Genesis Energy LP (GEL) 2008 Q4 法說會逐字稿

Welcome to the 2008 fourth-quarter and year-end 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 locations, 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 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 [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, L.P. Mr. Sims will be joined by Joe Blount, Chief Operating Officer; Bob Deere, Chief Financial Officer; Ross Benavides, General Counsel; and Karen Pape, Controller.

Thank you Karen, and welcome to everyone. This morning we reported financial results for the fourth quarter and full year of 2008. I'm not going to spend a lot of time on the results or accomplishments for the full year. Rather, I would like to focus on the fourth quarter because, like it or not, the world is different than it was in most of 2008.

It's our belief Q4 of 2008 is likely a lot more indicative of any enterprise's potential performance on a go-forward basis, at least through the next couple of quarters and probably beyond.

As I said in the press release, our quarterly results reflect the ability of our increasingly integrated businesses to deliver solid financial results in a challenging economic environment. There's no question that the macroeconomic environment is tougher, but our assets are flexible, our employees dedicated, none of our businesses are materially directly impacted by commodity price fluctuations, and we have no material hedge gains or losses in our reported numbers.

For the fourth quarter of 2008 we generated total available cash before reserves of $24.3 million. On February 13 of 2009, we paid a total quarterly distribution of $14.1 million, including $0.33 per limited partner unit, resulting in a coverage ratio for our total distribution, including the GP and its incentive distributions, of approximately 1.7 times. This is the fourteenth consecutive quarter with an increase in the per unit distribution.

With that, I would like to turn it over to Bob Deere, our CFO, to review the specifics for the quarter and (technical difficulty) the full-year 2008.

Thank you Grant. For the 2008 fourth quarter we generated net income of $6.4 million, or $0.14 per unit. In the comparable period in 2007 we recorded a loss of $15.5 million, or $0.49 per unit.

Results from our Pipeline Transportation segment increased from $4.2 million to $9.8 million, or 130%. This was primarily due to the Denbury drop-down transaction in May 2008 that added $7.3 million to segment margin for the quarter. Excluding amounts attributable to the Denbury transaction, Pipeline revenues declined to -- due to a $1 million decline in our Pipeline loss allowance revenue as a result of lower crude oil prices and due to an $800,000 increase in our operating cost.

During the fourth quarter of 2008, the Refinery Services segment contributed $15.6 million, an increase of $3.4 million, or 28% between periods. Volumes of NaHS sold decreased by 6,435 dry short tons as compared to fourth-quarter 2007. However, increases to the sales price for NaHS, reflecting rising component commodity prices, coupled with the successful management of the cost components of our services more than offset the decline in volumes.

Segment margin from Industrial Gas activities in the 2008 fourth quarter decreased $857,000 from the prior-year period to $2.7 million. We sold on average 5,503 Mcf less per day to our CO2 Industrial customers than in the 2007 quarter.

Equity in earnings of joint ventures for the 2008 quarter also decreased by $224,000, or 63%, from the 2007 quarter.

Supply and Logistics segment margins increased from $4.5 million in the 2007 fourth quarter to $10.9 million in the 2008 fourth quarter. The barge operations acquired in July 2008 contributed $3.5 million of the $6.4 million increase to segment margin for the quarter. The remaining increase was the result of increased margins on our products sold due to our acquisition of products at favorable prices as well as our ability to vary the mix of products that we sell in response to current market conditions.

Depreciation, amortization and impairment expense decreased from $27.9 million for the fourth quarter of 2007 to $19.8 million for the fourth quarter of 2008. The decrease is attributable to a decline in the amortization of intangible assets acquired in the Davison acquisition, more than offsetting the additional depreciation from the DG Marine and the Free State Pipeline, both acquired during 2008.

Net interest costs decreased during the fourth quarter by $106,000 due to a higher average outstanding debt balance from borrowing for acquisitions being more than offset by lower interest market rates between periods.

Income tax expense increased by $2.6 million over the comparable period from the prior year. This increase is primarily related to the timing of recognition as the full-year benefit is consistent with that of the previous year.

Income tax benefit or expense will continue to be volatile as demonstrated by the change from the previous quarter due to the low level of taxable income that is incurred by the partnership. As a result of this volatility, we continue to believe that available cash before reserves is a better measure of our performance quarter on quarter.

