Genesis Energy LP (GEL) 2010 Q2 法說會逐字稿

Welcome to the 2010 second-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 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 genesisenergy.com, where a copy of the press release we issue 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 press release, the improvement in our net operating margins over the 2009 second quarter is primarily driven by real increases in demand for our products and our service capabilities. With refinery utilization in PADD II and PADD III, which is most important to us given our geographical footprint, in the low to mid 90% ranges we would expect our Pipeline and Supply and Logistics segments to be performing quite well, and indeed they are.

In our Refinery Services segment, where we primarily remove sulfur in the crude oil at our refining partners' facilities, we have seen a dramatic recovery in the demand for NaHS, the byproduct we receive for performing such sulfur removal services.

The worldwide demand for copper, molybdenum, and pulp is very, very strong. This is actually quite an interesting aspect of our business. We have indirect exposure to growing economies worldwide that have a voracious appetite for the commodities in which NaHS is used somewhere in their production chain.

Absent a significant double-dip in worldwide macroeconomic activity, we believe these trends in operating environment bode very well for the Partnership's future.

Last week we announced the acquisition of the 51% interest in DG Marine, our inland tank barge joint venture, that we didn't already own. Under current market conditions, we believe the acquisition rollup could add as much as $2.5 million to a full quarter's available cash before reserves. The barges have become an increasingly important part of our business to provide integrated services upstream, inside the fence, and downstream of our refinery customers.

In late June we amended and extended our bank credit facility, increasing total commitments and extending this maturity for a full five years. The amended facility gives us a much more flexible manner of financing the inventory of crude and products we build upstream and downstream of our refining customers. We appreciate the confidence and trust our banking partners have shown in us.

Before I turn it over to Bob I want to sincerely thank all of our employees. Their dedication to working hard without ever compromising safety or environmental responsibility is part of our culture and an immeasurable reason Genesis continues to deliver solid operating and financial results.

Thank you, Grant. I will discuss the key differences in our second-quarter results from the second 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 did not have a corresponding impact on our earnings or available cash flow.

For the 2010 second-quarter, available cash before reserves improved to $26.1 million as compared to available cash before reserves for the second quarter of 2009 of $22.2 million. Net income attributable to the Partnership for the second quarter of 2010 was $14.2 million or $0.29 per unit as compared to net income attributable to the Partnership of $4.5 million or $0.13 per unit for the second quarter of 2009.

Turning to our operating segments, results from our Pipeline Transportation segment improved to $11.4 million, a $1.1 million increase when compared to the second quarter of 2009. Volumes transported on our Jay System increased approximately 5,100 barrels per day in the second quarter of 2010 principally due to increased volumes from Little Scandia Creek, which had been shut-in for most of 2009 due to low crude oil prices and maintenance. Additionally, the Castleberry extension of our Jay System allowed us to access additional production in the area.

Other factors that contributed to the increase in segment margin were the effects of higher crude oil prices on revenues from pipeline loss allowance volumes, and increased tariff rates of 7.6% on our Jay and Mississippi Systems that were effective in July 2009.

Refinery Services segment margin for the second quarter of 2010 was $16.2 million, an increase of $3 million or 23% from the comparative period in 2009. NaHS sales volumes increased by approximately 17,400 dry short tons or 83% as improvements in macroeconomic conditions impacted market prices for copper and molybdenum, thereby increasing the demand for NaHS.

We have seen notable improvements in demand from copper and molybdenum miners in South America as well as the Western United States, and to a lesser extent from our industrial activities customers, including pulp and paper and leather tanning industries. The average sales price of NaHS declined by 20%, because the pricing in the majority of our sales contracts for NaHS included an adjustment for fluctuations in commodity benchmarks, freight, labor, energy cost, and government indexes. The frequency at which lease adjustments can be applied vary by geographical region and supply point.

Caustic soda sales volumes also improved over the second quarter of 2009. However, declines in caustic soda market prices reduced revenues from these activities.

