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Northern Tier Energy LP (NYSE:NTI)

Q1 2013 Earnings Call

May 14, 2013 11:00 am ET

Executives

Maria Testani

Henry M. Kuchta - Co-Founder of Northern Tier Energy GP LLC, Chief Executive Officer of Northern Tier Energy GP LLC, President of Northern Tier Energy GP LLC, Director of Northern Tier Energy GP LLC and Member of Executive Committee

Chester J. Kuchta - Chief Operating Officer of Northern Tier Energy GP LLC and Vice President of Northern Tier Energy GP LLC

David Bonczek - Chief Financial Officer of Northern Tier Energy GP LLC, Principal Accounting Officer of Northern Tier Energy GP LLC and Vice President of Northern Tier Energy GP LLC

Analysts

Chi Chow - Macquarie Research

Jason Smith - BofA Merrill Lynch, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2013 Northern Tier Energy LP Earnings Conference Call. My name is Karen and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded. I'd like to turn the call over to Maria Testani, Director of Planning and Strategy. Please proceed.

Maria Testani

Thank you, Karen. Good morning, and welcome to Northern Tier Energy LP's 2013 first quarter earnings conference call. The slides that accompany this call can be found on our website, www.ntenergy.com.

On the call today is Hank Kuchta, our President and Chief Executive Officer; Chet Kuchta, our Chief Operating Officer; Dave Bonczek, our 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 the 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.

Henry M. Kuchta

Thanks, Maria, and thank you all for joining us today. I will begin with some brief highlights for the quarter and an update on the April turnaround activities and expansion project. Chet will discuss operating performance and market conditions, Dave will provide further details on the financial results for the quarter, and Maria will provide you with some key metric guidance for the second quarter of 2013. Near the end, I will make some closing remarks and then we will take your questions.

Yesterday, we reported strong first quarter results. In addition, we declared a cash distribution of $1.23 per unit. This is our third distribution since the completion of our initial public offering. Since the IPO, we have distributed $3.98 to our unitholders. In a moment, Dave will provide details on the calculation of available cash and the distribution for the first quarter.

Our first quarter 2013 operating income was $131.9 million, compared to $2.7 million for the first quarter of 2012. This increase in operating income was driven by the safe and reliable nature of our Refining operations and the strategic advantage our assets enjoy. Compared to the first quarter of 2012, we experienced an approximate 12% and 9% increase in barrels per day of throughput and refined product sales, respectively. The lower increase in sales when compared to throughput is due to the inventory build during the quarter, leading up to the turnaround in April.

During the first quarter of 2013, total throughput averaged 85,365 barrels per day compared to 76,004 barrels per day for the first quarter of 2012. The higher refinery throughput is primarily due to improved utilization of existing capacity.

Now moving to the April turnaround activity. The turnaround performed in the second quarter of 2013 marks the first full plant shutdown since Northern Tier Energy has owned the St. Paul Park refinery. A turnaround of this magnitude must be performed only once every 5 to 6 years. The last large scale turnaround performed at the refinery was in 2007 and the next one is expected to be performed in 2018. So although not an anomaly, these plant-wide turnarounds are not frequent and will only impact distributions every 5 to 6 years. The turnaround and expansion project have been completed, and we are currently operating at expanded rates. Despite extremely poor weather conditions, the work was completed safely with no loss time injuries. The weather, which included sleet and snow for most of the -- April did impact our projected worker productivity levels. One of the crew towers, along with the downstream units, started up on April 30. The second crew tower, which is being revamped for the expansion, started up on May 10. Maria will provide you with throughput projections for the second quarter later in our prepared remarks. Also, as we have stated in the past, we are still planning to complete a limited turnaround focused on the fluid catalytic cracking unit during the month of October.

Finally, I would like to turn your attention to Slide 3 and talk about our current improvement projects. I've already discussed the completion of our crew tower expansion. In addition, during the fourth quarter, as part of the fluid catalytic cracking turnaround, we intend to make a minimal investment, which will enhance the operating flexibility and resid processing in the FCC unit. The chart on the bottom of Slide 3 shows our yield improvement from black oil into higher-valued products after the completion of these various improvement projects. The black oil yield is expected to decrease by about 4.9% while the light product yield is expected to increase by 5.1%. In addition, we continue to make moderate investments to grow our capacity to transport crude by truck and to expand the retail network. Furthermore, the expansion of the retail network will contribute to further increasing expansion of our RIN generation. I will now turn the call over to Chet, who will further discuss our operating performance for the first quarter.

