Delek Logistics Partners, LP
Q4 2013 Earnings Call Transcript

Published: 26 Feb 2014

[Operator:]

Good morning. My name is Pamela, and I will be your conference operator today. At this time, I would like to welcome everyone to the Delek Logistics Partners’ Fourth Quarter 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. Now we’ll turn the call over to Keith Johnson. Sir, you may begin.

[Keith Johnson:]

Thank you, Pamela. Good morning. I would like to thank everyone for joining us on this webcast to discuss Delek Logistics Partners’ fourth quarter and yearend 2013 financial results. Joining me on today’s call is Uzi Yemin, our General Partners, Chairman and CEO; Assi Ginzburg, our CFO; Danny Norris, our 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 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 May 26, 2014 by dialing 855-859-2056 with a confirmation ID number 4430857. 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 the assets and entities comprising Delek Logistics Partners LP predecessor. Because management believes that results presented from the prior periods are not generally comparable, this earnings call will focus on results for the fourth quarter of 2013. Last night, we distributed a press release that provides the summary of our fourth 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.

[Assi Ginzburg:]

Thanks, Keith. Delek Logistics performed well during the fourth quarter. Our EPS was $13.2 million and EBITDA was $15.7 million. For the year our DCF was $52.9 million and EBITDA was $63.8 million. And end of the year with this year’s covered ratio of approximately 1.3 time. Based on our strong performance we are pleased to increase our quarterly distribution to $0.415 per unit for the quarter ended December 31, 2013, which is a 2.5% increase from our previous distribution. This is our fourth increase and is a 10.7% above the MQD of $37.05 per unit. During 2013, we continue through acquisition for total of approximately $105 million. And we have recently completed a fourth one in February for $96 million. The combination of these four acquisitions expected to earn an estimated of $22 million of annual EBITDA. Now, I will turn the call over to Danny to discuss financial results.

[Danny Norris:]

Thank you, Assi. For the fourth quarter 2013, Delek Logistics reported net income attributable to partners of $11.43 or $0.46 per diluted limited partner unit. For 2013 net income attributable to partners was $47.8 million or $1.93 per diluted limited partner unit. Revenues during the fourth quarter were $223.1 million and contribution margin was $18.6 million. For comparison purposes contribution margin for the third quarter of 2013 was $18.4 million, taking into account the contribution from the Tyler Assets before purchase on July 26, 2013. In the fourth quarter, total operating expenses was $7.2 million and a general and administrative expense was $1.7 million. Now I will spend a few minutes discussing our two reporting segments. Fourth quarter of 2013 contribution margin in our Pipeline and Transportation segment improved $11.8 million on sequential basis compared to $10.8 million in the third quarter of 2013. The improvement was primarily attributed to storage fees from full quarter of operation of the Tyler tank farm purchased in late July and storage at North Little Rock acquired in October. Our Sala Gathering System performed well as it benefited from throughput of approximately 21,900 barrels per day. Contribution margin in our Wholesale marketing and Terminalling segment was $6.8 million in the fourth quarter of 2013 compared to $7.7 million in the third quarter of 2013. This decline can be attributed to lower volumes and a lower value of RINs on a sequential basis which was partially offset by full quarter of operation of the Tyler Texas Terminal purchased in late July and partial quarter of operation of the North Little Rock terminal purchased in October. During the fourth quarter volume per day was lower on a sequential basis under our East Texas marketing agreement and at the Tyler terminal primarily due to turnaround work conducted at the Tyler Texas refinery in December. In our west Texas wholesale business, demand for refined products remained strong. As old drilling and exploration in this region has increased. Volumes were approximately 18,000 barrels per day. The gross margin was $1.24 per barrel in the fourth quarter compared to $1.63 per barrel in the third quarter of 2013. This reduction was due to a decline in the value of RINs. The margin per barrel in the fourth quarter included approximately $700,000 or $0.43 per barrel. From RINs generated in an ongoing ethanol blending activities during the fourth quarter of 2013. The third quarter gross margin included $2 million or $1.13 per barrel from RINs. Ethanol RIN values averaged approximately $0.29 per RIN in the fourth quarter of 2013 compared to approximately $0.85 in the third quarter. As of December 31, 2013, Delek Logistics had a cash balance of approximately $900,000 and total debt was $164.8 million. We ended the quarter with approximately $223 million of unused availability under our $400 million credit facility. Capital expenditures were approximately $1.8 million which included $374,000 of reimbursement under our omnibus agreement with Delek US. Maintenance capital expenditures were approximately $1.3 million in the fourth quarter of 2013 and growth related projects were approximately $500,000. Total capital expenditures for 2014 are expected to be $28.4 million, compared to a $5.1 million in 2013. This increase is associated with the acquisition completed over the past year and additional capital expenditures for growth. For 2014, capital expenditure amount consistent $9.5 million of maintenance and $10.9 million of growth related project. Of these amounts approximately $6.9 million should be reimbursed under our agreement with Delek US during 2014. Before turning the call over to Uzi, I want to review our most recent acquisition. Our most recent acquisition was completed on February 10, 2014. We purchased the El Dorado, Arkansas, storage tanks and product terminal for $95.9 million in cash. These assets will continue to support Delek US’ El Dorado, Arkansas refinery and are expected to contribute approximately $10.1 million of EBITDA annually. With that, I will turn the call over to Uzi for his closing comments.

[Uzi Yemin:]

Thank you, Danny. This was successful first year of operation for Delek Logistics. We completed three acquisitions and generated approximately $64 million of EBITDA during the year. We achieved our target to show double- digit increase in our distribution in the first year of operation and we remain committed to our goal of growing our distribution by at least 10% during 2014 as well as 2016. We are focused on growing our operation over time. This growth should come through additional third party acquisition and any increase in Delek US refinery throughput. In addition, through our relation with our partner Delek US future drop-downs of logistic asset should provide an additional $5 million to $10 million of EBITDA on annual basis. With that Pam, would you open the call for questions?

[Operator:]

(Operator Instructions). And your first question comes from the line of Theresa Chen with Barclays Capital.

[Theresa Chen:]

I just had a question – a couple of questions regarding the growth outlook now that large portions of the drop down acquisition have been done. First, does $5 million to $10 million EBITDA drop downs coming up, would you mind giving a little color about the time line of that?

[Uzi Yemin:]

Yes, it is going to happen between – during the next 12 months, probably 6 to 12 months.

[Theresa Chen:]

Got it, thank you. And then in terms of third party acquisitions, what’s your outlook for the market on that, and I was splitting into acquisition – third party acquisition that can be done on the DKL level alone or jointly with the DK?

[Uzi Yemin:]

Well, we see still tremendous amount of opportunities of assets that are strategic to us and not as strategic to others, as we showed lately with the Little Rock terminal, they are more asset in these areas that are not as strategic to others, and that can serve us very well. We remained committed to our target of $160 million EBITDA within three years. So that is our target and we worked towards that.

[Theresa Chen:]

Okay and then just turning towards organic capital expenditures. So the $10.9 million number for 2014, I am assuming that much of that will be spent towards the North Little Rock expansion. What are the rest spent for – what are your plans and what’s the outlook for growth projects beyond 2014 as well?

[Assi Ginzburg:]

First, you are right. $5.4 million out of that $10 million in order to upgrade the North Little Rock terminal, you should add additional around $1 million of annual EBITDA because the terminal we have the ability to run close to 20,000 barrels a day, and we then have bought ethanol blending ability and bio diesel blending ability. The other upgrade is to improve the west Texas terminal to add bio diesel into them, currently we do not blend bio diesel in west Texas. And there are other small project, some of them in the – also in the abalone Abilene area to upgrade one of the tank there to support Delek with its leased crude business in the area. So there are small projects but we think that can bring a lot of value. And one of the things that are positive for Delek Logistics that right now their assets are not fully utilized, so not all of them require CapEx in order to run at a higher capacity, so some would run growth will come not through acquisition or through growth CapEx but through just better utilizing the assets.

[Theresa Chen:]

And beyond 2014, can you comment just on general color of what the organic spend outlook will be?

[Uzi Yemin:]

Well, obviously we do have Paline renewal coming by the end of this year; we are working very hard on that renewal right now. We know that this is asset that – we see that this is an asset that we can improve EBITDA that we get out of that asset. Obviously, as the expansion of El Dorado as it happened I think we finished it last week or 10 days ago, that by itself will utilize more out of these assets because refinery will run more barrels and the gathering system, is it spending? We used to have 17,000 two years ago now it is going to earn more. So we expect this continue to grow, and all other assets around long view so still big plans ahead of us.

[Theresa Chen:]

Great, thank you, very much.

[Operator:]

Your next question comes from the line of Mark Reichman with Simmons & Co.

[Mark Reichman:]

Really just two questions. One, the future drop down I know the real offloading facility is completed, I was wondering what the utilization, how that is performing and then when will the actual crude oil tank will be completed? So that’s kind of a question and then second if you could just comment on financing, expected financing over the next year. I think that you have pretty much everything on your credit facility. I was wondering if you could just update us on current borrowing capacity post these most recent transactions.

[Uzi Yemin:]

I will take the first one and Assi if you want to – want to add some color to the first one that would be great. And Assi will take the second one. So to repeat the first question, I think you asked to give some color around the railcar facility in El Dorado. It is completed, it has the facility into size of 45,000 barrels, if you want to do light or a combination of light and heavy around 18,000 plus. 12,000 that’s all completed, you are absolutely right. How much we used it? We didn’t use it in the last five week just because of the simple fact that the refinery went in turnaround, we intend to start using it again in March. And the refinery came out of turnaround and obviously it depends on economics which barrels are the cheapest barrels to get in so we will see in the next couple of months how the market shapes up and how many barrels we will get into El Dorado by rail. It doesn’t prevent us to create an agreement in the future of minimum use, and we will come to the market once we make a decision on that. Danny, you want to add anything to that.

[Danny Norris:]

Thank you, Uzi, it was pretty clear. When you look at what we have done historically since it was completed throughput train in were from 10,000 and 20,000 a day. Again just based on economic. So we didn’t hit in capacity limits utilizing at that level.

[Assi Ginzburg:]

And just on the credit facility and we probably remember the current credit facility is $400 million. As of the end of the fourth quarter before we did the acquisition, the debt was around $165 million, when you add the $95 million of the cost of the acquisition; debt is basically close to $260 million which leave us around $120 million – $130 million of available to borrow in order to complete the other acquisition. So we feel comfortable that if $5 million to $10 million EBITDA drop down can be done without any additional financing needs. Probably if we will do any large third part transaction or an acquisition at that point we will have to consider a combination of only debt or probably a combination of debt and equity.

[Danny Norris:]

And then the one last piece of your question around the crude tank and timing. That tank the construction completed, we are going through the hydro testing, strapping and coding process now so it should be operational in the next 30 to 60 days.

[Mark Reichman:]

Great, thank you very much.

[Operator:]

Your next question comes from the line of Cory Garcia with Raymond James.

[Cory Garcia:]

I appreciate the time. Just want to take a close look at the El Dorado drop down specifically the refined product terminal. I know you guys mentioned some opportunities across your asset base in terms of getting more fully utilized that asset in particular what sort of opportunities do you guys see? I believe you guys mentioned you were running about half utilization in a prior nine months?

[Assi Ginzburg:]

I will start by saying that if you look at the drop down of El Dorado, the production terminal is selling around 12,000 barrels a day. The fact that we will run more crude in El Dorado; I am not sure how much we will increase the local market. We are going to enjoy El Dorado running more barrel and in 2013 we ran 65,000 barrels a day and for next year we are going to add the capability to around 80,000 barrels a day of light crude, the increase will come through two pipeline that support the El Dorado business. The first one is the crude pipeline; it is a $0.80 to $0.85 tariff that we will get – if El Dorado will run more crude. And then also the light product pipeline over there we are getting around $0.10 per barrel on every barrel that we basically move from the refinery to the Enterprise system. So that’s where the increase going to come from.

[Cory Garcia:]

Okay, that’s color. And also from I guess it is more of housekeeping item. Taking a look at your total CapEx I guess $20.4 million, should we just look at as more of steady run rate or any particular quarters going to be little heavy or weighted?

[Assi Ginzburg:]

Probably the Q3 and Q4 with the North Little Rock terminal will be more heavy weighted, and those will be growth project as you probably know. And for all the rest probably assume equal, so I’ll say around $1 million a month, and then in Q3 and Q4 slightly higher because of the North Little Rock spending.

[Cory Garcia:]

Right, appreciate the color.

[Operator:]

Your next question comes from the line of Richard Roberts with Howard Weil.

[Richard Roberts:]

Two quick ones for me. On the first one, can you give us a sense when we might hear something on renegotiation of Paline? Is that going to be something that won’t come until late this year early next year or they are potentially here something sooner?

[Uzi Yemin:]

Well, that’s obviously heavy on our mind because we think that we can get more EBITDA out of this asset. As you know the contract expires by the end of the year. Usually this contract when they are being renewed, they are not being renewed at the last minute. So we are in advanced negotiation with different people about different options. And we will notify the market as soon as we know something. I imagine that it will not be at the last minute.

[Richard Roberts:]

Okay, thanks, Uzi and second one if you could just kind a go back to the acquisition market and just may be update us on your thoughts there. Are you specifically looking around the current footprint you have on the both DKL assets side and on the DK refining markets or would you be willing to step out to different areas and then also if you are looking at, would it be a series of smaller acquisition? Would you consider something larger to kind of get you towards the $150 million mark? Just sort of any sense of how you guys are looking at acquisitions would be helpful. Thanks.

[Uzi Yemin:]

I think that’s a great question, Rich. Obviously, we know that we feel our area very well. So is the easiest way to go and get the underutilized assets that exist in our areas or in the surrounding areas if you will, from different people that are willing to sell it because they know that we can get more value out of these assets. It doesn’t make – it doesn’t mean that we are not going to go outside the areas that we operate today and extend our operation to other areas. But I would not see us buying a pipeline in Wyoming for example. That’s not something that we are thinking about. But we want to stay in our area, our goal is to be regional player integrated, so we will continue to work towards that goal and spending and extending our reach to other areas that touch the areas that we are in right now, if this make sense to you.

[Richard Roberts:]

Yes, very much. Thanks, Uzi.

[Operator:]

(Operator Instructions). And your next question comes from the line of [Lane Shen with Height.]

[Lane Shen:]

I just want to clarify that after your recent acquisitions, what’s your per forma EBITDA?

[Uzi Yemin:]

Well, you want to take it Assi?

[Assi Ginzburg:]

Can you repeat the question just to make sure that I heard you correctly?

[Lane Shen:]

I just want to ask after the recent acquisition, what’s your per forma debt/EBITDA ratio now?

[Assi Ginzburg:]

Probably somewhere between 3 to 3.4 times.

[Lane Shen:]

And what’s your target long-term debt/EBITDA do you think?

[Assi Ginzburg:]

We want to be at least 25 points below our covenants so it will be somewhere around 375.

[Lane Shen:]

Okay, so if you are – if you are going to another drop down and you said that you still have the enough facility to finance like that but does it make sense to finance partially buy equity also because even you already 2.4 EBITDA ratio?

[Assi Ginzburg:]

As I mentioned it may be slight equity combination probably with Delek but it depends on the sequence for example if we will sign sale and agreement earlier then the per forma EBITDA, at least with the bank, it can be probably higher and therefore we will be able to do the drop down and take everything with debt, so it’s combination of how the results will look like.

[Lane Shen:]

Okay, that makes sense. And what about Paline renewed contract, what kind of strategy you think is best fit for your Delek MLP? I am just talking about like there; do you want to renew the contract with mid-term or long-term? Like how many years do you think the most profitable contract that you want?

[Uzi Yemin:]

Well, that’s the good one. That’s what exactly what we are talking internally right now. Because there is tradeoff between short term and long term, there is a trade off if you want to be a common carrier or you want to be just single shipper, these are the things that we are looking at and to get more value for our assets. And that’s the reason we are hesitating to give more improvised as we are weigh these strategies internally.

[Lane Shen:]

Okay, great, thank you.

[Operator:]

And there are no further questions at this time. Do you have any closing remarks?

[Uzi Yemin:]

Well, I would like to thank my colleagues here, investors, the financial community and especially our employees for first full year that was very successful to our company, with a projection of $48 million EBITDA we ended the year with $64 million and if we do pro forma that number is much higher than that number. So very proud of what we achieved and we look forward for very successful 2014. And have a great day.

[Operator:]

And this concludes today’s conference call. Thank you for your participation. You may now disconnect.