Delek Logistics Partners, LP — 2017 Form 10-K Summary
Business context and reporting period
Fiscal year ended December 31, 2017; this is an annual filing, not a standalone fourth-quarter report. Delek Logistics owns and operates crude-oil and refined-products pipelines, storage and terminals, trucking, and wholesale marketing businesses, primarily in Texas and the southeastern United States. Its two segments are pipelines and transportation, and wholesale marketing and terminalling. Delek is the Partnership’s primary customer and is closely connected to many of its operations.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $538.1 million | $448.1 million |
| Operating income | $88.2 million | $77.7 million |
| Net income | $69.4 million | $62.8 million |
| Net income per common unit, basic | $2.09 | $2.08 |
| Contribution margin | $121.9 million | $108.7 million |
| EBITDA | $115.0 million | $97.3 million |
| Distributable cash flow | $85.0 million | $83.1 million |
| Cash provided by operating activities | $87.7 million | $100.7 million |
Net sales rose 20.1%, largely from higher west Texas product prices and sales volumes and increased Delek marketing-agreement throughput following Hurricane Harvey-related supply disruptions. Wholesale marketing and terminalling contribution margin increased to $51.6 million from $35.2 million, while pipelines and transportation contribution margin fell to $70.3 million from $73.5 million, primarily due to lower Paline Pipeline fees and higher operating costs. Operating margin was approximately 16.4% of sales, compared with 17.3% in 2016; contribution margin was approximately 22.7% of sales, compared with 24.3%.
Fourth-quarter 2017 net sales were $151.2 million, operating income $23.7 million, net income $18.9 million, and basic earnings per common unit $0.57. In fourth-quarter 2016, the corresponding figures were $124.7 million, $19.2 million, $15.3 million, and $0.47.
Year-end cash was $4.7 million. The balance sheet reported debt of $422.6 million, net of applicable debt discount and financing costs; principal outstanding was $179.9 million on the revolving facility and $250.0 million on the 2025 Notes. The $700 million revolving facility had $511.1 million of unused commitments, with $9.0 million of letters of credit outstanding. The Partnership reported compliance with credit-facility covenants at year-end. Total assets were $443.5 million and total deficit was $29.2 million.
Annual cash distributions were $2.835 per limited partner unit, up from $2.575 in 2016. The fourth-quarter distribution was $0.725 per unit, paid in February 2018. Distributable cash flow of $85.0 million was below reported distributions earned of $87.9 million, or approximately 0.97x coverage; distributable cash flow is a non-GAAP measure.
Material changes versus the prior comparable period
- Revenue growth reflected higher west Texas sales prices and volumes; cost of goods sold also increased, by 23.4%, and operating expenses rose 16.3%.
- Net income increased 10.5%, while interest expense rose 76.2% to $23.9 million, mainly because of higher debt balances and interest rates.
- Operating cash flow declined $13.0 million, principally due to working-capital increases, including higher inventory and receivables. Investing cash outflow decreased to $30.7 million from $72.7 million, mainly because joint-venture contributions fell substantially.
- In May 2017, the Partnership issued $250 million of 6.750% senior notes due 2025 and used substantially all net proceeds to repay revolving debt. The $9 million Big Spring Pipeline acquisition was completed in September.
- Delek renewed certain commercial agreements for five-year terms through November 2022; the Tyler Refinery marketing agreement runs through 2026. The Delek/Alon merger became effective July 1, 2017, without changing the Partnership’s commercial agreements.
Outlook, commentary, risks and contingencies
Management said cash from operations, revolver borrowings, and potential debt or equity issuance were expected to fund operations and distributions for at least the next 12 months. The 2018 capital-spending budget was approximately $17.5 million. Management cited improving market conditions and increased drilling activity, particularly in west Texas, as potential supports for activity, but provided no specific earnings or distribution-growth guidance.
Subsequent to year-end, the Partnership signed an agreement to acquire Delek logistics assets near the Big Spring refinery for $315 million, expected to be financed with cash and revolver borrowings; closing was expected in March 2018. It also announced a 50/50 terminal joint venture with Green Plains Partners, subject to customary conditions and approvals. These transactions are not part of 2017 results.
- Customer concentration is a central risk: Delek accounted for 85.8% of gross margin in 2017. Minimum-volume and fee agreements mitigate, but do not eliminate, risks from refinery outages, contract suspension, nonrenewal, force majeure, or Delek’s financial and operational condition.
- Debt, floating interest rates, distribution obligations, and credit covenants may constrain financing and growth. Annual distributions earned exceeded distributable cash flow in 2017.
- Wholesale marketing results are exposed to product prices, supply and demand, RIN values, and hedging performance. The Noble Petro supply and terminal lease agreements expired at year-end 2017; the Partnership shifted to purchases from Delek and other suppliers.
- Pipeline integrity, aging assets, environmental rules, FERC and state rate regulation, severe weather, spills, cyber incidents, and insurance limitations could raise costs or disrupt operations.
- The Department of Justice and EPA were pursuing an enforcement action concerning potential Clean Water Act violations arising from the 2013 Magnolia Station release. The Partnership had accrued $1.0 million at year-end; resolution could include penalties or other relief. The filing says other identified release remediation costs were substantially completed and generally reimbursable by Delek.
- The Partnership reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal control.
Important facts for investors to verify
- Review the $315 million Big Spring asset transaction’s closing, financing, purchase accounting, related-party approval, and resulting debt and distribution coverage.
- Assess the durability and enforceability of Delek’s minimum-volume commitments and renewals, and the Partnership’s 85.8% gross-margin dependence on Delek.
- Reconcile net debt reported on the balance sheet with gross principal outstanding, and examine revolver availability, maturity, interest-rate exposure, and covenant headroom.
- Track distributable cash flow against total distributions, maintenance capital spending, and cash available after debt service.
- Monitor the Magnolia release enforcement proceeding, the $1.0 million accrual, and any other environmental, pipeline-safety, or insurance developments.
- Evaluate the post-expiration west Texas supply and hedging arrangements and whether 2017 marketing margins are sustainable.