Global Partners LP (GLP) 2015 Q2 法說會逐字稿

Good day, everyone, and welcome to the Global Partners Second Quarter 2015 Financial Results Conference Call. Today's call is being recorded. There will be an opportunity at the end of the call for questions. (Operator Instructions) As a reminder, this conference is being recorded.

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, which could influence quarterly financial results. Therefore, Global Partners can give no assurance that our future EBITDA will be as estimated. The actual performance for Global 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 our filings with the Securities and Exchange Commission.

Global Partners undertakes no obligation to revise or publically 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 news 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. Eric.

Thank you, Edward, and good morning, everyone. Our second quarter performance reflects our diverse business. GDSO's product margin of $98.3 million was 56% higher than last year's second quarter, largely reflecting contributions from the Warren Equities acquisition in January of this year. Product margin in the Wholesale segment was up 76% over the second quarter in 2014, primarily reflecting a more normal gasoline blendstocks market.

Let me provide you with some color on activities during the quarter. The integration of the Warren assets is proceeding smoothly. We are leveraging our expertise to drive profitability throughout the network of approximately 520 Warren locations.

In addition, we have and continue to realize better than expected synergies and efficiencies in areas such as purchasing, merchandising and expense management, as well as within other commercial and operational sectors.

In Q2, we completed the acquisition of a portfolio of stations and dealer supply contracts from Capitol Petroleum. The purchase enhances our retail asset base, which now includes close to 100 sites in the mid-Atlantic. As Daphne will address, we are updating our full-year 2015 EBITDA guidance to reflect the Capitol transaction.

Turning to our Wholesale segment, notwithstanding the headwinds related to crude differentials, we continue to believe that normal supply and demand patterns favor the movement of Mid-Continent crude by rail to the East and West Coasts. As we have said previously, rail provides a level of optionality that pipelines cannot match, allowing product to move quickly and efficiently without the significant working capital requirement of a pipeline infrastructure.

Now let me update you on several growth projects. First, we have received a permit from the U.S. Army Corps of Engineers for a dock modernization project at our CPBR terminal in Clatskanie, Oregon, that will enable us to handle Panamax-size vessels. Pending completion of final design drawings, work to upgrade the dock is expected to begin in the fourth quarter of this year. Apart from other planned investments at the terminal, receipt of this permit is a significant step towards raising the profile of CPBR as a prime West Coast logistic center.

Second, the Summit Midstream Partners crude oil transmission pipeline that will link our Stampede, North Dakota terminal to Summit's Divide Gathering System is expected to be in service in the fourth quarter of this year. This connector will include a 46-mile, 10-inch diameter crude oil transmission pipeline with throughput capacity of 50,000 barrels a day, expanding our Stampede crude transload facilities draw area and enhancing the opportunity for producers to efficiently reach multiple downstream markets.

On the Gulf Coast, the development of our planned multiproduct waterborne rail facility in Port Arthur, Texas remains on track to open in 2017, giving us entree to the Gulf's significant refining capacity, as well as potential export opportunity. This facility, with its rail access and waterborne capabilities, will be designed to handle multiple products such as crude oil, ethanol and refined products, providing refiners and producers access to waterborne markets.

We believe these three geographically diverse projects continue to broaden the Company's asset base, providing customers with access to multiple markets.

Turning to our distribution, we continue to demonstrate our commitment to provide strong returns for our unit holders. In July, our Board increased the quarterly cash distribution by 8.6% to $0.6925 per unit, which is $2.77 on an annualized basis.

Now let me turn the call over the Daphne for her financial review. Daphne?

Thank you, Eric, and good morning, everyone.

Let me start with some color on our second quarter performance. Combined product margin of $166.2 million was up approximately $63 million from the same period last year. This reflects a $35.3 million, or 56% improvement, in the GDSO segment to $98.3 million, primarily reflecting the Warren Equities acquisition in the first quarter of this year, and an increase of $26.4 million in the Wholesale segment to $60.9 million, largely reflecting a more normal gasoline blendstocks market.

