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Edited Transcript of DKL earnings conference call or presentation 8-Aug-18 1:00pm GMT

Q2 2018 Delek Logistics Partners LP Earnings Call

Brentwood Aug 24, 2018 (Thomson StreetEvents) -- Edited Transcript of Delek Logistics Partners LP earnings conference call or presentation Wednesday, August 8, 2018 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 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 - Executive VP & CFO of Delek Logistics GP LLC

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Conference Call Participants

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* 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 Nora, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Delek Logistics Partners' Second Quarter Earnings Call. (Operator Instructions) Speaker, Keith Johnson, 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, Nora. Good morning. I'd like to thank everyone for joining us on this webcast to discuss DKL's Second Quarter 2018 Financial Results. Joining me on today's call will be Uzi Yemin, our General Partners' 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 believe, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You're 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 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 according with generally accepted accounting principles, or GAAP, we also 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 the Investor Relations section of our website. 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 - Executive VP & CFO of Delek Logistics GP LLC [3]

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Thanks, Keith. We had a strong second quarter performance, supported by our Permian Basin position. Our record results enabled us to both increase our DCF coverage ratio and lower our leverage ratio. The benefit from the Big Spring logistics assets acquired effective March 1, 2018, the year-over-year increase in the West Texas gross margin and improved performance on the Paline Pipeline drove the second quarter 2018 improvement compared to the prior-year period. Our distributable cash flow was approximately $33.5 million in the second quarter of this year compared to $23 million in the second quarter of last year. Our DCF coverage ratio was 1.34x for the second quarter, which is an increase from 1.14x in the first quarter of this year. EBITDA increased to $45.4 million compared to $30.3 million in the prior year period. Based on our performance, we increased our quarterly distribution to $0.77 per limited partner unit for the quarter ended June 30. This distribution is to be paid on August 13 to unitholders of record as of August 3, and it is a 2.7% increase from our first quarter 2018 distribution per unit. This is our 22nd consecutive quarterly increase, and it's 9.2% higher than our second quarter 2017 distribution per unit. At June 30, DKL had approximately $206 million of available capacity on our $700 million credit facility. Our total debt was approximately $737 million and total leverage ratio of 4.4x is well within the 5.5x currently allowable under our credit facility. It is also a reduction on a sequential basis from 4.6x in the first quarter of this year. For the second quarter 2018, Delek Logistics reported net income attributable to all partners of $25.6 million, which compares to $19 million in the prior year period. Limited Partners' interest and net income was $19.4 million or $0.79 per unit compared to $14.4 million or $0.59 per unit in the prior year period.

Next, I'll review our operating segments. In our Pipelines and Transportation segment, the second quarter 2018 contribution margin was $22.6 million compared to $17.9 million in the second quarter of 2017. This increase was primarily attributable to improved performance from the Big Spring acquisition and the Paline Pipeline. Operating expenses increased to $9.9 million in the second quarter from $7.9 million in the prior year period, primarily due to the acquisition. In our Wholesale Marketing and Terminalling segment, the contribution margin was $22.7 million in the second quarter of this year, which was an increase from $13.9 million in the prior-year period. This increase was primarily due to the Big Spring acquisition and an improvement in the West Texas gross margin. Operating expenses increased to $5 million in the second quarter of 2018 from $2 million in the prior year period, primarily due to the acquisition. Our West Texas wholesale gross margin was $8.06 per barrel in the second quarter of 2018 compared to $4.26 per barrel in the second quarter of last year. Throughput in West Texas was 12,261 barrels per day compared to 13,422 barrels per day in the prior year period. We have continued to see strong margins in West Texas into the third quarter, as drilling activity in the Permian Basin has increased. During July, the gross margin in West Texas averaged approximately $7 per barrel and volumes averaged just over 12,000 barrels per day. During the second quarter of this year, our equity income from our joint venture crude oil pipelines was approximately $1.9 million compared to income of $1.2 million in the prior year period. Capital expenditures were approximately $2.3 million in the second quarter of this year and included $1.3 million of discretionary spending, $1 million of maintenance -- and $1 million of maintenance. During the second quarter, approximately $300,000 was reimbursed by Delek US. For 2018, our total gross CapEx forecast is $19 million, which includes $6.6 million of discretionary and $12.3 million of maintenance capital before reimbursement by Delek US. We expect approximately $2.1 million of the maintenance capital to be reimbursed in 2018. As you may recall, Delek Logistics and an affiliate of Green Plains Partners, LP, announced the formation of a 50-50 joint venture, DKGP Energy Terminals LLC in February 2018. DKGP signed a membership interest purchase agreement to acquire terminal assets from an affiliate of American Midstream Partners, LP. I wanted to give you an update on this transaction. After delays in receiving federal regulatory approval, both partners felt that it was not in the interest of their unitholders to move forward with efforts to obtain regulatory approval, given the uncertainty of the outcome. On August 1, the membership interest purchase agreement between DKGP and American Midstream was terminated according to the terms of the agreement. While this was not our desired outcome, we are focused on continuing to grow our Permian Basin platform. With that I'll turn the call over to Uzi for his closing comments.

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

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Thank you, Kevin, and good morning. Our strategy to build our Permian Basin platform is driving results for DKL. We're benefiting through our West Texas marketing operations and by supporting the refining system of Delek US that purchases approximately 200,000 barrels per day of Permian crude. Also, our Paline Pipeline provides a route for shippers to take advantage of the crude oil price differentials in the market for Permian crude. With the initiatives completed in the first quarter of 2018 through the acquisition of the Big Spring logistics assets and the expansion of the Paline Pipeline, we have further enhanced our Permian Basin platform. This led to a record quarterly EBITDA of $45.4 million in the second quarter of 2018 and which would equate to approximately $182 million on an annualized basis.

