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Executives

Maria Testani – Director-Planning & Strategy

Hank Kuchta – President, Chief Executive Officer

David Bonczek – Chief Financial Officer, Vice President

Chet Kuchta – Chief Operating Officer, Vice President

Rex Butcher – Vice President, Commercial

Analysts

Chi Chow – Macquarie Capital

Jerren Holder – Barclays Capital, Inc.

Glenn Petersen – GRP Trading

Northern Tier Energy LP (NTI) Q4 2012 Earnings Call March 14, 2013 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2012 Northern Tier Energy LP Earnings Conference Call. My name is Ayesha, and I will be your coordinator for today’s call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Maria Testani, Director of Planning and Strategy. You may proceed, ma’am.

Maria Testani

Thank you, Ayesha. Good morning and welcome to Northern Tier Energy LP fourth quarter and full year 2012 earnings conference call. The slides that accompany this call can be found on our website www.ntenergy.com. On the call today are Hank Kuchta, President and Chief Executive Officer; and David Bonczek, Chief Financial Officer as well as other members of management.

Please read the Safe Harbor statement you will find on Slide 1. It is a reminder that we will be making forward-looking statements during the presentation and during the question-and-answer session. Actual results may differ materially from what we expect today and factors that could cause actual results to differ are included here as well as in our filings with the Securities and Exchange Commission.

I will now turn the call over to Hank for opening remarks.

Hank Kuchta

Thanks, Maria, and thank you all for joining us today. I’ll begin with some brief highlights for the quarter and the full year. I will also discuss operating performance and market conditions for the quarter. Dave will then provide further details on our financial results for the quarter and the full year. Following our financial results, Maria will provide some key metric guidance for you for the first quarter of 2013. Then, after a few closing remarks, we will take questions.

Yesterday, we reported strong fourth quarter results and record 2012 financial performance. In addition, on February 11, we declared a cash distribution of $1.27 per unit as a result of our fourth quarter operating performance. This was our second distribution since the completion of our initial public offering. Since our IPO, we have distributed $2.75 to our unit holders. Dave will provide details on the calculation of available cash and the distribution for the fourth quarter.

Our fourth quarter 2012 operating income was $144.2 million compared to $75.5 million for the fourth quarter of 2011. This increase in operating income was driven by the safe and reliable nature of our refining operations and the strategic advantage our assets enjoyed. We experienced an approximate 8% increase in throughput in Refined product sales compared to the fourth quarter of 2011. During the fourth quarter of 2012, total throughput averaged 90,265 barrels per day compared to 83,335 barrels per day for the fourth quarter of 2011. The higher refinery throughput was primarily due to improved productivity at the St. Paul Park refinery.

Our gross product margin per barrel of throughput averaged $24.49 in the fourth quarter of 2012 compared to $14.16 in the fourth quarter of 2011. This increase was driven by improved crude differentials, more favorable market crack spreads and stronger asphalt pricing during the fourth quarter of 2012. Of course it’s rare to have all variables to show an increase from quarter-to-quarter and this period was no exception, the positive variables were partially offset by less favorable gasoline basis.

Group 3 3-2-1 crack spread averaged $28.39 per barrel in the quarter ended December 31, 2012 as compared to $20.32 per barrel for the quarter ending December 31, 2011. On a 6-3-2-1 basis, the Group 3 market crack was $21.89 per barrel in the fourth quarter of 2012 as compared to $16.39 per barrel for fourth quarter 2011.

Operating expenses per barrel of throughput excluding turnaround expenses increased to $4.43 in 2012 fourth quarter from $4.25 in 2011. The increase in operating expenses per barrel of throughput was primarily due to cost related to environmental compliance projects at our refinery's wastewater treatment plan, partially offset by decreases in natural gas prices. The strong operating results in our Refining segment were partially offset by our crack spread derivative program, which was put in place in connection with the 2010 acquisition. Dave will provide further details on our derivative program.

Turning to our Retail segment, we reported operating income of $3.5 million in fourth quarter 2012 compared to operating income of $6.8 million in 2011. This decrease in operating income was primarily due to a reduction in fuel margins per gallon partially offset by higher fuel volumes. For the full year of 2012, consolidated operating income was $571 million compared to $422.6 million in 2011. This increase was mostly due to the 10.7% increase in Refining segment revenue which is attributable to higher sales volumes and higher average market prices for refined products.

