Genesis Energy LP (GEL) 2009 Q3 法說會逐字稿

Welcome to the 2009 third quarter 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 streamed to remove sulfur at refining locations principally located in Texas, Louisiana and Arkansas. The supply and logistics division is engaged in the transportation, lending, 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 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 more recently filed and future filings with the Securities and Exchange Commission. We also encourage you to visit our website at genesisenergy.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, Chief Operating Officer; Bob Deere, Chief Financial Officer; Ross Benavides, General Counsel; and Karen Pape, Chief Accounting Officer.

Thank you and welcome to everyone. This morning we reported our financial results for the third quarter of 2009. As I mentioned in the press release, we continue to be pleased with financial results from our diversified and increasingly integrated businesses, none of which would be possible without the efforts of our dedicated employees. While Bob will go into a lot more detail, I would like to make a couple of high-level comments about our performance this quarter, especially relative to the last couple of quarters. You've heard us talk about the macroeconomic headwinds. What that means in our business is that it is all about volume, quantity, demand metrics. We have relatively fixed margins and very minimal commodity price exposure one way or the other. In the third quarter across all of our segments, we saw stabilization in volumes and, importantly, even signs of improvement, especially in our sales of sodium hydrosulfide third quarter over second quarter 2009.

You've also heard us use the phrase increasingly integrated. As an example, with our north Louisiana terminals, our trucks, our access to barge capacity through DG Marine and now control of Gulf Coast storage at Sunshine Terminals, we're increasingly positioned to handle more volumes of heavy refined products and at a higher net margin because of our vertically integrated logistical capabilities. As a result we're encouraged and hope that we can continue deliver growth absence a significant deterioration of macroeconomic conditions, but also without significant capital requirements even though we have access to ample committed liquidity to operate our business and grow organically or through acquisitions if we see the right opportunities.

Because of our belief in the sustainability of our results, we're proud to have recently announced the 17th consecutive quarterly increase in the distribution rate to our unit holder. With that I'll turn it over to Bob Deere, our CFO, to review the specifics for the third quarter of 2009.

Thank you, Grant. We will first focus on our improvement from the second quarter of 2009. I will discuss the key differences in our third quarter results from the second quarter of 2009 and then follow that with a comparison of the third quarter of 2009 to the 2008 third quarter. My discussion will focus on our segment margin, as fluctuations in our revenues resulting from changes in commodity price of crude oil and petroleum products do not have a corresponding impact on our earnings or available cash flow. For the 2009 third quarter we generated net income attributable to the partnership of $4.3 million or $0.14 per unit. Second quarter 2009 net income attributable to the partnership was $4.5 million or $0.13 per unit. The decline in net income is primarily attributable to non-cash expenses not affecting our payment of distributions to our unit holders.

Our available cash before reserves generated in the third quarter of 2009 improved to $23.7 million from $22.2 million in the second quarter of 2009. Results from our pipeline transportation segment were flat at $10.3 million when compared to the second quarter. A slight increase in pipeline operating costs due to equipment maintenance and a decline in pipeline loss allowance volumes were essentially offset by higher market prices for the pipeline loss allowance volumes and the annual increases in tariff rates of approximately 7.6% on our Jay and Mississippi systems. Average crude oil volumes per day experienced a slight decline of 749 barrels. Most of the volume decline occurred on the Mississippi system where the incremental tariff is only $0.25 per barrel. During the third quarter of 2009, the refinery services segment contributed $12.7 million, a decrease of $500,000 or 4% between periods. Volatility in caustic soda prices was the primary factor in the decrease in segment margin.

Sales volumes of NaHS or sodium hydrosulfide and caustic soda both increased from the second quarter. NaHS sales volumes increased by 7,299 dry short tons to 28,207 dry short tons, while caustic soda volumes increased 7,135 dry short tons to 26,898 dry short tons. We are particularly pleased with the increase in NaHS volumes, primarily to our mining customers. The increase in caustic sales coupled with market prices for caustic soda. Supply and logistics segment margins increased by $2.8 million to $9.4 million for the third quarter, as compared to $6.6 million for the 2009 second quarter. The availability of fuel oil volumes improved and we were able to acquire more petroleum products for blending and sale, utilizing the storage capacity we acquired in the second quarter of 2009 near Baton Rouge and Houston and our access to the barge transportation capabilities of our DG Marine joint venture. Overall, the volumes of products sold by our supply and logistics segment increased by more than 7%.

