Genesis Energy LP (GEL) 2009 Q4 法說會逐字稿

Welcome to the 2009 fourth quarter and year-end 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 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 Bob Deere, Chief Financial Officer, Ross Benavides, General Counsel, and Karen Pape, Chief Accounting Officer.

Thanks Karen, and welcome to everyone. As we mentioned in the release, we're cautiously optimistic about increased activities and opportunities across our businesses relative to the third quarter of 2009. As you can see, higher throughput volumes are by and large driving the increased pipeline segment margin. Likewise higher volumes are primarily responsible for the improvement in Refinery Services market. That's a good thing. In one sense, it indicates macroeconomic activity is improving. The lack of Contango and winning economics in our crude oil business is, and appears will be, a challenge. Diversifying and expanding our geographic and commercial footprint for our heavy refined products blending storage transporting business is a top priority. In any event, we're encouraged, certainly relative to the glass is half empty view of the world a year ago. With the help of all of our employees, we delivered sustained quarterly distribution growth through the great recession, and we believe in our ability to continue on that path for the foreseeable future. With that, I'll turn it over to Bob Deere our CFO to review our results in greater detail.

Thank you, Grant. I will discuss the key differences in our fourth quarter results as compared with the third quarter of 2009. My comparison of the annual periods will follow the quarterly comparison. My discussion will focus on our segment margin, as fluctuations in our revenues resulting from changes in the commodity price of crude oil and petroleum products, did not have a core responding impact on our earnings or available cash flow. For the 2009 fourth quarter, we generated available cash before reserves of $23.7 million. Essentially equal to the previous quarter. While we reported a net loss attributable to the partnership of $6 million, this loss was due to non-cash charges not affecting the payment of distribution to our unit holders, as I will discuss later.

Turning to our operating segments, results from our Pipeline Transportation segment improved by $1.1 million to $11.3 million when compared to the third quarter. Throughput in our crude oil pipelines increased with increases on the Mississippi System and Jay Systems offsetting a slight decrease in volume on the Texas System. In total, volumes increased by 2,395 barrels per day with a majority of that increase on the Jay system. We were pleased to see volumes begin to flow again in December from Little Escambia Creek which had been shut-in due to crude oil prices and maintenance since November of 2008. Little Escambia Creek only accounted for 191 barrels per day of the increase in the fourth quarter, but January, 2010, volume was over 2,000 barrels per day.

CO2 volumes transported on our Free State Pipeline increased by 45,300 Mcf a day, resulting in increased revenue of $500,000. Also adding to revenues was an increase in pipeline loss allowance volumes in higher market prices for those loss allowance volumes. The added revenue from the pipeline loss allowance volumes was approximately $400,000.

During the fourth quarter of 2009, the Refinery Services segment contributed $13.2 million, an increase of $500,000, or 4% between periods. Increased NaHS sales volumes was the primary factor in the increase in segment margin. NaHS sales volumes increased by 3,760 dry short tons to 31,967 dry short tons. Caustic soda volumes decreased by 1,500 dry short tons to 25,398 dry short tons. We're particularly pleased with the increase in Nash volumes, primarily to our mining customers.

Supply and Logistics segment margin decreased $2.3 million between the quarters. The flattening of the forward curve in crude oil prices and narrowing of the differential in prices between sour and sweet crude oil contributed to approximately $800,000 of such decrease. Seasonal declines in asphalt sales, slightly lower petroleum product sales, and increased operating expenses, principally due to river flooding early in the fourth quarter, accounted for approximately $800,000 of such decline. DG Marine contributed approximately $400,000 less compared to the third quarter.

Our Industrial Gas segment's margin declined slightly. We typically experience a seasonal decline in CO2 marketing volumes due to the use of CO2 in food and beverages which have greater demand in the warmer months. The volume decline was approximately 8,000 Mcf per day which is slightly less than the seasonal decline between the third and fourth quarters in 2008. The planned turnaround at the facility owned by our syngas joint venture was completed in the third quarter of 2009. However, cash distributions were not made to the joint venture partners in the fourth quarter, as the invoices for the turnaround were paid during that period.

Decreases in other expenditure components of available cash contributed to keeping the fourth quarter segment margin consistent with with the third quarter. These components include the cash portion of our corporate general administrative costs, interest costs, and maintenance capital expenditures.

