Global Partners LP (GLP) Q2 2015 Earnings Report, Transcript and Summary

Good day, everyone and welcome to the Global Partners’ Second Quarter 2015 Financial Results Conference Call. Today’s call is being recorded. [Operator Instructions] As a reminder, this conference is being recorded. With us from Global Partners are President and Chief Executive Officer, Mr. Eric Slifka; Chief Financial Officer, Ms. Daphne Foster; Chief Operating Officer, Mr. Mark Romaine; Executive Vice President and Chief Accounting Officer, Mr. Charles Rudinsky; and Executive Vice President and General Counsel, Mr. Edward Faneuil. At this time, I would like to turn the call over to Mr. Faneuil for opening remarks. Please go ahead, sir.

Good morning, everyone. Thank you for joining us. Before we begin, let me remind everyone that this morning we will make forward-looking statements within the meaning of federal securities 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, commodity prices, weather, credit markets, the regulatory and permitting environment and the forward product pricing curve, which could influence quarterly financial results. Therefore, Global Partners can give no assurance that our future EBITDA will be as estimated. The actual performance for Global may differ materially from those expressed or implied by any such forward-looking statements. In addition, such performance is subject to risk factors including, but not limited to those described in our filings with the Securities and Exchange Commission. Global Partners undertakes no obligation to revise or 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 news releases, publicly announced conference calls or other means that will constitute public disclosure for purposes of Regulation FD. Now, please allow me to turn the call over to our President and Chief Executive Officer, Eric Slifka. Eric?

Thank you, Edward and good morning everyone. Our second quarter performance reflects our diverse business. GDSO’s product margin of $98.3 million was 56% higher than last year’s second quarter largely reflecting contributions from the Warren Equities acquisition in January of this year. Product margin in the Wholesale segment was up 76% over the second quarter in 2014 primarily reflecting a more normal gasoline blend stock market. Let me provide you with some color on activities during the quarter. The integration of the Warren assets is proceeding smoothly. We are leveraging our expertise to drive profitability throughout the network of approximately 520 Warren locations. In addition, we have and continue to realize better-than-expected synergies and efficiencies in areas such as purchasing, merchandising and expense management as well as within other commercial and operational sectors. In Q2, we completed the acquisition of a portfolio of stations and dealer supply contracts from Capitol Petroleum. The purchase enhances our retail asset base, which now includes close to 100 sites in the Mid-Atlantic. As Daphne will address, we are updating our full year 2015 EBITDA guidance to reflect the capital transaction. Turning to our Wholesale segment, notwithstanding the headwinds related to crude differentials, we continue to believe that normal supply and demand patterns favor the movement of Mid-Continent crude by rail to the East and West Coasts. As we have said previously, rail provides a level of optionality that pipelines cannot match, allowing product to move quickly and efficiently without the significant working capital requirement of pipeline infrastructure. Now, let me update you on several growth projects. First, we have received the permit from the U.S. Army Corps of Engineers for a dock modernization project at our CPBR terminal in Clatskanie, Oregon that will enable us to handle Panamax size vessels. Pending completion of final design drawings, work to upgrade the dock is expected to begin in the fourth quarter of this year. Apart from other planned investments at the terminal, receipt of this permit is a significant step towards raising the profile of CPBR as a prime West Coast logistics center. Second, the Summit Midstream Partners’ crude oil transmission pipeline that will link our Stampede, North Dakota terminal to Summit’s Divide Gathering System is expected to be in service in the fourth quarter of this year. This connector will include a 46-mile, 10-inch diameter crude oil transmission pipeline with throughput capacity of 50,000 barrels a day, expanding our Stampede crude transload facilities draw area and enhancing the opportunity for producers to efficiently reach multiple downstream markets. On the Gulf Coast, the development of our planned multi-product waterborne rail facility in Port Arthur, Texas remains on track to open in 2017 giving us entrée to the Gulf’s significant refining capacity as well as potential export opportunity. This facility, with its rail access and waterborne capabilities, will be designed to handle multiple products such as crude oil, ethanol and refined products providing refiners and producers access to waterborne market. We believe these three geographically diverse projects continue to broaden the company’s asset base providing customers with access to multiple markets. Turning to our distribution, we continue to demonstrate our commitment to provide strong returns for our unitholders. In July, our Board increased the quarterly cash distribution by 8.6% to $0.6925 per unit, which is $2.77 on an annualized basis. Now, let me turn the call over to Daphne for her financial review. Daphne?