Supply and Logistics segment margin was $7.2 million in the second quarter of 2010 compared to $6.6 million in the second quarter of 2009. Increased access to heavy product storage capacity leased from third parties and to barge transportation services through DG Marine increased segment margin by $600,000.

Volumes from crude and petroleum products increased 5.1% between the periods. However, the narrowing of quality differentials and contango pricing conditions during the period slightly depressed the contribution to segment margin of these additional volumes.

The barge operations of DG Marine increased segment margin by $300,000. The increase resulted from improved contractual terms and the effect of having the entire fleet available throughout the second quarter of 2010.

While DG Marine's barge operations are included in the segment margin, they are excluded from available cash before reserves. Beginning in August 2010, available cash generated by DG Marine will be included in available cash before reserves as a result of the acquisition of the remaining 51% interest in the joint venture.

Our Industrial Gases segment increased slightly between the quarterly periods primarily due to a 5% increase in volumes delivered to our customers. Volumes increased as customers in consumer-related businesses such as food industry increased purchases in response to improving economic conditions. The average sales price of CO2 was consistent quarter-to-quarter.

Interest costs, corporate, general, and administrative expenses, maintenance capital expenditures, and income taxes to be paid in cash affect available before cash before reserves. Interest costs increased by $500,000 in the second quarter of 2010 due to higher average debt levels.

Corporate, general, and administrative expenses excluding non-cash items were $900,000 more in 2010, primarily related to an increase in personnel and other compensation-related charges. Somewhat offsetting these costs, proceeds from asset disposals in the second quarter of 2010 were $700,000 higher than in the 2009 second quarter.

In addition to the factors impacting available cash before reserves, net income included the effect of several non-cash (technical difficulty) charges and credits.

Depreciation and amortization expense totaled $13.6 million for the second quarter, a decrease of $2.5 million between the quarterly periods, primarily as a result of lower amortization expense recognized on intangible assets. Unrealized gains on derivative transactions totaled $1.6 million for the 2010 quarter compared to $300,000 in the 2009 second quarter.

Non-cash compensation for employees decreased $3 million in the 2010 quarterly period from the $3.2 million recorded in the corresponding 2009 period. The decrease was the result of a settlement in the first quarter of 2010 of a compensation arrangement with our senior management team and the former owner of our General Partner.

I will now discuss principal differences between the first six months of 2010 and 2009. For the first six months of 2010 we reported net income attributable to the Partnership of $21.1 million or $0.36 per unit. In 2009, we reported $9.7 million or $0.29 per unit.

As discussed last quarter, available cash before reserves in the first quarter of 2010 was negatively impacted by $5.4 million of unusual items. As a result, available cash before reserves generated during the first half of 2010 was $44.2 million compared with $43.5 million for the same period in 2009.

Excluding the effect of the unusual items, we generated $49.6 million in available cash year to date to 2010. Including the effects of the unusual first-quarter items, segment margin for the six months ended June 30, 2010, was $68.5 million, an increase of $3.5 million when compared to the same period in 2009.

Increases in Pipeline Transportation segment margin and Refinery Services segment margin of $1.3 million and $3.5 million, respectively, offset slight decreases in our Supply and Logistics and Industrial Gases operations.

Pipeline Transportation segment margin increased $1.3 million to $21.8 million for the first half of 2010. Volumes of the Jay System increased approximately 5,100 barrels per day due to restarted production from wells that had been shut-in for most of 2009 and the effect of our Castleberry extension of that system, as previously discussed. Volumes on the Texas and Mississippi Systems declined between the periods due in large part to maintenance in the first quarter of 2010 on the Texas system.

The combination of increased tariff rates on our crude oil pipelines and increased revenues from pipeline loss allowance volumes due to higher crude oil prices increased the Pipeline segment margin by $1.2 million. However, our pipeline operating costs increased $900,000, largely attributable to the pipeline integrity test on a segment of our Texas pipeline in the first quarter of 2010 that cost approximately $600,000.

