Global Partners LP (GLP) 2013 Q2 法說會逐字稿

Good day everyone, and welcome to the Global Partners second quarter 2013 financial results conference call. Today's call is being recorded. There will be an opportunity for questions at the end of the call. With us from Global Partners are President and Chief Executive Officer, Mr. Eric Slifka,Chief Financial Officer, Ms. Daphne Foster, Chief Operating 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.

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, changes in commodity prices, weather, credit markets, and the forward product pricing curve. Therefore Global Partners can give no assurance that our future EBITDA will be as estimated.

The actual performance for Global Partners may differ materially from those expressed or implied by any such forward-looking statements. In addition, such performance is subject to risk factors included 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 revision to the forward-looking statements that may be made during today's conference call.

With Regulation FD in effect, itis 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.

Thank you Edward. Good morning everyone, and thank you for joining us. Our second quarter 2013 results were not as strong as the comparable period in 2012, as lower retail gasoline margins and a less favorable distillates market impacted our profitability and distributable cash flow. EBITDA of $37 million was down about $3.8 million, and distributable cash flow was about $3.3 million lower than the same quarter last year. Second quarter net income of $8.7 million was off about $9.8 million from the same period in 2012. The variance in net income is in part attributable to increased depreciation and amortization associated with our two acquisitions earlier this year.

Net product margin in our gasoline distribution and stations operations segment was $58.8 million, compared with $62.2 million in the same period a year ago. As we have discussed previously, quarterly margins typically decline as gasoline prices increase, and improve as prices fall. In the second quarter of last year, this segment benefited from favorable market conditions in a declining price environment. In the second quarter of this year, margins compressed as NYMEX gasoline prices and physical prices increased. In the gasoline distribution and station operations segment, we also have an active ongoing new to industry and raze and rebuild program including co-branding arrangements. Activity in the quarter included the opening of new to industry locations in Darien, Connecticut, and Billerica, Mass., as well as the completion of raze and rebuild projects in South Kingston, Rhode Island, and Stratford, Connecticut.

In our Wholesale segment, net product margin in the quarter increased $11.4 million year-over-year to $46.1 million due to stronger wholesale gasoline margins and increased crude oil logistics activities, which more than offset our performance in a less favorable distillates market. With the acquisition of Cascade Kelly and Basin Transload, the Phillips 66 take or pay contract and other term contracts at our terminals, our crude oil logistics and marketing activities expanded year-over-year.

However, during the quarter weather conditions in the Bakken delayed scheduled tank and pipeline expansion at an to our crude transload rail facilities in North Dakota. The expansion project at our Columbus, North Dakota transload rail terminal, where we are adding 170,000 barrels of storage capacity should be completed early next year. The project at our facility in Beulah, North Dakota where we are building 280,000 barrels of storage capacity is expected to come online by the end of this year. Additionally I am pleased to report the completion of the Tesoro Logistics Pipeline connection to our Columbus North Dakota facility. Tesoro Logistics will commence deliveries this month into our tankage via the new lateral connection. This 7 mile lateral will carry crude from various gathering points along the Tesoro High Plains system, which accesses crude throughout the North Dakota producing region.

On the West Coast, we continue to conduct crude oil transload activities at our facility in Clatskanie, Oregon and are pursuing the opening of our ethanol production plant. In North Dakota and Oregon assets, along with the terminal in Albany, New York, represent an east to west virtual pipeline that allows producers and marketers to reach premium markets in major refining centers on both coasts. These assets represent significant growth initiatives. The Columbus to Albany segment of this virtual pipeline is serviced about Canadian Pacific, via single line haul rail, while the Beulah to Clatskanie route is operated by the BNSF and the Genesee and Wyoming Short line.

