Global Partners LP (GLP) 2014 Q4 法說會逐字稿

Good day, everyone, and welcome to the Global Partners fourth-quarter 2014 financial results conference call. Today's call is being recorded. There will be an opportunity for questions at the end of the call. (Operator Instructions)

With us from Global Partners are President and Chief Executive Officer, Mr. Eric Slifka; Chief Financial Officer, Ms. Daphne Foster; Chief Operating Officer, Mr. Mark Romaine; Executive Vice President and Chief Accounting Officer, Mr. Charles Rudinsky; and Executive Vice President and General Counsel, Mr. Edward Faneuil.

At this time, I would like to turn the call over to Mr. Faneuil for opening remarks. Please go ahead, sir.

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 law. These statements may include, but are not limited to, projections, beliefs, goals, and estimates concerning the future financial and operational performance of Global Partners.

Estimates for Global Partners' future EBITDA are based on a number of assumptions regarding market conditions, including demand for petroleum products and renewable fuels, commodity prices, weather, credit markets, the regulatory and permitting environment, and the forward product pricing curve. Therefore, Global Partners can give no assurance that our future EBITDA will be as estimated.

The actual performance for Global Partners may differ materially from 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 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 allow me to turn the call over to our President and Chief Executive Officer, Eric Slifka.

Thank you, Edward. It is a pleasure to be with you all this morning to discuss our accomplishments in 2014, update you on our strategic initiatives, and share our outlook for the year ahead.

Global delivered record full-year net income, EBITDA, and distributable cash flow in 2014. Our results benefited in part from significantly colder weather and a favorable gasoline blendstocks market in the first quarter and from the steep decline in wholesale gasoline prices benefiting our gas station business during the second half of the year. Our ability to capitalize on favorable market opportunities reflects the breadth of our asset base and the diversity of our products and businesses.

In the fourth quarter, our Gasoline Distribution and Station Operations segment reported a record $86 million product margin, 42% higher than Q4 of 2013, due to sharply declining gasoline prices. In our Wholesale segment, gasoline and gasoline blendstocks product margin declined due to less favorable market conditions. Crude oil product margin, on the other hand, nearly doubled year over year to $43.7 million from $22.3 million in the fourth quarter of 2013.

Turning to our recent highlights, in January, we closed on the acquisition of Warren Equities. The integration is proceeding on plan and we are already seeing anticipated synergies from the transaction.

This is a transformational addition to our gas station and convenience store network, which now includes approximately 1,500 locations in 10 states: 8 in the Northeast and two in the Mid-Atlantic. In round numbers, our retail gasoline volume in 2014 was approximately 1 billion gallons and with Warren, that figure increases by roughly 500 million gallons a year.

With Xtra Mart, we have added an extremely well-recognized regional brand to our convenience store portfolio. There are 147 Xtra Mart stores in New England, New York, and Pennsylvania, with quick-service restaurants at a number of these locations.

Acquisitions are just one component in our strategy to expand the GDSO segment. In terms of organic initiatives, we continue to augment our portfolio with new-to-industry sites, raze and rebuilds, and merchandising initiatives at our retail locations.

Moving on to our Mid-Continent assets, we continue to enhance our interconnected network of storage and crude-by-rail assets. Our assets in North Dakota are well situated to facilitate the movement of crude oil as it is gathered in North Dakota and moved by truck and/or pipeline to Beulah and Stampede on its way to markets on the East and West Coasts or anywhere a customer takes it.

A 4.1-mile pipeline connection, connecting our Beulah, North Dakota, terminal to the Tesoro High Plains Pipeline System has commenced operations. By expanding crude oil gathering capabilities, the pipeline connection enhances the strategic value of our Beulah facilities.

Meadowlark Midstream Company, a subsidiary of Summit Midstream Partners, is continuing its work on a new crude oil pipeline that will connect our Basin Transload terminal in Stampede to Summit's Divide Gathering System. The 47-mile pipeline will have throughput capacity of 50,000 barrels a day and at the point of the connection will have a truck unloading station with 55,000 barrels of tankage. Subject to permitting, we expect the Summit pipeline to be commissioned in the fourth quarter.

Separately, we are in the process of constructing an additional 176,000 barrels of tankage at Stampede to accommodate increased throughput and we expect that project to be completed in Q2. The increased tankage, along with improved rail infrastructure, will allow additional throughput.

Another highlight in Q4 was the signing of a five-year take-or-pay contract with Tethys Partners. Tethys will use our rail, terminaling, storage, and marine logistics services to transload crude from sites in the US and Canada to our CPBR facility in Clatskanie, Oregon. The contract ramps up to 30,000 barrels a day effective April 1, and equates to approximately 55 million barrels of crude oil over the term of the agreement.

