Delek Logistics Partners, LP (DKL) Q3 2014 Earnings Report, Transcript and Summary

Good morning. My name is Tasia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Keith Johnson. Sir, you may begin your conference.

Thank you, Tasia. Good morning. I would like to thank everyone for joining us on this webcast to discuss Delek Logistics' third quarter 2014 financial results. Joining me on today's call will be Uzi Yemin, our Chairman -- our general partner's Chairman and CEO; Assi Ginzburg, CFO; Danny Norris, 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 the 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 February 6, 2015, by dialing (855) 859-2056, with the confirmation ID number 17066617. An online replay may also be accessed for the next 90 days at the partnership's website at deleklogistics.com. Last night, we distributed a press release that provides a summary of our third quarter 2014 results. This press release is available in 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.

Thank you, Keith. Delek Logistics reported yesterday another strong quarter. Our DCF was $17.7 million, and EBITDA was $21.2 million for the third quarter 2014. This is an increase from a DCF of $13.4 million and EBITDA of $16.6 million in the third quarter of 2013. We ended the quarter with a DCF coverage ratio of approximately 1.4x. Based on our performance, we are pleased to announce an increase in our quarterly distribution to $0.49 per unit for the quarter ended September 30, 2014, which is a 3.2% increase from our second quarter 2014. This will be our seventh consecutive increase and is 21% higher than our third quarter 2013 distribution of $0.405 per unit. Now I will turn the call over to Danny to discuss the financial results.

Thank you, Assi. For the third quarter 2014, Delek Logistics reported net income attributable to all partners of $15.1 million or $0.59 per diluted limited partner unit compared to net income attributable to all partners of $12.5 million or $0.51 per diluted limited partner unit in the prior year period. Improved performance compared to the third quarter of 2013 was driven by higher volumes on the Lion Pipeline System, several acquisitions completed during the past year and a higher margin in the West Texas wholesale business on a year-over-year basis. As a result, contribution margin increased to $23.7 million in the third quarter 2014 from $18.4 million in the prior year period. On a sequential basis, gross margin declined in our West Texas business compared to a record level in the second quarter of 2014, which was the primary reason for lower performance on a consolidated basis in the third quarter of this year. Now I will spend a few minutes discussing our 2 reporting segments. Third quarter 2014 contribution margin in our Pipeline and Transportation segment improved to $15.1 million compared to $10.8 million in the third quarter of 2013. The improvement was primarily attributable to storage fees from the Tyler tank farm purchased in late July of 2013 and the El Dorado tank farm acquired in February of 2014. Also during the quarter, volumes on the Lion Pipeline System increased year-over-year as we shipped higher volumes of crude and finished product for Delek US' El Dorado refinery following the turnaround completed at that refinery in the first quarter of 2014. Contribution margin in our wholesale and marketing terminalling segment was $8.6 million in the third quarter of this year compared to $7.7 million in the third quarter of last year. This increase was due to a higher margin in our West Texas wholesale business and higher terminal volumes due to acquisitions completed over the past year. Acquisitions included the Tyler, Texas terminal in late July of 2013, the addition of the North Little Rock, Arkansas terminal in October of 2013 and the El Dorado, Arkansas terminal in February of 2014. In our West Texas wholesale business, volume was 17,920 barrels per day in the third quarter of this year compared to 18,970 barrels per day in the prior year period. The gross margin was $2.20 per barrel in the third quarter of 2014 compared to $1.63 per barrel in the prior year period. The margin per barrel in the third quarter included approximately $1.2 million or $0.74 per barrel from RINs generated in our ongoing ethanol blending activities. This compares to a gross margin that included $2 million or $1.13 per barrel from RINs in the third quarter of last year. Terminalling throughput volume of approximately 95,000 barrels per day during the quarter increased on a year-over-year basis from approximately 74,000 barrels per day in the third quarter of 2013 due to acquisitions completed in the past year. During the third quarter, volume per day under our East Texas marketing agreement was approximately 59,660 barrels per day compared to approximately 61,700 barrels per day in the third quarter of 2013. As of June 30, 2014, Delek Logistics had a cash balance of approximately $700,000, and total debt was $230 million. We ended the quarter with approximately $157 million of unused availability under our $400 million credit facility. Capital expenditures were approximately $830,000 in the third quarter of 2014, which included no CapEx reimbursement under our Omnibus agreement with Delek US. Maintenance capital expenditures were approximately $480,000 and discretionary projects were approximately $350,000. Total capital expenditures for 2014 are expected to be $9.9 million. This is a decrease from our previous estimate of $13.1 million and is related to timing of discretionary projects. The 2014 forecast capital expenditure amount consists of $6.2 million of maintenance and $3.7 million of discretionary-related projects. With that, I will turn the call over to Uzi for his closing comments.