Moving from available cash, our net loss for the quarter was principally due to non-cash items. During the quarter, we recorded an impairment charge of $5 million related to an investment in the Faustina Project. The Faustina Project is a developmental pet coke to ammonia project in which we first invested in 2006. Based on the progress of the project and our decision not to fund further development cash calls, we determined that the likelihood of recovery of our investment was remote. And we wrote off the investment we had recorded.

The fourth quarter charge for non-cash equity based compensation charges increased by approximately $3.6 million as compared to the third quarter of 2009. This was primarily due to the compensation arrangements between our executives and our former general partner. The cash cost of these arrangements was borne by our former general partner.

I will now discuss the principle differences between 2009 and 2008. Available cash before reserves was $1.2 million more in 2009 as compared to 2008. Despite the changes in the economic environment between 2009 and 2008, our segment margin only decreased by $400,000 between the periods. Reduction in other cash costs and expenses more than offset the decline in segment margin resulting in the increased available cash before reserves. Net income attributable to the partnership in 2009 was $18 million less than 2008. However, the factors creating this difference were non-cash charges not affecting available cash before reserves.

Results from our Pipeline Transportation segment increased $9 million to $42.2 million, or by 27%. The inclusion of a full year in 2009 of the effects of the NEJD CO2 pipeline lease and Free State pipeline acquisition added $11.9 million to segment margin. These pipeline transactions closed at the end of May, 2008. Throughput on our crude oil pipeline systems decreased 6%. Although approximately one third of the volumetric decrease was on the Mississippi System where the incremental tariff is only $0.25 per barrel.

As I previously indicated, the Little Escambia Creek field was shut-in for most of 2009 which accounted for a difference of 3,470 barrels per day of volume on the Jay system. In December of 2009, that production from that field restarted. Increases from other fields on the Jay system offset a portion of the Little Escambia Creek decline, resulting in an annual net decline for the Jay system of 2,905 barrels per day. The throughput decline was mitigated by increases in tariff rates of 7.6% on the Jay and Mississippi Systems effective July first, 2009. Sales of pipeline loss allowance volumes declined $4.1 million as a result of approximately 10,000 fewer loss allowance barrels combined with significantly lower crude oil prices in 2009.

During 2009, our Refinery Services segment contributed $51.8 million, a decrease of $3.9 million, or 7% between the periods. There were two significant components of this fluctuation. First, NaHS sales volumes declined by 34%. The demand for NaHS primarily in mining and industrial activities has been negatively impacted during 2009 by microeconomic conditions. As we have seen in the current quarter, we expect demand for NaHS to continue to increase as market prices and demand for the copper and molybdenum improve and stabilize. Similarly, we expect improvements in industrial activities like the pulp and paper and tanning industries to increase NaHS demand.

The second component of the variance in margin for this segment was an increase in caustic soda sales volumes of 30% that offset some of the impact of the NaHS sales decline. Caustic soda is a key component of our sulfur removal process. Our economies of scale and logistics capabilities allow us to effectively market caustic soda to third parties.

Supply and Logistics segment margin was $29.1 million in 2009 compared to $32.4 million in 2008. Volumes of crude oil and petroleum products sold in 2009 were approximately 1% more than in 2008. Although we did not see a decline in volumes, we did not experience the price environment in the petroleum products markets and robust refinery utilization that occurred in 2008. Those market conditions in 2008 created blending and sales opportunities which expanded margins in comparison to historical rates. Relatively flat petroleum prices and reduced refinery utilization in 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 products storage and to barge transportation capabilities through our DG Marine joint venture. However, the result of all the above factors was that our crude oil and petroleum products marketing activities contributed $11.1 million less to segment margin in 2009 than in 2008.

Contango pricing in the crude oil market, primarily in the first three quarters of 2009, provided opportunities for us to hold more barrels and storage tanks to take advantage of higher oil prices for future deliveries. We hedged the future delivery price with the use of derivative contracts, principally NYMEX futures, and minimized price risk. During 2009, we averaged approximately 174,000 barrels of crude oil in inventory and recorded $2.2 million of segment margin related to storing and hedging crude oil. The DG Marine barge operations we acquired in July, 2008, added approximately $5.6 million more to our segment margin in 2009 as compared to 2008. However, because the cash flows generated by DG Marine must be utilized to reduce DG Marine's debt under its credit facility, we exclude the effects of DG Marine from our calculation of available cash before reserves.

