Genesis Energy LP (GEL) 2006 Q4 法說會逐字稿

Welcome to the 2006 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 also operates an industrial gasless 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 would 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 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.

Thank you and welcome to everyone. This morning, we reported net income for the fourth quarter of 2006 of $651,000 or approximately $0.05 per unit. In the quarter, we wrote off $602,000 of unamortized costs related to the replacement of our credit facility. Excluding the credit facility write-off, net income for the quarter would have been $1,253,000 or approximately $0.09 per unit. In the fourth quarter of 2005, we reported net income of $498,000 or $0.05 per unit.

During the quarter, we generated available cash before reserves of $3,674,000 or $0.26 per unit and earlier this month, we paid a distribution of $2,954,000 or $0.21 per LP unit attributable to the fourth quarter of 2006. That distribution represents an increase of $0.01 per unit or 5% over the third quarter 2006 distribution and an increase of $0.04 per unit or 24% over the fourth quarter of 2005 distribution. This is the sixth consecutive quarter that we have increased our distribution.

Excluding the effects of the write-off of the credit costs, available cash before reserves in the quarter would have been approximately [$0.30] per unit. Coverage of our distribution for the fourth quarter was 1.2 times; excluding the write-off costs, it would have been 1.4 times.

During the fourth quarter, we closed on a new credit facility. This new facility positions us to pursue our plan to make accretive investments to grow the partnership as well as provide working capital for our existing operations. The facility provides for an aggregate maximum capacity of $500 million and a committed amount of $125 million initially with the ability to increase the committed amount up to the maximum amount with lender approval as a pro forma EBITDA to be realized from prospective acquisitions.

Ross Benavides, our CFO, will now review the financial results for the quarter and the year-to-date period.

Thank you, Grant. For the 2006 fourth quarter, we generated net income of $651,000 or $0.05 per unit. In the comparable period in 2005, we reported 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.

As previously stated, we recorded a write-up of unamortized costs related to our prior credit facility totaling $602,000 during the fourth quarter. Without this item, results from continuing operations for the fourth quarters would have reflected an increase of $163,000 in the 2006 period.

Results from our pipeline transportation segment, crude oil gathering and marketing segment were generally consistent between the fourth quarter periods. Segment margin from industrial gas activities in the 2006 three-month period declined to $2,635,000 as compared to $2,932,000 for the three month period in 2005. We sold on average [8,339] cubic feet less per day to our CO2 industrial customers in the 2006 quarter. As we've explained in the past, this segment of our business does experience some seasonality, with volumes generally dropping off in the winter months. That seasonality was greater in the fourth quarter this year for the contracts that we own in the third quarter of 2005 and 2006, the average daily volume increased by [4,700] cubic feet per day.

G&A expenses were also consistent between the two fourth quarter periods. And as we've previously stated, interest costs increased during the fourth quarter due to the write- off of unamortized costs related to the credit facility we replaced in November.

We will now turn to our results for the full-year 2006. We recorded net income for 2006 of $8,381,000 or $0.59 per unit compared to income for 2005 of $3,415,000 or $0.35 per unit. Our income from continuing operations for 2005 was $3,689,000 or $0.38 per unit and our income from discontinued operations for 2005 was $312,000 or $0.03 per unit. The cumulative effects of a new accounting pronouncement reduced 2005 net income by $586,000 or $0.06 per unit. Our segment's results showed significant increases in 2006 over 2005. If we adjust for the effects on general and administrative expenses and interest costs of the transition costs and the credit facility write-off, 2006 net income would have been $10,421,000 or $0.74 per unit.

Under new accounting rules for our stock appreciation rights plan, we recorded expense of almost $1.9 million in 2006 for this plan. The expense affected our pipeline transportation and crude oil gathering and marketing segments as well as general and administrative expenses. In 2005 under the old accounting rules, we recorded accretive income of $482,000 for this plan. The resulting effect between 2005 and 2006 was almost $2.4 million of additional expenses in 2006.

