Global Partners LP
Q2 2013 Earnings Call Transcript

Published: 8 Aug 2013

[Operator:]

Good day, everyone, and welcome to the Global Partners Second Quarter 2013 Financial Results Conference Call. Today's call is being recorded. There will be an opportunity for questions at the end of the call. With us from Global Partners are President and Chief Executive Officer, Mr. Eric Slifka; Chief Financial Officer, Ms. Daphne Foster; Chief Operating Office, Mr. Mark Romaine; Executive Vice President and Chief Accounting Officer and Co-director of Mergers and Acquisitions, Mr. Charles Rudinsky; and Executive Vice President and General Counsel, Mr. Edward Faneuil. At this time, I would like to turn the call over to Mr. Faneuil for opening remarks. Please go ahead, sir.

[Edward J. Faneuil:]

Good morning, everyone. Thank you for joining us. Let me remind everyone that during today's call we will make forward-looking statements within the meaning of federal securities laws. These statements may include, but are not limited to projections, beliefs, goals and estimates concern in the future financial and operational performance of Global Partners. Estimates for Global Partners' future EBITDA are based on a number of assumptions regarding market conditions, including demand for petrolium products and renewable fuels, changes in commodity prices, weather, credit markets and the forward product pricing curve. Therefore, Global Partners can give no assurance that our future EBITDA will be as estimated. The actual performance for Global Partners may differ materially from those expressed or implied by any such forward-looking statements. In addition, such performance is subject to risk factors including, but not limited to those described in Global Partners filings with the Securities and Exchange Commission. Global Partners undertakes no obligation to revise or publicly release the result of any revision to the forward-looking statement that may be made during today's conference call. With Regulation FD in effect, it is our policy that any material comments concerning future results of operations will be communicated through press releases, publicly announced conference calls or other means that will constitute public disclosure for purposes of Regulation FD. And now, please let me turn the call over to our President and Chief Executive Officer, Eric Slifka.

[Eric Slifka:]