Segment margin from Industrial Gas activities in 2009 decreased $2.1 million from the prior year period to $11.4 million. We sold on average 4,730 Mcf less per day to our C02 industrial customers in 2009 than in 2008. Our industrial customers sell the CO2 to companies in the food and beverage industries and for use in tertiary oil recovery and other industrial processes. The macroeconomic conditions have depressed the demand for CO2 in these areas. Additionally, due to a scheduled turnaround at our syngas joint venture, the contribution to our available cash for our joint ventures in 2009 was approximately $1.3 million less than in 2008. The turnaround was completed, and we expect our joint ventures to contribute to available cash throughout 2010.

Other items affecting available cash before reserves are cash cost and expenses, including corporate general administrative expenses and interests costs. Our cash corporate G&A expenses declined by $5.7 million, primarily in the areas of professional service fees and bonus expense. Interests cost on debt under the Genesis credit facility decreased $2.6 million between 2009 and 2008 due to lower market interest rates. The $18 million decline in net income for 2009 as compared to 2008 was the result of an increase in non-cash charges. The largest of these charges are depreciation, amortization, and impairment expense, and the charge related to the compensation arrangement between our executives and the former owner of our general partner. In 2009, routine depreciation and amortization of our assets declined $8.8 million between the annual periods, as the decline in 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. As I previously discussed, we recorded an impairment charge of $5 million in 2009 related to the Faustina investment. Non-cash compensation charges increased by approximately $20.1 million between 2009 and 2008, as a result of the compensation arrangement between our executives and our former general partner, as well as the effects of the increase in the market price of our common units on the stock appreciation rights plant expense. Grant, will now provide some concluding remarks to our prepared comments.

Thanks Bob. As we've discussed today, we're cautiously optimistic as we put 2008- 2009 behind us and look forward. Hopefully, the world's glass is just now half full. Hopefully, the whole glass is not smaller. In any event, with the 1.43 times coverage of our total distribution, our relatively conservative credit metrics, our dedicated employees, our increasingly integrated suite of service capabilities, and our commitment to our customers and service providers, we're as well positioned as anyone to take advantage of opportunities. We're excited to have the Quintana Group, members of the Davison family, and the other investors in our GP on board and on point. With their support and encouragement, we look forward to identifying capitalizing on those opportunities. With that, I'll turn it back to the moderator for any questions.

Thank you. (Operator Instructions) Our first question is from Ron Londe of Wells Fargo. Please proceed with your question.

Thanks. Grant, I think it would be helpful if you could possibly go through each one of your segments and give us a feel what you're macro expectations are for 2010, Just some of the trends that you might see. Either, the partnership improving upon or maybe even [detracting] from the performance?

Sure. Okay. Well, as I mentioned in our prepared remarks, the Pipeline operating margin is really being driven by volume increases. Primarily on -- from the crude oil perspective on the Alabama-Florida System, and we anticipate that that should continue clearly in 2010 as well as increases in our Free State CO2 Pipeline. Denbury is to -- finished some top side production facilities work at two of the major flood fields that are used to flood off of the Free State line, so we anticipate the volume increase that we saw fourth quarter over third quarter to be sustained throughout 2010.

On Refinery Services, we're very encouraged by the order book as it's shaping up for 2010. As we've often said, it's going to take, in our opinion, a while to get back to the -- kind of the 160,000 ton a year run rate that we -- ourselves of NaHS that we experienced in '05, '06, '07, and '08. We're very encouraged that we're headed that direction. The CO -- or the Industrial Gases, as Bob mentioned, primarily at the T&P Syngas facility which was in a major turnaround this year that we anticipate that distributions from that resume in the order of magnitude of $1.5 million to $2 million in 2010 which is kind of the annual run rate for it. So shifting to Supply and Logistics, as we've said, the kind of legacy, crude oil handling business because of the current conditions in crude oil market and demand for -- at refineries for crude oil which is fairly -- is quite depressed. The Contango economics that we experienced in 2009 and the blending economics that one normally anticipates that you have at higher differentials between sweet and sour when the market is not in Contango. We're in kind of a perfect storm on that in a sense that refinery demand is so low that you don't have the dips and you don't have the Contango opportunities.

So that's going to be a little bit of a challenge for us in 2010. And on the Refined Product side, I think by and large, we are working to continue to integrate the DG Marine assets, the Gulf Coast storage assets, and optimize our trucking and rail access to products to blend, store and transport. And I think that, certainly on a -- we believe that from that perspective, that the sustainability of that contribution to the Supply and Logistics margin is solid. And, in fact, that's where we can actually grow with with the footprint that we have.

