Genesis Energy LP (GEL) 2010 Q3 法說會逐字稿

Welcome to the 2010 third-quarter conference call for Genesis Energy. Genesis has four business segments. The Pipeline Transportation Division is engaged in 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 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 we mentioned in the press release, our existing businesses had another solid quarter with net operating margin increasing approximately 4% sequentially and over 11% from the year earlier quarter. The increasing performance continues to be driven by steady volume growth. As Bob will discuss further, we've seen improvement and (inaudible) on our crude oil and CO2 pipelines.

Our refinery services division continues its strong improvement in volumes. We believe this improvement is driven by positive changes in the global economy, in particular the recovery of economies outside the United States or Europe, including developing countries. As the demand in the countries increases for base metals, such as copper and molybdenum, and for paper products and packaging materials, demand by our mining customers and pulp and paper customers for NaHS has improved.

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

During the quarter, we also completed the acquisition of the 51% interest in DG Marine, our inland tank barge joint venture, that we didn't already own. 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.

Last week, we made an announcement of the execution of an agreement to acquire a 50% interest in Cameron Highway Oil Pipeline Company or CHOPS for $330 million in cash. Included in the purchase price, net to the 50% acquired interest is approximately $50 million worth of crude oil line fill and approximately $9 million worth of pumping equipment not yet installed at offshore locations to allow CHOPS to operate at its design capacity.

As we indicated in the press release, we believe that Cameron Highway is an attractive investment underpinned by the cash flows tied to large dedicated anchor fields, the majority of which are not yet fully developed. Cameron Highway has the capacity and is geographically positioned to benefit from continued development in the Gulf of Mexico, as well as hopefully give rise to future midstream service opportunities.

We are very excited about the opportunity to partner with Enterprise Products Partners, LP, the operator of Cameron Highway and owner of the other 50% interest. This is a very strategic investment for us and it further compliments the integrated midstream services we provide to Gulf Coast producers and refinery complexes, including Texas City and Port Arthur, where we currently have limited activities.

As senior management looks forward to opportunities to deliver future value to the Partnership's common unit holders, we have closely examined our marginal cost of equity capital. Given some of the Partnership simplifications and or IDR restructurings that have recently occurred in the MLP space, we felt compelled to examine such potential transactions, which could have the desired effect of lowering our marginal equity cost of capital and further aligning the interest of our general partner with those of our limited partners.

It is impossible at this time to determine whether a simplification restructuring will occur or how it might be restructured, but senior management believes that under the right circumstances, the most desirable simplification restructuring transaction would result in the complete elimination in one form or another of our IDRs. Due to the fact that we're in the preliminary stages of consideration, we won't have any comments beyond our prepared remarks and we feel it would be premature and inappropriate to respond to any questions related to this area.

Before I turn it over to Bob, I want to sincerely thank all of our employees. Their dedication for working hard without ever compromising safety or environmental stewardship 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 third-quarter 2010 results principally as compared to the third quarter of 2009. My discussion will focus on our segment margin, as fluctuations in our revenues resulting from changes in the commodity price levels of crude oil and petroleum products do not have a corresponding impact on our earnings or available cash flow.

For the 2010 third quarter, available cash before reserves improved to $28.1 million as compared to available cash before reserves for the third quarter of 2009 of $23.7 million. Net income attributable to the Partnership for the third quarter of 2010 was $5.1 million or $0.12 per unit as compared to net income attributable to the Partnership of $4.3 million or $0.14 per unit for the third quarter of 2009. As we said in the press release, net income available for the common unit holders for the third quarter of 2010 was negatively impacted by approximately $6.4 million in non-cash charges or approximately $0.16 per common unit when compared to the second quarter of 2010.

Turning to our operating segments, results from our Pipeline Transportation segment improved to $11.9 million, a $1.7 million increase when compared to the third quarter of 2009. Increased volumes transported on our crude oil and CO2 pipeline systems were the primary drivers of this increase.

The Jay System volume increased approximately 6,000 barrels per day in the third quarter of 2010 principally due to increased volumes from Little Escambia Creek, which had been shut-in for most of 2009 due to low crude oil prices and maintenance. Also, the Castleberry extension of our Jay System allowed us to access additional production in the area. Higher crude oil prices on revenues from pipeline loss allowance volumes also contributed to the increase in segment margin.

