Delek Logistics Partners LP (DKL) 2016 Q1 法說會逐字稿

Good morning. My name is Erica, and I will be your conference operator today. At this time I would like to welcome everyone to the Delek Logistics Partners Q1 earnings call.

(Operator Instructions)

Keith Johnson, Investor Relations, you may begin your conference.

Thank you, Erica. Good morning. I would like to think everyone for joining us on this webcast to discuss Delek Logistics Partners first-quarter 2016 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 the 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 statement, whether as a result of new information, future events or otherwise.

Last night we distributed a press release that provides a summary of our first-quarter 2016 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. Our DCF was approximately $20.4 million in the first quarter of 2016, which is a 21% increase from $16.8 million in the first quarter of 2015. EBITDA increased to $23.7 million for the first quarter of 2016 compared to $21.1 million for the prior year period. The DCF coverage ratio was 1.2 times.

Based on our performance, we are pleased to announce an increase in our quarterly distribution to $0.61 per limited partner unit for the quarter ended March 31, 2016. This distribution is payable on May 13, 2016 and is a 3.4% increase from our fourth-quarter 2015 distribution per unit. This is our 13th consecutive increase, and is 15.1% higher than our first-quarter 2015 distribution of $0.53 per limited partner unit.

During the first quarter of 2016, DKL continued to maintain a flexible financial position with $337 million of availability capacity on our $700 million credit facility, and a leverage ratio of 3.5 times, which is well within the 4.75 times currently allowable under our credit facility.

Now, I will turn the call to Danny to go over the financials.

Thank you, Assi. For the first quarter of 2016 Delek Logistics reported net income attributable to all partners of $15.4 million or $0.54 per diluted common limited partner unit, compared to net income attributable to all partners of $14.6 million or $0.56 per diluted common limited partner unit in the prior-year period.

Our contribution margin increased to $26.8 million from $24.5 million in the first quarter of 2015 as performance in both segments increased on a year-over-year basis. First-quarter 2016 contribution margin in our pipelines and transportation segment improved to $20.3 million compared to $19.4 million in the first quarter of 2015. The improvement was primarily attributable to fees associated with the El Dorado rail offloading racks and the Tyler crude oil storage tank purchased in March of 2015.

I want to provide some guidance on the Paline pipeline as you model the coming quarters. As you may be aware, the current contract expires on June 30 of 2016. Beginning in the third quarter, the revenue from that pipeline is expected to decline as the capacity leased is reduced from 35,000 to 10,000 barrels per day as we have exercised our option to extend the contract at a lower rate through the end of this year.

During the third quarter this pipeline is scheduled for hydro testing, which is required by PHMSA every five years and is expected to last 40 days. In anticipation of the contract ending, we are evaluating the options for this pipeline in 2017, which could include reversing it to flow from the Gulf Coast to Longview, Texas to allow interested shippers to take advantage of crude oil differentials in that market.

Contribution margin in our wholesale marketing and terminalling segment was $6.6 million in the first quarter of this year compared to $5.1 million in the prior-year period. On a year-over-year basis, results benefited from improved performance in our East Texas assets due to higher volumes from Delek US' Tyler, Texas refinery, which underwent a scheduled turnaround in the first quarter of 2015. That increase was partially offset by a $1.4 million decline in the West Texas gross margin and $800,000 of expenses associated with internal tank contamination at two terminals during the first quarter this year.

Our West Texas wholesale gross margin was $0.53 per barrel in the first quarter of 2016 compared to $1.40 per barrel in the first quarter of 2015. The first quarter of this year margin was negatively affected by higher cost inventory being sold at the beginning of the quarter as prices were declining. Also a competitive market continues to exist as suppliers face lower demand as drilling activity in the region slowed. We did experience an improvement in gross margin per barrel later in the quarter with March averaging more than $1.

Looking forward we expect the gross margin per barrel should be in a range of $1 and $1.75 during the remainder of 2016 but will vary based on product supply and demand changes in the region through the year.

West Texas wholesale throughput was 14,370 barrels per day compared to 16,645 barrels per day in the first quarter of last year. Capital expenditures were approximately $1.1 million in the first quarter of 2016. We have reduced our total capital expenditure forecast for 2016 to $14.3 million, which includes $3.5 million of discretionary and $10.8 million of maintenance. This compares to our previous forecast of $18.2 million, which included $13.4 million of maintenance and $4.7 million of discretionary related projects.

We have invested approximately $56.1 million as of March 31 in our joint venture pipeline projects, and the estimated total investment for the Rio and Caddo pipelines is expected to be approximately $96 million pending revisions to the estimated cost related to an extended construction schedule at Caddo due to weather conditions. At this time we do not expect the revisions to be material.