Our crude oil gathering activities offset some of the improvement in petroleum products, as volumes declined slightly with less sweet crude oil available in our areas of operations, as production levels declined in response to the price decline late in 2008 and first quarter of 2009. Our industrial gases segment margin was flat between the two quarters. While we experienced our seasonal increase in CO2 marketing volumes from the second to third quarter of approximately 10,000 Mcf per day to 80,520 Mcf per day, the planned turn around at the facility owned by our syngas joint venture reduced its contribution to segment margin. The turn-around was completed in the third quarter of 2009. As previously mentioned, the decrease in net income between the second and third quarters was primarily attributable to non-cash charges. Non-cash items, such as the difference in equity income and distributions from our equity investees, decrease our net income by approximately $1 million.

Additionally, our limited partner unit price increased between the two quarters, resulting in an increase of $600,000 in the non-cash expense associated with our stock depreciation rights. General and administrative expenses included an increase of $700,000 in the non-cash expense related to the compensation arrangements between our executives and our general partner. Our general partner will bear the cash cost of this arrangement. I will now discuss the principal differences between the third quarter of 2009 and third quarter of 2008. Net income attributable to the partnership for the third quarter 2009 decreased by $6.5 million from a year ago. Results from our pipeline transportation segment decreased $1.2 million to $10.3 million or by 11%. Sales of pipeline loss allowance volumes declined $1.4 million as a result of approximately 5,600 fewer loss allowance volumes combined with significantly lower crude oil prices in 2009.

Throughput on the crude oil pipeline systems decreased by 11%, although approximately half of the volumetric decrease was on the Mississippi system, where the incremental tariff is only $0.25 per barrel and on the Texas system where the tariff is only $0.31 per barrel. The throughput decline was mitigated by increases in tariff rates of 7.6% on the Jay and Mississippi systems effective July 1, 2009. During the third quarter of 2009 our refinery services segment contributed $12.7 million, an increase of $1.2 million or 11% between periods. There were three significant components of this fluctuation. First, NaHS sales volumes declined by 26%. The demand for NaHS, primarily in mining and industrial activities, has been negatively impacted by macroeconomic conditions. As we have seen in the current quarter, we expect demand for NaHS to continue to increase as market prices and demand for copper and molybdenum improve.

Similarly, we expect improvements in industrial activities, like pulp and paper and tanning industries, to increase NaHS demand. Second, an increase in caustic soda sales volumes of 46% offset some of the impact of the NaHS sales decline. A key component of our sulfur removal process is caustic soda. And our economies of scale and logistics capabilities allow us to effectively market caustic soda to third parties. The final component effecting our segment margin was our aggressive management of production and logistical cost. Raw materials and processing cost related to providing our refinery services and supplying caustic soda as a percentage of our segment revenues declined 33% between the periods from 66% to 33% of revenue. We have managed our acquisition costs by managing the timing of our purchases and our logistics cost. We have also taken steps to reduce processing costs.

The cost of delivering NaHS and caustic soda to our customers, as a percentage of segment revenues, was consistent between the two quarterly periods at approximately 13% to 14%. Supply and logistic segment margin was $9.4 million in the third quarter of 2009 compared to $9.8 million to the third quarter of 2008. Contango pricing in the crude oil market provided opportunities for us to hold more barrels in storage tanks to take advantage of higher oil prices for future deliveries. We hedge the future delivery price with the use of derivative contracts, principally NYMEX futures, and minimize price risk. During the third quarter of 2009 we averaged approximately 220,000 barrels of crude oil in inventory and recorded $900,000 of segment margin related to storing and hedging crude oil. The DG Marine barge operations we acquired in July, 2008 added approximately $1.7 million more to our segment margin in the third quarter of 2009, as compared to the third quarter of 2008.

This increase occurred despite the decline in average charter rates in the heavy oil barge transportation market as a result of adding four additional tows, each tow consisting of a push boat and two barges, in the last quarter of 2008 and the first half of 2009. Offsetting these improvements in supply and logistics segment margin was a decrease in the margin of our crude oil gathering and petroleum products marketing operations. In 2009 we experienced some reduction in crude oil gathering volume as a result of choices made by crude oil producers to reduce operating expenses or postpone development activities that could have enhanced or maintained existing production level. Volatile price changes in the petroleum products markets and robust refinery utilization in the third quarter of 2008 created blending and sales opportunities with expanded margins in comparison to historical rates.