As we discussed at our investor day, CPBR currently has 200,000 barrels of storage and 12 railcar offloading positions. We are pursuing plans to build additional storage, enlarge the dock, and increase rail capacity.

Our plan there is to concurrently offload crude trains and operate the ethanol manufacturing facility, creating additional product flexibility. We expect to complete this expansion next year.

In Port Arthur, Texas, we are pursuing permits to develop our waterborne rail terminal project, which remains on target to open in 2017. This is a key milestone as we continue the build-out of our system to drive optionality to the South, East, and West. The facility will be located on land owned by Kansas City Southern, which connects to all of the Class I railroads that transport crude and other products from various markets in North America.

The site is 225 acres. We have looked at multiple layouts for the terminal, which has the potential to accommodate as much as 9 million barrels of storage. As we advance conversations with a number of prospective customers, we are very enthusiastic about the opportunities for this project.

Let me take a moment to address a question on the minds of many investors in recent months: how do current oil prices affect our crude oil supply and logistics operations? Our fundamental bias remains that normal supply and demand patterns favor the movement of Mid-Continent light crude to the East and West Coasts.

Although current market conditions are drawing a portion of those light crude barrels to empty storage at the Cushing, Oklahoma, oil hub, that demand is temporary. Once storage is in Cushing is full, we expect to see much of this Mid-Continent sweet crude volume again move east and west. Our wholesale supply and logistics operations are well positioned to handle these volumes.

We have a broad base of terminaling and transloading assets that serve crude oil and refined petroleum products by rail, pipeline, and/or marine transport. Our 25 bulk storage terminals have a combined capacity of 11.7 million barrels.

Earlier this year, we completed the acquisition of a 2.1 million barrel terminal in Boston Harbor from Global Petroleum Corp. This asset, which had been leased by the Partnership -- to the Partnership by GPC for many years, is the largest terminal in our portfolio. It is a major regional hub for the storage and distribution of refined petroleum products, including heating oil, gasoline, distillates, diesel, kerosene, and blendstocks. In addition, a portion of the storage capacity is contracted to store fuel as part of the Government reserve programs.

Turning to our distribution, we remain committed to maintaining a strong return for our unitholders. In January, the Board of Directors of our general partners increased Global's quarterly distribution to $0.665 per unit or $2.66 on an annualized basis. This represents an increase of 1.92% over the prior quarter's distribution and 8.57% more than the distribution paid in the fourth quarter of 2013.

Now let me turn the call over to Daphne for her financial review and our 2015 guidance. Daphne?

Thank you, Eric, and good morning, everyone. Let me give you some color on our fourth-quarter performance. Gross margin was up about $6.6 million or 5% from the same period of 2013, to $141.5 million. Gross margin benefited from year-over-year margin improvement in our GDSO segment and crude oil operations, partially offset by less favorable market conditions in the wholesale gasoline and gasoline blendstocks market. In addition, please keep in mind that our Q4 2013 results benefited from a $9.9 million decrease in RIN-related liability.

Fourth-quarter EBITDA was $61.9 million, a decrease of approximately $3 million from the prior-year period, reflecting higher expenses associated with investments in our wholesale and GDSO businesses, which offset the increase in gross margin. Net income attributable to Global for the fourth quarter was $27.9 million compared with $34 million in the fourth quarter of the prior year, reflecting higher depreciation from additional investments in our business and higher interest expense due to the issuance of high-yield bonds midyear.

DCF was $44.4 million, approximately $8 million less than the same period in 2013. The larger variance in DCF compared with that in EBITDA was due primarily to increased maintenance CapEx in our GDSO segment and higher interest expense related to the bonds.

Looking at our segments in more detail, wholesale segment product margin was down approximately $16.4 million to $65.9 million. As Eric mentioned, this was primarily due to less favorable market conditions in gasoline and gasoline blendstocks as well as a $9.9 million favorable impact from RIN-related liabilities in the fourth quarter of 2013. Crude oil product margin was up approximately $21.4 million to $43.7 million due to increased volumes and higher margins.

Fourth-quarter commercial segment product margin was off about $600,000 from the prior-year period to $6.4 million.

Our GDSO segment had a record quarter due to the declining price environment. The segment generated a 42% increase in product margin, up $25.3 million from the prior-year period to $86 million. The NYMEX price for 87 RBOB regular gasoline fell $1.15 per gallon, from $2.59 at the end of September to $1.44 at the end of December. And was the primary reason for our 59% increase in fuel product margins to $62.8 million.

