Global Partners LP (GLP) Q1 2013 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Global Partners First Quarter 2013 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; Treasurer and incoming CFO, Ms. Daphne Foster -- I'm sorry, 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 will turn the call over for opening remarks.

Good morning. 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 and renewable fuels, weather, the level of market competition 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 please let me turn the call over to our President and Chief Executive Officer, Eric Slifka.

Thank you, Edward, and good morning, everyone. Global Partners delivered a solid performance in the first quarter. Our results reflected our diverse product mix, our crude logistics activities and our additional station count, primarily related to gas stations and convenience stores acquired in March 2012. In the first quarter, Global generated net income of $14.8 million. EBITDA more than doubled to $38.8 million, while DCF up $26.6 million increased 276% from the same period last year. Our Gasoline Distribution and Station Operations segment was a key driver of our performance, as the net product margin nearly doubled to $46 million. Keep in mind that this year's first quarter included a full 3 months of contributions from Alliance Energy compared with just 1 month in Q1 a year ago. As we have said in the past, annual margin results in this business are reasonably consistent although there is some variability quarter-to-quarter due to the effect of changing price directions. To illustrate the margin impact, our net product margin in this segment in the first quarter was $46 million compared to an average per quarter of $57.2 million over the last 12 months for this segment. From a strategic standpoint, we have significantly expanded our crude oil activity, broadening our single line haul origin-to-destination capabilities through the addition of key assets in North Dakota and Oregon, which completes another leg of our rail logistics system, allowing customers to reach premium markets in major pricing centers on both coasts. Utilizing our crude-by-rail virtual pipeline system from North Dakota through Albany, New York, Phillips 66 is taking delivery of crude under a 5-year take-or-pay contract, with an average of 50,000 barrels a day from the U.S. and Canada at its Bayway, New Jersey refinery. Based on the size, proximity and capacity of our Albany offloading facility, our single-line connection between the Bakken and Albany, we believe that our crude-by-rail virtual pipeline is the most cost-efficient system for moving crude to the East Coast. To support our growing crude volumes and provide purchasing optionality for our customers, capacity expansion is underway at our transloading terminals in the Bakken region. We are increasing the tank storage of our North Dakota transloading facilities to a combined 550,000 barrels. At Columbus, North Dakota, we are expanding from 100,000 barrels to 270,000 barrels. Volume there is poised to increase due to our recently announced agreement with Tesoro Logistics, which is building a new 7-mile lateral to our tanks from its Lignite, North Dakota crude oil station. Tesoro Logistics' High Plains Pipeline System will own and operate the lateral, which is expected to be completed in the third quarter of this year. At our Beulah, North Dakota transloading facility, we are building 280,000 barrels of crude storage. Beulah can supply refiners and other customers on the West Coast through our recently acquired Cascade Kelly Holdings crude oil and ethanol facility in Oregon. We see this facility as a strategic asset in bringing price-advantaged products to the market for the petroleum refiners and ethanol producers on the West Coast. The combination of Global's crude-by-rail destination assets on the East and West Coasts, served by single line haul through our origin assets in the Bakken region, provide an efficient and strategic system for scaled movement and optionality of crude-by-rail. We continue to explore opportunities to strategically expand our crude-by-rail activities. We also are leveraging our capabilities as an energy logistics provider in other products including propane and compressed natural gas. At the end of April, we began receiving and distributing product from our new rail-fed propane storage facility in Albany, New York. The 540,000-gallon terminal can source advantaged propane directly from Midwest and Canadian sources via single line haul on Canadian Pacific. In addition, we are growing our footprint by expanding our wholesale marketing efforts at third-party terminals across the country to better serve a growing number of national commercial uses of transportation fuels. In the compressed natural gas arena, we recently announced that Global CNG subsidiary is developing a compressed natural gas loading station in Bangor, Maine. Bangor Gas will be providing firm natural gas supply to the station under a multiyear agreement with Global CNG. The station will provide large, commercial, industrial and municipal customers with natural gas on a year-round basis. The station is scheduled to open in the third quarter. Turning now to our distribution. In April, the Board of Directors of our general partner approved a 2.2% increase in the quarterly distribution to $0.5825 per unit. This translates to an annualized increase of $0.05 from $2.28 to $2.33 per unit. The board will continue to review the distribution on a quarter-by-quarter basis. As we announced 2 weeks ago, Tom has elected to retire from Global effective June 30. I want to thank Tom for his financial stewardship and his dedicated service over the past 7 years. Tom has contributed his expertise during a period of significant growth for the partnership and we wish him well in his retirement. At the same time, we are fortunate to have a talented group of people within our organization who share Tom's leadership skills and his commitment to excellence. Effective July 1, 2013, Treasurer Daphne Foster will take over as CFO, and Mark Romaine, Senior Vice President, Light Oil Supply and Distribution, will be our COO. Daphne, who is joining us on this morning's call, joined Global in 2007. She has been responsible for leading our Treasury Department, broadening and strengthening the relationships with our bank group and implementing an effective capital structure to accommodate our long-term growth initiatives. Mark, who came on board in 1998, has successfully managed the expansion of our logistics operations, building long-term relationships with our logistics and group of partners and developing our origin-to-destination assets from the mid-continent region to the East and West Coasts. With that, now let me turn the call over to Tom for his financial review.

