Global Partners LP (GLP) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to the Global Partners First Quarter 2012 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 Operating Officer and Chief Financial Officer; Mr. Tom Hollister; 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.

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 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, 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 filing with the Securities and Exchange Commission. Global Partners undertakes no obligation to revise or publicly release the results of any revision 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, allow me to turn the call over to our President and Chief Executive Officer, Mr. Eric Slifka.

Thank you, Edward, and good morning, everyone. Consistent with the guidance we provided on our fourth quarter conference call in March, our first quarter results were weak as a result of record warm weather and rapidly increasing gasoline prices. Not only was the first quarter 20% warmer than normal, it was the warmest first quarter ever recorded by the National Weather Service locally in more than 120 years the weather service has been recording temperatures.

Heating oil, residual oil, and natural gas volumes were all adversely affected by the warm weather. Additionally, NYMEX gasoline prices increased rapidly in the first quarter, climbing $0.70 from $2.69 at year-end to $3.39 at March 31. A spike in gasoline prices typically squeezes distribution margins related to supply and gas stations, hampers margins at the stations themselves, and likely causes reduction in demand. For example, AAA Boston estimates that retail gas prices rose only $0.53 during the same period of time that the NYMEX climbed $0.70. By our estimates the combination of these two factors reduced EBITDA for the quarter by about $10 million. Approximately 60% of the impact was weather related and the remaining 40% was due to gasoline margins and to a lesser extent gasoline demand.

While the loss of weather related volume cannot be made up over the remainder of the year, it is possible for us to recoup the gasoline margin and volume because in our experience, the ups and downs and gasoline prices and margins tend to normalize over a 12 month period. This is one reason that we have continued to shift the focus of our business toward gasoline, gasoline blend stocks, and other non-weather sensitive fuels.

Had we not undertaken this transformative step beginning several years ago, unseasonably quarters such as we experienced in Q1 would have had a far greater impact on our results. Along with the factors, I have mentioned, we incurred one-time expenses in the first quarter related to the March closing of our Alliance Energy acquisition. Tight expense controls brought these closing costs in at $4 million, approximately $1 million less than we had estimated on our fourth quarter conference call. Exclusive of the one-time closing costs, as well as the impact of the weather and gasoline prices, we estimate that our EBITDA of $18.5 million would have been greater by $14 million, and our bottom line would have improved by a comparable amount.

While 2012 started slowly, the underlying strength of our business, our new gasoline station operations, and our portfolio of organic projects are encouraging signposts for the balance of the year and beyond. Under the leadership of Andrew Slifka, President of our newly created Alliance Gasoline Division, Alliance has established itself as a premiere owner and operator of gasoline stations and convenience stores across the Northeast. Alliance has grown over the past 20 years through a series of strategic acquisitions and organic projects.

In a moment, for example, I will talk about a management contract that Alliance has secured with Getty Realty. We look forward to continuing Alliance's success in broadening its geographic presence and further strengthening its dealer relationships. The Alliance Division is now part of our new gasoline distribution and station operations segment. Tom will discuss some modifications we have made to our segment reporting shortly. The takeaway point here is that this segment complements our wholesale business and adds to our year-round income stream. We expect it to be an important contributor to future cash flow and operational growth.

Now, let me discuss several of our organic growth projects highlighted by multi-million dollar rail expansion project at our Albany, New York terminal that will more than triple its current throughput capacity to approximately 150,000 barrels per day. The expansion, which is expected to be completed in the third quarter of this year, will enable two 120-car unit trains to be offloaded daily.

Our Albany project is designed to create an efficient and cost effective mechanism for transporting crude oil and other energy projects from North American producing regions such as the Bakken region of North Dakota to refineries along the U.S. East Coast. In connection with the terminal expansion, the Partnership is finishing construction of a 100,000 barrel tank and associated piping to load rail cars at our Stampede transload facility in the Bakken region.