Results from our Refinery Services segment improved to $29.5 million from $25.9 million in the prior-year period. NaHS sales volumes increased 51% as a result of the increased demand from mining companies and other industrial customers. The related revenue increase was only 5% due to the effects of the pass-through of fluctuations in commodity benchmarks and transportation.

Caustic soda sales volumes increased 24%. However, revenue decreased 57% as the market prices for caustic soda decreased from an average of $640 per dry short ton in the first half of 2009 to an average of $304 per dry short ton in the first half of 2010. Delivery costs increased as freight demand and fuel prices increased in the 2010 period.

Our Supply and Logistics operations decreased $800,000 to $11.7 million. The additional opportunities we experience for heavy-end petroleum products increased segment margin by $2.3 million.

However, this only partially offset the impacts attributable to the contraction of the contango pricing structure in the crude oil markets. Quality differentials and the narrowing of contango pricing decreased the contribution to segment margin of our crude oil activities by $2.7 million.

The contribution from DG Marine's inland marine operations for the first six months of 2010 declined $500,000 as long-term charter agreements began to expire during the early part of 2009. As these charter agreements expired, average charter rates declined for the remainder of 2009 as the tows operated under spot contract arrangements.

The decline in segment margin was partially offset by the addition of four newly constructed barges placed in service during the second quarter of 2009 as well as a gradual improvement in the charter terms in the latter part of the first six months of 2010.

Industrial Gases segment margin decreased by $400,000 as a result of a slight decrease in volumes delivered to our customers, in combination with an increase in the average transportation rates of 9%.

Cash corporate G&A expenses increased $3.3 million, primarily due to the first-quarter unusual item of $2.3 million of expenses incurred related to the sale of our General Partner. Other factors increasing corporate G&A cost included increased bonus expense and exercises of stock appreciation rights.

Increased cost of debt under the Genesis credit facility increased $700,000 due to higher average debt outstanding between the periods. Excluding the factors affecting available cash before reserves, net income was affected by a decrease in depreciation and amortization expense of $4.5 million as a result of lower amortization expense recognized on intangible assets.

Unrealized gains on derivative transactions totaled $2.1 million for the first six months of 2010, compared to $200,000 in the 2009 period. Non-cash compensation for employees decreased $6.4 million primarily due to the settlement of the compensation arrangement between our senior management team and former General Partner.

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

Thanks, Bob. I really don't have much to add other than just to reiterate that we at Genesis are pretty excited about our future. We believe we have substantial flexibility and expertise to be opportunistic as we identify internal and external opportunities that we believe will build long-term value for the partnership.

With that, I will turn it back to the moderator for any questions.

(Operator Instructions) Ron Londe, Wells Fargo.

Thanks. You mentioned the pipeline integrity test cost of around $600,000, which is a decent amount of money. Can you give us some color on that, what your thoughts are there?

That really was an expense incurred in the first quarter. It was a required periodic pressure test and repair in certain spots of our Texas System, and to increase -- we actually were able to increase the maximum operating pressure of the line.

So the out-of-pocket expense was about $600,000 plus the opportunity cost, i.e. the foregone revenue associated with the test was about $200,000. But that was all incurred in the first quarter.

The only reason we mentioned it today was to try to tie back to the year-to-date 2010 back to 2009.

Was there a strategy involved in that test, for running that test? Or was that a routine test?

It was to up the maximal operating pressure of the line in anticipation that we would hope to increase or have the opportunity to potentially increase throughput through that system.

Okay. Also, it's obvious the NaHS business is a fairly cyclical business, dependent on copper, which obviously goes up and down with the economies of the world. But there is a couple of things that seem to be happening out there, especially in South America.

There is a couple of major companies that are talking about merging. I think there is Vale -- if I'm correct pronouncing it correctly, or Vale -- and Paranapanema SA are thinking about merging.