Total refinery throughput increased to 83,851 barrels per day from 81,150 barrels per day in 2011 and gross product margin per barrel increased to $29.62 from $20.11 in 2011. I’d like to briefly mention the February 7 announcement of our crude expansion project which is highlighted on Slide 5. The project will expand St. Paul Park’s crude throughput by approximately 10%. The expansion will increase our processing capability of Bakken crude principally through modifications to the number two crude unit.

The project will cost approximately $29 million which we intend to fund with our revolving credit facility. We expect the project to be accretive to EBITDA and cash available for distribution by Q1 2014. Using conservative crack estimates, we project approximately $36 million in incremental annual EBITDA.

Also in 2013, we plan to continue to invest in our trucking operation to buy crude directly from the well head for delivery into the refinery. This will decrease both our trucking transportation cost and pipeline fees. In addition, our Board of Directors have approved the installation of ancillary equipment related to upgrading the value of our fuel product stream.

The final topic I’d like to discuss is our 2013 turnaround activities. As you know, 2013 will be a major turnaround year for us. During April, we will shut down the refinery for approximately 25 days. We will fulfill all of our supply commitments some of which will be supplied by drawing on inventory build during the first quarter. While we are in turnaround during April, we intend to complete the crude expansion project that I previously mentioned.

Our 2013 turnaround schedule also includes an October partial plant turnaround focusing on fluid catalytic cracking unit. This unit turnaround will last for the majority of October.

With that, I will turn things over to Dave Bonczek for further discussion of our quarterly financial results.

David Bonczek

Thanks, Hank. On a GAAP basis, we reported net income of $84.5 million for the fourth quarter of 2012 compared to net income of $292.7 million for the fourth quarter of 2011. Included in net income prior to the 2012 or 2011 fourth quarters are impacts of our former contingent consideration arrangement, unrealized gains on derivative activities, and a loss on the early extinguishment related to the refinancing of our 2017 Senior Secured Notes.

Excluding these special items, fourth quarter 2012 adjusted net income was $99.1 million compared to the fourth quarter 2011 adjusted net loss of $18.1 million. For the full year, we reported GAAP net income of $197.6 million in 2012 and $28.3 million in 2011. Utilized adjusted EBITDA as a proxy for normalized operating results, adjusted EBITDA for the fourth quarter of 2012 was $162 million, an increase of $95 million compared to the fourth quarter 2011 adjusted EBITDA of $67 million. This increase primarily due to favorable market crack spreads, favorable crude differentials and higher throughput rates in the fourth quarter of 2012. For the full year 2012, we realized adjusted EBITDA of $740 million compared to $431 million in 2011.

Turning to Slide 3, we maintain ample liquidity and minimum leverage in the company with $273 million in cash and cash equivalents as of December 31, 2012 and the total gross debt to adjusted EBITDA ratio of 0.4 times also as of December 31, 2012. Cash from operations was $309 million for the full year 2012 or $441 million excluding impacts relating to our IPO. The cash provided in the 2012 period relates primarily to the strength of the Refining segment operating results.

After reserves were established for capital expenditures and turnaround and after paying $26 million for changes in working capital requirements, the cash available for distribution to unit holders was $116.7 million or $1.27 per unit. This distribution was paid on February 28 to unit holders of record as of February 21.

Our total unit holder return since our IPO is 92% through the end of 2012. Including the Q4 distribution, our total unit holder return since our IPO is 126% through February 28. As Hank noted, this is our second distribution since becoming a publicly traded partnership at the end of July. The amount of our quarterly distributions will vary based on our operating cash flow during any respective quarter. Specifically, the fourth quarter distribution was affected by lower market prices for our products and higher feedstock costs when compared to the third quarter distribution.

These seasonal market changes are typical, and expected given the industry in which we operate. Our quarterly distribution will not be stable and will vary as a direct result of variations and certain factors including fluctuations in the prices of crude oil, other feedstocks, refined product prices, capital expenditures, reserves or payments based on changes in working capital requirements, and any other cash reserves being necessary and appropriate by the Board of Directors of our general partner. Unlike most publicly traded partnerships, we do not have a minimum quarterly distribution.

