Genesis Energy LP (GEL) 2008 Q3 法說會逐字稿

Welcome to the 2008 third-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 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 Supply and Logistics 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 provisions to protect 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 GenesisEnergyLP.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 Bob Deere, Chief Financial Officer; and Karen Pape, Controller.

Thanks, Karen, and welcome to everyone. This morning we reported for the third quarter of 2008 net income of $10.8 million or $0.25 per unit and total Available Cash Before Reserves of $23.6 million. We are very pleased with these results.

While Bob will go into more detail for the quarter, I would like to point out a few operational highlights and recent accomplishments. All four of our segments generated improved results in the third quarter compared to year-over-year, and three of the four segments generated improved sequential quarterly results. In Supply and Logistics we continued to see tangible benefits from our benefits to diversify the types and sources of refined products we handle and continue to identify opportunities from the integration of Genesis legacy operations and those from the Davison transaction.

In Refinery Services our operations continue to run smoothly. While the third quarter results were not as good as second quarter results, third quarter results were impacted by hurricanes Gustav and Ike, yet were still improved over all prior quarters other than the second quarter.

In Industrial Gases we improved slightly in year over year and consecutive quarter comparisons with the second and third quarter results typically slightly higher than the first and fourth, reflecting minor seasonal variations and the back-to-back sales of CO2 to our industrial customers.

On May 30 of this year we completed an investment of $250 million in CO2 pipelines with Denbury, the indirect owner of our General Partner. The third quarter was the first quarter to include three full months of activity from the Denbury drop-down transaction. Otherwise, our existing crude oil pipeline systems performed solidly after taking into account the operational impact of hurricanes Gustav and Ike.

On July 18 we completed acquisition of the inland transportation business of Grifco through a joint venture with members of the Davison family. The acquisition consideration in part plus the capital to significantly grow the business was provided by a $90 million revolving credit facility arranged by the joint venture in an otherwise challenging bank market. While we clearly believe our investment is an outstanding stand-alone fee-based opportunity, our whole investment hypothesis for pursuing a barge operation was to enhance our other existing supply and logistics operations.

Next week we will pay a total distribution of approximately $13.7 million or $12.7 million to our Limited Partners and $1 million to our General Partner, including its incentive distribution. Coverage of our total distribution for the quarter as reported is approximately 1.7 times.

Another accomplishment for the quarter was the appointment of Bob Deere as Chief Financial Officer. Bob has already been a solid addition to our senior executive management team. Bob's financial skill set and experience will serve us well as we continue to grow and integrate new businesses into Genesis as well as further exploit our existing assets and business lines.

With that, I'll turn it over to Bob to review the financial results reported for the quarter and year-to-date.

For the 2008 third quarter, we generated income of $10.8 million or $0.25 per unit. In the comparable period in 2007 we recorded net income of $1.7 million or $0.07 per unit. Our discussion of the third quarter of 2008 will focus on comparing it to the second quarter of 2008 rather than the third quarter of 2007 as the third quarter of 2007 did not include a full quarter of the operations acquired from the Davison family.

In the second quarter of 2008 we reported net income of $7.3 million or $0.17 per unit. There will be a full discussion comparing the year-over-year quarterly results in the third quarter Form 10-Q.

Turning to our business segments, results from our Pipeline Transportation segment increased by $3.8 million to $10.6 million or by 56% as compared to the second quarter of 2008. The CO2 pipelines acquired from Denbury on May 30, 2008 provided a $4.4 million increase between consecutive quarters. Revenue from crude oil tariffs and sales of pipeline loss allowances decreased by $300,000 or 4.2%. Operating costs increased by $200,000 or 6.3%. Volumes increased on the Mississippi and Jay Systems by 1% and 17%, respectively. However, volumes declined on the Texas System by 17%.

Volumes on both the Mississippi and Texas Systems were affected by hurricanes Gustav and Ike. However, no material damage was done to any of pipeline systems as a result of the hurricanes.

