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Calumet Specialty Product Partners, L.P. (NASDAQ:CLMT)

Q4 2008 Earnings Call Transcript

February 18, 2009 12:00 pm ET

Executives

Jennifer Straumins – SVP, Calumet GP, LLC

Bill Grube - President & CEO

Pat Murray – VP & CFO

Analysts

Darren Horowitz - Raymond James

Dave Rosenfeld - Williams Jones

Operator

Good day, ladies and gentlemen. And welcome to the fourth quarter 2008 Calumet Specialty Products earnings conference call. My name’s Emmanuel and I’ll be your Operator for today. (Operator instructions) To remind you, this conference is being recorded for replay purposes.

Now I’ll just turn the call over to your host for today, Ms. Jennifer Straumins, Senior Vice President. Please proceed.

Jennifer Straumins

Thank you, operator. Good afternoon, and welcome to the Calumet Specialty Products Partners investor’s call to discuss our fourth quarter 2008 financial results. During this call, Calumet Specialty Products Partners, L.P. will be referred to as the partnership or Calumet. Also participating in this call will be Bill Grube, our President and CEO; and, Pat Murray, our CFO. Following the presentation we will hold the line open for a question-and-answer session.

During the course of this call, we will make various forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such statements are based on the beliefs of our management as well as assumptions made by them, and in each case, based on information currently available to them. Although our management believes that the expectations reflected in such forward-looking statements are reasonable, neither the partnership, its general partner, nor our management can provide any assurances that such expectations will prove to be correct. Please refer to our partnership's press release that was issued this morning as well as the latest filings with the Securities and Exchange Commission for a list of factors that may affect our actual results and could cause them to differ from our forward-looking statements made on this call.

We’re very pleased with our overall performance as we managed through this period of unprecedented crude oil price volatility and economic uncertainty. Both of these factors impacted customer demand during the latter part of the fourth quarter. Our customers delayed purchases as they waited to see the impact of the dramatic drop in crude oil prices would have on our product pricing. NYMEX crude prices fell from an average of almost $118 per barrel in the third quarter to an average of just over $42 per barrel in December, a drop of almost 64%. Our customers also slowed purchases at the end of the year to manage their inventories, just as we were trying to manage our inventories.

During the fourth quarter, we achieved increased gross profit in our specialty products segment. This increase resulted from feedstock costs falling faster than our product prices fell. Historically, we have experienced lags in product pricing both with feedstock prices’ increase and decrease.

We’re also pleased to announce that we completed turnaround schedules at Princeton -- scheduled turnarounds at Princeton, Cotton Valley, and Shreveport during November and December of 2008. These turnarounds significantly impacted our production results during the fourth quarter. At this time, Princeton and Cotton Valley are running at historic average rates. And our Shreveport refinery is currently running approximately 50,000 barrels per day of crude, which is 17,000 barrels a day higher than our fourth quarter average run rate.

In order to continue to achieve improved results from operations, to further enhance liquidity, and for continued compliance with the financial covenants in our credit agreements, we will continue to focus on our specialty products, maintaining prudent working capital levels and increasing our Shreveport refinery throughput rates. Although current economic and capital market conditions remain very challenging and can impact all businesses in ways we cannot currently anticipate, we believe that our strategies positioned us to continue to improve our operating results.

The Shreveport refinery expansion project was completed and operational in May 2008. This project has increased Shreveport’s throughput capacity from 42,000 barrels a day to approximately 60,000 barrels per day. For 2008, the refinery had total feedstock runs of approximately 37,000 barrels a day, which represents an increase of approximately 2,700 barrels per day from 2007.

Before the completion of the expansion project, the Shreveport refinery did not achieve the expected significant increase in feedstock runs year-over-year, primarily due to unscheduled down time due to Hurricane Ike and scheduled down time in the fourth quarter to complete a three-week turnaround. And as I mentioned, we are running approximately 50,000 barrels a day at Shreveport currently. And as part of the -- as part of the expansion project, we enhanced Shreveport’s refinery’s ability to process SOUR crude. During the fourth quarter we processed approximately 12,000 barrels per day of sour crude. And we anticipate running up to 19,000 barrels a day in our current configuration.

