Genesis Energy LP (GEL) 2010 Q4 法說會逐字稿

Welcome to the 2010 fourth-quarter conference call for the 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 stream to remove sulfur at refining operations, 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 (sic). 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, L.P. Mr. Sims will be joined by Bob Deere, Chief Financial Officer; Steve Nathanson, President and COO; and Karen Pape, Chief Accounting Officer.

Thank you and welcome to everyone. We have an interesting discussion today, as Genesis Energy reported for the fourth quarter a $74.7 million net loss, strengthening underlying operational performance of our increasingly integrated businesses, and a record amount of available cash before reserves for the quarter of $29.2 million, as well as a record amount for the year.

The net loss for the quarter is a result of $75.6 million of noncash management compensation expense that was borne entirely by our general partner. As a result of this being attributable to our general partner, our net income per limited partner unit was $0.02 for the fourth quarter.

Our underlying business environment continues to improve. As an example, our Refinery Services Division achieved a further strong improvement in volumes. We believe this improvement continues to be 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 these countries increases for base metals such as copper, molybdenum and aluminum, as well as for paper products and packaging materials, demand by our mining customers and pulp and paper customers for NaSH has improved.

Because of this and the continued strong performance by our other segments, our overall net operating margin increased approximately 6% sequentially and over 22% from the year-earlier period -- quarter.

During the quarter, we also completed the acquisition of a 50% interest in Cameron Highway Oil Pipeline Company, or CHOPC. This is a very strategic investment for us, and it further complements the integrated midstream services we provide to Gulf Coast producers in refinery complexes, including Texas City and Port Arthur, where we historically have had limited activities.

We are encouraged by the recent issuance of deepwater permits and look forward to a recovery of drilling activity in the Gulf of Mexico to continue the development of these world-class domestic oil reserves.

In December, we announced the permanent elimination of the Partnership's Incentive Distribution Rights, or IDRs. In exchange for the IDRs and the 2% economic interest attributable to our general partner interest, we issued 20 million common units and 7 million waiver units to the stakeholders of our general partner.

This transaction reflects a strategic move by us to lower our equity cost of capital through the permanent elimination of our incentive distributions. Over the last four years, we have averaged approximately $300 million in acquisitions and growth capital deployed annually.

By lowering our cost of capital, we hope to strengthen our competitive position in the midstream energy space, and believe this transaction can enhance our ability to hopefully continue to build long-term value for Genesis.

Because of the performance-based structure of the waiver units, the interests of management and the former stakeholders of our general partner are now directly aligned with the holders of our common units, and we are all incented to do what we possibly can to continue our track record of building value for and growing distributions to the holders of our common units.

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 stewardship is part of our culture and an immeasurable reason Genesis continues to deliver solid operating and financial results.

Thank you, Grant. I will now discuss the key differences in our fourth-quarter 2010 results, principally as compared to the fourth 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, petroleum products or chemicals like caustic soda do not have a corresponding impact on our earnings or available cash flow.

As Grant discussed, net loss attributable to the Partnership for the fourth quarter of 2010 was $74.7 million. However, net income available to our common unitholders was $1 million or $0.02 per unit for the period.

For the fourth quarter of 2009, we reported a net loss attributable to the Partnership of $6 million, with net income available to our common unitholders of $3.2 million or $0.08 per unit.

Net income available for our common unitholders for the fourth quarter of 2010 was negatively impacted by approximately $10.7 million of one-time charges related to the acquisition of CHOPC and our IDR restructuring.

More reflective of our underlying operations, available cash before reserves for the fourth quarter of 2010 improved to $29.2 million as compared to $23.7 million for the fourth quarter of 2009. This was an increase of $5.5 million or 23% over the comparable period in the previous year.

Turning to our individual operating segments, results from our Pipeline Transportation segment improved to $14.5 million, a $3.2 million increase when compared to the fourth quarter of 2009. Our 50% ownership interest in Cameron Highway contributed $2.4 million to segment margin for the five weeks that we owned our interest in 2010. Increased volumes transported on our onshore crude oil and CO2 pipeline systems contributed an additional $700,000 and $200,000, respectively, to segment margin.

Refinery Services segment margin for the fourth quarter of 2010 was $17.3 million, an increase of $4.1 million or 31% from the comparative period in 2009.

