Delek Logistics Partners LP (DKL) 2014 Q4 法說會逐字稿

Good morning. My name is Jennifer 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.

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. I will now turn the conference over to Mr. Keith Johnson. Please go ahead, sir.

Thank you, Jennifer. Good morning. I would like to thank everyone for joining us on this webcast to discuss Delek Logistics fourth-quarter and year-end 2014 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. Just 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 24 by dialing 855-859-2056 with a confirmation ID number 70265546.

An online replay may also be accessed for the next 90 days at the Partnership's website, deleklogistics.com. Last night, we distributed a press release that provides a summary of our fourth-quarter and year-end 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 strategic remarks. With that, I'll turn the call over to Assi.

Thank you, Keith. Delek Logistics has had one of its best quarters ever. Our DCF was $21.8 million and EBITDA was $26.1 million for the fourth quarter of 2014. This is an increase from a DCF of $13.3 million and EBITDA of $16.7 million in the prior-year period.

We ended the quarter ending year with a fantastic DCF coverage ratio of approximately 1.7 times. Based on our performance, we are pleased to announce an increase in our quarterly distribution to $0.51 per unit for the quarter ended December 31, 2014, which is a 4.1% increase from our third-quarter 2014 distribution.

This is our eighth consecutive increase and is 23% higher than our fourth-quarter 2013 distribution of $0.41 per unit. For 2014, our DCF was $80 million, a 52% increase from $53 million in 2013.

Our EBITDA was about $95 million from $64 million in 2013. For 2014, our declared distribution was $1.90 per unit compared to $1.60 per unit in 2013. Now, I will turn the call over to Danny to discuss the finance results.

Thank you, Assi. For the fourth quarter of 2014, Delek Logistics reported net income attributable to all partners of $20.5 million or $0.80 per diluted limited partner unit, compared to net income attributable to all partners of $11.3 million or $0.46 per diluted limited partner unit in the prior-year period.

Improved performance compared to the fourth quarter of 2013 was driven by a higher margin in the West Texas wholesale business, acquisitions completed during the past year and higher volumes across our different pipeline systems.

As a result, contribution margin increased to $29.3 million in the fourth quarter of 2014 from $18.6 million in the prior-year period. Now, I'll spend a few minutes discussing our two reporting segments.

Fourth quarter of 2014 contribution margin in our pipeline and transportation segment improved to $14.1 million compared to $11.8 million in the fourth-quarter 2013. The improvement was primarily attributable to storage fees from the El Dorado tank farm acquired in February of 2014 and higher volumes across our pipeline systems.

Contribution margin in our wholesale marketing and term-link segment was $15.2 million in the fourth quarter this year compared to $6.8 million in the prior-year period. This increase was primarily due to our West Texas wholesale business as the gross margin was $6.36 per barrel in the fourth quarter of 2014 compared to $1.24 per barrel in the prior-year period.

This increased margin was primarily driven by realized netbacks in local markets that did not decline as quickly as Gulf Coast prices. The margin per barrel in the fourth quarter included approximately $1.2 million or $1.70 per barrel from RINs generated in our ongoing ethanol-branding activities.

This compares to a gross margin that included $700,000 or $0.43 per barrel from RINs in the fourth quarter of last year. Also contributing to improved results on a year-over-year basis was higher terminal volumes due primarily to the acquisition of the El Dorado, Arkansas terminal in February of 2014.

In addition, higher volume under our East Texas marketing agreement that supports Delek US' Tyler, Texas refinery on a year-over-year basis was a factor in the higher contribution margin.

As of December 31, 2014 Delek Logistics had a cash balance of $2 million and total debt was $252 million. We ended the quarter with approximately $441 million of unused availability under our $700 million credit facility.

Our leverage ratio at December 31, 2014 was 2.56 times, well within the 4.25 times allowable under our credit facility. Capital expenditures were approximately $4.4 million in the fourth quarter of 2014, of which $1.6 million of CapEx was reimbursed under our omnibus agreement with Delek US.