Chester J. Kuchta

Thank you, Hank. Our gross product margin per barrel throughput averaged $25.81 in the first quarter of 2013 compared to $17.71 in the first quarter of 2012. This 45.7% increase was driven by improved per barrel differentials for our crude cost, an improvement in the benchmark crack spread and an improvement in our gasoline and distillate pricing in the 2013 quarter. The Group 3-2-1 crack spread averaged $27.64 per barrel in the quarter ended March 31, 2013, as compared to $22.30 per barrel for the quarter ended March 31, 2012. On a 6-3-2-1 basis, the Group 3 market crack was $19.55 per barrel in the quarter ended March 31, 2013, as compared to $14.30 per barrel for the quarter ended March 31, 2012.

Operating expenses per barrel of throughput, excluding turnaround expenses, were $4.89 in the 2013 quarter compared to $4.53 in the 3 months ended March 31, 2012. The increase in operating expenses per barrel of throughput is primarily due to the inclusion of our crude trucking cost, which were previously a part of cost of sales when third parties were performing the transportation for us. These trucking costs are offset by lower crude cost. Also, the timing and scope of ongoing maintenance activities will impact operating expenses per barrel in any given quarter.

Turning to our Retail segment. We reported operating income of $0.6 million in the first quarter of 2013 compared to an operating loss of $0.4 million in the first quarter of 2012. This increase in operating income was primarily due to cost reduction efforts, primarily related to store operating cost. With that, I'll turn it over to Dave for further discussions of our quarterly financial results.

David Bonczek

Thanks, Chet. On a GAAP basis, we reported net income of $119.4 million for the first quarter of 2013 compared to a net loss of $193.6 million for the first quarter of 2012. Included in GAAP net income for either the 2013 or 2012 first quarters are impacts of our former contingent consideration arrangement, unrealized gains or losses on derivative activities and a loss on early extinguishment related to our hedges. Excluding these special items, first quarter 2013 adjusted net income was $108.2 million compared to our first quarter 2012 adjusted net income of $5.1 million. We also utilized adjusted EBITDA as a proxy for normalized operating results.

Adjusted EBITDA for the first quarter of 2013 was $156.6 million, an increase of $75 million compared to the first quarter 2012 adjusted EBITDA of $81.5 million. This increase is primarily due to favorable market crack spreads, favorable crude differentials and higher throughput rates in the first quarter of 2013.

Turning to Slide 4. We continue to maintain ample liquidity and minimum leverage in the company. We had $172.3 million in cash and cash equivalents as of March 31, 2013, and a net debt to last 12 months of adjusted EBITDA ratio of 0.1x, also as of March 31, 2013. Cash flow from operations was $41.5 million in the first quarter of 2013 or approximately $123 million if you exclude a net working capital build leading into our April turnaround. After reserves were established for capital spending and turnaround expenses, the cash available for distribution to unitholders was $113.2 million or $1.23 per unit. This distribution will be paid on May 30 to unitholders of record as of May 23.

As Hank noted, this is our third quarterly distribution since becoming a publicly traded partnership at the end of July 2012. The sum of these 3 distributions totaled $3.98 per unit. The amount of each quarter's distribution will vary based on our operating and investing cash flow during any respective quarter. Seasonal market changes are typical and expected given the industry in which we operate. Also, the level of our throughput may be impacted by our maintenance and turnaround schedules. Hank discussed our spring turnaround, which involved a full plant shutdown, and Maria will discuss the resulting impact on our projected throughput for Q2. We intend to partially mitigated the impact of the lower throughput by limiting cash reserves in Q2 for turnaround and expansion capital spending. Beyond Q2, these reserves will be reestablished to cover required cash commitments. So as we have said in the past, quarterly distribution will not be stable and will vary as a direct result of variations and certain factors, including fluctuations in the prices of oil, other feed stocks, refined product prices, capital spending and any other cash reserves deemed 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 first quarter of 2013, we incurred realized losses from derivative activities of $17.4 million on 504,000 barrels of gasoline production, and 761,000 barrels of distillate production.