Refinery services segment margin for the third quarter of 2010 was $16.2 million, an increase of $3.5 million, or 28% from the comparative period in 2009. NaHS sales volumes increased by approximately 17,200 dry short tons or 26% as demand for base metals such as copper and molybdenum had increased dramatically in response to improvements in the world economies as previously discussed by Grant.

As a result of similar factors, we have also seen notable improvements in demand from our customers in the pulp and paper industry.

Caustic soda sales volumes declined 20% or approximately 5,500 dry short tons. Despite the decrease in caustic soda sales volumes, revenues from sales of caustic soda increased 18% due to an increase in caustic soda prices. Average index prices for caustic soda increased from approximately $198 per dry short ton in the third quarter of 2009 to $378 per dry short ton in the 2010 comparable quarter.

Supply and Logistics segment margin was $7.7 million in the third quarter of 2010 compared to $9.4 million in the third quarter of 2009. Fluctuations in the effects of quality differentials on pricing of petroleum products limited the contribution to segment margin. We were able to partially offset the decline in our segment margin attributable to the effects of quality differentials by increasing our volume by 50%. Our volume increase was primarily attributable to increased access to heavy product storage capacity and to barge transportation services, including DG Marine.

In the third quarter of 2009, we held an average of 220,000 barrels of crude oil in storage to take advantage of contango market conditions. In 2010, contango market conditions had narrowed and we reduced the volumes of crude oil stored to 170,000 barrels. Fluctuations in price differentials between different grades of crude oil increased margins on our gathering and marketing activities, offsetting the narrowing of contango market conditions.

Our Industrial Gas segment margin increased slightly between the quarterly periods primarily due to a 7% increase in volumes delivered to our customers. Volumes increased as customers in consumer-related businesses such as the food industry increased purchases in response to improving economic conditions. The average sales price of CO2 per Mcf decreased 4%.

Corporate, general, and administrative expenses, maintenance capital expenditures, income taxes to be paid in cash, and interest costs affect available before cash before reserves. Corporate, general, and administrative expenses excluding non-cash items were $700,000 more in the 2010 period, primarily related to an increase in personnel and other compensation-related charges. Interest costs related to our revolving credit agreement increased by $1.8 million in the third quarter of 2010 due to higher average debt levels. The increase in debt is primarily attributable to the acquisition of the 51% of DG Marine we did not own and the replacement of borrowings under the DG Marine credit facility with borrowings under our credit facility.

Additionally, while not impacting available cash before reserves, interest expense increased by approximately $1.3 million associated with our share of the cost of terminating the DG Marine interest rate swaps and a write-off of facility fees related to the termination of the DG Marine credit facility.

In addition to the factors impacting available cash before reserves, net income included the affect of several non-cash charges and credits. Depreciation and amortization expense totaled $13.5 million for the third quarter, a decrease of $2.3 million between the quarterly periods, primarily as a result of lower amortization expense recognized on intangible assets. Unrealized losses on derivative transactions totaled $2.9 million for the third quarter of 2010 compared to $200,000 in the 2009 third quarter. Non-cash compensation for employees increased $500,000 in the 2010 quarterly period from the $4.5 million recorded in the corresponding 2009 period.

I will now discuss principal differences between the first nine months of 2010 and 2009. For the first nine months of 2010, we reported net income attributable to the Partnership of $26.2 million or $0.48 per unit. In 2009, we reported $14 million or $0.43 per unit. Available cash before reserves generated during the first nine months of 2010 was $72.3 million compared with $67.3 million for the same period in 2009.

As discussed in our first quarter 2010 release, available cash before reserves in the first quarter of 2010 was negatively impacted by $5.4 million of unusual items. Excluding the effect of the unusual items, we generated $77.7 million in available cash year to date in 2010. Without adjusting for the negative impact of non-recurring first quarter items, segment margin for the first nine months ended September 30, 2010, was $107.9 million, an increase of $7.6 million when compared to the same period in 2009.

Increases in Pipeline Transportation segment margin and Refinery Services segment margin, and Industrial Gases segment margin of $2.9 million, $7 million, and $200,000 respectively, offset a $2.5 million decrease in our supply and logistics operations.

Pipeline Transportation segment margin increased $2.9 million to $33.8 million for the first nine months of 2010. Volumes on the Jay System increased approximately 5,400 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. Volumes on the Texas and Mississippi Systems declined slightly 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 also increased the Pipeline segment margin by $1.6 million. However, pipeline operating costs increased $1 million, largely attributable to the negative impact of $800,000 associated with the pipeline integrity test on a segment of our Texas pipeline in the first quarter of 2010.