Total capital expenditures for 2015 are expected to be $20.7 million, which includes $13.6 million of maintenance and $7.1 million of discretionary-related projects. Included in the 2015 amount is approximately $4 million of CapEx to be reimbursed under our agreement with Delek US.

This compares to total expenditures in 2014 of approximately $7 million. With that, I will turn the call over to Uzi for his closing comments.

Thank you, Danny. In addition to great financial performance during the fourth quarter, we also completed a number of strategic steps during this period that positions us for continued growth in 2015.

We acquired logistics assets in East Texas that should provide support to Delek US' Tyler, Texas refinery and improve our market position in that area. The tracking office acquired extended our logistics service offering that can be provided to third parties and to Delek US' El Dorado refinery.

To [better] support future growth to our lender commitments under the credit facility was expended to $700 million from $400 million and allowable leverage ratio was increased. Also, the credit facility was improved to increase our flexibility to partner with third parties and to develop [mulltel] projects.

Finally, we completed new agreements for the Paline Pipeline effective January 1 that should increase our annual this year by approximately $13.6 million from the 2014 level. In March, we expect to purchase the identified drop-down from Delek US that included a crude oil storage tank at Tyler and (inaudible) at El Dorado.

These outfits are expected to impact to $10 million of annual EBITDA. When combined with the new Paline agreement and steps completed during 2014, we believe that we are on track to achieve our growth rate of approximately $25 million to $35 million depending on EBITDA by the end of the first quarter of 2015.

All of these initiatives can be achieved with an estimated investment of $80 million to $85 million of capital, which can be financed with the existing availability on our revolver. For 2014, our EBITDA of approximately $96 million is doubled the initial projection of approximately $48 million including in our IPO prospectus in November 2012.

We're ready to accomplish this increase through a comblination of organic growth and acquisitions (inaudible). We continue to focus on growth in 2015 and the recent increase in our financial flexibility should support our efforts as we move towards our goal of $[22] million of EBITDA on an annual rate in 2015.

In addition, we continue to target an annual distribution increase of [up to] 15% per year in the future. With that, Jennifer, can you please open the call for questions?

(Operator Instructions) Mark Reichman, Simmons.

Good morning. Just a couple of questions. First of all, could you just address the West Texas marketing margin per barrel?

It was strong in the fourth quarter and I realize that the product prices were maybe a little stronger than expected, but where prices sit now, what would you expect in the first quarter?

Let's take it a few stages. The first one here is the $6 was -- this was a strong margin. However, that's a repeat of the second quarter. So this is -- after the last three quarters, we got $6 for three quarters. Now, we always said that that margin would fluctuate.

But we are comfortable with guidance of $3 long-term for the year. Probably we need to revise that in the next two, three quarters to see if this rate continues, but for this moment, we think $3 for purpose of modeling for the year is a good number.

Okay. And then also on the drop down opportunities with the EBITDA expected to be kind of between the $5 million to $10 million range, could you just talk a little bit about how those assets are performing currently?

And maybe for the first year, I mean, would you expect it to be closer to the $5 million or the $10 million? How would those cash flows be expected to ramp over the next year following the drop-down?

First of all, the tank as we all know, market is in Contango.

Right.

So that is a good [option] that pays [for itself] handsomely right now. The well facility as we know, marketing Canada (inaudible) is very cheap or very depressed, and the fact that as we mentioned, the price of (inaudible) is not falling as fast as the price of crude.

That's allowed us to enjoy that facility as well. So they're performing very well right now.

Assi, do you want to add something right now?

Sure. I think the best thing for modeling purpose is to assume the average of $7.5 million EBITDA for next year between the two assets. If you look at the historical drop downs and evaluation, we've done them somewhere nine to ten times so I expect this ones action to be similar.

Okay. And then just last question for me. You guys have done a real good job, you know, not just growing through drop downs but also being able to identify third-party acquisitions and close some in the latter part of the year.

