Delek Logistics Partners LP (DKL) 2013 Q4 法說會逐字稿

Good morning, my name is Pamela, and I will be your conference operator today. At this time, I would like to welcome everyone to the Delek Logistics Partners fourth-quarter earnings conference call. (Operator Instructions).

Now I will turn the call over to Keith Johnson. Sir, you may begin.

Thank you, Pamela. Good morning. I would like to thank everyone for joining us on this webcast to discuss Delek Logistics Partners' fourth-quarter and year-end 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, our CAO, 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 May 26, 2014, by dialing 855-859-2056 with the confirmation ID number 44430857. 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, included results from the assets and entities compromising Delek Logistics Partners LP predecessor. Because management believes that results presented from the prior period are not generally comparable -- not generally comparable, this earnings call will focus on results for the fourth-quarter 2013.

Last night, we distributed a press release that provides a summary of our fourth-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 (technical difficulty). With that, I will turn the call over to Assi.

Thanks, Keith. Delek Logistics performed well during the fourth quarter. Our DCF was $13.3 million and EBITDA was $16.7 million. For the year, our DCF was $52.9 million and EBITDA was $63.8 million.

We ended the year with a DCF coverage ratio of approximately 1.3 times.

Based on our strong performance, we are pleased to increase our quarterly distribution to $0.415 per unit for the quarter ended December 31, 2013, which is a 2.5% increase from our previous distribution. This is the fourth increase and is 10.7% above the MQD of $0.375 per unit.

During 2013, we completed three acquisitions for a total of approximately $105 million. And we recently completed a fourth one in February for $96 million. The combination of these four acquisitions expected to add an estimate of $22 million of annual EBITDA.

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

Thank you, Assi. For the fourth-quarter 2013, Delek Logistics reported net income attributable to partners of $11.3 million, or $0.46 per diluted limited partner unit. For 2013, net income attributable to partners was $47.8 million, or $1.93 per diluted limited partner unit.

Revenues during the fourth quarter were $223.1 million and contribution margin was $18.6 million. For comparison purposes, contribution margin for the third quarter of 2013 was $18.4 million, taking into account the contribution from the Tyler assets, which were purchased on July 26, 2013.

In the fourth quarter, total operating expenses was $7.2 million and general and administrative expenses were $1.7 million.

Now, I will spend a few minutes discussing our two reporting segments. Fourth quarter of 2013 contribution margin in our pipeline and transportation segment improved $11.8 million on a sequential basis, compared to $10.8 million in the third quarter of 2013. The improvement was primarily attributed to storage fees from a full quarter of operation of the Tyler tank farm purchased in late July and storage at the North Little Rock terminal acquired in October.

Our SALA Gathering System performed well, as it benefited from throughput of approximately 21,900 barrels per day.

Contribution margin in our wholesale marketing and terminalling segment was $6.8 million in the fourth quarter of 2013, compared to $7.7 million in the third quarter of 2013. This decline can be attributed to lower volumes and a lower value of RINs on a sequential basis, which was partially offset by a full quarter of operation of the Tyler, Texas, terminal purchased in late July and a partial quarter of operation of the North Little Rock terminal purchased in October.

During the fourth quarter, volume per day was lower on a sequential basis under our East Texas marketing agreement and at the Tyler terminal, primarily due to turnaround work conducted at the Tyler, Texas, refinery in December.

In our West Texas wholesale business, demand for refined products remains strong as oil drilling and exploration in this region has increased. Volume was approximately 18,000 barrels per day. The gross margin was $1.24 per barrel in the fourth quarter, compared to $1.63 per barrel in the third quarter of 2013.

This reduction was due to a decline in the value of RINs. The margin per barrel in the fourth quarter included approximately $700,000, or $0.43 per barrel, from RINs generated in our ongoing ethanol blending activities during the fourth quarter of 2013. The third-quarter gross margin included $2 million, or $1.13 per barrel, from RINs.

