Delek Logistics Partners LP (DKL) 2012 Q4 法說會逐字稿

Good morning, my name is Vanessa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Delek Logistics Partners LP earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

I would now like to turn the call over to Mr. Keith Johnson. Please go ahead, sir.

Thank you, Vanessa. Good morning. I would like to thank everyone for joining us today, and we are excited to host our first conference call and webcast to discuss Delek Logistics Partners' fourth-quarter and full-year 2012 results. Joining me on today's call will be Uzi Yemin, our Chairman and CEO; Assi Ginzburg, our CFO; Danny Norris, Vice President of Finance; and other members of our management team.

As a reminder, this conference call may contain forward-looking statements, as that term is defined under federal securities laws. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believe, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements. You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission, and in our latest earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise.

Today's call is being recorded, and will be available for replay beginning today, and ending June 6, 2013, by dialing 855-859-2056, with the confirmation ID number 98107477. An online replay may also be accessed for the next 90 days at the partnership's website at DelekLogistics.com.

As you may know, Delek Logistics commenced operations on November 7, 2012, upon successful completion of its initial public offering. Operations for the 3 months and 12 months ended December 31, 2012 include results from Delek Logistics Partners LP predecessor, up to November 7, 2012. Because the results presented from prior periods are not comparable, this earnings call will focus on the period beginning November 7, 2012 and ending December 31, 2012, which we refer to as the post-closing period. A reconciliation of the post-closing period to the full fourth-quarter results is provided in tables attached to our release.

Last night, we distributed a press release that provides a summary of our fourth-quarter and full-year 2012 results. This press release is available on our corporate website and through various news outlets. On today's call, Assi will begin with a few financial comments, and Danny will review our financial performance. Then Uzi will follow with a few closing strategic comments.

With that, I'll turn the call over to Assi.

Thank you, Keith. I'm excited to participate in my first earnings call as a CFO, and in the first earnings call of Delek Logistics. Delek Logistics has had a great start since its IPO on November 7, 2012. Both our DCF of $8.1 million and EBITDA of $10.2 million were ahead of expectations for this period. We paid our first cash dividend in February, and ended the period with a strong cash position.

Based on our strong performance, we currently expect to recommend to the Board of Directors of our general partner to increase the quarterly distribution to $0.385 per unit for the quarter ending March 31, 2013. This would represent a 2.7% increase from our MQD.

Now, I will turn the call over to Danny to walk through the financial results.

Thank you, Assi. Good morning, everyone. For the 55-day period from November 7, 2012 to December 31, 2012, Delek Logistics reported net income of $8.4 million, or $0.34 per common partner unit. Our first regular cash dividend of $5.5 million, or $0.224 per unit was paid last month. This amount, which was prorated for the 55-day period, corresponds to the minimum quarterly distribution of $0.375 cents per unit, or $1.50 per unit on an annualized basis. Revenues during the post-closing period were $111.2 million, and contribution margin was $11.3 million. Total operating expenses of $2.9 million and general and administrative expenses of $1.2 million were in line with expectations.

Now, I will spend a few minutes discussing our two reporting segments. Our pipeline and transportation segment includes the following assets. The Lion Pipeline System and the 600-mile SALA gathering system, which transport crude to Delek US's El Dorado, Arkansas refinery. Our East Texas crude logistics system provides crude to Delek US's Tyler, Texas refinery and also connects that refinery to Longview, Texas. In addition, this segment includes the 185-mile Paline pipeline, which transports crude south from Longview to the Gulf Coast, and is contracted to a third party. Also included is approximately 1.7 million barrels of ancillary crude oil storage.

For the 55-day period, this segment performed well, as it benefited from elevated throughput of 21,595 barrels per day in the SALA gathering system, which compares to 19,500 barrels per day included in the forecast provided in the prospectus filed November 1, 2012 and prorated for the 55-day period. During the post-closing period, volume on the Lion Pipeline System was 42,880 barrels per day, which as expected, was below minimum commitment levels, due to the continued suspension of crude oil deliveries from the Exxon North pipeline. This pipeline resumed deliveries again in early March 2013. We expect the combination of the resumption of this pipeline, along with improved third-party pipeline access to our Magnolia pipeline and the connection to the rail off-loading operation should allow us to exceed minimum volume commitments in the future.