Primarily for these same reasons, second quarter EBITDA increased $29.6 million to $48.7 million and DCF increased approximately $30 million to $26.2 million. Net income was $7.2 million, an improvement of nearly $20 million.

Looking at our segments in more detail, product margin from gasoline distribution in our GDSO segment increased $14.2 million to $53.2 million, reflecting six months of contribution from Warren, as well as one month from the Capitol Petroleum portfolio acquired June 1. Fuel margins in this segment were negatively impacted during the quarter by rising wholesale gasoline prices, particularly during April and May when prices during those two months increased more than $0.20 per gallon.

Product margin from S\station operations added $45.1 million, which was up approximately $21 million or 88% from last year's second quarter, again primarily reflecting the addition of the Warren sites.

Volume in the GDSO segment was 377 million gallons in the second quarter, an increase of approximately 115 million gallons, primarily reflecting the Warren acquisition. Our GDSO portfolio at the end of the second quarter consisted of 286 Company-operated locations, 282 Commissioned agents, 296 Lessee Dealers and 673 Contract Dealers, for a total of 1,537 sites.

Turning to the Wholesale segment, crude oil product margin of $36.8 million was up $6.7 million from the previous year, due to an increase in the fair value of forward contracts. We did experience a decrease in logistics volume and tighter margins in part due to unfavorable market conditions. Additionally, logistics volume was down due to the year-over-year declining contractual commitments with one particular customer.

As we said in our first-quarter call, contango structure in the crude market has incented suppliers to fill available storage, particularly in Cushing, and this continued into the second quarter. Supply disruptions in Canada due to the unplanned upgrader downtime and production issues related to wildfires also contributed to the tightness in physical crude differentials.

Gasoline and gasoline blendstocks margin improved nearly $22 million from the second quarter of 2014, but remember last year's result was negatively impacted by backwardation in the forward ethanol market and we looked at the full six-month performance as a more meaningful metric. Taking the same view this year, for the first six months gasoline and gasoline blendstocks margin increased slightly or $1.9 million to $47.5 million from the first six months of 2014.

The margin for other oils and related products was down $2.1 million to $6.4 million due in part to a competitive distillate rack market and a weak propane market, partly offset by strong residual fuel demand.

Volume in the Wholesale segment decreased 362 million gallons to 825 million gallons in the second quarter of 2015, primarily due to an elected change in supply logistics by a particular gasoline customer and the discontinuation by Global of a small discrete blendstocks distribution activity. This decline in volume was greater than the increase in our GDSO segment volume. Our smaller Commercial segment product margin was up $1.3 million, or 23% to $7 million.

Turning to expenses. Excluding amortization, total expenses were $117.5 million, with SG&A and operating expenses increasing $13.8 million and $21.1 million, respectively, from the second quarter of 2014. The majority of the increase stems from the Warren acquisition, with a lesser amount related to the purchase of the Capitol Petroleum assets. In addition, SG&A expenses included approximately $1 million in Warren related acquisition costs and $3.1 million in Capitol Petroleum related acquisition costs.

June was a busy month as we successfully completed two capital markets transactions and closed on the Capitol Petroleum portfolio. We completed a private placement of $300 million 7% unsecured Senior Notes due 2023. We completed a public offering of 3 million common units, generating net proceeds of approximately $109 million after estimated expenses. Net proceeds from the private placement and the offerings were used to reduce indebtedness outstanding under our revolving credit facility.

The recent $300 million bond offering increased borrowings to finance the acquisitions of Warren, the Revere terminal and Capitol. And the issuance of the $375 million 6.25% eight-year unsecured bonds in June of 2014 caused interest expense to increase $4.2 million to $16.4 million for the second quarter of 2015, compared with $12.2 million for the same period of 2014.

Total CapEx for the quarter was approximately $19.1 million, $7.5 million of which was maintenance CapEx, the majority of which consisted of investments in our gasoline stations as well as investments in IT. Expansion CapEx was $11.6 million and included $6.9 million in investments in gasoline stations and C-stores, including investments in two New to Industry sites, three Raze-and-Rebuilds, and co-branding investments.

