Global Partners LP (GLP) 2014 Q3 法說會逐字稿

Good day, everyone and welcome to the Global Partners Third Quarter 2014 Financial Results Conference Call. Today's call is being recorded. (Operator Instructions) With us from Global Partners are President and Chief Executive Officer, Mr. Eric Slifka; Chief Financial Officer, Ms. Daphne Foster; Chief Operating Officer, Mr. Mark Romaine; Executive Vice President, Chief Accounting Officer, and co-Director of Mergers and Acquisitions, Mr. Charles Rudinsky; and Deputy General Counsel, Ms. Amy Gould.

At this time, I will turn the call over to Miss Gould for opening remarks. Please go ahead.

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, 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 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.

Among other risks and uncertainties, there can be no guarantees that the proposed acquisition of Warren Equities will be completed, or if it is completed, whether Global can achieve the expected synergies or improvement in Warren's historical results. The proposed transaction is subject to the satisfaction of certain conditions contained in the stock purchase agreement.

Global Partners undertakes no obligation to revise or publicly release the results of any revisions to the forward-looking statements that may be made during today's conference call. With Regulation FD in effect, it is our policy that any material comments concerning future results of operations will be communicated through press releases, publicly announced conference calls or other means that will constitute public disclosure for purposes of Regulation FD.

Now please let me turn the call over to our President and Chief Executive Officer, Eric Slifka.

Thank you, Amy, and good morning, everyone.

Global Partners reported strong financial results in the third quarter reflecting margin increases in all three segments.

Wholesale segment product margin was up 32% year-over-year, driven by higher throughput volume at our crude oil transload facility and an increase in gasoline and gasoline blendstock product margin.

In the GDSO segment, product margin grew 24% from the third quarter of last year. The segment benefited from ongoing organic project initiatives as well as the effect of declining wholesale prices. Our commercial segment was up 10% in the third quarter led by margin gains in distillate gasoline and bunker fuel.

One of the strategic themes for Global is the optimization created by the integration of the wholesale, [terminaling], and retail components of our business.

Through organic projects and M&A activity, we have established a portfolio, high quality, vertically integrated assets that position us to achieve success in ever-changing market conditions.

It's worth noting that we have approximately 10.1 million barrels of storage capacity at 25 petroleum product bulk terminals, many throughout the Northeast. These assets are supplied by a combination of barge, rail, truck, and pipeline creating a level of efficiency and optionality that enables us to effectively source barrels for both our customers' needs as well as the needs of our growing retail gas station assets.

While we talked a great deal about our East/West virtual pipeline and planned expansion into the Gulf Coast at Port Arthur, our entire network of bulk terminals is integral to the strength and flexibility of our system.

In October, we entered into a definitive agreement to acquire 100% of the equity interest from the Warren Alpert Foundation and Warren Equities Inc., one of the largest independent marketers of petroleum products in the Northeast.

Warren Equities operates 147 Xtra Mart convenience stores and fuel operations, markets fueled through 53 commissioned agent locations, and supplies fuel to approximately 320 dealers. We believe this is a great acquisition for the partnership increasing our retail presence throughout the Northeast and expanding our footprint into the adjacent mid-Atlantic region.

These Warren assets add approximately 500 million gallons of fuel annually through our network and increase the number of our total retail sites from approximately 900 to more than 1,500. In addition, the transaction will be more than -- will more than double the number of Global-operated convenience stores from approximately 120 to 267.

Last week we announced that the transaction had received early termination of the Hart-Scott-Rodino waiting period, which gives us the green light to move forward from a federal regulatory perspective. We anticipate that the transaction will close in the first quarter of 2015 and will be accretive in the first full year of operations.

Over the past 15 months, we have rebuilt and/or renovated and reopened 20 C-stores including nine on the Connecticut Turnpike and two -- and launched, I'm sorry -- and launched new-to-industry locations in Danbury and Stratford, Connecticut, Billerica and Leominster, Massachusetts.

We also have strengthened our cash flows from 11 newly acquired C-store commissioned agent locations on the Mass Turnpike and several ground lease sites. We are combining these efforts with merchandising strategies, programs, and other initiatives to enhance the overall consumer experience at our sites driving additional traffic and increasing gasoline and sundry sales.

Global is unique. In addition to being a logistics provider, we are a wholesaler, an expanding natural commercial industrial supplier, a liquid products terminal operator, and a gasoline retailer. Ultimately, it is this integration that we believe provides the highest return to global and the greatest benefit to our customers and unit holders.

