Global Partners LP
Q1 2014 Earnings Call Transcript

Published: 12 May 2014

[Operator:]

Good day. Welcome to the Global Partners First Quarter 2014 Financial Results Conference Call. Today’s call is being recorded. There will be an opportunity for questions at the end of the call. At this time all participants are in a listen-only mode. (Operator Instructions) With us from Global Partners are President and Chief Executive Officer, Mr. Eric Slifka; Chief Financial Officer, Ms. Daphne Foster; Chief Operating Officer, Mr. Mark Romaine; Executive Vice President, 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. Before we begin, let me remind everyone that this morning 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 concerning 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 petroleum products and renewable fuels; changes in commodity prices; weather; credit markets; the regulatory and permitting environment; 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 results of any revisions to the forward-looking statements 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. Now please let me turn the call over to our President and Chief Executive Office, Eric Slifka.

[Eric S. Slifka:]

Thank you, Edward, and good morning, everyone. Global Partners delivered strong financial results in the first quarter that highlighted the breadth and diversification of our product offerings. Severe weather created significant supply and demand imbalances in the quarter, enabling us to benefit from favorable margin opportunities in our Wholesale segment and drive volume and margin through our system. We generated first quarter EBITDA of more than $86 million, distributable cash flow of more than $69 million, and net income of $57 million. The increase in our Wholesale segment product margin primarily reflected the performance of gasoline and gasoline blendstocks. Other oils and related products, which includes fuels such as distillates and residual fuels and residual oil, benefited from tight supplies, extremely cold temperatures, and curtailment of deliveries to interruptible natural gas customers, driving demand. With crude oil product margin down slightly in Q1 due to weather, our results reflected our successful product diversification and portfolio development. Our irreplaceable and strategically situated assets form the foundation of a world-class system that generates an average throughput of nearly 500,000 barrels a day and positions us to further capitalize on growth opportunities. Turning to our Gasoline Distribution and Station Operation segment, we continue to build our pipeline of initiatives with new- to-industry and organic projects such as raze and rebuilds, site enhancements with co-branded partners, diesel site additions, and expansion of our food service offerings at our Alltown locations. We also continue to optimize newly acquired sites through rebranding efforts. For example, during the first quarter, we’ve rebranded approximately 25 locations. In the quarter, we added 11 company-operated stores to our portfolio. We remain committed to expanding and growing the GDSO segment. Moving to our Commercial segment, we delivered solid results, posting a double-digit increase in product margin that primarily reflected colder weather and the expansion of our bunker business. Turning to our mid-continent assets, we’re continuing to develop our infrastructure to address the growth of one of the world’s most prolific energy producing regions. Oil production in the Williston Basin reached nearly 1 million barrels a day in February, and officials in North Dakota expect output to increase in the coming months with the completion of new wells. In that regard, we have broadened our crude oil gathering capabilities in the Bakken region, expanding the draw area for our transload facilities. In April our Basin Transload subsidiary signed a pipeline connection agreement with Tesoro Logistics that creates additional flexibility for our customers. Under the agreement, Tesoro will build, own, and operate a new 4.1- mile pipeline lateral expected to be operational in the fourth quarter from its Dunn Center Station to the Basin facility in Beulah, North Dakota. With this additional connection to the Tesoro High Plains Pipeline, shippers will have direct access to the East from various Bakken origin points through our Columbus terminal on CP’s single-line rail or West through Beulah on BNSF single-line rail. In addition, we are pursuing activities at our Albany terminal to provide refiners and other customers with a wide array of products, including biodiesel and a broader suite of crudes. In Oregon, we are looking to expand our facility to manufacture ethanol and transload crudes simultaneously. Our commitment is to the safety of our employees and the communities we serve. In that regard, last week we proactively announced a compliance program for crude oil rail cars arriving at our East and West Coast terminals. By way of background, we leased approximately 2,000 rail cars. Approximately 90% of our fleet is already CPC-1232 compliant, and we’re taking the steps to upgrade the balance of that fleet. Starting on a phased-in basis on June 1st, our facilities will begin accepting only those crude oil rail cars that comply with CPC-1232 standards. Turning to our distribution, solid fundamentals have enabled us to continue to consistently deliver strong returns to our unitholders. In April, the Board of Directors of our General Partner increased the Partnership’s distribution for the eighth consecutive quarter. The distribution of $60 to $50 per unit or $2.50 per unit on an annualized basis, represents an increase of 2% over the fourth quarter of 2013 and 7.3% over the first quarter of 2013. Distribution coverage on a trailing 12-month basis ended March 31, is 2.6 ttimes. The Board will continue to review the distribution on a quarter-by-quarter basis, but suffice it to say that we’re optimistic about the strength and direction of our business. With that, let me turn the call over to Daphne for her financial review.