Consistent with our underlying business performance, we generated $24.3 million of available cash before reserves, which represented an increase of $11.1 million over the same period in the prior year.

Now we will review results for the full-year 2008. We recorded net income for 2008 of $26.1 million, or $0.61 per unit, compared to a loss for 2007 of $13.6 million, or $0.64 per unit. Overall, the improvement in our year-on-year performance is due to the positive impact of our acquisition of the Davison companies and DG Marine coupled with the pipeline drop-downs completed earlier this year.

Segment margin from our Pipeline operations increased from $14.2 million in 2007 to $33.1 million in 2008, or approximately 134%. The CO2 pipeline drop-down transaction contributed $16.9 million of the $19 million increase between years. Volume increases on all three crude oil pipelines totaling 8%, combined with a slight increase in the average tariff, contributed $1.4 million to segment margin, and increased revenue from volumetric gains resulting from higher crude oil market prices added $1.7 million.

Partially offsetting the revenue increases were operating cost increases totaling $1 million.

Average daily volumes on our Mississippi System increased 17% during 2008 due to increased receipts from Denbury's production. Average daily volumes on the Jay Pipeline System were essentially unchanged. For our Texas System, average daily volumes increased by 4%.

Segment margin from Refinery Services in 2008 was $55.8 million as compared to $19.7 million for 2007. The large increase is indicative of the fact that we acquired the Refinery Services segment in July 2007 as part of the Davison transaction.

Segment margin from Industrial Gas activities in 2008 was $13.5 million as compared to $13 million for 2007. For the year, CO2 sales volumes were substantially unchanged.

Our net earnings from joint ventures decreased $761,000, or 60%, from 2007.

Segment margin from Supply and Logistics increased from $10.6 million in 2007 to $32.4 million in 2008. The portions of the Supply and Logistics business acquired in the DG Marine transaction added approximately $5 million to Supply and Logistics segment margin for the year. The remainder of the increase is attributable to the acquisition of the Davison companies in 2007 as well as increased margin on product sales.

Depreciation, amortization and impairment expense increased $31.1 million as a result of our acquisition of the Davison companies and DG Marine coupled with the pipeline drop-downs completed earlier this year.

Interest costs were $10.1 million in 2007 compared to $12.9 million in 2008. This $2.8 million increase was due to our average outstanding balance of debt increasing by $107 million for 2008 as compared with 2007. Somewhat offsetting the increase in debt was a decline of 3.5% in our average interest rate for 2008 as compared with 2007.

Experiencing a similar impact from our acquisitions and drop-downs, we realized $89.8 million in available cash before reserves for 2008, representing an increase of $61.6 million over the previous year.

Grant will now provide some concluding remarks to our prepared comments.

Thanks Bob. All in all, we're pleased with the financial performance in the quarter and very appreciative of our employees' efforts and enthusiasm.

While no business is immune to the effects of the current economic environment, the demand in the aggregate for our assets, products, and services appears to be reasonably solid. In fact, in response to these challenging times we are identifying new ways to use our assets, expertise, and customer relationships as well as do everything we do more efficiently.

While we would hope otherwise, we anticipate the challenging environment will continue for the foreseeable future and have tried to position the partnership for such likelihood. With the 1.7 times coverage of our current distributions and our relatively conservative leverage ratio on net debt of approximately 2.75 times trailing EBITDA, pro forma for a full year of the CO2 pipelines, we hope to be able to take advantage of both organic and/or attractive acquisition opportunities that we believe are likely to develop in 2009.

Assuming the continuing performance of our businesses, we would expect to be able to continue growing our distributions but clearly would intend to balance such near-term distribution growth with our goal of creating long-term value for all of our stakeholders.

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

(Operator Instructions). Ron Londe, Wachovia Securities.

Could you kind of discuss some of the trends that you will be challenged by, looking forward? Specifically, what you're going to do around the lower levels that we're seeing of refinery utilization? How the NaHS business might be affected by the end users? Where you see the Industrial Gas business going this year? And the effects on the pipeline volumes going forward?

I'll take Refinery Services first. Basically, we have a diversified portfolio of Refinery Service locations. And probably the stronger headwind is really on the demand side. You saw that the actual volumes were down somewhat in the fourth quarter. And I'll address why we were able to kind of expand our margins.