The product is transported from there by unit train to Global Partners terminal along the Hudson River in Albany, New York, where it is shipped by barge to refiners. We believe that Global Partners is currently the only company capable of delivering single-line haul of crude, in volume, to the East Coast from the Bakken region. Single line hauls are highly efficient in terms of both costs and reliability. We are able to move product from North Dakota rapidly at an average of just four or five days per train shipment; with some shipments completed in as little as two and a half days.

In addition to this expansion project, we are developing a new rail-fed propane facility in Albany and pursuing other projects designed to leverage our expertise in purchasing, logistics, transportation, storage, and marketing of petroleum products and other commodities. For example, Getty Realty recently entered into an interim fuel supply and services agreement with Global to provide gasoline supply and certain oversight services to approximately 254 dealer managed locations in the New York City metropolitan area and New Jersey. Global will be paid a fee to manage these assets.

Turning to our distribution, the Board last month declared a quarterly cash distribution of $0.50 per unit for the March quarter that will be paid May 15 to unit holders of record as of the close of business May 4. The Board will continue to evaluate the distribution on a quarter by quarter basis in light of our earnings power, which continues to be strengthened by acquisitions and organic projects. In summary, the breadth and strength of our asset base and the emergence of new organic opportunities position the Partnership for improved results in 2012. Now let me turn the call over to Tom for his financial review and our full-year EBITDA guidance. Tom?

Thank you, Eric, and good morning, everyone. Eric highlighted for you the two primary issues that caused our weak first quarter performance. With a net loss of $1.4 million and EBITDA of $18.5 million, we estimate that net income EBITDA and distributable cash flow were affected by about $10 million as a result of the warm weather and sharply rising gas prices. We also incurred $4 million of one-time closing costs associated with the completion of the Alliance Energy acquisition on March 1, bringing the total closing costs to $5.1 million, including the $1.1 million incurred in the fourth quarter. We do not expect to incur any additional closing costs associated with this transaction.

Total operating expenses increased $7.3 million in the quarter from the same period in 2011, related primarily to the inclusion of one month of Alliance operating expenses; as well as the one-time Alliance closing costs. These increases were offset by year-over-year decreases in our core expense base. Exclusive of the costs associated with Alliance, we remain on track to achieve targeted annualized core expense savings of $10 million to $12 million from 2011 to 2012.

In our 10-Q, which you will see later this week, we have modified our segment recording in the first quarter to better reflect our business following the acquisition of Alliance Energy. We are making the change in our segment reporting for several reasons, including first the significance of our Alliance acquisition, which further broadens our gasoline distribution network and expands our presence in the gasoline station market; second, the formation of our new Alliance Gasoline Division under Andrew Slifka, who will oversee all of our Alliance and mobile assets; and third and most importantly, how our chief operating decision maker reviews performance and makes decisions.

Beginning with our first quarter 10-Q, we now will have three operating segments, which are also our reporting segments. In addition to our wholesale and commercial segments, we now have a third segment called "Gasoline Distribution and Station Operations", which includes the operations of our Mobil and Alliance assets. Moving to the balance sheet, the primary change to the March 31 balance sheet from year-end 2011 is the increase in net property and equipment of $320 million, which is substantially related to the acquisition of the Alliance assets. The related financing of the Alliance acquisition is reflected in the issuance of 5.85 million units to the seller and net revolver borrowings of $182 million. We have increased our environmental reserves by $22 million in connection with the Alliance transaction.

Turning to our distribution, as you know our Board last month declared a quarterly cash distribution of $0.50 on all outstanding common units. Let me point out that the distribution on the 5.85 million units associated with the Alliance acquisition has been prorated to reflect the actual 31 days of ownership in the 91 day quarter.

Although we typically do not provide specific guidance on future results, we thought it would be helpful to provide some additional color given the weak results for the first quarter, the recent acquisition of Alliance, and what we believe are promising opportunities for the Partnership.