Where do you think you're capital spending for -- growth capital spending is going to hit in 2010?

We have, in addition to the IT system that we've mentioned previously, that we're putting in an entire new IT framework. That will be considered growth capital, as it positions us to -- from an IT point of view, a platform for additional growth. But we've identified maybe $3 million or $4 million of additional growth projects at this point, which are just kind of budgeted projects. We haven't -- we never discuss and announce acquisition-type targets or significant growth projects until we're ready to, so.

Okay. Thank you.

Yes.

Thank you. Our next question is from John Edwards with Morgan Keegan & Company. Please proceed with your question.

Yes. Good morning, everybody.

Good morning.

Grant, could you talk a little bit about the impact of having a new general partner going forward? How you expect things to change?

Well, I think that -- .

To the extent that you can comment on that.

No. I understand. And I think it's probably -- you have to have a little historical perspective. I think that from the Denbury's perspective, there was a change in their strategic thinking of their ownership position and control position in Genesis that occurred in August of 2008. Coincident with the IRS ruling that they got on their CO2 pipelines. So we had a change in the strategic thinking of the GP. Then we had an economic tsunami. And then we had a process to change the GP which we just now consummated. So in one sense, I think that -- I feel that the partnership, and we as a management team have somewhat been in a holding pattern for about a year and a half. But it's been good, because I think it's focused a lot of attention on how to optimize our footprint of existing operations. And we believe that we can deliver fairly quality growth off of our footprint without having to spend money on the outside. So I think that clearly the -- having a new GP that, as I characterize -- is on board and on point. That I would anticipate the support and encouragement to get back into a growth mode, and also emphasizing that we've been very conservative in our capital structure so we believe that we will be able to find the right things together. And we'll be encouraged to find the right things to grow the partnership.

Okay. Thank you. And then could you talk a little bit about the -- there was an item in the release about -- I think it was costs allocated the general partner was $11 million and some. Talk about what that was?

Bob, is going to handle that one.

John, I can talk about that. Principally, the allocation there is of the compensation expense that we've mentioned a couple of times was attributable to the general partner. So that provides expense allocation to the general partner, and that was the main element throughout that. I believe also that the other elements of income and expense then simply fall out as they do.

Okay. So when we calculate EBITDA, is that something we would exclude? Or add back?

Right. That's correct. If you're looking at the -- particularly for the cash flow attributable to the limited partners, then those amounts would be attributable solely to the general partner.

Okay. But as far as -- well maybe we can take this offline because there was -- we were looking. There was three different ways we could calculate the adjusted EBITDA since it wasn't in the release. Three pretty different numbers, so -- .

Oh, well if you give my pick, John, then I'm sure I can [pick a good one out of that]. But, I'm happy -- we'll take that offline and be happy to walk you through the calculation.

Okay.

And the allocation.

Okay. Great. What do you have available on your credit facility now?

Currently, we have $407 million, I believe.

Is our borrowing base calculated based upon the LTM EBITDA. Obviously, we can -- for the purposes of using the remainder of the $407 million up to $500 million of existing commitments for an acquisition, we can access that by presenting pro forma-acquired EBITDA, and expansion of the multiple determining instead of 4.25 times, 4.75 times the LTM actual EBITDA plus pro forma. So it's -- all of its available for acquisitions.

The full borrowing base is available right now?

Technically, the $407 million is what's available, absent the presentation of an acquisition opportunity to our lender group.

Okay. I was just trying to see if you had anything drawn on that?

We have -- what's our total outstanding as of 12-31?

$320 million.

$320 million out of $407 million was drawn at 12-31.

Okay. All right.

And that's for Genesis only.

Okay. Great. And on the -- can you comment -- you commented a little bit more, or you commented on some of the segments. As far as the NaHS recovery trajectory, you're up 13% Q over Q. Do you expect that to moderate some going forward? Or do you expect similar increases in the next few quarters?

I don't know that I think of it in terms of percentage increases quarters over quarters, but I would say that what we've seen so far as a practical matter, the first two months of 2010, that we're at double digit percentage above run rate for the fourth quarter.

Okay. And then as far as the margins on the NaHS, we're looking at NaHS-caustic soda combined -- your margin per ton. It's varied quite a bit. The [implications] -- you could help us out with that?

