Global Partners LP
Q2 2014 Earnings Call Transcript

Published: 7 Aug 2014

[Operator:]

Good day, everyone, and welcome to the Global Partners Second Quarter 2014 Financial Results Conference Call. Today's call is being recorded. [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 will 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 be making 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 Officer, Eric Slifka.

[Eric Slifka:]

Thank you, Edward, and good morning, everyone. We are pleased with our overall operational progress and financial performance through the first half of 2014. Demand across our business is strong. We are on a positive trajectory to successfully execute our plans during the remainder of 2014 and beyond and remain on track to achieve our full year EBITDA guidance. One of the key themes for Global continues to be the increasing optionality we provide customers through strategic expansion of our assets. In the relatively short time, we have established a national footprint for moving energy products by rail from one of the country's largest crude-producing regions to refiners and other customers on the East and West Coasts. From our initial storage tank in Columbus, North Dakota, for example, we have increased our storage capacity in the Bakken region by 450%, creating formidable truck, rail and pipeline service terminals in a state that alone accounts for 12% of the U.S. crude production. In addition, we continue to build a system designed to have flexibility for our customers and allow us to adjust to the supply-and-demand shifts that are inherent to energy industry. Recently, I had the honor of speaking at the Energy Information Administration's 2014 Energy Conference in Washington, D.C., about the energy renaissance underway in the United States and the integral role that rail has to play in the industry's domestic resurgence. At the conference, I've pointed out that crude transported to the Gulf or Atlantic Coast from the Bakken requires a transit time of just 3 to 6 days, when moved by rail. By pipeline, the same trip takes about 40 days. The use of unit trains increases the efficiency of product by rail, as a single unit train is capable of transporting more than 80,000 barrels of crude. For highly viscous products, the use of heated tank cars further contributes to efficiency of crude by rail, reducing the need for expensive diluent additives required, when these products are transported through pipelines. The bottom line is that while there's no single solution to crude transportation in the United States, rail offers an extraordinary level of flexibility, optionality, rapid transit and market penetration, all the while requiring a lower cost of capital. Although, it's impossible to know precisely where the market is going or what products we may be carrying in the future, we have positioned ourselves to provide the logistics for whatever the market demands. With that as a backdrop, let me spend a few minutes discussing some of our recent highlights and how these new developments dovetail with our objective of continuing to generate solid returns for unitholders. A significant development is a long-term agreement we have with Kansas City Southern to develop and build a waterborne rail terminal in Port Arthur, Texas. The terminal will initially handle heavy crudes from Canada, but ultimately, may also handle refined petroleum and ethanol, as well as condensate. We are excited about the opportunity to embark on this project with such an outstanding partner. The terminal is initially envisioned to receive 2 120-car unit trains per day. However, KCS has the capacity to deliver up to 6 unit trains to the site per day. We will have 345,000 barrels of tank storage and a dock capable of handling Panamax-size vessels, and it will be designed to feed local refineries by barge. In terms of the capital investment, at this point, we estimate the initial phase to be between $75 million and $100 million, over 3-year period. Subject to the receipt of permits, we anticipate the opening of the facility in early 2017. We believe that this will be a terrific asset for the company, because it fits squarely in our long-term growth strategy. Development of the Port Arthur site will broaden our revenue and income streams, to include the Gulf Coast, a region that represents half of the U.S. refining capacities. By way of background, the EIA puts the Gulf's refining capacity at about 9.4 million barrels a day. Our new terminal in Port Arthur will enable us to address not only the significant local demand for domestic and Canadian crude, but provide a potential opportunity for future exports of any energy products as well. One of the reasons that our crude oil terminals and logistics are so attractive to existing and prospective customers is the increasing breadth of our gathering capacity and capabilities. In Q2, we've signed an agreement with Meadowlark Midstream Company, a wholly owned subsidiary of Summit Midstream Partners. Meadowlark will build, own and operate a new crude oil transportation system, serving our Columbus, North Dakota rail loading terminal. The project is expected to be operational by the second quarter of 2015. When completed, the system will include

[Daphne H. Foster:]

Thank you, Eric, and good morning, everyone. Consistent with our discussion when we spoke with you on our first quarter earnings call in early May, our financial results for the second quarter were substantially as expected. Having benefited from unusually favorable margins in gasoline blendstocks in the first quarter, we had anticipated an approximate $20 million negative impact on our gasoline blendstock margins from backwardation in the forward ethanol market to likely occur in the second quarter. In addition, we noted in our Q1 call that we were experiencing increased costs in crude rail logistics early in the second quarter. Our Q2 results reflect these impacts. Wholesale gasoline and gasoline blendstocks margin declined $16 million year-over-year. In addition, our results reflect our investment in personnel to support our growing business and to capitalize on growth initiatives, including crude oil activities, retail gasoline and convenience store operations and the development of other projects. EBITDA was $19.1 million for the second quarter of 2014, a decrease of $13.5 million from the $32.6 million for the same period last year. The net loss for the second quarter was $12.7 million, a decrease of $17.5 million from $4.8 million for the prior year period. DCF was negative $4.2 million, $23.2 million less than DCF of $19 million for the same period in 2013. The larger variances in net income and DCF, as compared to EBITDA, were due to