Turning to our recent expansion in the Bakken, in June we announced that Meadowlark Midstream Company, a subsidiary of Summit Midstream Partners, will build, own and operate a new crude oil pipeline that will serve our base and transload rail terminal in Columbus, North Dakota, a facility we refer to as "Stampede." The project features a 47-mile pipeline connecting to Meadowlark's Divide Gathering System and serving our Stampede terminal.

At the point of connection, the system will have a truck unloading station with 55,000 barrels of tankage. The pipeline is expected to be operational in the second quarter of 2015. The pipeline has the capacity of throughput 50,000 barrels a day. In connection with this agreement, we have begun construction on an additional 176,000 barrels of tankage at Stampede, which will bring total capacity there to 446,000 barrels. The new tankage should be ready by the end of March.

At our base and transload terminal in Beulah, North Dakota, construction is moving ahead on a new 4.1-mile crude oil pipeline being built by Tesoro Logistics. The pipeline, which will be owned and operated by Tesoro will connect our Beulah terminal at the Tesoro High Plans pipeline system. With this additional connection, our mid-continent assets will provide shippers with direct access to our east and west crude rail terminals through various Bakken origin points. The latter is expected to be operational in Q1.

Our previously announced plans to develop, build, and operate a crude oil terminal in Port Arthur, Texas, under a long-term lease with Kansas City Southern remain on track. That site will give us entre to the Gulf Region's significant refining capacity as well as potential export opportunities.

In August, our Columbia Pacific Bio-Refinery facility in Clatskanie, Oregon, received a permit to simultaneously manufacture ethanol and transport crude. This marks a new chapter in the development of that site. We will be giving investors a tour of the Clatskanie terminal as part of next week's 2014 Investor Day in Oregon, and we look forward to seeing many of you there.

Earlier this year, we voluntarily committed to only allow CPC-1232 compliant crude oil railcars into our East and West Coast terminals. I am pleased to report that we have achieved this initiative as all railcars delivering crude oil to both facilities meet the CPC-1232 standards. The federal government is considering requiring all railcars in the country that transport crude oil to comply with the CPC-1232 standard, we support the government's effort to acquire this on a broader scale.

Turning to our distribution, strong fundamentals have enabled us to consistently deliver value to unit holders. In November the Board of Directors of our general partners increased the partnership's distribution for the 10th consecutive quarter. The distribution of $65.25 per unit or $2.61 per unit on an annualized basis is 2.35% greater than previous quarter distribution and 8.75% higher than the distribution paid in third quarter of last year. The Board will continue to review the distribution on a quarter-by-quarter basis, and we remain optimistic about the strength and direction of our business.

Based on our performance through the first three quarters, we are increasing our full-year 2014 EBITDA guidance to a range of $215 million to $230 million.

And, with that, now let me turn the call over to Daphne for the financial view. Daphne?

Thank you, Eric, and good morning, everyone. The third quarter was strong across all business segments. EBITDA was $74.7 million, an increase of $16.2 million from $58.5 million for the same period last year.

Net income for the third quarter was $42.5 million, an increase of $16.7 million from the prior-year period.

DCF was $51.5 million, $7.1 million greater than the same period in 2013. The smaller increase in DCF compared to those in EBITDA and net income was due primarily to higher maintenance CapEx largely at our gasoline stations.

Looking at our segments in more detail, combined product margin increased $36.8 million year-over-year to $170.3 million from $133.5 million in the third quarter of 2013.

The wholesale and GDSO segment increased $20.8 million and $15.5 million, respectively.

Commercial segment product margin increased to $5.2 million in the third quarter from $4.7 million for the same period last year.

Within the wholesale segment, crude oil product margin increased $20.1 million in the third quarter to $44.7 million from the same period last year. You may recall that crude oil volumes and margins in the third quarter of 2013 were negatively impacted by temporary supply dislocations.

By contrast, crude throughput volume in the third quarter of 2014 were among the highest we have experienced, and crude oil product margin was the highest of any quarter.

Due to improved market conditions when compared with the third quarter of 2013, when gasoline blendstock was substantially backward. Gasoline and gasoline blendstock product margin in the third quarter of this year increased $3.5 million to $25.4 million.

Volume in the wholesale segment was down about 7% year-over-year due, in part, to a shift from crude oil supply to delivery logistics as well as the lower gasoline blendstock volume.

