Delek Logistics Partners, LP — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. The Partnership operates pipelines and transportation assets, and wholesale marketing and terminalling businesses. It is substantially dependent on Delek Holdings and its refineries.
Key financial results
Amounts in millions, except per-unit data and where otherwise stated.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $152.5 | $167.9 | Down 9.2% |
| Contribution margin | $40.2 | $36.3 | Up 10.6% |
| Operating income | $29.1 | $27.3 | Up 6.7% |
| Net income | $19.7 | $20.0 | Down 1.5% |
| Net income per common unit, diluted | $0.51 | $0.59 | Down 13.6% |
| EBITDA (non-GAAP) | $39.4 | $34.7 | Up 13.5% |
| Distributable cash flow (non-GAAP) | $29.0 | $28.0 | Up 3.6% |
| Cash provided by operating activities | $26.2 | $23.7 | Up $2.5 |
- Margins: Contribution margin was 26.3% of revenue versus 21.6% in Q1 2018; operating margin was 19.1% versus 16.2%. Lower product costs helped margins despite lower sales.
- Cash and liquidity: Cash was $5.4 million at quarter-end. The revolving facility had $461.2 million drawn and $388.8 million of unused commitments; no letters of credit were outstanding. Management said it believed resources were sufficient for the next 12 months, including distributions and capital spending.
- Debt: Long-term debt carrying value was $705.2 million, including $461.2 million under the revolving facility and $250 million principal amount of 6.75% senior notes due 2025. Facility borrowings carried a weighted-average rate of approximately 5.1%. The Partnership reported covenant compliance at quarter-end.
- Distribution: The quarterly distribution was $0.82 per unit, or $3.28 annualized; $27.4 million in total was declared for Q1 and scheduled for May 14, 2019. Distributable cash flow exceeded that distribution by about $1.5 million, approximately 1.06x coverage using the Partnership’s non-GAAP measure.
- Balance sheet: Total assets were $640.2 million, up from $624.6 million at year-end 2018. Total deficit was $141.9 million.
Material changes and operating performance
- Revenue fell $15.4 million, mainly because west Texas wholesale gasoline and diesel volumes and selling prices declined. These decreases were partly offset by a full quarter of revenue from Big Spring logistics assets acquired in March 2018.
- Pipelines and transportation contribution margin rose to $24.2 million from $19.7 million, supported by Big Spring assets, fees for managing Delek Holdings’ Permian gathering project, and trucking activity.
- Wholesale marketing and terminalling contribution margin declined to $15.9 million from $16.7 million. West Texas gross margin per barrel fell to $3.56 from $5.16.
- Operating expenses increased 27.7% to $16.1 million, and general and administrative expenses increased 50.4% to $4.5 million. The filing attributes increases to operating acquired assets for a full quarter, higher allocated employee and operating costs, and project-management expenses.
- Interest expense rose 40.2% to $11.3 million, reflecting higher average debt balances and floating rates. Equity-method investment income increased to $2.0 million from $0.9 million.
- Investing cash outflow was $3.8 million, versus $219.1 million in Q1 2018, when the Big Spring asset and marketing-contract acquisitions occurred. Financing used $21.6 million, compared with $195.6 million provided in the prior-year quarter, which included substantial facility borrowing for those acquisitions.
Outlook, risks and unusual items
- No specific earnings guidance was provided. The 2019 capital spending forecast was reduced to $12.2 million from $17.3 million, primarily due to revised timing for maintenance and discretionary projects.
- Management described improving crude and refined-product prices in Q1 2019 and continued favorable Permian Basin activity, while noting that commodity prices and west Texas wholesale margins remain volatile.
- Delek Holdings generated $63.0 million, or about 41% of consolidated revenue, and is a major customer and affiliate. Long-term commercial agreements and minimum-volume commitments support revenue, but performance depends substantially on Delek Holdings’ operations and ability to pay.
- Two Paline Pipeline capacity agreements expired February 28, 2019 and were not extended; capacity became available to shippers at the filed tariff rate.
- The Partnership recorded four crude-oil releases in Q1 2019 and had $1.1 million accrued for remediation and related matters, excluding the separate $2.2 million Magnolia Release accrual. The Magnolia matter was resolved through penalties and other relief; settlement of its accrual was expected in the second half of 2019. Management said most eligible release costs are reimbursed by Delek Holdings.
- Adoption of lease accounting on January 1, 2019 added $20.2 million of right-of-use assets and lease liabilities, with no material income-statement impact. Environmental compliance, pipeline integrity, spills, interest rates, commodity volatility and customer concentration remain relevant risks.
Important facts for investors to verify
- Whether west Texas wholesale volumes and per-barrel margins stabilize or recover, and how the expired Paline agreements affect utilization and revenue.
- The durability of affiliate minimum-volume commitments and Delek Holdings’ financial capacity, given the Partnership’s customer concentration.
- Debt levels, floating-rate exposure, facility availability and distribution coverage; coverage cited above uses management’s non-GAAP distributable cash flow measure.
- Progress and costs of release remediation, including whether the recorded accruals and expected reimbursements prove adequate.
- Whether the revised $12.2 million capital spending forecast and management’s liquidity expectations remain on track.