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Edited Transcript of DKL earnings conference call or presentation 3-Aug-17 1:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Delek Logistics Partners LP Earnings Call

Brentwood Aug 17, 2017 (Thomson StreetEvents) -- Edited Transcript of Delek Logistics Partners LP earnings conference call or presentation Thursday, August 3, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ezra Uzi Yemin

Delek Logistics Partners, LP - Chairman, CEO & President of Delek Logistics GP LLC

* Keith Johnson

Delek Logistics Partners, LP - VP of IR of Delek Logistics GP, LLC

* Kevin L. Kremke

Delek Logistics Partners, LP - CFO & EVP of Delek Logistics GP LLC

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Conference Call Participants

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* Gabriel Philip Moreen

BofA Merrill Lynch, Research Division - MD

* Justin Scott Jenkins

Raymond James & Associates, Inc., Research Division - Research Analyst

* Ned Antonov Baramov

Wells Fargo Securities, LLC, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Delek Logistics Second Quarter Earnings Call. (Operator Instructions)

Mr. Keith Johnson of Investor Relations, you may begin your conference.

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Keith Johnson, Delek Logistics Partners, LP - VP of IR of Delek Logistics GP, LLC [2]

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Thank you, Melissa. Good morning. I would like to thank everyone for joining us on this webcast to discuss DKL's second 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, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. 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 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, Kevin will begin with the financial overview, then Uzi will offer a few closing strategic remarks. With that, I'll turn the call over to Kevin.

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Kevin L. Kremke, Delek Logistics Partners, LP - CFO & EVP of Delek Logistics GP LLC [3]

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Thanks, Keith. Our operating performance continued to benefit from our Permian Basin-related operations, which had robust margins in West Texas and more than offset lower pipeline performance. Our distributable cash flow was approximately $23.4 million in the second quarter 2017 compared to $23.7 million in the second quarter of last year, and the coverage ratio was 1.07x. EBITDA was $30.3 million compared to $27.1 million in the prior year period.

Based on our performance, we increased our quarterly distribution to $0.705 per limited partner unit for the quarter ended June 30. This distribution is to be paid on August 11, 2017, and is a 2.2% increase from our first quarter 2017 distribution per unit. This is our 18th consecutive quarterly increase and is 11.9% higher than our second quarter 2016 distribution.

During the second quarter of 2017, DKL completed its inaugural public bond offering with $250 million in aggregate principal amount of 6.75% unsecured notes due 2025. Net proceeds of approximately $242 million were used to reduce the outstanding borrowings on the revolving credit facility to provide greater flexibility in funding the drop-downs associated with the Alon acquisition.

At June 30, 2017, DKL had approximately $538.5 million of available capacity on our $700 million credit facility. Our total debt was approximately $397 million. And the total average -- the total leverage ratio of 3.9x is well within the 5.5x currently allowable under the credit -- our credit facility.

For the second quarter of 2017, Delek Logistics reported net income attributable to all partners of $19 million, which compares to $18.9 million in the prior year period. Limited Partner's interest in net income was $14.4 million or $0.59 per diluted common limited partner unit compared to $16.1 million or $0.66 per diluted common limited partner unit in the prior year period. Our contribution margin was $31.8 million compared to $30 million in the second quarter of 2016.

Now I will review our operating segments. In our Pipelines and Transportation segment, the second quarter of 2017 contribution margin was $17.9 million compared to $20.3 million in the second quarter of 2016. This decline was primarily attributable to lower performance from the Paline Pipeline and lower volume on the SALA Gathering System. In the second 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 $7.9 million in the second quarter of this year from $6.9 million in the prior year period, which was primarily due to employee-related expenses.

In our Wholesale Marketing and Terminalling segment, the contribution margin was $13.9 million in the second quarter this year, which was an increase from $9.7 million in 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 $4.26 per barrel in the second quarter of 2017 compared to $2.13 per barrel in the second quarter last year. Throughput in West Texas also increased to 13,422 barrels per day compared to 12,594 barrels per day in the prior year period.

During the second 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 $1.2 million, compared to a loss of just over $200,000 in the prior year period. We received a distribution from the joint ventures in the second quarter of this year of approximately $780,000 and expect to receive approximately $1.2 million in the third quarter. Capital expenditures were approximately $2.1 million in the second quarter this year and included $550,000 of discretionary spending and $1.6 million of maintenance.

During the second quarter, approximately $800,000 was reimbursed by Delek U.S. For 2017, our total gross CapEx forecast is $21.5 million, which includes $7.1 million of discretionary and $14.4 million of maintenance CapEx before reimbursement by Delek U.S. We expect approximately $5.3 million in maintenance Capex to be reimbursed in 2017.