Vale seems to be increasing their capacity to around -- it looks like about 30% next year. They have a mine in Zambia that is going to start producing at 650,000 tonnes per year in 2013. Brazil is increasing the market for copper by about 400,000 tonnes.

How are you set up to try to capitalize on that incremental new capacity that is going to be coming on, above and beyond what is going on cyclically in the marketplace for copper?

I don't -- I think you probably somewhat overemphasized the cyclicality of it. I think with the economic tsunami of late 2008-2009 or the Great Recession, however you want to characterize it, that that is something that precious metal and copper haven't really seen in the historical perspective. In December of 2008 copper prices got as low as $1.20 a pound as I recall, and yet that was still above the apparent cash cost of producing copper.

As a result, we have seen -- and I mentioned in the prepared remarks, our view of the world is it is real demand. It is growing into the BRIC companies, Brazil, Russia, India, and China. Current copper prices are in the $3.30 range (technical difficulty). And we have seen a substantial recovery in our sales to our mining customers, as well as a number of their -- as you point out, a number of their expansion projects that were shelved in 2009 and early 2010 are certainly coming back onto the front burner.

So we keep a very close eye on it, keep a very close forward order book. And we are always looking at opportunities to look at other refinery locations where we can provide the sulfur removal services and increase our flexibility on taking the NaHS in kind.

I will also comment relative to NaHS that it is not just mining that is relatively strong to the year-ago period, but it is also the pulp business is very, very strong. Again, primarily driven in large part by worldwide demand, although US demand for non-newsprint type paper products, whether or not its containerboard or other packaging materials for packaging things, is remarkably strong.

Okay, thanks.

Gabe Moreen, Bank of America Merrill Lynch.

Thanks, good afternoon, everyone. Two questions for me. One is contango kind of hit briefly I guess in the second quarter. I was wondering if you were able to lock in some margins, and it's not a big deal for you guys, but just whether that is going to show up in the third quarter.

We did have some contango opportunities in the second quarter. It's a very small part of our business. But we were able to take advantage of it when it appeared.

But due to hedge accounting, in essence, because it is hedging crude oil, we basically recognize the margin associated with the contango hedge in the period in which the hedge is placed and the physical barrels go into storage.

Okay. Then in terms of a bigger picture question, I don't know if I will get an answer to this but I will try fishing anyways. With the DCF showing up with the consolidation from DG Marine, that is an appreciable uptick obviously in your DCF.

Any thoughts to an appreciable uptick in the distribution? Or do you think you are just going to keep going, steady state, quarter by quarter here?

I think that that is a discussion that the Board has on a quarterly basis. We will determine distribution policy at the discretion of the Board at our next meeting.

That's what I thought I would get. Thanks a lot.

John Edwards, Morgan Keegan.

Yes, good afternoon, everyone. On your tariff adjustment, you mentioned it was 7.6% last year. What are you looking for this year going forward?

Yes, it would be down about 2% from last year because of the --

Yes, the FERC formula?

Yes.

Okay, all right.

That is applicable only on the Mississippi and Florida Systems.

Right. And then you mention that pricing declined on NaHS by 20% for a whole host of reasons. What is your outlook going forward?

Well, again, the actual sales price is not what we look at. It is very much a fixed margin business. The largest cost component to it is caustic soda, and the majority of our contracts are direct pass-through of the ultimate price of caustic soda. So that is what leads to the fluctuations, but the margin is relatively constant.

Okay, so the margin didn't change. The margins remain stable?

Correct.

All right. Then what is a good run rate now for depreciation/amortization? I think you are at 13 something and change. Is that a reasonable run rate going forward?

John, that is a reasonable run rate. We continue to amortize off the intangible assets that we have, but that decline is slowly slowing as we get later in the life of those. So I would take the current run rate as being reasonable at this point.

Okay, and that includes the other half of DG Marine? Wouldn't it go up a little bit for that?