Thank you, Edward, and good morning, everyone and thank you for joining us. Our second quarter 2013 results were not as strong as a comparable period in 2012 as lower retail gasoline margins and a less favorable distillates market impacted our profitability and distributable cash flow. EBITDA of $37 million was down about $3.8 million, and distributable cash flow was about $3.3 million lower than the same quarter last year. Second quarter net income of $8.7 million was off about $9.8 million from the same period in 2012. The variance in net income is in part attributable to increased depreciation and amortization associated with our 2 acquisitions earlier this year. Net product margin in our Gasoline Distribution and Station Operations segment was $58.8 million compared with $62.2 million in the same period a year ago. As we have discussed previously, quarterly margins typically decline as gasoline prices increase and improve as prices fall. In the second quarter of last year, this segment benefited from favorable market conditions in a declining price environment. In the second quarter of this year, margins compressed as NYMEX gasoline prices and physical prices increased. In the Gasoline Distribution and Station Operations segment, we also have an active ongoing new to industry and raise and rebuild program, including co-branding arrangements. Activity in the quarter included the opening of new-to-industry locations in Darien, Connecticut and Billerica, Mass [ph] as well as the completion of raise and rebuild projects in South Kingston, Rhode Island and Stratford, Connecticut. In our Wholesale segment, net product margin in the quarter increased $11.4 million year-over-year to $46.1 million due to stronger wholesale gasoline margins and increased crude oil logistics activities, which more than offset our performance in a less favorable distillates market. With the acquisition of Cascade Kelly and Basin Transload, the Phillips 66 take-or-pay contract and other term contracts at our terminals, our crude oil logistics and marketing activities expanded year-over-year. However, during the quarter, weather conditions in the Bakken delayed schedule tank and pipeline expansion at and to our crude transload rail facilities in North Dakota. The expansion project at our Columbus, North Dakota transload rail terminal where we are adding 170,000 barrels of storage capacity should be completed early next year. The project at our facility in Beulah, North Dakota where we are building 280,000 barrels of storage capacity is expected to come online by the end of this year. Additionally, I am pleased to report the completion of the Tesoro Logistics pipeline connection to our Columbus, North Dakota facility. Tesoro Logistics will commence delivery this month into our tankage via the new lateral connection. The 7-mile lateral will carry crude from various gathering points along the Tesoro High Plains System, which accesses crude throughout the North Dakota producing region. On the West Coast, we continue to conduct crude oil transload activities at our facility in Clatskanie, Oregon and are pursuing the opening of our ethanol production plant. The North Dakota and Oregon assets, along with our terminal in Albany, New York represent an East to West virtual pipeline that allows producers and marketers to reach premium markets in major refining centers on both coasts. These assets represent significant growth initiatives. The Columbus to Albany segment of this virtual pipeline is serviced by Canadian Pacific via single line haul rail, while the Beulah, Clatskanie route is operated by BNSF and the Genesee & Wyoming short line. Looking at other projects during the second quarter, we began receiving and distributing products from our new 540,000-gallon rail set propane storage terminal in Albany serviced by Canadian Pacific. This facility allows us to source propane throughout North America. In addition, we continue to expand our marketing of gasoline and distillates through arrangements at a number of third-party terminals in the East, Southeast and the Gulf region. In compressed natural gas, in July, we signed a multiyear agreement with Bangor Gas Company to provide Global a firm supply of natural gas to our loading station under construction in Bangor Maine. Using proprietary compression technology developed by OsComp Systems, this station will provide large business customers with natural gas on a year-round basis. We have contracted with several multiyear term customers for this facility, which is on track to begin full operations in the fourth quarter. Turning now to our distribution. In July, the Board of Directors of our general partner approved an increase in the quarterly distribution to 0.5875 per unit. This translates to an annualized increase of $0.02 per unit from $2.33 to $2.35 per unit, resulting in distribution coverage on a trailing 12-month basis of 1.49x. The board will continue to review the distribution on a quarter-by-quarter basis. Although we face certain short-term market challenges in crude and gasoline markets, we believe in the fundamentals that underpin our strategy and business plan. Before turning the call over, I want to formally welcome CFO, Daphne Foster, and Chief Operating Officer Mark Romaine, in their new roles with Global. Effective July 1, Daphne who has been responsible for leading our Treasury Department for a number of years was promoted to CFO. Mark who has been instrumental in building and expanding our supply and logistics operation was named as our new Chief Operating Officer. I know they both will do an outstanding job. Now, let me hand the call over to Daphne for our financial review.

[Daphne H. Foster:]

