Genesis Energy LP (GEL) 2008 Q1 法說會逐字稿

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  • Karen Pape - SVP, Controller

  • Welcome to the 2008 first quarter earnings conference call for Genesis Energy. Genesis has four business segments. The Pipeline Transportation Division is engaged in the pipeline transportation of crude oil, and to a lesser extent, 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, 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 directs you to its most recently filed and future filings with the Securities and Exchange Commission.

  • We also encourage you to visit our website at GenesisCrudeOil.com, where a copy of the press release we issued today is located. This 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 net income for the first quarter of 2008 of $1,645,000 or $0.04 per unit. In the year earlier period, we reported net income of $1,585,000 or $0.11 per unit. This quarter's results included approximately $11.7 million or approximately $0.30 per unit of non-cash charges for amortization of intangibles related to the 2007 Davison acquisition.

  • Later this month, we will pay a total distribution of approximately $12.1 million, or $11.5 million to our limited partners and $600,000 to our general partner, including its incentive distribution. Coverage of this total distribution for the first quarter was 1.3 times, or $15.8 million of cash available for distribution divided by $12.1 million of the total distribution. This is the 11th consecutive quarter with an increase in the per unit distribution.

  • Our existing businesses are meeting our expectations, and quite frankly, we believe we can get more out of our existing footprint of assets. We have also made progress towards completing the expected $250 million dropdown of assets from Denbury Resources, the indirect owner of our general partner. I'll address the status of that transaction later in the call.

  • Ross Benavides, our CFO, will now review the financial results for the quarter.

  • Ross Benavides - CFO

  • Thanks. For the 2008 first quarter, we generated income of $1,645,000 or $0.04 per unit. In the comparable period in 2007, we reported net income of $1,585,000 or $0.11 per unit. During this call, we'll focus our discussion on the first quarter of 2008, by comparing it to the fourth quarter 2007, rather than the first quarter of 2007, as the fourth quarter of 2007 was the first full quarter to include the operations acquired from the Davison family.

  • In the fourth quarter of 2007, we reported a net loss of $15,462,000 or $0.49 per unit. Results from our Pipeline Transportation segment increased by $466,000 to $4,643,000 or 11%, as compared to the fourth quarter of 2007. Pipeline tariff revenue increased by $695,000, primarily due to increased throughput of 4,311 barrels per day and higher crude oil prices affecting our pipeline loss allowance revenue.

  • The increase in volumes was primarily on the Texas system, where tariffs are relatively low, so the effects of the added volume only increased tariff revenues by $127,000. The remaining increase was due to higher crude oil prices affecting our pipeline loss allowance revenue.

  • Operating costs increased by $298,000 between the quarters, primarily due to maintenance work on the Texas system.

  • We acquired our Refinery Services segment in the Davison transaction in July of 2007. During first quarter of 2008, this segment contributed $13,588,000 or almost 50% of segment margin. During the fourth quarter of 2007, the Refinery Services segment contributed $13,353,000, or 48% of total segment margin, an increase of $235,000.

  • Performance of this segment was in line with our expectations for the quarter. Performance in this segment is impacted by the price of caustic soda, as well as the volume of sour gas supplied to us by the refineries we serve. Generally, our sales prices are indexed to the price of caustic soda, and during the first quarter of 2008, we sold 41,742 dry short tons of NaHS, a decrease of 187 dry short tons. On a tons per day basis, volumes were almost exactly the same.

  • Segment margin from Industrial Gas activities in the 2008 first quarter decreased by $483,000 from the fourth quarter 2007 period, to $2,776,000. Our CO2 supply business is a seasonal business, and the first quarter there is typically the slowest quarter. As compared to the first quarter of 2007, this segment's contribution improved by $162,000 with average sales volumes in the first quarter of 2008 increasing by 5,904 Mcf per day.

  • Our Supply and Logistics segment was previously known as our Crude Oil Gathering and Marketing segment. With the acquisition of the Davison businesses, we renamed the segment and included in it the petroleum products, fuel logistics, terminaling and truck transportation activities we acquired from the Davisons.

  • Supply and Logistics segment margins decreased $1,083,000 from the 2007 fourth quarter, to $6,261,000 for the 2008 first quarter. While improvements in crude oil differentials help the Crude Oil Gathering and Marketing portion of this segment, the availability of products for our Refined Products portion of the business and a significant increase in the price of diesel fuel, reduced the contribution of the petroleum products and transportation portion of this segment.

