Delek Logistics Partners, LP — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a standalone fourth-quarter filing. Financial statements are audited; Ernst & Young issued an unqualified opinion, and management reported effective internal controls.
Business context and financial performance
The Partnership owns crude-oil and refined-products pipelines, storage, trucking, wholesale-marketing and terminal assets, primarily supporting Delek’s Tyler and El Dorado refineries. Many commercial agreements include minimum-volume commitments, but Delek directly or indirectly generated 90.0% of gross margin in 2015, up from 76.6% in 2014.
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net sales | $589.7 million | $841.3 million |
| Operating income | $77.3 million | $78.8 million |
| Net income | $66.2 million | $70.1 million |
| Basic common-unit earnings | $2.55 | $2.88 |
| EBITDA | $96.4 million | $93.9 million |
| Distributable cash flow | $81.1 million | $78.6 million |
| Operating cash flow | $68.0 million | $85.1 million |
| Capital spending, excluding business combinations | $22.4 million | $9.2 million |
Sales fell 29.9%, mainly because lower gasoline and diesel prices and lower west Texas marketing volumes reduced reported sales. Operating income declined modestly and net income fell 5.5%, while EBITDA and distributable cash flow increased. Contribution margin rose 3.7% to $108.4 million: pipeline and transportation contribution margin increased 41.7% to $78.0 million, offset by a 38.5% decline in wholesale marketing and terminalling contribution margin to $30.4 million. West Texas marketing margin per barrel dropped to $1.35 from $4.67.
Fourth quarter: Net sales were $108.9 million versus $173.3 million in Q4 2014; operating income was $17.9 million versus $21.8 million; net income was $15.3 million versus $20.2 million; and basic earnings per common unit were $0.56 versus $0.81.
Cash, debt and distributions
- Year-end cash was effectively zero; current assets were $47.0 million and current liabilities $20.7 million.
- Debt outstanding was $351.6 million, up from $251.8 million. The $700 million revolving facility had approximately $346.9 million available, plus $1.5 million of letters of credit. The facility matures December 30, 2019; year-end weighted-average borrowing rate was about 2.8%. The Partnership reported covenant compliance.
- Operating cash flow declined $17.1 million, primarily due to working-capital movements, including lower accounts payable and higher receivables. Investing cash outflow was $56.6 million, including $37.4 million invested in joint ventures; financing cash outflow was $13.3 million.
- Quarterly distributions increased from $0.53 per unit for Q1 to $0.59 for Q4 2015. The Q4 distribution, paid February 12, 2016, totaled $16.1 million including general-partner incentive distributions. Management intends to distribute at least $0.375 per unit quarterly if sufficient cash is available; payment is not guaranteed.
Changes, outlook and material risks
- In March 2015, the Partnership acquired El Dorado crude-oil rail offloading racks and a 350,000-barrel Tyler crude tank for a combined $61.9 million. These related-party acquisitions were funded with revolving-credit borrowings and accounted for at Delek’s historical carrying values.
- Two pipeline joint ventures were formed to develop the Caddo and RIO pipelines. The Partnership’s projected total investment is approximately $96 million; $41.3 million had been invested at year-end. The assets were still under construction and had not generated revenue.
- For 2016, management forecast approximately $18.2 million of capital spending, including $11.5 million for maintenance and $1.9 million for regulatory projects. Management said expected liquidity sources should cover anticipated operating needs, including minimum distributions, for at least 12 months.
- Management cited lower crude prices, reduced west Texas drilling activity, weaker local demand, and unfavorable ethanol-price movements relative to fixed-price contracts as pressures on wholesale margins. Lower commodity prices also challenged midstream-sector financing and project economics.
- Key risks include customer concentration and exposure to Delek’s refinery operations; contract renewals and force-majeure provisions; debt, floating rates and distribution capacity; aging infrastructure, pipeline releases, environmental compliance and insurance limitations; joint-venture construction and execution risks; and FERC/state regulation. Some Delek agreements’ initial terms expire in November 2017.
- The DOJ was evaluating potential Clean Water Act enforcement related to the approximately 5,900-barrel Magnolia Station release in 2013; no specific penalty claim had been made. The filing reports estimated year-end accruals of $1.0 million for Magnolia, $0.2 million for the 2014 Haynesville release and $0.1 million for the 2015 Fouke release. Delek indemnification applies to certain costs, subject to agreement terms.
- After the February 2016 Q4 distribution, the subordination period ended and 11,999,258 subordinated units converted one-for-one into common units. The conversion did not change total outstanding units or distributions at that time.
Important facts for investors to verify
- Whether Delek’s refinery performance, payment obligations and contract renewals sustain the Partnership’s heavily concentrated margin base.
- Whether west Texas marketing margins recover, and how minimum-volume commitments and the 2017 contract expirations affect cash generation.
- Joint-venture construction progress, total funding needs, customer commitments and expected returns relative to the planned $96 million investment.
- Debt capacity, covenant headroom, floating-rate exposure and the sustainability of distributions against distributable cash flow and future capital needs.
- Final regulatory outcomes, remediation costs and insurance recoveries related to pipeline releases, particularly the Magnolia Station matter.