Delek Logistics Partners LP (DKL) 2013 Q2 法說會逐字稿

Good morning, My name is Lavrielle and I will be your conference operator today. At this time I would like to welcome everyone to the Delek Logistics Partners second-quarter 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. Keith Johnson, Vice President of Investor Relations, sir, you may begin your conference.

Thank you, Lavrielle. Good morning. We'd like to thank everyone for joining us on this webcast to discuss Delek Logistics Partners' second-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 November 7, 2013 by dialing 855-859-2056 with the confirmation ID number 21216298. 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 the results from assets and institutes comprising Delek Logistics Partners, LP predecessor. Because management believes that results presented from the prior period are not generally comparable this earnings call will focus on results for the second quarter 2013.

Last night we distributed a press release that provides a summary of our second-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 view our financial performance. Then Uzi will offer a few closing strategic remarks. With that I will turn the call over to Assi.

Thank you, Keith. Delek Logistics performed well during the second quarter. Our DCF of $12.8 million was approximately 18% ahead of our IPO forecast. EBITDA was $15 million for this quarter and $30.5 million year to date. Based on our strong performance we are pleased to be able to increase our quarterly distribution by 2.6% from our previous distribution of $0.385 per unit for the quarter ended June 30, 2013. This is our second increase in 2013 and is a 5.3% increase above our (inaudible).

In early July our revolving credit facility was amended to increase lender commitment to $400 million from $175 million, improving our financial flexibility to support future growth initiatives. In the second part of July we completed our first purchase of assets from Delek U.S. Holdings for $94.8 million. In addition, we acquired from a third-party the Tyler-Hopewell pipeline which will enable us to transport refined products to our Big Sandy terminal from Delek's Tyler refinery. Now I will turn the call over to Danny to discuss the financial results.

Thank you, Assi. For the second quarter 2013 Delek Logistics reported net income of $11.8 million or $0.47 per diluted limited partner unit. Revenues during the second quarter were $230.1 million and contribution margin was $16.1 million. Total operating expenses of $6.1 million were higher than expected due to outside services and tank maintenance related expenses. General and administrative expenses of $1.1 million were below expectations.

Now I will spend a few minutes discussing our two reporting segments. For the second quarter of 2013 our Pipeline and Transportation segment performed well as it benefited from elevated throughput of approximately 22,660 barrels per day in the SALA Gathering System, which compares to 19,500 barrels per day included in the IPO forecast.

During the second quarter 2013 crude volume on the Lion pipeline system was approximately 49,270 barrels per day, which was above minimum commitment levels of 46,000 barrels per day. During the second quarter of 2013 volumes on the Lion pipeline system benefited from improved third-party pipeline access to our Magnolia pipeline and the connection to the rail offloading operation at Delek U.S.'s El Dorado refinery.

Our East Texas crude logistic system delivered approximately 11,470 barrels per day during the quarter. As anticipated, volumes transported on the East Texas system decreased below the minimum volume commitment level of 35,000 barrels per day in April 2013 when a third-party pipeline was reconfigured to supply crude to Delek U.S.'s Tyler Texas refinery.

Performance in our Wholesale Marketing and Terminalling segment benefited from higher volumes and ongoing blending activities. Under our East Texas marketing agreement approximately 64,970 barrels per day of refined products were marketed from our Delek U.S.'s Tyler Texas refinery. This was better than the 52,000 barrels per day included in the IPO forecast due to increased throughputs at that facility.

Also, volume in our West Texas wholesale operation increased approximately 14% on a year-over-year basis to approximately 19,100 barrels per day. As in previous quarters, demand for refined products in West Texas remains robust as oil drilling activity in this region has increased economic activity. The gross margin of $2.20 per barrel in the second quarter compares to $1.52 per barrel in the prior year period.

The margin per barrel included approximately $2.1 million or $1.23 per barrel from RINs generated in our ongoing ethanol blending activities during the second quarter of 2013. Ethanol RIN values increased from approximately $0.04 per RIN in the fourth quarter of 2012 to an average of approximately $0.83 per RIN in the second quarter of 2013. Market prices for RINs continue to increase and were trading for approximately $1.07 per RIN at the end of July.