Going forward, and as you can see on Slide 5, we have 1.5 million and 2.3 million barrels hedged of gasoline and distillate production for 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 U.S. Gulf Coast. 90% of our hedged diesel barrels are against U.S. Gulf Coast, while the remainder is against Group 3. Some of these barrels are hedged at crack against Western Canadian Select, while the remainder is hedged at cracks against WTI. You'll see more details in the footnote on Slide 5. We currently don't have any plans to enter into additional cracks per hedges. However, we may enter into contracts when we determine that it makes economic sense. At this time, I'll turn the call back to Maria to provide you with Q2 2013 key metric guidance for modeling purposes.

Maria Testani

Thank you, Dave. You can find our updated key metric guidance for the second quarter of 2013 on Slide 6. I would like to highlight a few of these key metrics on that slide.

For the Refining segment, we project throughput at the St. Paul Park refinery of between 55,000 and 60,000 barrels per day. Refined product sales that are produced by the St. Paul Park refinery of between 60,000 and 65,000 barrels per day, and total refined product sales of 65,000 and 70,000 barrels per day. Please note that some of the products that we sold during this quarter were bought directly on the open market due to the refinery being shut down for the turnaround. Therefore, we will not capture a material gross margin spread on those products. In addition, these estimates for refined products sold do not include blended barrels of ethanol and bio diesel. We project direct operating expenses per barrel of throughput, not including turnaround expenses, of $7.25 per barrel. And we will not make a reserve for turnaround during Q2 given the lower throughput. The higher OpEx per barrel projection versus historical levels is due to the lower throughput during the second quarter, coupled with steady fixed cost levels.

Total company-wide capital expenditures are expected to be $39 million, of which $6 million is attributable to our wastewater treatment plant and $18 million is attributable to expansion capital. The expansion portion of the capital spending will be funded with cash on hand or our revolving credit facility, and will not impact the cash available for distribution in Q2 2013. We will begin to replenish the cash on hand or repay the revolver with incremental EBITDA from the expansion projects in Q3.

Dave noted that our hedging positions, which are listed on Slide 5, please note that these positions are in markets outside of our market and therefore, we are subject to basis risk, as it relates to our local cost of crude versus WTI and our product prices as they relate to the respected hedge market.

Finally, we have disclosed a normalized or pro forma quarterly throughput OpEx per barrel and turnaround reserve. These values are a representation that assumes the turnaround and expansion projects had been completed prior to April 1, 2013. Throughput would have been between 91,000 and 96,000 barrels a day of crude oil and other feedstock. OpEx per barrel will have been between $4.25 and $4.75, and we would have established a turnaround reserve of between $5 million and $10 million for the quarter. I will now turn the call back to Hank for closing remarks.

Henry M. Kuchta

Thanks, Maria. Our first 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 and protecting our competitive position on our refined products. 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 loyal SuperAmerica and SuperMoms customers. I would also like to take a moment to thank our employees for their continued dedication to the company. Their hard work enabled us to successfully complete our first plant-wide turnaround at the refinery, and most importantly, was done in a safe manner. We will continue to provide our investors with access to the favorable, mid-continent crack spread and cost advantage crude through quarterly cash distributions, while managing our liquidity with the same diligence we had since the inception of our company. This concludes our prepared remarks, and we are now ready to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] First question comes from the line of Chi Chow, Macquarie Capital.

Chi Chow - Macquarie Research

I guess, you reported about $10 million of turnaround expense in the first quarter, I'm just wondering if that was leading up to the April turnaround, and then do you have guidance for the maintenance turnaround expenses in the second quarter?

