Delek Logistics Partners LP (DKL) 2017 Q1 法說會逐字稿

Good afternoon. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Delek Logistics Partners Q1 2017 Earnings Conference Call. (Operator Instructions) Keith Johnson, Investor Relations, you may begin.

Thank you, Christa. Good afternoon. I would like to thank everyone for joining us on this webcast to discuss Delek Logistics Partners' First Quarter 2017 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; as well as 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.

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. Overall, our operating performance was stable on a year-over-year basis, as our Permian Basin-related operations were the primary factor offsetting lower pipeline performance. Our DCF was approximately $20.6 million in the first quarter 2017 compared to $20.4 million in the first quarter 2016. The DCF coverage ratio was 0.98x for the first quarter 2017. EBITDA was $23.9 million for the first quarter 2017 compared to $23.7 million in the prior year period.

Based on our performance, we increased our quarterly distribution to $0.69 per limited partner unit for the quarter ended March 31, 2017. This distribution is to be paid on May 12, 2017, and is a 1.5% increase from our fourth quarter 2016 distribution per unit. This is our 17th consecutive increase and is 13.1% higher than our first quarter 2016 distribution.

During the first quarter 2017, DKL continued to maintain a flexible financial position, with approximately $301 million of available capacity on our $700 million credit facility and a leverage ratio of 3.8x, which is well within the 4.75x currently allowable under our credit facility.

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

Thank you, Assi. For the first quarter of 2017, Delek Logistics reported net income attributable to all partners of $14.6 million, which compares to $15.4 million in the prior year period. Limited partners' interest in net income was $10.5 million or $0.43 per diluted common limited partner unit compared to $13.2 million or $0.54 per diluted common limited partner unit in the prior year period.

Our contribution margin was $26.5 million compared to $26.8 million in the first quarter of 2016.

First quarter 2017 contribution margin in our Pipelines and Transportation segment was $16.1 million compared to $20.3 million in the first quarter of 2016. This decline was primarily attributable to lower performance from the Paline Pipeline and/or volume on the SALA Gathering System.

In the first quarter of 2017, the Paline Pipeline was a FERC-regulated pipeline with a tariff established for potential shippers, compared to the prior year period, when the pipeline capacity was contracted to 2 third parties for a fixed monthly fee.

Operating expenses increased to $8.2 million in the first quarter of 2017 from $7.7 million in the prior year period. The operating expense increase was primarily due to employee-related expense.

Contribution margin in our Wholesale Marketing and Terminalling segment was $10.4 million in the first quarter of this year, which was an increase from $6.6 million in the prior year period. This increase was primarily due to an improvement in the West Texas gross margin and lower operating expenses on a year-over-year basis. The increases were partially offset by lower volume on the East Texas marketing agreement and at the Tyler terminal resulting from 16 days of planned downtime at Delek U.S.' Tyler, Texas refinery in the first quarter this year. The estimated impact of this downtime was approximately $500,000 of lost margin.

Our West Texas wholesale gross margin was $2.72 per barrel in the first quarter of 2017 compared to $0.53 per barrel in the first quarter of 2016 and $1.96 per barrel in the fourth quarter of 2016. Throughput in West Texas increased to 14,467 barrels per day compared to 14,370 barrels per day in the prior year period.

During the first quarter of 2017, both the Caddo and RIO joint venture crude oil pipelines were operating. Our equity income from these joint venture pipelines was approximately $245,000 compared to a loss of $229,000 in the prior year period. We did not receive a distribution in the first quarter of this year, but based on prior performance, we have received distributions of approximately $780,000 in the second quarter of this year.

Capital expenditures were approximately $2.8 million in the first quarter of 2017 and included $1.9 million of discretionary spending, $900,000 of maintenance.

During the first quarter of 2017, approximately $3.1 million was reimbursed by Delek U.S. For 2017, our total gross capital expenditure forecast is $18.3 million, which includes $3.2 million of discretionary and $15.1 million of maintenance before reimbursement by Delek U.S. We expect approximately $5.3 million of the maintenance capital expenditures to be reimbursed in 2017.

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

Thank you, Danny. As drilling activity has increased in the Permian Basin, our operations began to benefit in a number of ways in the second half of the first quarter, and this trend continued into the second quarter.

The West Texas wholesale business experienced higher gross margin per barrel as fuel demand in the area increased to support the drilling activity. Our RIO joint venture crude oil pipeline is benefiting from increased oil production in the Delaware Basin. Also, volume shipped on the Paline Pipeline increased as crude oil differentials widened to support shipping economics on this pipeline to the Beaumont area.

Based on our initial results for April, the gross margin per barrel in West Texas was approximately $5.90, and the 36,000-barrel per day capacity pipeline of Paline Pipeline is full. This translated into EBITDA of approximately $10 million for the month of April.

Our sponsor, Delek U.S., continues to progress towards completing the acquisition of the remaining outstanding stock of Alon USA in an all-stock transaction. Once the transaction is completed, the drop-down inventory at Delek U.S. should be increased. We believe that shortly following Delek U.S. closing the Alon transaction, there's a potential for the asphalt terminal to be the first drop-down to DKL. Our financial flexibility should allow us to utilize our great facility to complete this purchase.

We continue to focus on creating long-term value for shareholders, or unitholders, and believe that the combination of an increased drop-down inventory at our sponsor, contribution from our joint venture pipeline project and growth initiatives should continue to support our annual distribution growth per limited partner unit of at least 10% through 2019.

Before I turn the call over for Q&A, I would like to welcome Kevin Kremke to the team. He has been with us since early April and will become CFO on June 1. I also want to thank Assi for his contribution as CFO. And on June 1, Assi will transition from that position into a new role with the company in strategic planning business development area.

With that, Christa, will you open the call for questions?

(Operator Instructions) Your first question comes from the line of Gabriel Moreen from Bank of America.

Uzi, that sounds like fairly impressive performance in the month of April. Can you talk about what shippers are currently thinking on Paline in terms of potentially entering into longer-term agreements? Do you have, I guess, longer-term visibility on cash flow in that pipeline?

That's a great question. Let me divide your question into 2. The first one is the tariff on Paline, as we filed temporary tariff a few months ago, is basically $0.75. We do not believe that this is a long-term sustainable tariff. It actually needs to be higher. So our willingness, the company willingness, DKL willingness, to enter into a long-term agreement under $0.75, the incentive is pretty low. So that -- we think that we are giving some value away to incentivize our people to ship. If the pipeline continues to be full, and we know that in May it is full again, we need to look very carefully on the tariff. Now we have the ability to change that tariff with a 30-day notice, but we do need to do that. Once we do that and we come to something that is more market, if you will, driven as the Permian activity continues and the margin or the differential between the Beaumont area or the East Houston area and the Midland area continue to stay wide, then we will need to think and entertain the idea of long-term shippers. But under the current tariff, we're basically completely full, so there's no incentive for us to go and lock in shippers.

Great. That's helpful. And I guess, as a follow-up to that, the ability to then increase that tariff kind of automatically, is that just you've got that headroom under allowed returns and you don't think shippers would object to that relative to the incentive tariff you've got right now?

So this is Mark. We -- so we basically have a base FERC tariff of $1.50 a barrel on the line. And we instituted last year some volumetric incentive tariffs, the 2 different tiers, depending on how much volume you ship. So if you ship between 1,000 barrels a day and 10,000 barrels a day, that tariff was $1. And anything over 10,000 barrels a day, you had an incentive tariff of $0.75. We actually filed -- we basically revoked those temporary tariffs and instituted new temporary volumetric incentive tariffs that should take effect June 1 and have upped those by a quarter. So we still have the base tariff that if we revoke, and we can revoke our temporary tariff at any time, where the full tariff would go back to the $1.50. So we kind of have that ability to do as is.

And Gabe, I'd like to add one more thing, just clarify something. The differential that you well know, didn't start to widen until the second part of the first quarter, i.e. March. So the results that we're seeing in the first quarter don't include Paline being full. This is just the month of March, and obviously, March and then -- since then, obviously, differential support very much the pipeline being at full capacity.

Appreciate that. And last one for me is just on the RIO and Caddo quarterly pipeline contributions. Are those ramping as expected? Anything we should know about how those contributed or not contributed?

Yes, so as you remember when you start up a pipeline on the distributions, you have to keep 3 months of the expenses to cover it in reserve. So that's what happened with Caddo for the first quarter. But we did get -- even with the reserve, we did end up getting that distribution for them for our first quarter business, as I believe Danny said in the second quarter. And the Caddo Pipeline is actually performing as expected for the rest of the year, it appears. And RIO is ramping up also, so we expect to continue to get increased distributions for the rest of the year.

(Operator Instructions) We have no further questions in the queue at this time. I turn the call back over to the presenters.

Well, thank you, Christa. I'd like to thank my friends around the table. I'd like to thank the people that listened to call and the investors in your confidence in us. But mostly, I'd like to thank our employees, who made this company what it is. Thank you. We'll talk you soon.

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