Global Partners LP (GLP) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to the Global Partners fourth-quarter and year-end 2013 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, 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'd like to turn the call over to Mr. Faneuil for opening remarks. Please go ahead, sir.

Good morning, everyone. Thank you for joining us.

Before we begin, I want to express appreciation on behalf of our entire organization for the words of comfort and support we have received following the passing this month of Fred Slifka, our Chairman. Freddie was larger than life, a loving husband, father, and grandfather, he leaves a legacy of integrity, leadership and philanthropy that benefited numerous individuals and organizations.

Beginning in the 1950s and 1960s, Freddie and his brother Richie built the foundation of the business that has become Global Partners. Richard, who served as Vice Chairman of the Board since March 2005 has been appointed Chairman, and we wish him continued success.

Turning to today's call, let me remind everyone that this morning we will be making forward-looking statements within the meaning of Federal Securities laws. These statements may include, but are not limited to, projections, beliefs, goals, and estimates concerning the future financial and operational performance of Global Partners.

Estimates for Global Partners' future EBITDA are based on a number of assumptions regarding market conditions, including demand for petroleum products and renewable fuels, changes in commodity prices, weather, credit markets, the regulatory and permitting environment, and the forward product pricing curve. Therefore, Global Partners can give no assurance that our future EBITDA will be as estimated. The actual performance for Global Partners may differ materially from those expressed or implied by any such forward-looking statements.

In addition, such performance is subject to Risk Factors, including but not limited to, those described in Global's 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, it is our policy that any material comments concerning future results of operations will be communicated through press releases, publicly-announced conference calls or other means that will constitute public disclosure for purposes of Regulation FD. Now, please let me turn the call over to our President and Chief Executive Officer, Eric Slifka.

Thank you, Edward, and good morning, everyone. Global delivered positive financial and operational results in 2013. Volume and margin increased in all three segments, highlighting the diversification of our product mix, and the strength, stability, and growth of our midstream logistics business.

Crude oil was a key business driver in our wholesale segment, generating double-digit increases in product margin and volume for the year. During 2013, we significantly expanded our capacity to ship and receive crude and other products by rail, with the acquisitions of Basin Transload in North Dakota, and the Columbia Pacific Bio-Refinery in Oregon.

Product margin in our Gasoline Distribution and Station Operations segment increased in 2013, primarily reflecting a full year of results from Alliance Energy, which we acquired in March of 2012. Alliance expanded our portfolio of retail gas station assets in the Northeast.

Since that acquisition, we've complemented and strengthened our assets by opening new-to-industry sites and rebuilding facilities in our portfolio, including 11 locations in 2013. We have a robust pipeline of scheduled site development.

The wholesale and GDSO segments were augmented by a strong performance in our commercial segment. Although a comparatively small portion of our overall business, commercial product margin grew in 2013, led by contributions from our bunker fuel and natural gas operations.

Let me take a moment to discuss the current environment in the crude-by-rail market. For Global Partners, safety is paramount. Regardless of whether product is received and distributed at our terminal by truck, barge, pipeline or rail, rigorous training, environmental controls, preventive safety measures, and emergency response planning have always been, and continue to be, an integral part of our operations.

A lot of local and national attention has been focused on safety. Freight rail carriers, shippers, rail infrastructure companies, and others across industry, continue to commit resources to meet new testing requirements and address new regulations, with an intense focus on ensuring that the entire system is as safe as possible. Global has been and remains committed to this initiative.

Today, 90% of our fleet of railcars is comprised of the newer CPC-1232 design cars, and we fully expect the balance of the cars in our crude fleet to be compliant with that standard by the end of the year. Moreover, we continue to work closely with our employees, customers and railroads, as well as federal and state agencies and local communities, to ensure the safe, reliable handling of products throughout our network.

As I mentioned on our Q3 call, one of the benefits of our virtual pipeline system for customers is the ability to ship barrels to the highest value markets. We recently completed an expansion that more than doubled the storage capacity of our Basin Transload crude oil terminals in Beulah and Columbus, North Dakota, to 550,000 barrels. This expansion provides additional optionality for our customers.