We acquired our Refinery Services segment in the Davison transaction in July 2007. During the third quarter of 2008 this segment contributed $13 million or a decrease of about 26% from the second quarter of 2008. Sales volumes of NaHS decreased between quarters by 18% or 38,319 dry short tons. Third quarter operations were impacted by hurricanes Gustav and Ike. Fortunately, other than refinery outages, we sustained no material damage to our operations from the two hurricanes. However, delivery of volumes were negatively impacted by the hurricanes.

Segment margin for Industrial Gas activities in the 2008 third quarter increased by $500,000 from the second quarter of 2008 to $3.5 million. Our CO2 supply business is a seasonal business, and the third quarter generally performs better than the second quarter of the year.

Supply and Logistics segment margins increased $4.2 million from the 2008 second quarter to $13.7 million for the 2008 third quarter. The newly acquired marine transportation businesses contributed $1.5 million of the improvement inclusive of the $800,000 segment margin attributable to minority interest. The supply and logistics businesses acquired from the Davison family contributed $2.1 million of the improvement. The legacy crude oil gathering businesses contributed the remaining $600,000 of the increase between consecutive quarters.

General and administrative expenses for the third quarter of 2008 were unchanged from the second quarter of 2008 at $9.2 million. Excluding amounts for bonus plan and stock appreciation rights plan, general and administrative expenses increased by $700,000. Stock appreciation right plan expenses decreased as a result of the decline in our common unit price during the third quarter of 2008.

Net interest costs increased during the third quarter by $2.4 million due to a higher average outstanding debt balance resulting from borrowing on our revolving credit facility to fund the drop-down transaction with Denbury and due to interest expense, facility fees and commitment fees on the $90 million revolving credit facility at DG Marine that is included in our consolidated financial results.

Income tax expense was a $1.5 million benefit in the third quarter as compared to a $1.6 million expense in the second quarter of 2008. The third quarter benefit results from restructuring some of the Refinery Services operations that were in taxable corporations.

For the nine-month period, we reported net income of $19.7 million or $0.47 per unit. In 2007 we reported $1.9 million or $0.11 per unit. Our Available Cash Before Reserves increased to $65.5 million from $15 million. These results are reflective of the accretive nature of the acquisitions made during the last two years.

I will not take the time in this call to further detail the accretive impact on each individual segment. There is, however, additional information in our press release.

That concludes our discussion of financial results. Grant will discuss our plans going forward.

Thanks, Bob. Regardless of the current changes in the economy and capital markets, our growth objectives and strategy remain the same. We will focus on continuing the successful integration of our existing assets and businesses. We will complete organic growth opportunities, such as the new sour gas processing facility at Holly refinery in Woods Cross, Utah, and the Alabama Pipeline extension. Additionally, we'll seek opportunities to make further acquisitions, including tuck-in and bolt-on opportunities from our significantly expanded footprint, and we will identify and evaluate organic opportunities strategic to our existing business segments and competencies.

We believe we're in a solid financial condition to weather the extraordinary current conditions in the capital markets. We have a $500 million revolving credit facility that we entered into in 2006 when market conditions for borrowers were more favorable, with three years remaining left on the term of the facility.

As of September 30, our remaining availability is approximately $150 million, and we had $22 million of cash on hand. We're operating under a distribution policy that maintains solid distribution coverage that serves to increase availability under our credit facility over time. We do not have organic growth projects or expansion plans that would require us to access the debt or equity markets in the near or intermediate term.

I want to emphasize that we're pleased with the progress we have made in integrating and generating solid results from our diverse portfolio of assets. Assuming the continuing integration and performance of our businesses, we believe we have positioned ourselves to continue to deliver above-peer distribution growth, fund our organic growth from internal funds and have the flexibility to be opportunistic in the acquisition market.

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

(OPERATOR INSTRUCTIONS) Ron Londe, Wachovia.

In the past you had a goal of raising the distribution between 15% and 18% per year going forward. Is that still in your sights, or what do you think about that goal going forward?