No, it's all been consolidated. What you have seen in the financial segments consolidates 100%; and then historically showing the minority interest in that portion.

Okay, great. Then on the NaHS outlook, obviously a high-water mark I think was in the mid-40s. You hit 38,000 tons this quarter. How are volumes tracking now for the third quarter?

Well, we are about five weeks into the third quarter, but we have seen nothing at this point inconsistent with the run rate of the second quarter. I think as I mentioned we are reasonably encouraged with our forward order book on NaHS for the remainder of the year.

Okay. So it is safe to say your forward order book is a lot higher than -- I guess it is tracking higher than the second order pace?

It is certainly not inconsistent with the second-quarter pace.

Okay, I will let it go at that. All right. Then, what is your CapEx outlook now for the rest of the year?

We have nothing on the drawing board of substance. We have a continuing implementation -- well, let me step back and talk about maintenance capital a little bit, which was shut up. That typically that runs in the neighborhood of $1 million to $1.5 million a quarter, so that would be a reasonable expectation for the last couple of quarters of the year.

One of the larger ticket items -- and I will let Bob respond or talk more about it -- but as we have mentioned before, is the conversion and implementation of a new IT system. Want to give a little more color, Bob?

Yes, John, from a financial impact standpoint, we are on track, we remain on track to complete the system around the end of the year and therefore to incur all the expenditures. The original projections of the system are still fairly consistent with our expected outcomes at this point.

All right. And I'm sorry, liquidity? I'm sorry. What is your liquidity now? I missed that.

As far as our outstanding debt balances?

No, no, just what -- I mean your available liquidity.

We have available to us the entire $525 million of the new facility.

Okay. The whole thing? Okay, great. Thank you.

(Operator Instructions) David Fleischer, Chickasaw Capital Management.

Hey, Grant, Bob. You sounded a lot more optimistic in your press release statement on possible internal, external investments. I guess it sounds like maybe you're expecting something soon or -- and I guess you can't comment so much on that.

Is -- some of these things that you are looking at, what size you might consider doing, now that you have got maybe call it a stronger financial situation.

I think as everyone knows, we are constantly evaluating opportunities. We have always maintained that we don't have an overly capital-intensive existing footprint. But we do believe that we have high-return kind of opportunities as they arise off of our footprint.

For us to spend large amounts of money, it would probably be in acquisitions. I think one of the other things that we have tried to maintain is a discipline that we are very much concentrating on, and have been for a long time, of building a business and not just a collection of assets. So I would -- what we would in all likelihood be most interested in looking at are additional pipeline opportunities, storage opportunities, perhaps some marine transportation assets, other refinery-related service opportunities.

From a price point of view, we have a very conservative credit metric. While we have the full $525 million available to us, it has an accordion feature that we could expand the senior secured piece. And as most of you know, the public debt markets are quite available to us, even though we haven't been a first time this year at this point. We believe that we could do that also.

So we are not looking to do a deal just to do a deal; that we are very disciplined in our analysis; and -- but we are looking at a number of things.

Okay. Well, let me ask one other specific question then. You mentioned how NaHS prices have come down, tied to some indices. Can you just tell us how we can forecast those prices, looking at what items would most help us forecasting NaHS prices?

Clearly the number-one cost component is caustic soda. And as we said in the release, I think on a period-over-period basis, caustic soda Gulf Coast indexes have gone from around $600 a ton to around $300 a ton. Today, they are in the $350 to $360 a ton.

That is not the only component that goes into it, but that is -- if we were trying to do that. But again, responsive to one of the earlier questions, we view it very much as a -- within reason -- as a fixed margin business, because most of that is incurred and passed on and is understood by the consumers of NaHS.

Okay, thank you.

Thank you. Ladies and gentlemen, we have no further questions at this time, so I'd like to turn the floor back to management for any closing comments.

Again, thanks, everybody, and we will talk to you in 90 days if not sooner. Thank you very much.

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