As part of our strategy to serve producers, refiners, and marketers in the Bakken, in 2013 Global entered into a pipeline connection agreement with Tesoro Logistics. As part of the agreement, Tesoro constructed a seven-mile lateral, linking its High Plains Pipeline system to our Columbus terminal. We continue to negotiate additional pipeline connections to broaden our cost-effective access to production in the region.

Our Basin terminals in North Dakota's Bakken region are complemented by our distribution facilities on the East and West Coasts. Organic projects are under way at both locations.

At our terminal in Albany, New York, we are seeking to handle biodiesel and a broader slate of crudes. In Oregon, we are seeking to simultaneously operate our facility for both ethanol manufacturing and crude transloading. Neither of the projects affects the volumes currently being put through these facilities.

We remain committed to continuing to work cooperatively with state and municipal officials and communities, to provide information related to these projects. We also continue to pursue rail expansion opportunities to serve the distribution needs of the changing energy market for products including biofuels, crude, refined petroleum products, and NGLs. We have identified new logistics and marketing opportunities with energy producers in Canada, through our recently opened office in Calgary.

The strength of our business has enabled us to increase value to our unitholders. In January, the Board of Directors of our General Partner approved the seventh consecutive increase in our quarterly distribution.

The distribution of $0.6125 per unit or $2.45 per unit on an annualized basis, resulted in distribution coverage of 1.5 times on a trailing 12-month basis. The Board will continue to review the distribution on a quarter-by-quarter basis.

With that, let me turn the call over to Daphne for her financial review. Daphne?

Thank you, Eric; and good morning, everyone. Before we go through the fourth-quarter and full-year financial results, let me take a moment to comment on the restatement of our 2013 interim quarterly results, which primarily reflect a correction in our accounting for renewable identification numbers, or RINs.

During the 2013 year-end financial statement close process, we determined that our RIN accounting treatment was incorrect, and we did not have adequate controls in place to effectively report, monitor and control our RIN position. We have adopted a new accounting policy, and designed, and have substantially implemented a new operational policy. With these changes, we believe that we have adequate controls in place.

We expect the impact of our operational policy and controls to minimize the fluctuations in our results due to RINs. Our restated 2013 quarterly financials and our year-end financials reflect a point in time valuation of our RVO and RIN forward commitments.

It is important to keep in mind that the mark-to-market RVO accounting treatment does not take into consideration any forward purchase commitments, or RINs, that we will generate through blending. While these liabilities had sizeable swings during 2013, at the end of the year the liability relating to our RVO was $13 million, and the liability for RIN forward commitments was $6 million. The impact of these liabilities is reflected in our full-year results, and we expect these liabilities to be significantly reduced at the end of the first quarter, and to be immaterial thereafter.

Now, let me provide some additional detail on the fourth quarter and full year. As we go through the numbers, please keep in mind that our results for the fourth quarter benefited from a $9.5 million decrease in the mark-to-market liability related to the RVO, and a $400,000 decrease in the liability related to RIN forward commitments. By contrast, the 12-month period was adversely impacted by a $13 million increase in the mark-to-market liability related to the RVO, and a $6 million increase in the liability related to RIN forward commitments.

The fourth quarter was particularly strong in our wholesale and commercial segments. Wholesale product margin increased about $40 million from the same period last year, due in part to our crude operations, including contributions from our North Dakota and Oregon acquisitions.

Given the significant contribution of our crude oil operations during 2013, in our 10-K you will see a break out of crude oil sales and product margin within the wholesale segment. Crude oil contributed 27% of the segment's product margin in the fourth quarter. Additionally, we experienced favorable conditions in the distillate and gasoline and gasoline blend stock markets.

Our gasoline distribution and station operations segment performed in line with expectations generating a $61 million product margin. This was approximately $8 million less than the robust fourth-quarter we experienced last year. Our commercial segment also had a healthy 56% increase from last year, largely due to our bunker operations. Fourth-quarter EBITDA increased from $47 million in the fourth quarter of 2012 to $65 million, and DCF increased about $20 million to $52 million.

Looking at our full-year financial highlights. Net income for 2013 was $42.6 million, down about 9% from 2012, reflecting more than $25 million in additional depreciation and amortization, largely due to acquisitions. In line with our guidance, EBITDA was $157 million in 2013, an increase of $21 million. Distributable cash flow of $105 million grew by nearly $25 million from a year earlier, and combined product margin increased $91 million or 25% to $461 million in 2013, driven by growth in all segments.

