Global Partners LP (GLP) Q1 2012 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Global Partners First Quarter 2012 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 Operating Officer and Chief Financial Officer, Mr. Tom Hollister; Executive Vice President, Chief Accounting Officer and Co-Director of Mergers and Acquisitions, Mr. Charles Rudinsky; and Executive Vice President and General Counsel, Mr. Edward Faneuil. At this time, I'd like to turn the call over to Mr. Faneuil for opening remarks. Please go ahead, sir.

Good morning, everyone. Thank you for joining us. Let me remind everyone that, during today's call, we will make forward-looking statements within the meaning of federal securities laws. These statements may include, but are not limited to projections, beliefs, goals and estimates concerning the future financial and operational performance of Global Partners. Estimates for Global Partners' future EBITDA are based on a number of assumptions regarding market conditions, including demand for petroleum products and renewable fuels, weather, credit markets and the forward product pricing curve. Therefore, Global Partners can give no assurance that our future EBITDA will be as estimated. The actual performance for Global Partners may differ materially from those expressed or implied by any such forward-looking statements. In addition, such performance is subject to risk factors, including, but not limited to, those described in Global Partners' filings with the Securities and Exchange Commission. Global Partners undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statement 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 allow me to turn the call over to our President and Chief Executive Officer, Mr. Eric Slifka.

Thank you, Edward, and good morning, everyone. Consistent with the guidance we provided on our fourth quarter conference call in March, our first quarter results were weak as a result of record warm weather and rapidly increasing gasoline prices. Not only was the first quarter 20% warmer than normal, it was the warmest first quarter ever recorded by the National Weather Service locally in more than 120 years the Weather Service has been recording temperatures. Heating oil, residual oil and natural gas volumes were all adversely affected by the warm weather. Additionally, NYMEX gasoline prices increased rapidly in the first quarter, climbing $0.70 from $2.69 at year end to $3.39 at March 31. A spike in gasoline prices typically squeezes distribution margins related to supply in gas stations, hampers margins at the stations themselves and likely causes reduction in demand. For example, AAA Boston estimates that retail gas prices rose only $0.53 during the same period of time that the NYMEX climbed $0.70. By our estimate, the combination of these 2 factors reduced EBITDA for the quarter by about $10 million. Approximately 60% of the impact was weather-related and the remaining 40% was due to gasoline margins and to a lesser extent, gasoline demand. While the loss of weather-related volume cannot be made up over the remainder of the year, it is possible for us to recoup the gasoline margin and volume, because, in our experience, the ups and downs of gasoline prices and margins tend to normalize over a 12-month period. This is one reason that we have continued to shift the focus of our business toward gasoline, gasoline blendstocks and other nonweather sensitive fuels. Had we not undertaken this transformative step beginning several years ago, unseasonably quarters such as we experienced in Q1, would have had a far greater impact on our results. Along with the factors I've mentioned, we incurred onetime expenses in the first quarter related to the March closing of our Alliance Energy acquisition. Tight expense controls brought these closing costs in at $4 million, approximately $1 million less than we had estimated on our fourth quarter conference call. Excluses -- exclusive of the onetime closing costs, as well as the impacts of the weather and gasoline prices, we estimate that our EBITDA of $18.5 million would have been greater by $14 million and our bottom line would have improved by a comparable amount. While 2012 started slowly, the underlying strength of our business, our new gasoline station operations and our portfolio of organic projects are encouraging signposts for the balance of the year and beyond. Under the leadership of Andrew Slifka, President of our newly created Alliance Gasoline Division, Alliance has established itself as a premier owner and operator of gasoline stations and convenience stores across the northeast. Alliance has grown over the past 20 years through a series of strategic acquisitions and organic projects. In a moment, for example, I will talk about a management contract that Alliance has secured with Getty Realty. We look forward to continuing Alliance's success in broadening its geographic presence and further strengthening its dealer relationships. The Alliance division is now part of our new gasoline distribution and station operations segment. Tom will discuss the modifications we have made to our segment reporting shortly. The takeaway point here is that this segment complements our wholesale business and adds to our year-round income stream. We expect it to be an important contributor to future cash flow and operational growth. Now let me discuss several of our organic growth projects highlighted by a multimillion dollar rail expansion project at our Albany, New York terminal the will more than triple its current throughput capacity to approximately 150,000 barrels per day. The expansion, which is expected to be completed in the third quarter of this year will enable two 120 car unit trains to be offloaded daily. Our Albany project is designed to create an efficient and cost-effective mechanism for transporting crude oil and other energy products from North American producing regions such as the Bakken region of North Dakota to refiners along the U.S. East Coast. In connection with the terminal expansion, the partnership is finishing construction of a 100,000-barrel tank and associated piping to load rail cars at our Stampede transload facility in the Bakken region. The product is transported from there by unit train to Global Partners' terminal along the Hudson River into Albany, New York, where it is shipped by barge to refiners. We believe that Global Partners is currently the only company capable of delivering single-line haul crude in volume to the East Coast from the Bakken region. Single-line hauls are highly efficient in terms of both costs and reliability. We are able to move products from North Dakota rapidly at an average of just 4 or 5 days per train shipment, with some shipments completed in as little as 2.5 days. In addition to this expansion project, we are developing a new rail set propane facility in Albany and pursuing other projects designed to leverage our expertise in purchasing, logistics, transportation, storage and marketing of petroleum products and other commodities. For example, Getty Realty recently entered into an interim fuel supply and services agreement with Global to provide gasoline supply and certain oversight services to approximately 254 dealer managed locations in the New York City metropolitan area and New Jersey. Global will be paid a fee to manage these assets. Turning to our distribution, the board last month declared a quarterly cash distribution of $0.50 per unit for the March quarter that will be paid at May 15 to unit holders of record as of the close of business, May 4. The board will continue to evaluate the distribution on a quarter-by-quarter basis in light of our earnings power, which continues to be strengthened by acquisitions and organic projects. In summary, the breadth and strength of our asset base and the emergence of new organic opportunities, position the Partnership for improved results in 2012. Now let me turn the call over to Tom for his financial review and our full year EBITDA guidance. Tom?

