Delek Logistics Partners LP (DKL) 2016 Q3 法說會逐字稿

Good morning. My name is Kim, and I will be on your conference operator today. At this time, I would like to welcome everyone to the Delek Logistics Partners' Q3 earnings conference call. (Operator Instructions) Keith Johnson, Investor Relations, you may begin your conference, sir.

Thank you, Kim. Good morning. I would like to thank everyone for joining us on this webcast to discuss Delek Logistics Partners' third-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 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 these 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.

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 will turn the call over to Assi.

Thanks, Keith. Our DCF was approximately $19.1 million in the third-quarter 2016 compared to $22.6 million in the third quarter of 2015. The DCF coverage ratio was 0.99x for the third quarter 2016 and 1.16x for the nine months ended September 30, 2016.

During the third quarter of 2016, the (inaudible) reduced our DCF by $1 million through a combination of expenses and capital spending for the work done when the pipeline was done.

EBITDA was $22 million for the third-quarter 2016 compared to $26.1 million in the prior year period. Based on our performance, we are pleased to announce an increase in our quarterly distribution to $0.655 per limited partner unit for the third quarter ended September 30, 2016. This distribution is payable on November 14 (technical difficulty) and is a 4% increase from our second-quarter 2016 distribution per unit. This is our 15th consecutive increase and is 14.9% higher than our third-quarter 2015 distribution of $0.57 per limited partner unit.

During the third-quarter 2016, DKL continued to maintain a flexible financial position with $318.5 million of available capacity on our $700 million (inaudible) and a leverage ratio of 3.70 times, which was well below our 4.75 currently available under our credit facility.

Also, before I turn the call over to Danny, I wanted to provide an update related to my role as the CFO with DKL. As you may be aware, after further discussion with our sponsor Delek US, I will continue as the CFO through May 2017. The general partner and I have agreed that I will remain as CFO during the time period for DKL as well. I am looking forward to continuing this role and am excited about the initiative we have ahead of us. Behind May 2017, I will continue working for the Company as an officer in a different role.

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

Thank you, Assi. For the third quarter of 2016, Delek Logistics reported net income attributable to all partners of $13.2 million or $0.41 per diluted common limited partner unit compared to net income attributable to all partners of $18.6 million or $0.70 per diluted common limited partner unit in the prior year period. Our contribution margin was $24.7 million compared to $29.1 million in the third quarter of 2015. This decrease on a year-over-year basis is due to lower performance in the pipelines and transportation segment.

Third-quarter 2016 contribution margin in our pipelines and transportation segment was $16.1 million compared to $20.4 million in the third quarter of last year. This decline was primarily attributable to lower performance in the Paline pipeline due to a decline in both the amount of capacity that is leased and the lease revenue on a year-over-year basis. Also, lower volume on the sale of gathering system reduced contribution margin. These factors were partially offset by lower operating expenses that declined to $7.7 million in the third quarter of this year from $8.4 million in the prior year period. The operating expense decline was primarily due to lower tank maintenance costs and utilities. Tank maintenance costs are lower due to the completion of projects in the prior year period and 2016 cost-saving initiatives.

Expenses in the third quarter of 2016 included approximately $500,000 of expense related to the hydro testing of the Paline pipeline.

Contribution margin in our wholesale marketing and terminaling segment was $8.6 million in the third quarter of this year, which is in line with the prior year period. A decline in gross margin in West Texas and lower volumes in the East Texas marketing agreement was offset by reduced operating expenses on a year-over-year basis.

Operating expenses declined to $1.6 million from $3.2 million in the prior period due to a combination of lower tank maintenance work at the terminals, utilities and supplies. Similar to the pipelines and transportation segment, tank maintenance costs are lower due to the completion of projects in the prior year period.

Our West Texas wholesale gross margin was $1.16 per barrel in the third quarter of this year compared to $1.50 per barrel in the third quarter of last year. Throughput in West Texas during the third quarter of 2016 was 12,162 barrels per day compared to 18,824 barrels per day in the prior year period. Demand in the region continued to be affected by low crude oil price environment.