  • Fuel prices have obviously risen dramatically over the last six months. Generally, our transportation contracts have fuel price escalators, but in tough situations where the transportation is part of the cost of the product we deliver, we have to negotiate increases separately. Additionally, the escalation of fuel prices often lag the actual increases which affect our segment margin, and fuel prices are increasing rapidly.

  • Operational difficulties at some of the refineries from whom we purchase refined products, resulted in reduced volumes being available to us during the first quarter of 2008.

  • General and administrative expenses decreased by $3,744,000 from the fourth quarter of 2007, to $8,524,000 in the 2008 period. This decrease was attributable to differences in non-cash charges between the periods, from announced recorded compensation for our senior executive and stock-based compensation for our employees.

  • Depreciation and amortization decreased by $9,612,000 from the fourth quarter of 2007, to $16,789,000 in the first quarter of 2008. As we previously explained, the intangible assets acquired in the Davison acquisition are being amortized over the period during which the intangible asset is expected to contribute to our future cash flows. As acquired intangible assets are generally viewed as being more valuable in the earlier years after the acquisition, amortization expense is front-end loaded. Consequently, we incurred more amortization expense in the fourth quarter of 2007 than we did in the first quarter of 2008. Additionally, we recorded an impairment charge of $1,498,000 on our natural gas pipeline operations in the fourth quarter of 2007.

  • Net interest costs decreased during the first quarter by $3,183,000 due to a lower average outstanding debt balance. In December of 2007, we issued new partnership units in a follow-on offering and reduced our debt balance. For the fourth quarter 2007, our average debt balance was $234 million as compared to $76 million during the first quarter of 2008. Additionally, the average interest rate on our outstanding debt decreased from 7.6% in the fourth quarter of 2007, to 6.2% in the first quarter of 2008, due to changes in market rates. At March, 31, 2008, we had $82 million of debt outstanding on our credit facility.

  • Income tax benefit was $1,377,000 for the first quarter of 2008, while we recorded an overall benefit, we estimate current income taxes for the first quarter 2008 was $249,000. Part of the Davison acquisition included businesses that generate nonqualified income for MLP purposes. We contributed some of those assets into corporations in order to assure that we meet the 90% qualified income test. Over time, we expect to reduce the taxes paid, by restructuring operations or outgrowing the limitations.

  • Grant will now discuss our strategy for growth going forward.

  • Grant Sims - CEO

  • Regarding the dropdown transaction from Denbury, we will repeat the guidance provided during the conference call in March. We've reached substantial agreement in the process of finalizing the business issues with Denbury and our lenders and our credit facility, as to the terms of the dropdown by Denbury to us, Denbury's NEJD and Free State CO2 pipelines, and the terms of a long-term transportation service arrangement for the Free State line and a 20-year direct financing lease for the NEJD system.

  • We expect to receive approximately $30 million per annum in the aggregate under the lease and the Transportation Services agreement, with a lesser prorated amount for 2008, obviously, with future payments for the NEJD pipeline fixed at $20.7 million per year during its 20-year term, and the payments relating to the Free State pipeline dependent on the volumes of CO2 transported therein.

  • While the principle business terms of the transactions have been agreed to for months, the associated documentation has taken longer than originally anticipated, due to some rather complex structuring issues. We believe we have identified and are dealing with all such issues. We have, in fact, received the unanimous support of the 14 financial institutions and our credit facility, subject to their review of final documentation for the proposed transaction. Therefore, subject to their final concurrence, as well as final action by our audit committee, including the receipt of the fairness opinion for their advisors, we believe these long anticipated transactions should close in the near future.

  • We expect to pay for these pipeline assets with $225 million in cash and $25 million of our common units, based on the average closing price of our units on the 5 days surrounding the closing of the transaction. We would expect to draw the $225 million under our revolving credit facility at LIBOR plus 150 basis points. As a result, we would expect approximately $5 million per quarter increase in cash available for distribution once the dropdown transactions are consummated.

  • Assuming the continuing performance of the combined businesses since the Davison acquisition, and the expectation of completing the aggregate $250 million dropdown transaction, we are comfortable continuing our distribution guidance that we would reasonably expect to be able to grow our distributions at a 15 to 18% annual rate for at least the next two years.

  • That concludes our prepared remarks for this conference call. At this time I will turn it back to the moderator to take questions from the audience.

  • Operator

  • (OPERATOR INSTRUCTIONS) John Edwards with Morgan Keegan.

