Genesis Energy LP (GEL) 2007 Q3 法說會逐字稿

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  • Operator

  • Welcome to The 2007 Third 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 transportation of crude oil and, to a lesser extent, natural gas and carbon dioxide. Refinery Services Division primarily processes sour gas streams to remove sulfur at refining locations principally located in Texas, Louisiana, and Arkansas.

  • The Logistics and Supply Division is engaged in the transportation, blending, 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 direct you to its most recently filed and future filings with the Securities and 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 Operating Officer, Ross Benavides, Chief Financial Officer and General Counsel, and Karen Pape, Senior Vice President and Controller.

  • Grant Sims - CEO

  • Thank you, and welcome to everyone. This morning, we reported earnings for the third quarter 2007 of $1,699,000, or $0.07 per unit. In the third quarter 2006, we reported net income of $1,695,000, or $0.12 per unit. For the year-to-date period, we reported $1,912,000, or $0.11 per unit, of net income for the 2007 period and [$7, 730,000], or $0.55 per unit, for the 2006 period. A significant factor in the year-to-date swing in earnings is the impact of the increase in expense for our stock appreciation rights plan as a result of the 43% increase in our unit price between the first of the year and September 30.

  • During the third quarter of 2007, we generated available cash before reserves of $7,251,000, or $0.25 per common unit, and later this month, we will pay distributions of $7,892,000, or $0.27 per common unit, attributable to the third quarter 2007. That distribution represents an increase of $0.04 per unit, or 17%, over our second quarter 2000 distribution and an increase of $0.07 per unit, or 35%, over our third quarter 2006 distribution. This is the ninth consecutive quarter that we have increased our distribution.

  • Because the Davison transaction closed in late July, our reported results for the third quarter only include the results of the Davison transaction for August and September. If we include the pro forma results of the Davison acquisition for the full quarter, our pro forma available cash before reserves would have been approximately $9.5 million. Coverage of our total distribution for the third quarter on a pro forma basis was approximately 1.2 times.

  • Available cash before reserves for the third quarter was adversely affected by higher-than-normal maintenance capital expenditures totaling $2.1 million. We replaced a segment of pipeline on our Jay pipeline system and we're replacing a tank in Texas. Typically, our maintenance capital expenditures would be less than $0.5 million for a quarterly period.

  • Additionally, available cash before reserves for the quarter also included income taxes of $1 million or $1.4 million on a pro forma basis. This is the first quarter for us to have significant income tax expense. Part of the Davison acquisition included businesses that generate non-qualified income for MLP purposes. We contributed some of those assets into corporations in order to assure that we meet the 90% qualified income test.

  • We believe it is the amount of qualified income we generate increases and as certain other activities are restructured, this estimated tax cost will likely decrease in future periods. We are very pleased with the contribution of the Davison businesses to our results for the quarter, and we look forward to continuing to work with the new team to develop operating synergies and organic growth opportunities.

  • I'll address our outlook and external growth plans after Ross Benavides, our CFO, reviews our financial results for the quarter and the year-to-date period.

  • Ross Benavides - CFO

  • Thank you, Grant. For the 2007 third quarter, we generated earnings of $1,699,000, or $0.07 per unit. In the comparable period in 2006, we recorded net income of $1,695,000, or $0.12 per unit. We recorded a $1,192,000 benefit for our stock appreciation rights plan in the 2007 quarter, due to a 20% decline in our unit price during the third quarter. This compares to expense for the plan of $915,000 in the third quarter of 2006.

  • Our operating results for the quarter included two months of operations acquired from the Davison family in late July. Segment margin from the historic Genesis business activity was slightly better than in the prior year. We have reconfigured our segments after the Davison acquisition to be four segments, Pipeline Operations, Refinery Services, Supply and Logistics, and Industrial Gases.