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

Thank you, Danny. Our operations improved on a year-over-year basis, and we continue to maintain financial flexibility at DKL. This financial position should support our growth initiative, which includes our joint venture pipeline project investment, evaluating third-party acquisition and partnering with our sponsor Delek US. Our third joint venture pipeline project is expected to be operational in the third quarter when the Rio pipeline is completed in July. Construction on the Caddo pipeline is expected to be completed by January 2017.

We continue to explore third-party acquisition opportunities created by a challenging MLP environment. Also, there may be potential opportunities to partner with our sponsor. As previously disclosed by our sponsor, Delek US is exploring options to unload the value of its retail assets, and DKL continues to evaluate the flexibility of this type of dropdown. In addition, Delek US investment in Alon US may create additional growth opportunity for DKL in the future.

Through our growth initiative and financial position we believe that we can continue to support our target to increase the annual distribution per limited partner unit by 15% for 2016.

With that, Erica, could you please open the call for questions?

(Operator Instructions)

Brian Gamble, Simmons.

Good morning.

Good morning, Brian.

Question on -- let's just start with Paline on the pipe. Taking the contract down and extending it clearly you needed to do that -- that testing at some point anyway. The impact from that test, did you say it was all in Q3?

That is correct.

What -- so the combination of having that downtime in Q3, as well as reduction in the capacity on the lease, what margin impact do we anticipate that having on Q3 and Q4?

It is hard to say, and I will tell you why. Because we do believe that even though the T&D capacity is coming down there may be shippers on that line so if you ask about the 40 days downturn because of the Hydro test then we can probably calculate that and get that to later. Regard to the coming down to 10,000 barrels -- I wouldn't read -- that is 10,000 barrels as the pipeline will continue to operate and to let people ship on top of the 10,000. Mark do you want to --

Brian, this is Mark Smith. We are also during our planning schedule for the Hydro test we are trying to actually minimize -- because we have some extra capacity in that line we are trying to minimize the amount of volume during that 40-day Hydro test that actually doesn't ship. So that's another piece of the pie that Uzi is talking about. It is hard to tell you exactly what the impact is. We are trying to minimize the volume impact of the Hydro test.

As far as of the volumes that are sitting there that could potentially be put on the pipe are there enough volumes there to feasibly cover the complete delta there between the old contract and the new contract, or are we looking to just supplement part of the missing barrels?

I think it all depends on market conditions. There's a lot of volume that gets into Longview off of all those pipelines that expansion of PEII. Plains has a pipeline coming in from Cushing there, so I think it is all going to depend on differentials. So we have -- now that the capacity lease is reduced, that gives us extra space for other interested parties that might want to ship, given differential conditions.

Great, that's helpful. And then on the wholesale business, the West Texas margin a little lower than we had anticipated. Nice to see it bounce a little bit in March. We talked about baseline $2 for the year at the last call. Now we are talking a buck to a buck seventy-five for the rest of year. Is that purely based on -- walk me through the factors that have changed that thought process for the rest of year.

Yes, I think it is really related to the RINs. So as you know at the beginning of year when the RBO got announced, RINs jumped from last year being about $0.50 to where they have stayed pretty steady this year at $0.71, $0.72 a gallon. And the fact that we are not an obligated party, and there's a few of others of us like us wholesale marketers out in West Texas, what has happened is that basically that has become a part of the calculation of what potential margin you could have.

So people are trying to get volume because of the decrease in drilling activity. So they are basically driving the margins down because we have this extra margin in the -- high margin in the RINs that we can then sell to a third-party and capture. So the racks in West Texas are all selling at prices below transportation costs because of the RIN value.

That make sense. Any -- your forecast for what the RINs value does for the rest of year is pretty consistent in the $1 to $1.75 per barrel that you are anticipating at the rack?

Correct

Okay. And then on the CapEx numbers drop in growth a little bit, great to see maintenance come down at any point. What were you able to save on the maintenance front and what got slightly pushed out on the growth front? I'm guessing that might be some Caddo dollars, but not completely sure. Just walk me through the pieces there.

Most of the maintenance, our tank maintenance at the refineries, we are generally on a 10-year schedule at the refineries for tank maintenance. And when we really looked at our Delek US overall CapEx budget for 2016, we reduced it from $90 million to $65 million by basically moving some of the tank maintenance to future years, and, therefore, you saw a reduction. I don't think there was a big reduction in gross CapEx at this point.

Great. Appreciate the color.

Thank you.

There are no further questions at this time. I will turn the call back over to the presenters.

Thank you so much. These are challenging times in our market, but I would like to still thank investors. I'd like to thank my colleagues here, our Board and mainly our employees who made this Company what it is. Thank you. We will talk to you soon.

This concludes today's conference call, you may now disconnect.