Relatively flat petroleum prices and reduced refinery utilization in the third quarter of 2009 narrowed the economics of our blending opportunities and reduced sales margins to more historical rates. Somewhat offsetting these declines were the additional opportunities to handle volumes from the heavy end of the refined barrel, due to our access to the additional leased heavy product storage and to barge transportation capabilities through our DG Marine joint venture. However, the result of all of the above factors is that our crude oil and petroleum products marketing activities contributed $2.9 million less to segment margin in 2009 than in the third quarter of 2008. Segment margin from industrial gas activities in the 2009 third quarter decreased $1 million from the prior year to $2.9 million. We sold an average of 3,296 Mcf less per day to our CO2 industrial customers than in the 2008 quarter. Our industrial customers sold the CO2 to companies in the food and beverage industries and for use in the tertiary oil recovery.

The macroeconomic conditions have depressed the demand for CO2 in these areas. Additionally, due to a scheduled turnaround at our syngas joint venture, there was no contribution to our available cash by our joint ventures in the 2009 third quarter. The turnaround was completed and we expect our joint ventures to contribute to available cash in the fourth quarter of 2009. Depreciation, amortization and impairment expense declined $2.3 million between the third quarter periods, as a decline in the amortization of intangible assets acquired in the Davison acquisition more than offset the additional depreciation from DG Marine and the free state pipeline, both acquired during 2008. Additionally, some of the assets acquired in the Davison acquisition reached the end of their depreciable lives early in the third quarter of 2009. Corporate, general and administrative expenses increased by $4.4 million between the periods.

This increase was primarily the result of compensated -- compensation-related increases, which included the $3.1 million non-cash charge in the third quarter of 2009 related to the compensation arrangements between our executives and our general partner. As previously mentioned our general partner will bear the cash cost of this arrangement. Net interest cost decreased during the third quarter by $1.1 million due to a decrease of 2% in market interest rates during the periods. Although our average outstanding debt levels were higher in the 2009 period, the rate difference was more than sufficient to offset the cost. Income tax expense in the third quarter of 2009 increased as taxable income increased in relation to the tax deductions attributable to that income. As the majority of our operations are not taxable to us, income tax expense is not expected to be significant overall. Our balance sheet as of September 30, consolidates the results of Genesis Energy and our joint venture, DG Marine.

The long-term debt balance of $384.4 million reflects $335 million outstanding under the Genesis credit facility and $49.4 million outstanding under the DG Marine credit facility. During 2009, as refineries have reduced production capacity, demand for transportation services has weakened, putting pressure on the rates DG Marine can charge for its services. And on October 30, 2009, Genesis Energy loaned the remaining $8 million available under the $25 million subordinated loan agreement to DG Marine. Additionally, DG Marine has successfully amended its credit agreement to allow for other forms of credit support should they be needed as a result of the current imbalance in capacity and demand in this segment of the barge market. The Genesis Energy long-term debt amount of $335 million includes approximately $12 million of working capital financing associated with storing crude oil volumes to take advantage of the Contango pricing in the crude oil market.

At September 30, the Genesis Energy borrowing base calculated upon 4.25 times our last four quarters of EBITDA was $419 million. This level of available credit provides us with sufficient liquidity to run our current business. The Genesis bank credit agreement has provisions that allow us to increase our borrowing base for material acquisitions. Should we want to grow through acquisitions, we have additional committed capital available up to $500 million in the form of a higher multiple of 4.75 times EBITDA and the inclusion of an agreed-upon amount of pro forma EBITDA associated with any such acquisition. Grant will now provide some concluding remarks to our prepared comments.

Thanks, Bob. Once again, I want to thank our employees for their efforts in delivering the financial results that we reported today. As we have tried to point out in our prepared remarks and think such results indicate, we believe we've seen a stabilization in our businesses and arguably a turnaround towards something. We're just not sure where that turnaround is headed, hence the term new normal, which we borrowed for some really smart Wall Street types.

However, with the 1.5 times coverage of our increased distributions, our relatively conservative leverage ratio, our dedicated employees and our increasingly integrated suite of service capabilities, we should be as well positioned as anyone to take advantage of opportunities likely to arise, as we hopefully put the depths of the recent challenging economic environment behind us. That concludes our prepared remarks for this conference call. I will turn it back to LeTanya to take any questions from the audience.