David Bonczek

Yes, you're referring to expense, Chi, as opposed to the reserve [indiscernible] the same number in Q1. But yes, that was mainly spending leading up to the full April turnaround. Obviously, there's a lot of planning and cost incurred before actually entering into the turnaround. We had given guidance in the past or even in our S1, that the full turnaround expense for 2013 would approximate, call it, $60 million. We will feel a bit of an expansion in there, probably 10% or so just because of some of the productivity issues we had with the weather. But again, the spending, or the expense itself does not directly impact the distribution. This is where we smooth it out via the turnaround reserve. And as I and Maria mentioned, because we got -- the productivity did extend the turnaround for a few days and lowered the throughput projections for Q2, we are not going to make a reserve for turnaround in Q2. But going forward, we may need to run that $10 million reserve, whatever it may be, we haven't given guidance yet into 2014 for a period of time.

Chi Chow - Macquarie Research

Okay, great. And, Dave, did you mention that you're going to forgo the maintenance CapEx? I think it's both the turnaround reserve and the maintenance CapEx you're foregoing, right, in the second quarter?

David Bonczek

Yes, it wasn't the maintenance CapEx. What we had said -- so the Maintenance CapEx will reduce the distribution in Q2. And so that number is roughly around $20 million, $21 million as you can see on Slide 6.

Maria Testani

It's maintenance and wastewater treatment, Chi.

David Bonczek

Right. And in terms of the improvement capital, we said we're going to basically use cash in the balance sheet, at least initially for the spend. And then as we deem necessary, given our liquidity, if we feel we need to replenish that cash on the balance sheet or pay off the revolver, if we decide to use that, we will do that with the EBITDA generated from the improvement project. Now we will see some EBITDA generation in Q2 as a result of the expansion, however, we've decided to start deferring that cash replenishment until beginning of Q3.

Chi Chow - Macquarie Research

Okay, great. Okay, secondly, Bakken and Canadian crude spreads, they look like they narrowed really significantly at the back half of the first quarter. Were you buying crude ratably through that period or did you defer purchases due to the turnaround in April?

Chester J. Kuchta

Yes, Chi, we did -- we certainly bought a lot less crude for delivery during the month of April because we didn't run or we didn't plan to run a very small amount. So we did buy some and -- but for the most part, that April land [ph] crude had to be either deferred, pushed out or not purchased. So in order to smooth things out, going forward, because of the Canadian lag, you can't just buy 0 for a whole month, because when we start up our -- we starve with any Canadian crude that we find quite economic most months. So we did buy some, but for the most part, no, we don't buy April.

Chi Chow - Macquarie Research

Okay, great. Did the differential variance there, the volatility, does that cause you to change your crude slate in anyway? And what are your thoughts on long-term differentials on Bakken and Canadian on spreads? And I'll leave it there.

David Bonczek

Yes, it certainly does, and we react to it immediately as the differentials move. I want to say -- we didn't approach a market where heavies were so expensive that we didn't buy any. We do have that optionality. You're right, in the back end of the first quarter that the differentials did get quite strong. We've seen them come off recently as the ARB has somewhat collapsed from over $15 per barrel on Brent TI to today below $8. Luckily, as we've pretty much forecasted, as that ARB collapsed, the differentials on Bakken and Syn came off similarly, not as much as the ARB, but it certainly came off $4 to $5 a barrel. As we look short-term to medium-term, we see this relative strength in WTI and relative weakness on Brent on the TI side of things, we obviously have the pipelines moving oil from West Texas down to the Gulf, as well as a lot of discussions around BP Whiting [ph] running light sweet crude in the near term and soon to be heavy crude. We see different estimates on when they're going to start up on their heavy slate. So I can't really comment on that other than the curve suggest they're going to be running heavy crude in the third or fourth quarter, but I can't tell you for certain. And longer term, we continue really with the same story, which is we almost don't care about the ARB because we think the ARB will move and it moves down, dips will come off as they have, and when it moves out, the dips will strengthen, but so will the product crack. So I think it's been pretty consistent and it appears it will continue to do that going forward.

Operator

Next question comes from the line of Jason Smith from Bank of America.

Jason Smith - BofA Merrill Lynch, Research Division

Just a follow-up on Chi's last question. Could you provide some color around just the actual slate in the first quarter? I'm thinking mix of Syncrude, Bakken and heavy Canadian? And then also how we should think about that and how that's going to be impacted by the turnaround in the second quarter should the percentages be the same or is there -- and are you going to shift one way or the other because of the turnaround?

