Global Partners LP (GLP) Q2 2014 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Global Partners Second Quarter 2014 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, 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 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 be making 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, the regulatory and permitting environment and the forward product pricing curve. Therefore, Global Partners can give no assurance that our future EBITDA will be as estimated. The actual performance for Global Partners may differ materially from those expressed or implied by any such forward-looking statements. In addition, such performance is subject to risk factors including, but not limited to, those described in Global Partners' filings with the Securities and Exchange Commission. Global Partners undertakes no obligation to revise or publicly release the results of any revisions to the forward-looking statements that may be made during today's conference call. With Regulation FD in effect, it is our policy that any material comments concerning future results of operations will be communicated through press releases, publicly announced conference calls or other means that will constitute public disclosure for purposes of Regulation FD. Now please let me turn the call over to our President and Chief Executive Officer, Eric Slifka.

Thank you, Edward, and good morning, everyone. We are pleased with our overall operational progress and financial performance through the first half of 2014. Demand across our business is strong. We are on a positive trajectory to successfully execute our plans during the remainder of 2014 and beyond and remain on track to achieve our full year EBITDA guidance. One of the key themes for Global continues to be the increasing optionality we provide customers through strategic expansion of our assets. In the relatively short time, we have established a national footprint for moving energy products by rail from one of the country's largest crude-producing regions to refiners and other customers on the East and West Coasts. From our initial storage tank in Columbus, North Dakota, for example, we have increased our storage capacity in the Bakken region by 450%, creating formidable truck, rail and pipeline service terminals in a state that alone accounts for 12% of the U.S. crude production. In addition, we continue to build a system designed to have flexibility for our customers and allow us to adjust to the supply-and-demand shifts that are inherent to energy industry. Recently, I had the honor of speaking at the Energy Information Administration's 2014 Energy Conference in Washington, D.C., about the energy renaissance underway in the United States and the integral role that rail has to play in the industry's domestic resurgence. At the conference, I've pointed out that crude transported to the Gulf or Atlantic Coast from the Bakken requires a transit time of just 3 to 6 days, when moved by rail. By pipeline, the same trip takes about 40 days. The use of unit trains increases the efficiency of product by rail, as a single unit train is capable of transporting more than 80,000 barrels of crude. For highly viscous products, the use of heated tank cars further contributes to efficiency of crude by rail, reducing the need for expensive diluent additives required, when these products are transported through pipelines. The bottom line is that while there's no single solution to crude transportation in the United States, rail offers an extraordinary level of flexibility, optionality, rapid transit and market penetration, all the while requiring a lower cost of capital. Although, it's impossible to know precisely where the market is going or what products we may be carrying in the future, we have positioned ourselves to provide the logistics for whatever the market demands. With that as a backdrop, let me spend a few minutes discussing some of our recent highlights and how these new developments dovetail with our objective of continuing to generate solid returns for unitholders. A significant development is a long-term agreement we have with Kansas City Southern to develop and build a waterborne rail terminal in Port Arthur, Texas. The terminal will initially handle heavy crudes from Canada, but ultimately, may also handle refined petroleum and ethanol, as well as condensate. We are excited about the opportunity to embark on this project with such an outstanding partner. The terminal is initially envisioned to receive 2 120-car unit trains per day. However, KCS has the capacity to deliver up to 6 unit trains to the site per day. We will have 345,000 barrels of tank storage and a dock capable of handling Panamax-size vessels, and it will be designed to feed local refineries by barge. In terms of the capital investment, at this point, we estimate the initial phase to be between $75 million and $100 million, over 3-year period. Subject to the receipt of permits, we anticipate the opening of the facility in early 