Delek Logistics Partners LP (DKL) 2017 Q3 法說會逐字稿

Good morning. My name is Kirk, and I will be your conference operator today. At this time, I would like to welcome, everyone to the Delek Logistics Partners' Q3 2017 Earnings Call. (Operator Instructions) Mr. Keith Johnson, you may begin your conference.

Thank you, Kirk.

Good morning. I would like to thank everyone for joining us on this webcast to discuss Delek Logistics Partners third quarter 2017 financial results. Joining me on today's call will be Uzi Yemin, our general partner's Chairman and CEO; Kevin Kremke, CFO; 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, 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 those 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.

In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP results, which can be found in the press release, which is posted on Investor Relations section of our website.

On today's call, Kevin will begin with a financial overview, then Uzi will offer a few closing strategic remarks. With that, I'll turn the call over to Kevin.

Thanks, Keith.

Our operating performance continued to benefit from our Permian Basin-related operations. We had a strong margin increase year-over-year in West Texas and performance on our Paline Pipeline improved from third quarter of 2016 as well. Our distributable cash flow was approximately $21.6 million in the third quarter of 2017 compared to $19.1 million in the third quarter of 2016, and the coverage ratio was 0.97x for the third quarter of this year.

EBITDA increased to $29.7 million compared to $22 million in the prior year period. Based on our performance, we increased our quarterly distribution to $0.715 per limited partner unit for the quarter ended September 30. This distribution is to be paid on November 14 to unitholders of record as of November 7, 2017, and is a 1.4% increase from our second quarter 2017 distribution per unit. This is our 19th consecutive quarterly increase and is 9.2% higher than our third quarter of 2016.

At September 30, 2017, DKL had approximately $533 million of available capacity on our $700 million credit facility. Our total debt was approximately $401 million and the total leverage ratio of 3.7x is well within the 5.5x currently allowable under our credit facility.

For the third quarter of 2017, Delek Logistics reported net income attributable to all partners of $16.9 million, which compares to $13.2 million in the prior year period. Limited partners' interest and net income was $12.2 million or $0.50 per diluted common limited partner unit compared to $9.9 million or $0.41 per diluted common limited partner unit in the prior year period.

Our contribution margin was $30.8 million compared to $24.7 million in the third quarter of 2016.

Now I will review our operating segments. In our Pipelines and Transportation segment, the third quarter of 2017 contribution margin was $17.5 million compared to $16.1 million in the third quarter last year. This increase was primarily attributable to improved performance from the Paline Pipeline and the Lion Pipeline System, partly offset by lower volume on the SALA Gathering System.

The third quarter of this year the Paline Pipeline was a FERC-regulated pipeline with a tariff established for potential shippers compared to the prior year period when 10,000 barrels per day of pipeline capacity was contracted to third parties for a fixed monthly fee.

During the third quarter of 2017, the Paline Pipeline was shut down for 9 days due to the effects from Hurricane Harvey in the Beaumont area. Operating expenses increased to $8.6 million in the third quarter of 2017 from $7.7 million in the prior year period.

In our Wholesale Marketing and Terminalling segment, the contribution margin was $13.3 million in the third quarter of this year, which was an increase from $8.6 million to the prior year period. This increase was primarily due to an improvement in the West Texas gross margin and in the east Texas marketing agreement.

Our West Texas wholesale gross margin was $4 per barrel in the third quarter of 2017 compared to $1.16 per barrel in the third quarter of last year. Throughput in West Texas increased to 12,929 barrels per day compared to 12,162 barrels per day in the prior year period. Third-party pipelines on the Gulf Coast shut down for a period of time due to the effects from Hurricane Harvey. This reduced product availability in the West Texas area, limited throughput and played a role in a higher gross margin per barrel for the third quarter of this year.

We've continued to see robust margins in West Texas into the fourth quarter and during October, the gross margin in West Texas averaged $3.20 per barrel and volumes averaged approximately 14,000 barrels per day. During the third 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 $1.6 million compared to a loss of $308,000 in the prior year period. We received a distribution from the joint ventures in the third quarter this year of approximately $700,000 and expect to receive about $2.1 million in the fourth quarter.

Capital expenditures were approximately $3.8 million in the third quarter of 2017 and included $1.9 million of discretionary spending and $1.9 million of maintenance. During the third quarter this year, approximately $400,000 was reimbursed by Delek U.S.

For 2017, our total growth capital expenditure forecast is $17 million, which includes $6.8 million of discretionary and $10.2 million of maintenance capital before reimbursement by Delek U.S. We expect approximately $5.3 million of the maintenance CapEx to be reimbursed in 2017.

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

Thank you, Kevin.

This was the second quarter in a row with EBITDA of approximately $30 million. The crude oil differentials in the market continued to support third-party shipment from the Paline Pipeline as it operated near capacity upon restarting after Hurricane Harvey. The pipeline has been over nominated and we have increased the incentive tariff from $0.75 per barrel to $1.25 per barrel effective November 1.

Also, we are working on a project that will increase capacity going forward from 35,000 barrels per day to 42,000 barrels per day in the first quarter of 2018 to improve upon capacity. An incremental capacity increase of 7,000 barrels per day and a $0.50 increase in tariff would equate to an increase of $8 million in EBITDA on an annualized basis.

We continue to explore opportunities to provide logistic support to the larger refining operations of Delek U.S. During the third quarter, we built a track of floating racks to support crude deliveries to the Big Spring refinery. We believe that there are additional opportunities to support crude sourcing flexibility for DKL's refining system and create synergies in West Texas. In addition, the drop-down inventory at Delek U.S. may provide potential growth at DKL over time and we believe that the Asphalt terminal may be the first drop-down to DKL. Our financial flexibility should allow us to utilize our credit facility to complete this purchase.

We continue to focus on creating long-term value for unitholders and believe that the combination of 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 back to Kirk, I would like to congratulate my dear friend, Alan Moret, for his appointment as President of DKL. Alan joined Delek with the Alon transaction and I look forward to working with him in the future as we did in the past.

With that, Kirk, can you please open the call for questions?

(Operator Instructions) Your first question is from Justin Jenkins with Raymond James.

I think all the prepared comments this morning almost took every one of my questions. But I guess, maybe I'll start on the Paline expansion. Is there any opportunity to further expand that down the road? I know we're just getting started here, but thinking about fairly wide differentials that you mentioned. Is there that opportunity may be even further down the road to get the pipe even bigger?

Great question. The short answer is, yes. We're looking on another project that will enhance the pipeline -- I guess we're targeting maybe 55,000, we'll notify the market. This is a project that we're looking at for the next 12 months or be completed in next 12 months.

With the differentials where they are with the Midland brand where it is, there is a growing demand and if we had even 100,000 barrels' pipe -- would've fully operating it under the current environment.

So for us, we want to take advantage of these wide differentials and make sure that we take what the market gives us. For a long period of time, the tariff was $0.75. As you know, we can increase it all the way to $1.50, and with the current differentials, it makes sense. However, we want to accommodate our shippers and if they are willing to sign a long-term agreement, then we look at the benchmark of $1.25. Alan, I don't know if you want to add something to that.

I think you said it very well, Uzi. I think that we see excellent demand at the -- under the current market conditions and we're working on projects to utilize that demand and serve our shippers.

. I guess, maybe follow up on the financing side of things. Certainly more difficult environment here for Midstream and MLPs, thinking about the drop-downs over time, any thoughts on financing mechanisms there? And maybe any interest in terms of simplifying the structure as it relates to the ADRs overtime?

That's a great question again. First the drop-down, we have a very clear schedule of what we want to do with it and we are sticking to that schedule. Obviously, as you know, we have a tremendous amount of capacity under our revolver, which Kevin led the -- Kevin and Assi led the offering of the high yield, the 6.75%, or the bond yield. So we have tremendous amount of capacity.

We believe that with the improvement in West Texas, the synergies that we see between us and Alon, and Kevin mentioned the $3.20 for October, which is not difficult for fourth quarter but because of the synergies between DK and ALJ, and also the outlook for Paline, we can look very carefully on minimizing the equity issuance in this environment.

Your next question is from Richard Roberts.

Couple of quick ones for me. So just looking at coverage right now, you're a little bit below 1x but you're still growing the distribution around 10% a year. Can you just talk a little bit about how you think about coverage going forward? And then just maybe how you see coverage increasing from here, while still growing the distribution?

That's a great question and if you look what happened at Paline during the quarter, obviously, Paline operates at 27,000 barrels, not because we didn't have demand. We had huge demand but the problem is that the pipe was down for a period of time because of Hurricane Harvey and Nederland being shut. If you normalize it to the normal number, which is always 33,000, 34,000, on top of that you have the $0.50 incentive rate that is going away as we move the tariff from Paline from $0.75 to $1.25, you see that there are -- as we said, $8 million on 7,000 barrels and probably compared to the third quarter probably $10 million or $11 million just on the current operation. And the increase of just -- pumping capacity with too much investment. That, together with the fact that we have tremendous amount of drop-down inventory, gives us more comfort or makes us very comfortable about the coverage ratio even though we missed it a little bit this quarter.

That is very helpful. Thanks, Uzi.

And then just one more for me. So I see the alkylation project at Krotz, so with that, I guess it's safe to assume you'll be operating that as a refinery for a while. Just thinking about the drop-down assets related to Krotz Springs, I consider those to be maybe more secure now as a potential drop-down to DKL, so with that in mind, does that change the order of expected drops at all? Or do you still think, sort of, Big Spring, all those assets come first and then Krotz is towards the end?

You are asking a wonderful question. As you know though, we just made an offer yesterday and I -- we want to avoid any comments around this offering until we complete this over the next few months. So obviously, we had explained a long time ago but I wouldn't comment on that at this point.

(Operator Instructions) The next question is from Ned Baramov from Wells Fargo.

I apologize if I missed this, but what is the associated CapEx with the Paline expansion project?

To 42,000?

Yes.

De minimis.

Okay. And then you mentioned there is further potential to expand that to 55,000 barrels. Is there a meaningful CapEx associated with that?

We're working on that. I'm sure that we will notify the market in the next call, how much we're talking here. Obviously, this is a very high-return project, so it's not something that the typical project that exists in the market today. As long as the differentials will stay where they are, this is going to be a great project for us.

Okay. That's fair. And on the potential drop-downs, is there any change in the expected schedule for the consummation of all the deals? I think previously, you anticipated about 18 or to 24 months in order to complete all the drop-downs that are available to the partnership, is there any change for this?

Not at this point.

Okay. And finally, a housekeeping item for me. What was cash interest expense in the quarter?

Kevin, do you have it?

Yes. Right at -- in the quarter, right at $7 million.

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

Thank you, Kirk. That was another excellent quarter for DKL. Also, we made progress on several initiatives and the Paline Pipeline is fixing to be something great for us.

I'd like to welcome, again, Alan Moret as our new President. I'd like to thank you, unitholders and analysts, for your interest in our company, our Board of Directors, but mostly, I'd like to thank our employees who make this company what it is. Have a great day and we'll talk soon.

This does conclude today's conference call. You may now disconnect.