We remain committed to an active hedging program and work to manage our commodity risks both in our specialty products and our fuels product segments. Due to the volatility of the price of crude oil and the impact such volatility has had on our short term cash flows, we modified our crude -- our hedging strategy to allow us increased flexibility in the overall portion of input prices for specialty products that we may hedge, the time horizon that we may hedge, and the types of derivative instruments that we may use.

Specifically, we’ve targeted the use of derivative instruments, primarily combinations of options, to mitigate our exposures to changes in crude oil prices for up to 75% of our specialty products’ production as conditions warrant. Currently, we believe that a time horizon for hedging crude oil purchases ranging from three to nine months forward for our specialty products segment is appropriate given our general ability to manage our specialty products’ prices.

We continue to consider current crude oil prices, specialty products gross profit expectations, and liquidity as primary factors assessed to determine the volume, time horizon, and type of derivative instrument we may execute. We plan to continue to use derivative instruments to achieve our goal of limiting crude oil price volatility on our operations.

On December 31st, 2008, we had approximately 7,700 barrels per day of crude oil hedges and -- for the period January 2009 through March 2009 and are at the lower end of our targeted volume range of hedging for our specialty products segment. The forward market for crude oil is in a state of deep contango, which means that the future months’ crude oil is priced several dollars higher than the current month. This makes it very difficult for us to justify a significant amount of hedging, which would give us little economic benefit. We will continue to monitor the crude oil markets and resume crude oil hedging when it makes economic sense.

During the fourth quarter we settled a significant portion of our outstanding derivative instruments relating to 2009. We settled early approximately 450,000 barrels of 2009 hedges for a loss of $15.8 million. Based on crude oil pricing falling further since that time, we would have experienced additional losses.

During the last five fiscal quarters from October 2007 through the end of December 2008, we’ve experienced significant crude oil price volatility. As a result, we’ve realized derivative gains and losses in our specialty products segment over these quarters. The total net derivative loss for the period was $19.8 million. However, this includes the $15.8 million of losses that we pulled forward early from 2009. Based on these results, we believe that our hedging program has been effective at offsetting a large portion of volatility in our specialty products segment’s quarterly gross profits.

Another merit -- major area of focus for us is in maintaining compliance with our financial covenants pursuant to our credit agreements. As we’ve previously discussed, we’ve experienced challenging financial conditions, primarily attributable with historically high crude oil price volatility, the acquisition of Penreco, and the delay in cost overrun of the Shreveport refinery expansion project; all of which impacted our operations during 2008. Compliance with our financial covenants is measured quarterly based upon performance over the most recent four quarters. And, as of December 31st, 2008, we were in compliance with all financial covenants under our credit agreements. We’re continuing to take steps to ensure that we continue to meet the requirements of our credit agreements and currently believe that we will be in compliance for all future measurement dates.

I’d now like to give you a summary of our quarter-over-quarter sales volumes by segment. Total specialty products segment sales for the fourth quarter of 2008 was 21,848 barrels per day, compared to 21,674 barrels per day during the same period in 2007, which is an increase of only 0.8%. These volumes were positively impacted by the addition of Penreco, but was offset by the reduced production due to turnarounds at Princeton, Cotton Valley, and Shreveport. Our total fuels product segment sales volume for the fourth quarter of 2008 was 26,325 barrels per day, compared to 26,664 barrels per day during the same period in 2007, or 1.3% increase. Again, these -- these volumes were impacted by the downtime at Shreveport for the plant turnaround.

We announced on January 22nd, 2009 a quarterly distribution of $0.45 per unit for the quarter ended December 31st, 2008 on all outstanding units. The distribution was paid on February 13th to unit holders of record at close of business on February 3rd. I'd now like to turn the call over to Pat Murray for a review of our financial results.

Pat Murray

Thank you, Jennifer. Net income for the three months ended December 31st, 2008 was $18.5 million, compared to net income of $7.8 million for the same period in 2007. The partnership’s performance for the quarter ended December 31st, 2008, as compared to the same period in 2007, increased by $10.7 million due primarily to an increase of $53.2 million in gross profit offset by increased derivative losses and interest expense of $28.4 million and $8.3 million, respectively. The increase in gross profit was primarily due to the significant decline in crude oil prices during the fourth quarter of 2008 as compared to the rising crude oil price environment in the fourth quarter of 2007.