Regarding our derivative program, for the fourth quarter of 2012, we incurred realized losses from derivative activities of $37.6 million on 2.3 million barrels of gasoline production and 1.4 billion barrels of distillate production. Going forward and as you can see on Slide 4, we have 2 million and 3 million barrels of hedged for gasoline and distillate production respectively in 2013 at a weighted average strike price of $19.28 per barrel.

30% of our hedged gasoline barrels are against NYMEX RBOB while the remainder is against Gulf Coast. 90% of our hedged diesel barrels are against Gulf Coast, while the remainder is against Group 3. Some of these barrels are hedged at cracks against Western Canadian Select while the remainder is hedged at cracks against WTI. You will see more details in the footnote on Slide 4.

We currently don't have plans to hedge more than 20% of our production going forward. We will enter into hedge contracts when we determine that it makes economic sense.

At this time, I'll turn the call over to Maria to provide you with Q1 2013 key metric guidance for modeling purposes.

Maria Testani

Thank you, Dave. You can find our updated key metric guidance for the first quarter of 2013 on Slide 6. For the Refining segment, we project throughput at the St. Paul Park refinery of between 80,000 and 85,000 barrels per day; Refined product sales of between 75,000 and 80,000 barrels per day; direct operating expenses per barrel of throughput not including turnaround expenses of $4.85; and a turnaround reserve of $10 million.

I would also like to point out as we did on our last earnings call that we are still in the shorter month and it is typical to see a seasonal weakening in basis for our light products relative to the benchmark. With respect to retail, we are projecting we will sell 72 million gallons of gasoline at a $0.16 gross margin. We project we will sell 80 million of merchandise with a 25.5% gross margin. Retail direct operating expenses are projected to be $29 million.

In terms of company wide items, SG&A is projected to be $22 million; total D&A is projected to be $10 million; cash interest expense is expected to be $5.1 million; taxes are projected to be $0.5 million; and capital expenditures are expected to be $31.5 million, of which $4 million is attributable to our wastewater treatment plans and $20.5 million is attributable to expansion capital. The expansion portion of capital spending will be funded with our revolving credit facility and will not impact the cash available for distribution in Q1 2013.

Dave noted that our hedging positions are listed on Slide 4. Please note that these positions are markets outside of our market and therefore we are subject to basic risks as it relates to our local cost of crude versus WTI and our product prices as they relate to the respective hedge market.

The last topic I want to touch on is the recent news around refiners meeting obligation related to renewable fuel standard. There is a concern that the rising price of ethanol rents will negatively impact refiner earnings. Our rent obligations are partially mitigated due to the level of our ethanol blending and due to carryover of some rents from the prior year.

However, we do anticipate that we will need to acquire somewhere between $25 million to $35 million additional rents due to blend wall limitation. Our view at this point is that the refined product market prices will expand to a level to mitigate much of the rising rent prices we are seeing. While we are monitoring this, we do not see this as a significant headwind specific to our business in 2013.

I will now turn the call back to Hank for closing remarks.

Hank Kuchta

Thanks, Maria. Our fourth quarter results yet again demonstrate the strategic nature of our business and the differentiated performance of our assets. We remain focused on enhancing our crude sourcing advantage, protecting our competitive position on the refined products and improving the efficiency with which we operate.

We can only accomplish our goals if we continue to reinvest in our business to maintain a safe and reliable operation and to provide a compelling value proposition to our customers. We will continue to provide our investors with access to our favorable midcontinent crack spreads and cost advantage crude through quarterly cash distributions while managing our liquidity with the same focus and diligence we have had since the inception of our company.

Lastly, I want to remind you that our business is seasonal and cyclical and our company is structured as a variable distribution master limited partnership with no minimum quarterly distribution. Therefore, it is important that you all remember that our distributions per unit will vary from quarter to quarter.

This concludes our prepared remarks and we are now ready to take your question.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Chi Chow with Macquarie Capital. You may proceed.

Chi Chow – Macquarie Capital

Great. Thanks. Good morning. Want to ask you about the working capital impact line there in that figures in the cash available for distribution. Can you talk about the policy of including that impact and how do you determine the level of the working capital adjustment?

David Bonczek

Yeah, I will take that one Chi, its Dave. I don’t want to use the word policy but you do see back in Q3 as well that we included some working capital in the Q3 distribution. And what we’ve been saying all along is that we would attempt to payout permanent decreases in working capital to the extent they would not negatively impact our liquidity in the following quarters. So what we saw in Q3 and Q4 is, we did have the ability to increase the level of trade credit that utilized on our crude supply, and as a result it did throw out some cash because of the decrease in the working capital. And as you know, we came in to our IPO with a very strong liquidity position. And we felt just to be consistent what we’re saying that we can pay out this decrease in the working capital to the unit holders.