2017. We believe that this will be a terrific asset for the company, because it fits squarely in our long-term growth strategy. Development of the Port Arthur site will broaden our revenue and income streams, to include the Gulf Coast, a region that represents half of the U.S. refining capacities. By way of background, the EIA puts the Gulf's refining capacity at about 9.4 million barrels a day. Our new terminal in Port Arthur will enable us to address not only the significant local demand for domestic and Canadian crude, but provide a potential opportunity for future exports of any energy products as well. One of the reasons that our crude oil terminals and logistics are so attractive to existing and prospective customers is the increasing breadth of our gathering capacity and capabilities. In Q2, we've signed an agreement with Meadowlark Midstream Company, a wholly owned subsidiary of Summit Midstream Partners. Meadowlark will build, own and operate a new crude oil transportation system, serving our Columbus, North Dakota rail loading terminal. The project is expected to be operational by the second quarter of 2015. When completed, the system will include: truck unloading, 55,000 barrels of tankage on Meadowlark to buy gathering system, and a 47-mile pipeline serving the Columbus facility. To handle the additional crude volumes flowing through this system, we are in the process of constructing an additional 176,000 barrels of tankage. This expansion will increase storage capacity in Columbus to 446,000 barrels. The Meadowlark agreement reflects our continuing strategy to optimize the operations of our Mid-Continent assets and drive incremental volumes through our system. Recall, in March of last year, we signed a pipeline connection agreement with Tesoro Logistics, which developed a 7-mile lateral times at Tesoro High Plains Pipeline System directly to our Columbus facility. Tesoro Logistics is also developing a 4.1-mile pipeline lateral from its Dunn Center Station to our Basin Transload facility in Beulah, North Dakota. This connection is expected to be operational in the fourth quarter of this year. With this connection, shippers will have access to East and West from various Bakken origin points through the Beulah terminal. We are seeing strong demand at the Columbus and Beulah terminals and are currently exploring the possibility of further expansion there. Turning now to our East and West Coast assets. In Albany, we are working toward offering refiners and other customers a wide array of products, including biodiesel and a broader suite of crudes. In Oregon, we continue to work on expanding our Columbia Pacific Bio-Refinery facility to simultaneously transload crude and manufacture ethanol. A decision on our permit application is expected shortly. Unit train volume into our Clatskanie terminal is up. An interest in the facility from prospective customers is at an all-time high. Across all of our initiatives, safety is paramount. To that end, we are closely following the U.S. Department of Transportation's recently proposed rulemaking regarding enhancements to crude-by-rail safety. As many of you know, Global has been proactive on the issue of railcars safety, announcing in April a plan to begin requiring all crude cars arriving in our East and West Coast terminals to be CPC-1232-compliant. I am pleased to report that we have fully implemented this initiative in Oregon and expect to complete it in Albany in the third quarter of this year. As a leader in the energy industry, we also look forward to actively engaging in broader industry dialogue about the DOT proposal. Moving to our GDSO segment. We continue to benefit from our focus on new-to-industry and organic projects, including raze and rebuilds and site enhancements. We're also expanding our co-branding initiatives and food service offerings, through our all-time stores. During the second quarter, we rebranded approximately 30 locations and benefited from the addition of 11 new stores we began operating in the first quarter. Turning to our distribution. Solid fundamentals have enabled us to continue to consistently deliver strong results to our unitholders. In July, the Board of Directors of our general partner, increased the partnership's distribution for the ninth consecutive quarter. The distribution of $0.6375 per unit, or $2.55 per unit on an annualized basis, represents an increase of approximately 2% over the first quarter of this year and 8.5% over the second quarter of 2013. Distribution coverage on a trailing 12-month basis ended June 30 is 2.2x. The board will continue to review the distribution on a quarter-by-quarter basis, but we remain pleased with the strength and long-term direction of our business. At the outset of my remarks, I mentioned our strong performance through the first half of 2014. Year-to-date, at June 30: our EBITDA is more than $105 million; DCF, more than $65 million; and net income, over $44 million. With that, let me turn the call over to Daphne for her financial review.