Looking at other projects during the second quarter, we began receiving and distributing product from our new 540,000 gallon rail fed propane storage terminal in Albany serviced by Canadian Pacific. This facility allows us to source propane throughout North America. In addition, we continue to expand our marketing of gasoline and distillates through arrangements at a number of third-party terminals in the East, Southeast, and the Gulf region. In compressed natural gas in July we signed a multi-year agreement with Bangor Gas Company, to provide Global a firm supply of natural gas to our loading station under construction in Bangor, Maine. Using proprietary compression technology developed by OSCOM Systems, this station will provide large business customers with natural gas on a year round basis. We have contracted with several multi-year term customers for this facility, which is on track to begin full operations in the fourth quarter.

Turning now to our distribution. In July, the Board of Directors of our general partner approved an increase in the quarterly distribution to $58.75 per unit. This translates to an annualized increase of $0.02 per unit from $2.33 to $2.35 per unit, resulting in distribution coverage on a trailing 12-month of basis of 1.49 times. The Board will continue to review the distribution on a quarter-by-quarter basis. Although we face certain short-term market challenges in the crude and gasoline markets, we believe in the fundamentals that underpin our strategy and business plan.

Before turning the call over, I want to formally welcome CFO, Daphne Foster, and Chief Operating Officer, Mark Romaine, in their new roles with Global. Effective July 1st, Daphne who has been responsible for leading our Treasury department for a number of years was promoted to CFO. Mark who has been instrumental in building and expanding our supply and logistics operation was named as the new Chief Operating Officer. I know they both willdo an outstanding job.

Now let me hand the call over to Daphne for our financial review.

Thank you Eric. Good morning everyone. Looking at our segment results, total wholesale volume was up more than 350 million gallons for the quarter, or 35% from a year earlier to a total of 1.4 billion gallons,primarily reflecting increases in our crude oil and logistics activities. The second quarter was the first full quarter of contribution from our acquisition of a majority interest in Basin Transload in North Dakota, and our purchase of the Cascade Kelly holdings crude and ethanol facility in Clatskanie, Oregon.

Total wholesale net product margin increased $11.4 million to $46.1 million, led by a $9.3 million margin increase in wholesale, gasoline, and blend stock. Which together with increased crude oil activities more than offset a less favorable distillates market. As a reminder, last year wholesale gasoline and blend stocks were negatively impacted in part by a challenging futures market.

In our gasoline distribution and station operations segment, gasoline volume was 264.2 million gallons in the second quarter compared with 262.7 million gallons in Q2 of 2012. As Eric noted, net product margin decreased 5% to $58.8 million reflecting less favorable margins stemming from rising prices. Our commercial segment generated strong growth in the quarter as volume was up 10% to 94.3 million gallons. While net product margin was up 3 million to 6.2 million. These results primarily were attributable to the performance of our bunkering activities, and to colder weather period over period.

Total SG&A and operating expenses for the quarter were $74.4 million, up approximately $13.3 million compared with the second quarter of 2012. The variance in the year-over-year expenses are primarily attributable to the impact of the Basin and Cascade Kelly acquisitions, as well as the long-term Getty lease. Interest expense of $9 million was approximately equal to last year's interest expense, despite the increase debt associated with Cascade Kelly and Basin acquisitions. Due to lower inventory levels, a longer payment cycle relating to our crude business, and a reduction in our interest rate spread under our credit facility.

Turning to the balance sheet. Our long-term assets are up approximately $220 million from December 31, 2012, reflecting the acquisitions of Basin Transload and Cascade Kelly. Under GAAP rules, as the 60% controlling owner of Basin Transload, we consolidate 100% of Basin's assets and liabilities on our balance sheet, and then deduct the non-controlling interest out of equity. On a pro forma basis if you were to deduct the non-controlling Basin interest of $40 million, long term assets would be up approximately $180 million, roughly equal to the combined consideration paid for the two acquisitions.

Our leverage has declined from a year ago. Total debt to EBITDA was 5 times on June 30,based on trailing four quarter EBITDA. Funded debt to EBITDA, which consists of our acquisition-related debt including the $115 million term loan, and the $70 million senior notes, which financed our Basin and Cascade Kelly acquisitions was 3.7 times on June 30.

