Delek Logistics Partners, LP quarterly report, Q1 FY2018

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Delek Logistics Partners, LP — Q1 2018 Form 10-Q

Business context and reporting period. This unaudited filing covers the three months ended March 31, 2018, compared with Q1 2017. The partnership operates pipelines and transportation, and wholesale marketing and terminalling businesses. A substantial majority of its assets support Delek’s refineries, and much of its business is conducted under agreements with Delek.

Financial performance and position

  • Revenue: $167.9 million, up 29.7% from $129.5 million. Affiliate revenue was $61.6 million, versus $36.6 million.
  • Profit: Operating income was $27.3 million, up 47.7%; net income attributable to partners was $20.0 million, up 37.0%. Basic and diluted earnings per limited partner unit were $0.59, versus $0.43.
  • Margins: Contribution margin, a company-defined measure, increased 36.9% to $36.3 million. Operating margin was approximately 16.2% of revenue and net margin approximately 11.9%.
  • Non-GAAP measures: EBITDA was $34.7 million, versus $23.9 million; distributable cash flow was $27.3 million, versus $18.4 million. Q1 declared distributions totaled $24.0 million, or $0.75 per limited partner unit, implying approximately 1.14x distributable-cash-flow coverage.
  • Cash flow: Operating cash flow was $23.7 million, broadly level with $23.5 million a year earlier. Investing used $219.1 million, primarily for the Big Spring logistics assets and a marketing contract intangible. Financing provided $195.6 million, principally reflecting net revolver borrowings.
  • Liquidity and debt: Cash was $4.8 million at March 31. Total debt carrying value was $737.7 million; the revolver had $494.7 million outstanding and $205.3 million of unused commitments, with no letters of credit. The revolver’s weighted-average rate was approximately 4.4% and it matures December 30, 2019. The partnership reported compliance with debt covenants.
  • Balance sheet: Total assets were $665.9 million and total deficit was $130.6 million. The deficit increased from $29.2 million at year-end, substantially reflecting acquisition-related distributions and equity accounting.

Material changes versus Q1 2017

  • Wholesale marketing and terminalling revenue rose 33.1% to $134.2 million; segment contribution margin rose 60.1% to $16.7 million. Management cited improved West Texas marketing conditions, favorable price movements, greater volumes, improved East Texas marketing performance, and Big Spring operations.
  • Pipelines and transportation revenue rose 17.6% to $33.7 million and contribution margin rose 21.9% to $19.7 million, helped by Big Spring assets and higher third-party throughput on the Paline Pipeline.
  • Interest expense nearly doubled to $8.1 million, primarily due to the 2025 senior notes issued in 2017 and higher revolver rates.
  • Operating cash flow changed little despite higher earnings; management attributed the offset mainly to increased receivables from related parties.

Outlook, management commentary, risks and unusual items

  • On March 1, 2018, the partnership acquired Big Spring logistics assets from Delek for $170.8 million and separately paid $144.2 million for a 20-year marketing contract intangible. Both were financed with revolver borrowings. The asset acquisition was a common-control transaction recorded at Delek’s historical carrying value; prior periods were not recast.
  • Management said available liquidity sources should meet anticipated operating needs, including minimum quarterly distributions, for at least the next 12 months. The 2018 capital-spending budget was approximately $19.9 million. No specific earnings or distribution-growth forecast was provided; the board declared $0.75 per unit for Q1, payable May 15, 2018.
  • Management cited improved market conditions and increased drilling activity, particularly in the Permian Basin, as supportive of demand. Results remain exposed to product prices, West Texas marketing margins and RIN values, volume and refinery utilization, seasonality, and customer activity.
  • Related-party reliance is material: Delek is a major customer and controls the general partner. The filing identifies risks from Delek’s ability to perform under commercial agreements and notes that Delek financing covenants could indirectly constrain the partnership’s use of its revolver.
  • Environmental and operating risks include pipeline releases, asset failures, regulatory requirements, and remediation costs. A February 2018 release of approximately 203 barrels occurred on the SALA Gathering System. The DOJ, on behalf of the EPA, is pursuing a Clean Water Act enforcement action related to the 2013 Magnolia Release; the partnership had accrued $1.0 million and was negotiating a resolution. Delek reimbursement is expected for specified asset-failure and remediation costs, but additional regulatory action or expenses remain possible.
  • A hypothetical 1% change in floating rates on Q1-end floating-rate debt would change annualized interest expense by approximately $4.9 million. Commodity derivatives produced a $1.6 million gain in Q1; management described direct commodity exposure as limited.
  • The partnership adopted ASC 606 revenue guidance in January 2018; adoption did not materially affect results, apart from additional disclosures. It was evaluating the impact of lease accounting guidance expected to be adopted in 2019.

Important facts for investors to verify

  • Whether Big Spring’s contracted throughput, fees, and marketing economics deliver the expected contribution as the assets are operated for full quarters.
  • Revolver availability, refinancing plans ahead of its December 2019 maturity, borrowing costs, and covenant headroom, particularly given acquisition-related debt and the partners’ deficit.
  • Distributable cash flow quality and distribution coverage, including the effects of working-capital movements and related-party receivables.
  • Delek’s financial capacity and continued performance under minimum-volume and other commercial commitments; confirm the duration and terms of those agreements.
  • Potential penalties, remediation obligations, insurance recovery, and Delek reimbursement related to the Magnolia Release and other environmental or asset-failure matters.
  • Progress and closing conditions for the DKGP Energy terminal transaction, which was expected to close in Q2 2018, and the effects of the partnership’s planned terminal contributions.