Delek Logistics Partners, LP annual report, FY2013

Delek Logistics Partners, LP — 2013 Form 10-K

Business context and reporting period. This filing reports the fiscal year ended December 31, 2013, with quarterly financial data and selected comparisons to 2012. Delek Logistics owns and operates crude-oil and refined-products pipelines, storage, terminals and wholesale marketing operations, primarily supporting sponsor Delek’s Tyler, Texas and El Dorado, Arkansas refineries. Comparisons require caution: 2013 and 2012 include predecessor results, and the Tyler assets are retrospectively included; the predecessor’s accounting and tax treatment differed from the Partnership’s after its November 2012 IPO.

Financial performance

Metric	2013	2012
Net sales	$907.4 million	$1,022.6 million
Contribution margin	$65.8 million	$32.8 million
Operating income	$46.3 million	$13.5 million
Net income	$41.0 million	$24.8 million
Net income attributable to partners	$47.8 million	$8.4 million
EBITDA (non-GAAP)	$58.7 million	$23.6 million
Distributable cash flow (non-GAAP)	$43.5 million	$8.2 million
Cash from operating activities	$44.4 million	$26.6 million

Wholesale marketing and terminalling generated $847.2 million of sales and $29.2 million of contribution margin; pipelines and transportation generated $60.2 million of sales and $36.6 million of contribution margin. The filing defines contribution margin as net sales less cost of goods sold and operating expenses, before depreciation and amortization. Reported 2013 net income includes a $6.9 million loss attributable to the Tyler predecessor assets; 2012 net income included a one-time $18.5 million tax benefit from the predecessor’s conversion to partnership tax status.

Fourth quarter: Net sales were $223.1 million, operating income $13.3 million, net income $11.3 million and basic common-unit earnings $0.46. The declared distribution was $0.415 per unit.

Liquidity, debt and distributions

• At year-end, cash was $0.9 million and debt under the revolving facility was $164.8 million. The $400 million facility had $223.2 million of reported borrowing availability and $12.0 million of letters of credit outstanding; it matures November 2017.
• The facility’s weighted-average interest rate was approximately 2.5% at year-end. Borrowings bear variable rates; substantially all Partnership assets secure the facility. Management reported compliance with covenants at December 31, 2013.
• Operating cash flow was $44.4 million; investing cash outflow was $20.1 million and financing cash outflow was $46.8 million. Year-end cash declined by $22.5 million.
• Quarterly per-unit distributions rose from $0.385 for Q1 to $0.415 for Q4 2013. The Partnership stated it expected available liquidity to cover anticipated operating needs, including distributions, for at least 12 months, while noting distributions are not legally guaranteed.

Material changes versus the prior period

• Contribution margin increased 100.8% and operating income increased substantially, principally reflecting higher contracted service rates under Delek agreements and the Tyler terminal and tankage agreement. The 2012 comparison is not fully like-for-like.
• Net sales declined 11.3%, mainly because bulk biofuel sales ended after the IPO (they contributed $198.1 million of 2012 sales) and average gasoline and diesel selling prices fell. Lower product costs offset much of the revenue decline.
• East Texas Crude Logistics throughput fell from about 55,000 bpd in 2012 to 19,896 bpd in 2013 after a third-party pipeline began carrying most Tyler Refinery crude supply. Management expected the Partnership’s system volumes to remain near 10,000 bpd or less, with Delek’s minimum-volume obligation supporting fees equivalent to 35,000 bpd while applicable.
• 2013 acquisitions included the Tyler terminal and 96 tanks for $94.8 million, the Hopewell Pipeline for approximately $5.7 million, and the North Little Rock terminal for approximately $5.0 million. The Tyler transaction was a common-control transfer and recorded at historical book value.
• The $400 million revolving credit commitment replaced a $175 million commitment in July 2013. Debt rose from $90.0 million at 2012 year-end to $164.8 million at 2013 year-end.

Outlook, risks and unusual items

• No numerical earnings or EBITDA guidance is provided. The 2014 capital spending forecast is approximately $20.4 million, including $7.4 million of discretionary wholesale-terminal projects, primarily North Little Rock expansion.
• After year-end, on February 10, 2014, the Partnership acquired the El Dorado terminal and 158 storage tanks for $95.9 million, financed with revolver borrowings. The assets have stated terminal capacity of about 26,700 bpd and tank capacity of about 2.5 million barrels. Related agreements include an eight-year throughput and tankage agreement, and the annual Delek administrative fee increased from $3.0 million to $3.3 million.
• Customer concentration is a central risk: Delek accounted for 79.5% of total gross margin in 2013, and the business depends heavily on Delek’s refineries, contractual performance and its arrangements with J. Aron. Delek’s agreement with third parties to supply Tyler contributed to the sharp decline in East Texas system throughput.
• Other principal risks include refinery shutdowns or weaker refining economics, force majeure or contract termination, pipeline outages and aging assets, variable-rate debt, limited access to third-party customers, regulatory and environmental compliance, and conflicts of interest with the sponsor.
• Two 2013 crude-oil releases were disclosed. The Magnolia Station release was substantially remediated, with further monitoring or soil work under discussion. A release near Macedonia involved recovery of approximately 40 barrels; soil remediation remained outstanding at filing. Management did not expect the Macedonia event to materially affect results.
• Management reported effective disclosure controls and internal control over financial reporting. Ernst & Young issued unqualified opinions on the financial statements and internal control.

Most important facts for investors to verify

• Whether minimum-volume payments remain enforceable and collectible, especially for the East Texas system, and how actual Tyler crude volumes evolve.
• How the $95.9 million El Dorado acquisition affects debt, interest expense, cash available for distribution and post-acquisition results.
• Whether the $43.5 million distributable cash flow adequately supports the distribution after maintenance capital spending, debt service and sponsor reimbursements; this non-GAAP measure is not equivalent to cash available for distribution.
• The final purchase-price allocations and realized returns for 2013 acquisitions, and the utilization and economics of North Little Rock expansion and the restored Big Sandy connection.
• Progress and ultimate costs of environmental remediation, along with 2014 capital expenditures and any changes in covenant headroom or borrowing availability.
• Comparability caveats: predecessor accounting, the 2012 tax benefit, discontinued biofuel activity and the retrospective inclusion of Tyler assets materially affect period-to-period interpretation.