Delek Logistics Partners, LP (DKL) Q1 2018 Earnings Report, Transcript and Summary

Good morning. My name is Beth, and I will be your conference operator today. At this time, I would like to welcome everyone to the Delek Logistics Partners First Quarter Earnings Call. [Operator Instructions] Thank you. Keith Johnson, you may begin your conference.

Thank you, Beth. Good morning. I’d like to thank everyone for joining us on this webcast to discuss DKL’s first quarter 2018 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. 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 press 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 statement, whether as a result of new information, future events or otherwise. In addition to reporting financial results in accordance with the generally accepted accounting principles, or GAAP, we report certain non-GAAP results. Investors are encouraged to review the reconciliation of these non-GAAP results, non-GAAP financial measures to the comparable GAAP results that can be found in the press release, which is posted on the Investor Relations section of the website. On today’s call, Kevin will begin with a financial overview, and then Uzi will offer a few closing strategic remarks. With that, I’ll turn the call over to Kevin.

Thanks, Keith. Our operating performance benefited from our Permian Basin-related operations and one-month performance from the Big Spring logistics assets during the first quarter of 2018. We had a strong margin increase year-over-year in West Texas and performance of our Paline Pipeline improved. Our distributable cash flow was approximately $27.3 million in the first quarter of 2018 compared to $18.4 million of the first quarter of last year. Our distributable coverage ratio, which improved on a year-over-year basis and sequential basis, was 1.14 times for the first quarter of 2018. EBITDA increased to $34.7 million compared to $23.9 million in the prior year period. Based on our performance, we increased our quarterly distribution to $0.75 per limited partner unit for the quarter ended March 31, 2018. This distribution is to be paid on May 15 to unitholders of record as of May 7 and a 3.4% increase from our fourth quarter 2017 distribution per unit. This is our 21st consecutive quarterly increase and is 8.7% higher than our first quarter 2017 distribution per unit. At March 31, 2018, DKL had approximately $205 million of available capacity on our $700 million credit facility, following the $350 million acquisition of the Big Spring logistics assets in March. Our total debt was approximately $738 million and total leverage was at 4.6 times, is well within the 5.5 times currently allowable under our credit facility. For the first quarter of 2018, Delek Logistics reported net income attributable to all partners of $20 million, which compares to $14.6 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 $10.5 million or $0.43 per diluted common limited partner unit in the prior year period. Now I will review our operating segments. In our Pipelines and Transportation segment, the first quarter of 2018 contribution margin was $19.7 million compared to $16.1 million in the first quarter of last year. This increase was primarily attributable to our improved performance on the Paline Pipeline and the Big Spring acquisition, which was partly offset by lower performance from the SALA Gathering System. Operating expenses increased to $9.6 million in the first quarter of this year from $8.2 million in the prior year period, primarily due to the acquisition and variable costs. In our Wholesale Marketing and Terminalling segment, the contribution margin was $16.7 million in the first quarter of this year, which was an increase from $10.4 million in the prior year period. This increase was primarily due to an improvement in the West Texas gross margin and the East Texas marketing agreement. Operating expenses increased to $3 million in the first quarter of 2018 from $2.2 million in the prior year period, primarily due to the acquisition. Our West Texas wholesale gross margin was $5.15 per barrel in the first quarter of this year compared to $2.72 per barrel in the first quarter of last year. Throughput in West Texas increased to just under 16,000 barrels per day compared to 14,400 barrels per day in the prior year. We have continued to see strong margins in West Texas into the second quarter. During April, the gross margin in West Texas averaged approximately $5.90 per barrel and volumes averaged approximately 14,200 barrels per day. During the first quarter of 2018, our equity income from our joint venture crude oil pipelines was approximately $858 million compared to income of $245 million in the prior year period. We received a distribution from our joint ventures in the first quarter of 2018 of approximately $1.7 million. Capital expenditures were approximately $2.2 million in the first quarter of 2018 and included $1.5 million of discretionary spending and $700,000 of maintenance. During the first quarter of 2018, approximately $400,000 was reimbursed by Delek US. For 2018, our total gross CapEx forecast is $19.9 million, which includes $9.6 million of discretionary and $10.3 million of maintenance capital before reimbursement by Delek US. We expect approximately $2.1 million of maintenance capital to be reimbursed in 2018. With that, I will turn the call over to Uzi for his closing comments.

Thank you, Kevin. During the first quarter, we completed the purchase from our sponsor of the Big Spring logistics assets that should provide an additional $40 million of EBITDA on an annual basis. In addition, the capacity was increased from 35,000 barrels per day to 42,000 barrels per day on the Paline Pipeline. Those steps should allow us to build from a record quarterly EBITDA in the first quarter of 2018. In addition, we continue to work through the HSR process related to the announcement – announced joint venture with Green Plains Partners and the joint ventures purchase of the two light product terminals from an affiliate of American Midstream. We continue to focus on creating long-term value for unitholders and believe that the joint venture, the Big Spring acquisition and growth initiatives should continue to support our annual distribution growth per limited partner unit of at least 10% through 2019 while maintaining advocate distributing coverage. With that, Beth, would you open the call for questions?

[Operator Instructions] Your first question comes from the line of Justin Jenkins, Raymond James.

Great. Thanks, good morning, guys. I guess, I’ll start on the growth side. Obviously, a lot of interest in Permian infrastructure lately given differentials, and I’m guessing that will be a topic on the DK call here shortly. But curious, if there’s any incremental projects you’re looking at, at the DKL level given the existing footprint to build upon and refining base to leverage here?

Well, obviously, that’s a joint – first, that’s a great question. We all see the growth in the Permian. We were preparing ourselves for that. You will see on the DK side, that together with DKL, we are looking into continue growing our gathering, continue to look into other assets in the area and we are – we expect this to be a cornerstone of our 2019-2020 growth for DKL. I don’t want to be specific with any projects, but the growth in the gathering and the – that is going on in the Permian is absolutely something that we focus on.

Perfect. Appreciate that, Uzi. And then, maybe on – with the diff, where it is today, I know you just expanded the Paline Pipeline and I’m sure it’s probably full. But with the diff, where it is, is there a push to expand that once again?

Yes, we’re looking at that as we speak. And we will notify you over the next probably few months. But yes, there’s an opportunity over there.

Understood. Last one in the Permian for me, on the RIO Pipeline. I think your partner last night said that the pipe has been expanded to 80,000 barrels a day. Any thoughts on additional financial contribution from that and maybe the strategic direction for that JV given some pretty big changes coming at your partner on that pipeline?

That – we always believed in that asset. And we think that Endeavor is a great partner. And obviously, that will be, as we all know, part of Marathon, which is a great partner as well. So we think that the arrangement, the RIO Pipeline, the distribution from that pipeline will continue to grow. It is running full as we speak, obviously, with the idea of expanding on that. And DKL should enjoy from – enjoy that as well.

Perfect, I’ll leave it there. Appreciate the color, guys.

[Operator Instructions] There are no further questions. I’ll turn the call back to our presenters.

I’d like to say thank you, Beth. I’d like to thank my colleagues around the table. I’d like to thank the Board of Directors and you, unitholders, for your trust in us. But mainly, I’d like to thank our employees for making this company what it is. Have a great day. We’ll talk to you next time.

This concludes today’s conference call. You may now disconnect. Thank you.