Delek Logistics Partners LP (DKL) 2013 Q1 法說會逐字稿

Good morning. My name is Marcy, 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). Thank you. Mr. Johnson, you may begin your conference.

Thank you, Marcy. Good morning. I would like to thank everyone for joining us on this webcast to discuss Delek Logistics Partners first-quarter 2013 financial results. Joining me on today's call will be Uzi Yemin, our General Partner's Chairman and CEO; Assi Ginzburg, our CFO; Danny Norris, VP 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 believes, 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 August 8, 2013, by dialing 855-859-2056 with a confirmation ID number 41638349. 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 prior to November 7, 2012, include results from assets and entities comprising Delek Logistics Partners LP Predecessor. Because management believes that results presented from the prior period are not comparable, this earnings call will focus on results for the first quarter of 2013.

Last night we distributed a press release that provides a summary of our first-quarter 2013 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 offer a few closing strategic remarks. With that, I'll turn the call over to Assi.

Thank you, Keith, and good morning. Delek Logistics performed extremely well during the first quarter. Our DCF of $13.2 million was 23% ahead of our IPO forecast. EBITDA was $15.5 million, ahead of forecast as well.

Based on our strong performance we are pleased to be able to increase our distribution by 2.7% over our MQD to $0.385 per unit for the quarter ended March 31, 2013. In addition, we plan to recommend to our Board of Directors to increase our distribution by an additional 2.6% to $0.395 cents per unit for the second quarter of 2013.

And now I will turn the call over to Danny to discuss the financial results.

Thank you, Assi. For the first quarter 2013, Delek Logistics reported net income of $12.2 million or $0.50 per limited partner unit. Revenues during the first quarter were $210.9 million, and contribution margin was $17.2 million. Total operating expenses of $5.9 million were higher than expected due to $1 million of expenses associated with the crude oil release at our Magnolia station in March 2013.

Pursuant to the Omnibus Agreement with Delek US, the Partnership's costs related to this crude oil release are not expected to exceed $1 million. General and administrative expenses of $1.7 million were below expectations.

Now I will spend a few minutes discussing our two reporting segments. For the first quarter 2013, our pipeline and transportation segment performed well, as it benefited from elevated throughput of 22,130 barrels per day in the SALA Gathering System, which compares to 19,500 barrels per day included in the IPO forecast.

During Q1 of 2013, volume on the Lion pipeline system was approximately 45,000 barrels per day. As expected, this was below minimum commitment levels of 46,000 per day due to the continued suspension of crude oil deliveries from the Exxon North pipeline. This pipeline resumed deliveries again in March 2013.

During the second quarter of 2013, improved third-party pipeline access through our Magnolia pipeline began in May, and the connection to the rail offloading operation at Delek US's El Dorado refinery has also been completed. This should allow us to exceed minimum volume commitments on the Lion pipeline system.

Our East Texas crude logistics system delivered approximately 51,150 barrels per day during the quarter. As anticipated, volumes transported on the East Texas system decreased below the minimum volume of commitment level of 35,000 barrels per day in April when a third-party pipeline was reconfigured to supply crude to Delek US's Tyler, Texas, refinery.

Performance in our wholesale marketing and terminalling segment benefited from a margin of $3.69 per barrel, which compares to $2.24 per barrel in the prior-year period. Also, volume increased 7.6% to approximately 16,550 barrels per day in West Texas. Both volume and margin exceeded our IPO forecast. Demand for refined products in West Texas remains robust as oil drilling activity in this region has increased.

The margin per barrel included approximately $1.8 million of revenue or $1.18 per barrel from the sale of RINs generated from our ongoing ethanol blending activities. Ethanol RIN values increased from approximately $0.04 per RIN in Q4 of 2012 to approximately $0.76 per RIN in March 2013. We believe that we will continue to benefit from RINs if market conditions remain firm going forward.

Approximately 53,100 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 IPO forecast. As of March 31, 2013, Delek Logistics had a cash balance of $19 million, and total debt was $90 million.

Capital expenditures were $1.3 million, of which approximately $310,000 was reimbursed under our Omnibus Agreement with Delek US. Maintenance capital expenditures were approximately $933,000 in the first quarter 2013. 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, and good morning. We are pleased to report strong results from Delek Logistics for the first quarter. Our cash from EBITDA performance continued to exceed expectations provided in our IPO forecast. Both our West Texas business and volumes in the SALA Gathering System performed very well and were the primary factors in better-than-expected results.

We increased our quarterly distribution by 2.7% from our minimum quarterly distribution in the first quarter of 2013. Also, as a result of our expected performance, we intend to recommend to the Board of Directors of Delek Logistics' General Partner an increase in the quarterly distribution to $0.395 per unit for the second quarter.

If approved, this would represent a 2.6% increase from our core distribution of $0.385 per unit. Our relationship with our sponsor, Delek US, DK, creates the potential for additional growth through logistics assets that may be available for drawdown beginning in the second half of this year. We believe the combination of these assets has the potential to create $25 million to $30 million EBITDA. These assets are drawn down over the next 18 to 24 months.