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

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Ezra Uzi Yemin, Delek Logistics Partners, LP - Chairman, CEO & President of Delek Logistics GP LLC [4]

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Thank you, Kevin. We had a record quarter from an EBITDA perspective and the third highest gross margin per barrel in West Texas. Also, we have increased our DCF coverage ratio over the past 3 quarters and it's now approaching 1.1x.

Our sponsor, Delek U.S., completed the acquisition of Alon USA in an all-stock transaction on July 1. We believe this will offer DKL the opportunity to provide logistics support to the larger refining operations of the combined company and the potential to create synergies in West Texas. In addition, the drop-down inventory at Delek U.S. has been increased, and we believe that there is a potential for the asphalt terminal to be the first dropped 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 our unitholders and believe that the combination of an increased drop-down inventory at our sponsor, contribution from our joint venture pipeline projects and growth initiative should continue to support our annual distribution growth per limited partner unit of at least 10% through 2019.

With that, Melissa, could you please open the call for questions?

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Questions and Answers

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Operator [1]

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

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Kevin L. Kremke, Delek Logistics Partners, LP - CFO & EVP of Delek Logistics GP LLC [2]

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Theresa?

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Operator [3]

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Your next question comes from the line of Justin Jenkins.

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Justin Scott Jenkins, Raymond James & Associates, Inc., Research Division - Research Analyst [4]

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Great. I guess, maybe starting with the Paline Pipeline. It looks like we've got a new incentive volume structure out there with FERC. I guess, Uzi, maybe if you could have some comments in terms of how you're seeing demand for the pipe today and how you expect it to unfold as we're seeing maybe some improving outlook for Midland differentials going forward.

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Ezra Uzi Yemin, Delek Logistics Partners, LP - Chairman, CEO & President of Delek Logistics GP LLC [5]

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Well, obviously, it is full now. It is full -- it was full in -- essentially full. Maybe [500] barrels here and there because of a transfer, not -- it's being allocated, actually. So -- and obviously, the outlook for Midland is improving. If we look at the fourth quarter -- I think I'm going by memory, but it's around $1.50 under. So there is no reason to believe that Paline won't continue to be full. But just remember that the FERC-regulated allows us to go all the way up to the old tariff. So while it's an incentive tariff now, if the outlook in Midland will continue to look bear, than there's no reason to believe that we won't look at the tariff in the future.

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Justin Scott Jenkins, Raymond James & Associates, Inc., Research Division - Research Analyst [6]

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Okay, Uzi. And then maybe staying with the Midland theme on West Texas wholesale here, looks like a pretty strong and improving quarter. Just curious if the $4.26 a barrel was pretty stable throughout the quarter or if we saw any month-to-month improvement within the quarter.

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Ezra Uzi Yemin, Delek Logistics Partners, LP - Chairman, CEO & President of Delek Logistics GP LLC [7]

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No, it was actually pretty stable. I'll volunteer that the margins in July were around $3, if you would like to know. And we're seeing again improvement. Just remember that there are synergies between ALJ or Big Springs and the West Texas operation of DK. These synergies will come to fruition and to a play in the upcoming quarters. That's the reason we're very optimistic about West Texas.

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Justin Scott Jenkins, Raymond James & Associates, Inc., Research Division - Research Analyst [8]

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Perfect. You stole my next question there with that last comment on the ALJ synergies. But last one if I could. Uzi, maybe your thoughts on drop-downs and DKL's access to capital and how you're thinking about funding going forward.

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Ezra Uzi Yemin, Delek Logistics Partners, LP - Chairman, CEO & President of Delek Logistics GP LLC [9]

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Well, obviously, we do -- we completed the bond offering. That -- one of the reasons was to allow us flexibility in the drop-down mechanism. We mentioned the asphalt terminal. We are looking at that, actually doing some work internally vis-a-vis conflict committee, business plan and all that. There's no reason to believe that we don't act quickly on these assets. And then we have a work full of stuff that we're planning to do over the next 18 to 24 months. We said all along that we think it's 50 to -- or $60 million to $80 million of EBITDA. We haven't changed our mind. If anything, we see an opportunity maybe to look at that more carefully in the future.

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Operator [10]

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Your next question comes from the line of Gabriel Moreen from Bank of America Merrill Lynch.

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Gabriel Philip Moreen, BofA Merrill Lynch, Research Division - MD [11]

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Just a quick question for me in terms of how the RIO pipeline utilization is trending and any potential offshoots for growth there?

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Ezra Uzi Yemin, Delek Logistics Partners, LP - Chairman, CEO & President of Delek Logistics GP LLC [12]

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Absolutely, yes. It continues to grow. It's a pipeline that, as we know, as production grows in the area, we will continue to see more into it. And we're pretty optimistic that this pipeline will be full over the next 12 to 18 months.

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Gabriel Philip Moreen, BofA Merrill Lynch, Research Division - MD [13]

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Okay. And then when that happens, Uzi?

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Ezra Uzi Yemin, Delek Logistics Partners, LP - Chairman, CEO & President of Delek Logistics GP LLC [14]

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There's an opportunity to expand that, also opportunity to connect that pipeline to different areas, to different, if you will, assets that we have in the area vis-a-vis Big Spring or other assets. As you know, we -- DK is gathering, not DKL, gathers a lot of barrels in the area. And now with the Big Spring refinery around that, that is another opportunity that we're looking at it very carefully. So when we say growth opportunities in West Texas, that's another -- that's one of the avenues that we're looking at, Gabe.

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Gabriel Philip Moreen, BofA Merrill Lynch, Research Division - MD [15]

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Great, Uzi. And then just bigger picture in terms of order of operations on drop-downs, sort of magnitude, any change in your thinking in terms of kind of how you're staging the drop-downs over the next couple of years?

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Ezra Uzi Yemin, Delek Logistics Partners, LP - Chairman, CEO & President of Delek Logistics GP LLC [16]

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No, we -- as a matter of fact, we haven't changed our mind. We're working -- as I said earlier, we're working very hard to drop -- we understand that we haven't done drop-downs for a long time. The market is expecting us to do so, so we will move very quickly on that, and it should be very accretive to the unitholders of DKL.

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Operator [17]

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(Operator Instructions) Your next question comes from the line of Ned Baramov from Wells Fargo.

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Ned Antonov Baramov, Wells Fargo Securities, LLC, Research Division - Associate Analyst [18]

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Guys, I had another question on the drop-downs. I was just curious what's the time frame to complete all the remaining drops? I know you've already mentioned that the asphalt assets are going to come here in the near term. But just the remaining assets that are available, would you say that's a 2-year process? Or maybe...

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Ezra Uzi Yemin, Delek Logistics Partners, LP - Chairman, CEO & President of Delek Logistics GP LLC [19]

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Yes, so thanks for the question. It's 18- to 24-month process.

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Ned Antonov Baramov, Wells Fargo Securities, LLC, Research Division - Associate Analyst [20]

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Okay. Very good. And then could you potentially quantify the organic growth opportunities in and around the Alon Big Spring refinery in the Permian?

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Ezra Uzi Yemin, Delek Logistics Partners, LP - Chairman, CEO & President of Delek Logistics GP LLC [21]

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Well, as you know, we just completed the acquisition a month ago. We're working on that, and we are very optimistic. I'm actually more optimistic than I was before, and I was optimistic before. So give us some time and we'll quantify it, we'll will give you some numbers, and we'll give you time frame.

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Ned Antonov Baramov, Wells Fargo Securities, LLC, Research Division - Associate Analyst [22]

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Sure thing, will do. And then one last housekeeping item for me.

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Ezra Uzi Yemin, Delek Logistics Partners, LP - Chairman, CEO & President of Delek Logistics GP LLC [23]

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I just wanted to say that we don't want to say something, then we don't fulfill, if you will. So we don't want to make promises that -- we want to be conservative. And -- but we feel very, very good about DKL. I think actually the biggest or one of the biggest beneficiaries of this merger with Alon between DKL and ALJ is DKL, and I think the market starts to understand that.

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Ned Antonov Baramov, Wells Fargo Securities, LLC, Research Division - Associate Analyst [24]

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Sure. Understood. And then my last question relates to the unit purchase program that you have at DK. I believe that was a $30 million program. I was just wondering how much you had left under the $30 million.

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Ezra Uzi Yemin, Delek Logistics Partners, LP - Chairman, CEO & President of Delek Logistics GP LLC [25]

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I'm going by memory. Probably a little more than half. Kevin is saying half, so around that number, probably $15 million. We haven't executed a lot lately because we worry about the liquidity of DKL and -- but we still think that DKL is a very attractive paper.

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Operator [26]

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There are no further questions at this time. I'll turn the call back over to the presenters.

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Ezra Uzi Yemin, Delek Logistics Partners, LP - Chairman, CEO & President of Delek Logistics GP LLC [27]

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Thank you, Melissa. I'd like to thank my colleagues around the table. I'd like to thank you guys for your trust in us. But mostly, I'd like to thank our employees and ALJ employees for helping us in this process. There are great days ahead of us. Thank you, and have a great day.

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Operator [28]

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