Turning to the segments, wholesale product margin was up $57 million or 39%, driven primarily by the increase in crude operations. Looking at the segment in more detail, crude oil product margin increased $57 million year-over-year to $93 million, and represents 20% of combined product margins. Product margins from other oils, which includes distillates, propane, and residual oil, increased about $12 million to approximately $67 million, due in part to colder weather, and favorable market conditions.

Gasoline and gasoline blend stocks also benefited from favorable market conditions. The decline in that product margin of approximately $11 million is due primarily to the increase in the RIN-related liabilities.

Product margin in our GDSO segment for the full-year 2013 increased $24 million to $230 million, representing 50% of our combined product margin. The higher margin reflects in part a full-year performance from the Alliance Energy acquisition. Our commercial segment product margin increased nearly $10 million to $28 million, driven by year-over-year increases, primarily in our bunker business.

Turning to expenses, a year-over-year comparison is less meaningful, given the acquisitions. Excluding amortization, total SG&A and operating expenses were approximately $300 million for the year; however, they do not reflect a full year of our North Dakota or Oregon acquisitions, or the full run rate of increased overhead, as we added staff during the year to support our growing crude business, and the development of other projects. Amortization expense increased from $7 million in 2012 to $19 million in 2013, reflecting acquisition-related intangibles.

Interest expense remained fairly flat year-over-year. Despite the increased borrowings to finance the acquisitions, through a combination of borrowings under our bank revolver and the issuance of $70 million in five-year unsecured 8% notes, working capital borrowings declined, in part due to the positive impact of the crude payment cycle and lower inventory levels. A reduction in our interest spread also lowered interest expense.

For the year, total CapEx was approximately $67 million, $11 million of which was maintenance CapEx. Significant expansion projects during 2013 included the new tanks in North Dakota that Eric discussed, investment in our retail gas station assets, including new to industry sites, and our new propane terminals in Albany. Due to the acquisitions and our larger portfolio of gas station sites, we expect maintenance CapEx to range from $18 million to $22 million this year.

In December, we strengthened our balance sheet with the refinancing of our bank facility. We reduced pricing and slightly upsized to $1.6 billion, wrapping in the maturing $115 million term loan.

The facility matures in April 2018, and consists of $1 billion working capital facility, and a $625 million revolver for acquisitions and CapEx. We also closed in December on additional long term financing, with the issuance of $80 million in five-year unsecured 7.75% coupon notes to TSO Capital Partners and Kayne Anderson, on terms similar to the issuance of $70 million in notes earlier in the year.

Our balance sheet remains strong with excess borrowing capacity of more than $450 million. Key changes in our balance sheet year-over-year relate to the two acquisitions in early 2013. In addition to raising the 150 million in new five year unsecured notes, long-term assets increased $230 million, reflecting the two acquisitions, as well as CapEx.

Turning to guidance. For full year 2014, Global expects EBITDA in the range of $175 million to $195 million. This guidance is based on assumptions regarding current market conditions, including demand for petroleum products and renewable fuel, weather, credit markets, the regulatory and permitting environment, and the forward product pricing curve, which could influence quarterly financial results. Now, let me turn the call back over to Eric.

Daphne, thank you. Before closing, let me make some comments on the first quarter.

While the extremely cold weather has hampered shipment of products by rail, this was more than offset by the fact that below-average temperatures and the curtailment of deliveries to interruptible natural gas customers increased demand for heating oil, residual fuel, kerosene, diesel, and other petroleum products, throughout our market area. We are also seeing a favorable market for gasoline and gasoline blend stocks within our wholesale segment.

Our diverse product mix remains a key element in reducing the effect of volatility in our markets. Global continues to broaden its geographic footprint and asset base, through strategic acquisitions and organic growth projects.

We continue to expand our mid-continent assets with increased storage capacity and additional pipeline connectivity. This critical infrastructure provides optionality and market efficiencies for our customers, by enabling product movements to the highest-value markets.

Looking ahead, we will continue to develop and enhance our system of product terminals, rail distribution facilities, and gas station sites. The flexibility of these assets diversifies our cash flows, expands our income streams, and provides opportunities to optimize within our network.