Thank you, Danny. We believe that we are on track to achieve our goal that we discussed during our last conference call to have $25 million to $35 million of annual EBITDA by the end of the first quarter of 2015. A portion of this growth is in place and is currently benefiting DKL. For example, we have benefited from higher volumes on the Lion Pipeline System since March 2014 and first-year [ph] increases, which took effect in July. Between now and the end of the first quarter 2015, we expect the remaining parts of the growth plan to fall in place. We're improving the efficiency of our Tyler, Texas terminal to handle more truck volume to support Delek US' planned expansion of its Tyler refinery. Also, we recently purchased our third terminal in East Texas, which will allow us to better support Tyler. I verify [ph] drop-downs that include a crude oil storage tank in Tyler and rail offloading works [ph] at El Dorado are expected to be purchased from Delek US by the end the first quarter 2015. In addition, as a part of our growth plan, we are currently in the final stages of negotiating a new agreement for the Paline pipeline. All of these initiatives can be achieved with an estimated investment of $80 million to $85 million of capital. As we achieve our growth targets in the first quarter of 2015, we will be moving closer to our goal of an annualized run rate of $150 million of EBITDA by the end of next year. Our financial position remains solid, and we continue to target a distribution increase of at least 15% per year in the future. With that, Tasia, could you please open the call for questions?

[Operator Instructions] Your first question comes from the line of Theresa Chen with Barclays.

My first question is related to the Paline recontracting. Now that we're very close to the expiration of the current contract, can you provide us with, like, an update of what the recontracting scheme might look like? And if not, can you tell us when you'd be ready to share that information?

That's a great question. We are in the final stages of negotiating a new contract. Obviously, it's going to be, we think, much better than the current contract. However, that contract wasn't signed just yet. It's in the final stages of awarding. And we expect this to happen in the next few weeks, obviously, because it is expiring by the end of the year, the current contract. So because of different reasons, mainly business reasons and things that in relation to the negotiation, we are not discussing numbers just yet. But it's embedded in the growth of $25 million to $30 million that we put ourselves -- we put as the target for ourselves until the first quarter of 2015.

Okay, fair enough. And then secondly, in terms of the West Texas marketing rate, what should we think of as a good basis of a run rate from here? I mean I understand that second quarter of this year benefited from some idiosyncratic factors, and it's up year-over-year but back to around the same level of second quarter of last year. I just wanted to know, how should we think about this margin going forward?

Obviously, we will -- this will bounce with the market. A good -- by the way, for the fourth quarter, it bounced back from the $2.20. So we see better margins in the fourth quarter so far. A good indication -- and it's new to us as well, but a good indication in our head right now is around $3 on an annual basis. It will change between quarters. $2.20 is probably not normal. It's not -- it's too low. And in fourth quarter, we probably expect to be closer to normal, which we call $3 normal.

Perfect. That's very helpful. And then lastly, on the revised CapEx guidance, I'm just curious. What were the projects that were pushed out further related to the decrease in guidance?

This is Fred Green. The -- most of what got pushed out was expenditures to expand the North Little Rock terminal. We developed the project scope while we were doing due diligence, but once we took over operation and we're able to work with the various pipeline companies and other facilities in the area, we're modifying the scope of the project a little bit. And we've been able to achieve much higher throughputs than we expected with no CapEx, so we're kind of rethinking that scope.

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

A couple quick ones from me. For one, so I assume that we still probably have a little bit of a gap between what we can see out there on the growth side and what your target is for year-end '15, so I assume that's going to have to be met with some acquisitions. Can you just update us on sort of what you're looking at, whether it's would you be willing to step onto new markets and to new basins; if you're strictly focused on assets that would integrate with DK's assets, or more third-party focused; maybe even easier, just what you're not interested in on the M&A side?

Well, these are great questions, Rich, so I'll try to answer them one by one. First of all, we do have projects that are ahead of us that are both on the acquisition side as well as organic growth. As we did in the past, we announce them only when they are basically signed. A great example about that is obviously the small acquisitions we just did, the Mount Pleasant and the Greenville. We negotiated that for a few months. We knew this was in the pipeline and only announced when we signed that. Now we will need bigger acquisitions, and we have them in the pipeline. And also, we have other big projects, organic projects, in front of us, but we want to be cautious when we announce something and then it's not closed. So that's the reason we don't announce specific projects. However, we feel good about our goal of $150 million by the end of next year. Second, in terms of the area, we think that the growth area that is attractive for us is areas that we know. However, it doesn't mean that it needs to be all DK related. These can be third-party-related acquisitions. Mount Pleasant, you may say it's related to DK, but it's actually supplying other customers. So these are the areas that we know and know how to buy assets or how to build assets that will be attractive to our operation. So are we going to go to Alaska tomorrow morning? Probably not. But it's not necessarily assets that will serve only DK.