Thank you, Eric. Before I begin, let me state that it has been a privilege to serve with Eric as a Global executive and a director of the board. Global has a superb management team and a roster of committed, highly-skilled employees. Having worked closely with Daphne and Mark for many years, I'm pleased to know that Global's financial and operational leadership are in excellent hands for the future. Now let me turn to our segment results. Our total wholesale volume was up almost 430 million gallons for the quarter or 38% from a year earlier to a total of 1.6 billion gallons due to increases in our crude-by-rail business, comparatively colder weather, as well as some increases in the gasoline and blendstock business. The net product margin in the wholesale gasoline and blendstocks business, however, was off 49% or $9.1 million due to tighter margins related to market conditions. This was more than offset by a $27.1 million increase or 188% in our distillates, residual and crude oil activities to $41.6 million for the quarter, compared with $14.5 million a year ago. The majority of the increase in the margin was due to our growing crude-by-rail activities, although comparatively colder weather also played an important role in the results for distillates and residual oil. Basin Transload began contributing in modest amounts to our crude results during the 60 days we owned the business. The results from our new Oregon facility were not material to the quarter. Our Gasoline Distribution and Station Operations segment showed an 87% increase in volume to 264.6 million gallons and a net product margin increase of $22.9 million to $46 million, up from $23.2 million a year ago. These improvements were a reflection of the 3 months' results from Alliance Energy this year compared to 1 month a year ago due to the March 1 acquisition date. On a run rate basis, however, this was a weak quarter for this segment due to a margin squeeze brought on by rising prices, as Eric mentioned. And to a lesser degree, lost volume related to the series of storms in the northeast in the first quarter. Although margins in late March were improved, between January 15 and March 8, the price for NYMEX are above gasoline increased $0.50 a gallon from $2.70 to $2.30 a gallon. Street prices for regular gas in New York, as reported by AAA, increased from $3.54 to $3.78. On the northeast weather front, February alone had several storm days causing lost driving volume. In contrast, volumes in our Commercial segment were up 28% to 114 million gallons, primarily due to increases in our bunkering activities related to our new location at the IMTT terminal in New York Harbor. The net product margin was up $4.2 million due to the bunkering expansion, as well as the effects of comparatively colder weather on our heating oil and natural gas businesses. Year-over-year expense comparisons are not helpful due to the impact of the Alliance acquisition. SG&A and operating expenses remained tightly managed however, with total expenses for the quarter at $70.1 million, down $500,000 from $70.6 million in the most recent quarter. We expect that if expenses will rise during the year, as we see run rate increases from the Basin and West Coast operations. Interest expense at $8.9 million is less than last year's $9.3 million and only about $300,000 more than the fourth quarter's $8.6 million, despite the increased borrowings for the quarter related to the acquisitions. The reduction in interest costs is due to 3 factors: the management of lower inventory levels, which are down $239 million from a year ago; second, a longer payment cycle in our crude-by-rail business; and third, a reduction in our interest rate spread under our credit facility. Turning to the balance sheet, let me make a few observations. As the 60% controlling owner of Basin Transload, under GAAP rules, we consolidate 100% of Basin's assets and liabilities on our balance sheet and then deduct the noncontrolling interest out of equity. Our long-term assets are up approximately $223 million, reflecting the purchases of 100% of the assets of Basin Transload and Cascade Kelly Holdings or our Oregon facility. On a pro forma basis, if you were to deduct out the noncontrolling Basin interest of $40 million, long-term assets would be up approximately $183 million, roughly equal to the combined consideration paid. As you know, we financed the purchase with a $115 million bank loan and a $70 million senior unsecured 5-year loan from GSO, the credit arm of Blackstone. Our leverage has declined from a year ago based on a trailing 4-quarter EBITDA. Total debt-to-EBITDA was 5:1 on March 31, 2013. And excluding working capital borrowings, leverage based on our long-term debt, which has been acquisition-related, including the new $115 million bank loan and the new $70 million senior note from GSO stood at 3.7:1 on March 31 this year, significantly less than 5:1 on same basis at this time a year ago. We expect this leverage ratio to decline further. That is to say, improve during the course of 2013, as we see the earnings impact of Basin Transload, our new Oregon transloading and ethanol facility, as well as other organic projects and year-over-year additional crude-by-rail activities. Turning to our guidance, we are reaffirming our expectation for full year 2013 EBITDA in the range of $175 million to $190 million. This guidance, which excludes our Oregon acquisition, is based on assumptions regarding current market conditions including demand for petroleum products and renewable fuels, weather, credit markets and the forward product pricing curve, which will influence quarterly financial results. Now let me turn the call back over to Eric to conclude our prepared remarks.