Thank you, Eric, and good morning, everyone. Looking at our segment results, total Wholesale volume was up more than 350 million gallons for the quarter or 35% from a year earlier to a total of 1.4 billion gallons, primarily reflecting increases in our crude oil and logistics activity. The second quarter was the first full quarter of contribution from our acquisition of a majority interest in Basin Transload in North Dakota and our purchase of the Cascade Kelly Holdings crude and ethanol facility in Clatskanie, Oregon. Total Wholesale net product margin increased $11.4 million to $46.1 million, led by a $9.3 million margin increase in the Wholesale gasoline and blendstocks, which together with increased crude oil activities more than offset a less favorable distillates market. As a reminder, last year Wholesale gasoline and blendstocks were negatively impacted in part by challenging futures market. In our Gasoline Distribution and Station Operations segment, gasoline volume was 264.2 million gallons in the second quarter compared with 262.7 million gallons in Q2 of 2012. As Eric noted, net product margin decreased 5% to $58.8 million, reflecting less favorable margins, stemming from rising prices. Our Commercial segment generated strong growth in the quarter as volume was up 10% to 94.3 million gallons, while net product margin was up $3 million to $6.2 million. These results primarily were attributable to the performance of our bunkering activities and to colder weather period-over-period. Total SG&A and operating expenses for the quarter was $74.4 million, up approximately $13.3 million compared with the second quarter of 2012. The variance in the year-over-year expenses are primarily attributable to the impact of the Basin and Cascade Kelly acquisitions, as well as the long-term Getty lease. Interest expense of $9 million was approximately equal to last year's interest expense despite the increased debt associated with the Cascade Kelly and Basin acquisition due to lower inventory levels, longer payment cycle relating to our crude business and a reduction in our interest rate spread under our credit facility. Turning to the balance sheet. Our long-term assets are up approximately $220 million from December 31, 2012, reflecting the acquisitions of Basin Transload and Cascade Kelly. Under GAAP rules, as the 60% controlling owner of Basin Transload, we consolidate 100% of basin assets and liabilities on our balance sheet and then deduct the noncontrolling interest out of equity. On a pro forma basis, if you were to deduct the noncontrolling Basin interest of $40 million, long-term assets would be up approximately $180 million, roughly equal to the combined consideration paid for the 2 acquisitions. Our leverage has declined from a year ago. Total debt to EBITDA was 5x on June 30, based on trailing 4-quarter EBITDA. Funded debt to EBITDA, which consist of our acquisition-related debt, including the $115 million term loan and the $70 million senior notes, which financed our Basin and Cascade Kelly acquisitions, was 3.7x on June 30. Turning to our guidance, based upon our performance for the first half of the year and the short-term challenges we see for the balance of 2013 related to compressed margins and a reduced volume to the East and West coast in our crude oil logistics and marketing activities and to backwardation in the gasoline markets, we are adjusting our full year 2013 EBITDA guidance. We now expect 2013 EBITDA in the range of $150 million to $175 million, including the Cascade Kelly Holdings acquisition completed in the first quarter of 2013. Our guidance is based on assumptions regarding current market conditions, including demand for petroleum products and renewable fuels, changes in commodity prices, weather, credit markets and the forward product pricing curve, which will influence quarterly financial results. Now, let me turn the call back over to Eric to conclude our prepared remarks.

[Eric Slifka:]

Thanks, Daphne. While we are forecasting more moderate pace of growth in 2013, we strongly believe in the strategic direction of the partnership. Despite short-term challenges, we believe that we will deliver value to our unitholders through the optimization of our operating assets, our organic projects under development and other strategic initiatives. With that, we'll be happy to take your questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from Elvira Scotto of RBC Capital Markets.

[Elvira Scotto:]

Can you just remind us how much of your crude-by-rail capacity is contracted to third parties under fee-based contracts?

[Eric Slifka:]

No. We don't break that out, but we have multiple customers at multiple locations throughout our system that are contracted, both short and long term for throughputs through all of these facilities.

[Elvira Scotto:]

Okay. Is there any way you can help us quantify the impact of narrowing crude oil price spreads on your results or maybe what you've baked in for the spreads in your guidance?

[Mark Romaine:]

Yes. This is Mark. I think when you look at Q2 on the whole crude volumes, were pretty much where we expected. They were very strong at the beginning of the quarter and tapered off towards the end of the quarter. Margins were down as spreads in differentials compressed. I think we're expecting, based on the short-term supply dislocations and the compression of spreads in the front of the market, that our second half volumes will be lower.

[Elvira Scotto:]

Okay. So is the -- is that the biggest driver of the guidance revision?

[Eric Slifka:]

Really, Elvira, it's one of the drivers there. I would say there's still multiple legs of our business that we think will perform well. Our numbers year-on-year still generally look positive. So we really still like the position of the company. The other thing I think to take into account is that the assets and the acquisitions, both Basin transload and the Clatskanie, Oregon facility, we're very early on those. Those were February acquisitions. We continue to work hard to develop those assets and to increase the volumes that go through those facilities. Also, the timing in which we were able to have connections made to the facilities in North Dakota with some of that very, very difficult weather has put things off a little bit. So we continue to charge ahead. We think we've got the right assets in place to execute. We do think, in fact, that per barrel margins are going to be lower, but we think that over time, in the long run, we are positioned to take advantage of those product movements over time.

[Elvira Scotto:]

Okay. Just a couple of quick questions. So now the guidance includes the Cascade Kelly acquisition, any way you could break that up for us?