Ethanol RIN values averaged approximately $0.29 per RIN in the fourth quarter of 2013, compared to approximately $0.85 in the third quarter.

As of December 31, 2013, Delek Logistics had a cash balance of approximately $900,000 and total debt was $164.8 million. We ended the quarter with approximately $223 million of unused availability under our $400 million credit facility.

Capital expenditures were approximately $1.8 million, which included $374,000 of reimbursement under our omnibus agreement with Delek US. Maintenance capital expenditures were approximately $1.3 million in the fourth quarter of 2013 and growth-related projects were approximately $500,000.

Total capital expenditures for 2014 are expected to be $20.4 million, compared to $5.1 million in 2013. This increase is associated with the acquisitions completed over the past year and additional capital expenditures for growth. The 2014 capital expenditure amount consists of $9.5 million of maintenance and $10.9 million of growth-related projects. Both of these amounts, approximately $6.9 million, should be reimbursed under our agreement with Delek US during 2014.

Before turning the call over to Uzi, I want to review our most recent acquisition. Our most recent acquisition was completed on February 10, 2014. We purchased the El Dorado, Arkansas, storage tanks and product terminal for $95.9 million in cash. These assets will continue to support Delek US's El Dorado, Arkansas, refinery and are expected to contribute approximately $10.1 million of EBITDA annually.

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

Thank you, Danny.

This was a successful first year of operation for Delek Logistics. We completed three acquisitions and generated approximately $64 million of EBITDA during the year. We achieved our target to show a double-digit increase in our distribution in the first year of operation, and we remain committed to our goal of growing our distribution by at least 10% during 2014, as well as 2015.

We are focused on growing our operation over time. This growth should come through additional third-party acquisitions and any increase in Delek US refinery throughputs. In addition, through our relationship with our sponsor, Delek US, future drop-downs of logistic assets should be provide an additional $5 million to $10 million of EBITDA on an annual basis.

With that, Pam, would you open the call for questions?

(Operator Instructions). Theresa Chen, Barclays Capital.

I just had a question, a couple questions, regarding the growth outlook now that a large portion of the drop-down acquisitions have been done. First, the $5 million to $10 million of EBITDA drop-downs coming up, would you mind giving us a little color about the timeline of that?

Yes, it is going to happen between -- during the next 12 months -- call it six to 12 months.

Got it, thank you. And then in terms of third-party acquisitions, what is your outlook for the market on that, and splitting it into acquisition -- third-party acquisitions that can be done on the DKL level alone or jointly with DK?

Both. We see still a tremendous amount of opportunities of assets that are strategic to us and not as strategic to others. As we showed lately with the Little Rock terminal, there are more assets in these areas that are not as strategic to others and that can serve us very well.

We remain committed to our target of $150 million EBITDA within three years. So, that is our target, and we work toward that.

Okay, and then just turning towards organic capital expenditures, so that $10.9 million number for 2014, I am assuming that much of that will be spent towards the North Little Rock expansion. What are the rest spent for? What are your plans, and what is the outlook for growth projects beyond 2014, as well?

First, you're right. $5.4 million of that $10 million is in order to upgrade the North Little Rock terminal, which should add additional for around $1 million of annual EBITDA because the terminal will have the ability to run close to 20,000 barrels a day, and we're going to have both ethanol blending abilities and biodiesel blending abilities.

The other upgrade is to improve the West Texas terminals to add biodiesel into them. Currently, we do not blend biodiesel in West Texas, and there are small projects, some of them in the -- also in the Abilene area to upgrade one of the tanks there to support Delek with its leased crude business in the area. So they are small projects, but we think they can bring a lot of value.

And one of the things that are positive for Delek Logistics that right now, their assets are not fully utilized, so not all of them require CapEx in order to run at higher capacities. So some of the organic growth will come not through acquisitions or through growth CapEx, but through just better utilizing the asset.

And beyond 2014, can you comment just on general color of what the organic spend outlook will be?