Station operations product margin increased $2.1 million from the fourth quarter of 2013 due primarily to continued expansion of our C-store operations and merchandising efforts as well as the addition of 11 commissioned agents Mass. Turnpike sites.

Turning to expenses, total expenses were $95.4 million for the fourth quarter, with SG&A and operating expenses increasing $7.3 million and $3.5 million, respectively, year over year. Higher SG&A reflects investments and planned staff additions to support our growing businesses as well as growth initiatives, such as our Port Arthur project, gasoline stations, including $1.7 million in expenses related to the acquisition of Warren Equities and other expansion activities.

Higher operating expenses in Q4 include $3 million related to the growth in our GDSO segment, such as the Mass. Turnpike sites, additional sites under our unitary lease with Getty, and the completion of certain raze and rebuilds. Interest expense was $12.1 million for the quarter of 2014 compared with $11.4 million for the same period last year due to the issuance of the $375 million, 6.25%, eight-year unsecured bonds last June. The proceeds of the issuance were used to exchange outstanding senior notes and to repay a portion of our borrowings under our credit facility.

Total CapEx for the quarter was approximately $21.5 million, $5.6 million of which was maintenance CapEx. The majority of our $15.9 million in expansion CapEx consisted of investments in our gasoline station-related business and our crude transloading terminal.

For instance, we have renovated 19 of our 23 retail station sites on the highly traveled Connecticut Turnpike, with completion of the remaining sites expected by the end of the second quarter. And in January of this year, we introduced a new-to-industry gas station and convenience store in Orono, Maine.

Our crude-related investments included expanding tankage and rail infrastructure at our North Dakota terminals. The $5.6 million of maintenance CapEx consisted primarily of investments at our retail gasoline station and IT.

Our balance sheet remains strong. At December 31, total funded debt was $509 million, consisting of the $375 million in unsecured notes and $133.8 million in outstandings under our acquisition revolver. Total funded debt to EBITDA was 2.1 times and we had excess borrowing capacity of $1.4 billion under our committed bank facility, which at year end stood at $1.775 billion.

Partners' equity at December 31 was $636 million, reflecting our public offering of approximately $3.6 million in common units. The offering, completed on December 10, generated net proceeds to Global of $138 million.

In January of this year, we completed the acquisition of 100% of the equity interest in Warren Equities from The Warren Alpert Foundation. The purchase price of approximately $387 million was funded with borrowings under our credit facility.

We expect Warren to be accretive in the first full year of operations and generate $50 million to $60 million of EBITDA in the second full year. And as Eric mentioned, we are pleased with how the integration is proceeding.

Now let me comment on 2014 full-year performance, which benefited from several unusually favorable market opportunities. 2014 was exceptionally strong, with improvement in all segments.

EBITDA increased from $157 million in 2013 to $242 million. And DCF increased from $105 million to $161 million. Wholesale segment product margin increased $90 million, with contributions from gasoline and gasoline blendstocks up more than $28 million; crude oil up $49 million, as throughput volumes and margins increased year over year; and other oils, including distillates, up $12 million. The increase in the gasoline and gasoline blendstocks margin was partially due to a $19.3 million increase in RIN-related liabilities in 2013, which did not recur in 2014.

The GDSO segment also had significant increases year over year, largely due to an extraordinary period of declining prices. During periods of falling prices, retail fuel margins typically expand.

For the year, our fuel margin increased $39 million, from $150 million in 2013 to $189 million in 2014. While some of this increase was due to new or rebuilt sites streaming on, the favorable price environment was the primary reason for the increase. Contribution from station operations within the GDSO segment also increased, up $11.6 million to $91.8 million, due to additional sites, including the Mass. Turnpike sites and our merchandising efforts.

As a reminder, there were other notable opportunities that we took advantage of during 2014. The first quarter was extremely cold -- 9% colder than normal. Our other oils and related products, which include fuel, such as distillates and residual oil, benefited from the cold temperatures, tight supplies, and curtailment of deliveries to interruptible natural gas customers, driving demand.

Also in the first quarter, severe weather and rail congestion caused shortages of gasoline blendstocks in certain markets, creating very favorable market opportunities.

Turning to guidance, based on the current market environment, we expect full-year 2015 EBITDA in the range of $205 million to $225 million. The guidance is based on assumptions regarding market conditions, such as demand for petroleum products and renewable fuel, commodity prices, weather, credit markets, the regulatory and permitting environment, and the forward product pricing curve, which could influence quarterly financial results.

The guidance does not take into account unusually favorable market conditions, such as global experience with respect to gasoline blendstocks in the first quarter of 2014 and with respect to rapidly declining gasoline prices in the second half of 2014.