Thank you, Eric and good morning everyone. Let me start with some color on our second quarter performance. Combined product margins of $166.2 million, was up approximately $63 million from the same period last year. This reflects a $35.3 million or 56% improvement in the GDSO segment to $98.3 million, primarily reflecting the Warren Equities acquisition in the first quarter of this year and an increase of $26.4 million in the wholesale segment to $60.9 million, largely reflecting a more normal gasoline blend stock market. Primarily for these same reasons, second quarter EBITDA increased $29.6 million to $48.7 million and DCF increased approximately $30 million to $26.2 million. Net income was $7.2 million, an improvement of nearly $20 million. Looking at our segments in more detail, product margin from gasoline distribution in our GDSO segment increased $14.2 million to $53.2 million, reflecting six months of contribution from Warren as well as one month from the Capitol Petroleum portfolio acquired June 1. Fuel margins in this segment were negatively impacted during the quarter by rising wholesale gasoline prices, particularly during April and May when prices during those two months increased more than $0.20 per gallon. Product margin from station operations added $45.1 million, which was up approximately $21 million, or 88% from last year’s second quarter, again primarily reflecting the addition of the Warren sites. Volume in the GDSO segment was 377 million gallons in the second quarter, an increase of approximately 115 million gallons, primarily reflecting the Warren acquisition. Our GDSO portfolio at the end of the second quarter consisted of 286 company-operated locations, 282 commissioned agents, 296 lessee dealers and 673 contract dealers for a total of 1,537 sites. Turning to the wholesale segment, crude oil product margin of $36.8 million was up $6.7 million from the previous year due to an increase in the fair value of forward contracts. We did experience a decrease in logistics volume and tighter margins in part due to unfavorable market conditions. Additionally, logistics volume was down due to the year-over-year declining contractual commitments with one particular customer. As we said in our first quarter call, contango structure in the crude market has incented suppliers to fill available storage, particularly in Cushing and this continued into the second quarter. Supply disruptions in Canada due to the unplanned upgrade or downtime and production issues related to wildfires also contributed to the tightness in physical crude differentials. Gasoline and gasoline blend stock margin improved nearly $22 million from the second quarter of 2014. But remember, last year’s result was negatively impacted by backwardation in the forward ethanol market and we look at the full six month performance as a more meaningful metric. Taking the same view this year, for the first six months, gasoline and gasoline blend stock margin increased slightly of $1.9 million to $47.5 million from the first six months of 2014. The margin for other oils and related products was down $2.1 million to $6.4 million, due in part to a competitive distillate rack market and a weak propane market, partly offset by strong residual fuel demand. Volume in the wholesale segment decreased 362 million gallons to 825 million gallons in the second quarter of 2015, primarily due to an elective change in supply logistics by a particular gasoline customer and the discontinuation by global of a small discrete blend stock distribution activity. This decline in volume is greater than the increase in our GDSO segment volume. Our smaller commercial segment product margin was up $1.3 million or 23% to $7 million. Turning to expenses, excluding amortization total expenses were $117.5 million, with SG&A and operating expenses increasing $13.8 million and $21.1 million respectively from the second quarter of 2014. The majority of the increase stemmed from the Warren acquisition with a lesser amount related to the purchase of the Capitol Petroleum assets. In addition, SG&A expenses included approximately $1 million in Warren-related acquisition costs and $3.1 million in Capitol Petroleum-related acquisition costs. June was a busy month as we successfully completed two capital market transactions and closed on the Capitol Petroleum portfolio. We completed a private placement of $300 million, 7% unsecured senior notes due 2023. We completed a public offering of 3 million common units, generating net proceeds of approximately $109 million after estimated expenses and net proceeds from the private placement and the offering were used to reduce indebtedness outstanding under our revolving credit facility. The recent $300 million bond offering increased bonds to finance the acquisitions of Warren, the Revere terminal and Capitol and the issuance of the $375 million, 6.25% 8-year unsecured bonds in June of 2014 caused interest expense to increase $4.2 million to $16.4 million for the second quarter of 2015 compared with $12.2 million for the same period of 2014. Total CapEx for the quarter was approximately $19.1 million, $7.5 million of which was maintenance CapEx, the majority of which consisted of investments in our gasoline stations as well as investments in our IT. Expansion CapEx was $11.6 million and included $6.9 million in investments in gasoline stations and C-stores, including investments in two new industry sites, three raze and rebuilds and co-branding investments. We continue to have a strong balance sheet. At June 30, we had borrowings of $536 million under our $1.775 billion committed bank facility and total partners’ equity of $738 million. You will note the addition of an $89 million liability on our balance sheet classified as a financing obligation. This relates to the Capitol Petroleum transaction and is associated with certain properties previously sold by Capitol within two sale-leaseback transactions that did not meet the criteria for sale accounting. As a result, the acquired leased assets require capitalization on our balance sheet. The financing obligation does not represent incremental borrowed money and our credit agreement excludes this obligation from the leverage calculation. Turning to guidance as Eric noted, we are updating our 2015 EBITDA guidance to include the acquisition of the Capitol Petroleum portfolio. As a result, we now expect full year EBITDA in the range of $214 million to $234 million, up from a previously announced range of $205 million to $225 million. The guidance is based on assumptions regarding market conditions such as demand for petroleum products and renewable fuels, commodity prices, weather, credit market and regulatory and permitting environment and the forward product pricing curve, which can influence quarterly financial results. Now let me turn the call back over to Eric for his closing comments.