Thank you, Eric, and good morning, everyone. Eric highlighted for you the 2 primary issues that caused our weak first quarter performance with a net loss of $1.4 million and EBITDA of $18.5 million. We estimate that net income EBITDA and distributable cash flow were affected by about $10 million as a result of the warm weather and sharply rising gas prices. We also incurred $4 million of onetime closing costs associated with the completion of the Alliance Energy acquisition on March 1, bringing the total closing costs to $5.1 million, including the $1.1 million incurred in the fourth quarter. We do not expect to incur any additional closing costs associated with this transaction. Total operating expenses increased $7.3 million in the quarter from the same period in 2011, related primarily to the inclusion of 1 month of Alliance operating expenses, as well as the onetime Alliance closing costs. These increases were offset by year-over-year decreases in our core expense base. Exclusive of the costs associated with Alliance, we remain on track to achieve targeted annualized core expense savings of $10 million to $12 million from 2011 to 2012. In our 10-Q, which you will see later this week, we have modified our segment reporting in the first quarter to better reflect our business, following the acquisition of Alliance Energy. We are making the change in our segment reporting for several reasons, including: First, the significance of our Alliance acquisition, which further broadens our gasoline distribution network and expands our presence in the gasoline station market; second, the formation of our new Alliance Gasoline division under Andrew Slifka, who will oversee all of our Alliance and Mobil assets; and third and most importantly, how our chief operating decision to [Audio Gap] reviews performance and makes decisions. Beginning with our first quarter 10-Q, we now have 3 operating segments, which are also our reporting segments. In addition to our wholesale and commercial segments, we now have a third segment called Gasoline Distribution and Station Operations, which includes the operations of our Mobil and Alliance assets. Moving to the balance sheet, the primary change to the March 31 balance sheet from year end 2011 is the increase in net property and equipment of $320 million, which is substantially related to the acquisition of the Alliance assets. The related financing of the Alliance acquisition is reflected in the issuance of 5,850,000 units to the seller and net revolver borrowings of $182 million. We've increased our environmental reserves by $22 million in connection with the Alliance transaction. Turning to our distribution. As you know, our board last month declared a quarterly cash distribution of $0.50 on all outstanding common units. Let me point out that the distribution on the 5,850,000 units associated with the Alliance acquisition has been prorated to reflect the actual 31 days of ownership in the 91-day quarter. Although we typically do not provide specific guidance on future results, we thought it would be helpful to provide some additional color given the weak results for the first quarter, the recent acquisition of Alliance, and what we believe are promising opportunities for the partnership. We have said previously that, prior to the Alliance acquisition and in normal markets, our reasonable expectation for EBITDA for the partnership is in the range of $90 million to $110 million. On a pro forma basis with a full year of Alliance results, that range should increase to $130 million to $150 million. This outlook is, of course, based on a number of assumptions regarding market conditions, including demand for petroleum products and renewable fuels, weather, credit markets and the forward product pricing curve. With that in mind, and factoring in the weak first quarter results, the onetime closing costs and the addition of Alliance for 10 months of the year, as well as other factors, we believe that EBITDA for 2012 should fall somewhere between $110 million and $130 million. To summarize, we are encouraged by the partnership's prospects from our existing operations, as well as our new development opportunities. With that, we would be happy to take your questions. Operator?