But what we have seen is a reduction in -- because of economic activity in the pulping business as well as a slight pullback in mining and a deferral of expansions of -- by a number of our customers of expansion plans into 2010/2011, our belief is that that is primarily something that occurred in the fourth quarter and that there was a working off of copper inventories. And I think that's indicated by the fact that kind of quietly from mid December to today we've had about a 20% recovery in copper prices. So we think that that's going to turn around a little bit.

We were able to offset basically all of the reduced volumes on the sales side of NaHS with expansion of margins. We have a tremendous logistical aspect to that side of our business both on terms of delivering caustic soda into our facilities as well as handling the NaHS out of the facilities. And logistical costs have come down dramatically, as we've seen. And our ability to efficiently operate and manage our overall systems is I think reflected in the margin that we were able to generate even in the face of reduced volumes.

On the CO2 sides, we see -- even though we were down a little bit fourth quarter over -- fourth quarter of '08 over fourth quarter of 2007, we see basically that we anticipate that that is -- that the maximum it would be down -- and in fact indications are that everybody is kind of back on the rate that we saw in the first quarter of 2008.

On the Pipeline volumes, clearly as we said on the third-quarter conference call, the reason -- primary reason driving the Texas volumes where they were on a quarter-over-quarter basis was a result of the outage at Marathon, Texas City. That is back up and running.

We're seeing a little bit of decline over on the Florida System, which we believe is primarily a result of the low-price environment, because [there's] fairly high operating properties on that system. But all in all, with the increases that we anticipate in the Mississippi System and the return of the Texas System, we see, in the aggregate, our Pipeline volumes fairly steady.

In the Industrial Gas area you're looking for --?

Well, in the -- the CO2 sales we think were -- they were down a little bit in the fourth quarter, but we see them in the first quarter kind of back up to comparable levels that they were a year ago.

You didn't break out SG&A expense for the fourth quarter. Can you give us a feel for what those numbers were like?

We're -- Ron, we had some changes in -- this is Bob Deere. And we had some changes in our presentation and did not break those out. Overall the SG&A levels are fairly consistent, but I don't have those in front of me right now. Let me revert back to you with that information.

Great. And what are you looking for in depreciation and amortization going forward? Is it going to look a lot like the fourth quarter, or (multiple speakers) some other changes that are going to happen in '09?

We would see that there -- from the -- the depreciation and amortization associated with the Davison acquisition will continue to experience some declines just due to the methodology of depreciating the intangible assets, which frontloads that depreciation somewhat. Offsetting that though, of course, is the added depreciation that we have by the pipeline drop-downs and DG Marine -- of having them for full periods, where we only had them a part of the year last year.

Barrett Blaschke, RBC Capital Markets.

Just wanted to get a feel for maintenance CapEx going forward and any kind of growth capital for 2009?

We would anticipate a little bit higher run rate of maintenance CapEx in 2009 than we saw in 2008, a large piece of which -- at least in our thinking at this point -- is a fairly large expenditure on corporate IT systems that are kind of necessary to consolidate -- or more efficiently consolidate the businesses that we have acquired over the last couple of years. So I think that you will see higher CapEx, probably not unreasonable in the $9 million to $12 million range for the entire year relative to what you saw in 2008.

On growth CapEx, we really haven't announced anything other than we have the final dollars are going out on a project that we started last year, and that is the extension of the Alabama Pipeline to what we call the mid-rock expansion.

Okay. So can we kind of take it to mean that you're still trying to remain pretty flexible on maybe taking on additional acquisitions here given the coverage and the balance sheet position?

As I said in the prepared remarks, I think we are in a very good position with almost $195 million of cash and committed bank liquidity, given our high level of coverage of current distributions, and the solid performance of our underlying businesses, that we are in pretty good shape to be opportunistic.

On the Refinery Services side, I heard the comment that the margins for NaHS were moving up. Can you give us kind of an idea of what that range is in price on the -- per ton now?

The range, depending upon a number of factors, of the NaHS sales price was $1,000 to $1200 a ton.

John Edwards; Morgan, Keegan.

The NaHS volumes this quarter, did that include volumes from the Refinery Services expansion that you were going to do for Holly?

No, it did not. Holly is -- while we were ready in December of 2008 and had tested all of our facilities, the corresponding refinery changes that Holly was making were not ready, and we have not initiated commercial production from Holly yet, although we anticipate that by the end of the first quarter.