Thank you, Daphne. Let me conclude by saying that we remain focused on our strategic investments and organic projects that further enhance our growth, diversity and operational excellence throughout our organization. With that, we will be happy to take any questions. Operator?

Thank you. [Operator Instructions] Our first question today is coming from Gabe Moreen from Bank of America Merrill Lynch. Please proceed with your question.

Hey, good morning everyone and nice quarter despite the market reaction here which I am pretty puzzled by.

Thank you, Gabe.

Thanks. A couple of quick questions for you guys, just wanted to confirm and I know Daphne walked through the guidance quickly there at the end. Just that basically guidance has really only been adjusted to Capitol for Capitol, I realized that there is maybe a couple moving parts and stuff, but essentially that beyond Capitol, underlying guidance really isn’t changed, is that fair?

That’s correct, Gabe.

Okay, great. And then I guess a question on Port Arthur and going forward there, given the tightened spreads and what not, can you just kind of walk us through again the customer interest you are seeing and also to the extent when you think you might have contracts or whether people are – you are getting to that stage and the continued customer interest despite clearly some tightened spreads of late?

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

So, can you talk I guess then Eric, in terms of just the customer mix, in terms of – the mix here, how much producer driven versus refiner driven, do you have any ballpark sense of that, who is going to end up contracting here?

Yes. I mean, I would say it looks more refiner-driven at the moment and that seems to be where we are having sort of the heaviest conversations.

That’s good to hear. And then kind of last question for me. Appreciate the US Army Corps of Engineers permit, I guess I am just wondering how it fits into the bigger picture, Clatskanie, I know there has been a customer dispute there, I guess I am just trying to get a bigger sense of kind of how contracted the facility is, do you feel like this last permit is sort of the major last piece of a puzzle to getting I guess the terminal more utilized, if you could just help us walk us through the bigger picture there?

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

Okay. And just to press you a little bit more in terms of contracting and I guess the customer dispute where that stands, did that got filed…

Yes. I mean in terms of that, we are in dispute with the customer. We continue to sort of move forward putting other people into the facility and the goal is to continue to build the business out there, but it’s a great asset. So, I think particularly having that, the permits in place there, we will go a long way to working with customers to get them in near-term up the facility.

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

Hey, Mark, do you want to take that?

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

Got it, great. Thanks, Mark. Thanks everyone. We look forward to seeing 3Q with gasoline prices keep dropping here. Take care.

Thank you, Gabe.

Thank you. [Operator Instructions] Our next question today is coming from Lin Shen from HITE Hedge. Please proceed with your question.

Hey, good morning, Eric. Congratulations for the quarter.

Thank you.

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

Yes. I mean, I think as I will sort of handle those in the wrong order, but I think in terms of the narrowing of the spread, there were certain market factors that Daphne outlined that related to those spreads coming in. And as that loosened up, the spreads sort of moved out a little bit. I would say generally it’s a little more positive now versus in Q2. So, even though the spreads are there, we do have take-or-pay business, but the volumes are still moving through the system due to that take-or-pay contract that we have. So, that’s one piece. And then in the volumes, volumes certainly are off, but I would say that they are still pretty good, right? And looking ahead in the short window that we have had into this quarter, they have been better, so…

And also, how about your current utilization rate of Albany terminal?

That’s – I was talking – I was just talking about Albany in terms of volume.

I see. Thank you.

Sure.

Thank you. Our next question today is coming from Rob Longnecker from Jovetree. Please proceed with your question.

Hey, just following up on that last response. Could you talk a little bit about how much, excluding your take-or-pay business, how much volumes are off into Albany?

I am not sure – I think we sort of stopped breaking out exact volumes. But I mean, suffice it to say, that the volumes there – when I say they are still pretty good, I mean they are still pretty good, right? I mean, I am not going to give you an exact number, but it’s not as if volumes have been even cut half or anything like that, not anywhere close.

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

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

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

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

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

Yes.

Okay, thank you.

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

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