We continue to have a strong balance sheet. At June 30, we had borrowings of $536 million under our $1.775 billion committed bank facility and total Partners' equity of $738 million. You will note the addition of an $89 million liability on our balance sheet classified as a �financing obligation.� This relates to the Capitol Petroleum transaction and is associated with certain properties previously sold by Capitol within two sale-leaseback transactions that did not meet the criteria for sale accounting. As a result, the acquired leased assets required capitalization on our balance sheet. The financing obligation does not represent incremental borrowed money, and our credit agreement excludes this obligation from the leverage calculation.

Turning to guidance, as Eric noted, we are updating our 2015 EBITDA guidance to include the acquisition of the Capitol Petroleum portfolio. As a result, we now expect full-year EBITDA in the range of $214 million to $234 million, up from a previously announced range of $205 million to $225 million. The guidance is based on assumptions regarding market conditions such as demand for petroleum products and renewable fuels, commodity prices, weather, credit markets, the regulatory and permitting environment and the forward product pricing curve, which can influence quarterly financial results.

Now let me turn the call back over to Eric for his closing comments.

Thank you, Daphne. Let me conclude by saying that we remain focused on strategic investments and organic projects that further enhance our growth, diversity and operational excellence throughout our organization.

With that, we'll be happy to take any questions. Operator?

We'll now be conducting a question-and-answer session. (Operator Instructions) Gabe Moreen, Bank of America Merrill Lynch.

Nice quarter despite the market reaction here which I'm pretty puzzled by. A couple quick questions for you guys. Just wanted to confirm -- and I know Daphne walked through the guidance quickly there at the end -- just that basically guidance has really only been adjusted for Capitol and I realize there's maybe a couple of moving parts and stuff, but essentially that beyond Capitol underlying guidance really isn't changed. Is that fair?

That's correct, Gabe.

Okay, great. And then I guess a question on Port Arthur and going forward there, given the tightened spreads and whatnot. Can you just kind of walk us through again the customer interest you're seeing and also to the extent when do you think you might have contracts or whether people are -- you're getting to that stage and the continued customer interest despite clearly some tightened spreads of late.

Yes, I think, Gabe, the key to that facility is -- the premises we've had originally are having waterborne access in major refining centers or the ability to export and get out. I'd say the Gulf Coast in particular is tight on that waterborne access. So, when you look at that facility in particular, it's served by rail. There are many pipes that go by the area as well, and there's multiple refineries nearby. So, it's an asset that has interest for refiners in multiple products in multiple different ways. So it's not only something that we see a potential to bring crude in there or different types of crude but it also has interest for products, either there are limitations for those refiners on-dock capacity or they don't have any the way they're set up today. So this provides some different flexibility for them.

Can you talk, Eric, in terms of just the customer mix in terms of -- the mix here, how much producer-driven versus refiner-driven. Do you have any ballpark sense of who's going to end up contracting here?

I would say it looks more refiner-driven at the moment, and that seems to be where we're having the heaviest conversations.

That's good to hear. And then last question for me, appreciate the U.S. Army Corps of Engineers permit. I'm just wondering how it fits into the bigger picture at Clatskanie. I know there's been a customer dispute there. I guess I'm just trying to get a bigger sense of how contracted the facility is. Do you feel like this last permit is sort of the major last piece of the puzzle to getting the terminal more utilized? If you could just walk us through the bigger picture there.

Yes, Gabe. It's taken us a little bit longer than we had hoped. It's certainly a very critical piece to the puzzle because it allows major investment in that dock and it makes it a large dock, particularly for the West Coast. So that Panamax-size vessel's really important. Really where we need to get to is to finalize our agreements to move forward and get construction going there. Once we're there on that piece, I would say it becomes one of the better assets out on the West Coast.

Okay, and just to press you a little bit more, Eric, in terms of contracting and the customer dispute where that stands that 8K that got filed?

