Delek Logistics Partners, LP — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Financial statements include retrospectively presented predecessor operations for assets acquired from Delek, so reported results are not fully comparable with standalone historical performance.
Business context and key financial results
The partnership operates pipelines and transportation, and wholesale marketing and terminalling businesses, primarily supporting Delek’s refineries. A substantial majority of its assets and contribution margin depend on Delek and related commercial agreements.
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $143.5 million | $203.5 million |
| Operating income | $16.4 million | $15.7 million |
| Net income | $14.0 million | $13.6 million |
| Net income attributable to partners | $14.6 million | $14.7 million |
| Common-unit earnings, basic | $0.57 | $0.60 |
| Contribution margin | $24.3 million | $21.8 million |
| EBITDA | $20.9 million | $19.2 million |
| Distributable cash flow | $16.7 million | $15.8 million |
| Cash provided by operating activities | $15.8 million | $13.4 million |
Operating margin was approximately 11.4%, versus 7.7% in Q1 2014. Distributable cash flow covered the $13.7 million quarterly distribution declared for Q1 by approximately 1.22 times.
Financial position and liquidity
- At March 31, 2015, cash was nil; revolving-credit borrowings were $316.4 million, up from $251.8 million at December 31, 2014. The facility’s weighted-average borrowing rate was approximately 2.6%.
- Approximately $379.1 million was available under the $700 million revolving facility, with $4.5 million of letters of credit outstanding. The facility matures December 30, 2019; the partnership reported covenant compliance.
- Current assets were $38.0 million and current liabilities $26.2 million. Total assets were $332.6 million; total equity was a $20.6 million deficit, versus $39.8 million positive equity at year-end. The filing attributes a $42.7 million equity reduction to the Delek asset acquisitions, reflecting cash paid above the assets’ historical book value.
- Investing cash outflow was $8.6 million, including $7.6 million of property and equipment purchases and $2.2 million contributed to joint ventures. Financing cash outflow was $9.0 million, including distributions and acquisition payments, partly offset by net credit-facility borrowing.
Material changes and transactions
- Revenue fell 29.5%, chiefly because lower gasoline and diesel prices reduced wholesale sales values. Cost of goods sold fell 37.0%, so contribution margin increased 11.5% despite lower revenue.
- Pipelines and transportation contribution margin rose 61.0% to $19.3 million, supported by Delek throughput and tankage agreements, acquired trucking assets, higher Lion Pipeline volumes and increased Paline fees.
- Wholesale marketing and terminalling contribution margin declined 48.7% to $5.1 million. West Texas marketing margin fell to $1.40 per barrel from $3.57, and Tyler Refinery sales volumes were lower during maintenance and expansion downtime.
- On March 31, the partnership acquired Delek’s El Dorado crude rail offloading assets for $42.5 million and a Tyler crude storage tank for $19.4 million, funded with credit-facility borrowings. The rail racks are designed for up to 25,000 barrels per day of light crude or 12,000 barrels per day of heavy crude. Delek’s throughput agreement has a nine-year initial term, two optional three-year extensions and a $1.5 million quarterly minimum throughput fee.
- The partnership entered two pipeline joint ventures: a 50% interest in Caddo Pipeline and a 33% interest in Rangeland RIO. Combined projected investment is approximately $91 million; $6.0 million was recorded as equity-method investments at quarter-end.
- The quarterly distribution increased to $0.53 per limited-partner unit, or $2.12 annualized, from $0.425 in Q1 2014. The Q1 2015 distribution was declared for payment May 14, 2015.
Outlook, risks and unusual items
- Management stated that operating cash flow, facility borrowings and potential securities issuances were expected to fund operations and minimum quarterly distributions for at least 12 months. The 2015 capital-spending forecast was approximately $19.7 million.
- Management cited stable fee-based Delek agreements and minimum-volume commitments, but emphasized dependence on Delek’s operations and ability to meet its obligations. Delek-related financing covenants may also constrain use of the partnership’s full revolving-facility capacity.
- Risks include commodity-price and west Texas margin volatility, refinery outages, interest rates, competition, regulation, environmental and safety compliance, and pipeline or tank releases. The partnership says its first-quarter results are seasonal and should not be viewed as representative of future periods.
- An estimated 100-barrel crude release occurred near Fouke, Arkansas, on April 28. Cleanup was underway; costs and liabilities could not be estimated. Management did not expect the event, net of potential Delek indemnification and insurance, to materially adversely affect the partnership.
- The filing reports prior crude releases and ongoing environmental and safety exposure, but says pending litigation and the identified releases were not expected to have a material adverse effect. It also notes that environmental compliance may require continuing capital investment.
- No specific full-year revenue or earnings guidance was provided. Management’s forward-looking statements are subject to risks and are not guarantees.
Important facts for investors to verify
- Whether Delek’s refinery activity and minimum-volume commitments sustain throughput, fees and cash distributions.
- West Texas marketing margins and Tyler Refinery volumes as commodity prices and refinery maintenance conditions change.
- Debt growth, covenant headroom and liquidity after the acquisitions, planned capital spending and up to $91 million of projected joint-venture investment.
- Actual joint-venture construction costs, funding needs, completion timing and expected returns.
- Costs, remediation obligations and any insurance or Delek reimbursement related to the Fouke release and other environmental matters.
- Distribution coverage and cash generation, including the effects of working capital and maintenance capital expenditures on distributable cash flow.