Well, Ron, I think we evaluate the distribution policy every 90 days. But basically, we have seen nothing in the underlying fundamentals of our businesses which would deviate from that, although we do have, obviously, a significantly different capital market than we had several months ago. So I think that the operating results, the financial results of the Company, continued to support such outlook. But we evaluate it constantly in terms of what the overall reality of the markets are.

From the standpoint of end market demand for NaHS, have you seen that market come back after the hurricanes' shortfall in tonnage? Have you seen the market come back to normal? And what are your expectations going forward for this year, given that some of the end the markets are cyclically oriented?

At this point we have not seen any significant pullback in the quantity demanded. Obviously, the volumetric shortfall in the third quarter was driven by disruptions to our major supply source, our major refinery service facility at Conoco Philips in Lake Charles, as well as the timing of the ability to export some of our product because we couldn't get ships into the Houston ship channel to make shipments to our South American customers.

We've seen a few anecdotal rotations out of service of some of our historic pulp producers, but the majority of our demand, and we try to stay on top of it, we view as very solid. Obviously, there has been a reduction in commodity prices, copper being probably the most visible. But virtually all of our mining customers are integrated mines. In other words, the ore stream that they are using the NaHS as the benefaction agent or the separation agent in processing, the ore stream also contains molybdenum. That's the best I've ever said that word -- and gold. So we've seen no push-back on the quantities demanded at this point.

Over last year, you have talked about more acquisitions from Denbury. There was I guess a $150 million acquisition that was in the pipeline in the past. Where do you stand on that acquisition? Do you think that is going to ultimately come to fruition? Or is it on the back burner, or where are you know?

I think, as we discussed on our second quarter conference call, that there's a discrete event that occurred from a Denbury perspective that has caused us, both parties, to step back and consider where we are. And that is basically that Denbury got a ruling from the Internal Revenue Service that they get to treat the CO2 pipelines as intangible drilling expense, and therefore get an immediate tax write-off to zero. So it's problematic in the sense that they have a zero tax basis in their pipelines. We continue to have discussions of figuring out if there are otherwise to structure things, but at this point I don't know that there's an imminent drop-down scheduled to occur.

Barrett Blaschke, RBC Capital Markets.

Just wanted to ask a little bit post-hurricane on the volumes on the Texas System. Are we expecting those to kind bump back up, or is this a new run rate level?

No, we expected them to bump back up, but as of yesterday there was a fire at the Marathon Texas City refinery, and approximately -- it varies a little bit, but a run rate of 13,000 to 15,000 barrels a day is -- although we are delivering and filling up tanks, we don't know at this point what the extent of the outage is at Marathon. And so therefore, depending on the return of the customer, as you are aware, the Texas System basically has two customers, Houston refining and Marathon. The short-term or near-term EBITDA effect is, order of magnitude, around $4000 a day.

The Supply and Logistics business -- where was the gathering and marketing in barrels per day? Was there a volume for that?

Around 30,000 to 35,000 barrels a day on the legacy crude oil marketing.

David Fleisher, Chickasaw Capital Management.

Grant, different kind of question here for you, [there is] not different from my questions, the past two. There's a significant and growing, I would argue, stock price disconnect between some larger capitalization MLPs, which either are investment grade or at least give investors comfort that they have access to debt capital and that their distributions are secure, so such a disconnect between them and smaller-cap names such as yourself, as you have probably noticed in the market.

However, you, unlike a lot of other smaller cap MLPs, appear to have the opportunity -- I think you do have the opportunity to stand up and tell a really good financial story that you talked about today. But you didn't tell in a way I guess I would like to hear you tell it, and I want to hear, if that's the right story for you to tell, that addresses the stability of your cash flow, which is fairly stable in most cases with some volatility, but predominantly the high coverage ratio of your distribution, which appears to be high and likely to stay high. I guess part with that as the premise, really, is that I'd love to hear you extrapolate on is insights, perhaps, more thoughts, more specifics as to your commitment to husband your cash resources, $150 million you have on the revolver, the $40 million-ish of cash that you are going to be generating, in free cash flow in excess of your current distribution going forward per year, and your ability to use that and live within your free cash flow.