NaSH sales volumes increased by approximately 6400 dry short tons or 20%. Demand for NaSH has increased as copper, molybdenum and aluminum prices have increased mining activities, and activity levels in the pulp and paper industry have also improved.

We continue to control our costs of operating our processing facilities and logistics associated with our materials. Caustic soda sales volumes increased 4% or approximately 1100 dry short tons.

Supply and Logistics segment margin was $6.7 million in the fourth quarter of 2010 compared to $7.1 million in the fourth quarter of 2009. Crude oil marketing and barge activities increased segment margin by $1.1 million and $900,000, respectively, offsetting a decrease in segment margin from our petroleum products' marketing activities of $2.4 million.

Improvements in blending opportunities and an increase in crude oil volumes of 22% were the primary factors for the increase in crude oil marketing. Margin results increased primarily from improved dayrates and, to a lesser extent, from realized cost efficiencies.

Offsetting these gains, fluctuations in quality differentials on pricing of petroleum products reduced segment margin. In addition, the timing of recognition of the gain or loss on derivative contracts used to hedge our inventory does not always coincide with the recognition of the gain or loss on the sale of the physical inventory.

The fourth quarter of 2010 was negatively impacted by approximately $1 million due to such timing differences.

Our Industrial Gases segment margin increased by $500,000 between quarterly periods, primarily due to our syngas joint venture. In the fourth quarter of 2009, the facilities of the joint venture were undergoing turnaround maintenance activities, which reduced cash available for distribution to the joint venture holders.

Corporate general and administrative expenses, maintenance capital expenditures, income taxes to be paid in cash, and interest costs also affect available cash before reserves. Corporate general and administrative expenses, excluding noncash items, increased $500,000 in the 2010 period, primarily related to the employee compensation costs.

Interest costs not associated with acquisition transactions increased by $3.7 million in the fourth quarter of 2010 as a result of the issuance of unsecured notes and an increase in the interest rate on our credit facility.

DG Marine was excluded from available cash in 2009, and until August 2010, although it was included in the segment margin.

In addition to the factors impacting available cash before reserves, net income included the effect of several noncash charges and credits.

Noncash equity-based compensation expense totaled $75.6 million and $6.5 million in the fourth-quarter periods of 2010 and 2009, respectively, all of which was borne by our general partner, and in the current year associated with the elimination of our IDRs.

Depreciation and amortization expense totaled $13.1 million for the fourth quarter, a decrease of $7.1 million between the quarterly periods, primarily as a result of an impairment charge we took on an investment in the fourth quarter of 2009.

The net loss for the fourth quarter of 2010 also included $10.7 million of one-time transaction costs, reflecting $7.5 million of additional general and administrative expenses and $3.2 million of financing/interest costs related to the acquisition of CHOPC and the IDR restructuring.

I will now discuss the principal differences between the 12-month reporting periods of 2010 and 2009. For the full year of 2010, we reported net loss attributable to the Partnership of $48.5 million. Net income available to our common unitholders, however, was $19.9 million, or $0.49 per unit. In 2009, we reported net income attributable to the Partnership of $8.1 million or $0.51 per unit.

Available cash before reserves generated during the 2010 annual period was $101.5 million compared with $91 million for the same period in 2009, an increase of 11.5%.

Segment margin for the year ended 2010 was $149.6 million, an increase of $15.1 million when compared to 2009. Increases in Pipeline Transportation segment margin, Refinery Services segment margin and Industrial Gases segment margin of $6.1 million, $11.1 million and $700,000, respectively, offset a $2.9 million decrease in our Supply and Logistics operations.

Pipeline Transportation segment margin increased $6.1 million to $48.3 million or 15%. As previously noted, Cameron Highway added $2.4 million of segment margin for the five weeks in 2010 during which we owned our 50% interest.

Volumes on our onshore crude oil pipeline systems increased approximately 13%, primarily on our Jay System, resulting in an increase in crude oil tariff revenues of $3.1 million when combined with slight tariff rate increases.

Pipeline loss allowance revenues contributed $1.1 million, primarily due to an increase in crude oil market prices in 2010 as compared to 2009.

Results from our Refinery Services segment improved to $62.9 million from $51.8 million in the prior-year period. NaSH sales volumes increased 35% to 145,213 dry short tons, primarily as a result of increased demand from mining companies and pulp and paper customers.