(Operator Instructions) Our first question comes from David Fleischer with Chickasaw Capital. Please proceed with your question.

Hello, Grant. Well, you may be the next one quoted. Maybe Pimco gets the new normal, but you can get the "Turn around towards something" quote. (laughter) We'll try to give you future credit toward that one. Question for you. You talked generally about the NaHS demand looking better. You give us the specific numbers, obviously, where you were up about 7,000 tons, but can you tell us more about why you're confident that you're -- you're going to continue to see that demand increase, which is what you did say or Bob I think said. And how much of that increase demand came from foreign sources, how much of it is domestic, how much of it is from different customers versus same the customers or returning customers who hadn't been there before.

Okay. The -- as we've said in the second quarter conference call, one of the primary declines in demand for NaHS or in the quantities that we sold in NaHS in the first half of 2009 was South American mining operations. As a practical matter we sold zero in the first half. Of the approximately 7,000 or 7,300 ton increase that we saw Q3 '09 over Q2 '09, about 5,300 tons of that was to South American customers. We -- based upon our continued discussions with them and our representatives with the mining operations in South America, we continue to believe that that is going to be a -- an increasing demand. There are -- primarily this is the reopening, if you will, of -- or reinitiation of mining operations there, but -- so there's not new locations, but going back to the same mining locations that we saw in 2008.

Is that business less profitable because of the incremental transportation costs?

Not -- not really. I mean, the transportation costs is borne by the markets, if you will, and actually it's probably -- there's really not a significant delta in the net of transportation margin from a South American sale versus a North American sale.

Okay. Secondly, can you just update us on the Holly facility and how that is operating and functioning at this point?

Yes, as we've stated, we are -- our facility -- our NaHS facility in Woods Cross, Utah at the Holly refinery is operational. Holly is continuing to go through start-up mode of their reconfigured refineries. And we're making, currently making commercial quantities of NaHS where have a little bit of specification issues, but we have the ability to take the product in any event and blend it. But the -- as with any of our locations, it's dependent upon the amount of sulfur that a refiner needs to remove from it's stream and at this point we're not producing anything close to what the design capacity of the facility is.

Right. Is there any guidance you can give us on a slope there and implications of that?

I think that we are in communication with Holly, is the operator of -- is our refining partner there and we will probably on the next time we talk have a little bit better idea of what their ultimate operational plans are going to be for the facility.

Okay. And maybe the last question I'll ask now is you threw out those interesting cost figures on caustic soda and-- and basically indicated that you had higher cost inventory from before and one is tempted to want to take that $5 difference from your embedded costs to the -- and multiply that times its volume and come up with some nice incremental figures in the fourth quarter and going forward. Can you tell me why that's the right thing or the wrong thing to do?

David, that's -- that's only one component. I mean, that -- the math works in where you're headed but that is only one of several variable components in our overall margin and our profitability there. So there may be offsetting trends coming from other directions.

Or maybe it's a big component.

It is. It is the largest component.

Okay. Thank you.

Okay.

Our next question comes from Ron Londe with Wells Fargo. Please proceed with your question.

Yes, could you elaborate a little bit on the pipeline volumes? I think this morning Denbury said that they were going through some expansions that cut some other volumes. Was that what hurt the Mississippi and the Jay pipeline?

The Mississippi crude oil line was affected somewhat by some of the work that they were doing on their fields. The free state, which is the CO2 line, had -- had reduced throughput relative to the second quarter and relative to our expectations as a result of ongoing work that Denbury was conducting at Soso, Eucutta and Heidelberg. We believe that that work, as they stated this morning in their conference call, is substantially behind it and that throughput volumes on the CO2 pipe should increase as we go through time. And correspondingly we would anticipate that crude oil production volumes to go through our Mississippi crude oil system would also increase.

I was a little surprised that -- that you were showing a little less demand from -- for CO2 from the food and beverage industry. Can you -- can you give us an idea of wha -- why that's going on, because that's always been a fairly stable part of the -- part of the business?

Quarter on quarter is what he is looking at. It's down by about 3,000

Most -- we don't -- we don't know the specifics, Ron, on that, but we attribute that, again, just to the overall macroeconomic pressures that seem to be prevailing.

