Global Partners LP (GLP) Q3 2013 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Global Partners Third 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 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'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, changes in commodity prices, 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 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. And now please let me turn the call over to our President and Chief Executive Officer, Eric Slifka.

Thank you, Edward. Good morning, everyone, and thank you for joining us. Year-over-year EBITDA for the third quarter of 2013 was up $7.7 million to $37.2 million, while distributable cash flow increased about $8 million to $23.2 million. We benefited from a strong performance in our Gasoline Distribution and Station Operations and favorable market conditions in wholesale distillates. As expected, our performance was moderated by backwardation in wholesale gasoline blendstocks and supply dislocations in crude oil that compressed margins and reduced volumes. Through the first 5 weeks of Q4, we have seen a return to market conditions that support further growth in crude by rail volumes. Looking in more detail at our businesses, net product margin in our Gasoline Distribution and Station Operations segment was up 24% to $64.7 million in the third quarter from the same period a year earlier, driven in part by a lower retail gas price environment. Our performance also benefited from activities within our new-to-industry and raze and rebuild program. For example, in 2013, we completely renovated and reopened 3 additional locations on the heavily traffic Connecticut Turnpike. We have completed that work at 11 of our 23 turnpike locations. The remaining 12 locations should be substantiably -- substantially completed over the next year or so. Beyond the Connecticut Turnpike corridor, we continue to actively execute on our strategy to develop other locations. Year-to-date, we have opened 2 new-to-industry sites and 1 raze and rebuild facility. Our growth model concentrates on high-return projects, and we are pleased with their overall performance, which has resulted in increases in volume and C-store revenues. We expect to complete one more raze and rebuild and one major renovation by year end. In our Wholesale segment, net product margin increased $7.3 million in the quarter to $42.3 million from $34.9 million in the third quarter of 2012. Increased crude oil logistics and marketing activities, as well as favorable market conditions in wholesale distillates, more than offset the impact of backwardation in gasoline blendstocks and increased rack competition in the wholesale gasoline market. Crude oil activities in Q3 were up on a year-over-year basis, reflecting our acquisitions early in 2013 of Cascade Kelly and Basin Transload. Our take-or-pay contract with Phillips 66 and other term contract at our terminals. In North Dakota, our Columbus Transload facility recently began receiving crude oil from a new 7-mile pipeline lateral connection constructed by Tesoro Logistics, which transports crude from various gathering points along the Tesoro High Planes Pipeline System. The new 170,000-barrel Columbus tank should be completed by early 2014, bringing total storage capacity there to 270,000 barrels. In Beulah, construction has been completed on a 140,000-barrel storage tank and truck and rail offloading system. We expect to complete construction of an additional 140,000-barrel tank there shortly. The capacity expansion at Columbus and Beulah further positions us to benefit from the region's growing production. Turning to our West Coast operations in Oregon, we have increased contractual commitments at our terminal and are pursuing expansion of the facility to accommodate simultaneous operations of the crude transload facility and ethanol production. One of the real advantages of our origin-to-destination system is flexibility. Our system allows us to pull barrels from various locations and respond to variable market conditions. Since early 2013 when we began operating our mid-continent and West Coast locations, we have successfully leveraged the optionality of that east-west rail system by directing product movements to the highest-value market for our customers. We are also expanding our energy logistics and marketing activities to Canada with the opening of our office in Calgary. This initiative connects Canadian energy producers to U.S. markets through our terminal network. Having a presence in Canada provides us better access to the growing and available production in the region. Looking at other projects during the quarter, volumes at our rail-fed propane and butane storage and distribution terminal in Albany are ahead of expectations. For this reason, we are expanding the facility from its current 540,000 gallons of tank capacity to almost 1 million gallon. In addition, we have recently completed a new compressed natural gas loading station in Bangor, Maine. We have a multiyear agreement with Bangor Gas to supply natural gas to the facility. Several term customers have contracted to receive product from the station, with deliveries expected to commence this quarter. Turning to our distribution. In October, the Board of Directors of our general partner approved an increase in the quarterly distribution to $0.60 per unit. This translates to an annualized increase of $0.05 per unit, from $2.35 to $2.40 per unit, resulting in distribution coverage on a trailing 12-month basis of 1.56x. The board will continue to review the distribution on a quarter-by-quarter basis. Looking ahead, the fundamentals of our business is strong. Energy production in North America is booming. With our expanding midstream logistics and marketing infrastructure and virtual pipeline systems, we are participating directly in the significant growth. Our portfolio of irreplaceable origin-to-destination assets represent an energy infrastructure gateway to premium markets across the country. Complementing these assets, our Gasoline Distribution and Station Operations segment continues to contribute annuity-like income. With that, now let me turn the call over to Daphne for her financial review. Daphne?

