Genesis Energy LP (GEL) 2007 Q1 法說會逐字稿

Welcome to the 2007 First Quarter 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 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 Grant Sims, CEO of Genesis Energy LP. Mr. Sims will be joined by Joe Blount, President and Chief Executive Officer; Ross Benavides, Chief Financial Officer; and Karen Pape, Vice President and Controller.

Thanks Karen, and welcome to everyone. This morning, we reported net income for the first quarter of 2007 of $1.585 million or $0.11 per unit. In the first quarter of 2006, we reported net income of $2.591 million or $0.18 per unit.

During the first quarter of 2007, we generated available cash before reserves of $3.934 million or $0.28 per unit, and later this month, we'll pay a distribution of $3.094 million or $0.22 per unit, attributable to the performance in the first quarter of 2007.

That distribution represents an increase of $0.01 per unit or almost 5% over our fourth quarter 2006 distribution, an increase of $0.04 per unit or 22% over our first quarter of 2006 distribution. This is the seventh consecutive quarter that we've increased our distribution. Coverage of our distribution for the first quarter was approximately 1.3 times.

Last week we announced a major event for Genesis. On April 26th, we announced that we entered into an agreement to acquire from the Davison family, five energy-related businesses. I'll summarize the event after Ross Benavides, our CFO, reviews our financial results for the quarter.

Thank you, Grant. For the 2007 first quarter, we generated net income of $1.585 million or $0.11 per unit. In the comparable period in 2006, we recorded net income of $2.591 million or $0.08 per unit. Results from our operating segments were consistent between the two periods with the decrease in earnings resulting from higher general and administrative expenses and interest costs.

Segment margin from our pipeline operations was $2.868 million, an increase of $66,000 over the prior-year period. Our Mississippi and Jay systems both had increased throughput as compared to the first quarter of 2006. A decrease in throughput on the Texas system and higher operating costs offset the effects of Mississippi and Jay system volume increases.

Average daily volumes on our Mississippi system increased almost 18% in the first quarter of 2007 as compared to the first quarter of 2006 due to increased receipts from Denbury's production. Denbury is the largest producer of crude oil in Mississippi. 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 CO2-based tertiary recovery operations, Denbury expects to add crude oil gathering CO2 supply infrastructure to these fields. Further, that redevelopment of older fields and any related increases in production will likely 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. Volumes in the first quarter of 2007 increased 12% over the prior-year period. Additionally, tariff rates on the Mississippi and Jay system are approximately 6% higher than in the first quarter of 2007 due to FERC indexing adjustments that are effective in July of each year.

Our Texas system is dependent on the connecting carriers for supply and on two refineries on demand for our services. Volume on the Texas system fluctuates as a result of changes in the supply available for the two refineries to acquire and ship on our pipeline. Average daily volumes on the Texas system declined almost 25% when compared to the first quarter of 2006.

However, the effects of this decline were not material, because the decline related to the segment of the Texas system for which the tariff is only $0.22 per barrel. Volumes on the Texas system may continue to fluctuate as the refiners connected to our pipeline compete for crude oil with other markets connected to TEPCO's pipeline systems and with other refiners on the Texas Gulf Coast.

During the first quarter, we experienced an increased pipeline -- an increase in pipeline operating costs of $416,000. We continue our integrity management testing and repairs, primarily on the Jay system, incurring approximately $200,000 more in the 2007 first quarter than in the 2006 quarter.

We also are replacing an out-of-service tank on our Texas system and incurred costs of $100,000 to remove the old tank. Finally, the expense of our stock appreciation rights plan that relates to our pipeline operations personnel increased by $100,000 in the 2007 quarter as compared to 2006.

Segment margin from our Industrial Gas activities in the 2007 first quarter was $2.614 million or $13,000 less than in the 2006 first quarter. CO2 sales to our industrial customers are seasonal with first quarter sales generally as much as 20% lower than sales in the second and third quarters.