Other oils and related products, distillates, residual oil and propane make up the balance of wholesale product margin and were slightly lower than last year. Decreasing $2.8 million to $14.8 million in the third quarter from $17.6 million in the third quarter of 2013.

Our GDSO segment generated strong third quarter product margin of $80.2 million, $15.5 million higher than the third quarter of 2013 due to strong fuel margins as well as increased contributions from station operations, which include convenience store sales and rental income from leased stations.

Fuel product margin increased more than $10 million due, in part, to declining prices. During the quarter, the NYMEX price for 87 [RBOG] regular gasoline fell nearly $0.52 per gallon from $3.04 to a low of $2.52 in mid-September.

In addition, fuel product margin increased due to contribution from the site's development activities that Eric mentioned.

Station operations product margin increased $4.6 million, quarter-over-quarter, due to continued expansion of our C-store operations and merchandising efforts.

Turning to expenses, excluding amortization, total SG&A and operating expenses were $94.7 million for the third quarter, with SG&A and operating expenses increasing $13.5 million and $6.6 million, respectively, year-over-year.

Higher SG&A reflects investment in planned staff additions to support our growing businesses as well as growth initiatives in crude oil, gasoline stations, and other expansion activities. Specifically, the increase includes $1.8 million in additional overhead, $4.8 million in expected costs, which is a crude in line with performance, $3.5 million in additional professional fees, and $1.6 million in additional depreciation expense.

Expenses related to growth initiatives include the Warren Equity transaction and the Port Arthur terminal project.

The increase in operating expenses includes $3.8 million related to new retail locations and recently renovated sites, $1.3 million in costs associated with our crude oil terminal operations, and an additional $1.5 million across our terminal network.

Interest expense was $12.3 million for the third quarter of 2014 compared with $10.8 million for the same period last year. This increase is primarily due to two items -- the first is the $80 million issuance of $7.75% senior notes in December of 2013, the proceeds of which were used to pay down bank debt. The second is the $375 million, 6.25% eight-year unsecured bonds issued in June of this year. The proceeds from this offering were used to exchange the outstanding 8% and [7.75]% senior notes and to repay a portion of our borrowings under our credit facility.

Total CapEx for the third quarter was approximately $29 million, $11.2 million of which was maintenance CapEx.

The majority of our $18 million in expansion expenditures consisted of investment in our gasoline station-related business and our crude transloading terminals. For instance, we continue to renovate sites on the highly traveled Connecticut Turnpike and now have completed 17 of the 23 locations.

We also continue to invest in our 100 sites in metro New York, which are leased from Getty Realty.

Our crude-related investments include expanding tankage and rail infrastructure at our North Dakota terminal.

The $11 million of maintenance CapEx was primarily investments in our retail gasoline stations as well as office and IT upgrades.

Our balance sheet remains strong. At September 30, we had excess borrowing capacity of nearly $947 million under our $1.625 billion committed bank facility, and we had Partners' equity of $497 million.

Total funded debt of $640 million was 2.6 times our trailing 12-month EBITDA. Total funded debt consists of bank revolver debt and the eight-year unsecured bonds.

In preparation of our acquisition of Warren Equities, we have commitments from our bank group to increase the revolving credit facility by as much as $150 million. With $273 million outstanding under our revolver as of September 30, and the ability under our credit agreement to expand these facilities by $150 million, we have more than $500 million in excess availability to finance 100% of the Warren transaction. Long term, we plan to finance this acquisition with a 60-40 blend of debt and equity.

Based on our analysis of the Warren site and the significant synergies and improvements we anticipate as a result of this transaction, we believe we will substantially enhance the performance relative to Warren's historical results. We expect the acquisition to be accretive in the first full year of operations and to generate $50 million to $60 million in EBITDA in the second full year.

After adjusting for $26 million in interest-bearing amortizing notes from Warren customers, the acquisition price is effectively $357 million. On a forward basis, the purchase price equates to a 6.8 times multiple based on year 2 EBITDA.

Turning to guidance, as Eric mentioned, based on our performance through the first three quarters of 2014 with nine months EBITDA of $180 million, we are increasing our full-year 2014 EBITDA guidance to a range of $215 million to $230 million. The previous range was $175 million to $195 million.

As a reminder, our results during the first half of 2014 benefited from significantly colder-than-normal temperatures and severe weather that caused rail congestion and resulted in unusually favorable market opportunities in gasoline blendstocks.