Results from our Refinery Services segment improved to $45.7 million from $38.6 million in the prior-year period. NaHS sales volumes increased 42% as a result of increased demand from mining companies and other industrial customers. As we have discussed, the improvements in the global economy, primarily in developing nations, have led to increased demand for copper, molybdenum, and paper products. The increased global demand has affected our NaHS customers resulting in an increase in demand for NaHS from us.

Caustic soda sales volumes increased 5%. However, revenue decreased 43% as the market prices for caustic soda decreased from an average of $493 per dry short ton in the first nine months of 2009 to an average of $329 per dry short ton in the first nine months of 2010. As market price changes for caustic or a component of our pricing for NaHS and caustic to our customers, as well as the price we pay for caustic, the affect of market price fluctuations for caustic on our results is mitigated. Delivery costs increased as freight demand and fuel prices increased in the 2010 period.

Our Supply and Logistics operations decreased $2.5 million to $19.5 million. The improvements in our heavy-end petroleum products opportunities only partially offset the impacts of the narrowing and contango pricing and differentials in the crude oil markets. The effects of quality differentials on crude oil prices and the contango price market narrowed beginning late in the fourth quarter of 2009 and extended through most of the third quarter of 2010, decreasing the effects of contribution to segment margin of our crude oil activities by $2.2 million.

The contribution from DG Marine's inland marine operations in the first nine months of 2010 declined $500,000 as long-term charter agreements began to expire during the early part of 2009. However, increased opportunities in 2010 to handle the heavy-end petroleum products due to increased access to transportation services, including those of DG Marine, and storage facilities, increased segment margin partially offsetting the effects of the two factors above.

Industrial Gases segment margin increased slightly by $200,000 as a result of increased available cash generated by our equity investees, offset by a 6% increase in average CO2 transportation rates.

Cash corporate G&A expenses increased $3.9 million, primarily due to the first-quarter unusual item of $2.3 million of expenses related to the sale of our General Partner. Other factors impacting corporate G&A cost relate to personnel cost, including increased bonus expense and exercises of stock appreciation rights.

Interest cost on debt under Genesis' credit facility increased $2.5 million due to higher average debt outstanding between the periods, primarily related to the acquisition of the other 51% of DG Marine, and increased activities in our supply and logistics area affecting inventory volumes. Excluding the factors affecting available cash before reserves, net income was affected by a decrease in depreciation and amortization expense of $6.9 million as a result of lower amortization expense recognized on intangible assets.

Unrealized losses on derivative transactions totaled $800,000 for the first nine months of 2010, compared to $100,000 in the 2009 period. Non-cash compensation for employees decreased $5.9 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 to just 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. Thanks.

Thank you. We will now be conducting a question and answer session. (Operator Instructions) Our first question comes from the line of Gabe Moreen with Bank of America Merrill Lynch. Please proceed with your question.

Morning guys.

Morning Gabe.

Two questions if I could. One two-part questions on the entry into the Gulf here with Cameron Highway. Grant, can you talk about I guess whether you feel this I guess is a platform for further possible M&A in the Gulf. And if so, given I think more variable cash flow profile coming from Gulf assets, whether you feel you'd need to bulk up onshore or elsewhere in order to balance that out if you pursue Gulf stuff further.

Basically, as we stated that we viewed it as a quality standalone investment underpinned by the dedication of large fields and it's geographically positioned to benefit from additional developments. We don't necessarily view the Gulf as variable as you might have implied in your comments, but we do think that in addition to allowing us, hopefully generating additional investment opportunities like this that we want to emphasize the fact that it delivers into Texas City and Port Arthur where we have limited other presence and services that we currently render for the major refiners and those two refining complexes. And we see that this is a logical extension to what we're trying to do with all of our businesses in the Gulf Coast.

Okay, got it. And then if I could ask a question on the supply and logistics results for the segment. I don't know if there's any more -- possibly to get more color on the quality differentials you were talking about that were kind of a drag, if you've got any particular examples maybe worth citing.

Well, I think that general macroeconomic conditions as well as the underlying crude oil price, which in our opinion is somewhat has quite a bit of currency noise in it as opposed to fundamental noise, it causes some dislocations under historical quality [diffs] and relationships between refined products and crude oil. So with a little bit of the volatility that we've seen in crude prices resulting from the weaker dollar has caused some market anomaly, I guess, that manifested themselves in the third quarter.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Barrett Blaschke with RBC Capital Markets.