  • Segment margins from our Pipeline operation was $3,763,000, an increase of $305,000 from the prior-year period. Our Mississippi System has increased throughput as compared to the third quarter 2006, and we experienced an increase in revenues from volume metric gain. However, these revenue increases were partially offset by a decrease in throughput on the Texas System. Volumes on the Jay System were almost identical to the prior period. Average daily volumes on our Mississippi System increased almost 34% in the third quarter of 2007 as compared to the third quarter of 2006 due primarily 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 and CO2 supply infrastructure to those fields. Further, that redevelopment of older fields and any related increases in production will likely create increased demand for our crude oil production, our transportation services.

  • The Jay Pipeline System transports 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 decline in production curve of older producing fields in the area. Some of these older fields are currently undergoing redevelopment. Volumes in the third quarter of 2000 decreased 1% from the prior period.

  • As we announced in August, we have committed to building approximately a 33-mile extension of this system as we transport crude oil from the Little Cedar Creek Field in Alabama. We expect to complete this project during the first half of 2008. Our Texas System is dependent on connecting carriers for supply in our two refineries in demand for our services. Volumes from the Texas System fluctuate as a result of changes in the supply available for the two refineries to acquiring ship on our pipeline.

  • Average daily volume of the Texas System declined almost 26% when compared with the third quarter of 2006. However, the impact of this decline is not very material due to the relatively low tariff on that system. We negotiate an increase in this tariff to $0.31 from $0.22 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 [Tetco's] pipeline systems with other refiners on the Texas Gulf Coast. Revenues from volume metric gains related to our pipeline loss allowance increased by $176,000 as volumes were approximately 1,400 barrels more than in the prior period.

  • Our Refinery Services segment was acquired in the Davison transaction. This operation primarily provides a service to refining operations by processing sour hydrocarbon streams to remove the sulfur and return the hydrocarbons for further refining. Typically, we receive the byproduct of the process, sodium hydrosulfide, or NaHS as we call it, based on its chemical symbol, is our compensation for providing this service. The largest cost component of providing the services is acquiring and delivering to our operations caustic soda, which is the scrubbing agent introduced to the process to remove the sulfur and generate the byproduct, NaHS.

  • For the three- and nine-month periods ended September 30, 2007, we included two months of the activities of this operation in our results. Combining historic results of [this operation] for July with our results, indicates that pro forma Refinery segment margin would have been approximately $12.3 million for the third quarter.

  • Segment margin from Industrial Gas activities in the 2007 third quarter was $3,232,000, or $77,000 more than in the 2006 third quarter. CO2 volumes sold to our industrial customers were 3,461,000 cubic feet per day greater than in the 2006 quarter. Our share of the earnings from industrial gas joint ventures was approximately $94,000 more than in the 2006 third quarter. We received cash distributions from these joint ventures of more than $471,000 in the 2007 third quarter.

  • Segment margin from Supply and Logistics, previously known as the Crude Oil Gathering and Marketing segment, increased by $2,961,000 when comparing the two quarters. With the acquisition of the Davison businesses, we renamed the segment, included the petroleum product, fuel logistics, terminalling, and truck transportation activities we acquired. The portions of the segment acquired in the Davison transaction contributed substantially all of the $3 million increase in segment margin. The contribution to segment margin by crude oil operations was flat as compared to the similar prior-year period.

  • G&A expenses increased by $185,000 during the 2007 third quarter, compared to the 2006 period. Part of this increase results from administrative personnel and costs of the Davison locations totaling about $2 million. This increase is offset partially by a benefit related to our stock appreciation rights plan of $1.2 million. Additionally, we incurred transition costs in the 2006 period, totaling $1.3 million, when we brought in the new management team which did not recur in the 2007 period. The remaining increase resulted primarily from increased legal, audit, and other consulting fees.

  • Interest costs were $4,441,000 higher in the 2007 quarter as a result of the Davison acquisition, which is partially financed beginning on July 25 with borrowings under our credit facility. In the third quarter 2007, our average daily debt balance was $220 million greater than in the 2006 period. We incurred income tax expense for the quarter of $1,004,000. This is the first quarter for us to have a significant income tax expense. As Grant said, part of the Davison acquisition included businesses that generate non-qualified income for MLP purposes. We contributed some of those assets into corporations that assure that we meet the 90% qualified income test.