But as we’re looking at 2013, we do realize and you guys are also having a hard time modeling this type of activities, but we do see the volatile nature that working capital can have on our cash position. So activities like turnaround planning as well as the level of the trade credits that I mentioned in any given month can materially impact the working capital levels. And you are going to see this in Q1.

As you know, we have our April turnaround and we’re going to build a significant level of inventory in the month of March leading into that turnaround. So we’re going to make an investment in cash and if we were doing what we did in Q3 and Q4, this would potentially lower the distribution for Q1. So we don’t want to do that if we do have the liquidity to manage this through this period.

So what we’d like to do in 2013, we typically see the working capital level out during a year. So there might be an increase in one quarter, a decrease in the other. And I think going forward, on a perspective basis, we would like to exclude the movements in working capital from the cash available for distribution calculation. And only if we have a need to reserve some cash to manage through a difficult period may we withhold something, but at this point again Chi, it’s probably our desire to not impact the distribution going forward for these types of activities.

Chi Chow – Macquarie Capital

Okay. So we should just assume basically zero impact here in 2013?

David Bonczek

Yes.

Chi Chow – Macquarie Capital

Okay, thanks.

David Bonczek

But again our Board does have the discretion to change that.

Chi Chow – Macquarie Capital

Okay, okay. Thanks for that. And then Hank, you talked about the trucking assets I guess trucking assets that you are looking at bringing online in the Bakken. Are trucking cost lower than pipeline? I’m just wondering is there some efficiency gains on trucking from the filed versus sourcing Bakken and Clearbrook via pipeline?

Hank Kuchta

Remember the trucking operation in the Bakken between the well head and the receiving sites are whether its rail or pipeline are already out there. That’s the principal method of taking crude from the actual well heads to a receiving location. And then it’s either pumped or railed. So that aspect of this part of our business no matter what, so we are trying to do is we are taking something that has done very expensive recently because of the activity in the Bakken and trying to take on that operation ourselves which will end up reducing our costs.

Chi Chow – Macquarie Capital

Oh I see. Okay. Are you still seeing the price disconnect between the fuel pricing of Bakken versus what shows about Clearbrook?

Hank Kuchta

Well the way we see it is that the rail activity going out to the coast is what’s detouring ultimately the differentials there. And we do expect that they are going to come in line and we’ve seen that recently. So yes, our pipeline cost are always going to be our cheapest route, but the ability to for instance we guaranteed a discount, we are not necessarily going to see that if the rail activity out to the coast is justified by the spreads between TIM brands.

Chi Chow – Macquarie Capital

Okay. Great. Thanks for that. And Maria, thanks for the RIN guidance, appreciate that.

Maria Testani

Sure. No problem.

Operator

Your next question comes from the line of Jerren Holder with Barclays. You may proceed.

Jerren Holder – Barclays Capital, Inc.

Good morning. Going back to the renewable fuels credit, so should we expect slightly lower margins in the near term and higher margins later as these costs are ultimately passed on to the consumer?

Hank Kuchta

I will let Rex Butcher who handles our clean product to answer that.

Rex Butcher

What we are seeing is I mean effectively you’ve already seen in how the NYMEX has been trading. You’ve seen the volatility in the NYMEX gasoline price. You’ve also seen the volatility in the absolute RIN price as well. It got as high as $1.10 a gallon per RIN and its trading right around $0.75 today. So there is quite a bit of volatility and I do think you will see movements in both directions for a while and that will stabilize overtime.

Jerren Holder – Barclays Capital, Inc.

Given the ramp up and moving crude by rail especially of the Bakken to the West Coast, East Coast, South Coast markets, I guess can you talk a bit about how much that affects your sourcing cost? I guess given that your sourcing book in the Bakken and then Canada, how that all comes into play and what you see going forward as this all shapes up.

Hank Kuchta

Chet, why don't you take that question?

Chet Kuchta

Sure, Hank. As Hank mentioned earlier, regarding the rail pricing versus Clearbrook and [NBL], we have seen the increase in rail business affecting the Clearbrook pricing. We historically released the last year or so we were seeing a discount at Clearbrook market versus the rail market with the increase in rail business. Those prices have come closer together.