Henry M. Kuchta

I'll touch on the slate and then Chet can talk about going forward. So for the first quarter, we ran 22,000 barrels of heavy, meaning Western Canadian; 19,000 barrels per day of Canadian Syncrude; and 42,000 barrels per day of North Dakota light.

Chester J. Kuchta

Yes, and going forward, obviously, the month of April we're down, but we started up our refinery on sweet slate so we'll run a little bit less sour in the second quarter than a typical quarter as a percentage basis. But really, moving forward from today, really we're running our standard heavy diet, which is 25% to 30%, and the economics are favorable to do that. We will, with our expansion, that will be filled up with light sweet crude either MDL or synthetic or other Canadian sweet grades, depending on the various economics of those grades.

Jason Smith - BofA Merrill Lynch, Research Division

Okay. And you guys have historically said, I think, that you can run anywhere from 15 to 30 day of heavy Canadian, what's -- can you remind us what's the threshold, what's the differential you need between Bakken and Canadian to basically ramp up to 30 or to go down to 15?

David Bonczek

Well, I'm not sure we want to give out exact numbers, because that's commercially sensitive and we don't want to forgo our position. But it's safe to say that heavy Canadian to Bakken -- when heavy Canadian to Bakken was more than $20 a barrel, it tends to favor that. And I say tends because the other variable there you have to look at the clean product crack spread, as well as the heavy oil or fuel oil crack spread. And heavy crude making in our plant, 20% bottoms, obviously, it's very dependent on what we're receiving as a netback from making ash fall. And that market is as volatile as any of the market. So it's a somewhat complicated equation, but it's fair to say, we've been in a heavy crude maximum mode over the course of recent history.

Jason Smith - BofA Merrill Lynch, Research Division

And one last one. Hank, just your thoughts on M&A. Are you guys seeing any assets on the market that you could potentially be interested in? I know you've kind of, in the last few months, talked about wanting to stay in the mid-cont, is that still the case or would you be willing to look outside the mid-cont, and I'll leave it there.

Henry M. Kuchta

Yes, I would say that we're always going to be interested primarily on the mid-continent area. We are looking at the opportunities that are very early in there in the timeline, I'd call it, for actually completing something. So there's nothing really to report on and -- but we do continue to look for additional assets.

Operator

[Operator Instructions] The next question we have comes from the line of David Rothchild [ph] from Raymond James.

Unknown Analyst

I'm new, just starting to follow you folks as a company. So bear with me, these are some pretty basic questions. On your business between the Refining and the store business, what percentage of sales comes from Refining versus your -- the SuperAmerica?

David Bonczek

Yes, I mean, sales, I don't know if that's -- is relevant of a metric given the commodity nature of -- especially the Refining side.

Unknown Analyst

Well, or cash flow or whatever will be a relevant.

David Bonczek

Yes, yes, so EBITDA. From an EBITDA standpoint, kind of benchmark, you can see in our prior filings. But EBITDA throws off a steady $20 million plus of EBITDA in any given year. But obviously, it brings more than just the EBITDA generation. It provides an outlet for our gasoline at the refinery. It allows the refinery to run more ratably. And as we build that retail network and we're able to step out of the wholesale market where pricing is much more volatile.

Unknown Analyst

So of the EBITDA passes from the SuperAmerica or 25%, 10%?

David Bonczek

No, it's $20 million on $700 million for 2012...

Unknown Analyst

Okay. So it's a real small amount comes from here.

David Bonczek

It's a small amount. But again, it brings much more than -- it provides an outlet for our gasoline.

Unknown Analyst

Do you -- your gasoline, is it 100% sold to your own stores?

David Bonczek

No, about 50%, 60%.

Unknown Analyst

Okay, 50% to 60%. Do you guys own the entire SuperAmerica brand, are you a franchise for a bigger company and you just have the Minnesota-Wisconsin operations?

David Bonczek

No, no. We own the brand and we have 166 of our company-owned stores at the end of March 31, 2013. And we also have franchisees, about 70 stores.

Operator

We have no further questions at this time, so I'd like to turn the call back over to Maria Testani for closing remarks.

Maria Testani

That concludes our call today. Thank you, everyone, for joining us this morning. Please feel free to call me in the office if you have any additional questions. Thanks.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.

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