[Operator Instructions] Our first question comes from the line of Paul Jacob with Raymond James.

Just a housekeeping question. Could you tell me how many unit trains you offloaded in the quarter?

Paul, we're, for competitive reasons, not going to break out that exact number, but suffice it to say that the amount of trains that we're moving continues to increase.

Okay. So that run rate that you outlined on the last call, I should just expect it was at that rate or a little bit higher?

We continue to get more efficient at moving it, Paul. So the better we get, the better the facility gets and the better the operators get on both sided, the more you increase it.

Okay. And then, as you look to these further opportunities for supplying logistics with the rail set and propane, specifically, first of all, how do you see the portfolio shaping out from cash contributions? I mean, do you anticipate that 20% of your portfolios can be related to S&L sort of opportunities beyond your traditional business or this can be greater than that?

Well, it's interesting. I think that's hard to nail down because permits and property and finding the locations to begin to build out your entire system are difficult to come by and take time. We are sort of forging ahead and trying to build out the platform and the system as much as possible, but if it were easy, everybody would be doing it, right? So it's site-by-site and that's how we're trying to go about it. And there are all sorts of opportunities both in the Bakken region, as well as here on the East Coast and in other places as well, so we continue to focus on all those opportunities and try to get as many deals done as possible. I wouldn't say it's a target. I would say we're going to go wherever we can try and make the most money.

Okay. And then do you see any opportunity for exporting propane?

I think that's a possibility, but we're not focused on that just yet. We just want to get our infrastructure in place and then we can maybe focus on that.

Our next question comes from the line of Cathleen King with Bank of America Merrill Lynch.

First question on the Albany expansion. Have you guys quantified CapEx that you're sending on that expansion and also return expectations?

Cathleen, we have talked about the spending and the Kenwood Yard, which is what we call the Albany rail facility. The tripling of the expansion probably costs $6 million, $7 million. And there's also some related typing of $1 million or $2 million. We began that spending in the fourth quarter. It continued in the first quarter, and as Eric mentioned, should be finished this summer. We have not specifically mentioned return -- returns on that project, but we can say we expect a rapid payback.

Okay. Fair enough. And have you seen any impacts on demand for your facilities and just unit trains given the recent increase in Bakken crude oil prices?

I'm not sure, Cathleen, of exactly the question was. So the question is what?

Just any changes in demand that you're seeing given the recent increase in Bakken crude oil prices.