Thank you, Eric, and good morning, everyone. Consistent with our discussion when we spoke with you on our first quarter earnings call in early May, our financial results for the second quarter were substantially as expected. Having benefited from unusually favorable margins in gasoline blendstocks in the first quarter, we had anticipated an approximate $20 million negative impact on our gasoline blendstock margins from backwardation in the forward ethanol market to likely occur in the second quarter. In addition, we noted in our Q1 call that we were experiencing increased costs in crude rail logistics early in the second quarter. Our Q2 results reflect these impacts. Wholesale gasoline and gasoline blendstocks margin declined $16 million year-over-year. In addition, our results reflect our investment in personnel to support our growing business and to capitalize on growth initiatives, including crude oil activities, retail gasoline and convenience store operations and the development of other projects. EBITDA was $19.1 million for the second quarter of 2014, a decrease of $13.5 million from the $32.6 million for the same period last year. The net loss for the second quarter was $12.7 million, a decrease of $17.5 million from $4.8 million for the prior year period. DCF was negative $4.2 million, $23.2 million less than DCF of $19 million for the same period in 2013. The larger variances in net income and DCF, as compared to EBITDA, were due to: increased depreciation, as we continue to grow the business; the write-off of fees, related to the extinguishment of debt in connection with the our high-yield bond issuance; and higher maintenance CapEx attributed, in part, to investments in our retail gas station assets. Looking at our segments in more detail. Combined, the product margin declined $4.2 million year-over-year to $102.9 million, with increases in the GDSO segment, partially offsetting a $7.5 million decline in the Wholesale segment. Within Wholesale, crude oil product margin increased $10.4 million in the second quarter to $30.1 million, from $19.7 million in the same period last year. Again, as we noted in our Q1 call, we experienced increased costs in crude rail logistics early in the second quarter, as rail service took time to return to normal, after a challenging first quarter impacted by extreme cold and snow. Gasoline and gasoline blendstocks product margin had a $4.1 million loss in the quarter, a decrease of $16.4 million from the same period last year, due to backwardation in the forward ethanol curve. As a reminder in the first quarter of this year, railcar availability was severely limited due to weather-related delays, and gasoline blendstocks experienced shortages in certain markets. Both factors created favorable market conditions for us in Q1, but were not replicated in the second quarter. Given the offsetting effects of Q1 and Q2, we believe that the first half results for gasoline and gasoline blendstocks create a more relevant picture of the business than either individual quarter. So the first 6 months of this year, gasoline and gasoline blendstocks product margin was $45.6 million. Other oils and related products, distillates, residual oil and propane, make up the balance of Wholesale product margin and were slightly lower than last year, decreasing $1.5 million, to $8.5 million in the second quarter. Our GDSO segment generated a second quarter product margin of $62.6 million, $3.8 million higher than the second quarter of 2013, due to increased contribution from station operations, which includes convenience store sales and rental income from leased stations. The addition of 11 fee store commission agent locations, and our raze and rebuilds were key contributors to this increase. And as Eric mentioned, we continue to focus on our key store operations and merchandising efforts and are benefiting from these initiatives. On the fuel side, product margin was in line with last year, but both quarters were negatively impacted by increasing prices. Our Commercial segment performed essentially in line with last year, generating $5.7 million in product margin versus $6.2 million a year earlier. Turning to expenses. Excluding amortization, total SG&A and operating expenses were $82.7 million in the second quarter, with SG&A, excluding depreciation and operating expenses, increasing $5.2 million and $3.7 million, respectively, year-over-year. The higher SG&A reflects investments and staff additions during the year to support our growing business, as well as expenses associated with growth initiatives, including our crude oil activities, retail gas stations and expansion opportunities. The increase in operating expenses reflects, in part, costs related to new retail location and recently renovated sites. In June, we successfully complete a private offering of $375 million of 6.25% in unsecured bond. The proceeds were used to exchange our outstanding 8% and 7.75% senior notes and to repay a portion of our bonds under our credit facility. Interest expense was $12.2 million for the second quarter of 2014, compared with $10.7 million for the same period last year. The increase, however, was not due to an increase in borrowing costs, but reflects the $1.6 million in expenses associated with the write-off of fees in connection with the exchange and extinguishment of the prior senior notes. Total CapEx for the second quarter was approximately $31 million, $11.4 million of which was maintenance CapEx. Notable expansion projects include investments in our retail gas station assets, including our continued effort on the Connecticut Turnpike and unitary lease sites in New York and crude-related projects at our Albany, North Dakota and Oregon terminals. We now expect maintenance capital to be $30 billion to $35 million for the year, which includes continued investment in retail gas stations and our terminals, as well as office and IT upgrades. Our balance sheet remains strong. At June 30, we had excess foreign capacity of nearly $875 million, under our $1.625 billion committed bank facility, and partners' equity of $473 million. Total funded debt of $640 million, consisting of bank revolver debt and the 8-year unsecured senior notes, which combined has financed our long-term assets, was 2.8x our trailing 12-month EBITDA. Before moving to guidance, let me quickly update you on our accounting for renewable identification numbers, or RINs. As expected, liabilities relating to RIN forward commitments and our renewable volume application, or RBO, were both immaterial at the end of Q2. Our RBO was $700,000, and the liability relating to RIN forward commitments was less than $100,000. These liabilities are expected to continue to be immaterial going forward. Turning to guidance. We continue to expect 2014 EBITDA to be in the range of $175 million to $195 million. This guidance is based on assumptions regarding current market conditions, including demand for petroleum products and renewable fuel, weather, credit markets, the regulatory and permitting environment and the forward product pricing curve, which could influence quarterly financial results. In closing, I wanted to let you know that Mark Romaine and I are planning to attend the Citibank MLP Conference later this month in Las Vegas. In addition, we ask that you save the date for the Global Partners' 2014 Analyst Day, which will take place on Tuesday, November 11 in Portland, Oregon. The event will feature a tour of our Clatskanie, Oregon crude transloading facility and ethanol plant. We look forward to meeting with many of you at the conference, and later this fall at our Analyst Day. Now let me turn it back to Eric, for concluding comments.