As we have discussed, the improvements in the global economy, primarily in developing nations, have led to increased demand for copper, molybdenum, aluminum and paper products. The increased global demand has affected our NaSH customers, resulting in an increase in demand for NaSH from us.

Our Supply and Logistics operations decreased $2.9 million to $26.2 million. Declines in margins for our crude oil marketing and petroleum products activities of $1.1 million and $2.2 million, respectively, were partially offset by a $500,000 increase in our barge operations.

The contango price market narrowed late in 2009 and continued to be tight throughout the majority of 2010, accordingly providing fewer opportunities for us to store barrels or take advantage of higher oil prices for future deliveries.

During 2010, we averaged 101,000 barrels of crude oil inventory compared to 174,000 barrels in 2009. Segment margin related to storing and hedging crude oil in 2010 decreased $900,000 over the prior year. Fluctuations in differentials related to heavy-end petroleum products decreased segment margin from our petroleum marketing and activities.

Industrial Gas segment margin increased by $700,000, primarily as a result of increased available cash generated by our syngas equity investee. As previously discussed, scheduled turnaround maintenance activities negatively affected cash flow available for distribution in 2009. Cash flow distributions to the joint venture partners increased to more normal levels in 2010 following the completion of the turnaround.

Cash corporate G&A costs increased $3.8 million, primarily due to one-time costs in February related to the sale of our general partner and to personnel-related costs, primarily from bonus expense and stock appreciation and right exercises.

Interest costs, excluding interest on the debt of DG Marine and interest we consider as part of acquisition transaction expenses, increased $6.2 million. The average debt under Genesis' credit facility increased $31.4 million, primarily from the acquisition of the 51% interest in DG Marine that we did not own in July 2010 and the related elimination of the DG Marine credit facility with borrowings under our credit facility.

Interest costs were also affected by slightly higher interest rates and the interest associated with the $250 million of unsecured notes we issued in mid-November 2010.

In addition to the factors affecting available cash before reserves, net income was affected by noncash charges related to the compensation arrangement between our management team and our general partner of $76.9 million and $14.1 million in 2010 and 2009, respectively. As previously mentioned, our general partner bore the cash costs of this arrangement, all of which was settled in 2010 as a result of our IDR restructuring. The noncash costs related to other equity compensation increased $1.6 million.

Depreciation and amortization expense declined $14 million between 2010 and 2009 as a result of lower amortization expense on our intangible assets and a $5 million impairment charge related to the investment that we recognized in 2009.

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

Thanks, Bob. As you can see, we are benefiting from an ongoing improvement in our business environment that allows us to take advantage of the business opportunities presented to us by our integrated operations.

All of us here are very proud to have earned and paid an increased distribution for the 22nd consecutive quarter. Going forward, we believe that the investments that we have made in 2010, along with the structural changes and the elimination of our IDRs, will position us to continue to grow the Partnership's value for the benefit of all of our stakeholders.

With that, I'd like to turn it back to the moderator for any questions.

(Operator Instructions). Barrett Blaschke, RBC Capital Markets.

Just a quick question about your outlook for deepwater drilling and when we might see that picking up, and just kind of where you guys are on that in terms of your outlook.

So, obviously, the first deepwater permit since the Macondo incident of April of last year was recently issued. I think that the likely issuance of additional permits is very high. So we anticipate here in the remaining part of the first quarter and continuing into the second quarter that the pace of permits will increase and that there will be some return to activity.

A quick comment on the throughput on CHOPC for the five weeks that we owned it in the fourth quarter, and that is that there were significant turnarounds on two of the dedicated fields to -- on an annualized basis, turnarounds to kind of maintain the production equipment.

So our throughput for those five weeks on a 100% basis was negatively affected by approximately 25,000 to 30,000 barrels a day for the five-week period that we owned CHOPC. Had that not occurred, our contribution from CHOPC would have been approximately about $0.5 million more net to our interest, but those turnarounds are finished at this point.

Ron Londe, Wells Fargo.

I think on the Macondo spill, there were two rigs that were drilling that were going to eventually ship crude oil through CHOPC, and those were pulled off to drill the relief wells on Macondo. Have those come back and started drilling yet? What's going on there?

