Global Partners LP
Q4 2014 Earnings Call Transcript

Published: 12 Mar 2015

[Operator:]

Good day, everyone, and welcome to the Global Partners Fourth 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 (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 and Chief Accounting Officer 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 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, 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 the performance 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 publically release the results of any revisions to the forward-looking statement that maybe 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 allow me to turn the call over to our President and Chief Executive Officer, Eric Slifka.

[Eric Slifka:]

Thank you, Edward, its pleasure to be with all this morning to discuss our accomplishments in 2014 update you on our strategic initiatives and share our outlook for the year ahead. Global delivered record full-year net income, EBITDA and distributable cash flow in 2014. Our results benefited in part from significantly colder weather and a favorable gasoline blendstocks market in the first quarter and from the steep decline in wholesale gasoline prices benefiting our gas station business during the second half of the year. Our ability to capitalize on favorable market opportunities reflects the breadth of our asset base and the diversity of our products and businesses. In the fourth quarter, our Gasoline Distribution and Station Operations segment reported a record 86 million product margin, 42% higher than Q4 of 2013 due to sharply declining gasoline prices. In our Wholesale segment, gasoline and gasoline blendstocks product margin declined due to less favorable market conditions. Crude oil product margin, on the other hand, nearly doubled year-over-year to 43.7 million from 22.3 million in the fourth quarter of 2013. Turning to our recent highlights, in January we closed on the acquisition of Warren Equities, the integration is proceeding on plan and we’re already seeing anticipated synergies from the transaction. This is a transformational addition to our gas station and convenience store network which now includes approximately 1,500 locations in 10 states, 8 in the Northeast and 2 in the Mid-Atlantic and round numbers our retail gasoline volume in 2014 was approximately 1 billion gallons and with Warren that figure increases by roughly 500 million gallons a year. With Xtra Mart, we’ve added an extremely well recognized regional brand to our convenience store portfolio. There are 147 Xtra Mart stores in New England, New York and Pennsylvania with quick service restaurants at a number of these locations. Acquisitions are just one component in our strategy to expand the GDSO segment. In terms of organic initiatives, we continue to augment our portfolio with new to industry sites, ways and rebuilds and merchandizing initiatives at our retail locations. Moving onto our Mid-Continent assets, we continue to enhance our interconnected network of storage and crude by rail assets. Our assets in North Dakota are well situated to facilitate the movement of crude oil as it is gathered in North Dakota and moved by truck and/or pipeline to Beulah and Stampede on its way to markets on the east and west coasts or anywhere our customer takes it. A 4.1 mile pipeline connection connecting our Beulah North Dakota terminal to the Tesoro High Plains Pipeline System has commenced operations by expanding crude oil gathering capabilities the pipeline connection enhances the strategic value of our Beulah facility. Meadowlark Midstream Company, a subsidiary of Summit Midstream Partners is continuing its work on a new crude oil pipeline that will connect our base in Transload terminal in Stampede to Summit’s divide gathering system. The 47 mile pipeline will have throughput capacity of 50,000 barrels a day and at the point of the connection will have a truck unloading station with 55,000 barrels of tankage. Subject to permitting we expect the Summit pipeline to be commissioned in the fourth quarter. Separately we are in the process of constructing an additional 176,000 barrels of tankage at Stampede to accommodate increased throughput and we expect that project to be completed in Q2. The increased tankage along with improved rail infrastructure will allow additional throughput. Another highlight in Q4 was the signing of the five year take-or-pay contract with Tethys partners. Tethys will use our rail terminaling, storage and marine logistics services to transload crude from sites in the U.S. and Canada to our CPBR facility in Clatskanie, Oregon. The contracts ramps up to 30,000 barrels a day effective April 1st and equates to approximately 55 million barrels of crude oil over the term of the agreement. As we discussed at our Inventor Day, CPBR currently has 200,000 barrels of storage and 12 railcar offloading positions we are pursuing plans to build additional storage and [large] the dock and increase rail capacity. Our plan there is to concurrently offload crude trains and operating the ethanol manufacturing facility creating additional product flexibility we expect to complete this expansion next year. In Port Arthur, Texas we are pursuing permits to develop our waterborne rail terminal project which remains on target to open in 2017. This is a key milestone as we continue the build out of our system to drive optionality to the south, east and west. The facility will be located on land owned by Kansas City southern which connects to all of the class one railroads that transport crude and other products from various markets in North America. The site is 225 acres. We’ve looked at multiple layouts for the terminal which has the potential to accommodate as much as 9 million barrels of storage. As we advance conversations with a number of perspective customers we are very enthusiastic about the opportunities for this project. Let me take a moment to address the question on the minds of many investors in recent months. How do current oil prices affect our crude oil supply and logistics operations? Our fundamental bias remains that normal supply and demand patterns favor the movement of Mid-Continent light crude to the East and West Coast. Although current market conditions are drawing a portion of those light crude barrels to empty storage at the Cushing Oklahoma oil hub, that demand is temporary. Once storage in Cushing is full we expect to see much of this Mid-Continent sweet crude volume again move to east and west. Our wholesale supply and logistics operations are well positioned to handle these volumes. We have a broad base of terminaling and transloading assets that serve crude oil and refined petroleum products by rail, pipeline and/or marine transport. Our 25 bulk storage terminals have a combined capacity of 11.7 million barrels. Earlier this year we completed the acquisition of a 2.1 million barrel terminal Boston Harbor from Global Petroleum Corp. This asset which had been leased to the Partnership by CPC for many years is the largest terminal in our portfolio. It is a major regional hub for the storage and distribution of refined petroleum products including heating oil, gasoline, distillers, diesel, kerosene and blend stocks. In addition a portion of the storage capacity is contracted to store fuel as part of the government reserve programs. Turning to our distribution, we remain committed to maintaining a strong return for our unit holders. In January the Board of Directors of our general partners increased Global’s quarterly distribution to $0.665 per unit or $0.266 on an annualized basis. This represents an increase of 1.92% over the prior quarter’s distribution and 8.57% more than the distribution paid in the fourth quarter of 2013. Now let me turn the call over to Daphne for her financial review and our 2015 guidance Daphne?

