Delek Logistics Partners, LP — Q2 2018 Form 10-Q
Business context and reporting period
Quarter and six months ended June 30, 2018; comparisons are with the same 2017 periods. The partnership operates crude oil and refined-products pipelines, transportation, storage, wholesale marketing and terminals, primarily in Texas and the southeastern U.S. A substantial portion of its assets and revenue depend on Delek and its refineries. Results include the Big Spring logistics assets and marketing agreement from March 1, 2018; prior periods were not recast.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $166.3m | $126.8m | $334.2m | $256.2m |
| Operating income | $34.7m | $23.4m | $62.0m | $41.8m |
| Net income attributable to partners | $25.6m | $19.0m | $45.6m | $33.6m |
| Basic/diluted net income per common unit | $0.79 | $0.59 | $1.38 | $1.02 |
| EBITDA (non-GAAP) | $45.4m | $30.3m | $80.2m | $54.2m |
| Distributable cash flow (non-GAAP) | $33.5m | $23.0m | $61.5m | $41.5m |
Q2 contribution margin was $45.3m, up 42.8%; six-month contribution margin was $81.7m, up 40.1%. Operating margin was approximately 20.9% in Q2 versus 18.4%, and 18.6% for six months versus 16.3% (calculated as operating income divided by revenue). Six-month operating cash flow was $51.6m, compared with $46.9m. Investing used $221.7m, mainly for the Big Spring transactions; financing provided $170.6m. Cash increased $0.5m to $5.2m.
At June 30, total debt was $737.1m, including $493.9m outstanding on the $700m revolving facility and $250m principal of 6.75% senior notes due 2025. Revolver availability was $206.1m; there were no letters of credit. The revolver’s weighted-average rate was about 4.9%, and its maturity is December 2019. Total assets were $650.3m and total deficit was $129.0m. Management said the partnership was in covenant compliance and expected available sources to meet operating, distribution and capital needs for at least 12 months.
Material changes versus the prior comparable period
- Q2 revenue rose 31.2%; six-month revenue rose 30.4%. Management attributed growth to higher west Texas gasoline and diesel selling prices, Big Spring agreement revenue, and stronger east Texas marketing volumes in the six-month comparison.
- Contribution margin improved in both segments, supported by increased west Texas drilling activity and favorable market-price movements, as well as Big Spring operations. Wholesale marketing revenue and cost of goods sold both rose; higher selling prices were accompanied by higher product purchase costs.
- Interest expense nearly doubled: $10.9m in Q2 versus $5.5m, and $19.0m for six months versus $9.5m, primarily due to acquisition-related revolver borrowings and interest on the 2025 notes.
- On March 1, the partnership paid $170.8m for Big Spring logistics assets and a marketing contract intangible, financed with revolver borrowings. The intangible was recorded at $144.2m and is amortized over 20 years. The excess acquisition consideration over the assets’ historical carrying value was recorded in equity.
- The quarterly distribution increased from $0.705 per unit for Q2 2017 to $0.770 for Q2 2018. The board declared $0.770 per unit for Q2 2018, payable August 13, 2018.
Outlook, commentary, risks and unusual items
- No earnings guidance was provided. Management forecast approximately $19.0m of 2018 capital spending, including $3.4m regulatory, $8.9m maintenance and $6.6m discretionary projects; $4.4m had been spent through June.
- Management cited stronger market conditions and increased Permian-area activity, while noting that west Texas marketing margins can be affected by commodity-price volatility and RIN values. A 1% change in floating rates on June-end revolver borrowings would change annualized interest expense by approximately $4.9m.
- July 1 tariff and contract fee adjustments included increases of approximately 4.4% for FERC-indexed fees, 2.2% for CPI-indexed fees and 6.1% for PPI-indexed fees.
- Key risks include reliance on Delek and its ability to perform under commercial agreements, refinery utilization and minimum-volume commitments, leverage and refinancing, commodity and interest-rate volatility, competition, operational disruptions, and environmental and pipeline-safety obligations. Management reported no material change in previously disclosed risk factors.
- DOJ and Arkansas filed suit on July 13, 2018, concerning the 2013 Magnolia crude-oil release, seeking penalties and injunctive relief. The partnership had accrued $1.0m and believed it adequate; the matter’s outcome remains uncertain. A separate February 2018 release of about 203 barrels was substantially addressed, with certain costs expected to be reimbursed by Delek.
- The proposed acquisition of two terminals through the DKGP Energy joint venture terminated on August 1, 2018 after regulatory-approval delays; the partners reported no further transaction or development plans at that time.
Important facts for investors to verify
- Whether Big Spring contributes durable cash flow and whether its related-party fees, minimum-volume commitments and long-term contracts perform as expected.
- Debt levels, revolver availability, covenant headroom and refinancing plans ahead of the December 2019 revolver maturity; also assess the effect of variable rates.
- Distribution sustainability against distributable cash flow, capital needs and the partnership’s substantial cash distributions, including the $98.8m acquisition-related distribution.
- West Texas marketing margins and cash generation under changing product prices, purchase costs and RIN values.
- Resolution and ultimate costs of the Magnolia Release litigation, and the scope of any further environmental remediation or asset-failure expenses.
- The filing describes EBITDA and distributable cash flow as non-GAAP measures; review their definitions and reconciliations when comparing coverage across periods or issuers.