Crude on the Paline pipeline was flowing south from Longview, Texas to the Gulf Coast during the post-closing period. Our east Texas crude logistics system volume was approximately 56,920 barrels per day during the 55-day period. As we discussed in the prospectus, we expect volumes transported on the East Texas system to decrease below the minimum volume commitment level of 35,000 barrels per day. This is expected to occur once a third-party pipeline is reconfigured to supply crude to Delek US's Tyler, Texas refinery during the second quarter of 2013.

Our second segment is wholesale marketing and terminalling. This segment includes our East Texas marketing agreement with Delek US's Tyler, Texas refinery. In addition, our West Texas wholesale marketing business that purchases refined products to sell to third parties is included. Our terminal operations include Big Sandy, Texas, as well as Memphis and Nashville, Tennessee. Performance in this segment benefited from a margin of $3.14 per barrel in West Texas, almost twice our historical margin. Prices have benefited from the demand for refined products in West Texas, as oil drilling activity has increased. Approximately 61,400 barrels per day of refined products were marketed under the East Texas marketing agreement, which was better than the 50,000 barrels per day included in the 55-day prorated forecast. This combination contributed to better than expected performance during this period, relative to our forecast.

As of December 31, 2012, Delek Logistics had a cash balance of $23.5 million, of which $6.3 million is owed to Delek US for working capital related to the IPO. Our total debt as of 12-31-2012 was $90 million. For the 55-day period, capital expenditures were $5.7 million, of which approximately $4.5 million were reimbursed under our omnibus agreement with Delek US. Maintenance capital expenditures of approximately $1.2 million for the 55-day period was below our expectations. Total capital expenditures for 2013 are expected to be $8.8 million, of which approximately $4.9 million will be reimbursed under our agreement with Delek US.

With that, I will turn the call over to Uzi for his closing comments.

Thank you, Danny. First, I would like to share with you how excited I am over our first call with DKL. It's great to be here with you this morning. Obviously, we are pleased to report strong results from Delek Logistics, since it started operation on November 7. We have unlocked the value of these assets and created a new platform that allows us more flexibility to take advantage of logistic opportunities in the marketplace.

Our relationship with our sponsor, Delek US, DK, creates the potential for additional growth through assets that may be available for drop down in the future. We are focused on our strategy of providing growth and value by generating stable cash flow through a combination of optimizing the existing asset base, making acquisitions, and realizing organic expansion opportunities. During the first quarter of 2013, we completed our Nettleton pipeline reversal project, as well as the pipeline connection for the rail offloading facility at Delek US El Dorado, Arkansas refinery. Finally, I would like to review existing growth opportunities provided through our relationship with our sponsor, Delek US. These include refined product terminals and crude oil storage facilities at Delek US refineries. In addition, logistics assets that are constructed by Delek US may be dropped down.

We believe that the combination of these assets has the potential to create $25 million to $30 million EBITDA, as assets are dropped down over the next two years, beginning in the second half of this year. These assets provide a solid foundation for future growth as we explore additional third-party opportunities.

With that, Vanessa, would you please open the call for questions?

(Operator Instructions)

Your first question comes from the line of Mark Reichman from Simmons.

Just wanted to ask, first of all, get a little -- shed a little more color on your drop-down strategy. How are you thinking about that, and as far as the timing, why wait until the second half of the year?

Thank you for your question; it's a great one. Let's start with the first part. Our strategy is to take this $25 million to $30 million and drop them down within the next 24 months. Obviously, there is a tremendous amount of economics between what is sitting at DK level and the development we can create at DKL. So, it will be a combination of our leverage situation, which obviously we have a better cash situation than we expected, and how accretive it should be to DKL. That's the strategy. We will not drop them down all at the same time.

