Delek Logistics Partners LP (DKL) 2014 Q1 法說會逐字稿

Good morning. My name is Allison, and I will be your conference operator today. At this time I would like to welcome everyone to the first-quarter earnings conference call. (Operator Instructions) Thank you.

Mr. Keith Johnson, you may begin your conference.

Thank you, Allison. Good morning. I would like to thank everyone for joining us on this webcast to discuss Delek Logistics Partners' first-quarter 2014 financial results. Joining me on today's call will be Uzi Yemin, our General Partner's Chairman and CEO; Assi Ginzburg, CFO; Danny Norris, 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 believe, anticipate, plan, expect, 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 7 by dialing 855-859-2056 with the confirmation ID number 27447884. An online replay may also be accessed for the next 90 days at the Partnership's website at DelekLogistics.com.

Last night we distributed a press release which provides a summary of our first-quarter 2014 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 remarks. With that, I will turn the call over to Assi.

Thanks, Keith. Delek Logistics had a strong start to 2014. Our DCF flow was $17.0 million and EBITDA was $20.2 million for the first quarter of 2014, which is an increase from a DCF of $13.1 million and EBITDA of $15.5 million in the first quarter of 2013. We ended the quarter with a DCF coverage ratio of approximately 1.6 times.

Based on our performance, we are pleased to increase our quarterly distribution to $0.425 per unit for the quarter ended March 31, 2014, which is a 2.4% increase from our fourth-quarter 2013 distribution. This is our fifth consecutive increase and is 10.4% higher than our first quarter of 2013 distribution of $0.385 per unit.

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

Thank you, Assi. Good morning. For the first quarter of 2014, Delek Logistics reported net income attributable to all Partners of $14.7 million or $0.59 per diluted Limited Partner unit, compared to income attributable to all Partners of $12.2 million or $0.50 per diluted Limited Partner unit in the prior-year period. Improved performance compared to the first quarter of 2013 was driven by several acquisitions completed during the past year.

As a result, contribution margin increased to $22.8 million in Q1 of 2014 from $17.2 million in the prior-year period. In addition to acquisitions, strong results in the first quarter of 2014 were benefited from higher volumes on the SALA Gathering System and strong margins in our West Texas Wholesale business.

Now I will spend a few minutes discussing our two reporting segments. First-quarter 2014 contribution margin in our Pipeline and Transportation segment improved to $12.8 million on a year-over-year basis, compared to $8.9 million in first-quarter 2013. The improvement was primarily attributed to storage fees from the Tyler tank farm purchased in July 2013, the North Little Rock terminal acquired in October 2013, and the El Dorado tank farm acquired in February 2014.

During the quarter, volumes on the Lion Pipeline System declined year-over-year due to downtime associated with planned turnaround work at Delek US's El Dorado refinery. The financial effect of lower volumes was limited by fees generated under the minimum volume commitments on this system. Throughput on our SALA Gathering System benefited from Delek US's ability to store crude oil while its El Dorado refinery was undergoing a turnaround in January and February.

Contribution margin in our Wholesale Marketing and Terminalling segment was $10 million in the first quarter of 2014, compared to $8.3 million in the first quarter of 2013. Contribution from the Tyler, Texas, terminal, the addition of the North Little Rock, Arkansas, terminal and the El Dorado, Arkansas, terminal were the primary factors contributing to the improvement versus Q1 of 2013.

During the first quarter, volume per day increased under our East Texas marketing agreement to approximately 62,400 barrels per day from approximately 53,100 barrels per day in first quarter of 2013. This was primarily due to maintenance work at Delek US's Tyler, Texas, refinery during the first quarter of 2013 that reduced sales volumes during that period.

In our West Texas Wholesale business, volume was 15,999 barrels per day in Q1 of 2014, compared to 16,555 barrels per day in the prior-year period. This decline was primarily due to lower volume at the Abilene, Texas, terminal due to maintenance work in February and March 2014.

The gross margin was $3.57 per barrel in Q1 of 2014, compared to $3.69 per barrel in Q1 of 2013. The margin per barrel in the first quarter included approximately $1.1 million or $0.75 per barrel from RINs generated in our ongoing ethanol blending activities during Q1 of 2014. This compares to a gross margin that included $1.8 million or $1.18 per barrel from RINs in the first quarter of 2013.