Thanks, Tom. In summary, we posted a solid first quarter despite a challenging gasoline pricing environment and we remain encouraged about our prospects in 2013. We are increasing our crude-by-rail activities and broadened our product and terminal portfolio with the addition of our single line haul origin-to-destination assets on the East and West Coasts. Before we take your questions, I want to let you know that this month, we will be participating in a panel discussion at the Bank of America Merrill Lynch Transportation Conference in Boston, and presenting at the 2013 NAPTP MLP Investor Conference in Stanford, Connecticut. We look forward to seeing many of you at these events. With that, Tom and I will be happy to take your questions. Operator?

[Operator Instructions] Our first question is coming from Elvira Scotto of RBC Capital Markets.

I think last quarter on the call, you had mentioned that you were continuing to look for additional opportunities to build or expand crude-by-rail across the U.S, including the Gulf Coast and maybe Canada. Can you talk a little bit more about that? Are you still looking at building more of a national network? And then your thoughts on your competitive advantages in doing that, in light of maybe the differentials coming in a little bit and how you see that playing out?

Elvira, it's Eric Slifka. So we continue to look at all opportunities that are out there to provide our customers with the broadest possible network that we can build out, right? So at the end of the day, for us, really it's providing a service and providing the highest market for those customers and making sure that, in some form, we can provide those customers with a business model that lets them push barrels on the margin into different markets to attract the highest value. That's really ultimately our goal.

Okay, great. And you're looking to do this organically or through acquisitions or a combination of both?

We're looking at all options, right? We'll look at acquisitions, we'll look at grassroots growth projects where you buy a piece of land and you develop it. And so it's really we're pushing forth on all fronts to really provide us with that competitive advantage that allows that customer base to really put the barrels into the highest value market, right. And I think when you look at it, you consider other companies that are out there doing it. I'd say that we're looking -- I kind of think we're a little bit ahead of everybody in that business, right. So we've now got East and West Coast regions, with origin facilities in North Dakota. We'd like to continue to sort of forge ahead and build that system out and give us some more origin and destination options really. But at the end of the day, it's to provide that customer with the highest value system that is in the marketplace.