Yes. In terms of that we're in dispute with a customer. We continue to move forward with it putting other people into the facility and the goal is to continue to build the business out there, but it's a great asset so particularly having that, the permits in place there, will go a long way to working with customers to get them in there and term up the facility.

Got it. And if I can ask just one more, the connection to Divide. I hear that you're going to be getting a bigger area to get barrels into Stampede. Can you just talk about customer discussions thus far and even with compressed spreads can you just talk about whether you are seeing the interest given the optionality within your system where you crude by rail ends up going?

Mark, do you want to take that?

Yes, sure. With respect to Divide, the Summit line, the Divide header there, we've got a fair amount of volume that gets trucked in from the West. So we've had a number of discussions with those that are moving by truck now from the West. If you remember, the line that's being built starts about 45 miles due west of Stampede or Columbus. So the idea there would be not only to put the volume that's currently being trucked from the west into our facility, put that on pipe, but then it also gives us access to the producers that would be due South of that system as well. So that system, it's almost a right angle down from Stampede out 45 miles west and then probably another 45 miles south down to the Epping facility.

Got it, great. Look forward to seeing you at the 3Q with gasoline prices keep dropping here.

(Operator Instructions) [Lin Chen], [Height Hedge]

Congratulations for the quarter. Just wondering, given the narrow spread of Bakken crude brand, first of all can you talk about your current utilization for your Albany terminal? Also I would like to hear about your outlook that if the spread is going narrower, what do you think of the outlook for the Bakken crude to East Coast?

I'll handle those in the wrong order. In terms of the narrowing of the spread, there were certain market factors that Daphne outlined that related to those spreads coming in, and as that loosened up the spreads sort of moved out a little bit. I'd say generally it's a little more positive now versus in Q2. So, even though the spreads are there, we do have take-or-pay business, but the volumes are still moving through the system due to the take-or-pay contracts that we have. So that's one piece.

In the volumes -- volumes certainly are off but I would say that they're still pretty good. Looking ahead in the short window that we've had into this quarter they did better.

Also, how about your current utilization rate of Albany terminal?

That's what I was just talking about, opening in terms of volume.

Oh, okay. I see.

Rob Longnecker, Jovetree.

Just following up on that last response, could you talk a little about how much excluding your take-or-pay business, how much volumes are off into Albany?

We stopped breaking out exact volumes, but suffice it to say that the volumes there, when I say they're still pretty good I mean they're still pretty good, right? I'm not going to give you an exact number, but it's not as if volumes have been even cut in half or anything like that, not anywhere close.

Okay. And is there a point -- obviously you've been running this business for a while now and again not talking about the take-or-pay business -- is there a crossover point between the spreads where you see things start to slow down dramatically?

The problem is there are no true real liquid spreads that you can look at that will define exactly what the volume's going to look like. By example, not only do we have term throughput contracts but we also have term supply contracts, albeit supply contracts are of a shorter nature. But when you go and you're buying from individual producers, yes, you're competing with others for those barrels but it's really more about if they're producing, what is the highest market for that barrel, and then that's where that barrel is going to move, right? So the whole premise of having an East Coast and a West Coast capability for offtake of crude is really just trying to get those barrels to the market that's going to pay the highest for it.

What do you think the price differential is between rail to Albany and pipe to Cushing?

That's another one that we don't talk specifically about for competitive reasons, but I would say as a general statement we feel that the highest market -- net delivered highest markets -- are both the East and West Coasts, not the Gulf Coast. The Gulf Coast in particular, as you have production on sweet crudes down there, that is not the market where the sweet crudes should be going. That doesn't mean that there's not contracts and that doesn't mean that there's not barrels moving there. But the highest values provided to the producer or the marketer or the wholesaler really should be to the East and West Coasts. That's not to mean that there aren't moments in time where there are dislocations where that doesn't change, but over the long haul we believe it is still East and West Coasts net highest value for the producer.

Even at today's pricing and today's differentials?

Yes.

Okay.

We have reached the end of our question-and-answer session. I would like to turn the floor over back over to Mr. Slifka for closing comments.

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

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.