[Eric Slifka:]

At this point, we're not prepared to do that. I mean, look, there are lots of things going on. They're one of the -- it's a good asset that has not only an ethanol plant but a crude transload facility. And we're just trying to position that asset so that it can take advantage of doing both of those businesses. But I do want to reiterate, it's accretive for the year. We are giving that.

[Elvira Scotto:]

Great. And then just my last one, any impact from RINs this quarter?

[Eric Slifka:]

I mean, we really try to maintain a hedge book and minimize our exposure to that, and we really just treat it as a pass-through in our business.

[Operator:]

The next question is from Gabriel Moreen of Bank of America Merrill Lynch.

[Gabriel P. Moreen:]

Just following up on Elvira's questions on RINs. I guess, I'm just trying to reconcile the backwardation in the gasoline market, which I think is impacting to some degree second half guidance, which I think the strength you mentioned in gasoline and ethanol for the second quarter, that volume was at -- I mean, even if directly are not benefiting from RINS and you're maintaining a hedge book, did you see indirect benefits from heightened blending activities? So just wondering what your thoughts there. Was your thoughts were there?

[Eric Slifka:]

[indiscernible] do we see any direct benefits from blending activities? No. I mean, we're running our book the same as we always have. And certainly, we buy ethanol and we blend it into products, and we sell at the rack, but we also have other business partners in facilities that take those RINs as well as part of transactions. That's why we say we're really try to maintain a flat book or exposure to that. So we're not trying to get any unfound -- I mean, it would be great if you can get gains out of, but there's risk if you do that. We are trying to squeeze any of that risks that's out of the book.

[Mark Romaine:]

I would also mention that we are -- we do import gasoline, so we are an obligated party as a result of that import activity. So some of the blending activity that occurs at our rack offsets that obligation.

[Gabriel P. Moreen:]

Okay. And then I just wondered, in terms of the rail dynamic with crude, obviously, spreads have come in. They were the weather issues in the second quarter. But can you also talk to me a little about the competitive dynamic whether it's offloading in Albany with I think, some additional competitors there as well as with the onloading capacity in the Bakken, has there been a change in that competitive dynamic in terms of volume shifting to or from competitors, and was that a factor at all in the guidance revision?

[Mark Romaine:]

I don't think that, that's something that we've seen yet. I think that the capacity on both origin and destination side, I mean, while it is extending, you got and should continue to have corresponding increases in production. When we look at our position there, we look at our East-West system. So you got to keep in mind that over the last couple of years, the last several years has been quite a bit of volume going down at the Gulf Coast. We think long term, some of that will displace to the East and West Coast. So when you look at it on the destination side, there is a lot of refining capacity on both coasts, far more than exceeds our throughput capacity and any rail throughput capacity that's being built right now. The origin side, I think the market is pretty well balanced between production and takeaway capacity as well. So we haven't seen -- I don't believe we've seen any negative impact as a result of increased competition in either spot, not to say that we won't, but I don't think we've seen that yet. I think it's really been driven by the end of Q2 and what we see down the road at least in that very near term is really more driven by supply disruptions and increased demand in the mid-continent that wasn't -- that maybe took the market a little bit by surprise.

[Gabriel P. Moreen:]

And I guess as a follow-up to that, in terms of your discussions with customers and I assume a trying to line up more take-or-pay contracts potentially at your facilities, has their posture shifted at all over the last month or 2 in terms of potential willingness to sign up or what levels they'd be willing to commit for? Or they're -- are your discussions kind of status quo and they're also gearing the -- I guess, the spread compression in the mid-wife demand?

[Eric Slifka:]

These are very longer term in nature, so the conversations continue, and I think most companies are looking at this as shorter term in nature. The markets, when you look out forward,tell you that is shorter-term in nature. And so, the producers, I think, continue to look for ways to move that product through a system that provides them with the highest value and really, that's what we're trying to create for them or the takers, frankly.