Volumes sold were slightly higher in the 2007 first quarter, generating an increase of $39,000 in segment margins. Our share of the earnings from Industrial Gas joint ventures was approximately $52,000 less than in the 2006 first quarter. We received cash distributions from these joint ventures of more than $650,000 in the 2007 first quarter.

Segment margin from crude oil gathering and marketing declined by $129,000 when compared to the two first quarters. Field costs increased $613,000 with most of that increase attributable to increases in compensation costs to operate our truck fleet and to manage the crude oil operations, higher fuel costs and increased expenses related to our stock appreciation rights plan.

Offsetting the higher field costs was increased revenue from transporting crude oil for a fee, primarily for Denbury. We eliminated a contract in the second quarter of 2006 that reduced the volumes we purchased and sold as it was not as profitable as other transactions. Therefore, this decline in volume did not have a material impact on our results.

General and administrative expenses increased by $668,000 during the 2007 first quarter compared to the 2006 period, principally due to increases in employee compensation, bonus expense, legal and consultant fees and expenses related to the SAR plan.

In addition to annual compensation increases, we have added personnel since the first quarter of 2006 to support our increased efforts to grow the partnership. These additional personnel also contributed to increasing our bonus accrual.

Under the accounting method for our SAR plan, we determined the fair value of the outstanding SARs at each quarter end and record and adjustment for the change from the prior-period valuation. As the market price for our common units increases, we will continue to record increases for this expense.

This expense is recorded to the operating segment or to general and administrative expense, based upon on which of the areas the individual employee holding the rights is employed. The total expenses recorded for stock appreciation rights plan increased by almost $500,000 compared to the amount recorded for the first quarter of 2006.

This increase was spread $100,000 to pipeline operating costs and $200,000 each to crude oil field costs and to general and administrative expenses. Interest costs were $104,000 more in the 2007 quarter.

In the first quarter of 2007, our average daily debt balance was $3.8 million, whereas in the 2006 first quarter, we had no outstanding balance under our credit facility due to the pay down of debt from the proceeds of our December 2005 equity offering. The increased in debt resulted from the Sandhill acquisition in 2006 and other changes in the balance sheet.

Grant will now discuss our recently announced plans for growth.

The acquisition from the Davison family that we announced last week and expect to close early in the third quarter is what we hope will be the first step in many to grow the partnership. We executed a contribution and sell agreement with several entities owned and controlled by the Davisons of Ruston, Louisiana, whereby Genesis Energy LP will acquire the assets of five energy-related businesses focused on the transportation, storage, marketing and procurement of petroleum products and refining services.

The total value of the transaction is expected to be approximately $560 million, subject to potential adjustments, primarily for working capital acquired. The unaudited pro forma EBITDA for the 12 months ending December 3, 2007, generated by the businesses to be acquired, including adjustments for non-recurring items is estimated to be between $60 million and $61 million.

The Davisons will receive total consideration of approximately 13.5 million common units of Genesis and approximately $280 million in cash. The cash consideration is expected to be funded through our $500 million revolving credit facility, led by Fortis Capital Corp. and Deutsche Bank Securities Inc.

We expect the transaction to be immediately accretive and to provide significant operating synergies and numerous organic growth opportunities. As we move forward, we're closing this transaction as well as others we're working on, management will review and recommend to its Board of Directors the appropriate level in growth the future cash distributions to our unit holders.

As you are aware, we increased the quarterly distribution by a penny per unit for the seventh consecutive quarter, representing approximately 22% annualized growth rate in distribution. And as I mentioned earlier, this distribution will be paid later this month.

We also expect our existing businesses to continue to provide us with steady cash flow streams in 2007. Our pipelines 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 the sales under our carbon dioxide contracts and from our joint ventures. While we do experience some seasonality in the demand for CO2, overall, the business is fairly stable.

Additionally, as we've previously indicated, Denbury has stated that it is their intent to drop down $1 worth of midstream assets to us for every $1.50 of capital deployed in non-Denbury related investments. Based on the size of the transaction with the Davison family, we expect to begin working with Denbury on transactions up to an amount exceeding $350 million.