Obviously, we do have a Paline renewal coming by the end of this year. We're working very hard on that renewal right now. We know that this is an asset that -- or we think that this is an asset that we can improve the EBITDA that we get out of that asset.

Obviously, the expansion of El Dorado as it happened, I think, we finished it last week or 10 days ago, that by itself will utilize more out of these assets, because the refinery will run more barrels. And the gathering system is expanding. We used to have 17,000 three years ago. Now it is [20,000] more. So we expect this to continue to grow. And all other assets are on Longview, so still big plans ahead of us.

Great, thank you very much.

Mark Reichman, Simmons & Company.

Really just two questions. One, the future drop-downs, I know the rail offloading facility is completed, and I was wondering what the utilization -- how that is performing? And then, when will the actual crude oil tank be completed? So that's the one question.

And then the second, if you could just comment on financing -- expected financings over the next year. I think that you have pretty much everything on your credit facility. I'm just wondering if you could just update us on current borrowing capacity, post these most recent transactions?

I will take the first one, and Fred, if you want to add some color to the first one, that will be great. And Assi will take the second one.

So, to repeat the first question, I think the ask was to give some color around the railcar facility in El Dorado. It is completed. It has the size of 45,000 barrels. If we want to do all light or a combination of light and heavy, it's around 18,000, plus 12,000. That's all completed. You're absolutely right.

How much we used it, we didn't use it in the last five weeks just because of the simple fact that the refining was in turnaround. We intend to start using it again in March as the refinery came out of turnaround, and obviously, it depends on the economics of which barrels are the cheapest barrels to get in, so we will see in the next couple of months how the market shakes up and how many barrels we will get into El Dorado by rail.

It doesn't prevent us for to create an agreement in the future of minimum use, and we will come to the market once we make a decision on that. Fred, do you want to add anything to that?

No, I think Uzi was pretty clear. When you look at what we have done historically since it was completed, throughputs ranged anywhere from 10,000 to 20,000 a day, again just based on economics. So, we didn't hit any capacity limits utilizing at that level.

And just on the credit facility, as you probably remember, the current credit facility is $400 million. As of the end of the fourth quarter, before we did the acquisition, the debt was around $165 million. When you add the $95 million of the cost of the acquisition, that is basically close to $260 million, which leave us around $120 million, $130 million available to borrow in order to complete the other acquisition.

So we feel comfortable that a $5 million to $10 million EBITDA drop-down can be done without any additional financing needs. Probably if we will do any large third-party transaction or an acquisition, at that point we will have to consider a combination of only debt or probably a combination of debt and equity.

And then, the one last piece of your question around the crude tank and timing, that tank, the construction is completed. We are going through the hydro testing, strapping, and coating process now, so it should be operational in the next 30 to 60 days.

Great. Thank you very much.

Cory Garcia, Raymond James.

I appreciate the time. Just want to take a closer look at the El Dorado drop-down, specifically the refined products terminal. I know you guys mentioned some opportunities across your asset base in terms of getting it more fully utilized. That asset in particular, what sort of opportunities do you guys see? I believe you guys mentioned you were running about half utilization in the prior nine months?

I will start by saying that if you look at the drop-down of the El Dorado, the product terminal is selling around 12,000 barrels a day. The fact that we will run more crude in El Dorado, I am not sure how much we will increase the local market. We are going to enjoy El Dorado running more barrels, and in 2013, we ran 65,000 barrels a day, and for next year, we're going to have the capabilities to run 80,000 barrels a day of light crude.

The increase will come through two pipelines that support the El Dorado business. The first one is the crude pipeline. It is an $0.80 to $0.85 tariff that we will get if El Dorado will run more crude. And then, also, the light product pipeline, over there we're getting around $0.10 per barrel on every barrel that we basically move from the refinery to the Enterprise system.

So that's where the increase is going to come from.

Okay, that's great color. And also, from -- I guess it's more of a housekeeping item. Taking a look at your total CapEx of, I guess, $20.4 million, should we just look at that as more of a steady run rate, or any particular quarter it's going to be a little heavier weighted?