We're aggressively exploring opportunities to leverage this growth -- growing position. By partnering with our sponsor, Delek US, we're evaluating options to further support their Permian crude, as they continue to increase the amount of crude oil that they are gathering.

In addition, Delek US has logistics assets in its Krotz Springs refinery that can be future-potential drop-down with the ability to generate approximately $32 million of annual EBITDA. By combining the potential growth options through partnering with Delek US with organic projects and third-party acquisitions, we believe that we should be able to create long-term value for our unitholders. This initiative should continue to support our annual distribution growth per limited partner unit of at least 10% through 2019, while maintaining sufficient distribution coverage. With that, Nora, will you open the call for questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have our first question from the line of Justin Jenkins from Raymond James.

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Justin Scott Jenkins, Raymond James & Associates, Inc., Research Division - Research Analyst [2]

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Starting on the growth side, Uzi, you just hinted at this in your comments but anything incremental you can share in terms of the types of projects you're looking at? Or maybe the timeframe we should expect to see before an announcement?

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Ezra Uzi Yemin, Delek Logistics Partners, LP - Chairman & CEO of Delek Logistics GP, LLC [3]

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Well, we are -- obviously, our backbone as DKL is the logistics asset in the Permian Basin with the growth of the production in the area and the need for both crude gathering, also the need for marketing and wholesale are growing. And I have been to Midland yesterday, actually, and you see the growth everywhere. So I wouldn't be surprised if in the next few months we'll come with something that is a combination of different things that we discussed like third party, like organic and other initiatives in the area.

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

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Perfect, appreciate that, Uzi. And then maybe on the balance sheet, leverage ticked down by 0.2 of a turn from last quarter, and now it's out the terminal joint venture. I'm curious if we should expect leverage to continue to work its way down a little further into year-end, Kevin?

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

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Absolutely. That's our goal. As we said, when we're making acquisition, the leverage goes up, and then we work it down. We had healthy EBITDA in the quarter, we don't expect a material change to the bad in the upcoming quarters. So the leverage will continue to work it down -- work itself down.

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

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Great. And last one for me, if I could just that it relates to the structure of DKL. Simplification has been a big trend recently. Any thoughts on the GP-LP relationship and IDR structure here?

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

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Absolutely. It's heavy on our mind. We're looking into that. I wouldn't expect this to happen over the next 18 months because we still have room to grow, as you will see in the next -- in the upcoming quarters. But eventually, we will simplify the structure.

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Operator [8]

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(Operator Instructions) There are no further questions at this time. We have one from Ned Baramov of Wells Fargo.

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Ned Antonov Baramov, Wells Fargo Securities, LLC, Research Division - Associate Analyst [9]

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So given the termination of the purchase agreement with AMID, are there any other initiatives that the JV could pursue with Green Plains?

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Ezra Uzi Yemin, Delek Logistics Partners, LP - Chairman & CEO of Delek Logistics GP, LLC [10]

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No, not at this point vis-à-vis any terminals or any -- obviously, we have the ethanol terminal in North Little Rock together with the GPRE -- or GPP, and we think that they are wonderful partners but nothing that is coming to mind at this moment.

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Ned Antonov Baramov, Wells Fargo Securities, LLC, Research Division - Associate Analyst [11]

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Got it. And then this is the first full quarter of owning and operating the Big Spring logistics assets. Would you say that contributions from these assets are tracking in line with your original plan?

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

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Absolutely, and they are pretty much in line we expected that, and we got. That's the time to mention, and we mentioned it on the call that we have the next step, as we continue to improve -- DK continues to improve their Krotz Springs refinery. Then there will be another drop-down, but performance so far is in line.

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Ned Antonov Baramov, Wells Fargo Securities, LLC, Research Division - Associate Analyst [13]

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Very good. And then one more for me. Could you maybe talk about the potential, further expansion of the Paline Pipeline?

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

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Yes, well that's another opportunity that we are looking at. As you know, we said that we expanded up to 42,000. It depends on the appetite of third parties to sign up. We're looking at that. There's a process that is being done in-house and with potential shippers, and we'll notify you in the next -- probably in the next few months on the results of that.

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Ned Antonov Baramov, Wells Fargo Securities, LLC, Research Division - Associate Analyst [15]

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Okay. That's great. And maybe just one last question on West Texas. I think this quarter marked a record margin curve barrel, but volumes were somewhat down on a year-over-year basis and sequentially. So I think you noted the activity in the Permian remains strong. So maybe you can kind of help me understand why volumes were down.

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

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Well, a couple of reasons: first of all, the Big Springs refinery ran just a tad less this quarter; and second, as we all know, we are constrained by the capacity of Big Spring refinery or the Magellan Pipeline. So whatever they give us, we sell. So it's not that we -- we can sell much more, and that's the reason DKL is benefiting from high margins, but this is the supply that is existing in the area at this point.

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Operator [17]

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(Operator Instructions) There are no further questions at this time. Please proceed, presenters.

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Ezra Uzi Yemin, Delek Logistics Partners, LP - Chairman & CEO of Delek Logistics GP, LLC [18]

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Thank you, Nora. I'd like to thank my friends around the table here for supporting me, for supporting the company. I'd like to thank the Board of Directors and the executives of this great company for their efforts. I'd like to thank you, investors, for believing in us, but mostly, I'd like to thank our employees for making this company what it is. We'll talk to you in the future. Thank you. Bye.

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Operator [19]

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