  • I'll now turn to the year-to-date results. Our results for the nine-month 2007 period was significantly impacted by the SAR planned expense. For the nine-month period, we reported net income of $1,912,000, or $0.11 per unit. In 2006, we reported $7,730,000, or $0.55 per unit. Total SAR expense increased $2,229,000 between the periods, primarily due to a 43% increase in the unit price during the period.

  • Pipeline Transportation segment margin decreased $1,004,000 between the two periods with $518,000 related to increased SAR expense. The remaining decrease of $486,000 related to other increases in pipeline operating costs, a reduction in contribution to segment margin from natural gas pipeline operations, and a slight increase in revenues from volume metric gains.

  • Integrity management testing and repairs, including costs to tear down an out-of-service tank on our Texas System to make room for a new tank, a total of approximately $424,000 more in the 2007 than in the 2006 period. Offsetting these costs were cost reductions in several related areas. Volume fluctuates among the pipeline systems generally offset each other, year to date. With an increase in the Mississippi System of 24%, a 2% decline in the Jay System, and a decrease in the Texas System of 24%.

  • Overall, the impact on revenues was an increase of $192,000 due to the higher tariffs on the Mississippi and Jay Systems as compared to the Texas System. Volume metric gain prices were gone by about 411 barrels. Industrial Gas segment margin for the nine-month period was $8,804,000, which is consistent with the prior-year period of $8,808,000. An increase in revenues from the sales of CO2 was offset by an increase in the associated transportation costs.

  • Supply and Logistics segment margin increased by $1,912,000 with the operations acquired in the Davison acquisition, adding $2,966,000 of that change. Our existing Crude Oil Gathering and Marketing Operation segment margin decreased $1,054,000 of which $570,000 is attributable to our SAR plan expense. The remaining $484,000 is related to an increase in fuel, truck maintenance, and personnel costs with an offsetting increase in revenue from transporting crude oil.

  • G&A expenses were $3,204,000 more than in the 2006 period. Of this amount, $1,142,000 is attributable to the SAR plan. The remaining $2,062,000 is related to the administrative personnel costs at the Davison locations and increased legal, audit, and other consulting fees, partially offset by transition costs that were incurred in 2006. Interest cost also increased due to an average debt balance that was $76 million higher than in the 2006 period, due to the borrowings under our credit facility, the partially financed Davison acquisition, and a slight decrease in our average interest rate. Again, we incurred income tax expense of $1,059,000 for the year-to-date period. This relates to the non-qualified income-generating assets that we contributed to corporations in order to meet the growth income test.

  • Grant will now discuss our outlook and continued plans for growth.

  • Grant Sims - CEO

  • Thanks, Ross. As I said at the beginning of this call, we're pleased with the contribution of the Davison businesses to our results for the quarter. We believe the combined operations provide us with a solid base of diverse assets and businesses that should provide operating synergies and organic growth opportunities.

  • We expect our Pipeline segment 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 the 2006 averages. Tariff increases on the Texas System in June and the other systems in July will also contribute to pipeline results.

  • We expect the Refinery Services and Supply and Logistics segments to perform at their current pace for the remainder of 2007. We are working on a number of projects in our Supply and Logistics businesses to take advantages, synergies, and available capacity of assets that we acquired. 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're now in the process of negotiating several anticipated transactions with Denbury involving their CO2 pipeline. These dropdown transactions are currently thought to most likely consist of property sales combined with associated transportation or service arrangements, direct financing leases, or a combination of these approaches.

  • We anticipate that during 2007, we will enter into dropdown transactions involving Denbury's existing CO2 pipelines with a total currently estimated value between $200 million and $250 million. These dropdown transactions will 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 in the fourth quarter.

  • We would anticipate similar transactions with Denbury for the new CO2 pipeline they are constructing from the Jackson Dome to their Tinsley and Delhi Fields. Once that pipeline is completed, forecasts at this time to be during late 2008. If, in future periods, we're able to complete additional third-party acquisitions of sufficient size and returns, we would anticipate that we do similar dropdown transactions with Denbury for their proposed 280 to 300-mile CO2 pipeline from southern Louisiana to the Hastings Field outside Houston, probably during 2010. In the aggregate, these identified dropdown assets from Denbury represent approximately $1 billion of future growth opportunities for us.