Yes. I mean, okay, so everybody sort of looks at some of those prices that are out there and they look at Clearbrook as sort of the clearing price. And that's a mistake because it's very hard to physically get barrels out of there, right? So at the end of the day, those aren't really, that's not really the market that you're buying out of. So where you may see those big, huge discounts, they never really existed, right? So they're basically -- the alternatives by rail are it either moves down south or it comes east primarily, right? And there are some pipes there as well. But essentially for rail, it's a price that's going to be basis, a Southern price or East Coast price, and that's what will flow that barrel in either direction.

Okay, okay. And then switching to PADD 1 refining update. I assume that recent announcements around the Trainer refinery being sold to Delta would be positive for you guys? But just an update on how you see that environment today versus before because there's been some changes?

Yes, I mean, I think there's a lot of interest in East Coast refining, and I think that's good for us on multiple fronts. It provides us with a potential with another customer for the crude oil, but it does also mean there's another refiner under the East Coast that's going to be running and producing products of which we are a taker of, right? So on multiple funds, I think that's all good for us.

Good deal. And then switching over to the Getty announcement. Just trying to get more color on, first of all, why is that an interim agreement? And I guess, how long is that going to last? And then also I think you talked about that being a fee-based agreement, so does that mean you won't have any exposure to the wholesale margin?

That is, first -- well, on the margin piece, we basically have a minimum fee and there's some potentially some upside as well within that agreement, that's one. I think that it's short term in nature. That's the way Getty wanted to do it. They were having some trouble with the other companies that they were doing business with, so we stepped in place there, I think, as a good credit operator for them. And as we look forward, we hope to do more business with them. So for us, it's all good news and it's a lot of stations. I think it says a lot about our management team's capacity to run and operate the gasoline business. So...

And are you guys having to spend any capital to take on that or will just the returns be all incremental there?

All incremental.

Okay. And then final question. Did you talk about who your customers -- you anticipate your customers being on the propane facility at Albany?

No. But I think, just as a general statement, there's a lot of home heating oil retailers who are also in the propane business. So for us, I think, if we've got credit files on a lot of these guys, and it's going to be a natural extension of what we've been doing up in Albany for the last several years. So we're sort of very comfortable with that side of the equation.

Okay. Sorry, one more. Just thinking about how this quarter, I know you guys were impacted by rising gasoline prices, that was a negative impact. And then so far this quarter, we've seen quite the reverse. So could we expect sort of, based on your guidance for this year for EBITDA, that it might actually be higher second quarter contribution given that reversal in gasoline prices?

I think the general statement, prices went up $0.70 a gallon and we got squeezed during that. And we actually took a look at the numbers today since April 1, gas is up roughly $0.28. The margins tend to get squeezed on the up and expand on the down, and I think that's a good message to you.

Our next question comes from the line of Brian Zarahn with Barclays Capital.

Can you talk a little bit about some of the assumptions underlying the range, the low and high end of the range?

Sure, Brian. Of course, at this point, there are all kinds of uncertainties when you look forward. But certainly, we have taken into account the first quarter actual results, adding 10 months of Alliance, that potential impact of our various organic projects. Gasoline, you may have noticed, is backwards, so that's not a big help. Eric's talked about maybe a catch-up on some of the gasoline margins. So we take that bundle of factors and feel that at this point $110 million to $130 million is a pretty good estimate.

Is the largest driver more margin related versus volume related?

Say that once more again, Brian.

Do you believe that the biggest driver for that range would be margins -- margin assumptions?

Certainly, margins are a key part of each one of our segments. So I think the answer is probably yes. Whether it's wholesale or the new gasoline distribution gas station operations, margins certainly do drive our results.

And then on maintenance CapEx, can you give us your thoughts for 2012?

Yes, Brian. We've said sort 12 to 14 range is a good marker, about 4 on the terminals and 8 plus for the stations.

Okay. And in terms of the Alliance acquisition, can you give us a sense of their contribution, I know it was a partial quarter, but their contribution in the first quarter and then how things are progressing in the second quarter?