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

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

Operator?

(Operator Instructions) Gabe Moreen, Bank of America Merrill Lynch.

Just follow-up on the expansion opportunities. Is there any guidance you can give us in terms of overall CapEx spend for 2015? And I guess just how big the major buckets of expansion CapEx would be on -- by each individual business?

Good morning. I think in terms of expansion, last year, we spent about $51 million. So $24 million of that or so was in crude, $20 million was in the retail side, and then $5 million completing the propane and some other investments.

I think looking forward into 2015, the latter part of the year we will start to spend on the West Coast -- we hope to start to spend on the West Coast projects and on the Port Arthur project. Obviously, returns from that wouldn't be seen until 2016 and beyond.

I think in terms of the -- our GDSO segment, it is likely we would be in the -- around the same number as last year, although we evaluate each project separately and look to get at least a 15% return. So none of those expenditures are really baked into our performance in 2015. I don't know if that helps.

It does. Thanks, Daphne. And I guess mentioning the Q4 versus this year versus last in the wholesale gasoline segment, I guess I am just curious kind of the lack of market opportunities and how that came in this quarter. Can you elaborate a little bit more in terms of -- I know there was the RINs benefit last year that you didn't get this time around, but I guess I was under the impression that the gasoline market may have been in contango, too, for at least part of the quarter.

So I'm just curious if you can give us a little color on what you were seeing, whether you expect those conditions to persist.

Yes. It is Mark. With regard to Q4 2014 versus 2013, it really had -- first of all, 2014, on a gasoline blendstocks side, Daphne talked about it and we saw some very unusual logistics conditions in Q1 and into Q2 of 2014. So we saw some volatility in that gasoline blendstocks market.

As markets came out of backwardation in the ethanol, they continued to slide into contango. So really a different environment than we had in 2013, when we had really strong market conditions for ethanol in 2013. So in one case, you had markets coming out of backwardation going into contango and then the other -- the point that you are trying to compare it to in 2013 was I wouldn't say unusually strong, but I would say it was very strong. So you had markets going in different directions.

On the gasoline side, actually both Q4 of 2014 and 2013 were strong from a supply standpoint. You had supply disruptions in the -- really up and down the East Coast. You had some refinery issues and you had a lack of cargoes coming into that market.

So it created for us -- you know, 2013 may have been stronger than 2014, but they were both strong on the gasoline side.

Okay. Thanks, Mark. And then last question for me just is in terms of the weather upside that was obviously 1Q last year. Clearly it's been cold so far in 1Q thus far. It doesn't seem like it has been quite as -- some of the same price spikes as you saw this time last year.

But the new guidance for 2015, does that incorporate what you know about weather thus far or for this year? So in other words, the fact that it has been pretty cold in February.

Yes. I think where we are standing today, Gabe, is our guidance really reflects what we see today and what we are seeing for the balance of the year.

Okay. Fair enough. Thanks, everyone.

Cory Garcia, Raymond James.

Turning back to the GDSO business, clearly very strong results this quarter and then obviously you gave reasons why on the margin front. Is it safe to say that we have already seen that return to more of a normalized C-store retail type of margin at this point in the year?

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

Sure. Okay. So we have reached that settling point at this time of the year.

The market has been bouncing around in about a, I don't know, $5 or $7 range. And so I would say that that is sort of more normal.

Okay. Great. And incorporating that into your full-year guidance, I want to say, looking through my prior notes that sort of the pre-Warren run rate for that business was in the $80 million, $90 million EBITDA range.

Is that still the right figure to use, despite the fact that you guys are obviously continuing to push and drive towards enhancing just your core business as well through merchandising and some of the other initiatives?

Yes. It is Daphne. Yes. We have in the past said that the GDSO segment generates sort of $80 million to $90 million. And certainly we have made investments in that business, whether it is new to industries and raze and rebuilds and our merchandising efforts. So I think it is safe to put it above that level.

Okay, great. Thank you guys.

(Operator Instructions) Randy Saluck, Mortar Rock Capital.

Couple questions. One, with respect to Warren, I know your synergies. I know the gentleman before asked questions about synergies. But with respect to synergies, you talk about migrating the Warren system onto your supply system, which generates synergies that you can identify.

What about the combination and the scale associated with that? Have you looked into -- I'm sure you have looked into it, but have you sort of quantified what the additional synergies might be? And I have one other question.

This is Mark. We have been -- we have spoken in the past when we announced the acquisition about our expectation of our ability to recognize some synergies by combining the Warren sites into our own network. Some of those synergies will be driven by our ability to run barrels through our own terminal network, to benefit from our supply efforts.

