Genesis Energy LP (GEL) 2007 Q2 法說會逐字稿

Welcome to the 2007 second quarter earnings conference call for Genesis Energy. Genesis Energy LP is a diversified midstream energy master limited partnership, headquartered in Houston, Texas.

Genesis engages in four business segments. The pipeline transportation division is engaged in the pipeline transportation of crude oil, and to a lesser extent, natural gas and carbon dioxide. The refinery services division primarily processes sour gas streams to remove sulfur at refining operations principally located in Texas, Louisiana and Arkansas. The logistics and supply division is engaged in the transportation, storage and supply of energy products, including crude oil and refined products. The industrial gases division produces and supplies industrial gases such as carbon dioxide and syngas. Genesis' operations are primarily located in Texas, Louisiana, Arkansas, Mississippi, Alabama, and Florida.

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 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; Ross Benavides, Chief Financial Officer and General Counsel; and Karen Pape, Senior Vice President and Controller.

Thank you, and welcome to everyone. This morning, we reported a loss for the second quarter of 2007 of $1,372,000, or approximately $0.09 per unit. In the second quarter of 2006, we reported net income of $3,444,000, or $0.24 per unit.

For the year to date periods, we reported $213,000, or $0.02 per unit of net income for the 2007 period, and $6,035,000, or $0.43 per unit for the 2006 period.

A significant factor in this swing in earnings is the impact of the increase in expense for our stock appreciation rights plan, as a result of the 79% increase in our unit price between the first of the year and June 30.

During the second quarter of 2007, we generated available cash before reserves of $3,851,000, or $0.27 per common unit. And later this month, we will pay distributions totaling $3,235,000, which reflects the GP distribution, as well as $0.23 per common unit, attributable to the second quarter of 2007.

That distribution represents an increase of $0.01 per unit, or almost 5% over our first quarter 2007 distribution, and an increase of $0.04 per unit or 21% over our second quarter 2006 distribution.

This is the eighth consecutive quarter that we have increased our distribution. Coverage of our total distribution for the second quarter was approximately 1.2 times.

Last week, we closed on a transformational event for Genesis. On July 25, 2007, we completed our acquisition from the Davison family of five energy-related businesses. I'll summarize this event after Ross Benavides, our CFO, reviews our financial results for the quarter and the year to date period.

Thank you, Grant. For the 2007 second quarter, we generated a loss of $1,372,000, or $0.09 per unit. In the comparable period in 2006, we recorded net income of $3,044,000, or $0.24 per unit.

Expense for stock appreciation rights plan reduced net income by $3.7 million in the 2007 quarter, as compared to only $320,000 in 2006. The dramatic increase in expense for our stock appreciation rights plan was primarily due to the 63% increase in our unit price during the second quarter.

Results from our operating segments were slightly less after excluding the impact of the SAR expense, and general and administrative expenses and interest costs also increased slightly.

Segment margin from our pipeline operation was $2,227,000, a decrease of $1,375,000 from the prior year period. SAR expenses accounted for $577,000 of the decline.

Our Mississippi system had increased throughput as compared to the second quarter of 2006. However, this offset--this was offset by a decrease in throughput on the Jay and Texas systems, and a decrease in revenues from volumetric gains.

Average daily volumes on our Mississippi system increased almost 21% in the second quarter of 2007, as compared to the second 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 prospected fields.

As Denbury continues to acquire and develop old oil fields using CO2 base 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 will likely create increased demand for our crude oil transportation services.

The Jay pipeline transports crude oil production 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 older producing fields in the area. Some of these older fields are currently undergoing redevelopment.

Volumes in the second quarter of 2007 decreased 15% from the prior period. However, this was primarily due to a separation plant connected to the pipeline being off-line for maintenance during much of the quarter.

Our Texas system is dependent on connecting carriers for supply, and on two refineries for demand for our services. Volumes on the Texas system fluctuate 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 22% when compared to the second quarter of 2006. However, this impact--the impact of this decline was not very material, since it related to the segment of the Texas system for which the tariff has been only $0.22 per barrel.

We negotiated an increase in this tariff to $0.31 per barrel effective June 1, 2007. Volumes on the Texas system may continue to fluctuate as refiners connected to our pipeline system compete for crude oil with other markets connected to TEPCO's pipeline system, and with other refiners on the Texas Gulf Coast.

Revenues from volumetric gains related to our pipeline loss allowances decreased by $636,000, as volumes were approximately 8,000 barrels less than in the prior period. Segment margins from industrial gas activities in the 2007 second quarter was $2,958,000, or $68,000 less than in the 2006 second quarter. CO2 volumes to our industrial customers were 1,544 mcf per day greater than in the 2006 quarter. However, the mix of volumes among sales contracts resulted in a $22,000 decrease in segment margin.

Our share of the earnings from industrial gas joint ventures was approximately $46,000 less than in the 2006 second quarter. We received cash distributions from these joint ventures of more than $540,000 in the 2007 second quarter.

The segment margin from crude oil gathering and marketing declined by $920,000 when compared to the two second quarters. Field costs increased $1,053,000, with $608,000 of the increase due to SAR expense, and the remainder to increases in compensation costs and to higher fuel cost.