What does the deal flow look like out there? And I'm realizing that you're not just out to buy cash flow, that you're looking at all these assets strategically.

What would be your preference in terms of the direction you take or the types of assets that you might purchase for third parties?

Again, that's a great question, Mark. Let me take it in two stages. Step one, we always say that we are fee-based stable cash flow. So that's the vehicle. We prefer not to take commodity risk at the DK level. This is more of the same in the future.

We want to be very stable, fee-based, growing, as you mentioned, being, moving our distribution for eight times in a row, and we continue to believe that we have growth of 15% in our distribution going forward. So that's one thing.

The second thing is we obviously know that our coverage ratio is great. We also know that leverage ratio is very comfortable, so we continue to look and there is a deal flow coming.

And we are comfortable that our $150 million EBITDA by the end of this year is something that we can achieve and bring another 50% growth to the market within a year.

Great, thank you very much.

Thank you.

Theresa Chen, Barclays Capital.

Hey, good morning. My first question is a follow-up to Mark's last question on third-party acquisitions.

Given the new commodity price backdrop and outlook that we're in currently, have you seen any competitive changes in the market? Are there more sellers for certain types of assets or more willing sellers?

Let me put it this way. There were always willing sellers and we always look for assets that we can improve them.

The thing in our mind is still not long enough if, I mean, I can use term. So it's growing, but it doesn't -- it didn't get to the magnitude that actually we are expecting this to get to as the current situation would continue. We don't think that crude oil is about to jump to $80 tomorrow morning.

So as more pressure comes to the market, we think that there will be bigger deals and cheaper prices in the next two months.

Very helpful, thank you. And then on the West Texas margin, so we've seen the highs of mid-six's for two quarters now, and then low as $1 and change.

Do think that's a fair range for the extremes? I understand that on an average basis you are still going with the $3 per barrel number. But can the extremes swing even wider than what we've seen historically or do you think that this is -- this captures the range accurately?

In the last three quarters and I'm going by memory, it was a little more than $6 twice and once around $2. So I don't think $1 and change. I think it was close to $2, but again I'm going by memory.

Now although the trend is going higher, we see our assets performing very well. Now, do we think that we can go to $10? Probably not. And do we think that it can get to negative? Probably not or $2. Probably about [$2.50] just guess. Always something can change, but $1.50 to $2 is probably the lowest that we can get.

Okay, perfect, thank you. And then last question, so after you complete next drop-down in terms of replenishing the drop-down inventory, have you thought about possibly putting the retail field distribution assets into the drop-down inventory? Would that be a possibility down the line?

Obviously, we have seen other people doing retail. We've said all along that our retail (inaudible) performed very, very well. We said that this is a startup.

It's not mature and down the road that's something that we for sure will consider if it makes sense. But at this point, we still believe that we need to build this business from a performance standpoint so we support the initiative of very stable fee-based cash flow.

Okay. And then -- this is a very down-the-line question, but related to that, do think that the fee could be guaranteed at the parent level similar to how some other MLPs have done it?

We are getting into the technicality here and I wouldn't go to that level at this moment.

Fair enough, thank you.

Cory Garcia, Raymond James.

Good morning, fellas. Nice quarter. I have a quick question here related to volumes across your Lions system, just saw a slight drop off sequentially.

I'm wondering if that's seasonal or if that was maybe some opportunistic sourcing by DK of some heavier crudes into El Dorado?

Actually, very simple. If you remember in October, the valley pipeline shutdown.

And we had a couple of other -- more hiccups, but the Smith Valley shutdown for ten days and then that was the issue.

Okay, got you. Perfect. Thanks for clearing that up.

(Operator Instructions) There are currently no questions at this time.

I'd like to thank you, Jennifer, for helping us this morning. I'd like to thank my colleagues around the table.

That was a wonderful quarter and a great year. I'd like to thank our Board of Directors for the support they give our Company. All our Investors for the confidence that you've given us, but mainly I'd like to thank our great employees who make this Company what it is.

Have a great day. We'll talk to you soon.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.