A strong Wholesale margin helped offset the lower RINs benefit on a year-over-year basis. Also, the gross margin per barrel in the first-quarter 2014 improved sequentially from $1.24 per barrel in the fourth-quarter 2013.

As of March 31, 2014, Delek Logistics had a cash balance of approximately $4.1 million, and total debt was $260.5 million. We ended the quarter with approximately $126 million of unused availability under our $400 million credit facility.

Capital expenditures were approximately $800,000 in Q1 of 2014, which included no reimbursement under our Omnibus Agreement with Delek US. Maintenance capital expenditures were approximately $700,000 and growth-related projects were approximately $100,000.

Total capital expenditures for 2014 are expected to be $18.5 million, compared to $5.1 million in 2013. This increase from 2013 is associated with the acquisitions completed over the past year and additional capital expenditures for growth.

The decrease from our previous estimate of $20.4 million in 2014 is related to timing of growth-related projects. The 2014 capital expenditure amount consists of $9.5 million of maintenance, $9 million of growth-related projects. Of these amounts, approximately $6.9 million should be reimbursed under our agreement with Delek US in 2014.

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

Thank you, Danny. We had strong results during the quarter, and this occurred during a period when throughput on our Lion Pipeline System was reduced due to a scheduled turnaround at the El Dorado refinery, which was completed during the quarter. Any increase in throughput at the El Dorado refinery could result in extra fees to our Company.

We estimate that every additional 1,000 barrels per day above 2013 levels on the Lion Pipeline System will have the benefit of approximately $300,000 in annual throughput fees. Also, we only benefited from half a quarter of performance from the El Dorado drop-down during the first quarter.

Our focus on growth over the past year resulted in a 30% increase in EBITDA from the first quarter of 2013. We increased our quarterly distribution by 2.4% from the fourth quarter of 2013 and remain committed to our goal of growing our distribution by at least 10% in 2014.

Also, we remain focused on growing our operations over time through future dropdowns and third-party acquisitions. And we have the financial flexibility to support this growth.

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

(Operator Instructions) Theresa Chen.

Good morning. A question on the solid results in terminalling throughputs. Can you give us a little incremental color on what your outlook for throughputs is for the rest of the year, taking into account the contribution from dropdowns and the acquisition?

I assume that you're talking about the Lion Pipeline System. Is that correct, or in general?

In general.

Well --

Sure. When you look at the SALA Gathering System, we expect the SALA Gathering System to stay at those levels of 20,000 barrels a day and above.

When you look at the El Dorado system, during 2013 and the first quarter of 2014, the El Dorado refinery was running at around 66,000 or lower throughput, which means Delek basically paid DKL the minimum throughput.

As we said on the script earlier, every 1,000 barrel increase in the El Dorado refinery throughput should result in an approximately $300,000 increase in our fees from Delek on that system. As you know, we should have the ability to run higher volumes in the El Dorado refinery now that we completed some of the upgrades at that refinery.

That is why we are optimistic that if, for example, we'll be able to run an additional 10,000 barrels a day -- that was the original project in El Dorado -- it could result in increase of $3 million annual EBITDA to the MLP. When you add to that the dropdown in Q1 -- on February 10 we had a dropdown of the El Dorado tank farm -- if you annualize that for an annualized it should be resulting in around $10 million of EBITDA per year. That was our original forecast.

With that being said, in the first quarter we only enjoyed a half a quarter of that. So the way we see it, there was a potential increase of around $3 million in throughput fees from Delek on the El Dorado system in addition to another $1 million that is an annual rate, plus another $1.5 million for this quarter that is still missing. So annualized, that could be a big number for DK and DKL.

That's very helpful. Thank you. And then on the M&A front, do you have more transactions in mind like the North Little Rock terminal? Any other opportunities out there that you are currently assessing?

Yes. It is not may be, but that we know opportunities. It's a matter of us approaching these opportunities and decide what we want to do.

But these opportunities exist in our areas, and the Company -- many, many questions we are being asked: why not increase the distribution? We want to leave dry power for more and more acquisitions. Obviously, we are very happy with our performance, and we want to continue to grow our Company toward the goal of $150 million EBITDA by the end of 2015.