We have said previously that prior to the Alliance acquisition and in normal markets, a reasonable expectation for EBITDA for the partnership is in the range of $90 million to $110 million. On a pro- forma basis, with a full year of Alliance results, that range should increase to $130 million to $150 million.

This outlook is of course, based on a number of assumptions regarding market conditions, including demand for petroleum products and renewable fuels, weather, credit markets, and the forward product pricing curve. With that in mind, and factoring in the weak first quarter results, the one-time closing costs, and the addition of Alliance for ten months of the year, as well as other factors, we believe that EBITDA for 2012 should fall somewhere between $110 million and $130 million. To summarize, we are encouraged by the Partnership's prospects from our existing operations as well as our new development opportunities. With that, we would be happy to take your questions. Operator?

Thank you.

(Operator Instructions)

Our first question comes from the line of Paul Jacob with Raymond James & Associates. Please proceed with your questions.

Good morning, guys.

Good morning, Paul.

Just a housekeeping question. Could you tell me how many unit trains you offloaded in the quarter?

Paul, we're, for competitive reasons not going to break out that exact number. But suffice it to say that the amount of trains that we're moving continues to increase.

Okay. So, that run rate that you outlined on the last call, I should just expect those at that rate or a little bit higher?

We continue to get more efficient in moving it, Paul. The better we get, the better the facility gets. And the better the operators get on both sides, the more you increase it.

Okay. Then as you look to these further opportunities for supply and logistics with the rail set and propane specifically. First of all, how do you see the portfolio shaping out from cash contributions? Do you anticipate that 20% of your portfolio can be related to S&L sort of opportunities beyond your traditional business? Or, it can be greater than that?

Well, it is interesting. I think that is hard to nail down. Because permits and property and finding the location to begin to build out your entire system are difficult to come by and take time. We are sort of forging ahead and trying to build out the platform in the system as much as possible. But if it were easy everybody would be doing it? Right, so it is site by site. That is how we're trying to go about it.

There are all sorts of opportunities, both in the Bakken region as well as here on the East Coast and in other places as well. So, we continue to focus on all those opportunities and try to get as many deals done as possible. I would not say it's a target. I would say we are going to go wherever we can try and make the most money.

Okay. Then do you see any opportunities for our supporting propane?

I think that is a possibility, but we are not focused on that just yet. We just want to get our infrastructure in place. Then we can maybe focus on that.

Okay. Great, thanks.

Our next question comes from the line of Cathleen King with Bank of America, Merrill Lynch. Please proceed with your question.

Good morning, guys.

Good morning, Cathleen.

First question on the Albany expansion. Have you guys quantified CapEx that you're spending on that extension also return expectations?

Cathleen, we have talked about this spending.

Okay.

The Kenwood Yard, which is what we call the Albany Rail facility; the tripling of the expansion probably costs $6 million, $7 million. There is also some related piping of a $1 million or $2 million. We began that spending in the fourth quarter and continued in the first quarter. And as Eric mentioned, should be finished this summer. We have not specifically mentioned returns on that project. But we can say we expect to rapid payback.

Okay. Fair enough, and have you seen any impact on demand for your facilities and just unit train given the recent increase in Bakken crude oil prices?

I am not sure Cathleen of exactly the question. The question is what?

Just any changes in demand that you are seeing given the recent increase in Bakken crude oil prices?

Yes. I mean, it -- okay, so everybody sort of looks at some of those prices that are out there. They look at Clearbrook as sort of the clearing price. That is a mistake because it is very hard to physically get barrels out of there. Right, so at the end of the day those are not really. That is not really the market that you're buying out of. We may see those big huge discounts.

They never really existed. Right, they are basically; they are alternatives by rail are already to move down south. Or it comes East primarily, right? And there are pipes. There are some pipes there as well, but essentially for rail, it -- a price that is going to be basis. A southern price or an East Coast price. And that is what will flow that barrel in either direction.