The increased derivative losses of $28.4 million is due primarily to the settlement of certain crude oil derivative instruments that experienced a significant decline in value as crude oil prices declined. As Jennifer mentioned, included in this amount were approximately $15.8 million of losses recognized from the early settlement of certain crude oil derivatives related to 2009.

The increased interest expense of $8.3 million was the result of higher debt levels. Net income for the 2008 year was $44.4 million, compared to net income of $82.9 million for 2007. The partnership’s performance for the 2008 fiscal year as compared to 2007 was impacted for reasons consistent with those covered for the fourth quarter.

We believe the non-GAAP measures of EBITDA, adjusted EBITDA, and distributable cash flow are important financial performance measures for the Partnership. EBITDA and adjusted EBITDA, as defined by the partnership’s credit agreements, were $44.2 million and $13.6 million, respectively for the fourth quarter as compared to $12.7 million and $8.0 million, respectively for the fourth quarter of 2007. The partnership’s distributable cash flow for the quarter ended December 31st, 2008 was $3.1 million as compared to $4.2 million for the same period in the prior year. Adjusted EBITDA for the fourth quarter compared to the same period in 2007 was positively impacted by increased specialty products segment gross profit as we previously discussed.

EBITDA and adjusted EBITDA for the 2008 fiscal year were $135.6 million and $128.1 million, respectively as compared to $100.2 -- $100.7 million and $104.3 million, respectively for 2007. The partnership’s distributable cash flow for 2008 was $94.5 million as compared to $87.7 million for 2007. We encourage investors to review the section of the earnings’ press release found on our Web site entitled, “Non-GAAP financial measures” and the attached tables for discussion and definitions of EBITDA, adjusted EBITDA, and distributable cash flow financial measures and reconciliation of these non-GAAP measures to the comparable GAAP measures.

Gross profit increased $53.2 million, or 190.2%, to $81.2 million for the quarter ended December 31st from $28.0 million for the same period in 2007. Gross profit by segment for the fourth quarter for specialty products and fuel products was $77.7 million and $3.5 million, respectively; compared to $12.3 million and $15.7 million, respectively for the same period in 2007. The $65.4 million increase in specialty products gross profit is primarily due to the significant decline in crude oil prices during the fourth quarter as compared to the rising crude oil price environment in the fourth quarter 2007. The $12.2 million decrease in fuel products segment gross profit is primarily due to narrowing crack spreads in the fourth quarter 2008 as compared to the fourth quarter in 2007, offset by increased derivative gains $11.7 million in the fourth quarter of 2008 as compared to the same quarter in the prior year.

Selling, general, and administrative expenses increased $1.1 million to $4.6 million for the fourth quarter from $3.5 million for the same period in 2007. This increase is primarily due to additional selling, general, and administrative expenses associated with the Penreco acquisition. Transportation expenses increased $4.8 million for the quarter ended December 31st, 2008 to $18 million as compared to $3 -- $13.2 million for the same period last year. This increase is primarily related to additional transportation expenses associated with the Penreco acquisition with no similar expenses in the comparable period in 2007.

Interest expense increased $8.3 million to $9.6 million for the quarter ended December 31st, 2008 from $1.2 million for the fourth quarter of 2007. This increase was primarily due to an increase in indebtedness as a result of a new a senior secured term loan facility to close on January 3rd, 2008 and includes a $385 million term loan partially used to finance the acquisition of Penreco, as well as increased borrowings on our revolver as a result of higher than expected capital expense used to complete the Shreveport refinery expansion project.

As of December 31st, 2008, total capitalization for the partnership consisted of Partners’ capital in the amount of $473.2 million and outstanding debt of $465.1 million, which is comprised of borrowings of $375.1 million under the term loan facility with an unamortized discount of $15.2 million, borrowings of $102.5 million under the revolver, and a long term capital lease obligation of $2.6 million.

