Delek Logistics Partners, LP — Q1 2017 Form 10-Q
Business context and period. The filing reports the three months ended March 31, 2017, compared with Q1 2016. The partnership operates pipelines, transportation, storage, wholesale marketing and terminalling assets, with substantial operational dependence on Delek and its refining operations. Caddo Pipeline operations began in January 2017.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $129.5 million | $104.1 million |
| Contribution margin | $26.5 million | $26.8 million |
| Operating income | $18.5 million | $19.0 million |
| Net income | $14.6 million | $15.4 million |
| EBITDA (non-GAAP) | $23.9 million | $23.7 million |
| Distributable cash flow (non-GAAP) | $20.6 million | $20.4 million |
| Operating cash flow | $23.5 million | $26.4 million |
- Sales grew 24.4%, while cost of goods sold increased 38.7%; contribution margin declined 1.2%. Net margin was approximately 11.3%, compared with 14.8% in Q1 2016.
- Common-unit net income was $0.43 per unit versus $0.54. The $0.69 per-unit distribution was declared for Q1, totaling about $21.0 million. Distributable cash flow was below declared distributions by about $0.4 million (approximately 0.98x coverage); both DCF and coverage are non-GAAP-derived comparisons.
- Investing cash use was $5.4 million, mainly reflecting $2.8 million of capital spending and $1.7 million of joint-venture contributions. Financing cash use was $18.1 million, including $20.5 million of distributions. Cash ended at approximately $33,000.
- At March 31, debt under the revolving facility was $392.0 million; unused commitments were $300.5 million, and letters of credit totaled $7.5 million. The $700 million facility matures December 30, 2019; weighted-average borrowing rate was approximately 3.6%. The partnership reported covenant compliance.
- Total assets were $413.6 million and total deficit was $19.0 million. Management said available liquidity sources should cover anticipated needs, including minimum quarterly distributions, for at least 12 months.
Material changes and management commentary
- Wholesale marketing and terminalling contribution margin increased to $10.4 million from $6.6 million, supported by stronger West Texas marketing conditions and higher margins per barrel ($2.72 versus $0.53). Higher product prices lifted both sales and purchase costs.
- Pipelines and transportation contribution margin fell to $16.1 million from $20.3 million, primarily because Paline Pipeline revenue declined: its capacity had been under third-party monthly-fee contracts in Q1 2016, versus FERC-regulated tariffs for potential shippers in Q1 2017.
- Operating cash flow decreased, principally because accounts receivable rose with sales and excise-tax receivables increased. Interest expense rose 27.3% to $4.1 million, reflecting borrowing utilization and rates associated with joint-venture investment funding.
- Management’s 2017 capital-spending forecast was approximately $18.3 million: $5.3 million regulatory, $9.8 million maintenance and $3.2 million discretionary. No specific earnings or distribution-growth guidance was provided. Management described improving crude-oil prices and Permian drilling activity as potential supports for West Texas demand, while cautioning that results are subject to market and execution risks.
- Delek agreements are generally long-term, fee-based and include minimum volume or throughput commitments; certain agreements were renewed for five-year terms, and the marketing agreement was extended through 2026. The partnership nevertheless remains substantially dependent on Delek and its ability to perform under those agreements.
Risks, contingencies and unusual items
- The Department of Justice and EPA were evaluating potential Clean Water Act enforcement related to the 2013 Magnolia Release. The partnership was negotiating with the EPA and Arkansas and had accrued $1.0 million for the matter. It also reported a $0.1 million accrual for the Paline Release. Management said release costs were generally reimbursable by Delek under the Omnibus Agreement, but the enforcement resolution could include penalties or other relief.
- The Abilene petroleum-products supply contract expires December 31, 2017 and has no renewal option. The filing does not state a replacement arrangement.
- Floating-rate debt creates interest exposure: a hypothetical 1 percentage-point rate change would alter annual interest expense by approximately $3.9 million. Commodity-market volatility can also affect West Texas marketing margins, although the partnership uses short-term product swaps.
- Management cited environmental, pipeline-safety, operational, customer, competition, financing, joint-venture and regulatory risks. It reported no material adverse effect expected from pending litigation and no material change in contractual obligations during the quarter.
Investor verification priorities
- Confirm the sustainability of the $0.69 quarterly distribution against cash generation, maintenance needs and debt-funded requirements; compare distributable cash flow with total distributions.
- Track leverage, borrowing costs, covenant headroom and revolver availability, especially given the deficit balance and floating-rate exposure.
- Monitor Paline’s tariff-based revenue and the status of the Abilene contract before its year-end 2017 expiration.
- Verify the outcome and final cost of the Magnolia Release enforcement matter and whether Delek reimbursements fully cover eligible remediation costs.
- Assess whether stronger West Texas marketing margins persist and whether the Caddo and RIO joint ventures generate returns commensurate with the partnership’s investment.