[Daphne Foster:]

Thank you, Eric, and good morning, everyone. Let me give you some color on our fourth quarter performance. Gross margin was up about 6.6 million or 5% from the same period of 2013 to 141.5 million. Gross margin benefited from year-over-year margin improvements in our GDSO segment and crude oil operations partially offset by less favorable market conditions in the wholesale gasoline and gasoline blend stock market. In addition, please keep in mind that our Q4 2013 results benefited from a 9.9 million decrease in [indiscernible] related liabilities. Fourth quarter EBITDA was 51.9 million a decrease of approximately 3 million from the prior year period reflecting higher expenses associated with investments in our wholesale and GDSO businesses which offset the increase in gross margins. Net income attributable to Global for the fourth quarter was 27.9 million compared to 34 million in the [Technical Difficulty] of the prior year reflecting higher depreciation from additional investments in our business and higher interest expense due to the issuance of high yield bonds midyear. EPS was 44.4 million approximately 8 million less than the same period in 2013. The larger variance in EPS compared with that in EBITDA was due primarily to increased maintenance CapEx in our GDSO segment and higher interest expense related to the bonds. Looking at our segments in more detail, wholesale segment product margin was down approximately [15.4 million] to 55.9 million. As Eric mentioned this was primarily due to less favorable market conditions in gasoline blendstock as well as a 9.9 million favorable impact from land related liabilities in the fourth quarter of 2013. Crude oil product margin was up approximately 21.4 million to 43.7 million due to increased volumes and higher margins. Fourth quarter commercial segment product margin was up about 600,000 from the prior year period to 6.4 million. Our GDSO segment had a record quarter due to the decline in price environment. This segment generated a 42% increase in product margins up 25.3 million from the prior year period to 86 million. The NYMEX price for 87 or above regular gasoline fell $1.15 per gallon from 2.59 at the end of September to 1.44 at the end of December and was the primary reason for our 59% increase in fuel price margins at 62.8 million. Station operation product margin increased 2.1 million from the fourth quarter of 2013 due primarily to continued expansion of our key store operations and merchandizing efforts as well as the addition of 11th commission agent Mass Turnpike site. Turning to expenses, total expenses were 95.4 million for the fourth quarter with SG&A and operating expenses increasing 7.3 million and 3.5 million respectively year-over-year. Higher SG&A reflects investments in planned staff additions to support our growing businesses as well as growth initiatives such as our Port Arthur projects, gasoline stations including 1.7 million in expenses related to the acquisition of Warren Equities and other expansion activities. Higher operating expenses in Q4 include 3 million related to the growth in our GDSO segment such as the Mass Turnpike site, additional site under our [indiscernible] and the completion of certain [indiscernible] 12.1 million for the quarter of 2014 compared with the 11.4 million for the same period last year due to the issuance of 375 million, 6.25%, eight year unsecured bonds last June. The proceeds of the issuance we used to exchange outstanding senior notes and to repay a portion of our borrowings under our credit facility. Total CapEx for the quarter was approximately 21.5 million, 5.6 million of which was maintenance CapEx. The majority of our 50.9 million in expansion CapEx consisted of investment in our gasoline station related business and our crude transloading terminals. For instance we have renovated 19 of our 23 retail station sites on the highly travelled Connecticut Turnpike with completion of the remaining sites expected by the end of the second quarter. And