Delek Logistics Partners, LP — 2018 Form 10-K
Period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; quarterly figures are unaudited. Amounts are U.S. dollars.
Business context
The Partnership owns and operates crude-oil and refined-products pipelines, storage, transportation, wholesale marketing and terminal assets, primarily supporting Delek US Holdings’ Tyler, El Dorado and Big Spring refineries. It reports two segments: pipelines and transportation; and wholesale marketing and terminalling. Delek Holdings is its controlling affiliate and principal customer.
Financial and operating performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net revenue | $657.6 million | $538.1 million | +22.2% |
| Operating income | $125.8 million | $88.2 million | +42.6% |
| Net income | $90.2 million | $69.4 million | +29.8% |
| Common-unit diluted earnings | $2.65 | $2.09 | +26.8% |
| EBITDA (non-GAAP) | $164.0 million | $115.0 million | +42.5% |
| Distributable cash flow (non-GAAP) | $121.6 million | $85.0 million | +43.0% |
| Cash distributions per unit | $3.120 | $2.835 | +10.1% |
Operating margin was approximately 19.1% of revenue, versus 16.4% in 2017; net margin was approximately 13.7%, versus 12.9%. Segment contribution margin rose 39.3% to $169.8 million: pipelines and transportation contributed $93.8 million (+33.4%), while wholesale marketing and terminalling contributed $76.0 million (+47.3%).
Operating cash flow was $148.0 million, up from $87.0 million. Investing activities used $228.0 million, principally for the Big Spring logistics assets and marketing-contract intangible. Financing activities provided $79.9 million. Maintenance and regulatory capital expenditures were $7.3 million net of Delek reimbursements in the distributable-cash-flow reconciliation; total reported 2018 capital spending was $11.6 million.
At year-end, cash was $4.5 million, total debt was reported as $700.4 million, and unused revolving-credit commitments were $393.3 million. Current assets of $32.6 million compared with current liabilities of $36.5 million. Total liabilities were $759.4 million and total equity was a deficit of $134.8 million. The revolving facility had $456.7 million outstanding; the 2025 notes had $250.0 million principal outstanding.
Material changes and unusual items
- Effective March 1, 2018, the Partnership acquired Big Spring logistics assets from Delek Holdings for $170.8 million, financed with revolving-credit borrowings. The assets’ historical carrying value was $72.0 million; the $98.8 million excess purchase price was recorded as a reduction in equity.
- It paid $144.2 million for a related Big Spring marketing-contract intangible, amortized over 20 years. The acquisition and new marketing agreement contributed to year-over-year revenue and margin growth; prior periods were not recast for the acquired assets.
- In September, the revolving facility commitments increased from $700 million to $850 million, with an accordion feature up to $1.0 billion and maturity extended to September 2023. The year-end weighted-average borrowing rate was approximately 5.4%.
- Contract fees subject to FERC, CPI and PPI indexing increased in July 2018 by approximately 4.4%, 2.2% and 6.1%, respectively.
- Fourth-quarter 2018 unaudited revenue was $159.3 million, operating income $31.1 million and net income $21.3 million, compared with $151.2 million, $23.7 million and $18.9 million in fourth-quarter 2017. Common-unit diluted earnings were $0.58 versus $0.57.
- The fourth-quarter distribution was $0.810 per unit ($3.24 annualized), paid February 12, 2019. The reported annual distribution was $3.120 per unit, reflecting distributions earned during 2018.
Outlook, risks and contingencies
- Management expected sufficient financial resources for the next 12 months, including distributions and capital expenditures. The 2019 capital-spending forecast was $17.3 million.
- Management stated its belief that the business could support 10% annual distribution growth through 2019. The Partnership intended to pay at least $0.375 per unit quarterly if it had sufficient available cash; distributions are not legally guaranteed.
- Delek Holdings and its assignees accounted for 83% of contribution margin under Delek commercial agreements in 2018; Delek Holdings directly or indirectly represented 36.6% of total revenue. Customer concentration, refinery shutdowns, contract renewals, counterparty performance and affiliate conflicts are material risks.
- West Texas wholesale marketing is exposed to refined-product, ethanol and RIN price movements. The Noble Petro supply contract expired at the end of 2017; the Partnership shifted to purchases from Delek Holdings and other suppliers. West Texas gross margin increased to $27.1 million from $20.3 million, with margin per barrel rising to $5.57 from $4.03.
- Environmental and pipeline-integrity obligations, spills, regulatory changes, aging assets, severe weather, cyber incidents, commodity exposure and floating-rate debt may affect operating costs, cash flows and distributions. A one-percentage-point change in rates on year-end floating-rate debt would change annual interest expense by approximately $4.6 million.
- The 2013 Magnolia crude-oil release enforcement matter was settled in December 2018; the Partnership accrued the full $2.2 million settlement. It also reported 2018 releases, including two with undetermined quantities; $1.5 million and $0.5 million were accrued for remediation of the Smackover-Langley and Norphlet releases, respectively. The filing states that these costs are reimbursable by Delek Holdings under specified Omnibus Agreement terms.
Most important facts for investors to verify
- Whether Delek Holdings’ refinery operations, contractual minimums and payment capacity sustain the Partnership’s concentrated cash flows.
- Debt-service capacity and distribution coverage, including the effects of acquisition-related borrowing, incentive distribution rights and future capital needs.
- Realized performance and remaining value of the $144.2 million Big Spring marketing intangible, along with the acquired assets’ contribution to cash generation.
- Progress and final costs of spill remediation, regulatory compliance and required pipeline and terminal maintenance.
- Whether the stated 2019 distribution-growth objective and capital-spending plan remain achievable; distributions are discretionary and depend on available cash.