Delek Logistics Partners, LP
Q1 2013 Earnings Call Transcript

Published: 8 May 2013

[Operator:]

Good morning. My name is Marcy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Delek Logistics Partners, LP 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, Mr. Johnson. You may begin your conference.

[Keith Johnson:]

Thank you, Marcy. Good morning. I would like to thank everyone for joining us on this webcast to discuss Delek Logistics Partners’ First Quarter 2013 Financial Results. Joining me on today’s call will be Uzi Yemin, our General Partners, Chairman and CEO; Assi Ginzburg, our CFO; Danny Norris, VP of Finance, 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 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 August 8, 2013, by dialing 855-859-2056 with a confirmation ID number 41638349. An online replay may also be accessed for the next 90 days at the partnership’s website at deleklogistics.com. As you may know, Delek Logistics commenced operations on November 7, 2012, upon successful completion of its initial public offering. Operations prior to November 7, 2012, include results from assets and entities comprising Delek Logistics Partners LP predecessor, because management believes the results presented from prior periods are not comparable. This earnings call will focus on results for the first quarter 2013. Last night we distributed a press release that provided the summary of our first quarter 2013 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.

[Assaf Ginzburg:]

Thank you, Keith, and good morning. Delek Logistics performed extremely well during the first quarter, our DCF of $13.2 million, or 23% ahead of our IPO focus. EBITDA was $15.5 million a head of the forecast as well. Based on our strong performance, we are pleased to be able to increase our distribution by 2.7% over our MQD, the $28.05 per unit for the quarter ended March 31, 2013. In addition, we plan to recommend to our Board of Directors to increase our distribution by additional 2.6% to $39.05 per unit for the second quarter of 2013. Now, I will turn the call over to Danny to discuss the financial results.

[Danny Norris:]

Thank you, Assi. For the first quarter 2013, Delek Logistics reported net income of $12.2 million, or $0.50 per limited partner unit. Revenues during the first quarter were $210.9 million and contribution margin was $17.2 million. Total operating expenses of $5.9 million were higher than expected due to $1 million of expenses associated with the crude oil release at our Magnolia Station in March 2013. Pursuant to the Omnibus Agreement with Delek US, the Partnership’s costs related to this crude oil release are not expected to exceed $1 million. General and administrative expenses of $1.7 million were below expectations. Now, I will spend a few minutes discussing our two reporting segments. For the first quarter 2013, our Pipeline and Transportation segment performed well as it benefited from elevated throughput of 22,130 barrels per day in the SALA Gathering System, which compares to 19,500 barrels per day included in the IPO forecast. During Q1 of 2013, volume on the Lion Pipeline System was approximately 45,000 barrels per day. As expected, this was below minimum commitment levels of 46,000 barrels per day due to the continued suspension of crude oil deliveries from the Exxon North pipeline. This pipeline resumed deliveries again in March 2013. During the second quarter of 2013 improved third-party pipeline access to our Magnolia Pipeline began in May, and the connection to the rail offloading operation at Delek US’s El Dorado refinery has also been completed. This should allow us to exceed minimum volume commitments on the Lion Pipeline System. Our East Texas Crude Logistics System delivered approximately 51,150 barrels per day during the quarter. As anticipated, volumes transported on the East Texas System decreased below the minimum volume and commitment level of 35,000 barrels per day in April, when a third-party pipeline was reconfigured to supply crude to Delek US’s Tyler, Texas refinery. Performance in our Wholesale Marketing and Terminalling Segment benefited from a margin of $3.69 per barrel which compares to $2.24 per barrel in the prior year period. Also, volume increased 7.6% to approximately 16,550 barrels per day in West Texas. Both volume and margin exceeded our IPO forecast. Demand for refined products in West Texas remains robust as oil drilling activity in this region has increased. The margin per barrel included approximately $1.8 million of revenue, or $1.18 per barrel from the sale of RINs generated from our ongoing ethanol blending activities. Ethanol RIN values increased from approximately $0.04 per RIN in Q4 of 2012 to approximately $0.76 per RIN in March 2013. We believe that we will continue to benefit from RINs if market conditions remain firm going forward. Approximately, 53,100 barrels per day of refined products were marketed under the East Texas marketing agreement, which was better than the 50,000 barrels per day included in the IPO forecast. As of March 31, 2013, Delek Logistics had a cash balance of $19 million and total debt was $90 million. Capital expenditures were $1.3 million of which approximately $310,000 was reimbursed under our Omnibus Agreement with Delek US. Maintenance capital expenditures were approximately $933,000 in the first quarter 2013. Total capital expenditures for 2013 are expected to be $8.8 million of which approximately $4.9 million will be reimbursed under our agreement with Delek US. With that, I will turn the call over to Uzi for his closing comments.