I appreciate that, Uzi. And then just a kind of a minor one, and I apologize if you already answered this, but I hopped on the call late. It looks like, year-to-date, the trend on maintenance CapEx is trending pretty well below guidance. Are you expecting that we'll make that up in the fourth quarter? Or are some of the maintenance activities being pushed out to next year?

Fred, do you want to take that one?

Sure. We won't see a lot of additional CapEx here in Q4, but we'll see some more coming in Q1. Since a lot of the DKL assets support the various refineries, we will do some maintenance activity, maintenance CapEx activity, in Q1 in coordination or in conjunction with the Tyler refinery expansion and turnaround. So it's just deferred from Q4 to Q1.

[Operator Instructions] Your next question comes from the line of Cory Garcia with Raymond James. Cory J. Garcia - Raymond James & Associates, Inc., Research Division: I guess, a quick point of clarification on the prior West Texas wholesale. $3 is sort of a good range, I guess, per barrel, to think about a normalized rate. Does that include a contribution for RINs?

Yes. Cory J. Garcia - Raymond James & Associates, Inc., Research Division: Okay, about $1 or so per barrel of RINs...

Well, it depends. As you know, RINs fluctuate, but it's a good RINs [ph], also the benefits of ethanol. Now I want to be clear on that, Cory, because it's a point of reference or it's a point of interest for everybody. That will move. There will be quarters with $2 and there will be quarters with $6, but if we look at it as long-term benchmark, $3 is a good number. Cory J. Garcia - Raymond James & Associates, Inc., Research Division: Okay, no, that clears things up. And then I guess, at this point, it still seems like you guys are mulling over some of the discretionary projects that could be hitting beyond sort of the 1Q '15 time horizon. Is there any level of CapEx spend that at least we should be thinking about ballpark, or is it still too early to sort of say?

It's too early. I'm just going to repeat our guidance from the past that, usually, we target acquisitions not more than 7 to 9x EBITDA. So there's no need to expect that we will pay 17x or 13x for acquisitions. We won't do these outputs. By the way, there still assets exists in the marketplace that can -- we can improve our -- improve their profitability and still pay 7 to 9x. Cory J. Garcia - Raymond James & Associates, Inc., Research Division: Yes, yes, absolutely. And I guess, kind of expanding on that M&A topic, sort of any color you guys were able to give regarding with the recent pullback we've seen in oil prices? I know a lot of the recent M&A on your standpoints are more geared toward the refined product. Are we seeing some M&A potential transaction values on the crude side coming a little bit? Or is it still too early and people are still waiting to see how things play out?

Exactly. I don't think that everybody is sitting on a big pile of cash and everybody is just sniffing around. $77, we visited that number only in the last 3 days, so it's too early. I know that you guys react quickly, but it's too early to get a good sense of that. However, I do expect, if we're really staying at these levels of $70 to $80, that there will be assets coming to the market. And people that are more leveraged than us, that's the reason we keep our balance sheet with relatively lower leverage, 2.5x and improving. I believe that there will be -- have more assets coming to the market.

And your next question comes from the line of Michael Blum with Wells Fargo.

Just one more question on just the environment. I think I know how the lower crude prices impacts DK, but just in terms of an overall high-level view of DKL's business, can you just talk about how the business may be impacted to the positive or the negative and assuming it would stay in this kind of $80-ish, $75 TI environment?

Well, as you know, most of our contracts are on fixed fee. So for the most part, it doesn't influence us much. However, there's one area in West Texas which enjoyed growth in the past. And if drilling will go down, then maybe we'll see a little bit of pullback on the number of barrels that are being purchased. I -- we don't see anything like that happening. This is a much longer term. This will all be years. Obviously, we -- in this world, El Dorado ran 80,000 barrels of demand for DKL was much higher in the past. And if the demand from the refineries will continue the way it is, then we will see very minimal, if any, influence on DKL's business.

Okay. And if we see -- if we do see a slowdown in drilling activity, does that -- could that impact some of these organic projects that you sort of have in the line of sight but haven't announced yet?

Maybe one. I'm trying to think. Maybe one. All the rest, not really.

And there are no further questions at this time.

Well, as usual, I'd like to thank my colleagues around the table here. I'd like to thank you, investors and analysts, for your interest in our company. But mostly, I'd like to thank our employees who make this company what it is. Have a great day. We'll talk to you soon.

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