[Eric Slifka:]

Thank you, Daphne. Let me close by saying that we are executing on our long-term strategy to generate strong returns for our unitholders, through leadership in the gathering, storage, transportation and marketing of energy products across North America. Our alliance with KCS and Port Arthur is an important element in a multi-coastal virtual pipeline that augments our national energy-by-rail footprint. Our focus on high-value initiatives, such as infrastructure expansion project, investment in terminal and retail assets and cultivation of new sourcing opportunities, continues to put Global on a growth trajectory. Now, Daphne and I will be happy to take your questions. Operator?

[Operator:]

[Operator Instructions] Our first question today is coming from Gabe Moreen of Bank of America Merrill Lynch.

[Gabriel P. Moreen:]

Daphne, you've mentioned the $30 million to $35 million of maintenance CapEx for this year and some of the things driving that. I just -- I know it's maybe a little early to look out to 2015. But can you talk about whether you potentially see that maintenance CapEx coming back in, again, once some of the expenditures you're undertaking this year -- kind of you get through that?

[Daphne H. Foster:]

I don't -- Gabe, I don't think we'll comment on 2015. I mean, honestly, I think, that number's not a bad number going forward, as we continue to grow.

[Gabriel P. Moreen:]

Okay. Then maybe turning to the KSU deal, can you talk about sort of your contracting strategy around that? It's a reasonably sized CapEx expenditure. And then also kind of the second part of that question is

[Mark Romaine:]

Gabe, this is Mark. Good morning. I think 2 parts to that question, and the first part, with respect to the Port Arthur facility. Our plan for that facility is, Global will construct, own and operate that facility. We will operate it as a -- it will be open for third-party business. And we are actively engaged with several different parties on commercial discussions surrounding the opportunities at that facility. And those would be ongoing, as we continue to move forward in the permitting and construction process of that terminal. With regard to the Canadian portion of that business, as you know, we just about a year ago, opened up an office up in Canada. We've been actively sourcing product for our system out of Canada. Those efforts continue to grow. The Port Arthur facility is really the base model for that type and place for movement of heavy crude from Canada. So certainly, it fits in well with that initiative. And as you also probably know, there's quite a bit of infrastructure being built out, up in that Edmonton region. And we've been looking hard and active at those facilities. So I think the notion would be to either offer that service for a producer. Certainly, we've got our own marketing and supply activities that we'll look to leverage out in that system as well.

[Gabriel P. Moreen:]

Great. And if I could follow-up just one more on the Port Arthur facility. This 3-year timeline to build it, is that more just a function of the permitting required? Or is there actually, physically in terms of prepping the site is just going to take that long?

[Mark Romaine:]

Yes, I think the big wildcard there is the permitting. I think we have a better handle on the construction timeline or the expectations for the construction timeline. But I think a portion of that, the unknown, will be permitting timeline for that. So we're -- I think we're being fairly -- hopeful being fairly conservative with our estimate on that.

[Eric Slifka:]

Yes. I mean, Gabe, our estimate there is that 12 to 18 months, just on the permitting side, right. And so the second question is, is sort of the remainder of the time there. I can tell you that there has been quite a bit of interest and a lot of incoming calls from the third parties there, who are interested in that location and the fact that it gets to water. Thematically, it's one of those sites that faces the water and, I think, it could end up having quite a bit of value for our customers.

[Gabriel P. Moreen:]

Any existing sites got the dock capacity? Or is it really close enough to the dock capacity, Eric, that's kind of not going to be an issue from getting that on ships, if I understand that correctly?

[Eric Slifka:]

Yes, there's docks right there. I mean, the idea is that it's at the water. It's to get it to barge. That is the way it's designed. It also has the capability, with some investment, to go up to larger-size vessels as well.

[Gabriel P. Moreen:]

Okay, great. And then just last one from me, just in terms of what you're seeing right now, in terms of the ethanol forward curve, and whether the backwardations alleviated at all? I don't know if I missed out in the comments earlier.

[Mark Romaine:]

Yes, we have seen a lot of the backwardation has come out of ethanol. There is still some backwardation in the ethanol. But our view, ethanol seems to be well supported. And there is, probably -- it depends which side the curve moved here. And I think that our bias right now is that -- maybe the back end of that is a little more attractive.

[Operator:]

[Operator Instructions] We're showing no further questions in queue at this time. I'd like to turn the floor back over to Mr. Slifka for any additional or closing comments.

[Eric Slifka:]

Thank you for joining us this morning. This concludes today's call. Have a great day, everyone. Thank you.

[Operator:]

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