Segment margin for our pipeline operations increased $2,622,000 in 2006 as compared to 2005. All crude oil pipelines generated an improved gross margin in 2006. Tariff rates on all of our crude oil pipeline systems were increased during 2006. Our volumetric gains produced higher revenues during 2006 primarily due to crude oil market price increases. Although our expenditures for pipeline integrity testing and repairs were less in 2006 than in 2005, part of this reduction was offset by expenses for our stock appreciation rights plan that related to personnel employed in our pipeline activities totaling $289,000.

Average daily volumes on our Mississippi System increased 6% during 2006 due to increased receipts from Denbury's production. Denbury is 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 oil fields using CO(2)-based tertiary recovery operations, Denbury expects to add crude oil gathering and CO(2) supply infrastructure to these fields. Further, that redevelopment of older fields and any related increase in production could create increased demand for our crude oil transportation services.

The Jay pipeline system ships crude oil produced from fields in south Alabama and the Florida Panhandle. New production in the area surrounding the Jay system has offset some of the declining production curves of the older producing fields in the area. Interestingly, some of these older fields are currently undergoing redevelopment. While average daily volumes for all of 2006 on the system declined 374 barrels per day relative to the full-year 2005, our average volumes for the fourth quarter of 2006 were 261 barrels per day above the fourth quarter of 2005.

Our Texas system is dependent on the connecting carriers for supply and on the two refineries for demand for our services. Volumes on the Texas systems fluctuate as a result of changes in the supply available for the two refineries to acquire and ship on our pipeline. Overall volumes between 2005 and 2006 declined an average of 247 barrels per day or less than 1%. 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 Tepco's pipeline system.

Segment margin from industrial gas activities in 2006 was $11,443,000 as compared to $8,154,000 for 2005. The CO(2) assets acquired from Denbury in the fourth quarter of 2005 and earnings from our 50% investment in TNT syngas supply provided most of this margin increase. In 2006, we owned TNT syngas for 12 months versus nine months in 2005, and our net earnings from the syngas investment increased $697,000 from 2005.

Segment margins from crude oil gathering and marketing doubled to $7,366,000 in 2006 over 2005. Field costs declined $1,761,000 primarily due to reduction in the size of our fleet and a reserve recorded in the prior period for our share of the expected cost for environmental remediation of a truck unload site. Field costs included $362,000 of expenses related to our stock appreciation rights plan in 2006.

G&A expenses increased by $3,917,000 during the 2006 annual period compared to the 2005 period principally due to transition costs, deferred costs written off for our prior credit facility and increased expense for our stock appreciation rights plan. The transition costs accounted for $1,439,000 of the increase and credit related costs accounted for $101,000 of the increase.

In 2005, under the accounting rules in effect during that period, the decrease in our unit price from the end of 2004 to the end of 2005 resulted in a credit to G&A expense of $482,000 related to our SAR plan. In 2006, the expense for this plan was $1,279,000 for a total difference between years of $1,761,000.

The remaining increase in general and administrative expenses of $616,000 resulted from increases in compensation, our bonuses, and costs for legal and consulting fees. Depreciation and amortization and impairment expenses increased $1,242,000 primarily as a result of amortization of the CO(2) assets we acquired in the fourth quarter of 2005. Interest costs were $658,000 less than 2006 despite the write-off of $500,000 of interest expense of the prior credit facility cost.

In 2005, before we used the proceeds from our December 2005 equity offering to temporarily retire debt, we had higher average daily debt outstanding than in 2006 by approximately $15.8 million. This lower amount of debt reduced our net interest expense by $1,151,000 despite slightly higher interest rates. At December 31, 2006, we had $8 million outstanding under our credit facility. Debt obligations under our credit facility bear interest at variable rates.

In 2005, we disposed of vital assets for $1,585,000 generating $791,000 of gain. The assets sold included pipelines that were idled in 2002 and 2003; $312,000 of this gain is reflected in discontinued operations. Upon adoption at December 31, 2005 of a new accounting pronouncement, we recorded a non-cash charge of $586,000 for the cumulative effect of the accounting change. This accounting change related to estimates of conditional future asset retirement obligations. In 2006, we also adopted a new accounting pronouncement related to accounting for stock appreciation rights plan, which resulted in the credit income of $30,000.