Turning to our guidance. Based upon our performance for the first half of the year, and the short-term challenges we see for the balance of 2013 related to compressed margins and reduced volumes to the East and West Coasts in our crude oil logistics and marketing activities, and to backwardation in the gasoline market, we are adjusting our full year 2013 EBITDA guidance. We now expect 2013 EBITDA in the range of $150 million to $175 million, including the Cascade Kelly holdings acquisition completed in the first quarter of 2013. Our guidance is based on assumptions regarding current market conditions, including demand for petroleum products and renewable fuels, changes in commodity prices, weather, credit markets, and the forward product pricing curve, which will influence quarterly financial results.

Now let me turn the call back over to Eric to conclude our prepared remarks.

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

Thank you. (Operator Instructions). Our first question comes from Elvira Scotto from RBC Capital Markets. Please go ahead.

Good morning.

Good morning.

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

Now we don't break that out but we have multiple customers at multiple locations throughout our system that are contracted both short and long-term for throughputs through all of these facilities.

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

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

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

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

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

At this point we are not prepared to do that. Look, there are lots of things going on there. One of the things, it is good asset that has not only an ethanol plant but a crude transload facility, and we are just trying to position that asset so that it can take advantage of doing both of those businesses, but I do want to reiterate it is accretive for the year. We are giving that.

Okay. Great. And then just my last one. Any impact from RINS this quarter?

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

Great. Thanks very much.

Thanks.

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

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

Did we see indirect benefits from blending activities, no. I mean we are we are running our book the same as we always have. And certainly we buy ethanol and we blend it into products. And we sell at the rack, but we also have other business partners in facilities that take those RINS as well as part of transactions. That is why we say we really try to maintain a flat book for exposure to that. We are not trying to get any unfound, I mean it would be great if you could get gains out of it, but there is risk if you do that, and we are trying to squeeze any of that risk that is out of book.

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

Okay. Then in terms of, on the rail dynamic with crude, obviously spreads have come in, there were the weather issues in the second quarter. But can you also talk maybe a little about the competitive dynamic, whether it is offloading in Albany with some additional competitors there, as well as with the onloading capacity in the Bakken, has there been any change in that competitive dynamic in terms of volumes shifting to or from competitors, and was that a factor at all in the guidance revision?

I don't think that is something that we have seen yet. I think that the capacity on both the origin and the destination side, I mean while it is expanding you have got and should continue to have corresponding increases in production. When we look at our position there, we look at our east-west system. You have got to keep in mind that over the last several years there has been quite a bit of volume going down to the Gulf Coast. We think long-term some of that will displace to the East and West Coast.

When you look at it on the destination side there is a lot of refining capacity on both coasts, far more than exceeds our throughput capacity, and any rail throughput capacity that is being built right now. The origin side I think the market is pretty well balanced between production and takeaway capacity as well. I don't believe we have seen any negative impacts as a result of increased competition in either spot. Not to say that we won't, but I don't think we have seen that yet. I think it has really been driven by the end of Q2 and what we see down the road, at least in the very near term is really more driven by supply disruptions and increased demand in the Mid-continent, that maybe took the market a little bit by surprise.

I guess as a follow-up to that in terms of your discussions with customers, and I would assume trying to line up more take or pay contracts potentially at your facilities, has their posture shifted at all over the last month or two, in terms of potential willingness to sign up, or at what levels they would be willing to commit for, or are your discussions kind of status quo, and they are also viewing the spread compression in the Midwest to match?

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

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

Okay. Thanks very much.

Thank you. The next question is from Teresa Chen of Barclays Capital.

Hi, just a follow-up on the crude by rail discussion, following the accident in Quebec from your perspective, how do you think that will change the legal or regulatory landscape?

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

Great. On Cascade Kelly, would you mind giving us an update on the integration efforts, and do you have any plans for using this asset to export crude given the demand in EM?