in January of this year, we introduced [annuity in the free] industry gas station and convenience store in Orono Maine. Our crude-related investments included expanding tankage and rail infrastructure at our North Dakota terminals. The 5.6 million of maintenance CapEx consisted primarily of investment at our retail gasoline stations and IT. Our balance sheet remains strong. At December 31, total funded debt was 509 million consisting of the 375 million in unsecured notes and 133.8 million in outstanding under our acquisition revolver. Total funded debt to EBITDA was 2.1 times and we had excess foreign capacity of nearly 1.4 billion under our committed bank facility which at yearend stood at 1.775 billion. Partners' equity at December 31, was 636 million reflecting our public offering of approximately 3.6 million common units. The offering completed on December 10th, generated net proceeds to Global of 138 million. In January of this year, we completed the acquisition of 100% of the equity interest in Warren Equities from the Warren Alpert Foundation. The purchase price of approximately 387 million was funded with borrowings under our credit facility. We expect Warren to be accretive in the first full year of operations and generate 50 million to 60 million of EBITDA in the second full year and as Eric mentioned we are pleased with how the integration is proceeding. Now let me comment on 2014's full year performance which benefited from several unusually favorable market opportunities. 2014 was exceptionally strong with improvement in all segments. EBITDA increased from 157 million in 2013 to 242 million and DCF increased from 105 to 161 million. Wholesale segment product margin increased 90 million, this contribution from gasoline and gasoline blendstock up more than 28 million, crude oil up 49 million and throughput volumes and margins increased year-over-year and other oil including distillates up 12 million. The increase in the gasoline and gasoline blendstock margins was partially due to a 19.3 million increase in [rent] liabilities in 2013 which did not occur in 2014. The GDSO segment also has significant increases year-over-year largely due to an extraordinary period of declining prices. During periods of falling pricing, retail fuel margins typically expand. For the year our fuel margin increased 39 million from a 150 million in 2013 to 189 million in 2014. While some of this increase was due to new or retail sites streaming on, the favorable price environment was the primary reason for the increase. Contributions from station operations within the GDSO segment also increased up 11.6 million to 91.8 million due to additional sites including the Mass Turnpike site and our merchandizing efforts. As a reminder, there are other notable opportunities that we took advantage of during 2014 the first quarter was extremely cold, 9% colder than normal. Our other oils and related products which include fuel such as distillates and residual oil benefited from the cold temperature, tight supplies and curtailment of deliveries [the interruptible] natural gas customers driving demand. Also in the first quarter severe weather and rail congestion caused shortages of gasoline blendstock in certain markets creating very favorable market opportunity. Turning to guidance based on the current market environment we expect full year 2015 EBITDA in the range of 205 million to 225 million. The guidance is based on assumptions regarding market conditions such as demand for petroleum products and renewable fuel, commodity prices, weather, credit market, the regulatory and permitting environment and the slower products pricing curve which could influence quarterly financial results. The guidance does not take into account unusually favorable market conditions such as global experience with respect to gasoline blendstock in the first quarter of 2014 and with effects of rapidly declining gasoline prices in the second half of 2014. Now let me turn it back to Eric for concluding comments.