Well, our margin on caustic soda is kind of lower currently than it was in the first or second quarters of 2009, primarily driven by the fact that caustic soda itself is probably priced at 25% to 35% of what it was in the first and second quarters of 2009. But our clean NaHS margins are basically flat to what we've seen in historical periods.

Okay. What's your expected run rate now for G&A expense? You were at -- you had been in the [tens], you 12 and change this quarter. Is it going back into the [tens]? Is that a good number?

I'm sorry.

We've been in the [five to sixes] for clean G&A and probably some of the noise that is being caused by the compensation expense that is the responsibility of the previous general partner. But our run rate SG&A is in the $20 million, $21 million to $23 million range, I think, is a fair run rate on an annualized basis.

Okay. So what muddied that up was the -- I guess the big run up in your stock prices. You had some corresponding -- .

Correct. Yes. We have both SAR expense, which is not cash, unless they are exercised. But it flows through the G&A line and-or is expensed in the margins. And the executive compensation of the previous B plan, which has basically been extinguished. So hopefully as a result of the change in control, and hopefully that we won't have -- we'll have probably some first quarter entries reflecting the closing of the GP transaction on February fifth that on a go-forward basis past this quarter, we shouldn't have some of the gyrations associated with that.

It should be more in the $5 million to $6 million per quarter-type range.

That's correct.

All right. I think that's about it. I will hop offline here.

Okay. Thanks John.

Thank you. (Operator Instructions) Our next question comes from David Fleischer of Chickasaw Capital Management. Please proceed with your question.

Hello, Grant. Let me ask you a few different questions to just to follow along with the path of Ron and John here. First, I just want to be sure -- first of all, a quick question. That with the dropoff in Contango profits, that you actually mentioned several times, that the acceleration or downward slope that might be painful that you're looking forward to. It's not that there isn't a Contango, it's just a different smaller one. Can we assume that the [lessening demand] fall-off in Contango profit continues? But it doesn't accelerate from there?

That's a reasonable assumptions. Like I characterized it earlier, at least our -- the crude oil contribution, which obviously we don't break out. But the crude oil contributions with Supply and Logistics kind of got perfect stormed in the sense -- no Contango, no significant blend economics. So we don't see that it goes down any further than the fourth quarter. We think that's kind of the bottom, so to speak.

Okay. Good. I just wanted to be sure there wasn't a surprise brewing there. Secondly, you've had some nice competitive advantages and opportunities in the [Refinery] Services for investments. And we've seen -- talked about what you might do there. But is that a less likely area for growth? We're waiting on [Holly], is it a less likely area for future growth near-term at least given the adequate NaHS supply from existing projects? Is that a reasonable statement at this point, even as there might be more longer term opportunities?

Again, I think that it is how we're compensated and drive margin in that business is taking the NaHS in kind for providing the sulfur removal services. So we are somewhat market constrained on our ability to drive margin there. It's a volume gain -- game, but we do -- we are constantly looking at other locations to optimize among other things logistical costs. So I think that we are -- we could probably see some amount of diversification of our supply sources and expansion of our service arrangements with other people. But in large part, we need to have the demand-driven growth to drive segment margin there.

Okay. And then the third question, little bit more general. But love your top down view of the acquisition market -- the investment market but mostly the acquisition market. We've heard there are a lot of private equity firms crawling around out there with with cheap money, leveraged money, and yet you're a smaller Company and maybe your sweet spot in target assets is below their radar screen, I don't know. But I would love to hear how you evaluate the acquisition market and opportunities there as many companies just aren't able to fund assets at this point.

Yes, it's obviously a competitive environment, but we're also very focused in the geography and the type of business that we would ever consider. We've tried very hard to emphasize over the last couple of years that we are not a collection of assets, but we're building an integrated business model. And I think it's served us well in the last year and a half to do that. So while it's competitive, and whether or not how much leverage there is, this is somewhat of a blasphemous -- but, we're woefully underleveraged at the consolidated level. Our return on levered equity expectations are probably south of 30% to 35%. So I think on appropriate acquisition opportunities that we will be competitive for the right opportunities.

Okay. I'll leave it at that then.

All right.

Thank you, Grant.

Thank you.

Thank you. Mr. Sims, there are no further questions at this time. I'd like to turn the call back over to you for closing comments.

Okay. Thank you, very much, for participating, and we'll talk to you in 90 days if not sooner. Thank you.

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