Early in the second quarter of 2013 a decline in fuel prices for March through April negatively affected margins. However, margins in West Texas improved as fuel prices stabilized in the second half of the quarter. As of June 30, 2013 Delek Logistics had a cash balance of $27.3 million and total debt was $90 million. As mentioned by Assi, during July we amended our credit facility and expanded our borrowing capacity to $400 million from $175 million.

Capital expenditures were approximately $1.1 million of which $153,000 was reimbursed under our omnibus agreement with Delek U.S. Maintenance capital expenditures were approximately $859,000 in the second quarter of 2013. Total capital expenditures for 2013 are now expected to be $10.2 million compared to our previous estimate of $8.8 million. This increase is associated with additional tank maintenance work. Approximately $5.8 million will be reimbursed under our agreement with Delek U.S.

Before turning the call over to Uzi I want to review the acquisitions we completed in July. On July 26 we purchased the Tyler Texas storage tanks and product terminal for $94.8 million in cash. These assets will continue to support Delek U.S.'s Tyler Texas refinery and are expected to contribute approximately $10.5 million of EBITDA annually.

On July 19 we acquired the Hopewell-Tyler Products pipeline, this pipeline will allow our Big Sandy terminal to become fully operational and be served directly by Delek U.S.'s Tyler Texas refinery. We expect to spend approximately $1.3 million to refurbish this pipeline over the next few months before it is fully operational. We expect approximately $700,000 of annual EBITDA from this acquisition. With that I will turn the call over to Uzi for his closing comments.

Thank you, Danny. We remain focused on our strategy of providing growth and value for our unitholders, as demonstrated by the recently completed Hopewell pipeline acquisition and the Tyler drop down. Additional growth can be created through future drop downs of logistics assets from our sponsor, Delek U.S., and through our focus on third-party acquisitions.

We believe that over the next 18 months those drop downs will have the potential to create an additional $15 million to $20 million of EBITDA. This should provide Delek Logistics a solid foundation for creating value for our unitholders. With that would you please open the call for questions?

(Operator Instructions). [Teresa Chin].

I just wanted to get a little bit more color on the volume increases in the wholesale marketing segment. How long do think these growth rates can persist?

Well, these volumes are impacted by mainly the activity in the drilling around the Midland Odessa area. So as long as that activity continues we feel comfortable that the volumes should continue to increase -- this was obviously a great quarter. And in the winter activities go down a little bit, but going into the third quarter we don't see any reason why the volume will go down.

Great. And then also in terms of future drop downs, within that 18-month period do you think we'll see any more within this year?

I will let Assi take it.

As probably most of you remember, some of the drop downs we need to get banks approval in order to release liens that these assets are currently have liens to. And there is a potential that there will be more drop downs this year. It's easier on spreadsheets as a drop-down; it's much harder to do them in reality. And we are pushing to complete them.

Great. And also on the gross margins for the West Texas marketing, so excluding the benefit of $1.23 from Brent, that would've been down pretty significantly year on year, right? And was that just as a result of depressed wholesale fuel prices in the beginning of the quarter?

That is exactly right. That is exactly the point. When the prices went down in April we were preparing ourselves for the summer, we had inventory and the markdown of that inventory resulted in the dollar margin. Obviously we benefit dramatically when prices go up.

Perfect, thank you very much.

Michael Blum, Wells Fargo.

A couple of questions from me. One, any update that you can provide on the Paline Pipeline and any potential there to renegotiate that tariff ahead of its expiration of the contract?

Well, we continue to -- first of all, good morning, Michael, thanks for the question. We continue to work with several interested parties and we will provide some color when something is completed. But we do work on this asset, we feel that it is under -- I shouldn't say undervalued, but we don't collect as much as we should collect out of this asset and we feel [comfortable] that what we're going to collect will be increased.

Okay, great. And then I was wondering if you could just from a high-level talk about the impact to your business of 00 obviously we've seen TI Brent spreads come in and other locational spreads have narrowed pretty substantially. Can you just talk about how that is impacting flows across your assets and just generally the impact to your business?

Well, through the logistics assets obviously we have exposure to our -- with our refineries to the TI Brent spread. But from a logistic standpoint we don't see a significant change so far in regard to the assets that we operate and -- because of the spread coming down.