So, if investors truly believed and heard and those two sell-side analysts before me wrote that your distribution is quite safe and likely to keep growing, I think that your stock might start moving and being valued more like some of those other names, unlike the company that you are keeping right now. I guess you did say something about acquisition possibilities. I'd like you to try to define what you might do, what you won't do, keeping in mind that by being conservative, you have an opportunity to have a much better valuation here.

Well, you tell the story as well as I do. But David, we recognized early on that, we didn't realize that the capital market dislocations would be as serious as they are. But, given the equity that we sold at the end of December, given how we structured with $25 million of equity going into the drop-down transaction, we intentionally positioned ourselves to, A, maintain a high coverage ratio, still be able to deliver above-peer distribution growth; B, fund our identified and announced organic growth projects out of cash flow in excess of being able to grow our distribution; and, C, maintain the financial flexibility to be opportunistic.

And we certainly view that those three tenets has positioned us, I don't know, uniquely. Obviously, we pay a lot of attention to other people, but we have to focus on trying to do whatever we can to create unit holder value, and it's certainly going to be a buyer's market, if you will, for acquisition opportunities. And on a relative size basis, given where the market is currently valuing our equity, to have 15% to 20% on an enterprise value of committed dry powder is a pretty comfortable position to be in. So, as I said, we've obviously announced Holly, which actually, we believe, will have commercial operations, commercial quantities of NaHS that we're currently in the testing phase and start-up phase by the end of this month.

If you look at the practical results of the first three quarters of the year, we have, while giving a significant, in excess of 15% year over year distribution growth rate, we have held back $26.5 million of cash available for distribution, which is, including what we expect in the fourth quarter, that that will, in essence, pay for our investment in DG Marine, as well as the Holly facility, as well as the Alabama Pipeline extension. So we come out of 2008 having paid for our announced growth projects, which we're just now starting to see in the case of DG Marine, some of the benefits of it. And we'll, as I mentioned, have Holly coming on at the end of the year.

So we -- under relative circumstances, we believe that we have positioned ourselves to hopefully be able to outperform some of the people that we are trying to be compared against.

Kent Green, Boston American Asset Management.

I just was trying to reconcile the numbers on the cash available to distribution less the $1 million paid to the General Partner. You said your coverage ratio was about 170. So is my numbers coming out? Is it about $1.90 per unit, is that approximately correct?

Well, we had total available cash of $23.6 million, and you take out the 12.7 -- or, the $1 million that goes to the General Partner. Is that how you are trying to do it?

Yes. Is that the way I should do it? If you divide that, then, by the 39.4?

Hang on, Bob is checking the math, Kent.

I come with about $0.57 to cover 32, for the quarter. Is that a nine-month figure?

No, that's a quarterly figure.

No, that's a quarterly figure. Kent, we'll check on that, just a second. I'm trying to retrace --

Yes, that comes out approximately; it comes out about $0.57 per unit cash flow after the General Partner's $1 million.

Right; that's correct.

Barrett Blaschke, RBC Capital Markets.

We are starting to see acquisition multiples really coming down. You guys have traditionally grown more through acquisition than organic growth. Then you do have dry powder. Is this a time when you are trying to be more opportunistic there? Do you see it as still the better way to grow the business for Genesis?

We agree that the practical realities are that acquisition multiples have to come down. I think that we like having $150 million, $160 million of LIBOR plus 150 available to us, given that LIBOR is finally kind of unlocked and, I think, priced at about 173 today. So that puts us in a very good position. But we evaluate opportunities that we think that we can use our capital to generate the most long-term value for the unit holders, and whether or not that's -- we rank everything as we evaluate it, whether or not it's, quote-unquote, an organic opportunity or a tuck-in, bolt-on or an acquisition. That's how we evaluate things to maximize what we believe is creating the most long-term value for the unit holders.