To the second part of your question, why to wait, we feel that we still have growth inside DKL within our existing assets, the organic growth that exists right now. Outside Paline, which obviously is by the end of 2014. So, we want to create the stream, a sustainable growing of EBITDA from now through -- for the next two years, and by the end of these two years, Paline is obviously, the lease agreement is expiring, and it's [looming at us] to show additional growth in 2015.

So, we want to be consistent. We don't want to create too much noise and then quiet. We want to be very consistent. That's what we feel this vehicle is for.

Did I answer your question?

That's fair enough. And in the wholesale marketing internally, I could see the margin drove the performance there. In the pipeline and transportation segment, are you able to speak to contribution margin by system, versus your expectations during the fourth quarter?

Well, of course, we can do that. Assi, I don't know if you want to take this one?

If you look at the press release, we do show throughput by system in the press release. And we are showing the gathering system volume, and you can see those volumes were more than 21,000 barrels a day compared to 19,000 barrels a day in the forecast. So, you can calculate with $2.25 per barrel of fee, what can that be compared to the offering.

But how is OpEx by system? Pretty consistent with your expectations?

We are reporting OpEx. The answer is yes. As you can see, we are dead-on, on the OpEx, compared to the offering, on [one we gave you the S1], and we didn't see any material change from that. So, I can say that the answer is yes.

Okay, and then, is the $1.2 million for maintenance CapEx during the quarter, is that a pretty good run rate?

Fred, do you want to take that one?

It will vary based on the timing for the projects. We're doing tank work and still working on some additional pipeline projects. Probably -- maybe raise that to $2.5 million to $3 million.

$2.5 million to $3 million per quarter in 2013?

No, no, no, it's -- I'm sorry. $3 million is the cap on maintenance CapEx outside of API 653. No, we reported our budget amount for CapEx. Danny just reviewed that number. $8.8 million.

$8.8 million, right. That's what I had, yes. So, the $8.8 million is still a good number to use?

Yes, absolutely.

Okay, great. Thanks so much.

(Operator Instructions)

Your next question comes from the line of [Jarron Holder] from Barclays.

Looking at the Paline pipeline, is the intention to wait until the end of 2014 before re-signing that lease? Or is it possible that there's some type of early renegotiation before the end of the lease?

Well, it's a great question. And it depends how much appetite we have for risk. If we want a long-term five-, seven-, nine-years commitment, obviously we will need to compromise on economics. Right now, the differential between Longview barrels and the Gulf is around $10, $12. So, if we want to have -- if we bought, we can do that quickly. If we want to have long term and enjoy stable cash flow for longer term, then we need to wait.

We are still thinking about that internally, but that's the dilemma. And honestly, we feel that with the structure in Longview, and the things that we see in Longview, Longview is a great, great place to be to get cheap crude. So, we don't want to give too much value for expediting this negotiation.

Okay, and when the time comes, and I guess maybe you might be able to talk about it or not, given, like, what back spread is and your long-term view on what that spread could be, you said it was like $10 to $12 now, how do you split that up between the benefit that your customer will be getting, as well as the margining or fee that you would be able to charge? How do you guys think about that?

Well, again, we prefer -- we created this vehicle to be as stable as we can. So, we prefer to eliminate some of the noise and some of the fluctuation. That means that we see DKL enjoying very stable, long-term return on this asset, and eliminate some of the noise through other means, either through the customers or through the DK vehicle, and then selling that to the customers.

Okay, thank you.

Is that answering your question?

Yes.

(Operator Instructions)

At this time, there are no further questions.

Thank you, Vanessa. Obviously, I would like to thank each one of you on the call, and the investors that give us great confidence and are behind us since the launching of the IPO. I would like to thank my colleagues here and our employees for doing great job for this great start of our DKL vehicle. And also, I would like to thank, especially Assi, for joining the team as our new CFO, and Danny, first on the call. Thank you. Have a great day.

This does conclude today's conference call. Thank you for your participation. You may now disconnect.