Our 2014 EBITDA guidance is based on assumptions regarding current market conditions including demand for petroleum products and renewal fuel, weather, credit market, the regulatory and permitting environment, and the forward product pricing curve, which could influence quarterly financial results.

On Tuesday, November 11, Global will be hosting an Investor Day in Portland. The event will feature a tour of our Clatskanie, Oregon, crude transloading facility and the ethanol plant, and we look forward to meeting with many of you there.

Now let me turn it back to Eric for concluding comments.

Thank you, Daphne. Global's strong financial and operational performance is directly related to our success in integrating the wholesale logistics and retail components of our business. We are focused on continuing the leverage, the flexibility of our assets, to drive efficiencies across the business.

With that, we are ready to take your questions. Operator?

Thank you. (Operator Instructions) Theresa Chen, Barclay's.

Good morning.

Good morning, Theresa.

Great quarter. My first question is in relation to the higher guidance. So we have three quarters behind us, and we're about almost halfway through fourth quarter. In relation to the $15 million delta between the high and low end, at this point what can happen? What are the puts and takes to get us either to that high or low end?

Theresa, hi, it's Daphne. Well, I mean, I think we probably provided lots of different things that can happen. I mean, an example, if we think back about our comments about the third quarter and declining wholesale prices, certainly that was a contributor to the $10 million increase in the fuel product margin for a gasoline station-related business. Certainly, we can't sit here and project what's going to happen to fuel prices, so that's an example.

Okay, then, following up on that, for your wholesale and GDSO segments, you're seeing, for a third quarter, volumes a little lower year-over-year, profitability up a lot more. And I know you talked about third quarter last year being affected by some idiosyncratic factors and wholesale prices this quarter -- or a third quarter benefiting the GDSO segment. Just on a go-forward basis, when I think about that margin per barrel or per gallon, is this slightly higher than what should be normalized given the list from the lower wholesale prices or is this kind of like a normalized level?

Well, one of the comments that I can certainly making with regards to the decline in volume and, as you're pointing out, obviously, solid or improving margins. The crude oil business, we have certainly anticipated and have had a shift from supply to logistics, and that's primarily with one customer, and that was really from the very beginning as we anticipated supplying them as they got organized in terms of railcars and in terms of securing crude oil, and then it shifted, over time, to more logistics. So that's going to have an impact on sales volume and, therefore, margin per volume is going to change. So that's an example.

Okay, great. And then the last question -- could you give us an update on your efforts in Canada, and if you are looking to bring on any crude-by-rail origination capacity there or what has been going on?

With respect to Canada, we continue to try to develop our business up there. We look at three different -- we look at three different initiatives up there. Number one, we are continuing to increase our sourcing capabilities up there, and that's an initiative that's going on right now. So we continue to try to develop that.

In addition to that, we are trying to determine or evaluate potential development or acquisition opportunities in Canada around origination assets. So, yes, we're very active in that space and definitely part of our strategy.

Great, thank you very much.

Gabe Moreen, Bank of America Merrill Lynch.

Hey, good morning, and thanks for providing the detail on sort of the line-by-line items and your changes.

A couple of questions -- one is kind of on the crude oil wholesale volumes. Can you just talk about, I guess, kind of, which of the components are really contributing to the growth, whether it's kind of the loading on the Bakken side? Is there really any -- has there been any -- whether a significant contribution in 3Q from the West Coast assets or is that still to come? So just any color there would be helpful.

Yes, I think the contribution from the assets that comprise our system has been pretty consistent over the course of the last year. So there's really been no shift. I mean, they're all contributing in some fashion. Most of our crude, obviously, goes to Albany, so that's a key part of that system, and we are growing volumes in North Dakota.

We continue to work on the West Coast. Eric mentioned, I think, in his comments that we've received a permit to expand the West Coast CPBR facility to handle both crude and ethanol simultaneously. So we'll look to grow our volumes as our capabilities expand there. But there's been no real shift in how that -- how those individual pieces of the system are contributing to the overall business.

Yes, hey, Gabe, it's Eric. I just want to add one other thing there. We are working very hard and closely with rail to try and optimize and be as efficient as possible to move as much volume through this system. Now, the investments that we're making in rail and in tankage are, obviously, going to increase flexibility and the connections to pipelines will also increase, sort of, the draw area that our [throughputters] can buy from. So those are all important pieces that I think will help to, sort of, push volumes through those assets, but it's also on receiving end to make sure that, really, the [symphony] of how those cars come in and are moved out of those assets work hand-in-glove with the rail company.