One of the things we've really noticed this quarter is companies that have a large parent or a large sponsor seem to be doing a bit better, that it allows them to backstop their equity a little bit. Is there that type of a relationship with Denbury at this point, where if you guys saw an opportunity that maybe was a little beyond that availability, that there might be some help there to make an acquisition work?

I don't know that Denbury necessarily wants to be a holder of additional units. I'm not sure that we are overly interested in selling units at these current prices. So I think that until we get some more recognition from the market of what we believe the underlying value of the unit price is, I think that we'll look at doing things out of cash flow from operations and on the debt side.

One final, and that's just -- maintenance capital outlook for rest of '08 and 2009?

The maintenance CapEx in the fourth quarter would be generally consistent with our previous guidance of a normal run rate of around $750,000. This quarter on a reported maintenance CapEx basis was a little higher than normal, reflecting the fact that we moved corporate offices. And then, certainly towards the end of 2009 we anticipate probably a slight increase in run rate quarterly maintenance capital as we start dealing with turnover and replacement of some of our trucks.

Any increase from the Marine side?

No. Basically, at this point we expense virtually all of the maintenance capital associated with DG Marine, and therefore it kind of is picked up in the EBITDA number.

Kent Green, Boston American Asset Management.

You had a relationship with Denbury of acquisitions. Has this change in tax treatment modified that general agreement between the two of you?

Well, we've dealt with the tax basis issue and how we structured the one component of the drop-down that we consummated in May, Kent, and that was that there was a low tax basis on any JD, and accordingly, that is in part why that was structured as a financing lease. So we kind of have a template to deal with it. But again, the question is, what do we do with capital? And if it's an accretive transaction, then we would certainly consider it.

What will sort of be the pattern? You mentioned how much capital you have left under cash, and then on the revolver. Is there smaller acquisitions? And is there any more CO2 operations from Denbury or anybody else that could be of interest to you, which seem to be smaller bolt-on type of stuff?

Yes. I think that under the circumstances of the market that we're kind of not evaluating gigantic transactions, a bit more focused on transactions, again, whether or not they are organic or they are acquisition, that are smaller ticket items but that are the most accretive that we can identify at this point.

[Scott Fogelman], Morgan Keegan.

I've got a quick question regarding the Supply and Logistics division. You've mentioned in the press release and I think you mentioned this last quarter as well, that river levels really help you in this division. I assume that means higher river levels allows you to move around. Obviously -- pardon me?

I'm sorry; I didn't mean to interrupt you. But no; high levels -- well, if you have certain river conditions, you can actually load more per barge because you have a deeper draft. But you can get into circumstances, which we experienced in the first quarter, where you start seeing runoffs or high rain conditions, snowmelt and runoffs and high rain conditions, where actually the rivers are running too high, that the current levels, they become, in essence, non-navigable.

Because I'm trying to get a grasp of -- obviously, this had an exceptional quarter this quarter. What's a good -- going forward, can we expect, because your crude oil, your base has stayed the same. Obviously, that's not really what's driving in terms of barrels per day, what's driving the increase in segment margin out of here. But is there another metric that I could focus on to better track where supply and logistics is going in the future?

I don't know that we can give you any better metric than stated performance. I think that we, as I mentioned in my prepared remarks, we continued to identify flexible opportunities as we really understand how our legacy operations, the Davison trucking operations, the terminal operations, and now certainly we've thrown the Marine transportation in -- of how all that fits together. So we are continually using the -- what were once kind of disparate assets and pursuing the integration and defining on a going-forward basis what we can really do with them.

(OPERATOR INSTRUCTIONS). Mr. Sims, at this time, there are no further questions. I'd like to turn the floor back over to you for closing comments.

Thank you all again, and we'll talk to you in 90 days, if not sooner. Thanks.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.