Genesis Energy LP (GEL) 2010 Q1 法說會逐字稿

Welcome to the 2010 first 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 streams to remove sulfur at refining operations, principally located in Texas, Louisiana and Arkansas. Supply & 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 it's 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, and Karen Pape, Chief Accounting Officer.

Thank you and welcome to everyone. As I mentioned in the release, we had a successful quarter in terms of our underlying operations. We continue to see improvement in the business demand relating to our operational and service capabilities. Other than the loss to throughput on our Texas pipeline due to the integrity management activities during the quarter, aggregate throughput on our three crude oil pipelines is up year-over-year and sequentially, a trend we see continuing so far in the second quarter.

We are encouraged to see the demand for sodium hydrosulfide NaHS, which by and large drives our Refinery Services segment margin, continue to recover from the effects of the great recession, again showing year-over-year and sequential growth. It appears that April will likely be our strongest month for NaHS sales in a year and a half or so, and our future order book looks strong.

In our fourth-quarter call we talked about the challenges of lack of contango and glinting economics in our crude oil business. That challenge continued in the first quarter, but in late April and certainly continuing into May, quality differentials and temporal spreads returned to more normal values. Also on that call we stated it was a priority to diversify and expand our geographic and commercial footprint for our heavy refined products, transportation, blending, storage business.

Our volumes continue to increase sequentially. Were it not for the mismatch in timing of when we recognize margin, our refined product business would have contributed an additional $1.7 million for the first quarter. This is a continuing priority for us, and we are excited about the continuing integration of our trucks, terminals and barging capabilities.

Industrial Gases was a little light of our expectations as the lingering recessionary effects contributed to lower demand from the customers we supply. However, so far in the second quarter we have seen increasing volumes.

Before I turn it over to Bob to discuss in greater detail some of the nonrecurring items affecting reporting results, I'd like to thank the hard work and dedication of all of our employees for once again delivering solid operational results.

I will discuss the key differences in our first quarter results from the first quarter of 2009. 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 do not have a corresponding impact on our earnings or available cash flow.

For the 2010 first quarter available cash was negatively impacted by a total of $3.1 million due to one-time charges of $800,000 associated with a significant pipeline integrity test on the Texas System, a net increase of $1.7 million of unrealized profit in inventory offset by the unrealized loss on hedge value and $600,000 associated with a significant narrowing of quality differentials and contango pricing conditions during the first quarter. These items, coupled with $2.3 million of charges related to the change in our general partner, reduced available cash to $18.1 million for the first quarter of 2010 as opposed to $23.5 million before such items. Available cash for the first quarter of 2009 was $21.3 million.

Net income attributable to the partnership for the first quarter of 2010 was $6.9 million or $0.06 per unit as compared to net income attributable to the partnership of $5.3 million or $0.16 per unit for the first quarter of 2009.

Turning to our operating segments, results from our Pipeline Transportation segment improved slightly to $10.4 million when compared to $10.2 million for the first quarter of 2009. However, the increase would have been approximately $800,000 greater without the effects of the pipeline integrity test performed once in every five years on a portion of the Texas System.

Throughput on our Jay System increased 4665 barrels per day in the first quarter of 2010 due to increased volumes from Little Escambia Creek, which had been shut in for most of 2009 due to crude oil prices and maintenance as well as increased volumes on our Castleberry pipeline extension. Higher crude oil market prices in the first quarter of 2010 increased revenues from the pipeline loss allowance volumes by $500,000 despite a 3400 barrel decrease in the loss allowance volumes compared to the prior quarter.

Also offsetting the effects of the pipeline test on segment margin were higher tariff rates of 7.6% on our Jay and Mississippi Systems that were effective in July 2009. These higher tariffs added approximately $300,000 to pipeline segment margin.

Refinery Services segment margin for the first quarter of 2010 was $13.3 million, an increase of $500,000 from the comparative period in 2009.

NaHS sales volumes increased due to improvements in macroeconomic conditions which increased the demand for NaHS. We have seen notable improvements in demand from some copper and molybdenum miners as well as some improvement from our industrial activities customers including paper and pulp and tanning industries. Caustic soda sales volumes also improved over the first quarter of 2009.

However, caustic soda prices declined as market prices averaged approximately $270 per dry short ton during the first quarter of 2010 compared to $830 per dry short ton in the first quarter of 2009. Cost-effective timing of our purchases and aggressive management of our processing costs have helped contribute to the segment margin. Supply and logistics segment margin was $4.5 million in the first quarter of 2010 compared to $6 million in the first quarter of 2009. As mentioned above, the narrowing of quality differentials and contango pricing conditions during the period negatively affected segment margin by $600,000.

Additionally, net inventory in refined products actually increased over the quarter, and the net unrealized margin carried on the balance sheet but not yet recognized in segment margin grew by $1.7 million over the quarter. The barge operations at DG Moraine decreased segment margin by $800,000 comparatively as average charter rates declined due to reduced refinery utilization in response to economic conditions. While DG Marine's barge operations are included in segment margins, they are excluded from available cash before reserves.