We begin the year with strong momentum, and are well-positioned to meet our growth objectives. With that, we would be happy to take your questions. Operator?

(Operator Instructions)

Our first question comes from the line of Cory Garcia with Raymond James. Please proceed with your question.

Appreciate all of the color, obviously, on the ethanol accounting. Had one quick follow-up, or clarification.

As we're looking to model that segment, and the RVO liability flowing through the model, I believe in your prepared comments you mentioned that should be significantly reduced over the next quarter. Just curious if we're going to see Q1 inflated number as that peels through the cost of goods sold, or just looking more from a steady run rate basis, if Q1 is going to be weighted a lot more heavily because of that factor flowing through?

Cory, it's Daphne. Yes, I think the way to think about it is those liabilities will be substantially reduced by the end of the first quarter, and immaterial after the first quarter.

Right, so we should see an up lift in EBITDA similar to what we saw in the fourth quarter, in the first quarter as well?

I think I'm going to stick with exactly what I said. The liabilities come down, and obviously the reduction in liability is a pick up. When you have forward RIN commitments, obviously, you're going to bear in the expense within the time period that you settled already.

And the other thing, Cory, I would do is I would look towards our guidance as really what you want to use, and I'd also look towards my comments on Q1 as how you might want to think about our numbers going forward. I think that's really the best indicator.

Okay, sure yes, that's helpful, thank you. and then turning over to the crude-by-rail side of it. Knocking out the near term cold weather impact, have you seen or hear much of a push, an incremental push from producers looking to lock into longer-term contract deals? Have we seen a shift in sentiment or are guys still stepping back, saying we want to have the flexibility, maybe we're not looking into the longer term commitments on the loading side of things?

Cory, this is Mark. I think, I wouldn't say we've seen any significant change in that mind set. We continue to pursue various different arrangements, whether they're short term, long term, I wouldn't say we're seeing a significant shift in the mindset.

Obviously, I think everybody is getting more, from a producer standpoint, everybody seems to understand the benefit of the flexibility of crude-by-rail, and I think on a long term basis, when you look at the efficiencies and the opportunities that can create, you'll want to set yourself up for -- to take advantage of some sort of flexibility, and that's really the key benefit that rail offers. So with respect to our system, that's how we're designing our system, and that's how -- the conversations that we're having with producers are such that we're discussing the benefits of being able to go to multiple different markets and take advantage of those opportunities.

Absolutely. Thank you for the color.

(Operator Instructions)

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

I'm wondering if you could just comment on, we saw some news out of Albany County, that they're putting a moratorium on, I guess, crude expansions. I just wonder if you could just comment on that and any kind of impact that may or may not have on your business?

The facility continues to run and operate the way it has been for the past couple years. We have applications in to try and broaden the array of products that we can carry at the facility, and that's really what it's all about.

Okay, so in other words, the issue is that you have applications in, but this could hamper that?

Any other, the carrying of different products, yes.

Okay, but in terms of the existing operations, there's no issue?

Correct.

Okay, great. And then do you have a sense or any guidance you can provide for what you think growth capital could look like in 2014, and any specific projects you want to identify?

I would just say we don't specifically break that out, but generally I think as you see the Company get bigger and have more projects, and permitting is always a bugaboo on timing, if you will, you're going to do, you're going to spend more capital as you grow, right?

So should we expect the type of projects you're doing to be more of the same of what you did in 2013?

It could be. It depends on what deals we can strike, and just the timing of permits, right? But I think as a general statement, the Company is a bigger Company.

I would expect that we're going to spend more money on capital projects assuming that the permits come in during that 2014 time, and allow us to really get moving. Now if permits get delayed, it will be a little bit more like what historically it has looked like, so it really depends on the timing.

Okay, and then can you just comment broadly on the acquisition market? And obviously, I know you looked at a bunch of different markets, so just any color you can provide in terms of how active that is, how competitive, if it seems like you think that's something that you could get done in 2014?

I mean, it's very active. We look at all available potential companies that are out there for sale. I think it's got to be the right fit.

I've always said for us its got to be something that is strategic, and if it's strategic, we'll have an opportunity to buy it because we think we can wring more out of that asset than something else. So its got to be a strategic fit for us and it really depends on what comes to market, but I can tell you it's been busy.