And it is not just limited to the fuel supply end of the business. At the C-store level, there is certainly opportunities to drive synergies through the scale of the combined operations. So yes, we went -- on a very detailed basis, we went -- when we were looking at this portfolio, we went through a very detailed analysis of where we thought the synergies were at.

And I think we are encouraged by what we have seen so far. Our expectation is still to hit the numbers that we spoke about.

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

Okay. That's good. And then secondly, more generally, philosophically, dividend increases. What are your thoughts over the next year or two? Where would you like to be if things work out with (multiple speakers).

Yes. We deal with the Board on that every quarter. So we have come out and sort of said we are going to work with the Board to talk to them and what that looks like moving forward.

Is there a certain coverage ratio that you are comfortable with that you won't go below or target coverage ratios or anything like that?

Yes. Randy, we've said that we feel comfortable with 1.2 to 1.3 times coverage. I mean, obviously, we are running well above that now. It is a little over 2 times at the end of the year, but we are comfortable at 1.2 times to 1.3 times.

Okay. Thank you.

(Operator Instructions) James Jampel, HITE.

A couple questions. First on the contango in the crude oil market. Am I correct in assuming that that has little or no effect on you guys in general?

And then the second question relates to if we see a situation in the Bakken, where production levels off or even declines in a couple of years, if you could go through sort of a thought experiment on how that would affect your operations up there, vis-a-vis how other operations might deal with a potential fall off in production.

Good morning, James. It is Mark. To answer -- you had two questions there. The first was relative to contango in the crude markets. And we do have -- we do benefit somewhat from contango in any market to the extent that we have storage and we can store a barrel and hedge it forward. Then we will -- there will be some uplift from that. So I wouldn't assume that it is nothing.

In markets like this, you never have enough, but we do have some crude storage that we can pick up some uplift. As far as looking down the road on the crude business, and it is awfully tough to predict where volumes are going to go in this environment, I think our bias -- Eric stated it earlier, our bias is that the barrel coming out of North Dakota long term should want to move to the East and West.

It is not our expectation that the Gulf Coast will be calling for that barrel. So to the extent that the barrels are coming out of the ground in North Dakota, it is our expectation that the highest netback for those barrels will be on East and West Coast.

And again, I think we are well positioned to facilitate that movement. If you look at when we get into this business in 2011, maybe, which, as a reminder, was kind of on the heels of our ethanol business, which was -- which entailed moving ethanol unit trains out of North Dakota into our Albany facility, when we started this -- engaging in the crude logistics, I think crude production was probably somewhere around 400,000 barrels a day in North Dakota. And now it is well over 1 million barrels a day.

So I do believe that barring a complete shutdown of North Dakota that there is going to be opportunity for us to participate and grow the business through our Stampede and Beulah assets to our East and West Coast assets. As well as we continue to grow the business outside of that network as well. So our North Dakota assets can ship a barrel anywhere.

I mean, it is our preference to -- and it is our belief that our system provides a great netback for those barrels, but the fact of the matter is, we can ship them anywhere out of those rail terminals.

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

It is tough to say what -- I cannot speak to first or second. What I think is that crude by rail to the East and West Coasts will remain a high netback for producers and will remain relevant under any market condition.

So James, let me try to clarify a little bit there. It is still our belief that there is excess sweet production in the South for what the refining capacity -- the nearby refining capacity is. So that is really the Gulf Coast.

So because of that, it is our belief that the highest netback will be both East and West. Because you are competing with imported barrels that have to travel further to get to the market.

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

Yes, I think our guidance really, as we've said before, really takes into consideration the forward pricing curve as well as the commodity prices, et cetera. So that is what our 2015 guidance reflects.

Okay. And last -- to refresh me now, so your Port Arthur operations are focused on crude by rail to the South, are they not?

That is correct, but it is primarily heavies.

Heavies.

Mark wants to add a little color to that.

Let me add to that, because I think when we have been looking at this Port Arthur project for quite some time. And our initial business model contemplated the movement of heavy crude by rail into that market. So that is an undiluted barrel of heavy crude.

So when you look at the economics of an undiluted barrel by rail versus a deal bit by pipe, I think it can compete on an economic basis to those market -- to those markets. What we have since determined or where we -- what we have since -- since we started looking at it, we have come to understand that that Port Arthur project will likely be a lot more than crude.

So we have seen tremendous interest from the ethanol market in that facility. I think there is going to be some opportunity and it may be on an opportunistic basis, but I think there is going to be some opportunity to handle refined products through that facility. So when we look at Port Arthur now, we are looking at it as a multi-product rail to water scale storage facility.

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

All right. Thank you very much.

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

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

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