Volumes declined by 2,943 barrels per day, resulting in the reduction of segment margin of $381,000. Offsetting the effect of the volume reduction was increased revenue from transporting crude oil for a fee, primarily for Denbury, totaling $514,000.

G&A expenses increased by $2,351,000 during the 2007 second quarter, compared to the 2006 period, principally due to SAR plan expense. SAR plan expense increased $2,196,000 between the periods. The remainder of the increase resulted from higher employee compensation, and legal and consultant fees.

In addition to annual compensation increases, we have added personnel since the second quarter of 2006 to support our increased efforts to grow the partnership. Under the accounting method for our SAR plan, we determined the fair value of outstanding SARs at each quarter end, and record an 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 which of the areas the individual employees holding the rights are employed. The total expense recorded for our stock appreciation rights plan increased by almost $3,400,000, compared to the amount recorded in the second quarter 2006. This increase was spread $570,000 to pipeline operating costs, $608,000 to crude oil field costs, and $2,196,000 to general and administrative expenses.

Going forward, we can expect volatility in the SAR expense for periods during which the common unit price changes significantly, as it did during the first half of this year. Having completed the Davison transaction, SAR expenses may have less of an impact even during periods with significant unit price changes, as we expect overall earnings to be greater. However, it may continue to have an impact on future earnings depending upon how we structure incentive plans in the future with a new employee base.

Interest costs were $58,000 higher in the 2007 quarter. In the second quarter of 2007, our average daily debt balance was $7.4 million, whereas in the 2006 second quarter, it was only $5.2 million. The increase in debt resulted from costs related to business development and acquisition activities, and other changes in the balance sheet.

Now I'll turn to the year to date results. Our results for the 6-month 2007 period were also significantly impacted by the SAR plan expense. For the 6-month period, we reported net income of $213,000, or $0.02 per unit. In 2006, we reported $6,035,000, or $0.43 per unit.

Total SAR expense increased $3,861,000 between the periods. Pipeline transportation segment margin decreased $1,309,000 between the two periods, with $700,000 of that related to increased SAR expense. The remaining decrease related to other increases in pipeline operating costs totaling $232,000, a reduction in the contribution to segment margin from natural gas pipeline operation of $254,000, and a slight decrease in revenue from volumetric gains.

Integrity management testing and repairs, primarily on the Jay system, were approximately $152,000 more in the 2007 period than in the 2006 period. We also are replacing an out of service tank on our Texas system, and incurred costs of $183,000 to remove the old tank. Offsetting these costs were cost reductions in several related areas.

Volume fluctuations among the pipeline systems generally offset each other year to date, with an increase on the Mississippi system of 19%, a 3% decline on the Jay system, and a decrease on the Texas system of 23%. Overall, the impact on revenues was an increase of $127,000, due to the higher tariffs on the Mississippi and Jay systems as compared to the Texas system. Volumetric gain volumes were down 1,810 barrels.

Industrial gas segment margin for the 6-month period was $5,572,000, off by $81,000 from the prior year period. The decrease is related to our joint ventures.

Crude oil gathering and marketing segment margin declined by $1,049,000, with SAR plan expense accounting for $771,000 of that change.

Other field operating costs increased by $895,000, and personnel related costs to operating our trucks and managing our operations increased $589,000, and field costs increased by $186,000.

We had increased revenues from volumes transported for a fee of $1,118,000. That was offset by a $501,000 decrease in transaction margins.

General and administrative expenses were $3,019,000 more than in the 2006 period. Of this amount, $2,380,000 is attributable to the SAR plan. The remaining $631,000 related to the increased cost of employee compensation and legal and consulting services.

Interest costs also increased due to an average debt balance that was $5.6 million higher than in 2006, and a slight increase in our average interest rate.

Grant will now discuss our recent acquisition and continued plans for growth.

The acquisition from the Davison family that we completed last week is what we hope will be the first step in many, to grow the partnership. We acquired the assets of five energy-related businesses focused on the transportation, storage, marketing, and procurement of petroleum products, and refining services from several entities owned and controlled by the Davison family of Ruston, Louisiana.

The total consideration for the transaction was $563 million, subject to adjustment. Approximately one half of the consideration for the transaction was paid with 13,459,209 of our common units, issued at a value of $20.8036 per unit, for a total value of $280 million.

The remainder of the purchase price of $283 million, adjusted for purchase price adjustments and estimated working capital of an additional $35.1 million, was paid in cash, funded through our revolving credit facility.

Unaudited pro forma EBITDA for the 12 months ended December 31, 2006 generated by the businesses to be acquired, including adjustments for non-recurring items, is estimated to be between $60 million and $61 million.

Additionally, in connection with the Davison transaction, our general partner exercised its right to maintain its proportionate share of our outstanding common units by purchasing 1,074,882 common units from us, for $22.4 million in cash, or the $20.8036 per unit. And as required under Genesis' partnership agreement, the partnership's general partner contributed approximately $6.2 million to maintain its capital account balance.