[Mark Romaine:]

Yes. Our view in this business is based on, when you look at nothing has changed in the fundamentals of this business. When you look at -- the production forecasts haven't changed. Pipeline capacity expectations haven't changed. And there's still, as oil comes out of the ground in these developing plays, there's still going to be a need for rail in this game. And we think that we've got a system that is positioned very well from a logistics standpoint, from a cost-efficient standpoint. And so when you look at it on the longer term, as Eric said, these conversations and these discussions about term deals, they're long-term in nature and that's -- we think the business still supports that outlook.

[Operator:]

The next question is from Theresa Chen of Barclays Capital.

[Theresa Chen:]

Just a follow-up on the crude by rail discussion. Following the accident in Québec, from your perspective, how do you think that will change the legal regulatory landscape?

[Eric Slifka:]

I can't comment on what the Federal Railroad Administration may change. But obviously, we're watching it very carefully and in terms of what we do, we're very conscientious and very careful and we follow those guidelines and those standards where applicable.

[Theresa Chen:]

Okay. Great. And then on Cascade Kelly, would you mind giving us an update of the integration effort? And do you have any plans for using this asset to export crude given the demand in EM?

[Eric Slifka:]

I think -- look, I think that essentially, that asset we have third parties going through that facility, we're trying to create flexibility to do both crude and run the ethanol plant. We are working on achieving that and getting that done, and we're trying to create the maximum flexibility to provide our customers with the best asset that exists on the West Coast, right? And that's really where we're heading.

[Theresa Chen:]

Okay. Great. And then lastly, your previous comments on SG&A rising through the rest of the year, is that still the case? And would you mind quantifying what that would look like?

[Daphne H. Foster:]

I think, we said in the last quarter that they'll be rising because if you remember, we acquired the 2 acquisitions in February of 2013. So I think all I can say is that if you look at the second quarter, you now have a full run rate of a 3 months of basin and 3 months of CPBR.

[Eric Slifka:]

And as we said, we expect those 2 transactions to be accretive, right? So it's not just a cost.

[Operator:]

The next question is from Darren Horowitz of Raymond James.

[Darren Horowitz:]

Mark, first question for you, I want to go back to comment that you made, just thinking about the demand pull from the Pacific refiners and your ability to leverage the Basin terminal in Beulah. How do you think about connecting that U.S. mid-con supply and that Western Canadian sedimentary basin supply to the West Coast. Is it a situation where you think that Beulah effectively could be the point where you see significant volumes come through? And if that's the case, do you think 140,000 barrel tank and offloading rack is going to be enough as you scale into that?

[Mark Romaine:]

Well, I think, first of all, I think -- I don't think we are currently engaged in the construction of a second tank at Beulah. So by the -- I believe by the fourth quarter, we will have 280,000 barrels of storage at our Beulah facility. It's impossible to say that all of the volume will come out of Beulah that's headed to the West Coast. I think we see a tremendous opportunity to pull barrels both out of North Dakota and out of Western Canada. That's a very short -- it's a very short distance from the Edmonton area to Oregon. I think it's less than 900 miles. And you've got a lot of different grades of oil up there, so I think there's going to be some great opportunity up in that Western Canada area. And then, of course, with the BN origin at Beulah, I think there's going to be a balance of barrels that comes out of there as well. I think the key thing, though, when you think about this at a higher level is the system that we're building is a flexible system, and it's designed that way to allow us to pull barrels, whether it's us or the market or a refiner or a producer, to pull barrels from various different locations and respond to different market conditions.

[Darren Horowitz:]

Okay. And then my last question, when you think about the position in Oregon, obviously, Beulah which you have Albany [ph] in the East Coast presence, how do you think about integrating the Gulf Coast and the overall asset mix instead of just having an effective East to West Coast and vice versa pipeline, also building in some of the scale that can be growing from incrementals volume coming up through St. James in other areas?

[Mark Romaine:]

I think it's fair to say that any pricing centers should be viewed as instrumental to this flexible system. So as we continue to look at opportunities in the marketplace, we'll look at opportunities in any market that has a demand for this rail system.

[Operator:]

The next question is from Michael Blum of Wells Fargo.

[Michael J. Blum:]

My questions were already addressed.

