Delek Logistics Partners, LP (DKL) Q4 2012 Earnings Report, Transcript and Summary

Good morning. My name is Vanessa and I will be your conference operator today. At this time, I would like to welcome everyone to the Delek Logistics Partners, LP 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. I will now like to turn the call over to Mr. Keith Johnson. Please go ahead sir.

Thank you, Vanessa. Good morning. I would like to thank everyone for joining us today and we are excited to host our first conference call and webcast to discuss Delek Logistics Partners’ fourth quarter and full year 2012 results. Joining me on today’s call will be Uzi Yemin, our Chairman and CEO; Assi Ginzburg, our CFO; Danny Norris, Vice President of Finance, 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 June 6, 2013 by dialing 855-859-2056 with a confirmation ID number 98107477. 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 for three months and 12 months ended December 31, 2012 include results from Delek Logistics Partners LP predecessor up to November 7, 2012. Because the results presented from prior periods are not comparable, this earnings call will focus on the periods beginning November 7, 2012 and ending December 31, 2012, which we refer to as the post-closing period. A reconciliation of the post-closing period to the full fourth quarter results is provided in tables attached to our release. Last night, we distributed a press release that provided the summary of our fourth quarter and full year 2012 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 follow with a few closing strategic comments. With that, I’ll turn the call over to Assi.

Thank you, Keith. I am excited to participate in my first earning call as the CFO and in the first earning call of Delek Logistics. Delek Logistics has had the great start since its IPO on November 7, 2012. Both our DCF of $8.1 million and EBITDA of $10.2 million were ahead of expectations for this period. We paid our first cash dividend in February and ended the period with a strong cash position. Based on our strong performance, we currently expect to recommend to the Board of Directors of our General Partner to increase the quarterly distribution to $0.385 per unit for the quarter ending March 31, 2013. This would represent a 2.7% increase from our MQDs. Now, I will turn the call over to Danny to walk through the financial results.

Thank you, Assi. Good morning everyone. For the 55-day period from November 7, 2012 to December 31, 2012, Delek Logistics reported net income of $8.4 million or $0.34 per common partner unit. Our first regular cash dividend of $5.5 million or $0.224 per unit was paid last month. This month which was prorated for the 55-day period corresponds to the minimum quarterly distribution of $0.375 per unit or $1.50 per unit on an annualized basis. Revenues during the post-closing period were $111.2 million and contribution margin was $11.3 million. Total operating expenses of $2.9 million and general and administrative expenses of $1.2 million were in line with expectations. Now, I will spend a few minutes discussing our two reporting segments. Our Pipeline and Transportation segment includes the following assets. The Lion Pipeline System and the 600-mile SALA Gathering System, which transport crude to Delek US’ El Dorado, Arkansas refinery. Our East Texas crude logistics system provides crude to Delek US’ Tyler, Texas refinery and also connects that refinery to Longview, Texas. In addition, this segment includes the 185-mile Paline Pipeline, which transports crude south from Longview to the Gulf Coast and is contracted to a third-party. Also included is approximately 1.7 million barrels of ancillary crude oil storage. For the 55-day period, this segment performed well as it benefited from elevated throughput of 21,595 barrels per day in the SALA Gathering System, which compares to 19,500 barrels per day included in the forecast provided in their prospectus filed November 1, 2012 and prorated for the 55-day period. During the post-closing period, volume on the Lion Pipeline System was 42,880 barrels per day, which as expected was below minimum commitment levels due to the continued suspension of crude oil deliveries from the Exxon North pipeline. This pipeline resumed deliveries again in…

Thank you, Danny. First, I would like to share with you how excited I am over our first call with DKL it’s great to be here with you this morning. Obviously, we are pleased to report strong results from Delek Logistics since it started operation on November 7. We have unlocked the value of these assets and created a new platform that allows us more flexibility to take advantage of logistics opportunities in the marketplace. Our relationship with our sponsor, Delek US, DK creates the potential for additional growth through assets that maybe available for dropdown in the future. We are focused on our strategy of providing growth and value by generating stable cash flow through a combination of optimizing the existing asset base, making acquisitions and realizing organic expansion opportunities. During the first quarter of 2013, we completed our Nettleton pipeline reversal project as well as the pipeline connection for the rail offloading facility at Delek US El Dorado, Arkansas refinery. Finally, I would like to review existing growth opportunities provided through our relationship with our sponsor Delek US. These include refined product terminals and crude oil storage facilities at Delek US refineries. In addition, logistic assets or logistics assets that are constructed by Delek US maybe dropped down. We believe that the combination of these assets has the potential to create $25 million to $30 million of EBITDA as assets are dropped down over the next two years beginning in the second half of this year. These assets provide a solid foundation for future growth as we explore additional third party opportunities. With that Vanessa, would your please open the call for questions?

