Business context and reporting period
Delek Logistics Partners, LP filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017, with comparisons to 2016. The partnership operates crude oil, intermediate and refined-products pipelines, transportation, storage, wholesale marketing and terminal assets, primarily for Delek and third parties. Many assets support Delek’s Tyler and El Dorado refineries, and Delek is the partnership’s majority owner. Delek’s merger with Alon USA became effective July 1, 2017, after the reporting period; the filing says it did not change the partnership’s commercial agreements with Delek.
Financial results and position
Amounts below are in millions, except per-unit figures and percentages.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $126.8 | $111.9 | $256.2 | $215.9 |
| Contribution margin | $31.8 | $30.0 | $58.3 | $56.9 |
| Operating income | $23.4 | $22.5 | $41.8 | $41.5 |
| Net income | $19.0 | $18.9 | $33.6 | $34.3 |
| EBITDA (non-GAAP) | $30.3 | $27.1 | $54.2 | $50.9 |
| Distributable cash flow (non-GAAP) | $23.4 | $23.7 | $44.0 | $44.1 |
| Cash distributions per limited partner unit | $0.705 | $0.630 | $1.395 | $1.240 |
Q2 contribution margin was about 25.0% of revenue versus 26.8% a year earlier; operating margin was about 18.4% versus 20.1%. Basic net income per common unit was $0.59 in Q2, compared with $0.66; first-half figures were $1.02 and $1.23.
At June 30, cash was $4.9 million, total assets $415.5 million, long-term debt $396.9 million and total deficit $21.1 million. The partnership had $154.5 million drawn on its $700 million revolving facility, $538.5 million of unused commitments and $7.0 million of letters of credit. The facility matures December 2019; management reported covenant compliance. Six-month operating cash flow was $47.4 million, investing cash outflow $8.8 million and financing cash outflow $33.8 million. Capital spending was $4.9 million.
Material changes versus the prior period
- Q2 revenue rose 13.3%, while net income increased slightly; first-half revenue rose 18.7%, but net income fell 2.2%.
- Higher west Texas marketing prices and volumes and improved regional drilling activity lifted wholesale marketing and terminalling contribution margin 42.7% in Q2 and 49.0% for the first half. The west Texas marketing margin per barrel rose to $4.26 from $2.13 in Q2 and to $3.44 from $1.00 for the first half.
- Pipelines and transportation contribution margin declined 11.9% in Q2 and 16.2% for the first half, mainly because Paline Pipeline fees fell after its capacity shifted from third-party monthly contracts to FERC-regulated tariffs.
- Interest expense increased 66.3% in Q2 and 47.0% in the first half, reflecting the new notes and higher rates and average revolver borrowings. The $250 million, 6.750% senior notes due 2025 were issued in May; net proceeds of about $242.3 million were used substantially to repay revolver borrowings.
- First-half operating cash flow declined to $47.4 million from $57.6 million, while investing cash use fell substantially from $35.9 million, primarily because joint-venture contributions were lower.
Outlook, risks and unusual items
- Management said existing liquidity sources should meet anticipated operating needs, including minimum quarterly distributions, for at least the next 12 months. The declared Q2 distribution was $0.705 per unit, or $2.82 annualized.
- The 2017 capital spending forecast increased to approximately $21.5 million from $18.3 million, mainly for discretionary pipeline and truck-unloading upgrades and expansions. First-half spending was $4.9 million.
- Management cited improved crude-oil market conditions and Permian drilling activity as potential supports for west Texas demand, but results remain exposed to product prices, marketing margins, volumes and RIN values. Fees on certain agreements are inflation-indexed; July 2017 adjustments included a 0.2% decrease for FERC-indexed fees and increases under other agreements tied to CPI and PPI.
- Key risks include dependence on Delek and its ability to perform under commercial agreements, refinery utilization, joint-venture performance, operating disruptions, competition, financing costs and environmental, safety and regulatory obligations. A 1% interest-rate change on floating-rate debt outstanding at June 30 would change annual interest expense by about $1.5 million.
- The partnership accrued $1.0 million for potential Clean Water Act penalties or other relief related to the 2013 Magnolia crude-oil release; discussions with the EPA and Arkansas were ongoing. It also accrued $0.1 million for the 2016 Paline release. Management said it did not expect these matters, net of expected Delek reimbursement for remediation costs where applicable, to materially affect results.
- The Noble Petro supply contract for west Texas petroleum products expires December 31, 2017 and has no renewal option. The partnership expects to adopt the new revenue-recognition standard on January 1, 2018 and was evaluating its impact.
Most important facts for investors to verify
- Whether west Texas margins and volumes remain strong, and how much of the revenue growth reflects higher product prices rather than durable unit economics.
- The effect of the Paline tariff arrangement and the expiration of the Noble Petro contract on future segment contribution and supply continuity.
- Debt costs, covenant headroom and refinancing exposure, including the 6.750% notes and the revolving facility’s December 2019 maturity.
- Whether cash generation supports distributions and the raised 2017 capital budget without additional borrowing or equity issuance.
- Progress and final costs or penalties relating to the Magnolia release, and the extent and continued availability of Delek reimbursements.
- How the Delek–Alon combination affects the sponsor relationship, counterparty concentration, throughput and future commercial opportunities.