[Ezra Uzi Yemin:]

Thank you, Danny, and good morning. We are pleased to report strong results from Delek Logistics for the first quarter. Our cash flow and EBITDA performance continue to exceed the expectations provided in our IPO both our West Texas business and volumes in the SALA Gathering System performed very well and while the primary factors embedded than expected results. We increased our quarterly distribution by 2.7% from our minimum quarterly distribution in the first quarter of 2013. Overflow as a result of our expected performance, we intend to recommend to the Board of Directors of Delek Logistics general partner an increase in the quarterly distribution to $39.05 per unit for the second quarter. This approved – this would represent a 2.6% increase from our quarterly distribution of $38.05 per unit. Our relation with our sponsor Delek US DK created the potential for additional growth through logistics assets that may be available for drop down beginning in the second half of this year – may be available for drop down beginning in the second half of this year. We believe the combination of these assets has the potential to create $25 million to $30 million of EBITDA as assets are dropped down over the next 18 to 24 months. We remain focused on our strategy of providing growth and value by generating stable cash flow. This drop down should provide a solid foundation for future growth as we continue to explore additional third party opportunities. With that, Marcy, will you please open the call for questions?

[Operator:]

(Operator Instructions) Your first question comes from Mark Reichman from Simmons.

[Mark L. Reichman:]

Just a couple of questions. First, on the renewable identification numbers, how should we think about that for the balance of the year in terms of your ability to capture value from the sale of the RINs? I don't think you had much baked in for that in the prospectus, and I'm just wondering, what are your expectations, I think, over the next several quarters?

[Unidentified Company Representative:]

That’s a great one though, Mark, thank you for the question. Obviously, when we did the perspective, no body expected $0.70 RINs value. Now, all of a sudden we find ourselves with that number. We can’t project and we don’t want to project, see this $0.70 was big if it’s going to data or if it’s going back to $0.04, however, and we were very clear about that. In the next couple of years, our ability to blend ethanol in West Texas is not going to change dramatically, if anything, it’s going to go up as we increase our volume. So if you take that market value of the RIN and on top of that, some of the ethanol blending economic, which you know as much as I do, are very good right now. Then this should have great contribution to our profits going forward, not only in this quarter.

[Mark L. Reichman:]

Okay. And then on the general and administrative expenses, those were lower, I think, than last quarter, and certainly a little below expectations, which is a good thing. What was really behind that? And is this kind of a better number to use, or do you think $1.9 million is maybe more a better normalized number for G&A for the balance of the year?

[Unidentified Company Representative:]

Mark, good morning. I won’t speak with the S-1 forecast, there are timings questions of when we booked certain cost during the year and I think we can use the $1.9 million going forward.

[Mark L. Reichman:]

Okay. Thank you very much.

[Unidentified Company Representative:]

Thank you, Mark.

[Operator:]

Your next question comes from the line of Steve Sherowski with Goldman Sachs.

[Steve Sherowski:]

Hi. Good morning. Just a follow-up on the West Texas marketing question. I was just wondering, how sustainable do you think those margins are going forward? And I guess what I'm really trying to get at is are there any barriers to entry in that market?

[Unidentified Company Representative:]

Well, like any other markets, you need the fire plant and terminal. So this market is growing. As both Danny and Assi said earlier, the drilling activity in that area is increasing and as we benefit from Midland on one end, we benefit from Midland here as well. So as people continue to drill and continue to, and the activity in West Texas will continue to go higher, then volumes look very strong for us. Now, please remember that part of the margin is the RINs value and the internal value, so obviously we are very happy with the ethanol and RINs. We’ve said it all along that once we found out about the RINs situation, that we will benefit from that and that’s the first time that market actually see how great it is for DKL.

[Steve Sherowski:]

Okay, thanks. That's helpful. And on your East Texas business, just backing into the margin, that looked like it was pretty strong -- there was pretty strong growth year over year. What is the seasonality to that business? Or is there any that I should be modeling in?

[Unidentified Company Representative:]

Usually, first quarter is in terms of volume, little lower than the rest of the year, so we were optimistic that we can continue with this momentum in the next couple of quarters.

[Steve Sherowski:]

Okay, thanks. Just one final question. Any update on Paline?

[Unidentified Company Representative:]

In regard to what?

[Steve Sherowski:]

Re-contracting.

[Unidentified Company Representative:]

Where has your thought – has your thought process behind that changed all?

[Steve Sherowski:]

Longview continues to be a very good market for us, from the – in terms of barrels, barrels find themselves into Longview. We feel very optimistic about Longview and as a function of that, pay line we feel very optimistic that we can get fair value from pay line in the future.

[Steve Sherowski:]

Okay…

[Unidentified Company Representative:]

But nothing that specific.

[Steve Sherowski:]

Okay, thank you.

[Unidentified Company Representative:]

Thank you.

[Operator:]

Our next question comes from line of Cory Garcia with Raymond James

[Cory Garcia:]

Good morning, fellows. Just a quick bit of clarification, I guess, on the RINs blending, was that a incremental margin of $1.8 million in the quarter, I am reading that right?

[Unidentified Company Representative:]

That is correct.

[Cory Garcia:]

Okay. Is there anyway we can actually quantify the actual volumetric amount that you guys blended during the quarter? And then, I guess, beyond that, what sort of is your ultimate blending capability at your terminals or racks in West Texas?

[Unidentified Company Representative:]

Obviously, everybody is trying to blend as much as they can right now, so we’re trying to increase our blending everywhere we can, because of the value of the RINs and because of the value of the ethanol or the ethanol economics. I suggest that you model something around 5,000 to 6,000 barrels for the first quarter.

[Cory Garcia:]

Okay, okay

[Unidentified Company Representative:]

And obviously our goal is to go a little higher, Assi, do you want to add anything to this?

[Assaf Ginzburg:]

No.

[Cory Garcia:]

Right. No, that’s very helpful and sort of switching focus obviously your SALA Gathering System performed very well this quarter, wondering if you guys can provide any color in terms of any sort of organic growth opportunities that you may see in that area obviously this is more of a sort of a two and three year outlook type of question, but what sort of spending do you guys expect to sort divert into that area if it does prove out to a pretty nice oil basin?

[Unidentified Company Representative:]

Well, obviously, the SALA Gathering System, we said all along, our goal is to increase the volume that comes through the System. We are doing several fuel connection and little projects that may allow us to increase the SALA Gathering System in the future. Right now, we don’t see any reason why the volumes should go down. Fred, do you want to add anything to this?

[Frederec C. Green:]

No, but I think this question is more along the lines of if the brown hits or if see they’re going to local production, how much money are we willing to earn, and I think that will depend on the size of the wells, it’s kind of the criteria we use whether we truck a barrel or connected directly into the gathering system, either way what we charge the customers is the same, but it’s certainly easier to operate our pipelines in the top-rated trucks. So it’s just size of the new wells and where they are located relative to the rest of the pipe, I think it would just be part of our normal CapEx program.

[Cory Garcia:]

Sure, perfectly understandable. I appreciate the color, guys.

[Operator:]

(Operator Instructions) And there are no further questions at this time.

[Ezra Uzi Yemin:]

Thank you, Marcy. I would like to thank our employees, my colleagues and obviously the investors that give us great confidence. Thank you and we will talk to you soon.

[Operator:]

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