  • We expect to fund the transactions with Denbury with borrowings under our credit facility, as well as other sources of capital, such as a public or private offering of debt and/or equity. As a result of the Davison acquisition, we were able to increase our distribution by 17% from the August 2007 distribution of $0.23 per unit to $0.27 per unit. Based on the results for the quarter and our current properties and plans, we continue to expect to be able to grow our distribution in the range of 12% to 15% per year at a minimum for at least the next couple of years.

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

  • Operator

  • Thank you. We will now be conducting a question-and-answer session.

  • (OPERATOR INSTRUCTIONS)

  • Our first question comes from Ron Londe with Wachovia Securities. Please state your question.

  • Ron Londe - Analyst

  • Hi. Could you maybe run through your various divisions and give us a feel for what the effects of high oil prices are now on various operations?

  • Grant Sims - CEO

  • High oil prices from a Pipeline perspective, I mean, that's really kind of a tariff-based transportation. It will effect the value of the volumes we receive as a result of the pipeline loss allowance to the extent that we sell that. In essence, we're a [natural long] because the volume metric gains that we have from the PLA on our pipeline system.

  • On the Supply and Logistics, basically the predominance of the activity on the crude oil side is back-to-back marketing so it's a margin-based business. It is not necessarily affected by the absolute level of crude oil. In the fuel oil marketing part of the Davison acquisition, they have experienced a little bit of declining margin in the third quarter as a result of kind of the high oil price environment, and therefore high products environment versus the relatively low natural gas environment, so there's been a little bit of margin squeeze on that. And, really, I think that that kind of summarizes the effect of the overall level on our activities.

  • Ron Londe - Analyst

  • Is there any effect in the marketing part of the business from the standpoint of price differentials from various types of crude?

  • Grant Sims - CEO

  • Yes. Well, what we have now is a significant amount of increased capability to do blending because of under-utilized assets to some of the Davison terminals and that's certainly what we are focusing on. As I mentioned earlier, a number of our efforts on integrating and exploiting the anticipated operational synergies is to really kind of position us to take clear advantage of that.

  • The one other thing, Ron, on your first question was obviously with the high oil prices that our cost of operating the trucks from a fuel point of view has gone up and we are hoping that we could pass most of that on to all of our customers and take that into account, but there may be a lag associated with full recovery of the higher fuel costs.

  • Ron Londe - Analyst

  • What do you anticipate for depreciation in the fourth quarter?

  • Grant Sims - CEO

  • In the fourth quarter? I'm not sure we can say.

  • Ron Londe - Analyst

  • Depreciation in the third was a little higher than we expected and I was wondering if it was going to be higher in the fourth quarter.

  • Karen Pape - Senior Vice President and Controller

  • Yes, Ron, it will be a little bit higher because we only had two months of depreciation on the Davison assets. That additional amount is going to be somewhere in the $3-million range.

  • Ron Londe - Analyst

  • And then, also, you had a 4% increase in volumes of CO2. Was that from new customers or is that just natural growth of the business?

  • Grant Sims - CEO

  • It was basically just higher takes under the existing contracts by the existing customers.

  • Ron Londe - Analyst

  • Is there, from the standpoint -- you're talking about NaHS and caustic soda, can you give us a feel what caustic soda prices have been recently versus the NaHS prices and what the margins have been, the direction of the margin?

  • Grant Sims - CEO

  • We have experienced, on a quarter-over-quarter basis, widening of that margin. To an extent, approximately 65% of our NaHS contracts are neither directly or indirectly indexed to the cost of the caustic soda, which is the largest cost component in the sulfur removal process that we provide.

  • Ron Londe - Analyst

  • Okay. You source the caustic soda in the Gulf Coast?

  • Grant Sims - CEO

  • Yes.

  • Ron Londe - Analyst

  • Also, from the standpoint of units outstanding, the number that you had in your release, was that the average units for the quarter or was that at the end of the quarter?