Okay, great. And then at what point do you think you'll start including the Cascade Kelly acquisition in your guidance? Because I believe your guidance does not include any contribution from that?

You're right, Elvira. It's Tom. For the moment, as you know we've said and we do expect it to be accretive in the first full year of operation.

Are you going to start including it within your guidance at some point?

Not at this time.

Our next question is coming from Paul Jacob of Raymond James Financial.

I guess, first I want to talk about Basin Transload. Obviously, there's a lot of opportunity there to extend your footprint, and you recently signed a deal with Tesoro. Just curious, as you look at the Stampede facility and kind of where you're at in terms of the volumes coming into Albany. How do you see the build out going there? I mean is this mainly driven towards the West Coast at this point? Or do you see incremental opportunities on the East Coast to expand your footprint as well?

Paul, it's Eric Slifka. We're taking these assets and we're going to push them to provide the cheapest sources of crude that are available within the market. That means connecting the facilities not only by truck, but also by pipe. And so whether it's East Coast or West Coast, meaning whether it's the location in Beulah or Stampede, both of those facilities we would like to get connected to as many pipes as possible and 'we continue to pursue that and we're sort of positive. We think that there'll be more to come there. And hopefully, that will provide the customers that put barrels into those facilities with better purchasing opportunities.

Okay. Do you think that you could possibly expand your facilities in Albany to drive incremental unit trains into that facility if you thought that the demand warranted it?

Possibly. I mean you're orchestrating unit trains when they come in and go out of there. Obviously, it takes a little bit of time to tweak the system to get it as efficient as possible. Literally, people are out there with stopwatches, timing how long it takes to hook trains up and unhook them and pop them off and get them in and out. So you're working as hard as you can to maximize the volumes that you can put through those facilities, right.

Okay. And then last question for me is just in terms of your interest expense. I'm curious because you have lower inventory that drove that. Obviously, the longer payment cycle helps and that spread has come down. How much of that, in your opinion, is sustainable? And what's driving the inventory lower?

I would say it's careful and purposeful management on our part in the current market conditions. And the markets aren't paying us to keep extra inventory around. In the past, as you know, sometimes these markets will go into contango, and might run a little bit higher. Separately, obviously, the payment cycle in the crude business has helped. And I think we'll stay after that.

Paul, I'd like to add one other thing. We've also spent quite a bit of time trying to restructure contracts to really assist us either in that working capital requirement, certainly, or in the pricing of those contracts to the customers, right. So both of those things alleviate pressure on the lines.

[Operator Instructions] Our next question is coming from James Jampel of HITE.

In your service out of the Bakken, you mentioned you had a 5-year take-or-pay with Phillips 66 to Albany. In viewing the expansions you're undertaking and the other customers you have there, should we be expecting announcements of longer-term contracts such as the Phillips contract? Or are you seeing much more short-term types of deals out there?

Certainly, James, we're working hard to secure as many contracts as possible and we hope that we'll be able to get some long-term ones. I think -- I do think we're ahead of a lot of competitors that might be out there. So I think we're in a very good position to provide value to our customer base that others just can't quite do. So I think that crude-by-rail is becoming a much more accepted method of transportation at every level within the business. So I think we're positioned well to execute and we're hopeful that we'll be able to sign up additional customers to long-term contracts.

Do you have a sense of sort of your weighted average contract length now? And what you would expect it to be once the announced expansions are complete?

I don't know if I have a weighted average of that, but suffice it to say that directionally, the company is moving towards longer-term-type contracts that have take-or-pay features in them. I think that's a real goal of the company.

Okay. And on the ramp-up of the propane business, is that included in your guidance for this year? partial Europe, the propane?

James, the $1.75 to $1.90, separating out the Oregon facility, takes into account all the factors including market conditions and so forth.

And I think all of us here at HITE want to just say that we very much enjoyed working with Tom over his time at Global, and we wish you the best in your retirement. Enjoy.

Thank you, James. Likewise.

Thank you. At this time, I'd like to turn the floor back over to management for any additional or closing comments.

Thank you for joining us this morning. We look forward to updating you on our progress. Everyone, have a great day. Thanks.