And it's one of those things where, I think, people think it's an easy thing to do, and it's the turn of a switch and once you do it, it stays the same. I can guarantee it doesn't, so it's something you've got to be on, it's something you've got to be looking at every day and really trying to make sure that you're working closely with those rail companies to try and achieve higher volume.

So we're spending a tremendous amount of time, effort, and money on that to make sure that we're doing it in the best way, the best manner possible.

Great, thanks, Eric. And I guess another broad follow-up question would just be, look, obviously, mid-Atlantic and New England had a crazy cold winter last year. I'm just wondering what you're seeing is on the distillates or heating oil fuel side going into this winter, whether behavior has changed? Is that contributing more to second half 2014 results? Any color there?

Yes, I mean, I think the way I would look at that is did you've got to wait for the weather to come. I can just tell you on a competitive basis, [firm] gas in the winter up here is really expensive comparatively to other products. So if it's cold, cold, for us, is like really warm weather to an electric utility. So if it's cold, we'll sell more barrels, and that would be across the barrel from residual fuels to heating more -- to even diesel fuel and kerosene. So that's all good.

And as a follow-up to that, Eric, just given the fact that oil has come down so much over the last month, I would assume it's just been rendered much more competitive in a lot of those power gen markets. Is that fair?

Yes, I would agree with that, and really gas up -- gas in the Northeast, and I don't mean in every state, but, generally, as a general statement, gas in the Northeast is really pipeline constrained. And it's not that the commodity, the gas itself, is high-priced. It's actually there's just not enough capacity to get it to market.

Yes, I see it in my utility bill every month. So I look forward to seeing everyone next week. Thanks, guys.

(Operator Instructions) Rob Longnecker, Jovetree.

Good morning. I wonder if you could provide a little detail on how much of your rail business is under, sort of, a long-term contract?

Well, when I think about it, Rob, I mean, we announced that these 66 contracts, so you've got the volumes that are there. We don't specifically break it out, but there is multiple other transactions with other East Coast refiners that have term to it. There is also a mix of spot in there, as well. I would say the majority of the business really is term.

And can you guys provide, like, an average term on that?

We've only really announced -- we've only broke out that one contract for us, right? So -- and there's -- how many years (inaudible)? Three more years are remaining on that deal.

I guess, kind of, from a more broad perspective, maybe you could talk about, I mean, differentials that have been compressed for all of 2014. So I'm just wondering, maybe, how your spot operations have done and, kind of, how you think about and how your customers are thinking about those differentials, going forward.

Yes, Rob, it's Mark. I think that when you look at the differentials, sure. If you're just referring to the Brent TI, I mean, we've talked about this many times. First of all, they've expanded, they've contracted, they've -- there's been a little bit of volatility in those spreads, but, really, what drives the movement is not just that Brent TI, you've got to kind of look back into the field and look at cash prices for, say, in using an example, Bakken in North Dakota.

When you look at those values, it's still -- they're still wide enough to facilitate that move. And it remains our bias that those are barrels that don't belong in the Gulf Coast. So you've got to ask yourself, is it wide enough to move by rail? And then you've also got to ask yourself what's the alternative? And if the alternative is the Gulf Coast, it's a very weak market for light sweet crude with all the production that they have down there.

So it really makes, on a long-term basis, it seems to make sense to us that those barrels will continue to price themselves to move both East and West.

Okay, thank you. And then I believe, just looking back like over the last four quarters, I think in each quarter your, kind of, total wholesale gallon has been down. Not a lot but kind of down every quarter. I wonder if you could kind of speak to that a little bit?

Rob, it's Daphne. Part of that is related to or actually the lion's share would be related to the shift in crude oil from sales, which, obviously would be in our volume and toward logistics we are moving someone else's product.

Got you.

So let me be a little more specific there. The long-term contract that we had when we signed the company up, they didn't have sourcing capability, even though they were a large company, they didn't have sourcing capability, they didn't have the railcars, either. We had sourcing, we had rail, we had barging, and we had sort of the whole system of logistics to buy them with. And the goal from the beginning of the transaction was to put them into a position or allow them to do all of that themselves. So we still handle pieces of it for them, but the fact is, it's certainly our hope that they do all of this themselves.