Thank you, Eric. EBITDA and DCF were up significantly in the third quarter, increasing on a year-over-year basis by 26% and 55%, respectively. These increases primarily reflect the strong performance in our gasoline station-related business as well as a more favorable distillates market. Our fuel net product margin in our Gasoline Distribution and Station Operations segment increased almost $10 million, from $33.5 million in the third quarter of 2012 to $43.4 million due to the decline in gasoline prices. The NYMEX price for 87 [indiscernible] decreased $0.50, from a high of $3.13 on July 16 to $2.63 at the end of September. During the same timeframe, as an example, the AAA street price in Boston declined only approximately $0.25. Total net product margin for this segment during the quarter was $64.7 million, which includes $21.3 million generated from station operations, primarily rental income and margin generated in our approximate 120 owned and operated convenience stores. On a trailing 4-quarter basis, this segment generated $238 million in net product margin, which translates to a quarterly average of approximately $59 million. In our Wholesale segment, net product margin increased over $7 million or 21% to $42.2 million due to stronger distillate margins year-over-year as well as activity at our new transload terminal in North Dakota and Oregon. However, margins and volumes were negatively impacted in this segment by competitive pressures in our wholesale gasoline business, backwardation in gasoline blendstocks and supply dislocations in the crude oil markets. Our Commercial segment, which consists of deliveries to end-user commercial and public sector customers of gasoline, heating oil, natural gas and bunker fuel, performed in line with last year, generating $4.7 million in net product margin. While a smaller segment, it has contributed on average over $20 million in net product margin on a trailing 4-quarter basis over the last few years. Looking at expenses, total costs and operating expenses for the quarter were $82.5 million, up approximately $16.7 million compared with the third quarter of 2012. The variance in the year-over-year expenses is primarily attributable to the impact of the Basin and Cascade Kelly acquisitions as well as the long-term Getty lease. Comparison to this year's second quarter is more meaningful. Quarter-over-quarter total SG&A and operating expenses excluding amortization expense, which is primarily associated with our recent acquisitions, show a modest increase of $1.3 million to $75.8 million. Interest expense of $9 million was approximately in line with last year's quarter and reflects lower working capital borrowings and a lower borrowing rate offset by increased borrowings to finance our acquisitions, specifically the $115 million term loan and the $70 million senior unsecured note. Year-over-year, third quarter net income was down approximately $3.5 million, due largely to a more than $9 million increase in depreciation and amortization, primarily associated with recent acquisitions. Turning to the balance sheet, our long-term assets at September 30 were up about $220 million or 27% from year end, as a result of the 2 acquisitions. Compared to 7.4x a year ago, total debt-to-EBITDA was 5.5x at September 30, based on trailing 12 months of EBITDA of $160 million. Funded debt-to-EBITDA was 3.6x at September 30, and as a reminder, funded debt consists of our acquisition-related debt, including the $115 million term loan and the $70 million senior notes, which financed our Basin and Cascade Kelly acquisitions. Turning to our guidance, based upon our performance, through the first 9 months of 2013, we expect 2013 EBITDA in the range of $150 million to $175 million. Our guidance is based on assumptions regarding current market conditions, including demand for petroleum products and renewable fuels, changes in commodity prices, weather, credit market and the forward product pricing curve, which will influence quarterly financial results. Now let me call turn the call back over to Eric to conclude our prepared remarks. Eric?

Thanks, Daphne. In summary, we are broadening our earnings capacity through expansion projects designed to further optimize our logistics capacity and capabilities and to increase the volume of products put through our terminaling system and our gasoline station network. These projects represent significant growth opportunities for Global in 2014 and beyond. Before going to Q&A, let me note that we have several investor events scheduled for November, including the Jefferies Global Energy Conference in Houston, the Barclays Select Growth Conference in New York and the RBC Capital Markets' MLP Conference in Dallas. We look forward to seeing you there. With that, we'll be happy to take your questions. Operator?

[Operator Instructions] Our first question comes from the line of Theresa Chen with Barclays Capital.

Just 2 quick questions, with first, would you mind providing some additional color on your plans to expand in Canada? Do you anticipate building or leasing any terminals there?