Okay. And then the last question for me is, so you had -- in the wholesale division you had this drop in wholesale fuel prices, you had some inventory. Is there anything you can do from a hedging perspective or just otherwise operationally to mitigate those types of swings based on movements in price?

The answer for both questions is, yes. However, we -- for the most part we don't hold much inventory unless we feel that demand is increasing. That's [problem] number one. And second, we were expecting prices to go up in the summer which they usually do, that is the reason we didn't hedge. But the answer is, yes, of course we can hedge or of course we can minimize the inventory. If you take into account what the things that are happening in July, obviously that strategy paid off big time, you don't see the numbers but you just can see prices going up, immediately we will benefit from that -- or we already benefited from that in July.

Okay, great. I got it. Thank you very much. Appreciate it.

Steve Sherowski, Goldman Sachs.

Following your first drop down how should we think about your distribution growth trajectory going forward? And how do you -- I guess how should we think about that versus paying down debt?

Well, we -- during the IPO we said all along that we want to be very sustainable, not to be jumpy and not to change strategy based on good quarter or bad quarter. These quarters are very good. So there is no reason to believe that we will not continue to increase our distribution. But we want to do it in a very steady, very stable way versus going up and then going down. We increased it by 1 penny; there is no reason to believe that we will not continue increasing this distribution in the next coming quarters.

Okay, thank you. And just on the acquisition front, what should we be modeling for maintenance CapEx on the two assets that you recently acquired?

Assi, do you have that number?

Those numbers are extremely minimal, we -- you won't see a big change in our [forecast].

Okay, that is it for me. Thank you.

Cory Garcia, Raymond James.

I want to -- one quick housekeeping item. I believe you guys said during your last call that ethanol blending volumes were -- I think it was like 5,000 or 6,000 barrels per day. Do you have any updated figure for this quarter and how do you guys sort of expect that to trend through the back half of this year?

We still see about 700 barrels of ethanol that are being blended out of the gasoline that we are selling. And we expect that to be stable to growing. And you know, if you look at Q3, it is making a lot of sense to blend any barrels that exist. RINs are up -- if you look at the average of Q2 and the average of Q3 so far RINs are up. We are very positive on ethanol blending in the wholesale business.

Okay, that's helpful. Thanks. And also just taking a step back and looking at sort of the organic growth opportunities that may be out there for you guys, with the start up of Keystone, XL's Gulf leg a little bit later this year given the fact that it is essentially crosses a portion of your East Texas crude system, how should we be thinking about the opportunity to maybe tie into that line, pull some barrels off and get through your guys' system?

This is Fred Green, I will take that one. I think other than timing; I think it's fair to assume that at some point our system would connect with Keystone. We own the land where the lines intersect and there is sufficient property there for building a receipt facility and pumping back into the Nettleton line. So I think it's attractive and it's probably more of a question of when than if.

Okay, and it sounds like it is a pretty low CapEx requirement on your end, am I reading that right?

I don't know if I would say that just because of the difference in the size of our system versus XL. There is some tankage that would be required, that would be the primary investment.

Okay, perfect. Thanks for the color.

Mark Reichman, Simmons.

Just two quick questions. First on the products terminal that was acquired, the total throughput on I believe it was 55,000 barrels per day. Is that a good run rate? I thought it was a little higher than that in 2011. And then my second question is just on the G&A which came in a little lighter than expected. I thought the run rate on G&A was expected to be about $1.9 million and just wanted some clarification on the reason for the lower G&A this quarter?

To answer your first question, this is the [run rate] that we had in 2012, so the pro forma is based on historical run. I will tell you that if you look at the throughputs of the Tyler refinery of what we sold like product on the East Texas marketing agreement you will see that those numbers are much higher today probably 10% to 20% higher.

So the performance numbers were $10.5 million EBITDA, if Tyler will continue to run at these levels the numbers will be much higher. Second, on the G&A front, the $0.8 million missing in the G&A is actually $0.8 million that were added to the operating cost. We basically determined that some of the G&A costs were actually operating costs and that is why you see slightly higher OpEx and slightly lower G&A. Compared to the forecast.

Okay great, thank you.

(Operator Instructions). And there are no additional questions at this time.

Well, I would like to thank everybody here on the table, all our employees, our unitholders, the people that believe in us. That was a great quarter and third quarter started very well, so we will talk to you soon. Have a great day.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect your lines.