Okay. Then switching to PADD 1 refining update. I assume that your recent announcements around the Trainer refinery being sold to Delta would be positive for you guys? But just an update on how you see that environment today versus before because there has been some changes.

Yes, I mean, I think there is a lot of interest in East Coast refining. I think that is good for us on multiple fronts. It provides us with a potential of another customer for the crude oil. But it does also mean there is another refiner on the East Coast that is going to be running and producing products of which we are a taker of, right. On multiple fronts I think that is all good for us.

Good deal, and then switching over to the Getty announcement. I am just trying to get more color on first of all why that is an interim agreement? I guess, how long is that going to last? Then also, I think you talked about that being a fee-based agreement. But does that mean you won't have any exposure to the wholesale margin?

First, well, on the margin piece, we basically have a minimum fee. There is some potentially some upside as well within that agreement. That is one. I think that it is short-term in nature. That is the way Getty's wanted to do it. They were having some trouble with the other companies that they were doing business with. We stepped in place there, I think as a good credit operator for them. And as we look forward, we hope to do more business with them. For us that is all good news and it is a lot of stations. I think it says a lot about our management team's capacity to run and operate the gasoline business.

Are you guys having to spend any capital to take on that? Or, will just the returns be all incremental there?

All incremental.

Okay. Then, final question did you talk about who your customers? You anticipate your customers being on the propane facility at Albany?

No, but I think just as a general statement, there's a lot of home heating oil retailers who are also in the propane business. For us, I think we have got credit files on a lot of these guys. It's going to be a natural extension of what we've been doing up in Albany for the last several years. We are sort of very comfortable with that side of the equation.

Okay. Sorry, one more -- Just thinking about how this quarter; I know you guys were impacted by rising gasoline prices. That was the negative impact. Then, so far this quarter we've seen quite the reverse. Could we expect sort of based on your guidance for this year for EBITDA that it might actually be higher second quarter contributions given that reversal in gasoline prices?

I think the general statement, if prices went up $0.70 a gallon and we got squeezed during that. We actually took a look at the numbers today since April 1st, gas is off roughly $0.28. The margins tend to get squeezed on the up and expand on the down. And I think that's a good message to you.

Okay, thanks a lot.

Our next question comes from the line of Brian Zarahn with Barclays Capital. Please proceed with your questions.

Good morning.

Good morning, Brian.

I appreciate the full year EBITDA guidance. Can you talk a little bit about some of the assumptions underlying the range, the low and high end range?

Sure Brian; of course, at this point there are all kinds of uncertainties when you look forward. But certainly we have taken into account the first quarter actual results having ten months of Alliance. The potential impact of our various organic projects. Gasoline you may have noticed is backwards so that is not a big help. Eric has talked about maybe a catch up on some of the gasoline margins. We take that bundle of factors and feel at this point $110 million to $130 million is pretty good estimate.

The margin driver more of an on market related versus volume related?

Say that once more again, Brian.

Would that be? Do you believe the biggest driver for that range would be margins -- margin assumptions?

Certainly margins are a key part of each one of our segments. I think the answer is probably yes, whether it's wholesale or the new gasoline distribution gas station operations. Margins certainly do drive our results.

Then on maintenance CapEx, can you give us your thoughts for 2012?

Yes, Brian, we have said sort of $12 million to $14 million range is a good marker. About $4 million on the terminals and $8 million plus for the stations.

Okay. Now, in terms of the Alliance acquisition, can you give us a sense of their contribution? I know it was a partial quarter, but their contributions in the first quarter. Then how things are progressing in the second quarter?

Yes, we did not break it out. We did include one month of operations. We haven't broken out how much it was exactly. We can say that the margins were squeezed very similar to our own mobile assets in terms of sort of 12 month earning power. What I mentioned earlier, the range of $90 million to $110 million; then we added in Alliance and came to $130 million to $150 million to normal markets. That gives you some sense of how Alliance can perform.

