Delek Logistics Partners, LP annual report, FY2012

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Delek Logistics Partners, LP — 2012 Form 10-K Summary

Business context and reporting period

Fiscal year ended December 31, 2012. Delek Logistics Partners operates crude-oil and refined-products pipelines, storage, wholesale marketing and terminals, primarily supporting Delek US Holdings’ Tyler, Texas and El Dorado, Arkansas refineries. It completed its IPO on November 7, 2012. Accordingly, 2012 results combine predecessor operations through November 6 with the Partnership’s results thereafter; prior-year comparisons are affected by asset acquisitions and different intercompany revenue recognition.

Financial and operating highlights

  • Revenue: $1.023 billion, up 37.4% from $744.1 million in 2011. Wholesale marketing and terminalling accounted for $989.0 million; pipelines and transportation accounted for $33.5 million. Revenue growth largely reflected bulk biofuel sales made before the IPO, higher sales prices and volumes, and acquired assets. Bulk biofuel sales stopped after the IPO.
  • Profit: Operating income was $22.7 million, versus $20.0 million in 2011. Net income was $34.1 million, versus $12.6 million; 2012 included a one-time $18.5 million tax benefit from conversion to partnership tax status. Income attributable to the Partnership after the IPO was $8.4 million; limited partners’ interest was $8.2 million, or $0.34 per unit.
  • Contribution margin: $39.8 million, up 29.9% from $30.6 million. Pipelines and transportation contributed $15.7 million; wholesale marketing and terminalling contributed $24.1 million. West Texas marketing margin rose to $2.56 per barrel from $1.50.
  • Fourth quarter: Unaudited net sales were $249.2 million, operating income $7.8 million and net income $26.1 million. The quarter includes predecessor results through November 6 and Partnership results thereafter; quarterly net income is materially affected by the tax benefit.
  • Cash flow and investment: Operating cash flow was $34.4 million, versus cash used of $2.9 million in 2011. Investing cash outflow was $34.4 million, including $23.3 million for the Nettleton and Big Sandy acquisitions and $11.1 million of capital spending. Financing cash flow was $23.4 million. Reported distributable cash flow was $21.0 million for 2012, a non-GAAP measure that includes predecessor-period results.
  • Liquidity and debt: Year-end cash was $23.5 million; total debt was $90.0 million. The $175 million secured revolving facility had approximately $75 million available after $10 million of letters of credit. It matures November 7, 2017; the Partnership agreed to maintain at least $90 million of debt through November 2015. The filing reports compliance with debt covenants at year-end.
  • Distribution: The Partnership intends to target $0.375 per unit quarterly ($1.50 annualized), subject to available cash and reserves. It declared a prorated $0.224 per-unit distribution for the post-IPO portion of Q4, paid February 14, 2013. No distributions were paid during 2012.

Material changes versus the prior comparable period

  • Contribution margin increased $9.2 million, with improvement attributed mainly to stronger West Texas marketing margins and the inclusion of acquired Lion, SALA and Paline assets.
  • Operating expenses rose 81.4% to $23.4 million and general and administrative expenses rose 44.8% to $8.4 million, reflecting acquired assets, higher compensation and public-company costs.
  • Revenue and cost of goods sold both increased substantially; revenue growth should not be read as equivalent profit growth because wholesale sales include the cost of purchased products.
  • 2012 cash generation improved from 2011, but cash flow comparisons are affected by working-capital movements and the predecessor/Partnership transition.

Outlook, risks and unusual items

  • 2013 plan: Capital spending forecast was approximately $8.8 million, including $6.9 million of maintenance spending. Management’s stated objectives are stable cash flows, distribution growth, acquisitions, organic expansion and greater third-party utilization; no specific earnings or distribution-growth guidance was provided.
  • Customer concentration: Delek and its supply-and-offtake counterparty Aron accounted for approximately 71.1% of 2012 gross margin, according to the risk disclosures. Delek’s refining activity and performance under commercial agreements are central to cash generation.
  • Tyler crude pipeline competition: Management expected a third-party system to begin serving the Tyler Refinery in the first half of 2013. East Texas system throughput was expected to fall from about 55,000 barrels per day to below 10,000. Delek’s 35,000-barrel-per-day minimum commitment was expected to support about $5.1 million of annual transportation fees, in addition to approximately $3.0 million in annual storage fees, while applicable.
  • Facilities and contracts: Big Sandy terminal was idle because a necessary third-party pipeline was out of service, although minimum contractual payments continued. The Paline reversal was completed in October 2012, but the customer’s connection work remained outstanding; the Partnership believed additional capacity-reservation fees were due, and Delek had agreed to indemnify certain lost fees through 2013.
  • Subsequent environmental event: A March 9, 2013 crude-oil release at Magnolia Station was initially estimated at approximately 5,000 barrels, including about 1,500 barrels reaching a nearby creek. The company was working with the EPA, had notified insurers and said it could not yet precisely estimate costs or liabilities, but did not expect them to be material based on information then available. No interruption to connected pipeline operations was reported.
  • Other risks: The filing highlights exposure to refinery outages and margins, commodity and interest-rate movements, third-party pipeline availability, environmental and pipeline-safety requirements, seasonal demand, and limited geographic and customer diversification. The partnership’s distribution is not guaranteed and depends on cash flow, reserves, debt restrictions and capital needs.
  • Other notable items: The predecessor-to-partnership conversion generated the $18.5 million tax benefit. No material litigation was reported. The filing stated that internal-control attestation was deferred under the transition period for new public companies; management’s assessment and auditor attestation were expected for year-end 2013.

Important facts for investors to verify

  • Reconcile reported 2012 and Q4 earnings to the $18.5 million tax benefit and distinguish predecessor results from post-IPO Partnership results.
  • Review the terms, duration and enforceability of Delek’s minimum-volume commitments, especially the East Texas agreement as third-party Tyler crude supply begins.
  • Track the Magnolia Station release response, remediation, insurance recovery and any subsequent cost, penalty or claim disclosures.
  • Confirm progress on the Paline customer connection and the resulting capacity-reservation fees, and whether Big Sandy’s supporting pipeline returns to service.
  • Assess cash available for distributions after maintenance capital spending, debt service, affiliate fees and required reserves; the reported 2012 distributable cash flow includes predecessor-period results.
  • Monitor Delek’s financial condition and the Partnership’s customer concentration, credit-facility covenants, interest-rate hedge and debt requirement through November 2015.