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Northern Tier Energy LP (NYSE:NTI)

Q3 2013 Earnings Call

November 12, 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

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Faisel Khan - Citigroup Inc, Research Division

Matthew Blair - Macquarie Research

Operator

Good day, ladies and gentlemen, and welcome to the Quarter 3 2013 Northern Tier Energy LP Earnings Conference Call. My name is Cathy and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Maria Testani, Director of Planning and Strategy. Please proceed, ma'am.

Maria Testani

Thank you, Cathy. Good morning, and welcome to Northern Tier Energy LP's 2013 third quarter earnings conference call. The slides that supplement 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 factors that cause actual results to differ are included here, as well as in our filings with the Securities and Exchange Commission.

As a reminder, this call is being recorded and can be replayed by going to the Investors section of our website and clicking on the Calendar of Events or Presentations subsection. 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.

First, I would like to address the press releases made public this morning by us and Western Refining. The releases announced that Western has purchased 100% of the general partner and approximately 38% of the equity in Northern Tier Energy. We welcome Western Refining as a new strategic partner and investor who is committed, as we are, to Northern Tier Energy's long-term success.

We also like to thank ACON and TPG for their support over the past 3 years, and we now look forward to working together with Western to maximize value for all of our stakeholders.

We will not, however, be answering questions on this call in regards to this announcement. Rather, we will be focusing our statements solely on our quarterly operating results. In a moment, I will begin with some brief highlights for the quarter. Then, Chet will discuss operating performance and market conditions. Next, Dave will provide details on our financial results for the quarter. And lastly, Maria will provide some key metric guidance for the fourth quarter.

Last evening, we reported our third quarter results and declared our quarterly distribution of $0.31 per unit. This distribution was affected by unplanned downtime at the refinery and narrowing market conditions at the end of the quarter, both of which I will go into greater on detail soon.

Looking forward to 2014, we believe that the refinery will be able to take advantage of the capital improvements made this year to capture improving crude fundamentals and strong distillate cracks. We also think it's worth mentioning that this will be our fourth distribution since the completion of our IPO, for a total of $458 million or just under $5 per unit. Later in our prepared remarks, Dave will provide details on the calculation of available cash and the distribution for the third quarter.

As you can see on Slide 2, our third quarter 2013 operating income was $27 million, compared to $199 million for the third quarter of 2012. This decrease in operating income, when compared to the third quarter of 2012, was primarily the result of a 61% increase in the 6-3-2-1 Group 3 crack, a 7% decrease in throughput and production and lower local market prices for our refined products. The decrease in throughput was due to unplanned downtime at the refinery, primarily as a result of the fire in our larger crude tower. This caused us to run at reduced rate for approximately 3 weeks. As we noted in our last press release, the cost of the repairs and cleanup of this fire amounted to less than $3 million and was completed by October 14.

During the third quarter of 2013, total throughput averaged approximately 81,000 barrels per day, compared to 87,000 barrels per day for the third quarter of 2012.

Sales averaged 96,000 barrels per day in the third quarter of 2013, compared to 94,000 barrels per day in third quarter 2012. Please note that a portion of the sales volumes this quarter include products that were bought on the open market during the unplanned downtime to fulfill commitments to our customers.

Moving on to more recent activities, Northern Tier successfully completed the turnaround on its catalytic cracking unit during the month of October. Our team completed this work on schedule and with 0 lost-time injuries. During the turnaround, we were able to complete a previously announced discretionary project that expanded the operating flexibility of the wet gas compressor. We will also complete our previously announced slurry stripper project, but not quite in time for the end of the year, but in the first quarter 2014.

Looking to 2014, these 2 projects, along with the crude expansion project completed in the spring, will allow us to increase the light products yield and reduce the heavy products yield of the refinery. Please see Slide 3 for more information on our enhanced yield rates.

Finally, the trucking business continues to operate as planned, with the ability to source 20,000 barrels per day at the wellhead. We continue to realize pipeline cost savings as a result of this business. I will now turn the call over to Chet, who will further discuss our operating performance for the quarter.

Chester J. Kuchta

Thank you, Hank. As you can see on Slide 4, our gross product margin per barrel throughput averaged $11.84 in the third quarter of 2013, compared to $36.69 in the 2012 third quarter. This decrease was driven primarily by tighter crude spreads and more modest market crack and less favorable local market pricing for gasoline and asphalt.