The $73.6 million increase in Partner’s capital from December 31st, 2007 is primarily due to net income of $44.4 million and an increase in other comprehensive income of $95.2 million as a result of an increase in the fair market value of our derivative instruments offset by distributions to our partners of $66.1 million in 2008. On December 31st, 2008 we had availability on our revolving credit facility of $51.9 million based on $175.8 million borrowing base, $21.4 million and outstanding stand by letters of credit, and outstanding borrowings under the revolver of $102.5 million.

After paying our quarterly distribution of $14.8 million on February 13th, 2009, our current availability under the revolver is consistent with year-end. We believe we have sufficient cash flow from operations and borrowing capacity to meet our financial commitments, debt service obligations, contingencies, and anticipated capital expenditures. However, we are subject to business and operational risks that could materially adversely affect our cash flows.

Material decrease in our cash flow from operations or a significant sustained climb in crude oil prices would likely produce a corollary material adverse effect on our borrowing capacity under our revolving credit facility and, potentially, our ability to comply with the covenants under these credit facilities. Further substantial declines in crude oil prices, if sustained, may materially diminish our borrowing base which is based, in part, on the value of our crude oil inventory, which could ultimately result in a material reduction in our borrowing capacity under our revolver.

Now I’ll turn the call over to Bill Grube.

Bill Grube

Thank you, Pat and Jennifer. This concludes our remarks. We will now be happy to answer any questions you may have. Operator, could you please confirm if there are any questions?

Question-and-Answer Session

Operator

(Operator instructions) And our first question will come from the line of Darren Horowitz with Raymond James. Please proceed.

Darren Horowitz - Raymond James

Good morning. Thanks. Jennifer, first question for you, you mentioned in your prepared commentary that you had experienced the impact of delayed purchases on volumes at the end of the year. Can you give us some color as to how much you think was due strictly to customers managing their inventories for accounting purposes at the end of the year versus actual demand declines?

Jennifer Straumins

We think the majority of it was due to customers managing their inventories at the end of the year. We have seen quarter patterns pick up during the first part of the year.

Darren Horowitz - Raymond James

Okay. Switching gears over to working capital, what was the absolute amount that you locked in on the January 26 supply agreement for Shreveport’s feedstock?

Pat Murray

The absolute amount, it varies by -- by confirmation that we enter into. But the anticipation it would be up to about 15,000 barrels per day, crude oil to be supplied to the Shreveport refinery.

Darren Horowitz - Raymond James

Okay. So when you look at both supply agreements in aggregate how much -- how much feedstock have you essentially locked in?

Pat Murray

Well, essentially we’ve -- with the related party, take 15,000 from the January 26 agreement and approximately 8,000 on the Princeton agreement. So about 23,000 barrels per day.

Darren Horowitz - Raymond James

Okay. So from a macro perspective, and Pat you touched on this, when you are looking at how volatile crude oil prices have been and you’re looking at the impact from a collateral perspective that might diminish your borrowing capacity, is that something that concerns you? From our expectations it doesn’t seem like you have a healthy CapEx where you’re going to need that to access your revolver. Is it purely a situation where you’re just trying to balance, essentially, inventory versus working capital needs?

Pat Murray

Yes. I mean I think that’s right. And the situation for us is if you have a sudden decline in crude oil prices it can have a fairly immediate impact on your borrowing base, which, for us, is tested on a frequent basis. Ultimately, the business can recalibrate to lower crude oil prices because if crude oil price comes down then support that we might have to counter parties on crude oil supply, those things reduce as well. So you can manage through it. Lower absolute amounts of working capital. But it’s a sudden -- sudden decline that provides some short term vulnerability on working capital. But, again, if crude oil prices come down you should be increasing margins especially on the specialty products side. So you can maintain stability over time. But it’s a short term issue. That’s one reason that we have entered into these types of agreements that, I think, further enhance our liquidity.

Darren Horowitz - Raymond James

Sure. I appreciate the color. Thanks.

Operator

(Operator instructions) And our next question will come from the line of Dave Rosenfeld with Williams Jones. Please proceed.

Dave Rosenfeld - Williams Jones

Hi. Just a couple of questions. So Shreveport capacity was 37,000 in the fourth quarter? That’s how much you ran in the third -- fourth quarter?

Bill Grube

That was run rate. Yes.

Jennifer Straumins

That was the average over the quarter. There are periods during the quarter where we are running 50 plus thousand barrels a day and then we were down for part of the quarter due to the scheduled turnaround.