[Operator:]

The next question is from James Jampel of HITE.

[James Jampel:]

Can you remind us, just so we understand here how the crude oil spreads between the Bakken and the West Coast and the East Coast, how did they -- on a day-by-day basis, affect your profitability on crude-by-rail?

[Eric Slifka:]

Yes, I would say, it doesn't affect it on a day-by-day basis. But if you longer-term look out at some of those spreads, what that is telling you is that there's sufficient product, okay, that should move East and West over time, right? So when you look at those spreads, you can't look at them day-to-day because the business really isn't a day-to-day business, it's more of a term business.

[James Jampel:]

Your contract structure doesn't have any sort of sharing of profitability.

[Eric Slifka:]

No, nothing like that.

[James Jampel:]

So it's all fixed fee?

[Eric Slifka:]

So it's fixed fee. Take-or-pay, if you talking specifically about the P66, it's a take-or-pay contract or 91 million barrels over a period of time, right?

[James Jampel:]

So the impact we saw then in the second quarter is purely an operational issue caused by weather?

[Eric Slifka:]

Well, it's as we outlined, it's a couple -- it's a few things, right.

[James Jampel:]

And would -- on those all behind now in the third quarter?

[Eric Slifka:]

They are, but they are different challenges facing us moving forward as well. I think, generally, it's safe to say you expected to see more volume and lower margins, I think, particularly on the crude business. I do think that there are other factors that have led to supply moving to different markets because that supply was not as a great as people thought it was going to be just because there was some bad weather and difficulty in getting these wells up in producing. And then on the other side of that, I think there was a little surprise in the marketplace as to some of the demand that existed and the refining sector in the mid-con, right? And so I think those 2 things collided, and those, in our opinion, sort of what brought those spreads really racing in.

[James Jampel:]

But given the nature of your contract take-or-pay that shouldn't impact you?

[Eric Slifka:]

Correct. On the take-or-pay, that's correct. Don't forget, we're doing -- we're not only doing just take-or-pay contracts, but we're also moving our own volumes as well, right?

[Operator:]

The next question is from Rob Longnicker [ph] of Daugherty.

[Unknown Analyst:]

You guys provided a little color on why you cut the EBITDA I wondered if you just kind of give a little more detail on which of those buckets have the biggest impact on the $25 million to $30 million cut?

[Daphne H. Foster:]

We don't break out EBITDA by segment. I think that's all I can really say. I mean, I think we've been clear in terms of why we have adjusted the guidance. It's really looking at -- I mean, you can look exactly what we said in terms of looking back at performance for the first half of the year and looking at current market conditions, as well as backwardation in the gasoline market. But we do not break out the impact by segment by EBITDA.

[Unknown Analyst:]

Can you just say which is the largest of the ones you're talking about?

[Daphne H. Foster:]

We can't say that.

[Unknown Analyst:]

Okay. Can you say how many unit trains you guys ran in the quarter, please?

[Eric Slifka:]

Into Albany, we did approximately 100,000 barrels a day of trains in and out of that facility. And I know we've broken it out differently, but it's really getting hard to do it because the trains are all varying in sizes, and so it's really a per barrel. I think that's a better metric.

[Unknown Analyst:]

Okay. And you just made a comment yesterday in response to a previous question that the spreads don't impact your take-or-pay, but you said you're also moving your own volumes. Does that mean you guys were moving volumes to capture spreads just for yourselves or what do you mean by that?

[Eric Slifka:]

Sure. Exactly.

[Unknown Analyst:]

Got you. And if you talk about how much -- what size that's been for your business and the number of barrels per day you guys are moving?

[Eric Slifka:]

Yes. We don't break that out. It's just the market gave you an opportunity, and we want to take advantage of that opportunity.

[Operator:]

We have no further questions in queue at this time. I'll turn the conference back over to Mr. Slifka for closing remarks.

[Eric Slifka:]

Thank you, all, for joining us this morning. We look forward to updating you on our progress next quarter. Have a great day, everybody.

[Operator:]

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