As we moved into the fourth quarter, we have experienced increased volume and gross margin per barrel above $2 during October. Capital expenditures were approximately $3.1 million in the third quarter of this year. For 2016, our total capital expenditure forecast is $10.6 million, which includes $2.1 million of discretionary and $8.5 million of maintenance spend. This compares to our previous 2016 forecast of $14.3 million. We have invested approximately $95.8 million as of September 30 in our joint venture pipeline projects. And the estimated total investment for the RIO and Caddo pipelines is expected to be approximately $101 million.

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

Thank you, Danny. During the third quarter, we successfully completed the hydro testing of the Paline pipeline, which is required every five years, resulting in limited repair work. We have filed the third tariff on this pipeline and are actively marketing the access capacity to third-party shippers which have shown some interest for spot shipments.

With the completion of the RIO pipeline in September, we are looking forward to contribution from this investment in the fourth quarter and as we move into 2017. The joint venture continues to explore growth projects around the pipeline in West Texas and recently began construction on another storage tank in the system that should be completed by mid-2017. Our Caddo joint venture is expected to be completed in January 2017 and should provide additional growth for DKL in the next few years.

We continue to maintain financial flexibility at DKL and remain focused on our growth initiatives. These initiatives include the joint venture pipeline projects, evaluating third-party acquisitions, and exploring its options to partner with Delek US. We believe that the combination of our growth initiatives and financial position should continue to support our distribution goals. Based on expected contribution from our joint venture projects and improvement in our existing assets, our focus for 2017 distribution growth target is at least 10%.

As you know, on October 14, our sponsor, Delek US, made a nonbinding proposal to acquire the remaining outfitting stock of Alon USA in an all-stock transaction. I am sure that there are many questions related to this proposal and how it may benefit DKL. But we do not intend to make any comments related to this proposal at this time.

With that, Kim, could you please open the call for questions.

(Operator Instructions) Gabriel Moreen, Bank of America Merrill Lynch.

So, Uzi, on the last comment you made about double-digit growth in 2017, just to clarify, that is not contingent on additional M&A occurring at that DK level or dropdowns? (multiple speakers) or is that correct?

That is a great question. That is not contingent on additional M&A. As you know, third quarter was impacted by Paline. That is behind us. And based on the organic growth that we see in the system, we are expecting at least double -- or we expect at least 10%, if you will, not contingent on any M&A. Obviously, M&A or any new dropdowns may increase that number.

Great. Thanks, Uzi. And then, in terms of the $2.00 you had mentioned as a number out there for October for West Texas margins, can you just elaborate sort of what maybe occurred in October? Is it just the rig count has gotten to a certain level and you see that kind of $2.00 as a sustainable number if things keep going as they are going in the Permian?

Yes. This is Mark Smith. What happened is we have seen actual -- I think the rig counts are starting to take effect at some of the upticks in rig counts. We have seen our volumes go up by almost 2 a day in October versus the third-quarter average. And both the distillate margins, which had been suffering most of the year, are pretty decent, and they are actually positive versus most of the year being flat, and gasoline margins have stayed strong out there as the spec change happened between September and October.

Thanks, Mark. And then, just last broader question, maybe for the management team, is around just thinking about dropdowns in light of cost of capital includes some other refinery link drop-down MLPs. I have kind of been taking a look at that issue. Can you just talk about how you are broadly thinking about cost of capital and dropdowns in the current environment?

The good news for us, as I mentioned, is, as I mentioned on my comments, is that we are well below our allowable ratio in our debt to EBITDA, and we can probably borrow tomorrow more than $100 million and stay within that ratio.

So while the unit has been suffering probably, in my mind, for no reason down to increasing the cost of capital, our cost of debt stays very, very low. Probably the lowest in the industry. And, as you remember, we have $318 million available under our credit facility. So we have that ability, again, for the next few dropdowns to use debt only.

And just remind me, Assi, are you comfortable up to 4.5 or what level under the EBITDA are you kind of comfortable up to?

We usually target 0.5 time below the allowable by the bank, which is 4.25. With that being said, for an acquisition, if we can deleverage later and, as you know, we in general every year we were not paying everything as a dividend, we think that we can still have a lot of financial flexibility.