Okay. Then a follow-up on that. Given the strong coverage right now, should we assume that another third-party acquisition may happen sometime this year?

I don't see any reason why we won't try to achieve that goal.

Perfect, thank you.

Corey Garcia, Raymond James.

Good morning, fellas. We have been hearing a lot about crude starting to stockpile and buildup down in the Houston and even up in the Nederland market, recognizing that not only your terminalling but also your gathering footprint in the East Texas and Longview areas, I'm just curious. What sort of opportunities do you guys see in terms of playing a role in alleviating those and really profiting from those bottlenecks?

Is there capital? Is there organic growth that you guys see connecting with those long-haul pipelines?

Good morning, Cory. That is a great question. First of all, as you know, our Company is teaming up with Delek to look at these projects.

Usually, our Company is not taking the commodity risk; we leave it with Delek. However, with that being said, the East Texas market and also the area West of Tyler, the discounts are widening and we don't see any more the pricing we used to see.

So because of the pressure in Houston or in Midland, crude oil prices are falling in our area. That will allow us, we think, to start thinking about shipping more barrels to different places, or even enjoy them in our system.

That is the reason, as Assi mentioned, with the expansion of El Dorado and DK completing that project, we feel that the throughput through the El Dorado system or the Lion system should increase almost immediately.

That's definitely helpful. As a follow-on, I guess, any updated status or report on what you guys are thinking about for Paline?

Absolutely. That's a good question. With the differentials in East Texas looking the way they are, we are still evaluating that. I don't -- I expect us to come to the market in the next few months with a solid update; but we are very optimistic about the situation of Paline.

All right. Appreciate the color, guys. Great quarter.

Richard Roberts, Howard Weil.

Hey, good morning, guys. Can you talk a little bit maybe about what drove the strength in the West Texas marketing margins in the quarter? Even stripping out the RINs impact, it looks like pretty solid results versus where you were for most of last year.

We agree. A couple of things. Ethanol, cheap ethanol in West Texas obviously allow us to enjoy the margin.

Second, surprisingly enough, we conducted maintenance in one of the terminals and that shortened the market. So we were able to sell inventory at much higher prices.

We do see the strength in West Texas continuing in the second quarter, especially in light of the fact that one of our biggest competitors in that area is in turnaround right now, or is about to be in turnaround.

Okay, great. Thanks. I guess, second, one of your MLP peers last week said that they are seeing some of the frothiness in the third-party acquisition market coming out in terms of pricing. Can you update us on maybe what you are seeing out there in some of the areas that you are looking, as far as what asset prices are looking like?

Absolutely. We always told you that we are targeting, and even with the dropdown, targeting 8 to 10 times EBITDA. I don't see any reason why we change our behavior here.

I hear that there are prices are going all the way to 15 times EBITDA, 16 times EBITDA; very competitive. I don't see us changing our behavior in going up to 8 to 10 times EBITDA target. So it will be very accretive to the shareholder or unitholders as all these acquisitions were in the past.

Okay, great. Thanks. Then just maybe one final one. You talked several times about an ambition to get to $150 million of EBITDA by the end of next year. We can see the EBITDA coming from the remaining dropdowns; we can kind of make an estimate on what Paline might get. But even still that's probably a bit of a gap to $150 million.

So is there any indication you can give us on how we get there, aside from just acquisitions?

Well, I think that Assi just gave you another step forward with the question that he answered earlier. The idea of the expansion of El Dorado refinery for DK as well as the dropdown will add -- if DK is going to run close to what they are saying they are going to run, 80,000, then we are talking about another $3 million to $4 million additional on that side; and then the dropdowns are not fully embedded in the numbers.

Also, one thing that is changing as well is more throughput to other areas of our system where there were a minimum and is growing nicely. So organic growth will add a good chunk.

It doesn't mean that we don't need to continue to work very hard on third-party acquisitions. But from what we see on the M&A side, the organic growth, we are confident that the $150 million is fully achievable.

Great. Thanks a lot, Uzi.

(Operator Instructions) At this time there are no further questions.

Well, I would like to thank my colleagues here around the table, our employees, and of course you, the investors, for the confidence in our Company. This was a very good quarter for us, and we believe that 2014 and 2015 to be very good years.

Thanks again. We will talk to you soon.

This concludes today's conference call. You may now disconnect.