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

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

I think we said in the last quarter that they would be rising, because if you remember we acquired the two acquisitions in February of 2013, so I think all I can say is that if you look at the second quarter, you now have a full run rate of three months of Basin, three months of CBBR.

And we expect those two transactions to be accretive, right. So it is not just a cost.

Great. Thank you very much.

Thank you. The next question is from Darren Horowitz of Raymond James. Please go ahead.

Good morning, Eric.

Good morning, Darren, how are you?

Great, thank you. Daphne, Mark, congratulations on your respective promotions.

Thank you.

Thank you Darren.

I want to go back to a comment that you made, just thinking about the demand pull from the Pacific refiners, and your ability to leverage the Basin terminal in Beulah, how you do you think about connecting that US Mid-con supply and that western Canadian sedimentary basin supply to the West Coast? Is it a situation where you think that Beulah effectively could be the point where you see significant volumes come through, and if that is the case, do you think 140,000 barrel tank and offloading rack is going to be enough as you scale into that?

Well, first of all, we are currently engaged in the construction of a second tank at Beulah, so I believe by the fourth quarter we will have 280,000 barrels of storage at our Beulah facility. It is impossible to say that all of the volume will come out of Beulah, that is headed to the West Coast. I think we see a tremendous opportunity to pull barrels both out of North Dakota and out of western Canada. It is a very short distance from the Edmonton area to Oregon. I think it is less than 900 miles, and you have got a the lot of different grades of oil up there, so I think there is going to be some great opportunity up in that western Canada area, and then of course, with the BN origin at Beulah, I think there is going to be a balance of barrels that comes out of there as well. The key thing when you think about this at a higher level is the system that we are building is a flexible system, and it is designed that way to allow us to pull barrels, whether it is us, a marketer or a refiner or a producer, to pull barrels from various different locations and respond to different market conditions.

Okay. Then my last question, when you think about the position in Oregon obviously at Beulah which you have an Albany and the East Coast presence, how do you think about integrating the Gulf Coast into your overall asset mix, and instead of just having an effective east to west coast and vice versa virtual pipeline, also building in some of the scale that could be growing from incremental volumes coming up through Saint James and other areas?

I think it is fair to say that any pricing center should be viewed as instrumental to this flexible system. As we continue to look at opportunities in the marketplace, we will look at opportunities in any market that has a demand for this rail system.

Okay. Thank you very much.

Thank you. The next question is from Michael Blum of Wells Fargo. Please go ahead.

Thanks, my questions were already addressed. Thank you.

Thank you. The next question is from James Jampel of HITE. Please go ahead.

Hi, Eric.

How are you doing, James?

Fine, how are you?

Good.

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

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

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

No. Nothing like that.

So it is all fixed fee?

So it is fixed fee. If you are talking specifically about the P66, it is a take or pay contract for 91 million barrels over a period of time, right.

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

Well, it is as we outlined So it is a few things, right.

And would are those all behind now in the third quarter?

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

Given the nature of your contracts take or pay, that shouldn't impact you, correct?

On the take and pay that is correct. Don't forget though, we are not only just doing take or pay contracts, but we are also moving our own volumes as well, right.

I see. Okay. Thank you, Eric.

Thanks.

Thank you. The next question is from Rob Longnecker, Jovetree. Please go ahead.

You guys provided a little color on why you cut the EBITDA. Can you just give a little more detail on which of those buckets had the biggest impact on the $25 million to $30 million cut?

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

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

We can't say that.

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

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

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

Sure, exactly.

Got you. And you have you talked about how much again, what size that has been for your business, or the number of barrels per day that you guys are moving?

We don't break that out. The market gave me an opportunity, and we wanted to take advantage of that opportunity.

Okay. Thank you.

Thank you. We have no further questions in queue at this time. I would like to turn the call over to Mr. Slifka for closing remarks.

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

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