearly, there are lots of avenues to get capital. So I think that kind of relative to your earlier question about the size of the deal, that with all of the sources that we've put together with the kind of third party sources and closed-end fund and other private equity type arrangements that we're not at all capital constrained on the size of things that we can look at.

Just a final question. Have you really exhausted the amount of volumetric contracts on CO2 to industrial users out of the Jackson facility area?

I don't know if I would characterize it as exhausted. In fact, we're actually looking at one of the plants having an expansion. So there may be additional growth in that, but obviously, to a large extent that depends on Denbury's appetite to sell more CO2 from the dome into the industrial market as opposed to using it for their tertiary recovery operations.

Thank you.

Ladies and gentlemen, there are no further questions at this time.

Thank you very much. And we look forward to talking to you again in 90 days or so. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.