In addition to that, our credit facility does allow us to put some kind of a note, a high-yield, a term loan above our revolver and to inch up the leverage. With that being said, Delek US is usually -- and Delek Logistics are conservative companies, and I think 4.25 is doable, maybe 4.5 just as a short period of time between acquisitions.

Understood. Thanks very much.

Brian Gamble, Simmons.

Just on Paline, you talked about negotiations ongoing, interest being shown there post the hydro test. Any other details you can provide as far as how near-term those opportunities may be and/or the magnitude that we could potentially expect to be there either in Q4 or by next year?

Let me take the first part of it, and then Mark, I'm sure, will add some color as he talks too many companies in the area. Just to refresh everybody's memory, Longview is where the line starts and it goes to Nederland. The longer area is about to get more barrels coming from different sources. So more and more we hear from people that they have interest in shipping on the line because of the amount of barrels that we see in Longview. We need to look at the ARB carefully, which we are doing it almost every day. But we are extremely optimistic that when the ARB opens, because of the amount of barrels that are coming to Longview, that line will continue to perform the way it performed until a few months ago.

Mark, do you want to --

Yes. I think it would be -- Brian, I think Uzi said it pretty well. There is a pipeline starting up in the first part of next year, bringing a significant amount of barrels into Longview. We have gotten a lot of interest from the major players in the Nederland area that are looking for alternatives ways to get crude, and when things open up, I think they will be there to ship.

Great. Then, maybe next on the OpEx run rates. Those segments performed well for the quarter. You mentioned some tank maintenance and some utilities that were beneficial on a year-over-year basis or maybe quarter-on-quarter basis. Are those run rates appropriate to use both in Q4 and as we approach next year, or are there any sort of one-offs in Q3 that may be is a little bit better than we should expect to continue moving forward?

Brian, bearing incidence, which, again, this was a clean quarter, bearing -- avoiding incidents, if you will, in the future, that is what we expect to be our OpEx going forward. It may inch up just a little to make sure that we are maintaining integrity of the system, but, generally speaking, that is the level we are comfortable with.

Brian, (multiple speakers) quarter, $500,000 of the cost of the hydro test, it is part of the OpEx. So, if any, this quarter was OpEx was higher than it would have been otherwise. So we can actually -- can perform if everything goes well at an even lower rate.

Even better. We would like to hear that. And then, lastly, Uzi, you mentioned it and I will just throw it back at you just in case you changed your mind in the last 10 minutes. Anything you want to say on the DK?

I didn't change my mind.

Okay. Just checking. Thank you, guys. Appreciate it. Have a good day.

Lin Shen, HITE.

I am delighted to hear that you guys do commit to (inaudible) distribution 10% or double-digit next year. Unfortunately, I think that DKL is really undervalued in the market. I am just wondering, if there are some MLP -- you talked to this before, like there are (inaudible) on how the market treated them. How should we think about DKLs (inaudible) or distribution growth?

Would you please clarify the question? I am not sure I --

I just like -- is the distribution growth a function of their cost of capital on DKL or not? How should we think about how DKL, their equity is trading versus how do you plan to grow distribution?

Okay. Perfect. Now I understand the question. First of all, it is not dependent on the cost of capital. This is the question.

Second, I want to clarify something Dave asked earlier, and maybe I did a poor job answering his question. We are comfortable with that double-digit growth, regardless of dropdowns or M&A activities just because of the activity that we see increasing in our different assets. So there is no new capital coming in to support this 10% or more than 10%. Obviously, if we are doing M&A or new dropdowns, then that number can grow, but then it is a function of cost of capital, obviously. But for the basic 10%, we don't do anything unusual in terms of capital. I hope I answered your question.

Great. Thank you. That's what I want.

And there are no further questions at this time.

Thank you very much, Kim. I would like to thank my friends around the table. I would like to thank our Board of Directors and you investors for supporting our Company, but mainly, I would like to thank our employees for making this Company what it is.

Thank you and have a great day.

Ladies and gentlemen, this concludes today's conference call, and you may now disconnect.