Got you, okay. And just a last question -- can you guys provide what your TTM coverage ratio is? (inaudible).

2.3 times.

2.3 times, yes, so that's kind of substantially higher than anyone else in the universe. I'm just wondering if you can, kind of, provide some thinking -- what your thinking is around that?

Yes, I mean, what we've said in the past is we'd be comfortable with, sort of, a 1.2 times, 1.3 times coverage. We certainly have -- recent quarters certainly have much higher coverage and, in part, that's -- we have significant pipeline of pending projects that we are investing in. So that's a reason why the coverage is higher.

So when you talk about, sort of, the debt to equity is financing for the new transaction, does equity mean new equity or does that mean, sort of, what you're talking about here where you're kind of retaining some of your earnings?

Exactly.

So the latter -- it doesn't mean new equity -- ?

Right. We're taking some of the cash that we're earning, and we're putting it back into the business, and we're making investments.

Got you, okay. So I just want to make sure I'm fully clear on that. So you don't anticipate selling any new equity?

Not yet. Go ahead, Daphne.

I think, certainly, over time it's appropriate to raise equity. I think what we're very clear about is in terms of -- near term we have capacity under our bank facility that finance the entire Warren transaction, for instance. But we have also said, over time, it makes sense to fund that transaction longer term with 60-40 debt equity, and that longer term would be raising new equity in the longer term.

I mean, look, we're looking at our cost of capital, and we're figuring out the best way to balance our financials, but we're trying to be as efficient as possible, right? So we're always measuring different sources of capital and what's the cheapest way to do it but yet be conservative as well, right? So -- and it's that balance you're always trying to bring to the table.

Lin Chin, Height.

Okay, good morning, congratulations for a good quarter. A question for the outlook for the crude by rail business. Global is a pioneer to move crude out of Bakken by rail, and it was their successful story. But now we see a (inaudible) your client is expanding their own facility to move crude by rail. So Eric just mentioned that in the long term you think more and more of your clients are going to do the business by themselves. So I'm just wondering what's your outlook or strategy to position your crude as a rail business?

Yes, I just want to correct you one thing -- when I commented on that, it wasn't that they were doing it themselves, right, because they may, in fact, be building out a rail facility but in this particular transaction, specifically to the transaction the company did with us, the concept from the get-go was we would just provide, really, (inaudible) for them and the means for them to take the product into their refinery, right?

So in that particular instance, the goal from the very beginning was we were better positioned to handle the sourcing and the logistics around it. But, ultimately, the throughput through our terminals and through our rail system was something that we wanted them to eventually have to do it all themselves. But that's still through our system, so I want to be very clear, that's throughput through our system, and it's our opinion, and I'll turn this over to Mark, and Mark could go over some more specifics with you -- that the market itself is big enough to handle all of the rail capacities plus some that exist on the East Coast.

So, with that, Mark, why don't you pick up the (inaudible).

Yes, I don't want to beat this up, but I also want to make it clear that when -- because we mentioned a few times with respect to declining volumes, the shift from sales to logistics on some of the crude business, and that, as Eric said, that is still volume that goes through our terminals.

So if you looked at throughput, throughput would probably be up rather than sales. And I know we don't disclose that, but the number that -- the volume -- the volume through our terminals is up. It's just how we categorize it. So I just want to make that clear.

And then to expand on Eric's comment with respect to the size of the market and, Lin, to answer your question on refiner's developing their own capabilities, they certainly are, and it's well publicized, and it's something that I think the entire markets expected.

But there is a limit as to how much offload capacity can be built out at refineries. Some refiners are luckier than others, and they have space to build out scale. But I think -- I don't expect that we're going to see a heck of a lot more build out at the -- just looking at the East Coast, I don't think we're going to see a lot more buildout on the refiner destination side.

So when you look at the size of the market, if -- if -- all of the crude were to be supplied from domestic production by rail, you would need third party facilities, and that's where we think we will stay relevant, especially given our competitive advantages in the marketplace.

Yes, and let me add one other piece to that. In many locations the rails are already being strained by capacity, and we've actually heard of and seen where the rails have come in and said, "Hey, we can't do that business at that location because we don't have the available capacity."

So one of the things that we think is really unique about, particularly our East Coast system that we have is that is serviced by CP, and it has two routes. One route is through Chicago, which is tremendously congested. It has all sorts of problems, right, and then we also have a northern route, and that northern route is a little bit more open. It's a little bit farther in terms of miles, but in terms of efficiency to supply and backlogs, we think that's a better run for rails to go.