Yes, we did not break it out. We did include one month of operations, but we haven't broken out how much it was exactly. We can say that the margins were squeezed very similar to our own Mobil assets. In terms of sort of 12-month earning power, what I mentioned earlier, the range of $90 million to $110 million, then we added in Alliance and came to $130 million to $150 million in normal markets, that gives you some sense of how Alliance can perform.

Our next question comes from the line of Elvira Scotto with RBC Capital Markets.

Just a little more granularity on the guidance. So does the guidance incorporate what you think the Bakken opportunity can be this year?

We think so. We think so, and going from the capacity that the asset is at today to where it's ultimately going to be, that's a lot of oil moving through the facility, and it's going to take a little bit of time. It's not like turning a light switch. So I think over time, hopefully, we'll develop that asset to be fully utilized.

Okay. And then, does the guidance also include the Getty agreement? And how significant is that agreement relative to your overall EBITDA?

It's just another deal that I think puts us in a good position to execute. It adds some money to the bottom line, so it's what I call blocking and tackling, and if I could do 10 agreements like that, I would.

Okay. And then just lastly. So for the base business, are we looking at -- does the guidance assume the rest of the year returns to a normal operating environment?

It's based, Elvira, on market conditions as we see them now and all the various factors.

Our next question comes from the line of James Jampel with HITE Hedge Asset Management.

Two questions on two different subjects. First on the rail and propane to Albany. How was that impacted by increased liquids propane production in the Marcellus? How do those compete?

I'd say -- I think that's going to take a little bit of time for that to develop and play. And we are starting to see the efforts put towards is more crude oil plays and less gas plays, so wet plays are more in. We think we're positioned in the right place. If there were to be a great disconnect on pricing and on supply, the good news is that we would be able to take rail out of there. But our feelings still is we're set up to be taking in the best low-cost supply.

So the rail and the propane is coming in from where now, from Conway?

Not from Conway, from -- it's going to be coming in from North Dakota.

I see. I see. And potentially, you're saying there could be rail from Marcellus to Albany?

There could be, yes. Anything that's connected to a rail, it's going to add switches and it's just where -- those switches take is not as efficient because those are 2 line hauls. But essentially, I still feel that we're set up for the right supply in the most efficient manner that's out there. And I also think that, that having the right supply is going to be critical to being competitive.

Okay. And then on the crude oil out of the Bakken, right now, you're talking about a single-line haul. And today, in Pacific to Albany; and by water, I guess down south around the tip of New Jersey and then back up to Delaware.

To wherever the refineries are.

And so given that's multi-mode and perhaps longer, then what kind of advantage do you have over the 2-line haul over Chicago?

Two-line haul is just more expensive, and it doesn't move as quickly and the markets that many of those other rails go into are highly congested. And so we feel very comfortable that we're going to be a very, very, very efficient player in that marketplace.

So your view is that there's little that could be done by the competition to bring their cost down, to be competitive with this multi-model haul that you...

Well, I do believe if it comes down to be low-cost provider, we're well positioned to be one of them, if not the one.

I see. And are there refineries other than in the Delaware River that are served by Albany, to refresh me?

It's essentially the typical group of East Coast refiners. So you have COP, which has bay weight, that's a refinery. You have Trainer, which used to be a COP, it is now Delta. That's going to close whenever, next couple of months. You have the Carlyle Group that, as I've read in the press, is talking to Sun about their Philadelphia refinery. And then you have PTF, which has a couple of facilities as well. So that's the list. And the one facility that is still closed is Sun Marcus Hook.

Now Enbridge has been talking about trying to get Bakken crude to Montreal. Could you guys do that?

I mean, I think there's going to be some solutions that are different than ours. But we're still very -- we still feel very comfortable with our ability to compete with those other solutions, should they move forward.

Our next question comes from the line of Andrew Gundlach with First Eagle Global.