Yes sir. (Operator Instructions) Your first question comes from the line of Mark Reichman from Simmons.

Good morning. I just wanted to ask first of all to kind of get a little more – shed a little more color on your dropdown strategy. How are you thinking about that and as far as the time timing, why wait until the second half of the year?

Good morning, Mark. Thank you for your question, it’s a great one. So, let’s start with the first part. Our strategy is to take these $25 million to $30 million and drop them down within the next 24 months. Obviously there is tremendous amount of economics between what is sitting at DK level and the value that we can create at DKL. So, it would be a combination of our leverage situation which obviously we have better cash situation than we expected and how accretive it should be to DKL. So, that’s the strategy. We will not drop them down all at the same time. To your – to the second part of your question why to wait we feel that we still have growth inside DKL within our existing assets, the organic growth that exists right now outside Paline which obviously is by the end of 2014. So, we want to create the stream sustainable growing of EBITDA from now through – for the next two years and by the end of these two years Paline is obviously the lease agreement is expiring and (indiscernible) to show additional growth in 2015. So, we want to be consistent, we don’t want to create too much noise and then quiet. We want to be very consistent that what we feel this vehicle is for. Did I answer your question?

That’s fair enough. And in the Wholesale Marketing and Terminalling I can see the margins kind of drove the performance there, in the Pipeline and Transportation segment are you able to kind of speak to contribution margin by system versus your expectations during the fourth quarter?

Well, of course we can do that Assi I don’t know if you want to take this one. If you look at the press release we do show throughput by system in the press release. And we are showing the gathering system volume and you can see those volumes were more than 21,000 barrels a day compared to 19,000 barrels a day in the forecast. So, you can calculate with $2.25 per barrel of fee what can that be compared to the offering.

Alright. How was OpEx – how was OpEx by system I mean pretty consistent with your expectations?

We are reporting OpEx the answer is yes. As you can see, we are dead on the OpEx compared to the offering and what we gave in the H1 and we didn’t see any material change from that. So, I can say that the answer is yes.

Okay. And that is the $1.2 million for maintenance CapEx during the quarter is that a pretty good run rate?

Fred, do you want to take that one?

It will vary based on the timing for the projects. We’re doing tank work and still working on some additional pipeline projects. Probably maybe raise that to $2.5 million to $3 million.

$2.5 million to $3 million per quarter in ‘13?

No, no, no it’s – I am sorry $3 million is the cap on maintenance CapEx outside of (EPS) 633. No, I think we reported our budget amount for CapEx Danny just reviewed on that number at $8.8 million.

Alright, that’s what I had. So, $8.8 million you think is still a good number to use?

Yeah, yeah absolutely.

Okay, great. Thanks so much.

Thank you, Mark.

(Operator Instructions) Your next question comes from the line of Jerren Holder from Barclays.

Hi, good morning.

Good morning.

Looking at the Paline pipeline, is the intention to wait until the end of 2014 before resigning that lease or is it possible that there is some type of early renegotiation before the end of the lease?

We’ll it’s a great question and it depends of how much appetite we have for risk. If we want a long-term 5, 7, 9 years commitment, obviously we will need to compromise on economics. Right now the differential between Longview barrels and the Gulf is around $10, $12. So, if we want to have – if we bought we can do that quickly. If we want to have long-term and enjoy stable cash flow for longer term then we need to wait. We are still thinking about that internally, but that’s the dilemma. And honestly we feel that with the structure in Longview and the things that we see in Longview, Longview is a great, great place to be in order to get cheap crude. So, we don’t want to give too much value for expediting this negotiation.

Okay and when the time comes I guess maybe you might be able talk about it or not. Given like what that spread is and your long-term view on what that spread could be, you said it was like 10 to 12 now. How do you split that up between I guess the benefits that your customer will be getting as well as the margining or fee that you would be able to charge, how do you guys think about that?

Well again we prefer, we created this vehicle to be as stable as we can. So, we prefer to eliminate some of the noise and some of the fluctuation. That means that we see DKL enjoying very stable long-term return on this asset and eliminate some of the noise through other means, either through the customers or through the DK vehicle and then selling that to the customers.

Okay.

Is that answering your question?

Yeah, yeah.

(Operator Instructions) At this time, there are no further questions.

Thank you, Vanessa. Obviously, I would like to thank each one of you on the call and the investors that give us great confidence and are behind us since the launching of the IPO. I would like to thank my colleagues here and our employees for doing great job for this great start of our DKL vehicle. And also I would like to thank especially Assi for joining the team as our new CFO and Danny first on the call. Thank you. Have a great day.

This does conclude today’s conference call. Thank you for your participation. You may now disconnect.