Business context and reporting period
Delek Logistics Partners, LP filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The partnership gathers, transports and stores crude oil and markets, transports and stores refined products through its pipelines and transportation, and wholesale marketing and terminalling segments. Most assets support Delek’s Tyler, Texas and El Dorado, Arkansas refineries, and a substantial majority of contribution margin comes from Delek-related commercial agreements.
Comparisons require caution: 2013 reflects the Partnership after its November 2012 IPO, while 2012 results are those of its predecessor. The predecessor did not record all intercompany service revenue, and it sold bulk biofuels that the Partnership discontinued after the IPO.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | 2013: $230.1 million; 2012: $262.5 million | 2013: $441.0 million; 2012: $501.6 million |
| Operating income | 2013: $12.6 million; 2012: $3.9 million | 2013: $25.8 million; 2012: $8.9 million |
| Net income | 2013: $11.8 million; 2012: $2.5 million | 2013: $24.0 million; 2012: $5.0 million |
| EBITDA (non-GAAP) | 2013: $15.0 million; 2012: $6.2 million | 2013: $30.5 million; 2012: $13.2 million |
| Distributable cash flow (non-GAAP) | 2013: $12.8 million | 2013: $25.9 million |
Second-quarter segment contribution margin was $16.1 million, up 88.7% from $8.5 million; first-half margin was $33.3 million, up 84.9% from $18.0 million. The filing attributes the gains chiefly to higher pipeline and transportation fees under post-IPO Delek agreements and improved West Texas marketing margins from ethanol blending. The filing does not present a single consolidated margin percentage as a key reported metric.
For the six months, operating cash flow was $20.6 million, capital spending was $2.3 million, distributions paid were $14.9 million, and cash increased by $3.9 million to $27.3 million. At June 30, current assets were $81.2 million and current liabilities $45.2 million. Revolver borrowings were $90.0 million, with $73.5 million available before the subsequent credit amendment; letters of credit totaled $11.5 million. The weighted-average borrowing rate was approximately 2.0%. Management reported compliance with debt covenants.
The quarterly distribution was $0.395 per unit, equivalent to $1.58 annualized; the distribution for the June quarter was declared after quarter-end and payable August 13, 2013. Common-unit earnings were $0.48 basic and $0.47 diluted for the quarter, and $0.98 basic for the six months. The Partnership’s effective tax rate was 1.0% in both 2013 periods, versus 24.9% and 35.5% for the predecessor comparatives, principally because the Partnership generally is not subject to federal entity-level income tax.
Material changes versus the prior comparable period
- Net sales fell 12.3% for the quarter and 12.1% for the first half, mainly because bulk biofuel sales ceased after the IPO and gasoline selling prices declined. Lower sales were partly offset by higher West Texas sales volumes.
- Despite lower reported sales, operating income and net income rose substantially, with higher fee-based pipeline contribution and improved West Texas marketing margins. First-half operating expenses rose 31.2%, reflecting labor and maintenance costs and $0.3 million of unreimbursed Magnolia Station release costs; G&A declined 41.3%.
- East Texas crude throughput fell to 11,468 barrels per day in the second quarter from 53,402 a year earlier. A third-party system began transporting much of the Tyler refinery’s crude supply; management expected Partnership throughput to decline from about 55,000 barrels per day to approximately 12,000 or less. Delek’s minimum-volume commitment was expected to preserve associated fees while it remains in effect.
- Operating cash flow improved from $3.4 million to $20.6 million year over year, while investing outflow declined from $25.5 million to $2.3 million, largely because 2012 included the Nettleton and Big Sandy acquisitions. Financing cash flow shifted from $22.7 million provided to $14.5 million used, chiefly reflecting distributions and the absence of prior-year revolver activity.
Outlook, commentary, risks and unusual items
- Management said cash from operations, revolver borrowings and potential debt or equity issuance should meet anticipated operating needs, including minimum quarterly distributions, for at least the next 12 months. The 2013 capital-spending forecast was approximately $10.2 million; the filing gives no earnings or revenue guidance.
- On July 9, 2013, after quarter-end, the revolving facility commitment increased from $175 million to $400 million, with an accordion feature up to $450 million, subject to conditions. On July 26, the Partnership completed a $94.8 million related-party acquisition of Tyler terminal and tank assets, funded with $77.0 million of revolver borrowings and $17.8 million of cash. It also acquired the 13.5-mile Hopewell Pipeline for approximately $5.4 million on July 19. These subsequent events were not reflected in June 30 balances.
- The Tyler assets include a terminal with approximately 72,000 barrels-per-day capacity and 96 storage tanks with approximately 2.0 million barrels of aggregate capacity. Related agreements include an eight-year throughput and tankage contract, a 50-year site lease, and amendments to the omnibus agreement; the filing says the annual administrative fee payable to Delek increased but does not provide the revised amount.
- Principal risks include dependence on Delek and its ability to meet contractual commitments, Delek refinery utilization, customer and supplier concentration, commodity-price effects on marketing margins, variable interest rates, operational interruptions, environmental and safety regulation, and FERC or state rate regulation. The expanded credit capacity may also be constrained by covenants in Delek’s own credit arrangements.
- A March 2013 crude oil release at Magnolia Station did not interrupt operations. Management said remediation was substantially complete and estimated the impact to be immaterial; Delek is required to indemnify costs above $0.25 million. The Partnership reported no significant pending legal proceedings and no significant risk-factor changes.
- Management noted seasonal demand and refinery maintenance can affect volumes, particularly in the first and fourth quarters. Minimum-volume commitments are intended to mitigate some seasonality, but actual results remain exposed to volume, contract, and operating conditions.
Most important facts for investors to verify
- Reconcile reported growth in earnings and contribution margin against the predecessor-versus-Partnership accounting differences, discontinued bulk biofuel sales, and the changed Delek fee agreements.
- Confirm the duration, enforceability, and shortfall-payment terms of Delek minimum-volume commitments, particularly for East Texas crude logistics after the third-party pipeline diversion.
- Assess post-quarter borrowing and liquidity after the Tyler and Hopewell transactions, including facility availability, covenant headroom, and any restrictions arising from Delek’s credit agreements.
- Review the economics and related-party terms of the Tyler acquisition, the revised administrative fee, and the new throughput, tankage, lease, and site-services agreements.
- Monitor distributable cash flow relative to distributions, capital needs, maintenance spending, and Delek reimbursements; distributable cash flow is a non-GAAP measure and excludes working-capital changes.
- Track the Magnolia release remediation and indemnification, environmental obligations, and regulatory or operational developments affecting pipeline assets and throughput.