Thank you.

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

Hi, good morning.

Good morning, Elvira.

Just a little more granularity on the guidance. Does the guidance incorporate what you think the Bakken opportunity can be this year?

We think so. We think so and going from the capacity that the asset is at today to where it's ultimately going to be. That's a lot of oil moving through the facility. And it's going to take a little bit of time. It's not like turning a light switch. So, I think over time hopefully we'll develop that asset to be fully utilized.

Okay. Then does the guidance also include the Getty agreement? How significant is that agreement relative to your overall EBITDA?

It's just another deal that I think puts us in a good position to execute. It adds some money to the bottom line. It's what I call blocking and tackling; and if I could do ten agreements like that, I would.

Okay. Then, just lastly; so, for the base business are we looking at? Does the guidance assume the rest of the year returns to a normal operating environment?

It's based, Elvira, on market conditions as we see them now.

Okay.

-- And all the various factors.

Got you, alright thank you.

Our next question comes from the line of James Jampel with HITE Hedge Asset Management. Please proceed with your questions.

Hi, guys.

Hey, James.

I had two questions on two different subjects. First on the railing propane to Albany.

Yes.

How is that impacted by increased liquids, propane production, and the Marcellus? How do those compete?

I think, too. I think that's going to take a little bit of time for that to develop and play. We are starting to see the efforts put towards is more crude oil plays and less gas plays, so wet plays are more in. We think we're positioned in the right place if there were to be a great disconnect on pricing and on supply. The good news is we would be able to take rail out of there. But our feeling still is we're set up to be taking in the best low-cost supply.

The rail in of propane is coming from where now? From Conway?

Not from Conway, from -- it's going to be coming in from North Dakota.

I see. And potentially you're saying there could be rail from Marcellus to Albany?

There could be, yes. Anything that is connected to a rail is going to have switches. It is just where those switches take. It is not as efficient. Because those are two line hauls. But essentially, I still feel that we are set up for the right supply in the most efficient manner that's out there. And I also think that having the right supply is going to be critical to being competitive.

Okay. Then on the crude oil out of the Bakken. Right now, you're talking about a single line haul on today in specific to Albany; and by water, I guess down south around the tip of New Jersey, and then back up to Delaware.

Wherever the refineries are.

What, given that's a multimode and perhaps longer, what kind of advantage do you have over the two line haul over Chicago?

Two line haul is just more expensive and it doesn't move as quickly in the markets that many of those other rails go into a highly congested. We feel very comfortable that we are going to be a very efficient player in that marketplace.

Your view is that there is little that could be done on -- by the competition to bring their cost down to be competitive with this multi-modal haul that you're --

Well, I do believe if it comes down to being the low-cost provider, we're well positioned to be one of them if not the one.

I see. Are there refineries other than in the Delaware River that are served by Albany to refresh me?

It's essentially the typical -- the typical group of East Coast refiners. You have COP, which has Bayway. That's a refinery. You have Trainer, which used to be COP. It is now Delta. Or that is going to close whenever; in the next couple of months. You have the Carlyle Group that as I've read in the press is talking to SUN about their Philadelphia refinery. And then you PBF, which has a couple of facilities as well. That's the list and the one facility that is still closed is SUN Marcus Hook.

Now, Enbridge has been talking about trying to Bakken crude to Montreal. Did you guys do that?

I mean, it's. I think there's going to be some solutions that are different than ours. But we still feel very comfortable with our ability to compete with those other solutions should they move forward.

Okay, thanks.

Thanks, James.

Our next question comes from the line of Andrew Gundlach with First Eagle Global. Please proceed with your questions.

Good morning, a couple of questions. Just with respect to the Getty Realty announcement you mentioned as blocking and titling. But what does interim fuel supply mean? Does that mean eventually you'll turn it into something more permanent?