Our Industrial Gases segment margin declined $500,000 between the quarterly periods, primarily due to our 12% decline in volumes delivered to our customers. Volumes decreased as customers in consumer-related businesses such as the food industry reduced purchases in response to the economic conditions. The average sales price of CO2 was consistent quarter to quarter.

Interest cost, corporate and general and administrative expenses, maintenance capital expenditures and income taxes to be paid in cash affect available cash before reserves. Included in these components for the first quarter of 2010 were nonrecurring charges totaling $1.8 million related to the February 2010 sale of our general partner. Furthermore, available cash before reserves was reduced by approximately $500,000 related to exercises of stock appreciation rights at greater than normal quarterly exercise rates. Some of this increased activity related to the sale of the general partner.

In addition to factors impacting available cash before reserves, net income included the effect of several non-cash charges and credits. Depreciation and amortization expense totaled $13.4 million for the first quarter, a decrease of $2 million between the quarterly periods, primarily as a result of lower amortization expense on intangible assets.

In the first quarter of 2010 we recorded a credit of $2.2 million to general and administrative expenses related to the difference in the ultimate settlement value of the equity-based compensation arrangement between our former general partner and members of our management team. In the prior-year quarter the charge related to these arrangements was $2.1 million, a change of $4.3 million between the periods.

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

As we've discussed today, we're fairly confident we've seen the bottom and in fact are on the growth slowed for our businesses. Obviously, there continues to be a great amount of economic and political uncertainty out there, but our conservative capital structure and continuing relatively high distribution coverage ratio gives us a lot of comfort.

As capital markets have continued to improve and macroeconomic activity has rebounded, we believe there are more and more opportunities for us to grow through acquisitions that make sense for the partnership. In any event, we will never lose sight of the continuing need to integrate and capitalize on our existing businesses to hopefully continue our history of delivering increased distributions.

We are excited to have the Quintana Group, members of the Davidson family and other long-term investors in our GP, on board. With their support, encouragement and participation we plan on working creatively and tirelessly to deliver long-term value for all our stakeholders.

With that I'll turn it back to Christine for any questions. Thank you.

(Operator instructions) Ron Londe, Wells Fargo.

I hesitate to ask this question, but I'm going to ask it. Have you seen any positive or negative effects on your businesses from the oil spill in the Gulf?

We've not really seen any effect whatsoever on any of our operations and businesses. And I think at this point the Coast Guard has basically said that there has been no significant effect on commercial operations in general in the petroleum industry. So we've not seen any effects on it. A very unfortunate situation.

From the standpoint of the NaHS business, did you see any change in supplying Chile, positively or negatively, after the earthquake there? And can you give us a more in-depth rundown of what's going on in the NaHS business?

We had a few short-term dislocations as some of the operations at the ports on the Pacific side were sorting out operations after the earthquake. But, as a practical matter, it did not affect ultimately the imports of NaHS or the exports of copper and moly out of the mining operations. I think, as a general comment on NaHS, the large volume mining customers primarily were the ones to leave the demand side in the year-ago period, and they're certainly the ones that are providing the rebound and the growth that we're seeing. And as I've mentioned in our prepared remarks, so far in the second quarter we are very encouraged that that trend is continuing.

(Operator instructions) John Edwards, Morgan Keegan & Co., Inc.

The run rate for the depreciation and amortization, because it came down -- I think, Bob, you indicated it came down a bit. What's a good run rate now for that?

John, we've always experienced, particularly in the amortization of intangible assets that were acquired principally in the Davison acquisition, those are on a fairly good declining rate. So the rate, for a while, will continue to decline as those assets are quickly depreciated off the balance sheet. They have a short life. In addition to that, we had some other assets toward the end of the depreciable lives that provided slightly decreased pressure on the rate as well.

I would expect, in the near-term, for the quarters to continue to see a gradual decline off of the current rate.

Could you basically talk a little bit, as far as you've commented, the NaHS and caustic soda volumes are recovering. Can you give a little more color or a little more detail on how you think that's going to ramp?

Yes. I think we're -- as I said, we are very encouraged, as April looks like it very well is going to turn out to be the largest monthly sales volumes that we've experienced in about a year and a half. If the trend continues and our order book holds in, as we anticipate that it -- as it currently looks, that we feel comfortable that we are ramping back towards 150,000-160,000 ton a year run rate that we experienced for '05, '06, '07 and '08, before we had the economic dislocations.

Do you expect to get to that level, do you think, by the end of this year?

We would hope, as trends continue, we think it would not be unreasonable, hopefully, later in the year, that we would get to that kind of annualized run rate.

You talked about -- as far as the tariff from the pipeline, Bob, you had mentioned that adjusted last year. What's your expectations now for adjusting that this year, in July?

John, we think when July comes this year, absent some dramatic change in the underlyings there that we will actually see the rate decline and not be an increase.

So a slight decline? You're talking like 2% type magnitude or so?

Probably 2%, something in that range.

There are no further questions in the queue at this time. I would now like to turn the floor back over to management for closing comments.

Thank you very much, and we will talk to you in another 90 days, if not sooner. Thanks.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.