We're always looking to further our position in Canada and as those opportunities present themselves, we'll look to execute on them. Certainly, we think it's important to have the ability to service our customers and give them the capability to buy products through various other locations and channels. So we're going to look at all those opportunities, right?

Got it. And secondly, in regards to the Tesoro pipelines build in the Bakken, how will this or will this impact your crude loading volumes in the fourth quarter?

It was really very minimal. It wasn't down for a long time, so it's a real [indiscernible] issue.

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

Eric, just a couple of questions. Expanding on what you said about Canada, I mean, what direction of flows do you think might be most appealing should you build something in Canada?

It really depends. There's lots of various products, and the good thing is I think we have a system that can move those volumes east and west. The West Coast logistics are closer, so you're moving maybe approximately 900 miles to get to our plant in Oregon, right? Going east, depends on the products, but the good news is, it's depending on whatever market provides the higher value to the customer base, that's where they are going to push the products to. So it's really about trying to broaden our capacity to give our customers really the most locations to purchase product from.

Okay. You mentioned that the assets you had in this segment are irreplaceable on both on the origin and destination. I kind of understand the destination side, but seems like there's a lot of places to load crude on the origin side. What leads you to believe that they're irreplaceable on the origin side?

I mean, look, at the end of the day, I think it's the connection to the assets, right? So that's unique, all right? Having both origin and destination when you look at sort of all the competitors out there, I think we're in -- may not be the sole company with it, but there's not a lot of them.

Okay. And then my final one would be concerning the -- if I can call it the legacy Wholesale business, if you will. Did I hear you mention some sort of new competitive dynamic there? And what's going on there? And can we expect the return to historical profitability there?

In terms of the -- what, you call it the legacy -- I'm not, I mean, actually, the...

No, this is your -- the wholesale gasoline business affected by backwardation.

Oh, yes. No, I think that's really just a short-term kind of effect. I don't really believe that, that's going to sort of continue on, so...

So that you mentioned competitive pressures at the rack?

Yes, I think you just had a little bit of restructuring with some of the refiners directly marketing those areas. And -- but I think that, over time, settles out, and it gets back to more historical norms.

Do you see yourself competing for terminal acquisitions in your core area on the -- in the Northeast? Or is that something that's pretty much played out?

As the acquisitions come up, there is always a slew of competitors looking for those assets for us to be interested. I'd think it's got to be strategic, and that's the kind of an asset that we're going to buy. We're going to look at it and hopefully be able to do a lot more than just it looks like. And that's really the kind of assets we're going to be competitive on when it comes to purchases.

Okay. And another -- squeeze in one more, and then I'll let it go. The EBITDA guidance for the full year is still very wide, considering we have 3 quarters in the books. So is it really that difficult to narrow it at this point for the fourth quarter?

Yes, we've given you the guidance and kind of that's what we're going to stick with.

[Operator Instructions] Our next question comes from the line of Rob Longnecker with Jovetree.

Can you provide a little more volume -- a little more detail on crude volumes in the quarter, please?

You know what we've given historically, we've given some volumes that are through Albany. When I sort of want to -- I do want to talk a little bit about that. So looking back in Q2, we came -- we announced about 100,000 barrels, maybe 102,000 barrels a day to the Albany facility. Q3 was somewhere around 80,000 barrels a day. But looking forward, those volumes have really picked up substantially. Those numbers, too, that I gave you, sorry, were all products by rail there, right? So -- but those volumes had picked up more recently. So we think you'll sort of look back and take a look at the volumes that we've done in Q2. And we see it heading back to those kind of numbers and maybe even more, so...

And were you guys moving -- I know in the past, you have moved some barrels sort of on your own account. Is that something you did in the quarter?

Yes, we continually -- as an opportunity presents itself, we will move barrels ourselves, right? And obviously, in Q3, as those opportunities were limited in crude, we did less of that. And then you had the other products. But I think the point is, it's interesting because if you look at the spread, roughly 100,000 barrels of product corridor, 80,000 in a quarter whether the spreads could come right, weigh in. I think that really goes to the strength and stability of the business.

Spreads obviously jumped around a lot in the quarter. When they got really bad, were things -- obviously, it takes time for people to change their plans. I mean, were there discussions starting to happen that people started to back away or they happened too quickly or...

I mean, we had term business through the facility, and that's really what drove the volumes, right? So we do some spot business there, but these base volumes are stable.

[Operator Instructions] There are no further questions at this time. I would now like to turn the floor back over to Mr. Slifka for his closing comments.

Thank you for joining us this morning. We look forward to updating on our progress next quarter. Have a great day, everybody. Thank you.

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