[Eric Slifka:]

Thank you, Daphne. Let me close by saying that we have several key organic projects on horizon and that our diverse mix of products and business lines, expanding terminal portfolio and strong balance sheet will serve us effectively as we move through this year and beyond. Operator?

[Operator:]

Thank you. Ladies and gentlemen, at this time, we’ll be conducting the question-and-answer session [Operator Instructions]. Our first question comes from Gabe Moreen with Bank of America Merrill Lynch. Please state your question.

[Gabe Moreen:]

Just follow up on the expansion opportunities, is there any guidance you’d give us I guess in terms of overall CapEx spend for ’15 I guess just how big the major buckets of expansion CapEx kind of would be on individual business?

[Daphne Foster:]

I think in terms of expansion in last year we spent about 61 million, so 24 million of that was in crude, 20 million was in the retail side and then 5 million including the propane and some other investments. I think looking forward into 2015 the latter part of the year we will start to spend on the West Coast -- hope to start to sell on the West Coast projects and on the Port Arthur projects and [indiscernible] 2016 and beyond. I think in terms of our GDSO segment it’s likely we will be around the same number as last year although we evaluate each project separately and look to get at least 15% return and so none of those expenditures are really baked into our performance in 2015. I don’t know if that helps.

[Gabe Moreen:]

And I guess mentioning kind of Q4 versus this year versus last in the wholesale gasoline segment I guess I am just curious kind of the lack of market opportunities and how that came in. Can you elaborate a little bit more in terms of I know there was a rinse benefit last year that you didn’t get this time around but I guess I was under the impression of the gasoline market may have been in contango two for at least part of the quarter so I am just curious if you can give us a little more color on what you are seeing whether you expect those conditions to persist?

[Mark Romaine:]

With regard to Q4 2014 versus 2013 you really had -- first of all 2014 on a gasoline blendstock side Daphne talked about it and we saw some very unusual logistics conditions in Q1 and into Q2 of 2014, so we saw some volatility in that gasoline blendstock market. As markets came out of backwardation in the ethanol they continued to slide into contango so really a different environment than we had in ’13 when we had really strong market conditions for ethanol in 2013 so in one case you had markets coming out of backwardation going into contango and then the other the point that you’re trying to compare to in 2013 was I wouldn’t say unusually strong but I would say it was very strong. So, you had markets going in different directions on the gasoline side actually both Q4 of ’14 and ’13 were strong from a supply standpoint, you had supply disruptions in the really up and down the East Coast you had some refinery issues and you had a lack of cargos coming into that market, so it created for -- '13 may have been stronger than '14 but they were both on the gasoline side.

[Gabe Moreen:]

Okay, thanks Mark. And then I guess last question for me just is in terms of kind of the weather upside that was obviously 1Q last year, clearly it's been cold so far on 1Q thus far, it doesn’t seem like it’s quite as some of the same price [flexes] you saw this time last year but the new guidance for '15, does that incorporate what you know about weather thus far or for this year, so in other word that hasn’t been pretty cold in February?

[Daphne Foster:]

Yes, I think what we're getting today Gabe is, our guidance will reflect what we see today and what we’re seeing for the balance of the year.

