Delek US Holdings, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Delek is an integrated downstream energy company with refining, logistics and retail operations. Comparisons with 2017 are affected by the July 2017 Delek/Alon merger: the 2018 nine-month period includes nine months of Alon results, versus only three months in 2017.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenues | $2,495.2m | $2,370.6m | $7,411.9m | $4,783.4m |
| Operating income | $255.2m | $84.6m | $429.1m | $67.8m |
| Income from continuing operations, net of tax | $185.8m | $118.5m | $261.5m | $101.6m |
| Net income attributable to Delek | $179.8m | $104.4m | $224.0m | $77.7m |
| Diluted EPS | $2.03 | $1.29 | $2.56 | $1.13 |
| Interest expense | $31.2m | $34.1m | $95.2m | $62.5m |
- Q3 revenue rose 5.3% year over year; operating income and Delek-attributable net income increased substantially. Q3 pre-tax income was $236.8m versus $252.0m a year earlier, while the effective tax rate fell to 21.5% from 53.0%, supporting higher after-tax earnings. Nine-month effective tax rates were 20.3% and 52.3%, respectively.
- Q3 refining segment contribution margin was $319.5m, versus $180.1m; logistics was $43.1m versus $30.9m; retail was $15.3m versus $13.5m. Refining benefited from wider crude differentials and lower RIN prices, partly offset by weaker benchmark crack spreads. Nine-month refining contribution margin was $629.8m versus $264.9m, with merger scope materially affecting the comparison.
- Cash from operations was $201.2m for the first nine months, compared with $72.4m. Investing activities used $37.2m, versus providing $106.2m; financing activities provided $3.2m, versus using $29.8m. Capital expenditures were $210.9m.
- At September 30, cash and cash equivalents were $1,109.1m; total debt was $1,862.0m; and total assets were $6,158.7m. Total unused revolving credit commitments or borrowing-base availability was approximately $873.3m. Delek reported covenant compliance. The balance sheet also included $478.7m of obligations under supply-and-offtake agreements.
- Management forecast full-year 2018 capital spending of $305.5m and stated that available liquidity sources were expected to cover operating needs and capital expenditures for at least the next 12 months. The filing provides no earnings guidance.
Changes, transactions and unusual items
- On March 30, 2018, Delek refinanced debt with a $700m term loan and a $1.0bn asset-based revolver, replacing several existing facilities. At quarter-end, $300m was drawn on the revolver and approximately $696.5m of principal was outstanding on the term loan. The refinancing generated a $9.1m debt-extinguishment loss for the nine-month period. A post-quarter amendment reduced certain term-loan margins by 0.25 percentage points.
- Delek settled $150m of convertible-note principal in September with cash and shares; exercise of related call options offset the approximately 2.7m shares issued, resulting in no net dilution from that settlement.
- Delek completed sales of California discontinued-operation assets and asphalt terminal assets. The California sales produced a $41.2m loss on sale for the nine months, partly offset by a $1.4m Long Beach gain. The asphalt sale generated a $27.5m impairment charge and a $13.2m gain on sale.
- EPA small-refinery exemptions reduced reported RIN obligations and related costs by approximately $90.9m in 2018 across El Dorado and Krotz Springs. RIN pricing and eligibility for exemptions remain relevant to margins.
- After quarter-end, Shell agreed to pay $34m in a settlement concerning environmental and asset-retirement obligations at the non-operating Bakersfield refinery; $14m had already been recognized as a receivable, and Delek expected to recognize the remaining $20m upon receipt. The board also authorized an additional $500m share-repurchase program and declared a $0.26 quarterly dividend. A November warrant unwind agreement was estimated to create an approximately $36m initial liability; settlement terms depend on the specified trading-price calculation.
Outlook, risks and contingencies
- Results are sensitive to crude and refined-product prices, crack spreads and crude differentials, RIN costs, refinery utilization and maintenance, and derivative valuations. Management noted that rising crude discounts to product benchmarks had supported refinery margins, while crack-spread declines partly offset that benefit in Q3.
- Seasonality typically supports stronger refining, logistics and retail results in warmer months; planned refinery maintenance and weaker demand can weigh on first- and fourth-quarter results. Capital spending could exceed budget due to project, labor, equipment or regulatory-cost changes.
- Environmental and safety rules may require ongoing operating changes and capital investment. A proposed Big Spring EPA consent decree was expected to become final in Q4 2018 and could require significant pollution-control capital expenditures over five years; the amount was not yet reasonably estimable. Recorded environmental liabilities were $143.4m, of which $7.3m was expected to be spent within 12 months.
- Delek Logistics subsidiaries faced a civil action relating to the 2013 Magnolia pipeline release; Delek had accrued $1.0m and stated it did not expect a material adverse effect. The filing also identifies risks involving commodity volatility, operating reliability, counterparty credit, debt costs and access to credit, covenants, and regulatory and tax developments.
Most important facts for investors to verify
- Whether refining margins and crude differentials remain favorable, and whether RIN exemptions and RIN prices continue to benefit results.
- Underlying earnings and cash generation after separating merger-related scope changes, tax-rate effects, and asset-sale, impairment and refinancing items.
- Debt, borrowing availability, supply-and-offtake obligations, floating-rate exposure and the funding impact of planned capital spending and shareholder returns.
- The final scope and cost of the Big Spring consent decree, environmental remediation obligations, and collection and accounting for the $34m Shell settlement.
- The final cost and share-price effects of the warrant unwind, and execution of the expanded repurchase authorization and dividend.