So -- we think that's one of our competitive advantages, and it's, frankly, it's a single line haul, as well.

So great. So in the -- like, in the future, should we expect that you guys switch more of your contracts from the current, like, the sales of their crude to their more fee-based or take-or-pay contract?

I think we're going to continue to do business the way we always have, where we think we can make money, that's what we're going to do, right, because it's all about trying to create earnings for the Company.

Okay, thank you.

Rob Longnecker, Jovetree.

Just another follow-on on, kind of, the term contract. The Phillips agreement was kind of early 2013, and I was wondering if you could talk about -- and I known you haven't disclosed on the contract, but has it been a steady flow of contracts since then or was there, kind of, more in 2013 that slowed down in 2014 or can you kind of talk a little more about that?

Yes, I would say that the volume of our term business to varying degrees has increased since then. So we were fortunate to be able to get that deal done with P66, and that's been a great benefit for us, hopefully, for them, as well. But we have continued to build business into other destinations, and that's probably -- that business has actually increased in recent times.

Got you, okay. And then could you just talk a little bit more about what the contractual support of the new Texas facility is?

I'm sorry, I didn't hear. What's that again?

The new Texas facility? What's the contractual -- ?

Oh, what about -- you're asking something about Port Arthur?

Yes, correct.

So your question is -- just talk about what we're -- ?

Yes, is there contractual support for that or how would you structure that?

We are probably in the early stages of commercial negotiations around that facility where from a construction -- from a design and construction standpoint, we're in the final stages of initial design. We are underway with permitting activity. So we've got a ways to go on that. We've been engaged in commercial discussions with both marketers and refiners and crude producers around the use of that facility. So we'll continue to try to advance those as we get closer to our open date.

But you'll fully build it and put the CapEx into it without commitment?

Yes, our belief is that facility is going to have a lot of value, and there's probably a lot of different things we can do through that facility. We've talked about Phase 1 contemplating the move of some sort of less diluted heavy crude by rail into that market, but we're also seeing some good opportunities on the ethanol side, which is a business we're very active in. And we also think there is some opportunity to develop some refined product or blendstock initiatives around that as well.

(cross talk)

I'm sorry, go ahead?

No, I was just going to say we're very excited about the opportunity down there.

And how much capital are you guys putting into that?

Yes, we've talked about somewhere in the neighborhood of -- in the early stages of design we've talked somewhere in the neighborhood of $75 million to $100 million. And as we dial in the final design of that, it will be in that neighborhood. It may be plus or minus that range, but it will be -- it will probably be plus that range not minus.

Yes, our general buy, SNB rights, so is that -- the Gulf Coast not only is short tankage, but it's also short docks. And so there's stock capability there as well. And positioning ourselves to take advantage of that shortage is really one of our goals, right? So not only are we in a marketplace that has over a couple of million barrels of refined demand for crude, but it also -- it certainly also has some good docks, and that's going to be important as well.

Got you, okay. And then kind of thinking kind of bigger picture and longer term, it looks like, sort of, the ban on exporting crude is slowly getting eroded, and I would assume that's probably going to continue the next couple of years. How do you think that affects your business, kind of, like, you just look forward two or three years?

Yes, I mean, that's not crystal clear, but it is our bias that even though -- even if they allow exports, you could argue that local demand, domestic demand should be satisfied before we export anything. There is going to be some consideration for getting the right grade in the right spot, but I think we're reasonably well positioned for that given the fact that we've got destinations that aren't currently served by pipeline that need that product. And then we've got origins in a region where the barrels shouldn't naturally flow to the Gulf.

So I think -- I'm not saying -- how this market plays out, there will be ebbs and flows, and there will be some volatility around it, but I think we're reasonably well positioned even in the face of should they lift the export ban?

Yes, and I mean, those barrels should go to the closest market because theoretically they don't have the freight involved with them, you follow me? But even given that, we're talking about docks of various sizes that are multiple facilities that theoretically give you that optionality to export, should you need to. I don't expect that that's the way it should go, but it certainly could, and I think in those instances, we could be competitive in moving those barrels out through our facility as if on an export basis as well.

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.

Thank you, all, for joining us today, and we look forward to seeing you next Tuesday in Portland. Thanks, everyone, have a great day.

This concludes today's conference. All parties may disconnect, thank you.