They were both working at dedicated fields, Atlantis and Mad Dog, at the time of the spill. Those permits to resume those drilling activities at this point have not been reissued. But we are hopeful that, obviously, as the pace of permitting accelerates, that the operators will be allowed to get back to the further development of the dedicated fields to CHOPC.

Also, the coverage of the distribution was about 1.1 times. And generally speaking, historically you've had much better coverage. And I understand the reason for where it is now, but can you give us some insight into where your comfort level would be on coverage going forward? I mean, would you be more comfortable at 1.2 or 1.3 going forward, and how that might affect the growth of the distribution?

I think that we've always maintained, even during the period, that we had coverage significantly in excess of it, that we are comfortable running our businesses at a 1.1 to 1.2 coverage ratio. And so I think that from a long-term point of view, that's clearly it. We have no issues with running the businesses at that type of coverage ratio.

Okay. Also, there was a line item on your available cash flow before reserves called expenses related to acquiring assets that provide new sources of cash flow, $10.7 million. Can you give us a little insight into that item? I mean, it was kind of an unusual-looking item, and it had a significant effect on the available cash flow.

As Bob pointed out in the prepared remarks, it is one-time items that are required under [10-141R] to be expensed through the GAAP prepared income statements associated with, in this particular case, in the fourth quarter, our acquisition of CHOPC. So in essence, it's the bank advisory fees and the interest or the costs associated with the committed facility that we were required to put in place to effect the transaction with Valero; it actually shows up in the GAAP income statements and the interest expense line.

And then additionally, kind of the legal expenses, as well as the banker advisory fees on the IDR restructuring, all are considered for presentations of the cash available for distribution to be nonrecurring items associated with one-time events which prepare the Partnership for future growth.

Okay. Also, the depreciation was -- of around $13.1 million in the fourth quarter, what could we expect going forward on a quarterly basis for depreciation and amortization?

Ron, we've got still-declining balances from our intangible assets. Those are going to be offset, then, by any asset growth that we have. But I think you'll continue to see essentially the same kind of run rate that you're looking at right now.

Okay. Very good. That's all I have for now.

Scott Fogleman, Morgan Keegan.

Just a real quick question. The volumes have been really ramping up on the Jay Pipeline. What is your capacity on that, after the Castleberry extension?

The capacity from Jay to the delivery points is probably order of magnitude 100,000 barrels. It's a 16-inch pipeline, which was really built for peak production associated with Jay when it was originally developed by ExxonMobil back in the '70s.

Okay.

So we are not capacity-constrained, so to speak.

Sure doesn't sound it. And also, what's your outlook on NaSH? Do you believe that you'll be able to get up to the halcyon days of early '08 volume-wise?

You know, I think that we -- we got up to 38,000 tons and change in the fourth quarter. We certainly see demand continuing to increase and demand continuing to recover. We averaged in the first two quarters of 2008 approximately 45,000 tons a quarter.

We certainly are comfortable that we are getting back to kind of the 40,000 ton a quarter rate and are hopeful that it will continue to improve. But again, as we continue to emphasize, the demand for the products in which NaSH is used -- copper, molybdenum and aluminum -- as well as in paper products, primarily packaging materials, continues to show rather robust growth, and as a result, our order book from our mining and pulp and paper customers continues to expand.

Okay. Great. And just one final question regarding Supply and Logistics. You mentioned in the release that it appears that your derivatives, maybe you took a mark-to-market hit this quarter and it's going to be reflected in subsequent quarters. If you could give just a little bit more insight to that about what are the dollar figures we're talking about here?

As Bob mentioned in the prepared remarks, we would estimate and guide you that there was probably about $1 million of that to the negative of, in essence, realizing the close of the hedge position and a roll into a period. So there was a mismatch of the recognition of the hedge gain or loss versus the recognition of the margin on the physical sell of the barrels.

So in our minds, this and that effect, in conjunction with the nonrecurring turnarounds at two of the major fields on CHOPC, that everything else the same, that our cash available for distribution generated in the fourth quarter was understated by approximately $1.5 million.

Okay. I appreciate it. That's all I have for you.

There are no further questions at this time.

Okay. Well, thank you very much, and we will talk to you in 90 days or so, if not sooner. And I guess we anticipate filing the K on or about March 16. So thank you very much.

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