Look, I don't know. But certainly I hope so. They are going through a process with all their assets as they reorganize. There have been some press statements about that. I think if nothing else, we're positioned well to sort of move forward with them. It doesn't mean we have anything done with them. But, we will have a good feel for the assets if we're actually the company supplying them. Right, so --

I see, and then you would - I assume this is the LUKOIL assets, right. You would rebrand them to Mobil or something like that. Is that right?

Yes. You listen, if they were my assets, I would make sure that they are set up for the long-term and as efficient as they possibly could be. You would look at all potential options.

Including buying the real estate from Realty -- from Getty Realty, or is that separate?

Yes, I suspect that is not the mode that Getty's in.

Right.

Right? I don't necessarily see them doing that. But, I think we're a good operator of sites. And that's the position we're currently in. we just hope we can make everything a little bit longer term in nature.

Okay. Then the Albany propane, I'm a little. It's the first I've heard that Bakken propane could compete with Marcellus propane. I'm just curious how that works. Because the Enterprise TEPPCO line is going to be reversed. But it is only going to be reversed from Southwest Pennsylvania. The rest is designed to go straight up to Selkirk as you know. I don't understand how why?

I would think that transportation via rail has got to be more expensive than an already fully depreciated pipeline out of the Marcellus. I'm just curious, what makes Albany such a hub? Can you get to the export facilities in Providence easily so you could get it out off the East Coast?

I mean, how do you see? Or it's just something special about Albany that is kind of a unique market? And it just, as it relates to upstate New York, and that's it?

Well, don't forget, historical prices I think you have got to be very careful with because how product has moved historically is changing a lot. You could say a little bit of the same thing -- crude oil as well.

But the point I guess is where is that product going to go? And which is the highest market that it can get to, right? And how does it get there? I think what everybody has recently done is underestimate the amount of volumes of product that would be found.

Essentially out in that western area, it's stranded. Right? So, what is the value of it. The value has to go whatever the highest market is. I would say that market still is the East Coast, right. Now, that is not to say that there are some dynamics, don't change there. But, it still has to move. Something has got to give somewhere. All I know is that product exists where there aren't manufacturing plants or people. It's not going to get consumed there. It's going to price to move.

Do you have storage in Albany?

That is what we're currently building now.

Okay. You're betting that -- I understand. You are basically betting that the -- I think I understand. It is a longer conversation and maybe not for the phone call. But you are betting that the East Coast will compete with Mont Bellevue obviously only during the winter. Right? You are going to build storage so you can supply it during the summer and then sell it. You will make money on that spread. Is that the way to think about it?

Well, first of all, I think there is a good based business here because we know the customers. We think we do have a good low cost supply into the facility. That is what is going to allow us to compete. But, do not forget, there's a lot of set up with customers. Many companies aren't sort of in a position to do that where we are. For us, this is really I think a natural fit. We are already moving a lot of rail. We're already moving lots of product out of that western area. We already have credit files with many of these customers.

I understand.

I think logistically we're set up as good as anyone to do this business.

Okay. Perhaps the biggest change since last quarter was that SUN is going to Energy Transfer. That obviously means they've already announced it. That the retail business is up for grabs.

Yes (inaudible) --

Is there any reason to believe that -- or is there any reason why it wouldn't work? Is there any like regulatory or other type of reason that it would not work?

I am not sure what your question is. What is the question?

Does the Northeast SUN, Sunoco retail stations; is there any reason to prevent you from looking at that?

I don't believe so. We look at every transaction that we think is out there. I am not aware that those assets are for sale. But it's a deal that is going to take a little bit to get closed.

Right.

Clearly it's a new business for these guys. I don't know what their plans are.

Okay.

But we would be very interested in it, of course.

Great, okay, thank you so much.

There are no further questions at this time. I would now like to turn the floor back over to Mr. Slifka for closing comments.

That concludes today's call. We look forward to updating you on our progress. Thanks for joining us this morning.

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