We expect the transaction to be immediately accretive, and to provide significant operating synergies and numerous organic growth opportunities. With this transaction now completed, management will recommend to the board of directors that the 2007 third quarter distribution, which will be paid in November, be increased by $0.04 per unit, to $0.27 per unit. If approved, that distribution would represent an increase of 17% from the distribution to be paid for the second quarter of 2007, an increase of 35% from the distribution paid for the third quarter of 2006, and an approximately 69% increase relative to the same period in 2005.

Thereafter, we would expect to be able to grow our distribution based on our current properties and plans, in the range of 12% to 15% per year, for at least the next couple of years.

We also expect our existing businesses to continue to provide us with steady cash flow streams through the remainder of 2007. Our pipeline should produce consistent results as Denbury's tertiary recovery efforts continue to increase throughput to our Mississippi pipeline, and the other pipelines continue to transport volumes similar to 2006 averages.

Tariff increases on the Texas system in June, and the other systems in July, will also contribute to pipeline results.

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.

Having completed the Davison transaction, we are now positioned to move forward to negotiate several anticipated transactions with Denbury involving their CO2 pipelines. We currently expect these transactions to be structured as property sales combined with associated transportation agreements and/or direct financing leases.

We anticipate that during 2007, we will enter into drop-down transactions involving Denbury's existing CO2 pipelines, with a total currently estimated value of between $200 million and $250 million. These drop-down transactions would be subject to, among other things, negotiation of specific terms, the approval of the board of directors of both entities, and the receipt of fairness opinions by both companies, and would be expected to occur sometime in the fourth quarter.

We would anticipate similar transactions with Denbury for the new CO2 pipeline they're constructing from the Jackson Dome to their Tinsley and Delhi fields, once that pipeline is completed, forecast at this time to be mid-2008.

In future periods, if we are able to complete additional third party acquisitions of sufficient size and returns, we would anticipate that we would do similar drop-down transactions with Denbury for their proposed 280 to 300 mile CO2 pipeline from southern Louisiana to the Hastings field outside of Houston, probably during 2010.

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

Thank you. We will now be conducting a question and answer session. (Operator instructions). Okay, our first question is from Mr. Blaschke from RBC Capital. Please proceed with your question.

Good morning. I wanted to do just a couple of housekeeping questions, really. The adjustment for the stock appreciation compensation, was that $3.7 million, or do we have anything a little more detailed than that?

It was $3.7 million for the quarter, yes. I don't have the detailed number in front of me.

Okay, and do we happen to have a number for the GP compensation for the quarter?

Approximately $66,000.

$66,000? Okay. Other than that, just--I noticed that the--it looks like the Jay system volumes are still declining. Is there any reason for that? Was it just something this quarter, or should we expect that to continue?

There was significant work at two of the major processing facilities, the big Escambia Creek, as well the St. Regis Jay field, that occurred during that--during the second quarter, and we anticipate that--those remediation efforts to be completed, and it will see volumes actually increase in the third quarter over second quarter.

Okay. Thanks very much, guys.

Thanks.

Operator. Thank you. Our next question comes from Mr. Londe from A.G. Edwards. Please proceed with your question.

Sure, thanks. Just curious--you noted in here that the common units that were issued to, I assume, the Davisons. I didn't get a second quarter distribution, but they were--received an adjustment to the purchase price. Does that have any tax ramifications, or--on the partnership, or on the K-1s in the future for other unit holders? And was that included in that net price that you quoted on the 13.4 million in common units?

Yes, it was included in the net prices, and we do not see it having any impact on the other unit holders.

Okay. You know, it looked in general like--ex the compensation costs, that your overall G&A costs were higher than we would have expected. How much of that was new employees that you said you were hiring, and how much reflected legal expense that was associated with, possibly, the acquisition?

We don't have those numbers in front of us.

We do know--none of it is legal costs related to the acquisition. We just had a number of other things going on that we had looked at from a legal point of view, that we've had expenses for.

On the compensation costs, we've probably added six or seven individuals, and they do tend to be the more experienced people. So--

Including the three of us.

Yes.

Sorry. Even though we don't get paid anything.

Yes, right.

I assume that the three of you that were added get paid more than Rich Kinder, right?

More than a dollar.

Yes.

I still fly Southwest.

Okay. The Texas system, and the volume decline on the Texas system. Is that going to rebound in the next couple of quarters, do you expect a rebound? Or are those kind of--systemic kind of declines because of production declines in Texas?

No, we think that--as we've said, we're basically--that is kind of a delivery system, so we're dependent upon deliveries on the upstream end from third party pipelines, as well as the demand from the refineries, the two refineries that it serves.

And we--based upon our analysis of the crude oil slate that is used at the two refineries, we think that this is probably as low as it can possibly go, and based upon different operating conditions, we would anticipate that we're not going to see any further decline in it, and arguably, we might see a little bit of an upward momentum, because of turnarounds that occur in the second quarter.

Okay. That's all I had for now.

Okay, thank you. (Operator instructions).

Thank you. There are no further questions at this time. I would like to turn the call back over to management for closing comments.

Thank you very much, and hopefully with the third quarter, we'll be able to divulge the improved performance associated with the Davison transaction. So I will look forward to talking to all of you all again, in the near future.