I will now turn it back over to Grant.

The credit facility we obtained in the quarter was an important step that gives us the financial flexibility to make acquisitions. It could have a material impact on Genesis. We are pursuing accretive acquisitions and projects involving transportation gathering, terminaling, storage, assets and related midstream businesses, some of which may be outside the scope of our historical operations.

We do expect our existing businesses to continue to provide us with steady cash flow streams in 2007. Our pipeline should produce consistent results as Denbury's tertiary recovery efforts continue to bring more throughput to our Mississippi pipeline, and the other pipelines continue to transport volumes similar to the 2006 averages. Industrial gases should provide us with a steady source of cash flow, both from sales under our carbon dioxide contracts as well as from our joint ventures.

While we do experience some seasonality and the demand for CO(2) overall, this business is fairly stable. In discussing our key investment considerations, we've emphasized our ability to grow by acquiring and developing assets -- our relationship with Denbury, the strategic advantage of our size and current status as a general partner's IDRs, our financial flexibility to fund the growth and our strong total unit cash distribution coverage.

With our new senior executive team on board and our new credit facility in place, we are ready to hopefully take Genesis to the next level. If we are able to consummate significant accretive acquisitions from third parties, we fully expect that Denbury will sell and/or lease back certain of its existing and planned midstream assets to the partnership.

That really kind of concludes our prepared remarks for the conference call. At this time, I will turn it back to the moderator to take questions. Thanks.

(OPERATOR INSTRUCTIONS). Ron Londe, A.G. Edwards and Sons, Inc.

Just a few questions here. I know you mentioned that CO(2) was seasonal but the falloff in volumes in the fourth quarter seemed to be a little bit more dramatic than we were expecting. Was there some issue with regard to the timing of deliveries in the quarter? Or can you give us some more insight into that?

We haven't found any issues related to customers or anything like that. Again, we felt like it was primarily seasonality. We've just not gotten any indication that there's anything that is either a problem or that it will continue.

You talked about tariff increases for your oil pipeline segment. Can you give us a percent increase that you've experienced in 2006 and what you might experience in 2007?

The tariff increase that we did in 2006 was the FERC regulated indexing tariff. If I remember right, the index went up by approximately 3%. It's based off of PPI adjustments. So, depending on what that factor is, we would see increases in 2007 for the 2007 index.

Recently, Denbury announced that or been talking about building a pipeline over to Houston. I guess in their conference call, they upped the cost of that pipeline somewhere between $450 million or $600 million. Is there a potential for you to participate in that line?

We fully anticipate that consistent with what we believe is going to happen with the existing pipelines in Mississippi that once that is built, provided that we have added non- Denbury or deployed non-Denbury capital in the 1.5 to 1 ratio, that that project will be recapitalized into the partnership if and when it is completed.

(OPERATOR INSTRUCTIONS). Barret Blaschke, RBC Capital Markets.

Quick question on the Jay and Texas system volumes. I saw there was a little decline there. Could you walk me through that? You may have talked about it already. I might have just missed it.

We indicated it was a very small decline. What was it -- [271] barrels per day. As we've indicated before, it's a combination of the factors of the availability from the Tepco system and the competition of those refineries for those barrels and -- [pretty well is].

On the Jay system, I think that there is continuing development of a new significant build over there in two of the kind of original fields many, many years ago are currently undergoing significant redevelopments. So, we certainly anticipate that the Jay volumes are stabilized if not have a little bit of upward momentum.

We're probably seeing kind of the bottom end of the volume on that system?

At least for now, yes.

(OPERATOR INSTRUCTIONS). I'm showing no questions in the queue at this time. Do you have any additional comments?

We have none and I want to thank everybody for participating and thank you, Mr. moderator.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation.