Delek Logistics Partners, LP — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The partnership operates pipelines and transportation assets and wholesale marketing and terminalling assets, primarily supporting Delek’s refineries. Comparative figures include predecessor operations and reflect retrospective accounting for common-control asset transfers; revenue comparisons are also affected by predecessor accounting and acquired assets.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $165.1 million | $228.0 million | $480.7 million | $667.9 million |
| Operating income | $21.8 million | $17.2 million | $59.4 million | $57.0 million |
| Net income | $18.6 million | $14.8 million | $50.9 million | $49.9 million |
| EBITDA (non-GAAP) | $26.1 million | $21.1 million | $72.7 million | $68.0 million |
| Distributable cash flow (non-GAAP) | $22.0 million | $17.5 million | $59.5 million | $57.0 million |
- Q3 net income attributable to partners was $18.6 million, versus $15.1 million; nine-month partner-attributable income was $51.6 million, versus $51.5 million. Common-unit basic earnings were $0.71 for Q3 and $1.99 for nine months, compared with $0.60 and $2.07, respectively.
- Contribution margin rose 23.6% to $29.1 million in Q3 and 9.1% to $82.3 million for nine months. Pipelines and transportation contribution margin increased, while wholesale marketing and terminalling contribution margin declined.
- Operating cash flow was $66.8 million for nine months, versus $64.4 million. Investing used $43.9 million, principally including $27.1 million invested in joint ventures and $17.6 million of property and equipment purchases. Financing used $24.7 million.
- Cash was zero at September 30. Revolver borrowings were $325.2 million, up from $251.8 million at December 31, 2014; stated availability was $372.3 million, with $2.5 million of letters of credit outstanding. The facility matures December 30, 2019; its weighted-average borrowing rate was approximately 2.5%.
- Total assets were $361.8 million and total equity was a deficit of $11.7 million. The filing reports current assets of $42.6 million and current liabilities of $34.3 million.
Changes and business developments
- Sales fell 27.6% in Q3 and 28.0% for nine months, mainly because average gasoline and diesel selling prices in west Texas declined. Cost of goods sold also fell, helping Q3 operating income and contribution margin improve.
- West Texas marketing margin per barrel declined to $1.50 in Q3 from $2.20 and to $1.41 for nine months from $4.09. Management cited lower crude prices and drilling activity, and ethanol pricing relative to fixed-price contracts.
- Growth in pipeline and transportation contribution margin reflected higher Paline Pipeline fees, trucking assets acquired in December 2014, and throughput and tankage agreements for assets acquired from Delek in March 2015. The acquisitions included El Dorado crude rail offloading racks and the Tyler crude storage tank.
- In March 2015, the partnership entered two pipeline joint ventures. Its projected combined investment was approximately $96 million; $30.9 million had been invested by September 30.
- Quarterly distributions increased from $0.55 to $0.57 per unit. The board declared $0.57 per unit for Q3, or $2.28 annualized, payable November 13, 2015.
Outlook, risks and contingencies
- Management said expected operating cash flow, revolver borrowings and potential securities offerings should cover anticipated needs, including minimum quarterly distributions, for at least 12 months. The 2015 capital-spending forecast was reduced from $19.8 million to $16.8 million, primarily because certain tank repairs and replacements were delayed to 2016.
- The partnership relies substantially on Delek and its affiliates for commercial activity and has long-term fee-based agreements with minimum volume or revenue commitments. Delek’s credit covenants may indirectly constrain the partnership’s borrowing capacity; the filing cautions that this could affect access to the full revolver.
- Commodity price volatility can affect west Texas wholesale margins; floating-rate debt creates interest-rate exposure. The partnership also cites seasonality, refinery maintenance, customer concentration, operating hazards, regulation and environmental compliance as risks.
- The Department of Justice was evaluating a potential EPA enforcement action concerning alleged Clean Water Act violations related to a 2013 Magnolia Station release; no specific claim had been made. The partnership accrued $1.0 million for related costs. It also reported other crude releases, including a 2015 Fouke, Arkansas release, with final restoration expected by November 2015.
- Management stated it did not expect the identified release costs, litigation or other currently pending proceedings to have a material adverse effect. This is a forward-looking assessment, not a guarantee.
Important facts for investors to verify
- Whether west Texas marketing margins and volumes stabilize, and how commodity and ethanol-price movements affect results.
- Actual joint-venture funding needs, project timing and returns, alongside the partnership’s debt levels and revolver availability.
- Whether planned 2015 capital spending and deferred tank work remain on schedule and within budget.
- Progress and ultimate costs or penalties, if any, related to the Magnolia Station matter and other environmental releases.
- The sustainability of distributions relative to distributable cash flow, including the effect of IDRs and any future financing requirements.