[Daphne H. Foster:]

Thank you, Eric, and good morning, everyone. Before we go through the first quarter results, let me take a moment to comment on the status and impact of our accounting for Renewable Identification Numbers or RINs. As we reported last quarter, we have adopted a new accounting policy and have implemented a new operational policy to effectively report, monitor, and control our RIN position. As we had projected, there was a significant reduction in RIN-related liabilities during the quarter. At the end of Q1, the liability relating to our Renewable Volume Obligation, or RVO, was $3.9 million, and the liability relating to RIN forward commitments was $122,000. The decrease in these liabilities totaled $15.2 million, which was more than offset by the expense incurred during the quarter to purchase RINs to reduce these liabilities. We expect these liabilities to be immaterial going forward. As we go through these numbers, please keep in mind that results for the first quarter of 2013 included an increase of $35.3 million in RIN-related liabilities. In the first quarter of this year, EBITDA increased $86.5 million, DCF increased to $69.5 million, and net income increased to $57 million. Each metric increased more than $44 million year-over-year after adjusting for the negative impact of RIN-related liabilities during the first quarter of 2013. The strong performance reflects improvements in all segments. The Wholesale segment led the way with the highest margin of nearly $108 million, an increase of $58 million over last year after adjusting for RINs. Colder weather and unusually favorable market opportunities in the gasoline blendstocks market were the primary drivers of the strong performance. Looking at the Wholesale segment in greater detail, crude oil product margin declined about $3 million in the first quarter 2014 to $26 million in the same period last year. The decline was due to extreme cold and snow, which impacted rail traffic, increased congestion and caused delays which negatively affected crude oil activity. Although we have seen improvement in rail service, it has yet to return to normal levels. Therefore, we continue to experience increased costs in crude rail logistics. Conversely, rail congestion helped create unusual opportunities in the gasoline blendstocks market. Availability of railcars was severely limited due to weather related delays and gasoline blendstocks experienced shortages in certain markets, creating very favorable market conditions for us. Product margin in gasoline and gasoline blendstocks totaled $15 million or 36% of the segments product margin, up $44 million year-over-year after adjusting for RINs. Given the backward structure of the forward ethanol curve at the end of the first quarter, we expect to recognize a negative impact on our gasoline blendstock margins, most likely during the second quarter. As of today, we would estimate that negative impact to be approximately to be $20 million. Other oils and related products propane, distillates, and residual oil – make up the balance of Wholesale product margin and also benefited from weather that was 9% colder than normal and 11% colder than last year. Product margin from these other oils increased nearly $17 million to $35 million. Our GDSO segment generated a product margin of $52 million more than $6 million higher than the first quarter of 2013, which was negatively impacted by steadily increasing prices. Our Commercial segment also increased, generating $12 million in product margin, 18% more than a year earlier. Colder weather was the primary driver, although our bunker business also continues to perform well. Turning to expenses, excluding amortization, total SG&A and operating expenses were $85 million for the first quarter. A year-over-year comparison is not meaningful given the February 2013 acquisitions and the additional run-rate of increased overhead as we added staff during the year to support our growing crude business and the development of other projects. Amortization expense increased year-over-year due to the acquisitions, but decreased $1.4 million from last quarter to $4.5 million as we finalized our purchase price accounting for the basin acquisition. Interest expense increased about $600,000 year-over-year reflecting the increased debt associated with financing the North Dakota and Oregon acquisitions. Total CapEx for the quarter was approximately $13 million, $6 million of which was maintenance CapEx. Notable expansion projects included investments in our retail gas station assets including our continued effort on the Connecticut Turnpike and unitary leased sites in Metro New York, Westchester, and Long Island, expansion of our propane storage and distribution facility in Albany, and crude-related improvements and expansion projects. Our balance sheet remain strong with excess borrowing capacity of more than $600 million $600 million and Partner’s equity of $503 million. Total funded debt of $583 million, which includes bank revolver debt and the five year unsecured senior notes, decreased to 2.4 times a trailing 12 months EBITDA. Turning to guidance, we continue to expect 2014 EBITDA in the range of $175 million to $195 million. This guidance is based on assumptions regarding current market conditions, including demand for petroleum products and renewable fuels, weather, credit markets, the regulatory and permitting environment, and the forward-product pricing curve, which could influence quarterly financial results. In closing, I wanted to let you know that on May 21, Mark Romaine and I will be presenting at the 2014 NAPTP Investor Conference in Ponte Vedra Beach, Florida. We look forward to meeting with many of you at the conference. Now let me turn the call back over to Eric.