Okay, great. Thank you very much.

Thank you. Our next question comes from the line of Theresa Chen with Barclays Capital. Please proceed with your question.

Quick follow-up question to the comments related to spending, acquisitions and growth. You'd mentioned in your prepared remarks that you're looking to further broaden your geographic footprint, and I was wondering if you could give any color on what regions and where next makes sense?

Yes, Theresa, it's Mark. I think we're looking at trying to build out the entire network of terminals, and build that out in a way that provides us the most optionality and the most flexibility to deal with the way that the market's changing, and the areas that the products are coming out of now. So I think it's safe to say that any place in the US has certainly got interest to us, as long as it fits in with that model. So again, we'll look to develop assets that complement the existing assets that we have, and further develop the optionality that we can deliver through that book.

Okay, great. And then on guidance, would you mind giving any incremental color on what your expectations are by segment, either in terms of volumes or otherwise? I realize you still have some acquisition contribution feeding into 2014 that were closed in 2013, and project spending contribution as well, but any color on organic volumes will be really helpful.

Theresa, we basically are staying at a higher level in terms of 2014 EBITDA guidance, and just putting out the $175 million to $195 million. We haven't historically, and we're not going to today, going to start giving further guidance on individual segments or products.

Okay, thanks.

(Operator Instructions)

Our next question comes from the line of Lin Shen with HITE Hedge Asset Management.

It's actually James Jampel with HITE Hedge. How would you evaluate and adjust your strategy, if you sensed there might be an over build of crude-by-rail loading capacity, first in the US Bakken, and second in Canada. How would you get a sense if that was occurring, and what would you do?

I think -- James, it's Mark. I think that what we're trying to build here are assets that we think are competitive for the long term, and so, regardless of whether stuff gets over built, and I guess that's a pretty generic term. I'm not sure how you'd define that. If you want to define it just by capacity, that would be the total capacity, that would probably be the most relevant metric.

But the way we look at it is, we're trying to develop assets that we think have -- that are sustainable and that have longevity, and those types of -- the reason we look at the assets in that manner, is because we do think the market will become more efficient. And we think that if we've got the most efficient cost-effective model, then that should be sustainable in the long term, regardless of how much capacity gets built.

I see, and how should we think about the difference between the potential crude-by-rail initiative in Canada versus that which you already have going on in the Bakken?

I think Canada's a little bit different beast than North Dakota. North Dakota in the Bakken region, you have effectively one fungible grade.

So really in North Dakota, when I look at that, I say okay, it's not the fact -- it's not where you are in North Dakota. We're seeing a lot of build-out in terms of the gathering infrastructure in North Dakota, so when you look at one rail terminal versus the next, sure, there may be some minor differences in the cost to get the product to the rail terminal, but for us, it's more about where you can go with that barrel, and the flexibility that you can build into that, that we think will have long term sustainability.

In Canada, it's a little bit different. You got a lot of different product grades, you got a much wider geographic expanse, so it's important when you look at Canada to -- location is important when you look at Canada, and where you set up your rail terminals or otherwise because you're accessing multiple different grades. Those grades may belong in different markets. They may be better suited for one market versus the next, so I think where you put your stake in the ground in Canada is a little bit different than the thought process in North Dakota.

Okay, and last one for me. Have any of the slowdowns or reroutes that we've read about in the news regarding crude-by-rail, have those impacted the turnaround time on your cars yet?

I think -- I'm not 100% sure what you're referring to, but I think there's two things to talk about there. Number one, I think when you say slowdowns, if you're talking about the noise around rail carriers having to slow down through certain areas?

Yes.

We haven't seen an impact from that yet. What we've been experiencing, Eric referenced it in his comments earlier, weather has been really challenging from a rail perspective. Turn times on trains have been significantly reduced, due to weather.

We haven't seen anything -- when you look forward at how that's -- I think when you look forward at trains having to slow down through certain communities, I don't think you're going to see a meaningful impact on turn times as a result of that. In fact, some of the areas we travel through are already well below what the kind of prescribed speeds are being talked about.

Okay, thank you.

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

Thank you for joining us this morning. We look forward to keeping you updated on our progress. Everybody, have a great day, thanks.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Have a wonderful day.