  • Karen Pape - Senior Vice President and Controller

  • That number is a weighted average. If you're talking on the tables?

  • Ron Londe - Analyst

  • Right.

  • Karen Pape - Senior Vice President and Controller

  • The income statement tables, those are weighted average outstanding.

  • Ron Londe - Analyst

  • 28.3 million?

  • Karen Pape - Senior Vice President and Controller

  • No, I'm sorry. I didn't know which number you're referring to. The 28.3 is the total.

  • Ron Londe - Analyst

  • That's the end of the quarter?

  • Grant Sims - CEO

  • That's right. Exit number of units.

  • Ron Londe - Analyst

  • Okay. And what was it for the average for the quarter?

  • Karen Pape - Senior Vice President and Controller

  • The average for the quarter was 24,527,000.

  • Operator

  • Do you have any further questions, Mr. Londe?

  • Ron Londe - Analyst

  • No, I think that's all I have for now.

  • Operator

  • Thank you. Our next question comes from Barrett Blaschke with RBC Capital Markets. Please state your question.

  • Barrett Blaschke - Analyst

  • Hey, guys. Just kind of wanted to get a little color, if there is any, on any impending or upcoming growth projects and maybe a little bit on kind of looking at financing going forward?

  • Grant Sims - CEO

  • Well, obviously, the number one or the largest publicly-announced deal that we're working on is the first tranche of dropdowns, $200 million to $250 million, which again we anticipate. We're in the process of going through that negotiation and fairness opinions at the Board levels and that will be kind of the near-term deal. We are also currently constructing the Alabama extension that we mentioned in the release. That's about a $10-million deal and will be primarily funded in fourth quarter and first quarter of '08.

  • Additionally, we have a couple of new sour gas processing facilities. One actually went into service in October of this year and another, that was in southern Arkansas, and another one will be, is currently under construction and will be placed in service in Utah at the Holly Refinery in Woods Cross in the second quarter of '08.

  • Barrett Blaschke - Analyst

  • Okay. And I guess just kind of to get a longer-term picture, there's a lot of available assets still to be dropped down from Denbury. And, so far, it's kind of been, you guys acquire something, then you get to acquire something from them. Is that going to continue to be the policy or are you looking to maybe bump up on the organic side a little bit?

  • Grant Sims - CEO

  • At this point, in round terms under one-and-a-half-one kind of understanding with Denbury, one and a half for every $1.50 of non-Denbury capital that we efficiently put to work, we will endeavor to negotiate a dollar's worth of dropdown transaction. We've kind of created the bucket for $400 million of dropdown transactions, which is convenient to the $200 million, $250 million of existing assets, plus the $100 million to $150 million that is near term, going to be completed and in service in late 2008.

  • So, we have to -- under the same arrangement in order to "create the bucket available" for the large $500 million to $600 million that they are going to spend between now and 2009 for the line from Donaldsonville, Louisiana to south of Houston, we have to do some other third-party acquisitions and/or organic growth.

  • Barrett Blaschke - Analyst

  • Okay. Thank you.

  • Operator

  • Our next question comes from John Edwards with Morgan Keegan. Please state your question.

  • John Edwards - Analyst

  • Yes, good morning. Can you hear?

  • Grant Sims - CEO

  • Yes.

  • Operator

  • Mr. Edwards, can you please re-queue again?

  • Grant Sims - CEO

  • Uh oh.

  • John Edwards - Analyst

  • Good morning. Can you hear me?

  • Grant Sims - CEO

  • Yes.

  • John Edwards - Analyst

  • Okay. Just curious on the non-qualifying businesses, what contributions those made and what your plans are as far as divesting or retaining them.

  • Grant Sims - CEO

  • Well, I don't know that we can provide a necessary breakout of them. We do believe that, structurally, we can restructure and I'm quite confident that, over time, we can, based upon the current level of operations, that we can restructure and save about half of the apparent tax leakage at the current run rate. Additionally, as we grow and our qualified income increases and therefore our 10% allowance, we should be able to fit an additional portion of that within the 10% bucket.