[Eric S. Slifka:]

Thank you, Daphne. In the quarters ahead, we expect to capitalize on additional opportunities to grow and enhance our asset base, providing customers with even greater levels of optionality and flexibility throughout our system. Over the next 12 months to 24 months, we have in front of us a significant pipeline of pending projects, including crude and retail expansion opportunities. In addition, we remain actively engaged and evaluating a number of attractive acquisition opportunities. With that, we would be happy to take your questions operator.

[Operator:]

(Operator Instructions). Thank you. Our first question comes from the line of Gabe Moreen with Bank of America Merrill Lynch. Please proceed with your question.

[Gabe Philip Moreen:]

Good morning everyone and congrats on the nice quarter.

[Eric S. Slifka:]

Thanks, Gabe. How are you?

[Gabe Philip Moreen:]

Good, thanks. A question on guidance here, and I hear what Daphne is saying about the $20 million hit on blendstocks from the ethanol forward curve in 2Q, I am understanding that correctly, but it still seems like based on what you did this quarter and reiterating guidance here, you are still expecting to be down by my math somewhere else in your business in keeping that guidance. Is there anything you are seeing in terms of I guess that level of conservativism, or hopefully it proves to be conservative? I’m just wondering if there’s anything else you are seeing out there that is causing you to maintain guidance given the strong quarter?

[Daphne H. Foster:]

Hi, Dave. It’s Daphne. Well, in addition to the backwardation in the ethanol market as we mentioned, we also continue to experience increased costs in the crude rail logistics that we witnessed in the first quarter as rail service really has not yet recovered to normal levels. So that is also something that we are experiencing today. And frankly, it is still early in the year to adjust guidance.

[Gabe Philip Moreen:]

Fair enough. Thanks, Daphne. And related to those costs on the rail side, can you talk about I guess the new safety rule that you’re going to be adopting in terms of accepting rail cars? Do you expect to actually have that cost you volumes by the time you implement that in June, or is that something where you think you can – I know it is market dependent to some degree in terms of what volumes you get, but do you think you are – do you see that impacting the volumes you are going to get or not?