And again some of things we're looking at doing, what we are doing is our trucking business in North Dakota to recover some of the costs that are currently that will pay in one way or another whether we put more into a pipe or into a railcar. We also looking to expand our historical shipping capacity on the Enbridge North Dakota system where we historically also we’re paying incremental tariffs on top of post to tariffs. So those are our strategies we can affect what the West Coast or East Coast or Gulf Coast people are doing. They are going to buy crude, the most profitable crude they can buy which some of it currently is Bakken.

And of course the WTI spread is justifying that. Longer term, if you look at the full curve in 3Q and 4Q, those spreads don’t justify some of these movements that we would expect to differentials on Bakken to decrease to spread that oil real flow to those coasts because it has to flow to the coast. So depending on what that NTI is doing and would greatly affect the differentials on Bakken.

Jerren Holder – Barclays Capital, Inc.

Okay. And last one, on the capital improvement project, have you guys already done the necessary permitting to meet those expansion.

Hank Kuchta

Yes, we have and as I said, we expect the construction to be completed here in next month. So…

Jerren Holder – Barclays Capital, Inc.

Okay. Thank you very much.

Operator

Your next question comes from the line of Glenn Petersen with GRP Trading. You may proceed.

Glenn Petersen – GRP Trading

Hi, guys. Just wondering how to model the increase in production throughput, do we take that on like 84K per day capacity or how do you see that.

Hank Kuchta

It would be on the 84, but just realize we mentioned we were going to fund this project with our revolving credit facility. So essentially any of that incremental volume in that EBITDA is going to go towards that debt service throughout the rest of this year. And therefore, you still get the pick up and that increment starting after Q1 2014.

Glenn Petersen – GRP Trading

Right. Thanks. Appreciate that.

Operator

You have a follow-up question coming from the line of Chi Chow with Macquarie Capital. You may proceed.

Chi Chow – Macquarie Capital

Yeah. So Rex you talked about the match and volatility between the NYMEX gasoline price and RIN pricing. Do you see that same dynamic occurring with gasoline prices also gas prices in your markets?

Rex Butcher

Yes.

Chi Chow – Macquarie Capital

Okay. So you really that the RIN pricing is being pushed through not only to NYMEX but also in your margins.

Rex Butcher

Yes, it will ultimately be priced through overtime. Can I say that you are covering all of it today, no, but it will be priced overtime?

Chi Chow – Macquarie Capital

Okay, great. Thanks, Rex.

Operator

Your next question comes from the line of (inaudible) with Credit Suisse. You may proceed.

Unidentified Analyst

Thanks. Just quick modeling questions on your fourth quarter crude slip, can you share what the split was between the light and the heavy?

Hank Kuchta

You ran 25,000 barrels per day of heavy, 18,000 barrels per day of Canadian Syncrude and 44,000 barrels per day of North Dakota light.

Unidentified Analyst

Thanks. And just to confirm your CDU expansion that's not going to be – the cost is not going to be taken out of distributable cash flow right?

David Bonczek

The capital spending will not impact the cash flow right, and like I said we’ll draw on the revolver and then we'll service that debt as we realize the incremental EBITDA, so you should start seeing the benefit of the project in late Q1 2014.

Unidentified Analyst

Okay, thank you.

Operator

Your next question comes from the line of (inaudible) with Morgan Stanley. You may proceed.

Unidentified Analyst

Hi, just going back to the crude slide one second, I mean given what's going on with the rail bringing Bakken out to pad 1 and pad 5, would you be or do you have capability to kind of replace that with kind of more Syncrude or more Canadian Sweet?

Hank Kuchta

Well, we certainly, we’ll always pick up the most economic crude for our facility. And we have the ability to run approximately 30% heavy, we typically balance between Bakken and Syn. Syn is more attractive. We will incrementally replace NDL and vice versa. So we will respond to the markets that we are [confronted] with.

Unidentified Analyst

Thank you.

Operator

There are no further questions in queue at this time. I would now like to turn the call over to Ms. Maria Testani for closing remarks. You may proceed.

Maria Testani

This concludes our call today. Thank you everyone for joining us this morning and please feel free to call me in the office if you have any additional question. Thanks.

Operator

Thank you for your participation on today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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