A couple of questions. Just with respect to the Getty Realty announcement, you mentioned it's blocking and tackling. But what does interim fuel supply mean? Does that mean that eventually you'll turn into something more permanent?

Look, I don't know but certainly I hope so. They're going through a process with all their assets as they reorganize and there have been some press statements about that. And I think, if nothing else, we're positioned well to sort of move forward with them. It doesn't mean we have anything done with them, but we'll have a good feel for the assets if we're actually -- the company is supplying them, right? So...

And then you would agree -- I assume this is the LUKOIL assets, right? So you'd rebrand them to Mobil or something like that, is that right?

Yes, listen, if they were my assets, I would make sure that they're set up for the long-term and as efficient as they possibly could be. So you would look at all potential options.

Including buying the real estate from real from Getty Realty or is that...

Yes. I suspect that's not the mode that Getty's in, right? So I don't necessarily see them doing that but I think we're a good operator of sites and that's a position we're currently in, we just hope we can make everything a little bit longer term in nature.

Okay. And then, the Albany propane, I'm a little -- it's the first I've heard that Bakken propane could compete with Marcellus propane. And I'm just curious how that works, because the enterprise Kepco line is going to be reversed, but it's only going to be reversed from Southwest Pennsylvania. The rest is designed to go straight up to Celkirk [ph], as you know. And so I don't understand why -- I would think that transportation via rail has got to be more expensive than an already fully depreciated pipeline out of the Marcellus. And I'm just curious, what makes Albany such a hub? Can you get to the export facilities and Providence easily so you could get it out off the East Coast? I mean, how do you see -- I mean, or is there something special about Albany that's kind of a unique market and it just -- it relates to upstate New York, and that's it?

Well, don't forget, historical prices, I think you've got to be very, very careful with, because how product has moved historically is changing a lot. And so you could say a little bit of the same thing on crude oil as well but the point, I guess, is where is that product going to go and which is the highest market that it can get to, right? And how does it get there? And I think what everybody's recently done is underestimate the amount of volumes of product that would be found, and that essentially, out in that Western area, it's stranded, right? So what's the value of it? The value has to go to whatever the highest market is. And I would say that, that market is still is in the East Coast, right? Now that's not to say that some dynamics don't change there but it still has to move. So something's got to give somewhere. And all I know is that product exist where there aren't manufacturing plants or people, and it's not going to get consumed there, so it's going to price to move.

Do you have storage in Albany?

That's what we're currently building out.

Okay. So you're betting that -- I understand. So you're basically betting that -- I think I understand. It's a longer conversation, maybe not for this phone call. But you're betting that the East Coast will compete with Mont Bellevue obviously only during the winter, right? And you're going to build storage so you can supply it during the summer and then sell it and you'll make money on that spread. Is that the way to think about it?

Well, I'm -- first of all, I think there's a good base business there because we know the customers, so we think we do have a good low-cost supply into the facility and that's what's going to allow us to compete. But don't forget, there's a lot of set up with customers and many companies aren't sort of in a position to do that where we are. So for us, this is really, I think, a natural fit. We're already moving a lot of rail, we're already moving lots of product out of that Western area and we already have credit files with many of these customers. And so I think, logistically, we're set up as good as anyone to do this business.

Okay. Perhaps the biggest change since last quarter was that Sun is going to energy transfer and that obviously means they've already announced it that the retail business is up for grabs. And is there any reason to believe that -- or is there any reason why it wouldn't work? Is there any like regulatory or other type of reason why it wouldn't work?

Well, I'm not sure what your question is. Just -- so what's the question?

Does the Northeast Sun, Sunoco retail stations, is there any reason to prevent you from looking at that?

I don't believe so. We look at every transaction that we think is out there. I am not aware that those assets are for sale, but it's a deal that's going to take a little bit to get closed. Clearly, it's a new business for these guys, so I don't know what their plans are. But we would be very interested in it, of course.

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

That concludes today's call. We look forward to updating you on our progress. Thanks for joining us this morning.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.