[Eric S. Slifka:]

Yes, we don’t. It is Eric, Gabe. So we don’t. And as we said, most of the cars that we have are already CPC-1232 compliant. So, I think really when we’re talking about rail, we mean operationally. The winter was very hard, the grain harvest was large, and the system is not quite back to where it was. And so those operational difficulties are still continuing they are almost workout, but they’ve still been going on. So that’s really what we’re talking about. Does that answer your question?

[Gabe Philip Moreen:]

Yes, it did. Thank you. And then last question for you, Eric, just in your comments on M&A opportunities, any specific area, I guess more active than others wholesale gasoline side, crude oil side? Just wondering if you had any more comments there?

[Eric S. Slifka:]

It is really quite active everywhere. And the good news is we have a footprint of business that is diversified. So we can really look at a lot of the opportunities that are out there in different parts of the business. And we actually think that there are synergies that really would fit the company. So we will keep pounding away, and we’re hopeful that we will get something done.

[Gabe Philip Moreen:]

Great. Thanks, everyone.

[Operator:]

Our next question comes from the line of Elvira Scotto with RBC Capital Markets. Please proceed with your question.

[Elvira Scotto:]

Hi, good morning. I guess my question is, can you give us an update on the initiatives in Canada and how that’s progressing?

[Mark Romaine:]

Sure. Good morning, Elvira. This is Mark. How are you doing?

[Elvira Scotto:]

Good, thanks.

[Mark Romaine:]

Yes, we continued – we recently started that Calgary office back in – at the end of Q3 and started to ramp up our efforts in Q4. We don’t have – we haven’t made any significant impact. We’ve been successful at sourcing some crude-by-rail through various origin points in Canada. Nothing really in scale yet, but we continue to evaluate both spot opportunities, as well as strategic development up there. So I think we are pleased with the way that’s progressing. I’m not sure it’s – well developed as it will be. It certainly isn’t, but yes, we are progressing quite nicely with that.

[Elvira Scotto:]

Great, thanks. And then just one question on the quarter. When you look at the volumes that you reported across the segments in Wholesale, were those volumes – how did those volumes come in versus your internal expectations?

[Mark Romaine:]

So, we don’t talk about internal expectations, but I would just say generally, the system was constrained enough that there was more, I guess more margin than volume might be a better way to describe it right. So the barrels that you had were dear, and because of that, you were able to command a premium with them.

[Elvira Scotto:]

Great. That’s all I had. Thank you.

[Operator:]

(Operator Instructions) Our next question comes from the line of James Jampel with HITE. Please proceed with your question.

[James Jampel:]

Hey, Eric, how are you?

[Eric S. Slifka:]

Good. How are you doing James?

[James Jampel:]

Fine, thanks. A quick question again, what’s the opportunity in Canada? Any opportunity up there, would that be related to heavy oil? And if so, how do you characterize Global’s competitive advantage in sourcing and delivering heavy crude?

[Eric S. Slifka:]

Yes, I mean, I would say a few things James. I mean, we are looking to have the broadest capability and portfolio of buying origin barrels, whether they are different gravities or not, right. So at the end of the day, it’s about providing our customers and ourselves with the most flexibility in the system, right. So, ultimately that’s really the goal, right, and weather that’s East Coast or Gulf Coast or West Coast doesn’t really matter. We want to make sure that we can provide the most flexibility to our customers in the marketplace.

[James Jampel:]

So a Gulf Coast type of move, which is not something you have traditionally done, is something you would consider getting into?

[Eric S. Slifka:]

We’ve talked about that – yes on multiple calls and that is something that we are interested in. We think that there is a market in the business for that, and we continue to try and pursue opportunities to complete something down there.

[James Jampel:]

And do you see the recent tightening of spreads between WCS and WTI as being temporary or still being wide enough to allow you to enter that kind of business?

[Mark Romaine:]

Yes, James, this is Mark, I think our view on that whole spread situation is the barrel has got to price itself to move by rail to the destination, if that make sense. Pipeline capacity isn’t adequate to service all the production that’s coming online. So weather that spreads are – it’s not always just the spreads that you see published. Barrels often trade at a discount to those spreads or a premium to those spreads. So when you look at the entire spread available that allows you to make that move, it’s our view that that’s going to continue into the future.