  • So, it is kind of ancillary services that are performed, primarily in and around the refineries, that, in and of themselves, are not qualified, as well as some of the trucking that have historically been done by Davison's non-qualified commodities such as paper and glass and the like. So, we really think that it's a manageable situation over time that it's profitable business that we can manage our way out over time of the tax leakage from the current run rate.

  • John Edwards - Analyst

  • Okay, thank you. And then, what's the growth outlook for the businesses that you acquired from Davison?

  • Grant Sims - CEO

  • I think that we are, as I have mentioned, we are looking into, their focus has historically been on the refined products side and not so much on the crude oil side. And so, there's kind of a meld of two different focuses, which obviously Genesis has been focused on the crude oil side. So, over time, we believe that we're going to be able to more efficiently use our fleet of assets instead of logistical assets involved in that, including significant opportunities for blending operations in and around the terminal that we have.

  • The refinery services, we believe, has tremendous growth opportunity. Again, it's focused on removing sulfur from primarily crude oil as it goes into the refining process and, clearly, I think the overall quality of crude oil available to the domestic refiners is going to become more and more sour over time, whether or not it's Canadian heavy coming in or imports of heavy sour crude. So, we see that as a continuing potential growth opportunity for us.

  • John Edwards - Analyst

  • Can you quantify it in terms of approximate annual percentage expectation?

  • Grant Sims - CEO

  • No, I'm not prepared to do that at this point.

  • John Edwards - Analyst

  • Okay. Okay, and then, in terms of your credit availability right now, if you could comment a little bit about where you stand on that?

  • Grant Sims - CEO

  • We have, based upon these financial results of our total availability under our notional $500-million credit facility, we have about $380 million of total availability of which we have approximately $290 million, currently outstanding. We have financial flexibility under that existing agreement to pro forma in acquired EBITDA, and so we will have, as we get through the contracting process on the dropdowns, including the pro forma EBITDA associated with that, that we will have the full $500 million available to us.

  • John Edwards - Analyst

  • Okay, so I'm sorry. I misunderstood. So, out of the $500 million, how much is currently drawn and how much is available?

  • Grant Sims - CEO

  • Approximately $290 million is currently drawn. Under the existing EBITDA borrowing base calculation, approximately $90 million would be currently available.

  • John Edwards - Analyst

  • I got you.

  • Grant Sims - CEO

  • The incremental $120 million is the available once we present executed contracts to the bank group associated with the dropdown transaction.

  • John Edwards - Analyst

  • Okay, okay. Alright, thanks for clearing that up. That's all I have for now. Thank you very much.

  • Grant Sims - CEO

  • Thank you.

  • Operator

  • Thank you.

  • (OPERATOR INSTRUCTIONS)

  • Our next question comes from [Louis Shaming] with Zimmer Lucas. Please state your question.

  • Louis Shaming - Analyst

  • Hi. Good afternoon, everybody. I'm just trying to get a picture of the contribution of the Davison assets in this quarter and whether that's kind of a good run rate to use, going forward. It seems that you had roughly about $11.5 million of EBITDA contribution from these assets. Is that kind of correct?

  • Ross Benavides - CFO

  • Yes, on a pro forma basis. And this will be really kind of the last time we can do it because we're, I mean, obviously, we're integrating but it was a little bit more discreet for this quarter. But we believe that the kind of standalone EBITDA for the quarter on a pro forma basis for the full three months of the quarter was $15 million to $16 million for the Davison assets.

  • Louis Shaming - Analyst

  • Okay, and that would imply, basically, that you're on track for the $61 million to $62 million of EBITDA that you were projecting on an annualized basis?

  • Ross Benavides - CFO

  • Multiplying it by four.

  • Louis Shaming - Analyst

  • Yes, yes. That's correct. And in terms of the sour gas unit that you're installing at [Woods Cross], what kind of EBITDA impact do you expect from that?

  • Grant Sims - CEO

  • We're not prepared to release that at this point.