We remain focused on our strategy of providing growth and value by generating stable cash flow. This drawdown should provide a solid foundation for future growth as we continue to explore additional third-party opportunities. With that, Marcy, would you please open the call for questions?

(Operator Instructions) Mark Reichman, Simmons.

Just a couple of questions. First, on the renewable identification numbers, how should we think about that for the balance of the year in terms of your ability to capture value from the sale of the RINs? I don't think you had much baked in for that in the prospectus, and I'm just wondering, what are your expectations, I think, over the next several quarters?

That's a great one, Mark. Thank you for the question. You know, obviously, when we did the prospectus, nobody expected $0.70 RIN value. Now all of a sudden we find ourselves with that number.

We can't project, and we don't want to project, if this $0.70 would stay; if it's going to $1.00; or if it's going back to $0.04. However -- and we were very clear about that -- in the next couple of years, our ability to blend ethanol in West Texas is not going to change dramatically. If anything, it's going to go up as we increase our volumes.

So if you take that market value of the RINs, and on top of that, some of the ethanol blending economics, which you know as much as I do are very good right now, then this should have great contribution to our profits going forward, not only in this quarter.

Okay. And then on the general and administrative expenses, those were lower, I think, than last quarter, and certainly a little below expectations, which is a good thing. What was really behind that? And is this kind of a better number to use, or do you think $1.9 million is maybe more a better normalized number for G&A for the balance of the year?

Mark, good morning. I would stick with the S-1 forecast. There are timing questions of when we booked certain costs during the year, and I think we can use the $1.9 million going forward.

Okay, thank you very much.

Thank you, Mark.

Steve Sherowski, Goldman Sachs.

Just a follow-up on the West Texas marketing question. I was just wondering, how sustainable do you think those margins are going forward? And I guess what I'm really trying to get at is are there any barriers to entry in that market?

Well, like any other market, you need a pipeline and terminals. So this market is growing. As both Danny and Assi said earlier, the drilling activity in that area is increasing. And as we see -- as we benefit from Midland on one hand, we benefit from Midland here as well. So if people continue to drill and continue to -- and the activity in West Texas will continue to go higher, then volumes look very strong for us.

Now, please remember that part of the margin is the RINs value and the ethanol value. So obviously, we are very happy with the ethanol and RINs. We said it all along, that once we have found out about the RINs situation, that we will benefit from that. And that's the first time that the market actually sees how great it is for DKL.

Okay, thanks. That's helpful. And on your East Texas business, just backing into the margin, that looked like it was pretty strong -- there was pretty strong growth year over year. What is the seasonality to that business? Or is there any that I should be modeling in?

Usually, first quarter is, in terms of volume, a little lower than the rest of the year. So we are optimistic that we can continue with this momentum in the next couple of quarters.

Okay, thanks. Just one final question. Any update on Paline?

In regards to what?

Re-contracting. Has your thought process behind that changed at all?

Longview continues to be a very good market for us. In terms of barrels find themselves into Longview -- we feel very optimistic about Longview. And as a function of that, Paline -- we're still very optimistic that we can get very value from Paline in the future. But nothing specific.

Okay, thank you.

Thank you.

Cory Garcia, Raymond James.

Good morning, fellas. Just a quick bit of clarification, I guess, on the RINs blending. Was that an incremental margin of $1.8 million in the quarter? Am I reading that right?

That is correct.

Okay. Is there any way we can actually quantify the actual volumetric amount that you guys blended during the quarter? Then I guess beyond that, what sort of is your ultimate blending capability at your terminals or racks in West Texas?

You know, obviously, everybody's trying to blend as much as they can right now, but we're trying to increase our blending every way we can, because of the value of the RINs and because of the value of the ethanol, or the ethanol economics. I suggest that you model something around 5,000 to 6,000 barrels for the first quarter.

Okay, okay.

Obviously our goal is to go a little higher. Assi, do you want to add anything to this?

No.

That's very helpful. Sort of switching focus, obviously, your SALA Gathering System performed very, very well this quarter. I wondered if you could provide any color in terms of any sort of organic growth opportunities that you may see in that area? Obviously this more of a 2- to 3-year outlook type of question, but what sort of spending do you guys expect to sort of divert into that area if it does prove up to be a pretty nice oil basin?

Obviously, the SALA Gathering System -- we said all along our goal is to increase the volume that comes through the system. We are doing several, if you will, connections and little projects that may allow us to increase development in SALA Gathering System in the future. Right now we don't see any reason why the volume should go down. Fred, you want to add anything to this?

No. But I think his question was more along the lines of if the brown dense hits, or if we see a big boom in local production, how much money we willing to divert? I think that will depend on the size of the wells. It's kind of the criteria we use, whether we truck a barrel or connect it directly into the Gathering System. Either way, what we charge the customer is the same, but it's certainly easier to operate our pipelines and to operate trucks.

So it's just size of the new wells and where they're located relative to the rest of the pipe. But I think it would just be part of our normal CapEx program.

Sure, perfectly understandable. Appreciate the color, guys.

(Operator Instructions). There are no further questions at this time, sir.

Thank you, Marcy. I would like to thank our employees; my colleagues; and obviously, the investors, that give me confidence. Thank you, and we will talk to you soon.