Okay. Also, from a standpoint of DG Marine, can you give us a feel for how much of your internal need for logistics is provided by DG versus their overall customer base?

Yes and that's one of the interesting things. While it -- obviously day rates are --are pressuring a lot of barge operators on a -- because of the macroeconomic conditions, our investment in DG Marine was part of an integrated strategy and as a result of we use, if you will, for upstairs activity, so to speak, probably on the order of magnitude 40% to 50% of the existing capacity of DG Marine. And as a result our utilization rate for our aggregate fleet is in the mid-90% of our -- of our barges and tows.

You -- can you give us a feel for the other 50% or 60%? Can you give us an idea of where you are from a -- a day rate standpoint and from a contractual standpoint, whether short-term, long-term?

We have one other tow that we don't -- that we as Genesis don't use. It's under a long-term contract. The rest are basically operating under spot contracts or contracts of probably, I think, three months or so type contracts.

Okay. And the end market for those contracts?

Primarily other integrated oil companies. Again, our focus of using -- of the barges is consistent with our trucking and terminaling operations, which is really focusing on the black oil business or the heavy end of the refined product. And that's stuff that refineries aren't making on purpose, that is what is left over after they get the higher value products. And so typically the user of inland barges are refiners that have water access that need to move that product out.

Okay, thank you.

Okay.

(Operator Instructions) Our next question comes from John Edwards with Morgan Keegan. Please proceed with your question.

Yes, good afternoon, everyone.

Hi, John.

I was wondering on the NaHS business, I mean, David touched on this in terms of a -- a trajectory on volume. I mean, can you give us any insight as far as you had good Q for Q numbers, do you expect a similar increase going forward?

Well, percentage-wise, obviously, when you start from a lower number you get a bigger percentage number. But we -- even though we are encouraged by the future orders that we are anticipating actually taking in, in discussions and anticipating, I think it is going to be a process -- a temporal process before we get back to the kind of the 40,000-ton quarter run rate that we basically saw in 2005, '06, '07 and '08. But importantly, so far in the fourth quarter are certainly consistent with the latter part of the third quarter and so we -- we do anticipate continuing increases. We're just not comfortable at giving absolute percentage expectations.

Okay. And then you had mentioned, I think, before that on the caustic soda business you ultimately expect that to be like a $25 million EBITDA business. Any ideas on how trajectory on that?

I think that, at least my recollection is discussing that that's kind of -- we anticipated that would be more of an $8 million to $10 million business and we're kind of consistent with that over the last couple of quarters on a contribution margin basis. And we see that continuing even as our -- or the ability to continue that contribution even as our internal requirements ramp back up as we facilitate our increased sales of NaHS.

Okay, all right. I -- I stand corrected there. And then I'm -- any -- any thoughts you can share with -- with respect to the relationship to Denbury. They indicated on their call with the Encore acquisition that GEL was a good investment for them but not necessarily strategic. Any -- any thoughts you can provide on that -- on that front?

Well, I think Joe and I have been here for almost three and a half years, I guess, and it's been very autonomous, independent business in a classic sense of the GPM/LP relationship. I think due to the --the IRS tax ruling of treatment of CO2 investments by Denbury, as a practical matter being treated as intangible drilling cost and being -- having the ability to write it off, that Denbury's analysis of that tax ruling is such that kind of the financial engineering aspects of dropping additional CO2 assets into the partnership are some what blunted and so we are -- as far as we know, we go forward with what we've been doing, which is to try to operate our businesses the best that we can and preserve our flexibility to be accretive, either organically or through acquisitions.

Okay. And then question for Bob. I was -- what -- you're commenting on credit availability, liquidity. So where -- where do you now stand on liquidity? I wasn't quite clear on -- from your comment where -- what the number is.

The -- from a Genesis Energy perspective only, John, the available credit is $419 million, and our -- at September 30 our reported long-term debt under that credit facility was $335 million. Now, the $419 million, though, does not give effect to if we were to find or need some funds for acquisition that there is further availability under the credit line up to $500 million because of our ability to flex the EBITDA level and to get credit for pro forma EBITDA.

Okay. Okay, great. Thank you very much.

Okay.

There are no further questions.

Hello?

There are no further questions in queue at this time. I'd like to turn the call back over to Mr. Sims for closing comments.

Okay. Thank you, very much, and appreciate everybody's interest and we'll talk in 90 days, if not sooner. Thanks.

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