  • Louis Shaming - Analyst

  • Okay. And then, I guess the last question would be regarding the dropdown. What is your preference for financing that transaction with cash?

  • Grant Sims - CEO

  • We're considering all the options available to us. Obviously, we have, as we talked earlier on the previous question, we will have increased conventional revolving availability and we will look at the most efficient capital structure from a data and an equity point of view to fund both that, as well as other growth opportunities for us.

  • Louis Shaming - Analyst

  • Okay. But in the long term, what percentage of the transaction would you like to have equity financed?

  • Grant Sims - CEO

  • I think probably a long-term capital structure is kind of on the 50/50 basis, but I think it's probably more germane of we will go outside those targeted bounds depending upon the best available to us to consummate the transaction. But from a long-term point of view, that's probably a reasonable capital structure.

  • Louis Shaming - Analyst

  • Okay. Well, that's good to hear. Thanks a lot.

  • Operator

  • Our next question comes from Ron Londe with Wachovia Securities. Please state your question.

  • Ron Londe - Analyst

  • Hi. Yes, I was just curious, the extra maintenance capital spending for the tank, I assume that it wasn't, you weren't going to classify it in the future as growth capital spending because it's a replacement of the tank. Is there any incremental cash flow from the new tank? Or is it just basically replacing cash flow?

  • Grant Sims - CEO

  • It's a replacement of cash flow. We had a 653 inspection on it, which is our DOT inspection requirements and we were uncomfortable and so we made the decision to completely tear it down and rebuild it.

  • Ron Londe - Analyst

  • So, it's being build the same size?

  • Grant Sims - CEO

  • Yes.

  • Ron Londe - Analyst

  • Okay. And when will that be in effect?

  • Grant Sims - CEO

  • It should be placed into service January 1st.

  • Ron Londe - Analyst

  • Okay, thanks.

  • Operator

  • Our next question comes from Kent Green with Boston American Asset Management. Please state your question.

  • Kent Green - Analyst

  • Yes, one question pertains to the Texas System, which is in a continuous decline, I believe. Correct me if I'm wrong. Is there any particular reason why the Company wants to continue it? Would you have a competing asset or is it just -- you would be penalized if you divested something which had low returns against the Danbury agreement for dropouts?

  • Grant Sims - CEO

  • It's a positive cash flow item for us and we think that we've done, obviously, we've observed the declined volumes and we are reasonably convinced the throughput, given the demand at the two refineries it serves, can not go much lower than it's currently gone. So, we have no specific reason, at this point, to do anything with it.

  • Kent Green - Analyst

  • And then, on the dropdowns from Danbury, obviously Danbury has built a couple pipelines which we know about, continually building a couple more. Is this going to be limited to, say, CO2 pipelines? Or is there other take-away pipeline assets with the Mississippi and possibly Alabama assets that you could also? And would there be any other assets or have you depleted the volume metrics of CO2 contracts, etc.?

  • Grant Sims - CEO

  • I think there's no restriction that dropdowns are constrained to the CO2 pipelines. That's kind of the fairly obvious, highly visible assets that are, in essence, a cost center from their overall business endeavors, which would be kind of a high profile MLP-type asset. But we certainly anticipate that to the extent that their activity is either existing or planned activities generate additional midstream opportunities, that those would be fair game to re-capitalize into the Genesis mix.

  • Kent Green - Analyst

  • There's been a FLP, which is specializing in compression, and there's a lot of compression involved with CO2. Is that a possibility in the future?

  • Grant Sims - CEO

  • Again, depending upon the structure of those agreements, that that is clearly a qualified income, so that would, that is a potential source. And you're familiar with Denbury operations obviously can't, and that is that there are a lot of associated with injection and recycling and separation and recycling of CO2 at their (inaudible) fields, that there is a lot of potential other hardware on the ground that could be structured to be, to generate MLP income.

  • Kent Green - Analyst

  • Thank you very much.

  • Operator

  • (OPERATOR INSTRUCTIONS)

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

  • Grant Sims - CEO

  • Well, thank you very much for all the participants and we look forward to talking to you again in 90 days if not sooner. Thank you.

  • Operator

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