[Operator:]

Our next question comes from Cory Garcia with Raymond James. Please state your question.

[Cory Garcia:]

Turning back to the GDSO business clearly very strong results this quarter and obviously gave reasons why on the margin front, is it fair to say that we’ve already seen sort of that return to more of a normalized fee store retail type of margin at this point in the year?

[Mark Romaine:]

I think when you look at markets and as they settle if you will, you typically go back to more normalized margins overtime.

[Cory Garcia:]

Okay so we have sort of that settling point by this time of the year.

[Mark Romaine:]

Market's been bouncing around in about $5 or $7 range and so I’d say that is sort of more normal.

[Cory Garcia:]

Okay great and sort of incorporating that into your full year guidance, I want to say looking through my prior notes that sort of the pre-Warren run rate for that business was in 80 million to 90 million EBITDA range, is that still the right figure to sort of use despite the fact you guys are obviously continuing to push and drive towards enhancing just your core business as well through merchandizing and some of the other initiatives?

[Daphne Foster:]

Yes, we have in the past said that the GDSO segments generate 80 million to 90 million and certainly we’ve made investments in that business whether it’s new to industry [or ready to retails] and our merchandising efforts, so I think it’s safe to put it above that level.

[Operator:]

[Operator Instructions] Our next question comes from Randy Saluck with Mortar Rock Capital. Please state your question.

[Randy Saluck:]

Couple of questions, one with respect to Warren, I know your synergies I know the gentleman before asked questions about synergies but with respect to synergies you talk about migrating the one system onto your sort of supply system which generates synergies that you can identify, what about the combination and the scale associated with that, have you looked into I am sure you’ve looked into it but have you sort of quantified what the additional synergies might be? And I have one other question.

[Mark Romaine:]

Yes, we’ve -- Randy, this is Mark, we’ve spoken in the past when we announced the acquisition about our expectation of our ability to recognize some synergies by combining the Warren sites into our own network, some of those synergies will be driven by our ability to run barrels through our terminal network, to benefit from our supply efforts and it’s not just limited to the fuel supply end of the business. At the fee store level, there is certainly opportunities to drive synergies and through the scale of the combined operations, yes we went on a very detailed basis, we went -- when we were looking at this portfolio, we went through a very detailed analysis of where we thought the synergies were at and I think we’re encouraged by what we’ve seen so far. Our expectation is still to hit the numbers that we spoke about.

[Daphne Foster:]

And yes, Randy, just to be clear, we had said 50 million to 60 million in the second year and I think following up on what Mark just said and also Eric [Slifka] earlier in terms of feeling good about what we’re seeing thus far in synergies and we said this before as well that we are hopeful to get more than 50% of the way there in the first full year.

[Randy Saluck:]

Okay that’s good and then secondly more generally philosophically dividend increases what are your thoughts over the next year or two? Where would you like to be things work out?

[Mark Romaine:]

Yes, we deal with the board on that every quarter so we’ve come up and sort of said we’re going to work with the board to talk then what that looks like moving forward.

[Randy Saluck:]

Is there certainly coverage ratio that you’re comfortable with that you won’t go below or target coverage ratios or anything like that?

[Daphne Foster:]

Yes, Randy, we said that we feel comfortable with 1.2 to 1.3 times coverage. I mean obviously we’re running well below that now, it’s little over two times at the end of the year, but we’re comfortable with 1.2 to 1.3.

[Operator:]

[Operator Instructions]. Our next question comes from James [indiscernible] please state your question.

[Unidentified Analyst:]

A couple of questions, first on the contango in the crude oil market, am I correct in assuming that that has little or no effect on you guys in general? And then the second question relates to if we see a situation in the Bakken where production levels off or even declines in a couple of the years, if you could go through sort of a thought experiment on how that would affect your operations up there vis-à-vis how other operations might deal with it potential fall off in production?