Dave Rosenfeld - Williams Jones

Okay. And how many of that were sour barrels?

Jennifer Straumins

About 16,000.

Dave Rosenfeld - Williams Jones

16,000? Jennifer, you said 16,000?

Jennifer Straumins

That’s what I said. Yes.

Dave Rosenfeld - Williams Jones

So 16,000 of the 37,000 were sour.

Jennifer Straumins

Well, 16,000, when we were running the 50,000, were sour.

Bill Grube

Only about 10,000 actually

Jennifer Straumins

So 10,000 on average.

Dave Rosenfeld - Williams Jones

Okay. So 10. Now, you’re running around 50,000 as of right now. And what percentage of that is our sour?

Jennifer Straumins

We’re running about 16,000 is sour right now at 50,000 barrels a day.

Dave Rosenfeld - Williams Jones

Okay. And the current differential on the sour is still around $5?

Jennifer Straumins

A little bit less than that, now.

Dave Rosenfeld - Williams Jones

It looked like, correct me if I’m wrong here, that the gross profit per barrel in the fourth quarter was around $18? Is that -- is that likely to continue? Has the price differentials essentially remained the same here so far in the first quarter?

Bill Grube

Our lube price differentials have narrowed significantly and our fuels differentials have stayed about the same, is about what I would say.

Dave Rosenfeld - Williams Jones

So your gross profit per barrel should come down in the first quarter?

Bill Grube

It should definitely come down in the first quarter.

Dave Rosenfeld - Williams Jones

And that’s as a result of customers just looking at crude prices and of recalibrating?

Jennifer Straumins

That’s correct.

Bill Grube

Basically, that’s correct.

Dave Rosenfeld - Williams Jones

And talk about what your planned CapEx is going to be for ’09?

Jennifer Straumins

We plan on spending about $20 million in CapEx, majority of that is environmental and maintenance.

Dave Rosenfeld - Williams Jones

Okay. And can you talk a little bit about industry capacity and more industry development related issues?

Jennifer Straumins

Well, we previously announced -- two of our paraffinic competitors did announce that they were ceasing operations and they have followed through on that. There’s one more Group I paraffinic refinery that -- Sun Tulsa and they said in the conference call in January that if they could not sell their refinery, they’ve been trying to do, but they plan to turn that plant into a terminal by the end of the year. So we would expect either to see that refinery purchased or to see another 8,000 barrels a day of capacity with the paraffinic market

Dave Rosenfeld - Williams Jones

So if Shreveport continues to run at 50,000, what would you guess your company-wide barrels per day would be in the first quarter?

Bill Grube

65,000 to 70,000.

Jennifer Straumins

Closer to the 70,000.

Dave Rosenfeld

Okay. And what percentage of your fuels is hedged in the first quarter?

Jennifer Straumins

About 60% to 75% depending on what those run rates actually are. We’ve published what all the -- the total barrels of hedges are --it’s about 23,000 barrels a day hedged.

Dave Rosenfeld - Williams Jones

And I can’t remember -- what’s this with the cracks that you hedged there? $10?

Jennifer Straumins

A little over $11.

Dave Rosenfeld - Williams Jones

A little over $11. And on hedged barrels right now in the current environment what would you guess the crack spread is?

Jennifer Straumins

Right around $12.

Dave Rosenfeld - Williams Jones

So it’s the same as your hedge?

Jennifer Straumins

More or less, yes.

Dave Rosenfeld - Williams Jones

And have you entered into any other long -- have you started to hedge any further now?

Jennifer Straumins

We have not hedged any further additional fuels products since our last publication. We expect -- we are required by our credit agreements to hedge two years out at a certain level. So we will be hedging shortly.

Dave Rosenfeld - Williams Jones

Okay. Okay. Great. Thanks.

Jennifer Straumins

Thank you.

Operator

And at this time I show no more questions in queue. I’d like to turn the call back over to Jennifer Straumins.

Jennifer Straumins

Thank you. This concludes our fourth quarter earnings call. Thank you for your participation this afternoon. And please note that this teleconference will be available for replay using the instructions contained in our press release. Thanks, everybody.

Operator

And thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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