Probably the Q3 and Q4 with the North Little Rock terminal will be more heavy weighted, and those will be growth projects, as you probably know. And for all the rest, probably assume equal, so I will say around $1 million a month, and then in Q3/Q4, slightly higher because of the North Little Rock spending.

All right, great. I appreciate the color.

Richard Roberts, Howard Weil.

Two quick ones for me. On the first one, can you give us a sense of when we might hear something on the renegotiation of Paline? Is that going to be something that won't come until late this year or early next year, or is there a potential to hear something sooner?

That is obviously heavy on our mind, because we think that we can get more EBITDA out of this asset. As you know, the contract expires by the end of the year. Usually these contracts, when they are being renewed, they are not being renewed at the last minute. So we're in fast negotiation with different people about different options.

We will notify the market as soon as we know something. I imagine that it will not be at the last minute.

Okay, thanks, Uzi. And then a second one, if you could just go back to the acquisition market and just maybe update us on your thoughts there. Are you specifically looking around the current footprint you have on both the DKL asset side and on DK's refining markets, or would you be willing to step out into different areas?

And then, also, if you are looking at -- would it be a series of smaller acquisitions? Would you consider something larger to get you towards that $150 million mark? Just any sense of how you guys are looking at acquisitions would be helpful. Thanks.

That's a great question, Rich. Obviously, we know that we fill our area very well. So, it is the easiest way to go and get the underutilized assets that exist in our areas or in the surrounding areas, if you will, from the same people that are willing sellers, because they know that we can get more value out of these assets.

It doesn't mean that we're not going to go outside the areas that we operate today and extend our operation to other areas, but I do not see us buying a pipeline in Wyoming, for example. That is not something that we are thinking about.

We want to stay in our area. Our goal is to be a regional player, integrated, so we will continue to work towards that goal, and expanding and extending our reach to other areas that touch the areas that we're in right now. Did this make sense to you?

Yes, very much so. Thanks, Uzi.

(Operator Instructions). [Lane Shen], [Height].

I just want to clarify that after your recent acquisitions, what is your pro forma debt EBITDA?

Do you want to take it, Assi?

Can you repeat the question, just to make sure that I heard you correctly?

Yes, I just want to ask after the recent acquisition, what is your pro forma debt/EBITDA ratio now?

Probably somewhere between 3 to 3.4 times.

And what is your target long-term debt/EBITDA, do you think?

We want to be at least 25 points below our covenants, which will be somewhere around [375].

Okay, so if you are -- if you're going to do another drop-down and you just said that you still have there enough facility to finance like that, but does it make sense to finance partially by equity also because given you're already at 3.4 EBITDA ratio?

As I mentioned, it may be a slight equity combination, probably with Delek, but it depends on the sequence. For example, if we will sign Paline agreement earlier than the pro forma EBITDA, at least with the bank, it can probably be higher, and therefore we will be able to do the drop-down and take everything with debt. So, it's a combination of how the results will look like.

Okay, that makes sense. And talk about the Paline renew the contract. What kind of strategy do you think that is fit for your Delek MLP? I am just talking about like there, do you want to renew the contract with midterm or long term? How many years do you think the most [property] the contract that you want?

That's a good one. That is what exactly what talking internally right now, because there is a trade-off between short term and long term. There is a trade-off if you want to be a common carrier or you want to be just single shipper. These are the things that we are looking at in order to get the most value for our assets. And that's the reason we are hesitating to give more improvise as we weigh these strategies internally.

Okay, great. Thank you.

There are no further questions at this time. Do you have any closing remarks?

I'd like to thank my colleagues here, investors, the financial community, and especially our employees for a first full year that was very successful to our Company. We started with a projection of $48 million EBITDA. We ended the year with $64 million, and if we do pro forma, that number is much higher than that number. So, very proud of what we achieved, and we look forward for a very successful 2014, and have a great day.

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