[Mark Romaine:]

You had two questions there, the first was relative to contango in the crude markets and we do have -- we do benefit somewhat from contango in any market to the extent that we have storage and we can store a barrel and hedge it forward then there will be some uplift from that. So I wouldn’t assume that it’s nothing. In markets like this you never have enough but we do have some crude storage that we can pick up some uplift. As far as looking down the road on the crude business and it’s awfully tough to predict where volumes are going to go in this environment, I think our bias Eric stated it earlier, our bias is that the barrel coming out of North Dakota long term should want to move to the east and west it’s not our expectation that the Gulf Coast will be calling for that barrel so to the extent that the barrels are coming out of the ground in North Dakota it’s our expectation that the highest netback to those barrels will be on the East and West Coast. And again I think we’re well positioned to facilitate that movement. If you look at when we get into this business in 2011 maybe which as a reminder was kind of on the heels of our ethanol business which in entails moving ethanol unit trains out of North Dakota into our Albany facility. When we started this engaging the crude logistics [a chain] crude production was probably somewhere around 400,000 barrels a day in North Dakota and now it’s well over 1 million barrel a day so I do believe that in baring a complete shutdown of North Dakota that there is going to be opportunity for us to participate and grow the business through our St. Pete and Beulah assets to our East and West Coast assets as well as we continue to grow the business outside of that network as well so our North Dakota assets can ship a barrel anywhere. I mean it’s our preference and it’s our belief that our system provides a great netback for those barrels but the fact of the matter is we can ship them anywhere out of those rail terminals.

[Unidentified Analyst:]

So is your view then that crude by rail to East Coast and West Coast will remain full while pipelines to the south would suffer first?

[Mark Romaine:]

It’s tough to say what I can’t speak to first or second what I think is that crude by rail to the East and West Coast will remain a high netback for producers and will remain relevant under any market condition.

[Eric Slifka:]

So let me try to clarify a little bit there, it is still our belief that there is excess sweet production in the south for what the refining capacity, the nearby refining capacity is so that’s really the Gulf Coast. So because of that it is our belief that the highest netback will be both east and west because you’re competing with imported barrels that have to travel further to get to the market.

[Unidentified Analyst:]

And in terms of your projections for this year, have you included in those projections the benefit from contango on your crude assets?

[Daphne Foster:]

I think our guidance really is as we said before really takes in to consideration the forward pricing curve as well as the commodity prices et cetera so that is where our’15 guidance reflects.

[Unidentified Analyst:]

And lastly to refresh me also, your Port Arthur operations are focused on crude by rail to the south are they not?

[Eric Slifka:]

That’s correct, but it’s truck primarily okay, heavies [indiscernible] Mark want to add a little bit on to that.

[Mark Romaine:]

Let me add to that because I think when we -- we’ve been looking at this Port Arthur project for quite some time and our initial business model contemplated the movement of heavy crude by rail into that market so that’s an undiluted barrel of heavy crude. So when you look at the economics of an undiluted barrel by rail versus a [dilbit] by pipe I think it can compete on an economic basis to those markets. What we’ve since determined or what we’ve since we started looking at it, we can’t understand that that Port Arthur project will likely be a lot more than crude, so we’ve seen tremendous interest from the ethanol market in that facility. I think there is going to be some opportunity and it may be on an opportunistic basis but I think there is going to be some opportunity to handle refined products through that facility so when we look at Port Arthur now we’re looking at it as a multiproduct rail to water scale storage facility.

[Eric Slifka:]

Hey James, one other piece there is a really nice dock facility there as well so when you just think about an infrastructure play, we look at the Gulf Coast we look at capacity and availability on the Gulf Coast and we think Port Arthur because of its geographic closeness to refineries as well as its ability to access water from docks that currently need some investments. We look at that as really having a unique position in that marketplace for potential customers to use to get to the water.

[Operator:]

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference back to Mr. Slifka for closing remarks. Thank you.

[Eric Slifka:]

Thank you all for joining us this morning. We look forward to keeping you updated on our progress. Have a great day everyone.

[Operator:]

All parties may disconnect. Have a good day. Thank you.