Delek Logistics Partners, LP — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Financial statements are unaudited. The Partnership owns and operates crude oil and refined-products pipelines, storage, terminals and wholesale marketing assets, primarily supporting Delek’s refineries. Comparatives were retrospectively adjusted for assets transferred from Delek under common control; predecessor revenue and expense accounting differs from the Partnership’s, limiting comparability.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $236.3 million | $230.1 million | $439.9 million | $441.0 million |
| Operating income | $24.4 million | $7.4 million | $40.2 million | $15.7 million |
| Net income attributable to partners | $21.8 million | $11.8 million | $36.4 million | $24.0 million |
| EBITDA | $27.9 million | $10.7 million | $47.2 million | $22.5 million |
| Distributable cash flow | $24.0 million | $6.1 million | $40.0 million | $13.1 million |
- Q2 contribution margin rose 146.8% to $30.2 million; six-month contribution margin increased 99.3% to $52.2 million. Q2 operating margin was about 10.3%, versus 3.2% a year earlier.
- Q2 common-unit earnings were $0.88 basic and $0.87 diluted, versus $0.48 and $0.47. Cash distributions were $0.475 per limited partner unit for Q2, compared with $0.395.
- Six-month operating cash flow was $44.8 million, versus $12.2 million. Investing used $1.9 million, primarily capital expenditures; financing used $41.4 million. Cash increased $1.5 million to $2.4 million.
- At June 30, debt under the revolving facility was $239.0 million, with a 2.7% weighted-average interest rate. Available borrowing capacity was approximately $147.5 million; letters of credit totaled $13.5 million. The facility commitment is $400 million and matures November 2017. Management reported covenant compliance.
- Current assets were $66.0 million and current liabilities $58.3 million. Total equity was $7.9 million, down from $87.2 million at year-end, reflecting principally the accounting for the El Dorado acquisition and related distributions.
Material changes and drivers
- On February 10, 2014, the Partnership acquired Delek’s El Dorado terminal and 158 storage tanks for $95.9 million cash. The transfer was recorded at Delek’s historical carrying value, and comparatives were retrospectively adjusted. The new assets and associated throughput and tankage agreements contributed to pipeline and terminalling revenue.
- Q2 sales increased 2.7%, while six-month sales decreased 0.3%. The six-month decline reflected lower West Texas marketing volumes and slightly lower gasoline selling prices, partly offset by acquisition-related fees.
- Management attributed much of the sharp contribution-margin improvement to stronger West Texas marketing margins amid favorable supply and demand conditions associated with refinery downtime. West Texas marketing margin rose to $6.52 per barrel in Q2 from $2.20.
- Interest expense increased to $2.3 million in Q2 and $4.3 million for the first half, primarily due to acquisition-related borrowings and refinancing. General and administrative expense also rose, in part due to professional services and acquisition costs.
Outlook, risks and contingencies
- No specific earnings guidance was provided. Management said operating cash flow, credit-facility borrowings and potential debt or equity issuance are expected to cover anticipated needs, including distributions, for at least 12 months.
- 2014 capital spending was forecast at approximately $13.1 million, including pipeline and tank maintenance and discretionary projects such as Tyler Terminal expansion. Spending may change with project scope, timing, costs and regulatory requirements.
- Management declared a $0.475 per-unit distribution, payable August 14, 2014. Fees under certain Delek agreements increased July 1, 2014: approximately 3.9% for FERC-indexed fees and approximately 1.6% for certain other inflation-indexed fees.
- The business is substantially dependent on Delek and its ability to meet minimum-volume and payment commitments. Other stated risks include refinery utilization and product demand, commodity and interest-rate movements, operational disruptions, regulation, and environmental and safety compliance.
- Crude releases near Macedonia, Arkansas and Haynesville, Louisiana remained subject to remediation. Accrued additional remediation costs were $1.5 million and $2.5 million, respectively, at June 30. Delek is required under the Omnibus Agreement to reimburse costs above specified thresholds. Management did not expect these matters, net of insurance, to have a material adverse effect.
- The Partnership cited no material pending litigation, no material changes to previously disclosed risk factors, and no material changes to contractual obligations. It stated that operations were substantially compliant with environmental and safety requirements, while noting ongoing regulatory exposure and likely future compliance spending.
Important facts for investors to verify
- Assess how much of the margin and cash-flow improvement is sustainable versus the favorable, potentially temporary West Texas supply-and-demand conditions.
- Reconcile reported year-over-year results with the common-control predecessor adjustments and the differing treatment of intercompany services.
- Monitor Delek concentration, minimum-volume commitments, related-party arrangements, and the Partnership’s ability to fund distributions, acquisition-related debt and planned capital spending.
- Track remediation costs, insurance and Delek reimbursements for the Macedonia and Haynesville releases, as well as covenant headroom and floating-rate exposure.