  • John Edwards - Analyst

  • Just a quick question on the transportation volumes, we noted that the Texas pipeline volumes, they seem to come in quite strong and the Mississippi ones, they came in a little bit below, a little bit less strong. Can you talk a little bit more detail what was driving that?

  • Grant Sims - CEO

  • Well, basically the Texas system, as we've described in the past, basically the throughput on it is a function of the takes by the two primary customers on the system, either Houston Refining or Marathon. And we also believe that the bottom of the throughput capability, or just from a practical matter of loading those two refineries, is in the 25,000 to 26,000 barrel a day range. And indeed, based upon the crude product slate that they were desirous of running what is basically, principally responsible for driving the increase in throughput on the system.

  • On the Mississippi system, that's obviously primarily driven by Denbury, and Denbury from time to time, their volumes fluctuate as they're doing work at the fields that feed the system.

  • Operator

  • Barrett Blaschke with RBC Capital Markets.

  • Barrett Blaschke - Analyst

  • Just wanted kind of a quick housekeeping question. On the Supply and Logistics business, was there a volume for the total gathering and marketing barrels?

  • Karen Pape - SVP, Controller

  • It's approximately 28,000 barrels per day for the crude oil gathering and marketing.

  • Operator

  • (OPERATOR INSTRUCTIONS) Jeff Morgan with Wachovia.

  • Jeff Morgan - Analyst

  • Just a quick question about available cash before reserves. There's a $2.5 million subtraction there, and I was wondering if there was one big item or was it just a bunch of small things that added up to that $2.5 million?

  • Karen Pape - SVP, Controller

  • The biggest thing in there is the deferred tax benefit of approximately $1.6 million. The rest of it is really some small things, probably the biggest one being that we recorded a credit for our stock depreciation rights plan expense, a non-cash credit for that during the quarter. So, both of those items had to be taken out of that computation.

  • Operator

  • John Edwards with Morgan Keegan.

  • John Edwards - Analyst

  • That last question just reminded me of the other question. As far as deferred taxes, are you expecting any items like that in the coming quarters?

  • Ross Benavides - CFO

  • Expectation of deferred taxes?

  • John Edwards - Analyst

  • Yes, the $1.6 million, I guess was a benefit.

  • Ross Benavides - CFO

  • We'd expect to stay consistent with that, but at the same time there may be changes as we restructure some of the transactions, and we expect there may be some changes that would lower that.

  • John Edwards - Analyst

  • Okay, so are you saying as far as when the dropdown happens, that could go away?

  • Ross Benavides - CFO

  • There are other factors affecting that, in terms of when we would make changes that would reduce that, and so, it's not predictable at this time, but we expect over the course of the year that we would be reducing the tax rate. But it's just not determinable as to which quarter.

  • John Edwards - Analyst

  • Okay, so as far as looking forward goes, it's safe to assume about a zero number for that?

  • Ross Benavides - CFO

  • I would expect the same number, but it would decline by perhaps half, over the course of the year.

  • Operator

  • Barrett Blaschke with RBC Capital Markets.

  • Barrett Blaschke - Analyst

  • I know everybody's been kind of focused on this dropdown transaction, but kind of looking forward beyond that, what's the outlook for organic growth projects and maybe additional acquisitions, is it still kind of an open playing field as it's been in the past?

  • Grant Sims - CEO

  • I think that's fair. As I alluded to in my comments, Barrett, I think that we are -- while we're satisfied with the performance of the existing assets, we think we can get more out of it. We referenced a couple of refinery offsets, where we have historically gotten heavy fuel oil and asphalts and stuff, and so that affected us fairly dramatically in the first quarter. And then the fuel issues on the trucks, and probably combined, contributed as much as $1.2 million delta in what we would expect the Supply and Logistics margin to be on kind of a steady state basis.

  • Also in the Refinery Services side of life, a couple of our large processing facilities, because of some refinery issues, didn't perform as expected and we probably had as much as an $800,000 decline in what we would have anticipated to be kind of steady state gross margin in that side of life.

  • So we think that we can get a lot more out of our existing assets than what we're getting. And then basically, we're looking at, as we always are, other acquisition opportunities to expand that footprint and hopefully ones that fit very neatly with our existing operations and our existing footprint.

  • Operator

  • (OPERATOR INSTRUCTIONS) Thank you ladies and gentlemen, but there appear to be no further audio questions. I would like to turn the floor back to Management.

  • Grant Sims - CEO

  • Okay, well thank you very much, and we look forward to talking to you on the next call. Thank you.

  • Operator

  • This concludes today's teleconference and you may disconnect your lines at this time. Thank you for your participation.