Hey, guys. Just a quick question on kind of what's your outlook for the financing on the Cameron Pipeline?

As we said in the press release of last Monday that it's our intention to put in permanent financing, which would be a combination of debt and equity.

Okay, any target as to how you would break that out?

We're not willing to comment on that at this point.

Okay. Thank you.

Thank you. Our next question comes from the line of John Edwards with Morgan Keegan. Please proceed with your question.

Yes, good morning everybody. Hey, I think Bob, you mentioned on your comments that the contango had narrowed this quarter versus last year and I was just wondering what was the impact or, I mean, sorry, the volumes went down because of the narrowing contango. What was the impact of that on your numbers this quarter?

John, I'm going to answer it if that's all right.

Oh, that's fine.

Whoever. The -- contango for us is a very small part of our business. It's an opportunistic business. We don't depend on it. We typically would anticipate under reasonably recurring market conditions to generate about $2 million a year in total associated with contango. So it's not a big piece of our business. So I don't think that the year-over-year was significant, but potentially in the range of $300,000 or $400,000 for the quarter.

All right, that's helpful. And then we noticed that the caustic soda and NaHS, the volumes declined sequentially. Can you talk a little bit about that?

The NaHS volumes were down a little bit. We had anticipated making an export shipment by the end of the quarter and we missed the window to load the ship heading to South America. So that somewhat affected the NaHS volumes that were reported for the quarter, but certainly doesn't indicate that the forward outlook is anything other than robust. Caustic sales down a little bit just by virtue of a little bit of lumpiness from quarter-to-quarter, but wouldn't read anything into that in terms of the underlying fundamentals of our caustic distribution business.

Okay. So if the shipment of NaHS slipped to the next, I guess to the fourth quarter, should we expect it to be a little bit lumpy to the high side in the fourth quarter and then kind of go back to more of a gradual recovery in volumes?

Yes, but our shipment sizes are typically the same and the only way that your scenario would unfold is if we made up an extra shipment, and there's no guarantee of that.

Okay.

But we do keep certain amounts of inventories at our terminal locations in Peru and Chile to make sure that the continuing service to our South American customers, even if we do miss a shipment.

Okay. And then you were talking a little bit about I guess volumes in supply and logistics were offsetting quality differentials. And I'll have to admit, I didn't quite follow that. If maybe you could come at us again on that.

I think that, I mean our volumes increased quarter-over-quarter, but because of the quality diffs and the noise, somewhat of the noise caused by the fluctuation in crude oil prices and the relationship to refined products that as a practical matter our per barrel margin was affected negatively.

Okay, well, maybe I'll follow-up with you offline to go into more detail. All right, thank you very much.

Thanks, John.

(Operator Instructions) Our next question comes from the line of Ron Londe with Wells Fargo. Please proceed with your question.

Thank you. Yes, just a little more insight into the NaHS business. Can you give me an idea of what your peak volume would be of refining capacity in general got into the low 90s again, how much NaHS you could make available? I know there's a demand pull that has to happen also, but what kind of capacity could you get up to?

Yes, you're exactly right. I mean it's really a demand driven business, but we have kind of the installed capacity to produce on an annual basis between 160,000 and 180,000 tons, which obviously on an annual basis, which obviously is a function of the run rates at the refinery locations where we have our gas processing facilities.

Okay. Also, can you give us kind of your view of the outlook for the barge business and whether you see any shifts away from shipping number six fuel oil and if you can give me some insight into how much of that number six eventually gets into the export market versus the domestic market?

The utilization rate of our barges is in the -- between 95% and 100% range. It's a combination of both working strictly for third parties, but importantly using the barge capabilities and capacities to support our trucking and terminal operations. And as a general proposition, what we are trying to do with the refined products side on -- that's reported in the supply and logistics is to blend back to number six fuel oil, high-sulfur six fuel oil.

Virtually, the only domestic market for such is the power gen market in Florida, but primarily our targets are to build either barge size cargos, which are 40,000 barrels as a general rule, or export size ship cargos and partial cargos in the 150,000 barrel range, which are destined for international markets for boiler fuel and power generation applications internationally.

Is there a way to break down which is which percentage wise?

The conduction of fuel oil in Florida has been rather low over the last 18 months in large part due to macroeconomic conditions in the state of Florida.

Okay. Thank you.

We have no further questions at this time. I'd like to turn the floor back over to management.

Okay, well, thank you very much and if we don't talk to you sooner we'll talk to you again in about 90 days or so. Thank you.

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