The Group 3, 3-2-1 crack spread averaged $17.55 per barrel in the third quarter of 2013, as compared to $34.36 per barrel in the 2012 quarter.

On a 6-3-2-1 basis, the Group 3 market crack was $10.86 per barrel in the third quarter of 2013, compared to $27.53 per barrel in the prior year's quarter.

The tighter crude spreads were due to Syncrude upgrader downtime and excessive rains in Canada, both of which occurred in the month of June. Due to our transit lag, we saw these spreads impact our third quarter results. However, we expect our fourth quarter of 2013 and first quarter of 2014 profitability to benefit from the wider market crude differentials that began in mid-September.

Operating expenses per barrel of throughput, excluding turnaround expenses, were $5.16 in the 2013 quarter, compared to $4.54 in the 3 months ended September 30, 2012. The increase in operating expenses per barrel of throughput is primarily due to lower throughput levels and repair work at the refinery associated mainly with the fire which occurred in September.

Turning to our retail segment, we reported another solid quarter with operating income of $4.4 million in the third quarter of 2013, compared to operating income of $1.2 million in the third quarter of 2012. This improvement is primarily attributable to improved fuel margins.

We continue to look to grow the retail segment through obtaining more franchisees and expanding our SuperAmerica-operated stores. As stated in the past, we believe this strategy will allow the Refining segment to realize more favorable gasoline pricing relative to the Group 3 benchmark, especially in the shoulder months and allow us to further increase our ethanol-blended percentage, which will limit our exposure to RINs pricing.

I will close with a quick update on RINs. We expect to spend between $10 million and $20 million total on RINs for 2013. This is below our previous estimate and is due to the recent drop in the price of RINs and lower projected throughput due to our unplanned downtime.

With that, I'll turn it over to Dave Bonczek for further discussions of our quarterly financial results.

David Bonczek

Thanks, Chet. On a GAAP basis, we reported net income of $27.2 million for the third quarter of 2013, compared to net income of $61.1 million in the third quarter of 2012.

On a non-GAAP basis, adjusted EBITDA for the third quarter of 2013 was approximately $51 million, compared to third quarter 2012 adjusted EBITDA of approximately $250 million. As we've previously noted, these decreases are primarily due to lower throughput rates caused by our unplanned downtime, in addition to a weaker benchmark crack, narrower crude spreads and less favorable local market pricing. As we've stated earlier, we did complete our FCC turnaround and our strategic initiatives at the plant and we are now operating at economically justifiable rates, unaffected by any downtime.

Our throughput for the first half of November was approximately 95,000 barrels per day, Maria will provide further guidance on Q4 in a moment.

As you can see on Slide 2, we continue to maintain ample liquidity and minimum leverage in the company. We had approximately $127 million in cash on hand and total liquidity of $264 million, as of September 30, 2013. Our leverage ratio, measured by total debt to last 12 months adjusted EBITDA, is at 0.6x. Cash flow from operations was $98.5 million in the third quarter of 2013.

After deducting working capital impacts, maintenance CapEx and reserves from this cash from operations, cash available for distribution amounted to approximately $28 million for this quarter, which equates to a $0.31 distribution per unit. Slide 5 shows the detailed calculation of cash available for distribution. As Hank noted, this is our fourth distribution since becoming a publicly traded partnership at the end of July 2012, aggregating a return of just under $5 per unit.

As we have said in the past, we are a variable-rate MLP, and quarterly distribution will vary as a direct result of variations and certain factors, including fluctuations in throughput, the prices of crude oil and other feedstocks, refined product prices, capital expenditures and 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 third quarter of 2013, we incurred realized gains from derivative activities of approximately $800,000 on 504,000 barrels of gasoline production and 761,000 barrels of distillate production.

Going forward, and as you can see on Slide 6, we have a remaining 504,000 and 761,000 barrels hedged of 2013 gasoline and distillate production, respectively, at a weighted average strike price of $19.28 per barrel. We currently don't have plans to enter into additional crack spread hedges. However, we may enter into hedge contracts when we determine that it makes economic sense.

And now, I'll turn the call over to Maria to provide you with the Q4 2013 key metric guidance for modeling purposes.

Maria Testani

Thank you, Dave. You can find our updated key metric guidance for the third quarter of 2013 on Slide 7. I would like to highlight a few key metrics on that slide. For the refining segment, we project throughput at the St. Paul Park refinery of between 80,000 and 85,000 barrels per day and sales of between 82,500 and 87,500 barrels per day. These estimates for refined products sold do not include blended barrels of ethanol and biodiesel. In addition, please be aware that our sales volumes do include gasoline that was bought and sold on the open market during our catalytic cracking turnaround and, therefore, we do not expect to make a significant margin on these barrels.

We project direct operating expenses per barrel of throughput, not including turnaround expenses, of between $5.25 and $5.75 per barrel. The higher operating expenses per barrel of throughput can be attributed to our lower throughput during our FCC turnaround and unplanned downtime and the added cost, approximately $2 million, from repair works done at the refinery in October.

Cash reserve for turnaround funding is projected to be between $5 million and $10 million. Total companywide capital expenditures are expected to be $20 million, of which, $8 million is attributable to our wastewater treatment plant and $4 million is attributable to discretionary capital. Actual discretionary capital during the quarter will not affect the distribution. However, we will continue to replenish some of the cash previously used to fund the refinery expansion, as we did in the third quarter. We expect this cash reserve to be between $5 million and $10 million. The actual cash reserves turnaround and discretionary capital funding will depend on our overall liquidity levels in the respective quarter.

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

Henry M. Kuchta

Thanks, Maria. Although we had some unplanned downtime in the third quarter, we are happy with the ability of our team to restore operations to normal in a safe and timely manner. The refinery is now running at expanded rates, with the highest distillate yield in the history of the same St. Paul Park refinery.

The work we did in 2013 will allow us to remain nimble in 2014 and take advantage of market opportunities as they present themselves.

I would again like to thank our employees for their hard work as it continues to translate into enhanced value for our unitholders. This concludes our prepared remarks. And we are now ready to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Arjun Murti.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Hank, I think you said you didn't want to take questions on Western, but maybe I can -- if I can ask it in the context of NTI. Your previous owners were obviously private equity folks. You now have an operating refining company as the general partner and controlling owner. How will or how might the operations of NTI change going forward? Your CapEx plans, they're obviously on the other side of the United States, from a north/south perspective, but are there synergies that NTI could benefit from going forward?

Henry M. Kuchta

Well, I think you have to leave it to your imagination a little bit what the benefits can be from the 2 companies put together. They have some refineries in a C-Corp. We're a variable MLP. Who knows? Maybe there's some benefit there. I think, as Jeff said in his remarks, that -- I think he used the word long-term, that there are benefits for both companies and growth for both companies. So I think some of these things are, maybe, obvious when you're thinking about it. But it takes time to put them together, and we'll see what happens.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

And it sounds like, for the time being, your current plans are, as they are; current management team strategy, all that kind of stuff, is going to continue on?

Henry M. Kuchta

Yes. We were -- will remain a -- the company, as it's been run. There haven't been any changes to the senior management and Western has asked us to run it as we have been.

Operator

The next question comes from Faisel Khan.

Faisel Khan - Citigroup Inc, Research Division

Faisel from Citigroup. Just a question on the -- on your crude gathering strategy in the Bakken, can you give us a little more granularity in terms of where you're at with the total amount of volumes gathered out of the basin and what you are seeing in terms of savings, in terms of hauling that crude to the -- to your facility?

Chester J. Kuchta

Yes, sure. This is, Chet. I'll respond to that. We're moving between 15,000 to 20,000 barrels at the wellhead. And again, if you recall from our earlier presentations, our goal was to get these trucking costs down from, arguably, in the $5-plus region to below $3. And most recent months, we've been down around this $3-a-barrel cost doing it ourselves. So we've achieved that goal. On the benefits, certainly on the pipeline, we're not paying incremental tariffs on those barrels that we are moving under our own name. Now recently, that pipe has gone slack again. So when it goes slack, obviously, the incremental tariffs aren't there. So we're not making that additional savings. But that pipe will fill up again as the market changes. So the advantages are in our cost of delivering the crude and we're quite happy with that.

Faisel Khan - Citigroup Inc, Research Division

Okay. So is there -- I think you had plans to get up to, was it 30 a day? Or was it -- are you kind of maxed out at 20?

Chester J. Kuchta

No, we were -- our target was to get to 20 and we're not quite there yet and further growth beyond that will require an expansion of the trucking fleet, and we haven't made that commitment yet.

Faisel Khan - Citigroup Inc, Research Division

Okay. Understood. Last question for me. In terms of basis for gasoline and distillate in your selling region, what are you guys seeing versus the benchmark we're sort of used to looking, such as Chicago or the Gulf Coast? What are we seeing right now in terms of gasoline and distillate for the basis spreads?

Chester J. Kuchta

Yes, I mean, obviously, we're market takers. And historically, on average, this number is positive across the entire year, with the exception of the shoulder months. We have seen this year, with higher inventory levels in our market. That number can go negative even in the non-shoulder months as well. So clearly, quarter-over-quarter, that impacted our capture rate versus the group.

Maria Testani

Yes, Faisel, it's versus Group 3 not versus Chicago or the Gulf.

Faisel Khan - Citigroup Inc, Research Division

Sure. And what are you guys seeing right now in the market? Because it's hard to see sort of the St. Paul market, but what are you guys seeing right now in terms of basis for gasoline versus Group 3?

Chester J. Kuchta

We don't give out specific numbers on our gasoline basis.

Operator

[Operator Instructions] The next question comes from the line of Matthew Blair.

Matthew Blair - Macquarie Research

We saw that Enbridge had some apportionments on their mainline system in November, and just curious how it may affect Northern Tier. Are you going to be limited in your WCS and Syncrude deliveries in the fourth quarter?

Henry M. Kuchta

No, we will not be. That -- those apportionments can work a few different ways. In this case, what you've seen is a dramatic fall off in differentials and, obviously, we're going to benefit from those. So we'll be running our optimized slate for the fourth quarter, unless if something very unusual happens that isn't -- that hasn't yet occurred on the pipeline. So the events that occurred were the apportionment, but were also the demand which started, arguably, with our refinery when we had our fire but then some bigger events in Chicago and a large event up in Canada at one of the co-op refineries. So those things all kind of came together and have pushed, if you will, the market lower.

Matthew Blair - Macquarie Research

Right. Right. Okay. And then can you remind me, I think one of the reasons that you decided to expand St. Paul Park was because there was too much conversion capacity relative to the crude capacity of the refinery, so is that all equal now given your crude expansion? Or is there still a little bit of a mismatch there?

Henry M. Kuchta

It is -- it's -- there's a much closer match. They're still a -- we still have some downstream unit capacity, excess, if you will. But it is not substantial and we don't plan, currently, to do any further expansions on the crude towers.

Matthew Blair - Macquarie Research

Okay. And then last question for Maria, so the total planned CapEx in the fourth quarter is $20 million. How much of that is going to affect the 4Q distribution? Is it going to be $16 million, the maintenance plus the wastewater treatment?

Maria Testani

Yes, that's correct, $16 million.

Operator

The next question comes from the line of Chris Stamas [ph].

Unknown Analyst

Yes. Last time I looked, Flint Hills was going down for major turnaround in 2014, is that affecting any of your planning, going forward, in 2014?

Henry M. Kuchta

We don't -- we're not -- I'm not aware of that and our plans are we don't have any major turnarounds next year. So we will be running at our capacities -- economic capacities that we can. So we just have some small-unit turnarounds next year and the big turnaround cycle for us was 2013, and that shouldn't occur again for 5 years.

Unknown Analyst

Do you guys share the pipeline from Clearbrook, I think it is?

Henry M. Kuchta

The refinery from Clearbrook to our refinery down into Minneapolis, yes, is shared between Flint Hills and ourselves.

Chester J. Kuchta

But remember, that's a pipeline system, there's 4 pipelines.

Unknown Analyst

Sorry?

Chester J. Kuchta

There are 4 pipelines in the Minnesota Pipeline system that move crude. It's not just one pipe.

Unknown Analyst

Right. Well, if they're taking less, perhaps, during a turnaround, could you take more?

Henry M. Kuchta

No.

Operator

I would now like to turn the call over to Maria for closing remarks.

Maria Testani

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

Operator

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

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