Denbury has $200 million to $250 million of assets that we could acquire before the end of 2007 with another $100 million or so expected to be available within the next 12 to 18 months.

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

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Ron Londe with A.G. Edwards. Please proceed with your question.

Thank you. Just curious, I've been getting a lot of calls relating to what the variability of the Davison EBITDA might be over time during various economic environments. And can you give us a feel for what the history has been from the Davison assets over the last, let's say, five years?

I think that to the extent that a fair amount of the petroleum products as well as the by-product of sodium hydrosulfide that is recovered as a result of the performance of the refining services, is -- it's clearly somewhat subject to, as just about everything is to general economic conditions, Ron. But, we don't see any inordinate amount of cyclicality associated with looking at the historical performance of those businesses.

Okay. It's my understanding that the acquisition will be effective April 1st, but close probably -- which just like you said, the -- during the early part of the third quarter. How will that, if at all, affect the August 15th distributions?

The -- in essence, the cash flow from operations generated from April 1st forward will serve as a purchase -- a reduction in the purchase price it will book upon closing.

And we've not yet discussed with the Board, given that the -- we won't really pick up the -- in our financial statements, the operations until, in essence, the third quarter of 2007 of how that will effect distribution policy for the -- our existing operations, relative to the second quarter.

Okay. So, okay. That's -- that makes that much more clear. From the standpoint of some of the trends that we are seeing out there in the volumes, how much do you expect the -- from a seasonality standpoint, the CO2 business? I think you'd mentioned it could be 20% more than -- during the -- on a volume basis during the second and third quarter.

Ron, the -- historically, looking back over the last year where we've owned -- all of these same contracts for the same for that whole time period, in each of the first quarters, the volume has been right around 67,000 Mcf a day.

And in the third quarter, it gets -- it got up to 82,000 Mcf a day. So -- and it just kind of builds up to that point and then starts dropping off again. And that has been historically the pattern with this stuff for the last three or four years.

Okay. That's all I have for now. I'll -- I might come back with another one later.

Thanks.

Our next question comes from the line of Barrett Blaschke with RBC Capital Markets. Please proceed with your question.

Hey, guys. A quick question, with the addition of all these -- of all the -- of all the new assets, how does this affect how you're looking at the existing assets within Genesis at this point?

Does -- I know there was talk once upon a long time ago about maybe doing something different with the Jay system and that. Is this -- does this take that plan maybe a little further down the road? Or, are we just kind of in a holding pattern until we kind of see how it all plays out?

I think obviously, we need to see how everything plays out. But, relative to the Jay system, I know prior to our arrival in August of last year, there was some discussion of the possibility of a conversion of a portion of that system to gas service.

What we have seen is enough new development as well as redevelopment of some existing fields that we think that it's a pretty solid system for us in -- once we get through some of the redevelopment activities, which are currently undergoing that we really anticipate, not only stable throughput on that system, but actually increasing throughput.

Okay. And on the Texas system, could you kind of walk me through a little bit on what's -- what was needing to be done there?

Well, it's basically -- it's kind of a delivery system. And we take volumes off of the TEPCO system for further redelivery into two refineries, in the Marathon refinery and the Lyondell, or I guess it's call Houston Refining now, or whatever it is.

And so it's -- clearly, it's not the only supply source for either of those two refineries. And so, we've seen a little bit of diminution in those volumes, but -- and we don't think that -- we think from a logistical point of view that we can't see a lot of further downside.

And as we kind -- we've obviously been kind of busy here doing other things, but we intend to roll up our sleeves and see if we can kind of restore the throughput to historical norms on the pipeline system.

Okay, thank you.

Yes.

(OPERATOR INSTRUCTIONS) There are no further questions in the queue. Do you have any closing comments?

No. We appreciate everybody dialing in this afternoon, and we look forward to talking to you on other things in the near future. So, thank you very much.

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