Okay. And what kind of volumetric increase are you anticipating when that goes into service?

Again, it would depend upon what the overall level of demand for the byproduct that we take in return for providing the service, i.e., NaHS. It could be just a substitution of other produced NaHS, but it has the logical advantage of being geographically a whole lot closer to a lot of our markets in the mountain region.

I'm not sure how -- I'm not sure I understand the answer. What I'm trying to get at, do you expect the NaHS volumes to be flat at this level, or after that goes on the line, do you expect a fairly significant uptick in volume?

The NaHS volumes of approximately 34,000-plus tons in the fourth quarter reflects in essence the market demand for NaHS and not necessarily the supply capability of our integrated system.

So that's what I was trying to get at. So it's safe to interpret the volumes that you're seeing right now. That is reflective of current demand, and so that demand, it has been -- I think the prior quarter it was around 38,000, and the quarter before that, if memory serves me, I think it was in the low 40s?

Correct.

So is this reflective of the recessionary economic environment that we're in?

John, there's a couple of factors in there. In the fourth quarter there is a -- as Grant mentioned, there is some marginal impact that, as we've seen in specific customers in specific locations, though it's hard to judge that it's an overall impact at this point.

Coupled with that though we're also -- the timing in the utilization of our customers of their inventory as opposed to when they actually take shipments. So there is a small amount of timing difference from quarter to quarter regarding the deliveries.

The best we have right now though is that the fourth quarter is indicative of where we found the market throughout that time. The first quarter is hard to predict, and we can't be predictive in that regard.

Okay. And then in terms of the inventories that you are seeing out there, do you have some feel for what -- how that is relative to, quote, normal inventories, or --?

We believe that the inventory levels are perhaps coming down in the industry, but that's anecdotal evidence on our part. That's just our belief. And that's why I indicated that there is some slight timing difference, but that's very marginal in the -- from quarter to quarter.

Moving on to the Pipeline segment, the Texas volumes -- just to -- I think you made some comments there. It had to do with the Marathon refinery, that was what was (inaudible) I'm sorry -- the (technical difficulty)

Marathon, Texas City had a fire (multiple speakers)

Exactly.

On or about November 15, whenever our last conference call was. It happened that morning I think, as I recall, and it was basically off for half of the quarter. And it came back on at the first of the year.

Okay. So the -- you would expect volumes -- because obviously the volumes have been pretty flat in the 25, 26 range, then came down to 16 this quarter, so you would expect it to be back up to the range it's been in previous quarters?

That would be our expectation, yes.

You made some -- at the end of your opening remarks, you made some comments regarding the distribution outlook. Your previous comment had been 15% to 18% growth for the foreseeable future, and you -- it sounded like you were tempering that with your comment that -- it sounded like you might slow it up a little bit to balance the short-run versus the long-term view. If you could provide a little more color on that, it would be great.

I don't know what other color to give, other (multiple speakers)

Well, are you -- is it your expectation that you would slow down a little bit from the 15% to 18% expectation?

I think that that's a decision that the Board considers on a regular basis. But I do believe that we are kind of uniquely positioned to -- given the conservative financial metrics on which we've kind of entered this downturn and that it's probably prudent for all of us to step back and reevaluate changed circumstances and ultimately achieve our goal of creating the most long-term value we can for our unitholders.

Okay. Fair enough. Thanks.

We have a follow-up question from the line of Barrett Blaschke.

Barrett Blaschke. I want to follow on to John's question there, and plus I don't want him to worry that he cut me off earlier.

But just on the distribution growth also, we have seen a lot of people kind of slow up with the argument in part of cash is kind of king right now. And the other question I would get to I guess is do you feel like you're getting rewarded for the distribution growth you're giving, or at a certain point do you -- does the Board or Management hit a tipping point where they say, you know what, we're going to slow this down and focus more on keeping the cash in-house and making ourselves even more liquid then we are?

Well, I think that we've tried to emphasize that we have plenty of liquidity. So it's not an issue there. It's whether or not we ultimately create more long-term value by accelerating the current payout versus decelerating the current payout and using that financial flexibility to do things which ultimately create more value.

Seeing as there are no further questions, I would like to turn to call back to Management for any concluding remarks.

We don't really have any concluding remarks. We thank everybody, and we look forward to talking to you next time. Thank you.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation.