Global Partners LP Management Discusses Q3 2012 Results - Earnings Call Transcript

Nov. 8.12 | About: Global Partners (GLP)

Global Partners LP (NYSE:GLP)

Q3 2012 Earnings Call

November 08, 2012 10:00 am ET

Executives

Edward J. Faneuil - Executive Vice President of Global GP LLC, Secretary of Global GP LLC and General Counsel of Global GP LLC

Eric Slifka - Chief Executive Officer of Global GP LLC, President of Global GP LLC and Director of Global GP LLC

Thomas J. Hollister - Chief Operating Officer of Global GP LLC- General Partner, Chief Financial Officer of Global GP LLC- General Partner and Director of Global GP Llc- General Partner

Analysts

Paul Jacob

Jerren Holder - Barclays Capital, Research Division

James Jampel

Operator

Good day, everyone, and welcome to the Global Partners Third Quarter 2012 Financial Results Conference Call. Today's call is being recorded. There will be an opportunity for questions at the end of the call. With us from Global Partners are President and Chief Executive Officer, Mr. Eric Slifka; Chief Operating Officer and Chief Financial Officer, Mr. Tom Hollister; Executive Vice President, Chief Accounting Officer and Co-Director of Mergers and Acquisitions, Mr. Charles Rudinsky; and Executive Vice President and General Counsel, Mr. Edward Faneuil.

At this time, I'd like to turn the call over to Mr. Faneuil for opening remarks. Please go ahead, sir.

Edward J. Faneuil

Good morning, everyone. Thank you for joining us. Let me remind everyone that during today’s call, we will be making forward-looking statements within the meaning of federal securities laws. These statements may include, but are not limited to, projections, beliefs, goals and estimates concerning the future financial and operational performance of Global Partners.

Estimates for Global Partners' future EBITDA are based on a number of assumptions regarding market conditions, including demand for petroleum and renewable fuels, weather, the level of market competition and the forward product pricing curve. Therefore, Global Partners can give no assurance that our future EBITDA will be as estimated. The actual performance for Global Partners may differ materially from those expressed or implied by any such forward-looking statements. In addition, such performance is subject to risk factors including, but not limited to, those described in Global Partners' filings with the Securities and Exchange Commission. Global Partners undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statement that may be made during today’s conference call.

With Regulation FD in effect, it is our policy that any material comments concerning future results of operations will be communicated through press releases, publicly announced conference calls or other means that will constitute public disclosure for purposes of Regulation FD.

Now please let me turn the call over to our President and Chief Executive Officer, Mr. Eric Slifka.

Eric Slifka

Thank you, Edward, and good morning, everyone. Before commenting on our results, let me express, on behalf of everyone at Global, our deep concern for our employees and the other residents of New York, New Jersey and Connecticut who were affected by Hurricane Sandy. As the cleanup work continues and the rebuilding of homes and businesses begins, we are helping to ensure that the fuel needs of first responders, other emergency personnel and the entire region are met as efficiently as possible. While the storm was devastating for many of our employees, friends and neighbors in the region, fortunately for Global, our facilities sustained no significant infrastructure damage and the facilities are operational, although the availability of supply to New York is tight. Our New England gas station sites are running on a business-as-usual basis. The cooperative spirit demonstrated by state, federal and industry officials remains critical as the area continues its recovery.

Turning now to our Q3 estimates. On a year-over-year basis, our third quarter performance was very strong. We sold more petroleum products in Q3, nearly 1.6 billion gallons, than any previous quarter in our history driven primarily by our Alliance acquisition, our growing crude oil business and our fuel supply and services agreement with Getty Realty. By segment, our Wholesale business accounted for 1.2 billion gallons complemented by $282 million gallons of volume in our Gasoline Distribution and Station Operations segment. From a financial perspective, net income, EBITDA and distributable cash flow all posted new third quarter highs for Global Partners. Net income improved from $1.9 million in Q3 of last year to $6.9 million, EBITDA increased from $18.7 million to $29.5 million and distributable cash flow grew from $8.6 million to $15 million.

As we discussed on our August earnings call, our third quarter results did not match the excellent results we achieved in the second quarter. Net income, EBITDA and distributable cash flow each declined about $11 million from the second quarter, largely reflecting the steep increase in gasoline prices from the end of the second quarter to the end of the third quarter. In one of the largest 90-day price moves ever, the August New York Harbor RBOB price for gasoline jumped $0.71 a gallon, or 26%, from $2.72 at the end of June to $3.43 at the end of September. At the pump, the average price, according to AAA Boston, didn't keep pace, increasing only $0.50 a gallon over the same period. As we have previously -- as we have said previously, in the Gasoline Distribution and Station Operations segment, we prefer a stable or declining price environment.

Moving now to our recent achievements. In the Bakken region, we continued to expand our crude logistics and gathering activities. As we announced a few weeks ago, Global has signed a purchase agreement to acquire a 60% membership interest in Basin Transload, which operates transloading facilities in Columbus and Beulah, North Dakota, with a combined rail loading capacity of 160,000 barrels per day. Total purchase price is approximately $80 million, and the transaction is expected to close by year end. By way of background, Basin's Columbus property is the site of our recently completed 100,000-barrel tank and loading facility. We have direct single-line haul service on CP from Columbus to our terminal in Albany, and from there, it's an easy barge trip to refineries along the East Cost. In addition, we are developing a 140,000-barrel tank and truck loading rack at Beulah, which is about 195 miles from Columbus. The Beulah terminal sits along the Burlington Northern Santa Fe Railroad with long-haul service to the West Coast and Gulf Coast markets. As part of our Bakken initiative, we are engaged in discussions to connect the Columbus and Beulah sites to gathering systems in North Dakota, a step that will further enhance the flexibility of the Basin assets.

In the third quarter, we completed the rail expansion at our Albany, New York terminal, expanding our capacity to receive and distribute crude and associate products from the mid-continent via rail from 55,000 barrels today to 160,000 barrels per day. We believe that we have the most efficient model to move crude east.

Crude oil shipments from the mid-continent to our Albany terminal continued to accelerate. A total of 59 unit trains were received at our Albany terminal in Q3, up from 45 in Q2. In addition, with rail expansion now completed, we are receiving 120 car unit trains in Albany versus 80 car unit trains previously. We also continue to expand our sales with East Coast refiners. The terminal was a major focus in our 2012 Investor Day last month in Albany, and we are delighted that so many analysts and institutional investors joined us for this event. I hope that the presentations and terminal tour enhanced your knowledge of our business, framed our accomplishments and highlighted our growth prospects.

Construction of our new Albany propane storage facility is under way. This location will be capable of storing up to 540,000 gallons and complements our Albany terminal. We expect the facility to be ready for operation in the first quarter.

As you may have read in this morning's earnings release, we are in the process of making a small tuck-in acquisition of 6 gasoline stations from Massachusetts-based Mutual Oil Company. Three of the stations are located in Massachusetts, with 1 in Connecticut, New Hampshire and Rhode Island. Post closing, we expect to run these sites as dealer or commission agent locations and thus receive rental income and the supply margin from the sites. The transaction is expected to close by year end. Agreements such as the one to acquire select sites from Mutual complement our purchase of Alliance Energy and the Mobil locations from ExxonMobil in 2010. These transactions demonstrate that we have an effective and efficient platform for growth through acquisition and organic projects. We continue to explore other opportunities to acquire retail gas operators and distributors.

Turning now to our distribution. Last month, the Board of Directors of our general partner approved an increase that raised our quarterly distribution by 1.4% to $0.5325 per unit, up $0.03 on an annualized basis from $2.10 to $2.13 per unit. The Board will continue to review the distribution on a quarter-by-quarter basis.

In summary, we continue to broaden our asset base and position the partnership to capitalize on the many exciting opportunities in the dynamic and rapidly changing energy marketplace.

Now let me turn the call over to Tom for his financial review. Tom?

Thomas J. Hollister

Thank you, Eric. As Eric mentioned, our year-over-year results were strong with records for third quarter net income, distributable cash flow and EBITDA. Given the acquisition of Alliance Energy in the first quarter and the overall expansion of our business lines, rather than comparing our performance year-over-year, I will primarily make financial comparisons to this year's second quarter.

Let me begin by describing the margin results in our reporting segments. As Eric noted, sharp increases in gasoline prices contributed to a decline of $10 million, or 23%, for the second quarter in the gasoline portion of our Gasoline Distribution and Station Operations segment. This segment consists primarily of the operations from our Mobil and Alliance acquisitions.

Within the same segment, the margin associated with rental income from our dealers and commission agents, as well as sales at our company-operated convenience stores was $18.6 million in the third quarter, level with the second quarter results. The results from these activities, as we have previously explained, should be relatively consistent from quarter-to-quarter.

In our Wholesale segment, the net product margin was $34.9 million, essentially flat from the second quarter's $34.7 million. Within the segment, however, improvements in crude oil margin results were offset by margin reductions in other products caused in part by continued backwardation in the gasoline forward market as well as lower ethanol margins.

In our Commercial segment, the net product margin increased 50% to -- 50%, $4.8 million from $3.2 million, in the second quarter despite declines in residual fuel volume and margins. The $1.6 million increase was driven by improved margins in our bunkering activities and regional and national expansions of our delivered transportation fuel business. Compared with the second quarter of this year, expenses were up approximately $3.1 million primarily due to increases in operating expenses associated with management of the Getty locations. Interest was $9.2 million. They're very similar to $9.1 million in the second quarter. Maintenance capital expenditures were $3.6 million in the quarter. Expansion capital expenditures of $7.5 million were concentrated in our Albany terminal expansion, our Columbus tank and loading facility and our propane facility under development.

The balance sheet as of September 30 shows dollar increases in accounts receivable and inventory, supported by increases in trade payables and working capital borrowings largely due to increases in prices of our oil products. We recently increased the capacity of our revolving credit facility by $100 million to $1.5 billion, further enhancing our financing flexibility.

As noted in this morning's news release, we are narrowing our full year 2012 EBITDA guidance to a range of $115 million to $130 million. The previous range was $110 million to $130 million. Our guidance is based on a number of assumptions regarding market conditions, including demand for petroleum products and renewable fuels, weather, credit markets and the forward pricing -- product pricing curve, which will influence our quarterly financial results from time to time.

In terms of the Basin transaction, it is our intention to a arrange a financing structure for the transaction that enables us to be as efficient as possible. We are currently evaluating a number of financing options. We expect the Basin acquisition to be accretive in the first full year of operation based on current operating and anticipated future performance of the assets and economic and market conditions.

With that, we are ready to take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Paul Jacob with Raymond James.

Paul Jacob

So quick question at the Beulah site. Could you talk a little bit about the downstream ability there? Has anything changed in terms of the opportunities on either the West or the Gulf Coast for terminaling? And if not, if you don't find anything that would present an attractive acquisition opportunity, do you see anything for JVs?

Eric Slifka

I'm sorry, what's the last part of the question?

Paul Jacob

If you don't see any straight-on acquisition opportunities, would you be looking at anything in terms of a joint venture?

Eric Slifka

I think the facility, I think, stands on its own. There are customers going through that facility currently. So we think it's a good site even if we weren't to expand with our own, what I'd say, a destination point. Our preference is we'd like to build out a system that has both origination and destination. But ultimately, what that looks like and how long that takes, we're just -- we're working towards it. But we've got to find the right transactions in order to get that. If it doesn't happen, that's fine because that site stands on its own.

Paul Jacob

Okay. So the volumes at that site already have a place to go?

Eric Slifka

Correct, and there is already slowly moving towards its third-party volume, third-party throughput contract, that kind of stuff.

Paul Jacob

Okay, perfect. And then could give us a little bit of color relating to that propane facility in Albany? How do you plan to use that to extend your distribution footprint in that region? And do you see any opportunities there to extend your presence in gas transportation?

Eric Slifka

Yes, I think in terms of propane, many of the retail home heating oil companies that we currently sell heating oil, too, are also in that propane business. So we look at that customer base as being very similar. We also think that it's an advantaged supply location. So we think we have very good sourcing capabilities to get product into that facility at a low price. And so we think we'll supply many other companies as well there.

Paul Jacob

Okay. And then on the 6 stations that you just acquired, could you give us a little bit of color? I mean, I know that you probably, for competitive reasons, don't want to outline the acquisition price, if that's even negotiated at this point. But is this going to be in line with what you've spent historically on a site-by-site basis? And what type of margins are you looking at there is it on a DBW [ph] basis and so forth?

Thomas J. Hollister

Paul, I don't want to quite -- it's Tom Hollister. I don't want to quite use the routine -- the word routine. But Alliance certainly was built over the years through acquisitions of this kind, and there are plenty of distributors and gasoline operators who from time to time are interested in selling. This is sort of a normal type of return opportunity. And the nice part of it is because we have the infrastructure in place, it can be tucked in quite naturally. We think these are attractive sites with upside.

Paul Jacob

Okay, perfect. And then the rental income, is that going to count in terms of the MLP structure?

Eric Slifka

Paul, we've been through this over the past -- most of it does. The real property rent is qualified. The personal property rent, which is a smaller portion, does not. So ballpark, most of it is qualified.

Paul Jacob

Okay. And then last question for me. Do you see any impact from Hurricane Sandy showing up in the fourth quarter that you think will be material to your earnings?

Eric Slifka

I mean, for us our facilities really sustained no significant damage. They've been operational. I think you'll see some movement maybe from different parts of our business. But on the whole, we don't see it happening, a large effect on the company.

Operator

[Operator Instructions] Our next question comes from Jerren Holder with Barclays Capital.

Jerren Holder - Barclays Capital, Research Division

Just to follow up on the Hurricane Sandy questions. I know you mentioned that there isn't a material impact on your facilities. But what about your customers' facilities and their ability to sort of receive supplies? I know there were a lot of power outages and whatnot, and you could see on the news that there was just like a lot of stations not being able to supply to their customers. Can you comment on that a bit?

Eric Slifka

Yes, I mean, I think every -- each facility has its own unique story, and some have been affected more than others. And so the best way to think about supply is it's a little bit of a balloon. It just takes time to get from one place to the other place. So I'll give you one specific example. In Inwood, there are 3 other facilities in that marketplace.

Thomas J. Hollister

Explain where Inwood is.

Eric Slifka

It's over on Long Island.

Thomas J. Hollister

Right.

Eric Slifka

And at that facility, there's 2 other facilities in the area. One has sustained some damage. It's closed. Rumors are 1 month, 3 months, 4 months, we don't really know, but that -- but what happens is that volume gets displaced and someone else then has to pick it up and throughput the volume. So for -- in our case, hopefully, we'll get some of that volume and we'll be able to throughput and supply the customers. But the reason you're really seeing the system not work perfectly is because supply has to move around and be handled in a slightly different manner. I think what's fortunate for us is our facilities came through this in a really, really good fashion, and we're positioned well to, as the market smooths itself out, to supply the market. I think our -- my team here, in terms of supply and logistics and terminal operations, has done an incredible job of managing the system and working 24/7 and getting any assets that might have been down for power reasons were up very quickly. So I'm thrilled with the response that we've been able to provide to the marketplace.

Operator

[Operator Instructions] Our next question comes from Lynn Chen [ph] with HITE.

James Jampel

It's actually James Jampel from HITE. You mentioned that you had -- at the Analyst Day that there were going to be approximately 24 unit trains in September. Is that what actually came through?

Thomas J. Hollister

It's a pretty good number, That's a pretty good number, James. I can't remember exactly. That's a pretty good number.

James Jampel

And what are we running today? What are you expecting for November?

Eric Slifka

I think -- yes, I mean -- James. So I think it's -- what we'd like to say is we continue to push more and more product through the asset as the efficiencies and as the system gets used to increasing volumes. We're going to push to maximize that facility as quickly as we can. But the other thing not to forget about is, we've gone from 80 car unit trains to 120. That also represent more volume as well, right? So it's not necessarily a 1:1 comparison, too.

James Jampel

But you could get it to 2 120 car unit trains a day?

Thomas J. Hollister

The goal is to do 2 a day, correct.

James Jampel

And what's a realistic time frame for that?

Thomas J. Hollister

As soon as possible. I mean, there's a lot of moving parts that are associated with that. So -- but we are increasing it as quickly as we can.

James Jampel

I see. And I noticed the omission of a -- no comment or reference to the 130 to 150 in normal markets estimate EBITDA from the Analyst Day for next year. And should we read anything into that?

Thomas J. Hollister

No.

James Jampel

So I assume you would update us if there were an update to that?

Thomas J. Hollister

Yes.

James Jampel

And how many unit trains a day are in that normal markets estimate?

Thomas J. Hollister

Yes, we're not breaking that stuff out, James. But I think just suffice it to say we're as interested in -- you are -- as you are in moving as many unit trains through that facility as is possible. I think the great news is, is the facility's positioned to do well. It's -- we think it's a low-cost provider to the marketplace. It's a lot of cars that will be going through that facility as it ramps up. And we're very excited about the prospects of that asset over time and growing its volume.

James Jampel

Now I guess looking at the wholesale gasoline market, it doesn't look to be backwardated today anyway. Would -- is that a normal -- you would consider a normalized condition?

Eric Slifka

Those markets come and go, right? So in contango or into backwardation, and -- I think if you could just take a look at the historicals on the products and figure out when they're in contango, when they're in backwardation, and I think that will give you the exact answer to your question.

Operator

[Operator Instructions] There are no further questions in queue at this time. I would like to turn the floor back over to Mr. Slifka for closing comments.

Eric Slifka

This concludes today's call. We look forward to updating you on our progress. Thanks, everybody, for joining us this morning, and have a good day.

Operator

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for participation.

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