Thank you, Daphne. Let me close by saying that we are executing on our long-term strategy to generate strong returns for our unitholders, through leadership in the gathering, storage, transportation and marketing of energy products across North America. Our alliance with KCS and Port Arthur is an important element in a multi-coastal virtual pipeline that augments our national energy-by-rail footprint. Our focus on high-value initiatives, such as infrastructure expansion project, investment in terminal and retail assets and cultivation of new sourcing opportunities, continues to put Global on a growth trajectory. Now, Daphne and I will be happy to take your questions. Operator?

[Operator Instructions] Our first question today is coming from Gabe Moreen of Bank of America Merrill Lynch.

Daphne, you've mentioned the $30 million to $35 million of maintenance CapEx for this year and some of the things driving that. I just -- I know it's maybe a little early to look out to 2015. But can you talk about whether you potentially see that maintenance CapEx coming back in, again, once some of the expenditures you're undertaking this year -- kind of you get through that?

I don't -- Gabe, I don't think we'll comment on 2015. I mean, honestly, I think, that number's not a bad number going forward, as we continue to grow.

Okay. Then maybe turning to the KSU deal, can you talk about sort of your contracting strategy around that? It's a reasonably sized CapEx expenditure. And then also kind of the second part of that question is: Obviously, you've been making efforts in Canada. Can you talk about whether you're trying to marry up that offloading capacity in the Gulf Coast with onloading facilities in Canada, whether you feel confident that you're going to kind of be able to source that crude from Canada, given some competition from, I guess, onloading facilities in Alberta?

Gabe, this is Mark. Good morning. I think 2 parts to that question, and the first part, with respect to the Port Arthur facility. Our plan for that facility is, Global will construct, own and operate that facility. We will operate it as a -- it will be open for third-party business. And we are actively engaged with several different parties on commercial discussions surrounding the opportunities at that facility. And those would be ongoing, as we continue to move forward in the permitting and construction process of that terminal. With regard to the Canadian portion of that business, as you know, we just about a year ago, opened up an office up in Canada. We've been actively sourcing product for our system out of Canada. Those efforts continue to grow. The Port Arthur facility is really the base model for that type and place for movement of heavy crude from Canada. So certainly, it fits in well with that initiative. And as you also probably know, there's quite a bit of infrastructure being built out, up in that Edmonton region. And we've been looking hard and active at those facilities. So I think the notion would be to either offer that service for a producer. Certainly, we've got our own marketing and supply activities that we'll look to leverage out in that system as well.

Great. And if I could follow-up just one more on the Port Arthur facility. This 3-year timeline to build it, is that more just a function of the permitting required? Or is there actually, physically in terms of prepping the site is just going to take that long?

Yes, I think the big wildcard there is the permitting. I think we have a better handle on the construction timeline or the expectations for the construction timeline. But I think a portion of that, the unknown, will be permitting timeline for that. So we're -- I think we're being fairly -- hopeful being fairly conservative with our estimate on that.

Yes. I mean, Gabe, our estimate there is that 12 to 18 months, just on the permitting side, right. And so the second question is, is sort of the remainder of the time there. I can tell you that there has been quite a bit of interest and a lot of incoming calls from the third parties there, who are interested in that location and the fact that it gets to water. Thematically, it's one of those sites that faces the water and, I think, it could end up having quite a bit of value for our customers.

Any existing sites got the dock capacity? Or is it really close enough to the dock capacity, Eric, that's kind of not going to be an issue from getting that on ships, if I understand that correctly?

Yes, there's docks right there. I mean, the idea is that it's at the water. It's to get it to barge. That is the way it's designed. It also has the capability, with some investment, to go up to larger-size vessels as well.

Okay, great. And then just last one from me, just in terms of what you're seeing right now, in terms of the ethanol forward curve, and whether the backwardations alleviated at all? I don't know if I missed out in the comments earlier.

Yes, we have seen a lot of the backwardation has come out of ethanol. There is still some backwardation in the ethanol. But our view, ethanol seems to be well supported. And there is, probably -- it depends which side the curve moved here. And I think that our bias right now is that -- maybe the back end of that is a little more attractive.

[Operator Instructions] We're showing no further questions in queue at this time. I'd like to turn the floor back over to Mr. Slifka for any additional or closing comments.

Thank you for joining us this morning. This concludes today's call. Have a great day, everyone. Thank you.