Delek Logistics Partners, LP — 2016 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2016; fourth-quarter figures are included in the filing’s unaudited quarterly data. Delek Logistics owns crude-oil and refined-product pipelines, storage, terminals, trucking and marketing operations, primarily supporting Delek’s Tyler and El Dorado refineries. Delek accounted for 90.5% of partnership gross margin in 2016, making the partnership highly dependent on its sponsor and customer.
Key financial metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $448.1 million | $589.7 million |
| Operating income | $77.7 million | $77.3 million |
| Net income | $62.8 million | $66.2 million |
| Net income per common unit, basic | $2.08 | $2.55 |
| Contribution margin | $108.7 million | $108.4 million |
| EBITDA (non-GAAP) | $97.3 million | $96.4 million |
| Distributable cash flow (non-GAAP) | $81.7 million | $81.1 million |
| Cash provided by operations | $100.7 million | $68.0 million |
| Capital expenditures | $11.8 million | $22.4 million |
Fourth-quarter 2016 net sales were $124.7 million, operating income $19.2 million, and net income $15.3 million, compared with $108.9 million, $17.9 million, and $15.3 million, respectively, in fourth-quarter 2015. Fourth-quarter net income per common unit was $0.47 versus $0.56.
At year-end, cash was nominal ($59,000), debt was $392.6 million, and unused revolving-credit commitments were $301.4 million; $6.0 million of letters of credit were outstanding. The $700 million secured revolver matures December 30, 2019; its year-end weighted-average borrowing rate was approximately 3.4%. Current assets were $32.0 million and current liabilities $20.7 million. Total partners’ deficit was $13.3 million.
Material changes versus the prior comparable period
- Revenue fell 24.0%, mainly because west Texas gasoline and diesel sales prices and volumes declined. Cost of goods sold fell faster, while contribution margin was essentially flat.
- Net income decreased 5.1%, reflecting higher interest expense and equity-method investment losses, partly offset by lower operating expenses. EBITDA and distributable cash flow rose modestly.
- Operating cash flow increased by $32.7 million, aided by lower accounts receivable and inventory/current assets, including an excise-tax refund. This working-capital benefit should be distinguished from underlying earnings growth.
- Debt increased by $41.0 million year over year, alongside continued investment in joint ventures. The partnership invested $61.6 million in joint ventures during 2016.
- Pipeline and transportation contribution margin declined to $73.5 million from $78.0 million; wholesale marketing and terminalling contribution margin rose to $35.2 million from $30.4 million.
Outlook, management commentary, risks and unusual items
- Management said market conditions had begun improving in the latter half of 2016, with higher crude prices and increased Permian drilling potentially supporting west Texas activity. This is an expectation, not earnings guidance.
- Management budgeted approximately $18.1 million of 2017 capital spending: $5.3 million regulatory, $9.7 million maintenance and $3.1 million discretionary. It expects cash from operations, credit-facility borrowings and possible capital-market issuance to fund requirements, and believed liquidity would cover anticipated needs for at least 12 months.
- The quarterly distribution increased through 2016 to $0.68 per unit for the fourth quarter ($2.72 annualized); the partnership paid that distribution in February 2017. The partnership’s stated minimum distribution intention is $0.375 per unit quarterly, subject to available cash; it is not a legal obligation.
- The RIO joint-venture pipeline began operations in September 2016; the Caddo pipeline began in January 2017. The partnership owns 33% of RIO and 50% of Caddo and does not control day-to-day operations.
- Commercial agreements generally include minimum volume or fee commitments, but Delek is the dominant source of margin. Delek renewed certain agreements due to expire in November 2017 for five years; other agreements remain subject to renewal and counterparty, refinery, and force-majeure risks.
- West Texas wholesale marketing remains exposed to fuel-margin, demand, supply, ethanol and renewable identification number volatility. The major Noble Petro supply contract expires December 31, 2017, with no renewal option. Paline’s prior third-party capacity reservations expired in 2016.
- Environmental and safety matters include past crude-oil releases. The partnership accrued $1.0 million for a potential Clean Water Act enforcement matter related to the 2013 Magnolia Station release; negotiations with the EPA and Arkansas were ongoing. It accrued $0.1 million for the 2016 Paline release. Delek reimbursement applies to certain eligible costs, but not necessarily penalties or all losses.
- FERC indexing reduced certain tariffs and fees by approximately 2.0% in July 2016. Potential FERC policy changes could constrain rate increases or add reporting requirements. The filing also cites aging assets, pipeline integrity, environmental compliance, insurance, interest-rate, and sponsor-concentration risks.
Most important facts for investors to verify
- Whether operating cash flow remains strong after the unusually favorable 2016 working-capital movements, and whether cash generation covers distributions, maintenance and growth investment.
- Delek’s financial and operating condition, its refinery throughput, and the continued performance, renewal and shortfall-payment protection of the partnership’s commercial agreements.
- Progress and returns from the RIO and Caddo joint ventures, including utilization, operating costs, cash distributions and any further funding needs.
- Renewal or replacement of the Noble Petro supply contract and utilization of the Paline Pipeline after capacity reservations expired.
- Resolution and final cost of the Magnolia Station enforcement matter, other release liabilities, and required pipeline, tank and environmental capital spending.
- Debt capacity, covenant compliance, interest-rate exposure, and the sustainability of distributions; year-end cash was minimal despite substantial revolver availability.
Ernst & Young issued unqualified opinions on the 2016 financial statements and internal control over financial reporting. EBITDA and distributable cash flow are non-GAAP measures and should be considered alongside GAAP results and cash flows.