[James Jampel:]

Okay. Thank you.

[Eric S. Slifka:]

Thanks, James.

[Operator:]

Our next question comes from the line of Michael Blum with Wells Fargo. Please proceed with your question.

[Michael Blum:]

Thanks, and good morning, everybody. Just wanted to clarify coming off of Gabe’s questions, so just as it relates to the DOT announcement yesterday on the Bakken rail cars and then your own commentary on your crude business for the rest – crude-by-rail business for the rest of the year and guidance, are you saying that you just think it’s going to be harder to get the necessary cars you need?

[Eric S. Slifka:]

No, it’s Eric, it’s Eric not at all. We are just saying that because the winter was so harsh, and it was so difficult that for the rails to physically move the barrels, that sort of bottleneck that was existed in the system, really, is just getting fixed now. I mean, it was cold all the way through January, February and even in March. So the system is just beginning to relieve itself, and there is still current congestion there. But we think over time it will fix itself, but it has been very slow.

[Michael Blum:]

Okay. Thanks for that. And I guess, just as it relates to that announcement yesterday out of the DOT, does that – how do you see that impacting things for you?

[Eric S. Slifka:]

I mean, we don’t – we are in a good position here to sort of continue on and move forward with the business so…

[Michael Blum:]

So you don’t see any impact?

[Eric S. Slifka:]

Not on us.

[Michael Blum:]

Okay. Thank you.

[Operator:]

Our next question comes from the line of Darren Horowitz with Raymond James. Please proceed with your question.

[Darren Horowitz:]

Good morning, everyone. Eric, I just had a quick question. It’s a matter of clarification. I want to make sure I understood this correctly. When you’re talking about what you can do with the Albany terminal, I know previously you’ve discussed that you want to handle biodiesel and also you mentioned you’ve got a broader slate of crudes. So I’m just thinking about the incremental CapEx commitment and the timing as to when you can get that facility to evolve to the extent that you have planned. I mean it’s in a great position, obviously, to handle more propane coming through. Clearly, there is a lot of outlet and a lot of barge capability, so I’m just wondering your thoughts, the capital commitment and ultimately how much beyond 1.4 million barrels of capacity you think that facility could reflect?

[Eric S. Slifka:]

Yes, I mean, I think for the movement everything just in permits. So we’re waiting on that, and only the agencies that issue the permits will tell us when they are ready. So that’s not something we have control over.

[Darren Horowitz:]

Based on what you see coming out of Basin, is offloading capacity of 160,000 barrels a day going to be enough?

[Eric S. Slifka:]

We continue to look to expand the capacities there and make those assets as efficient as possible. And that’s also, let’s include the West Coast in that whole conversation. So essentially we are building out our capacities. We are connecting to pipelines. Our recent announcement with Tesoro, but we’re also looking at other gathering systems and connections there. So we are really trying to take those assets and make them as connected to us as much production in North Dakota as possible that will really connect to both the East and West coast.

[Darren Horowitz:]

Within the context of having a vertically integrated presence there, does it make sense for you to consider downstream evolving and maybe getting involved in barge shipments to the East Coast refiners, or is that not something that’s on the table?

[Eric S. Slifka:]

We currently do that right, so in terms of barge shipments, right. So we are in the barge business here. We have lots and lots of barges. So we take those, and we actually do currently deliver to refiners.

[Darren Horowitz:]

Thanks.

[Operator:]

No more further questions at this time. I would like to turn the floor back over to Mr. Slifka for closing comments.

[Eric S. Slifka:]

Thank you, everyone, for your time today. We look forward to updating you in our next call.

[Operator:]

This concludes today’s teleconference. You may disconnect lines at this time. Thank you for your participation.