Business context and reporting period
Delek Logistics Partners, LP’s Form 10-K covers the fiscal year ended December 31, 2014. The partnership owns and operates crude-oil and refined-products pipelines, storage, trucking, wholesale marketing and terminal assets, primarily supporting Delek’s Tyler, Texas and El Dorado, Arkansas refineries. Results are presented for the year, with unaudited quarterly figures available for Q4. Comparisons reflect retrospective inclusion of certain assets acquired from Delek; predecessor results may not be fully comparable because their revenue and cost accounting differed.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $841.3 million | $907.4 million |
| Contribution margin | $105.2 million | $60.4 million |
| Operating income | $79.8 million | $39.0 million |
| Net income | $71.1 million | $33.7 million |
| Net income attributable to partners | $72.0 million | $47.8 million |
| Basic earnings per common unit | $2.88 | $1.95 |
| EBITDA (non-GAAP) | $94.5 million | $52.7 million |
| Distributable cash flow (non-GAAP) | $79.3 million | $34.2 million |
| Cash from operating activities | $85.9 million | $37.0 million |
- Q4 2014: net sales were $173.3 million, operating income $22.1 million, net income $20.5 million and basic common-unit earnings $0.81.
- Cash at year-end was $1.9 million. Debt outstanding was $251.8 million, up from $164.8 million. The partnership reported $440.8 million of borrowing availability under its $700 million revolving facility and $7.5 million of outstanding letters of credit.
- Current assets were $40.9 million and current liabilities $30.6 million at year-end. Investing cash outflow was $29.8 million; financing cash outflow was $55.2 million.
- Cash distributions attributable to 2014 totaled $1.90 per limited partner unit. The Q4 distribution was $0.51 per unit, paid February 13, 2015.
Material changes versus the prior comparable period
- Sales declined 7.3%, largely from lower West Texas sales volumes and lower gasoline and diesel prices. Contribution margin rose 74.2%, primarily reflecting throughput and tankage agreements associated with the Tyler and El Dorado assets, plus stronger West Texas marketing margins.
- Operating expenses increased 8.8% to $38.8 million, mainly from maintenance and higher asset utilization. General and administrative expense rose 41.1% to $10.6 million, including acquisition-related and increased Delek service costs. Interest expense increased 89.4% to $8.7 million, reflecting higher borrowings and financing costs.
- Pipeline and transportation contribution margin increased to $55.8 million from $32.0 million. Wholesale marketing and terminalling contribution margin increased to $49.5 million from $28.4 million.
- East Texas Crude Logistics System throughput fell to 7,361 bpd from 19,896 bpd after a third-party pipeline began serving the Tyler refinery. Delek’s minimum-throughput payment obligation was expected to support fees at the 35,000-bpd contractual minimum through November 2017, subject to agreement terms.
- Cash from operations increased to $85.9 million from $37.0 million. Year-end debt rose alongside acquisitions and investment; the El Dorado assets were acquired from Delek for $95.9 million, and third-party Greenville-Mount Pleasant and trucking assets were acquired for approximately $11.1 million and $11.5 million, respectively.
Outlook, commentary and risks
- Management said available liquidity was expected to meet anticipated operating needs, including minimum quarterly distributions, for at least the next 12 months. No specific earnings or distribution-growth guidance was provided.
- Management budgeted approximately $20.7 million of 2015 capital spending, including $10.5 million for pipeline and transportation maintenance, much of it tank repair and replacement, and $2.8 million for Tyler Terminal expansion. Delek had announced a planned 15,000-bpd Tyler refinery capacity increase to 75,000 bpd in Q1 2015.
- The revolving facility was amended and expanded to $700 million, with an accordion feature up to $800 million subject to conditions, and maturity on December 30, 2019. The borrowing rate is floating; the reported weighted-average rate at year-end was approximately 2.3%. The partnership reported covenant compliance at December 31, 2014.
- New Paline Pipeline capacity agreements began January 1, 2015, leasing a combined 35,000 bpd to two unrelated parties for fixed monthly fees over an initial 18-month term.
- Customer concentration is a central risk: Delek directly or indirectly represented 76.6% of gross margin in 2014. Delek’s refinery performance, contract performance, and decisions about refinery operations could materially affect the partnership. Sunoco LP represented 23.3% of total revenue.
- Environmental and operational exposures include crude-oil releases at Magnolia, Macedonia and Haynesville. At year-end, recorded accruals included $1.3 million for Macedonia and $0.6 million for Haynesville; the filing describes certain Delek indemnities and reimbursements. The filing also notes an insurer contesting payment for a pipeline release.
- Other disclosed risks include aging infrastructure, pipeline safety and environmental regulation, seasonality and refinery maintenance, dependence on third-party pipelines and terminals, floating-rate debt, and conflicts of interest with Delek, which controls the general partner. Management reported effective internal controls; the auditor gave unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether Delek continues to meet its contractual obligations and whether its refinery operations sustain volumes and minimum-payment support.
- 2015 operating performance and realized contribution from the acquisitions, Tyler expansion and new Paline capacity agreements.
- Actual capital spending, especially tank integrity work, and any material changes to environmental accruals, indemnities or insurance recovery.
- Debt balances, floating-rate exposure, facility availability and covenant headroom as growth spending and distributions continue.
- Cash generation relative to distributions: the reported distributable cash flow is a company-defined non-GAAP measure and should be assessed alongside GAAP operating cash flow and maintenance capital needs.